 The Madness of George II
Bill Bonner
The
Daily Reckoning
8 December,
2003
The Daily
Reckoning PRESENTS:
The dark
underbelly of human calculation... and an inevitable side effect.
Squeeze a human
heart, and the slime oozes out.
We weren't
aware that the U.S. Constitution was still in force, but we read
that retired General Tommy Franks told Cigar Aficionado magazine
that another terrorist attack like Sept. 11th would bring it
to an end. We wondered how Americans would bear up under the
strain of a financial disaster.
Under pressure,
a man reveals the juice - good and bad. A soldier, for example,
may tell a reporter he is building a democracy. But threatened
by a mob, he reaches for the trigger.
The list of
stable paper currencies built by central bankers is as short
as the list of stable democracies built by armed invaders. Some
basic grease in the human heart seems to work against them. When
bankers discover that they can increase the supply of money simply
by printing up some worthless paper, they don't seem able to
stop themselves. Soon, there is too much paper and it becomes
worthless. And when foreigners invade a country - even foreigners
who think they have a better idea how to run the place - the
locals seem to resent it. That may not stop us from hoping. But
readers might want to check the odds - just in case.
The madness
of George II, reigning president of the American government,
is that he believes he can do what has never been done. Never
mind the grease, says he; with some Ajax and a little scrubbing,
the economy and the war effort will sparkle.
Most Americans
believe he will succeed. More spending and borrowing will bring
a recovery, they think. Somehow, the war in Iraq will work itself
out, they pray. Few notice the long odds; fewer still bet against
them. What will they do if things go against them? Suppose the
dollar falls more and the Chinese stop buying U.S. debt... or
actually sell it? What would happen to U.S. spending if interest
rates were forced up? How many people would refinance their homes?
How many could continue to live in the style to which they've
become accustomed? How many would lose their homes? How many
would lose their jobs - or be humbled into accepting a lower
income, and a lower standard of living? How many would blame
themselves?
Our worry is
not that George II will be proved wrong; we have little doubt
that neither of his grand projects will yield a decent return.
Instead, we worry what will happen when American hearts are squeezed
harder... when the miry clay of disappointment, bankruptcy, depression,
inflation, and national humiliation have Americans entrapped,
struggling to stand up straight.
"Incompetent
central bankers are more lethal even than incompetent generals,"
writes our old friend Lord Rees-Mogg in the Times of London this
week. "They, too, have their Gallipolis.
"'We have
suffered more from this cause [bad paper money] than from every
other cause of calamity,'" Lord Rees-Mogg quotes a dead
man, Daniel Webster. "'It has killed more men, pervaded
and corrupted the choicest interests of our country more, and
done more injustice than even the arms and artifices of our enemy.'
"I have
lived through most of the period of the decline of the pound
and the disintegration of the sterling area," his Lordship
continues. "It was a long, historic process. Its early stages,
which occurred before I was born, have some resemblance to the
current state of the dollar. After 1918, Britain was heavily
indebted and had lost competitiveness to new economies.
"The U.S.
is now heavily indebted, and the debts are growing rapidly. The
U.S. in its turn has lost competitive advantage to the countries
of East Asia... .High savings and competitive exports were the
characteristic of the U.S. 100 years ago. Now they are the characteristics
of East Asia."
The U.S. dollar
cannot be called stable. A dollar today will buy only about 5%
of what it would have bought a century ago. Compared to gold,
too, it has lost more than 90% of its value since Franklin Roosevelt
devalued it in the '30s.
'Steady' might
be a better word to describe it. But even that is not true. The
dollar does not drop at a steady rate, but at a jerky one. Like
a melting polar ice cap, it tends to lose a little every year...
and then, suddenly, a large iceberg falls off. Over the last
20 years or so, a strange weather pattern has persisted over
the northern hemisphere. While the dollar has continued to melt
away... it has melted at a slower and slower pace. Against gold,
it did not melt at all - until recently, it froze even more solidly.
With no telling
entrails in front of us, we cannot know what will happen. But
we take a guess: a chunk the size of New Jersey is about to fall
off.
Your editor
had tea with Lord Rees-Mogg on Wednesday. We reminisced about
paper currencies. None had ever survived for very long - and
even gold-backed currencies tended to give way under the stress
of a shooting war. Squeezed for cash, the Continental Congress
of the American colonies issued 'continentals' - I.O.U.s not
backed by gold. They were just promises to pay later, after the
war was over. But after the war was over, they became the thing
that worthless things were worth more than.
In America's
war against the Southern States, again, the Lincoln administration
resorted to paper. It established a central bank - a forerunner
to the Federal Reserve system - and issued I.O.U.s... .which
subsequently lost their value. The Confederate States did likewise.
Years after the war, desk drawers in Atlanta were still full
of I.O.U.s - completely worthless, of course.
Largely under
pressure from Johnson's War on Poverty and war in Vietnam, the
Nixon Administration resorted to I.O.U.s again - paper dollars
backed by the world's biggest debtor. Since 1971, the world has
seen nothing else. Central bank coffers are full of them. For
every ounce of gold in the world, there are approximately $20,000
worth of dollar-based assets and maybe $10,000 worth of dollar-denominated
debts, with the paper-based assets and credits growing many times
as fast.
The dollar
will almost surely fall more - perhaps much more... and perhaps
very suddenly.
That is when
hearts get pinched... and the juice oozes out.
 Bill Bonner
Dec 8, 2003
Bill Bonner
is the founder and editor of The Daily Reckoning. He is also the author, with Addison
Wiggin, of the Wall Street Journal best-seller: "Financial
Reckoning Day: Surviving The Soft Depression of The 21st Century"
(John Wiley & Sons), available at Amazon.
A version of
this essay was first published in the Daily
Reckoning.
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321gold Inc Miami USA
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