 Sitting on Bayonettes
Bill Bonner
The
Daily Reckoning
Posted June 1, 2004
The Daily Reckoning PRESENTS: "Seizing a city is a very different matter
from holding it." Since the tech-wreck in 2000, the Fed's
army has fought the war and captured the city... now it must protect the prize.
There is a
time for everything.
Yesterday,
we meant to tell you - perhaps we did - about our conversation
with a young French analyst. "Dynamism," he said, "that
is what separates America from Europe. You Americans are ready
to take action. While we Europeans hesitate."
There is, of
course, we explained, a time for action... and
a time for reflection. One of the curiosities of life is that
people - amidst the masses - tend to get mixed up. They tend
to reflect when they should act, and act when they should reflect.
Dynamism is
said to be the salvation of the U.S. economy. Yes, Americans
owe too much to too many people. Yes, they spend too much. Yes,
Asians will do their jobs cheaper. Yes, their stocks and real
estate are very high. Yes, their incomes are going down. Yes,
they have leveraged the entire country at artificially low interest
rates... and yes, millions of them will go bankrupt
when interest rates rise.
But no, there
is nothing to worry about, because America has such a 'dynamic'
economy.
Even the Europeans
admire it. They think Americans are naïve and stupid. But
they, too, believe the dynamic U.S. economy will not fail.
The burden
of today's little essay is that not only will dynamism not save
the U.S. economy... it will destroy it.
"You can do anything with bayonets... except
sit on them." Our French Daily Reckoning correspondent,
Philippe Bechade, quoted Talleyrand to make his point. The French
foreign minister under Napoleon explained that seizing a city
was a very different matter from holding it. For the latter,
you needed at least a minimum of cooperation from the citizens.
You had to sit down with them and make a kind of peace. And you
couldn't sit on bayonets.
Then again,
"Napoleon never ordered a bombing of a wedding on pretext
that enemy soldiers were in attendance... certainly
not based on dubious intelligence available," continued
Bechade.
"Talleyrand
would have declared, 'Sire, worse than a crime, you have committed
an error.'"
There is a
time for everything. A time to take action. A time to refrain
from embracing foolish action. And a crime for every purpose
under heaven.
George W. Bush
and Alan Greenspan are the dynamic men history needs. They are
the men for their time. America needs to be taken down a notch,
and they are just the men to do it. George W. Bush's contributions
to America's destruction are right out in the open: clumsy wars... and wanton new spending programs. Alan Greenspans's
crimes are less obvious.
But following
the collapse of the Nasdaq in 2000, and the recession of 2001,
Mr. Greenspan did not sit idly by. He and his crew fixed bayonets
and charged. But in lowering its key interest rate below the
inflation rate, and holding it there for longer than ever, the
Greenspan Fed has committed a grave error. It has enticed the
consumer deeper into debt. It kept alive marginal business and
investment projects (by making it easy for them to refinance
old loans)... and encouraged new
ones. (Once again, as reported this week, we have IPOs coming
to market with neither profits nor products.) And it fueled huge
new bubbles at home and abroad. Real estate in many areas of
the U.S. is soaring. A report from the Federal Reserve shows
the value of U.S. housing stock rising from about 60% of GDP
in 1945 to nearly 140% today. Houses in Southern California have
sprouted wings; new buyers can barely catch them before they
take off. And in China, a bubble of capital goods consumption
has set the entire nation into a smelly, noisy, dizzying construction
boom... and driven up the price of oil and
other raw materials all over the world.
Before the
industrial revolution, a laborer in China, India, or Massachusetts
enjoyed about the same reward for his efforts. But the introduction
of machinery in the West gave the Yankee a huge advantage; soon
an hour of his time was worth 10 times... or
a 100 times... more than that of an
Indian. Now, China and India are catching up.
Mr. Greenspan
hoped his E-Z credit would lead to a rise in hiring and wages.
He knows as well as we do that only if consumers have more money
to spend will a real boom get underway. He got the increases
he was looking for but not where he was looking for them. The
new factories were built in China, not America... and Chinese workers gained the extra income.
Putting up
its factories at a feverish pace, China develops more competitive
capacity every day. This too, is what Alan Greenspan's low rates
have wrought. Americans are more in debt than ever. They own
less of their own houses than ever before. The average American
worker earns 6%, in real terms, less than he did a quarter of
a century ago. During the same time, the average Chinese salary
increased 29 times.
Americans tried
to compensate for the loss of real earnings by becoming more
dynamic and carefree than ever. They rushed into the Information
Revolution... believing that this
new technology would keep them far ahead of the rest of mankind.
Then, they rushed into stocks...
and real
estate... and borrowing more
money... and spending more money. They seemed
ready to do anything - including invading woebegone foreign countries
- if they thought it would keep them on top of the world.
If he knew
what he was up against, the average American would squirm; he
has charged into debt...
now he
sits on his bayonet! He owes more than ever... works
harder than anyone... or, at least longer
hours. And now, he is faced with approximately 1 billion workers
in Asia against whom he must compete, head to head.
If any man
is to blame for this, it is Alan Greenspan. It is not all his
doing, of course. But no man did more to help it along.
We write not
in anger, but in resignation. Americans have come to believe
that they can get something for nothing - forever. They don't
think they will ever have to pay their debts. They imagine that
they will forever earn 10 to 100 times as much as a man in China
or India. They believe their economy is immune to the laws of
economics... that it is so 'dynamic,'
it can survive record debt and deficits forever. Mr. Greenspan
has come along at precisely the right moment; he will show them
otherwise.
Regards,
 Bill Bonner
The
Daily Reckoning
Editor's Note:
Bill Bonner is the founder and editor of The Daily Reckoning.
He is also the author, with Addison Wiggin, of the NY Times,
Wall Street Journal and international bestseller: "Financial
Reckoning Day:
Surviving The Soft Depression of The 21st Century" (John
Wiley & Sons).
Also... if you'll be in the New York area next week,
don't miss Bill's address at the Institutional Gold Conference.
It's the world's largest natural resource investment conference,
attracting the biggest names in gold - portfolio managers, mining
CEOs, analysts and financiers. Drop by if you can, it's free:
The
New York Institutional Gold Conference
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