The Best Thing About Money

Lusting after wealth is not always becoming, not always rewarding, rarely flattering or dignified…grubbing for money might be fine for a modest nation working its way up in the world; is it worthy of a great nation on a roll?

"It is strange, I mean the way things work out," said a guest at dinner last night. "It seems like a kind of madness wanders around the globe. While, here in Europe, we were trying to batter each others’ brains out, you, in America, were smart. You were sitting back and taking orders. Now you’re the ones who have gone mad."

Our guest had described the world of the 19th and 20th century – the days when the idea of an American empire was still repugnant and absurd. While wars, revolutions, pogroms, stormed over Europe – and much of the rest of the world – America kept to itself, reluctant to get involved. Attractive new ideas popped up all over Europe like poisonous mushrooms. But, for the most part, Americans kept their heads. Most went about their business – seeking happiness in their own private ways…trying to get rich. "The business of America is business," Calvin Coolidge explained.

Money isn’t everything, we suddenly recalled. Lusting after wealth is not always becoming, not always rewarding, rarely flattering or dignified. There is something vulgar about the hustle a real business needs…like sweat-stains on a starched shirt or a cold cup of coffee and stubbed out cigarettes. A man who wants to make a real fortune usually has to grub for it; it’s hard to be elegant or refined when you’re scratching for cash or market share. But grubbing for money is still better than a lot of other things men do. What follows is a long, rambling reflection on what the lust for money is better than.

First, we pause to deliver a shocking update.

Neo-Conservatism: People Love Claptrap

People love myth, fraud and claptrap – especially when it flatters them. Maybe their food, life expectancy, crime rates, transportation, liquor, women, and architecture are nothing to brag about, say Americans to each other, but when they grub for money, they grub good. ‘Old Europe,’ they say, making a comparison, "is too rigid, fossilized, hidebound…a museum."

And yet, even this is a fraud. Despite Laffer’s curve, Greenspan’s Bubbles, Friedman’s monetarism and Reagan’s revolution, the U.S. economy has done no better than Europe.

This week’s Economist examines the evidence.

Of course, everybody knows that America grew a lot faster than Europe over the last 10 years. But the figures, in terms of GDP/person are very close – 2.1% per year for America against 1.8% for Europe. Take out Germany – which has struggled with absorbing its formerly communist cousins from the East – and the two regions are exactly the same.

And productivity? "A study by Kevin Daly, an economist at Goldman Sachs, finds that, after adjusting for differences in their economic cycles, trend productivity growth in the euro area has been slightly faster than that in America over the past 10 years," says the Economist.

What about jobs? America is the greatest jobs machine on the planet, right? Again, excluding Germany, "jobs in the rest of the euro area grew at exactly the same pace as in America," concludes the Economist. "And since 1997 more jobs have been created in the euro area as a whole; total employment has risen by 8%, compared with 6% in America."

And get this…"GDP per hour in Germany and France now exceeds that in America."

Neo-Conservatism: Earn More, Work More

It’s true that Americans earn more and spend more than Europeans…but they work a lot more hours.

"Compare France with America," the Economist invites. "Between 1970 and 2000, America’s GDP per hour worked rose by 38% and average hours worked per person rose by 26%, so GDP per person increased 64%. French GDP per hour rose by a more impressive 83%, but hours worked per person fell 23%.

"Europeans simply enjoy leisure more," the Economist concludes.

But what about the ‘recovery?’ Hasn’t it been much more vigorous in America than in Europe?

Well, only on the surface. Spiked up by the biggest dose of fiscal and monetary juice in history, America’s economy has slightly outpaced Europe’s. But the figures are hard to compare. Europe calculates GDP growth more conservatively than America…and understates the truth, rather than overstates it, as they do at the Labor Department. More importantly, America’s jolt of growth has come at great cost. While Europe got no net stimulus, America has gotten enough to give it the shakes.

