David Fuller is right. What we are really watching is the decline of the United States of America... its currency... its capital base... and its competitiveness in the world economy.
The feds can try to play out more lines of credit to strapped families, but what they are really doing is giving them more rope with which to hang themselves. The real problem is that American wages have not kept pace with inflation... which means, the average American is not as rich as he used to be. He can only pretend to be rich... by exchanging more of his leisure time for dollars... and by borrowing. Both of those "coping mechanisms," as Robert Reich called them, are now exhausted. Now, he's going to swing.
Over the last 30 years, Americans believed they were on top of the world. Everybody said so. And, logically, they should have been. It was post Reagan Revolution, with the most modern, most capitalistic economy in the world... with the latest technology, with the world's best brains, with the top schools, and with Wall Street to "allocate capital" in the best possible way. If workers couldn't get ahead in this economy, they couldn't get ahead anywhere. At least, that was what people believed.
But capitalism is a jungle, we keep saying, not a zoo. It lets animals get fat, but only so they can be eaten by hungrier beasts.
To us here at The Daily Reckoning, it was fun listening to the conceits and pretensions of the zookeepers. At the end of the '80s, they announced their triumph over communism, apparently unaware that their biggest potential rivals had just cut themselves loose from a ball and chain. It is not even 20 years later, and both Russia and China are already formidable competitors. China's reserves of foreign currency, for example, are nearly 20 times those of the USA. And now, if the Red Giant decides to dump dollars, America's economy will be hit by a major crisis... and possibly paralyzed.
Then, near the end of the '90s, the dreamers thought they had found some magic formula. America no longer needs savings, said the pundits, because now our information technology allows us to create wealth using 'virtual' capital... brain capital. "They sweat; we think," said one genius, as if the Chinese and Russians couldn't think too. If this insight weren't hilarious enough, Ed Yardeni went on to say that there was a whole new species of human - those who understood this important new truth... those who "got it." Those who "didn't get it," were destined to be left in the dust, he said. We were happy to remain in the camp that was left behind.
Later, after the dotcoms blew up, another hallucination developed. One that sophisticated financial engineering, combined with enlightened macroeconomic management, had made market crashes and recessions obsolete. The geniuses went to work with computers, proving that those fancy derivative contracts (which they were selling) were completely foolproof. They were supposed to run into problems only once in a blue moon. "You're talking about sigma 25 events," they said, as if they had a clue. Scarcely three years later, the moon was blue.
It was all great fun. Watching the show, that is. And it's not over.
Yesterday, the Dow rose more than 200 points. Richard Russell, the keeper of Dow Theory flame, says the stock market is no longer pointing to deflation... but to inflation.
Of course, the price of gold has been pointing to inflation for a long time. It rose again yesterday - up to nearly $930. In Europe, too, inflation is making headlines - it's at a 14-year high. Many people in France, for example, think the euro (EUR) was a plot to increase prices; they want the franc back. Painted on the wall of a Paris building yesterday, we saw the citoyens' complaint: "Euroshima" it said.
And consumer inflation in China, at nearly 7%, is said to be "China's latest export."
But we are not writing today about the war between inflation and deflation. Today, we're focusing our attention on a bigger story.
*** The headlines rarely tell you much about what is really happening. They are like dispatches from the front. Inflation scored a victory in the oil market. Deflation advanced on the retail stocks. One company got killed. One trader blew himself up. A trendline broke through resistance.
Behind these news stories is the story so big that scarcely anyone notices it. The United States is losing ground. Its people are getting poorer. Why? Because now, it's America that drags around the ball and chain.
How much do Russia and China owe the rest of the world? How big are their trade deficits? How many trillions have they promised their retirees? Their sick? Their former employees? How high are their taxes? How much do their people save?
On almost every score, the former communist hellholes have a huge advantage over their North American competitor. The Chinese save nearly 50% of their incomes; Americans save nothing. Russian tax rates are less than half those of the United States. Both have positive trade balances. Even in high tech, America has a negative trade balance with the rest of the world.
Like Europe, America is chained to an aging population and democracy. Both are bad for business. The baby boomers are beginning to retire. They've already been promised the sun and the moon... And, once they're retired, they're going to vote for the stars too.
That's why Republican strategists are telling their candidates: No more tax cuts! The voters want to be sure there's money available for them when they retire.
A little late for that. The government didn't really set aside money in a 'lock box,' as Al Gore used to put it, for Americans' retirement. It just took the money out of the general fund and put an I.O.U. in the retirement fund. Now, those I.O.U.s are coming due. And what politician is going to stand up to the biggest block of voters in the country and suggest that they be cut back?
And unlike Europe, America has low savings rates... a negative trade balance with the rest of the world, and few industries that can stand the challenge of competition. Germany is still making cars at a profit; the United States is not. France has its luxury products. Switzerland has its precision tools.
In addition to the social charges, there is the big, leaden ball of military expenses. The U.S. military budget is half of the entire world's military spending, and represents 80% of the increase in world military spending since 2005. The whole point of having such a big military is to be able to push people around. But you have to make it pay. Empires traditionally demanded tribute from the peoples they conquered and/or protected. But the U.S. never got the hang of it. It maintains garrisons of troops all over the world - at its own expense. It thinks it is doing the world a favor; and it thinks it is rich enough to afford it.
The biggest U.S. outposts are in Afghanistan and Iraq, which aren't even in the military budget. When the war in Iraq began, we estimated that it would end up costing a trillion dollars. And now that the numbers are coming in, we have to admit that we were wrong. Instead of $1 trillion, the Congressional Budget Office estimates that the war will cost $1.7 trillion; the National Bureau of Economic Research puts the tab at $2.2 trillion; and the Congressional Joint Economic Committee thinks it will come to $3.5 trillion.
A trillion here... a trillion there... pretty soon, you're out of money.
But this is a story only the invisible man of the U.S. presidential election, Ron Paul, is willing to tell.
*** Who ever heard of a stock market without corrections? Don't prices go up as well as down? And isn't it normal from economies to take a breather every once in a while? Why the panic at a slight market pullback and first signs of a coming slump?
What is most astonishing about the situation is that there is so little astonishing about it. Bear markets and recessions - like the poor - will always be with us. It's not the end of the world when they come... because they go, too. Why then the feds' desperate attempts to avoid them? As we pointed out yesterday, the stock market was barely down 15% from its all-time high and already the Bernanke Fed was taking emergency measures. And hardly has a slowdown begun, and both the House and the Senate have rushed through proposals to send out checks. What kind of economics is this? What theory tells you that you should send out $1,000 checks as soon as GDP growth rates fall to 2%? And if $1,000 checks are supposed to make things better, why not send out $2,000 checks... and make them wonderful again?
As we point out above, the United States is in danger. But the danger cometh not from a bear market in stocks or a recession. Those things are normal, natural and inevitable. Even if you could prevent them by sending people money... you wouldn't want to. You'd just be making the situation worse.
Americans' problem is that they've spent too much, borrowed too much, and saved too little. That problem will not go away. It needs to be corrected.
*** "That guy they nabbed in the Societe Generale scandal. He's just a fall guy," explained a friend yesterday. "A sacrificial lamb. They made a deal with him to cover up the bank's losses elsewhere. At least, that's the rumor going around town. And it's probably true. You can't believe anything the banks say. "
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About the Author
Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.