RIP Robert S. McNamara and California’s Holes in its Budget

And it's one, two, three,
What are we fighting for?
Don't ask me, I don't give a damn,
Next stop is Vietnam;
And it's five, six, seven,
Open up the pearly gates,
Well there ain't no time to wonder why,
Whoopee! We're all gonna die.

- Country Joe & the Fish, "I Feel Like I'm Fixin' To Die Rag"

Robert McNamara must have been in a hurry too. He never had time to wonder why he was sending 500,000 American boys to fight a war when Lyndon Johnson was "publicly promising in campaign speeches not to 'go North,' not to send American boys to fight wars Asian boys ought to fight for themselves," as an editorial appearing in the June 17, 1971 issue of The Washington Post put it.

Both the International Herald Tribune and the Financial Times describe the former Secretary of Defense as the "architect" of the Vietnam War. This is news to us and libelous to real architects; as near as we could tell, the war went on without plans or blueprints, clapped together by jackleg meddlers. Then, the whole thing fell down in a heap.

But we do not disrespect the dead here at The Daily Reckoning. Instead, we cut them open in order to figure out what was wrong with them. Look for the autopsy report later in the week...until then, Robert S. McNamara, RIP.

For today, let us return to the markets.

Yesterday, the Dow rose 43 points. Oil sank to $64. Gold traded at $924. The dollar remained about where it was, at $1.39 per euro. And the 10-year note yielded almost exactly 3.5%.

Economists are guessing about how high unemployment will go in the United States. One estimate in RealEconomics has it peaking out at 14%. Another, from PIMCO, worries that it might just climb over 10% and stay there for a long time.

Naturally, the calls for more stimulus spending are becoming louder. People are wondering how come Washington bails out Wall Street but not California.

Wouldn't that stimulate the economy? The Golden State is issuing IOUs to paper over the holes in its budget. Wall Street has announced that it has found a way to make a buck on California's troubles; it will trade the IOUs just like bonds. But major creditors - fearing the paper could decline in value - may not take it...forcing California into a more immediate crisis.

This will make people wonder something else: how come creditors take US IOUs, but not California's? The feds' deficit is 70 times greater than California's. Yet, lend money to the federal government for 10 years and you get just 3.5%.

Meanwhile, in the business sector, Bloomberg continues its reports on the progress of the depression: "Earnings Drop Worldwide," says the headline.

In the United States, dividends are going down faster than at any time in the last 50 years. Businesses are earning less and paying less in dividends because shoppers have stopped buying.

Maybe it's just mid-summer. But despite the darkening clouds, there's an air of eternity...like the stillness before a thunder storm...as if time were stuck in a drop of amber...and lightning would never strike.

"The worst is behind us," says a report from the British Chamber of Commerce. Of course, those words could have come from any one of dozens of sources. Economists believe it. Businessmen. Investors. The recovery may be "long" and "fragile." Maybe "L" shaped...rather than the V we were hoping for.

However, Capital & Crisis' Chris Mayer tells us, the crisis is far from over. "We talk incessantly about bailing out the banks, bailing out Wall Street, when the real question is: who is going to bail out the taxpayers?"

Now, should come the part where the rebuilding begins...and yet, there is no rebuilding. Instead, the economic model that has existed more or less intact since the end of WWII is being dismantled.

Yes, dear reader, we have entered a period of creative destruction. Between the Napoleonic Wars and WWI was a period of growth and stability. There were disruptions - even grave disruptions, such as the War Between the States in the United States and the Franco-Prussian War in Europe. There were various uprisings, communes and Risorgimientos. But the 'powers that be' were solid. So was their money. The pound, the dollar, and the franc were all backed by gold. European powers ruled the earth. Britain ruled the waves. And gold ruled commerce and banking.

It all came to a disastrous end in 1914. Soon, almost every government in Europe was bankrupt. The royal families of Europe - the Hohenzollerns, the Hapsburgs, the Ottomans, and the Romanovs - all were swept away by war and revolution. And then came the Genoa agreement of 1922 that allowed central bankers to hold pounds or dollars, instead of gold, as reserves. It was a small step for man...but a big step on the road to ruin. Thereafter came a number of other steps leading up to Richard Nixon's giant step in August 1971, removing the last trace of gold from the world's official financial system.

The Archduke Ferdinand was shot in Sarajevo in June 1914. The summer that followed was uneasy but, for a while, calm. No one was quite sure what would happen next. As the warm days went by, it began to look as though nothing would happen at all. People had lived through a century of relative peace and prosperity. Smart people believed that something fundamental had changed. It was a new era, they thought. Globalization was making them all rich. And new technological innovations - the internal combustion engine, automobiles, airplanes, electrical appliances - promised a better, easier life for everyone. This better life was based on capital...savings put to work in factories, buildings, machines and transportation systems. Wars no longer made sense, since they destroyed this vital capital. Everyone clearly benefited from the new system of globalized trade; no one stood to gain anything worthwhile from war. One popular book of the time argued that war had become obsolete...unthinkable in this new modern world.

Alas...here we are.

Despite the comforting arguments in July 1914, the guns opened up in August and didn't stop until four years later. Even then, the destruction was not over. The next three decades were spent settling scores and sorting out the debris; the Bolshevik coup in Russia...Mao's victory in China...taking the Germans and Japanese down a notch...hyperinflation in Germany...depression in America - taken together, these developments created a new world order.

The United States of America emerged triumphant. The US has dominated the planet's military affairs ever since; the dollar has dominated its financial affairs.

But now this giant seems vulnerable. It still has the world's strongest military, but depends on it rivals for financing. Britain depended on financing from America in WWII. But America's elite were anglophiles...gladly sharing power with the British Empire in the interwar period, and then stepping into its boots after WWII. The handover of imperial power was smooth. Diplomats still speak of the 'special relationship' between the United States and Britain.

Today's rivals are different. They speak different languages. They have different political systems...and different cultures. They are not European powers. Led by China, they are responsible for a larger and larger share of the world's output. And they already are responsible for a large share of the world's savings - with the biggest piles of cash in the world. Until now, they have recycled those savings back into the United States. It was as if you bought a new automobile and then the manufacturer gave you back your money so you could buy another one. This arrangement seemed to serve everyone fairly well for a long, long time. Americans got to enjoy a standard of living that not even they could afford. Emerging markets got to emerge much faster than they would have otherwise. Factories went up in Asia; debts went up in America.

But that economic model is finished. Broken. It's over. Kaput. American consumers are not going to go further into debt so that Chinese factory workers can add to their savings. Instead, savings rates are soaring in the United States. And the Chinese are facing riots (described as "ethic riots" in the paper...they have left 156 dead in a remote Chinese province...How much effect did the financial downturn have on this civil insurrection? We don't know...)

Like the great powers in the summer of '14, no one has an interest in upsetting the economic model of the last 50 years or disturbing the political stability of post-Cold War period. Besides, the rising powers - again, led by China - are "trapped," say analysts. They are thought to have "no choice" but to back the United States and its dollar.

"China - with 80 different car makers to bail out... tens of thousands of huge socialist-era factories... and 100s of millions of workers to support - has a big problem," The Richebacher Letter's Rob Parenteau tells us.

"Much bigger than they're letting on."

"But when you are trapped, you spend all your time trying to figure out how to get free," said an analyst we met with yesterday. "Sooner or later, they'll find a way. Then, watch out."

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

RIP Robert S. McNamara and California's Holes in its Budget, 9.6 out of 10 based on 5 ratings

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