"Super-lax policies of the past few years have left behind large economic and financial imbalances that cast doubt on the sustainability of America’s growth," says the Economist. "From a position of surplus before 2000, the structural budget deficit (including state and local governments) now stands at almost 5% of GDP, three times as big as that in the euro area. America has a current-account deficit of 5% of GDP, while the euro area has a small surplus. American households now save less than 2% of their disposable income; the savings rate in the euro area stands at a comfortable 12%. Total household debt in America mounts to 84% of GDP, compared with only 50% in the euro zone."

Barely has the 21st century begun and America finds itself in a remarkable position. It has, what it believes is, the world’s most powerful economy…and the world’s most powerful military force. Like the defunct Soviet Union, it has a sickle in one hand and a hammer in the other. The sickle, alas, has an awkward bend in it.

"The U.S. suffers from…structural deficits that will limit the effectiveness and duration of its crypto-imperial role in the world," explains Niall Ferguson. "The first is the nation’s growing dependence on foreign capital to finance excessive private and public consumption. It is difficult to recall any empire that has long endured after becoming so dependent on lending from abroad."

But it suffers no deficit of raw power. The hammer – U.S. military might – is real. Americans are no better or worse than any other race; is it any wonder they will want to take a whack at someone?

Neo-Conservatism: Boring

Putting it another way: grubbing for money might be fine for a modest nation working its way up in the world; is it worthy of a great nation on a roll?

"The trouble with the emphasis in conservatism on the market," William F. Buckley said to Corey Robin, "is that it becomes rather boring. You hear it once, you master the idea. The notion of devoting your life to it is horrifying if only because it’s so repetitious. It’s like sex."

Another old ‘conservative,’ Irving Kristol said this to Corey: "What’s the point of being the greatest, most powerful nation in the world and not having an imperial role?"

"It’s too bad," Kristol lamented about money-grubbing. "I think it would be natural for the United States…to play a far more dominant role in world affairs…to command and to give orders as to what is to be done. People need that."

"When I think of all the crazy things that went on here in France during the last century," continued our dinner guest. "Or maybe I should say in Europe. You know, we invented most of the awful ideas back then. Deconstructionism, Freudianism, Nazism, Conceptualism, Socialism, Syndicalism, Minimalism, Communism, Functionalism…come to think of it almost all the worst ideas came from Europe. And even in America, if I’m not mistaken, almost all the new developments in philosophy, art and architecture came from immigrants…or maybe refugees…from Europe. Just about everything. Of course, most of it was harmless. Funny even…like Dadaism. But politics wasn’t so harmless. And now you do what we did. You come up with the new ideas…and you try to force other people to accept them. You have that…what do they call it…neo-conservatism."

To be continued…

Regards,

Bill Bonner
for The Daily Reckoning
June 25, 2004

We were lost yesterday. But now we are found. We were blind, but now we see.

Oh ye of little faith…what we saw was the price of gold shoot back over $400 yesterday. Sales of new houses hit yet another record.

Inflation coming? Nah…bonds actually went up. Long bonds that is, the kind that should go down if they saw inflation on the way. The unemployment numbers went up too. And sales of durable goods went down for a second month in a row.

People aren’t buying gold out of fear of good times (inflation)…they’re buying it out of fear itself. They fear the whole shebang is in danger.

Who are these people buying new houses? Often, they are those who can’t really afford them and wouldn’t normally qualify for a mortgage. They’ve been lured into homeownership by the lowest rates in two generations…and the fastest increase in prices (depending on where you are) ever. In Orange County, California, the median house sold for $250,000 5 years ago. Today, it sells for nearly $500,000. A median homeowner made $50,000 per year without breaking a sweat. In San Diego, the median house rose more than 30% last year. With interest rates at 6%, you could have netted 24% per year undefined you would have to be mad to turn down a deal like that.

"We will not be going to any movies or eating out at restaurants," said Ray Daneshi to the New York Times, after buying a $360,000 house near Disneyland with a mortgage equal to 100% of the sales price and 600% of his annual income. "But in two years, the house will be worth a lot more and we will have something to show for it."

