No Trespassing
The Daily Reckoning
London, England
Tuesday, February 8, 2005
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*** The world's best-known economist pays tribute to the
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*** "You freaks are as odd as they come!" More reasons the
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When we left you yesterday, dear reader, we were answering
a question no one had asked.
The answer concerns, we warn you, not the value of the
dollar tomorrow, nor of Google stock next week, but of the
price of the former eventually...and the latter not at all.
Still, there are many pieces to this puzzle. We examine one
today and hope to get a better picture of whole thing.
We add an additional preface: we note that the mail we
receive from readers is running 10 to 1 against us,
following last Friday's meditation on Mr. Bush as an
evangelical democrat. More on that below, too.
Since the fall of the Berlin Wall nearly everyone seems to
agree that central planning is bad for an economy. The
central planners, as any Economics 101 student can tell
you, do a poorer job of delivering the goods than the
'invisible hand' of Mr. Market.
Mr. Alan Greenspan, the best-known economist who ever
lived, paid homage the other day to the second best known
economist who ever lived - Adam Smith. He too acknowledged
Smith's great insight: that the information contained in
freely moving prices helped millions of independent
producers and consumers make decisions that turned out to
be in the best interests of everyone. But while praising
Mr. Smith and free markets generally, Mr. Greenspan forgot
to mention the one market with which he is most closely
associated, the credit market. There, buyers and sellers
are allowed a large degree of freedom. But at the short end
of the credit market, both are shackled to a rate that is
determined not by the open market, but by Mr. Greenspan's
Open Market Committee.
This led to our question: what is good for the goose of
lumber markets, stock markets, grain markets, laptop
computer markets and almost every other market under Heaven
must be good enough for the gander of the credit market,
no?
The answer is not one of logic, but of convenience. There
are times - indeed most of the time - when political
leaders prefer easier credit terms than buyers and sellers
determine on their own. In setting its key rate, the Open
Market Committee is likely to set a rate much more to the
politicians' liking the one offered by Mr. Market. A lower
rate, that is.
This artificially low rate gives the illusion that there is
more money available than there really is. Hardly anyone
ever complains. Consumers feel they have more money to
spend than they really have. Producers sense a demand that
really isn't there. Undeserving politicians get reelected.
And conniving central bankers are reappointed.
The 'information content' of the Fed's low rate misleads
everyone. Happily, they proceed on the long, slow process
of ruining themselves, unaware that they are responding to
a fraud. Only much later does the deception become a
problem.
Friedrich Hayek explains:
"The continuous injection of additional amounts of money at
points of the economic system where it creates a temporary
demand, which must cease when the increase of money stops
or slows down, together with the expectation of a
continuing rise in prices, draws labor and other resources
into employments which can last only so long as the
increase of the quantity of money continues at the same
rate - or perhaps even only so long as it continues to
accelerate at a given rate. What this policy has produced
is not so much a level of employment that could not have
been brought about in other ways, as a distribution of
employment which cannot be indefinitely maintained and
which after some time can be maintained only by a rate of
inflation which would rapidly lead to a disorganization of
all economic activity."
The way it works is simple: an economy is geared to produce
for real demand. Or it is misled by artificially low
interest rates to produce for a level of demand that
doesn't really exist. The deceit can go on for a very long
time. But, eventually, some form of adjustment must take
place - usually a recession restores order by reducing both
production and consumption. If it goes on for too long, or
to too great an extent, as it did for a brief period in
Germany in the late '20s, economic activity becomes
disorganized.
The U.S. economy faced a major recession in 2001 and had a
minor one. The necessary slump was held off by a dramatic
resort to central planning. Alan Greenspan cut lending
rates. George W. Bush boosted spending. The resultant shock
of renewed, ersatz demand not only postponed the recession,
it pushed consumers, investors and businessmen to make even
more egregious errors. Investors bought stock with low
earnings yields. Consumers went further into debt.
Government liabilities rose. The trade deficit grew larger.
Even on the other side of the globe, foreign businessmen
geared up to meet the phony new demand; China has enjoyed a
capital spending boom as excessive as any the world has
ever seen.
All of those bad decisions need to be corrected, one way or
another. What remains to be seen is how. Will they be
corrected in a painful ordinary way - with an economic
slump, maybe a very long one? Or, in a painful
extraordinary one, a disorganization of all economic
activity? As always, we wait to find out.
