Dead Men Talking
"Tradition...is the democracy of the dead." - G.K. Chesterton
Yesterday's news brought word, from deputy Defense Secretary Wolfowitz, that U.S. troops would be in Iraq for the next 10 years. Also came an estimate of the cost: an extra $3 billion would have to be added to the defense budget for Iraq...and an extra $1.5 billion for Afghanistan.
"Avoid foreign entanglements," cautioned the father of the country. But corpses have no voice and no vote, neither in markets nor in politics. They might as well be dead.
George W. Bush is undoubtedly better informed than George Washington...and, heck, it's a new era; having foreign entanglements is just what the times seem to call for. George W. Bush may not have the wisdom of a Washington...nor the brain...but at least he has a pulse.
Few people complain about this tyranny of the living. Most accept it as a fact of life. They would not want people to be excluded from the pleasures of life because of an 'accident of birth.' But they are perfectly happy to have the oldest and wisest of our citizens systematically barred from the polling stations and the trading floors by an accident of death. The departed shut up forever, leaving behind them their car keys and their stocks, and their voter registrations...that is all there is to it. Goodbye and good riddance. It is as if they had learned nothing useful...noticed nothing...and had no ideas that might be worth having, as if each generation were smarter than the one that preceded...and every son's thoughts - even the present 'culture of the moron' - improved upon those of his father.
Oh, progress! Thou art forever making things better, aren't thou? Throw out the sacred books - for what are they, but the thoughts of imbeciles? Forget the old rules...the old wives' tales...the traditions...habits of generations...the old timers' superstitions...the old fuddy-duddies doubts! We are the cleverest humans that have ever lived, right?
Maybe. But in today's letter, we convene a council from the spirit world; we invite the dead to have their say. Our aim is not to kvetch on behalf of our ancestors...but to warn the living: the corpses may have a point.
Many times have we referred to old timers' wisdom in these letters. The old timers wanted more from a stock than just the hope that someone might come along who was willing to pay more for it. They wanted a stock that paid a dividend...out of earnings. That was what investing was all about.
But by the 1990s, the old-timers on Wall Street had almost all died off. Stock buyers no longer cared how much the company earned or how much of a dividend it paid. All they cared about was that some greater fool would come along and take the stock off their hands at a higher price. And so they did. And now the market is full of them...greater and greater fools who think the stock market is there to make them rich.
In the space of 20 years, the character of the American economy and its markets changed so dramatically, the old-timers would scarcely recognize them. We mentioned yesterday how, in the mid-'80s, the U.S. slipped below the water line separating the net-creditors from the net-debtors. But almost no one noticed or cared. By then, the old-timers were already in Florida shuffling along, like the Mogambo Guru, waiting for someone to adjust their medication.
"In 1981," Marc Faber explains, "stock market capitalization as a percentage of GDP was less than 40%, and total credit market debt as a percentage of GDP was 130%. By contrast, at present, the stock market capitalization and total credit market debt have risen to more than 100% and 300% of GDP respectively."
We have wondered how this ends. Not well, is our guess. Too much debt and credit, too much capacity, too many dollars, too many bad investments, too much spending, too many deficits and too much confidence...What is the solution? 'Less' is our recommendation. "More," say Bernanke, Greenspan, Bush, and everyone else in a position to do something about it...
And so the whole thing rolls forward...towards its inevitable destruction. Because, and here the dead back us up 100%, all paper currencies sooner or later come to grief. The "if" question is settled. "When...and how" remain open.
And so, we turn to ancestors...and ask for advice.
"The state's need of money increased rapidly," says one of them, Bresciani-Turroni, describing the scene in Germany 80 years ago. "Private banks, besieged by their clients, found it impossible to meet the demand for money...."
As the situation heated up in the summer of 1923, there were some who gave our advice: "Less," they said.
But officials were in roughly the same situation as Bernanke and Bush today. "More," said they.
One, named Helfferich, the finance minister, explained:
"To follow the good counsel of stopping the printing of notes would mean - as long as the causes which are upsetting the German exchange continue to operate - refusing to give economic life to the circulating medium necessary for transactions, payments of salaries and wages, etc., it would mean that in a very short time the entire public, and above all the Reich, could no longer pay merchants, employees, or workers. In a few weeks, besides the printing of notes, factories, mines, railways and post office, national and local governments, in short, all national and economic life would be stopped."
When an economy comes to depend on more and more credit...it must get more and more of it...or it will come to a stop. A man who has borrowed heavily to finance a lifestyle he cannot really afford...must continue borrowing in order to keep up appearances. Or else he must stop. In market manias, love, politics, war...people rarely stop until they are forced to.
In Germany, once the Great Inflation got started, there was no stopping it until it had run its course. In 1921, a dollar would buy 276 marks. By August of 1923, it would buy 5 million of them. Middle-class savers were wiped out.
If only we could roust Herr Helfferich from his eternal sleep! We would like to shake the dust off his wormy cadaver and ask some questions. (And here, we think not of praising the dead, but of tormenting them.) What fun it would be to show him what his policies - the same, by and and large, as are now put forward by Greenspan, Bernanke and Bush - provoked. How gratifying it would be to see the little kraut squirm under an intense interrogation: what was he thinking, after all? Why did he think that more of the dreadful printing press money would undo the harm that had already been done by too much?
"The inflation retarded the crisis for some time, but this broke out later, throwing millions out of employment. At first inflation stimulated production...but later...it annihilated thrift; it made reform of the national budget impossible for years; it obstructed the solution of the Reparations question; it destroyed incalculable moral and intellectual values. It provoked a serious revolution in social classes, a few people accumulating wealth and forming a class of usurpers of national property, whilst millions of individuals were thrown into poverty. It was a distressing preoccupation and constant torment of innumerable families; it poisoned the German people by spreading among all classes the spirit of speculation and by diverting them from proper and regular work, and it was the cause of incessant political and moral disturbance. it is indeed easy enough to understand why the record of the sad years 1919-23 always weighs like a nightmare on the German people."
There, the dead have had their say.