See how easy it is, dear reader? You don’t have to save, or work, or come up with a new invention or write a hit song. All you have to do is buy a house. And you don’t need a penny to do it. Nor even much of an income.

But what’s this? Daneshi, a ‘sub-prime’ borrower got a sub- prime rate of 10.25% on the second part of his mortgage.

Still, "thanks to God," he says, forgetting to include the Great Enabler, Alan Greenspan, and the sub-prime lending industry, "for finding me a mortgage program that let me buy my own house."

Daneshi and his wife are both fully employed. They have no savings. They have no margin for failure, illness, children, divorce, insanity, depression, layoffs, injury or any other setback. If nothing goes wrong in their lives, they will be able to make their payments. This will allow the mortgage company to make its payments, which in turn will permit the sellers of mortgage-backed securities to make their payments.

Five trillion dollars of mortgage obligations is at stake, an amount equal to half the entire U.S. GDP. Mortgages now represent such a huge part of the entire land mass of Debtor Nation that, should any problem arise, the whole thing is likely to go belly up.

Much of this debt rests on the fragile shoulders of householders such as Daneshi. Buy gold, dear reader; he might miss a payment.

Over to the Homeland Team:

——————————————————————————–

Tom Dyson, from the Monumental city…

– Gold is back above $400. The long-edge of our ‘trade of the decade’ is moving in the right direction. Will we see $300 gold ever again? We seem to remember asking this question before. And we may ask this question again. Nevertheless, gold is once again above $400. For now. Silver gained too. It added 29 cents to trade back above $6 an ounce. Yesterday, it closed at $6.18.

– But we don’t rejoice. For the reasons behind yesterday’s $8 surge in the gold price were not cause for celebration. Over 100 people were killed in Iraq on Thursday and more than 320 wounded, reports Associated Press. A deadly combination of car bombs, rocket-propelled grenades and automatic weapons wreaked havoc across 6 Iraqi cities. The ferocious attacks – carried out by the followers of al- Zarqawi, the group responsible for the beheadings of Nicholas Berg and Kim Sun-il – were designed to disturb and undermine next week’s hand over of power.

– Weighed down by the carnage in the Middle East, the DJIA fell 36 points to close the session at 10,444, a loss of 0.34%. The Nasdaq and the S&P also fell; the indices now trade at 2,016 and 1,141 respectively, both down nearly one-third of a percent on the day. In economic news, the Department of Labor reported that initial jobless claims rose slightly for the week, while durable orders fell by 1.6%, said the Department of Commerce.

– The bloodshed reverberated through all the markets. Treasurys gained; 10-year yields were pushed down 5 basis points to 4.65%. Crude oil gained 36 cents to $37.93.

– We don’t need to tell you, dear reader, that the situation in Iraq is bloody awful. Open any newspaper and you’ll see a myriad of stories that show you just how dire the situation is. The coalition is seemingly mired in a bog of guerrilla violence and terrorism. As the press are wont to remind us all too frequently, it is difficult to see how democracy, capitalism or even peace are ever going to wriggle out of this nasty hornets’ nest.

– A new stock market is being built in Baghdad. We read that the job had been given to a 24-year old political science major, fresh out of college. Jay Hallen is the young sprat’s name. "Be careful what you wish for," Jay was told when he wrote to the White House, asking for a job. "A few weeks later," reports the Wall Street Journal, "Mr. Hallen got a phone call from a Pentagon personnel officer, who told him he had been given a job in the Coalition Provisional Authority and needed to be in Baghdad in less than a month." Mr. Hallen had not previously followed the stock market and "rarely watched financial news stations."

– "The headquarters of the old Iraqi exchange," the College Journal goes on, "where brokers in blue vests scribbled trades on boards, was looted after the war and is now occupied by squatters. Several listed companies no longer exist, and many Iraqi companies’ majority shareholders – Saddam Hussein and his friends and relatives – are either dead or in prison."

