Sitting on Bayonettes
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.
...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