| The Madness
Of George II |
| Squeeze
A Human Heart, And The Slime Oozes Out |
| By Bill Bonner |
| We weren't
aware that the U.S. Constitution was still in force, but we read that retired
General Tommy Franks told Cigar Aficionado magazine that another terrorist
attack like Sept. 11th would bring it to an end. We wondered how Americans
would bear up under the strain of a financial disaster.
Under pressure,
a man reveals the juice - good and bad. A soldier, for example, may tell
a reporter he is building a democracy. But threatened by a mob, he reaches
for the trigger.
The list of
stable paper currencies built by central bankers is as short as the list
of stable democracies built by armed invaders. |
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Some basic
grease in the human heart seems to work against them. When bankers discover
that they can increase the supply of money simply by printing up some worthless
paper, they don't seem able to stop themselves. Soon, there is too much
paper and it becomes worthless. And when foreigners invade a country -
even foreigners who think they have a better idea how to run the place
- the locals seem to resent it. That may not stop us from hoping. But readers
might want to check the odds - just in case.
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The madness of
George II, reigning president of the American government, is that he believes
he can do what has never been done. Never mind the grease, says he; with
some Ajax and a little scrubbing, the economy and the war effort will sparkle. |
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| Most Americans
believe he will succeed. More spending and borrowing will bring a recovery,
they think. Somehow, the war in Iraq will work itself out, they pray. Few
notice the long odds; fewer still bet against them. What will they do if
things go against them? Suppose the dollar falls more and the Chinese stop
buying U.S. debt...or actually sell it? What would happen to U.S. spending
if interest rates were forced up? How many people would refinance their
homes? How many could continue to live in the style to which they've become
accustomed? How many would lose their homes? How many would lose their
jobs - or be humbled into accepting a lower income, and a lower standard
of living? How many would blame themselves?
Our worry is
not that George II will be proved wrong; we have little doubt that neither
of his grand projects will yield a decent return. |
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Offshore
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| Instead, we
worry what will happen when American hearts are squeezed harder...when
the miry clay of disappointment, bankruptcy, depression, inflation, and
national humiliation have Americans entrapped, struggling to stand up straight.
"Incompetent
central bankers are more lethal even than incompetent generals," writes
our old friend Lord Rees-Mogg in the Times of London this week. "They,
too, have their Gallipolis.
"'We have
suffered more from this cause [bad paper money] than from every other cause
of calamity,'" Lord Rees-Mogg quotes a dead man, Daniel Webster. "'It
has killed more men, pervaded and corrupted the choicest interests of our
country more, and done more injustice than even the arms and artifices
of our enemy.'
"I have
lived through most of the period of the decline of the pound and the disintegration
of the sterling area," his Lordship continues. "It was a long, historic
process. Its early stages, which occurred before I was born, have some
resemblance to the current state of the dollar. |
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| After 1918,
Britain was heavily indebted and had lost competitiveness to new economies.
"The U.S.
is now heavily indebted, and the debts are growing rapidly. The U.S. in
its turn has lost competitive advantage to the countries of East Asia....High
savings and competitive exports were the characteristic of the U.S. 100
years ago. Now they are the characteristics of East Asia."
The U.S. dollar
cannot be called stable. A dollar today will buy only about 5% of what
it would have bought a century ago. Compared to gold, too, it has lost
more than 90% of its value since Franklin Roosevelt devalued it in the
'30s.
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'Steady' might
be a better word to describe it. But even that is not true. The dollar
does not drop at a steady rate, but at a jerky one. Like a melting polar
ice cap, it tends to lose a little every year...and then, suddenly, a large
iceberg falls off. |
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| Over the last
20 years or so, a strange weather pattern has persisted over the northern
hemisphere. While the dollar has continued to melt away...it has melted
at a slower and slower pace. Against gold, it did not melt at all - until
recently, it froze even more solidly.
With no telling
entrails in front of us, we cannot know what will happen. But we take a
guess: a chunk the size of New Jersey is about to fall off.
Your editor
had tea with Lord Rees-Mogg on Wednesday. We reminisced about paper
currencies. None had ever survived for very long - and even gold-backed
currencies tended to give way under the stress of a shooting war. Squeezed
for cash, the Continental Congress of the American colonies issued 'continentals'
- I.O.U.s not backed by gold. They were just promises to pay later, after
the war was over. But after the war was over, they became the thing that
worthless things were worth more than.
In America's
war against the Southern States, again, the Lincoln administration resorted
to paper. It established a central bank - a forerunner to the Federal
Reserve system - and issued I.O.U.s....which subsequently lost their value.
The Confederate States did likewise. Years after the war, desk drawers
in Atlanta were still full of I.O.U.s - completely worthless, of course.
Largely
under pressure from Johnson's War on Poverty and war in Vietnam, the Nixon
Administration resorted to I.O.U.s again - paper dollars backed by the
world's biggest debtor. Since 1971, the world has seen nothing else.
Central bank coffers are full of them. For every ounce of gold in the world,
there are approximately $20,000 worth of dollar-based assets and maybe
$10,000 worth of dollar-denominated debts, with the paper-based assets
and credits growing many times as fast.
The dollar
will almost surely fall more - perhaps much more...and perhaps very suddenly.
That is when hearts get pinched...and the juice oozes out.
Bill Bonner |
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