– Could the picture for investing be any worse, we ask. Or perhaps, as astute contrarian readers might already be asking, could the situation for investing be any better?

– We found a memo entitled "Why invest in Iraq" posted on a website for the U.S. Department of state. "Iraq is a uniquely attractive place to do business in the Middle East," the release begins. "Iraq has close to 25 million people with pent-up demand for goods and services they have been unable to purchase for years. Since the war, consumption has increased as a result of a significant increase in wages and the opening of international trade."

– And we can think of other reasons to be bullish on Iraq too, quite apart from the fact that the scenario cannot get much worse. Did the reader know that power plants in Iraq are pumping out more juice than they were before the war?

– Maybe the press frets too much? Maybe it’s easier to sell newspapers that way? And what about Iraq’s oil? We don’t worry about supply disruptions…the oil isn’t going anywhere; it can be sold next month instead, perhaps at even higher prices.

– An election approaches. Would it be foolish to expect the administration to generate as much good news as possible, and the military to be on its best behavior? You can be sure, dear reader, that for the next few months, the folks in the PR department at the Coalition Provisional Authority HQ won’t be lounging around by the pool, enjoying the Iraqi sunshine.

– Mr. Hallen has promised a stock market that is the envy of the Arab world. And before the market closed early last year, prices were already rallying as "Iraqis placed bullish bets that the war would benefit their investments." Here at the Daily Reckoning, we don’t know if Baghdad will bounce or if Iraq will turn out to be a good investment for the local Iraqi brokers, for the coalition or even for President Bush, but this contrarian-minded editor suspects that investments in Iraq might go up more than most Nasdaq stocks.

– If only we knew how to invest there…maybe we should extract Dan Denning from the friendly local entertainment and white sandy beaches of Thailand and send the insurgency team to Baghdad in search of value plays…?

——————————————————————————–

Back in Paris…

*** First, let’s check with the stars…

We found out a week or two ago that the heavenly bodies influence the amount of serotonin in the brain, which has an effect on our moods. What do we know? It is probably as good a way of guessing as any. And our friend Veronique tells us that her astrology-based stock market forecasting system has produced a 307% gain in the last 22 months. (French-speaking readers can check this out for themselves on her website at www.cosmovaleurs.com.) What’s she saying now?

"The last days [of June] and the beginning of July will prove dangerous," says her newsletter.

*** It was a big night for England. Its soccer team faced a crucial game in a crucial competition…the details of which your editor is completely ignorant. Fans were warned by yesterday’s Daily Express to "Hide any sharp or fragile objects" before the game begins. And "prior to the last- minute winner from Wayne Rooney [star player…and distant relative of ‘Gentleman Ruby’ Bob Fitzsimmons who won the world middleweight boxing championship by thrashing Jack Dempsey in New Orleans in 1891], check the height of your ceiling."

As it turned out, the poor English fans were disappointed. Portugal won in a sudden-death penalty shoot-out.

*** We have no television at home. But occasionally, in a hotel room, we turn it on – just to be appalled.

British television is even more vulgar than its American counterpart, if you can believe it. Producers delight in showing ordinary low-class stiffs in remarkably low-class situations, so revoltingly tawdry, it makes you wonder what point they’re trying to make. But what we saw on Wednesday night made us laugh. It must have been a group of the dumbest Brits God ever made…again, on a show purporting to be ordinary people going about their business. Two couples, including two ex- spouses, decide to team up together to buy a Bed and Breakfast in Spain. They sell their houses in Britain and set off, leaving with neither enough brains, skills, nor money to get the job done. Naturally, the whole adventure is a nightmare from start to finish – especially for the viewer. *** "The trouble with having a lot of money," our friend Jon said yesterday, "is that it is hard to get rid of without looking ridiculous. You spend a fortune on some extravagant fancy hoping to stir up the admiration of your friends and the envy or your enemies. But you merely become a fat mark for luxury salesmen…and a fool to the rest of the world."