More news, from our man on Wall St:
--------------
Eric Fry, from a corner office on the 26th floor...
"...The Chinese are actively negotiating to secure long-
term supplies of crude oil from countries as geographically
and politically diverse as Canada, Saudi Arabia, Iran and
Russia. Indeed, the Chinese and the Russians have embraced
one another in a kind of petro-political bear hug..."
Cheap oil will not be available for much longer. Read here
for the full story...
In Memoriam: Cheap Oil
http://dailyreckoning.com/RudeAwake/Articles/inmemoriamcheapoil.html
--------------
Bill Bonner, with more views from London:
*** Old Joe Granville "sees doom for the Dow," says the
headline. He fears a crash. He's been right before. Maybe
he'll be right again.
*** George W. Bush has pledged to cut the deficit in half.
At least from the press reports, we couldn't make sense of
the math. The proposed cuts only equal about 1% of the
deficit.
In order to really cut the deficit he'd have to cut the
'non-discretionary' entitlement programs such as Social
Security and Medicare. It would take a president with real
courage to do that.
*** James Boric, our resident penny stock sleuth, is
watching $17 billion dollars go down the tube...from the
comfort of his hotel room...
"Lying in bed this morning, I clicked onto the Bloomberg
channel. One of their reporters was explaining how venture
capitalists put $17 billion into the market in 2004, up
from $10 billion in 2003. 2005 should be even better, he
said."
"Many of those VC dollars end up in the small cap market.
It's a bad omen. Speculative money has a habit of flowing
towards the worst companies...companies that show little in
the way of sales and earnings growth. Their stocks may have
done well, but I wouldn't buy them."
"Don't get me wrong. While I wouldn't recommend a short-
term investment in a Russell 2000 ETF or index fund, I'm
still finding tons of little companies with valuations so
low, I sometimes wonder how Buffett missed them..."
*** Many readers are upset with us. They think they see
something vaguely elitist or even European in our remarks.
Many say we should stop criticizing the Bush
administration...or at least propose a better solution.
"Stop being so negative," is a familiar theme.
One thing that we find remarkable is the meanness of some
readers' comments. We are so loveable and humble, we're
surprised we can offend so many, so much.
We admit we don't have any way of knowing whether the world
will be a better place following the vote in Iraq...or not.
And our analysis of it is hardly 'European'...(As for
'elitism'...we have no clue how that fits into the
discussion. Our gripe is actually directed at America's
neo-conservative intellectual elite.)
All we know is that 1400 Americans...and many thousands of
Iraqis...have been killed. Many thousands more have been
wounded...and hundreds of thousands have lost children,
relatives, parents. Two hundred billion dollars have been
spent. Hundreds of billions more will be spent before it is
over.
'Is it worth it?' seems like an appropriate question.
"Yes," say the neo-conservatives. "No," say the Europeans.
"
Hallelujah," say the born-again evangelical democrats. But
we take the position of the old moss-backed American
conservatives: we don't know...and we didn't think it was
our place to ask.
If you can make the world a better place by killing people
in Baghdad and Fallujah, why not kill them in Tehran too?
And why stop there? Why not take out a group in Paris...or
Washington? Why not smother your mother-in-law or silence a
rap star?
Traditional American conservatism was not a doctrine of
world improvement, but a mood of skepticism towards all
'isms' and world improvers.
According to a new book by Kieron O'Hara, political
conservatism is under girded by two important principles.
The first is the 'change principle,' which holds that the
benefits of an existing order must be presumed to surpass
the "potential, abstract benefits that could be gained
through applying a social theory."
That doesn't mean you can't innovate in a society, but the
burden of proof should always be on the world improvers to
clearly show that their proposed change really will make
things better - something they can almost never do.
The second principle of old-time conservatism, says O'Hara,
is the "knowledge principle," which is the political
equivalent of Adam Smith's observation about free markets:
"
the knowledge required to coordinate and direct a complex,
dynamic society is clearly beyond any individual or
bureaucratic machine." In short, central planning doesn't
work very well, neither in Washington nor in Baghdad. But
we add our own little pseudo-formula to the 'knowledge
principle' - phony knowledge increases the larger the
enterprise and the farther you get from it, by the square
of the distance and the cube of the scale.
We barely know how our own government in Washington
functions and often suspect it acts against our own best
interests. Trying to figure out how to make a government
work in Baghdad is hardly a 'conservative' undertaking.
