Now we’ve finally figured it out. We were sitting in a pub, listening to a crazy woman. All of a sudden, it was clear...what went wrong with the US economy, we mean.
The dollar has dropped so low that America is becoming a shopping paradise for foreigners. Of course, we’ve been predicting that foreigners would buy up US assets...
Already, we’ve seen Arabs make bids for the NASDAQ...and a big chunk of the buyout-firm Carlyle. Poor Carlyle took a hit last month. It made bad bets and lost 24% of its assets. So let’s hope Abu Dhabi got a good deal for its billions.
What’s going on in the stock market? The Dow rose again yesterday – nearly 100 points. If there is a recession coming, the stock market doesn’t see it. What’s wrong with investors? Are they blind?
“Stocks are riding a wave of optimism fuelled by the Federal Reserve,” says Grace Wong, writing at CNNMoney.com. “But maintaining the upbeat mood will prove difficult to do. Get ready for the hangover.”
Still, she continues, “there are plenty of clouds on the horizon that could put the Fed in a tough spot and derail the rally.
“Surging oil and gold prices, along with a falling dollar, have fanned inflation worries. A sustained rise in prices could limit the Fed's ability to keep cutting rates and could even force policymakers to raise rates.
“In the long run, the US economic slowdown could also start dragging on corporate profits, which at large companies have been propped up by strong international business.”
Then, she quotes a money manager:
“‘It has been stuck in investors’ heads that when the Fed cuts rates it’s a good time to buy stocks,’ he said.”
“I don’t know...I don’t feel comfortable here...I think I’ll go back to Russia...”
The woman in the pub was probably crazy or drunk. Heavy set – her hair stood out...an odd reddish colour. Her cheeks were red too. She looked as though she had just come in from digging up potatoes all day. She was speaking to no one in particular...loudly...with a heavy Eastern European accent. Everyone ignored her. But your editor writes with his ears.
“I thought it would be different here. But it’s the same. Just people have more money.”
Like the smell of Proust’s lemon cakes, the words of a lunatic set off a whole chain reaction of thoughts. First, of course, there are many reasons why the United States got into its present fix:
Asians saved so much money, it swamped Western capital markets and drove down interest rates.
Wall Street generally, and the lending industry in particular, figured out how to securitise debt and thereby “socialise” the risk from their investments. They got the fees; ordinary investors got the losses.
The dollar was cut loose from gold in 1971; as the world’s reserve currency...and the currency of the biggest spendthrifts on the planet...it led the entire global economy into a liquidity bubble.
The Greenspan Fed panicked in 2001...taking rates down too low and holding them there for too long – inciting the residential housing bubble.
Globalised labour markets cut consumer prices...increased corporate profits...and allowed huge increases in monetary inflation (leading to higher asset prices rather than higher CPI readings)...
We could go on. You’ve seen all these explanations...and many more...here at The Daily Reckoning . But we prefer the grand sweep of theory. We thought about what went wrong in the Soviet Union.
The real problem was that centrally-controlled prices don’t work. Prices provide valuable information. They tell people when to buy, when to sell, when to invest, when to save, when to hoard...and when to run for cover. But when prices are not allowed to move freely...people get the wrong idea. They begin to do stupid things. They produce too much of the wrong thing...or too little of the right thing. Mistakes accumulate...piled one on top of another...until the whole thing collapses in a heap, which is what happened to the Soviet Union. Towards the end, the Soviet economy was a massive value-subtracting enterprise. “We pretend to work,” said the working classes, “and they pretend to pay us.”
It took natural resources and transformed them into finished products. But the products produced by Soviet industry were so badly designed, so shoddily made, so out-of-date, so unneeded, superfluous and trashy that they actually had less value than the raw materials that went into them.
Now, back in the USA, a credit drenched economy is actually subtracting wealth from the average person. People are getting poorer. Many are the contributing factors. But could the main reason be the same for America as it was for the Soviet Union?
Bill Bonner
The Daily Reckoning Australia
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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.
Comment by Allan Wallace on 29 September 2007:
A nice observation.
You could probably throw in our foreign adventures and a propensity to want both guns and butter into the mix.
Shaken, not stirred.
Comment by kievite on 30 September 2007:
You are over-simplifying very complex things to the extent this oversimplification hurts your credibility.
While it is generally true that USSR was one huge inefficient and badly managed corporation (not that different from any huge multinational corporation), which BTW eventually voluntarily downsized, the situation was very uneven and this corporation did produced several competitive high tech goods, especially in military sector and heavy machinery.
I think the key here was that they overextended themselves by huge overspending on military sector desperately trying to reach parity with the USA. It was the biggest strategic mistake they made and that was the main reason they destroyed the civil sector due to systemic underinvestment.
They also paid too much attention to heavy industry and underestimated the importance of consumer sector which was the sector people were the saying “We pretend to work, and they pretend to pay us.” BTW is not that true about any McJobs?
Science level, especially nuclear and materials science level was OK. Paradoxically the level of qualification and level of talent was pretty high. That became quite clear after mass emigration of their techies, especially programmers, to the West after the dissolution of the USSR.
Comment by Paul V. on 2 October 2007:
"You kill the dragon, you become the dragon".
Yes, the Red Dragon died by itself, but good ole US of A. put their hand to help it.
All Western developed countries including Australia became "welfare states" - huge governments, large government spending and ever increasing percentage of government depending economy, just like USSR.
Yes, there is still a difference, but it's disappearing every day.