Your editor, of course, is not rich; he is just a struggling scribbler. Still, he may have been the man Jon had in mind. There are certain kinds of absurdity he can’t seem to resist. Not sports cars, nor Manets, nor yachts, nor tech stocks, nor painted women – he is as numb to them all as a theatre rat is to Bertholt Brecht. But when it comes to real estate in exotic places, he reaches for his wallet.

‘We have found a tropical paradise,’ we told him. ‘We’re going to make an offer.’

"Where is it," he asked.

"In Latin America…in a third world country always on the verge of revolution. That’s why it’s reasonably priced."

"Does it have a good road?"

"Well, no…"

Does it have good utilities, you know, electricity and water…?"

"Well…no it doesn’t have any utilities at all."

"What are you going to do with it then," Jon wanted to know.

"Don’t know…just dream about it…I guess."

"Well, thank God for the world’s dreamers," said Jon. "Without them there would be no one to buy half the world’s stocks…and much of its property."

*** This from a DR reader with a "confused soul" but a "brilliant mind": "I read the newsletter nearly everyday but here’s the problem. I have all these great investment ideas and I just know they would turn to gold…in almost every industry possible, from movies to music, video games, down to a special loan program. Now here’s the problem. I’m gonna keep it real with you even though in today’s society, I shouldn’t. But who cares. See, I’m not even worrying about using correct grammar – I put ‘but’ after a period.

Well, when I was younger, I was good at school, certain aspects of it at least. Not behavior though. I always felt as though the world was owed to me. So at around the age of 15, I called one of my older male relatives – I’m not gonna be specific for legal reasons – and bought an ounce of weed. I doubled my money in less than 2 days and from there, it all got out of hand.

Within a year, I drove an older but very nice BMW. My mother, who was always overly nice to me when I was younger, paid the insurance for me. So I fell in this habit of spending money like there was no tomorrow. By 17, I was on planes out to California and Arizona once or twice a week; Tom, this is all true. I drove around in the most expensive rental cars all the time. Now, when I was 18, the unthinkable happened – I got arrested in Tennessee on my way to Vegas to meet a new connection. I spent 6 days in jail, bailed myself out for $5,000, and spent about $3,500 on my lawyer. It was the worst 6 days of my life. I promised myself that I would never go to jail again. I couldn’t stand it. It was disgusting to me.

So now I’m back home in New York and, just as if I hadn’t learned my lesson, 2 months later I went out to make some extra money. I got in trouble again; I spent 6 hours in that place. I told my brother the combination to my safe and bailed out for $8,000. Then got another high priced lawyer so I wouldn’t do no time and wouldn’t be convicted as a felon. I didn’t want to become another statistic.

I had $2,000 dollars when I came home. My mom kept my bail money, ’cause it was in her name when she came to the jail and got me. She kept my bail because she said I got it the wrong way. Now, a year later, I do nothing all day but work on my music and ponder these ideas that can make any man rich if they were put to use.

I try to get jobs but I have like $10 in my bank and $10 in my pocket, so I always have trouble getting to the interview. If I do get there, it’s either too low paying, too dead-end or, if it’s something I do like, I’m under qualified. I signed up for college in the fall but that’s not what I really want to do. I don’t do drugs and I’m a good-looking guy, but when it comes to getting money the legal way, I feel it’s not for me. It’s just not enough, or you need a whole bunch to start with. Then on the other hand, illegal ways are not for me either, because I’m more scared of jail than I’m scared of death.

What do you think I can do, if it’s not too much to ask?

Sincerely,

A confused soul, connected to a brilliant mind, in an impatient vessel, which needs guidance.

*** Dear Confused Soul,

We suggest a career in politics. Nothing else is likely to measure up to drug dealing – at least, not in terms of return on investment. Perhaps you won’t make as much, but at least the odds of breaking the law and going to jail are lower. After all, you will write the laws to suit you.

Apart from that, we might remind you of a old saying that might not be inspiring, but it is at least reassuring: money isn’t everything.