Born again evangelical democrats say they believe in
'freedom.' Old time conservatives are a little suspicious.
"
Just don't try to tell me what to do," they say. They also
believe in doing unto others what they would want done to
them; they wouldn't presume to tell others what to do
either.
*** And now, the mail. The first is directed not at us, but
at another reader, who wrote:
"First off, as an ex-pat Englishman trapped in the United
States by a wife who hated Europe, I never cease to be
amazed by the average American (including her). Perhaps
it's the school system, I don't know, but notice that the
New England Patriots are now 'World Champions.' Not content
with the 'World Series' in baseball, it seems that
everything that no one else plays in the world qualifies an
American team for the world title. I just think that it's a
way for this country to cling on to something 'tangible,'
albeit a fantasy, as a way of saying that America is still
number one. I think that it may also be a recognition that
the country is going down the pan economically and they are
inventing new and daft ways to cling on to the top spot.
"Just one more reason that the rest of the world finds them
an odd bunch."
In response...
"Trapped in America, huh? What an awful place to be
trapped..."
"It is only the country that attracts more immigrants than
any other country in the world due to the quality of
lifestyle and the opportunities available.
"And as far as our professional sports leagues...We'll call
them whatever the hell we want. When your pathetic people
in your pathetic country can actually compete with us in
any sport (or anything for that matter) than you will have
the right to join in our 'World Championships.' I
understand this is difficult for you guys...
"Oh, and by the way...Most of the world envies America.
Those that think we are an "odd bunch" are simply jealous
and frustrated or just upset about the UN scandal making
them broke...
"Who are you to speak for the rest of the world? You freaks
are about as odd as they come. We are a super power in
every aspect of the word and most of you disrespectful
ingrates wouldn't be around if it were not for the United
States. I understand that is difficult for you too.
"It takes real big men to write a negative e-mail everyday
about another country to make a living. Do you guys hear
yourselves? How do you look yourselves in the mirror
everyday?
"This guy here is broke and pathetic and can't make it in
America. It's pretty obvious. He sounds like you guys:
hiding out in another country running his mouth because he
is so weak..."
*** Another:
Great article on the Iraqi vote, however, please please
please, help re-educate the American people that we live in
a Constitutional Republic, not a Democracy! You guys are
too sharp not to notice the difference!
*** Still another - spelling mistakes uncorrected:
"It is hardly ever that I respond to you or others who see
fit to regale us poor illiterate mortals with their pearls
to swine missives. I am lifted with the realization that in
the company of erudites, I am, after all, in the company of
those who with their eloquent pedantry, can illuminate my
poor and miserable existance."
"In the instance of Iraq, pure and simple, you denegrate
the democratic ideal for some ephemeric better ideal; which
there seems to be abject failure, on your part, to
illucidate, as is your want, for the unspoken better
system.
"In other words, stop the goddamn whining and stipulate
just what the hell should be done at this point!
"From one of your devoted, but dissallusioned followers."
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---------------------
The Daily Reckoning PRESENTS: Why does capitalism triumph
in the West but fails everywhere else? It's all to do with
the protection of private property...
NO TRESPASSING
By Doug Hornig
In his landmark 2000 book, The Mystery of Capital, Peruvian
economist Hernando De Soto tackles the vexing question
posed by his subtitle: Why Capitalism Triumphs in the West
and Fails Everywhere Else.
The answer, De Soto maintains in a carefully constructed
argument, lies not with a scarcity of natural resources,
nor the legacy of colonialism, nor some innate inferiority,
nor even type of government. It is that the entrepreneurial
spirit flourishes in places where private property is
strongly protected by law, and languishes where it is not.
Although De Soto buttresses his conclusion in a very modern
way, with lots of charts and graphs, it would have come as
no surprise to the founders of the American republic. So
keen were they on the individual's right to private
property that they wrote specific protections into the Bill
of Rights, not once but three times (Amendments 3, 4 and
5), then for good measure threw in the open-ended
Amendments 9 and 10, which essentially guarantee our right
to live our lives as we please, subject only to a few
reasonable restrictions.
It's a good thing the founders can't see us now. The past
seventy-five years have seen the growth of government from
a relatively small entity charged with defending the
borders, adjudicating disputes, and delivering the mail, to
a bloated nightmare creature whose tentacles reach into
every corner of our existence. Liberal administrations and
Congresses have come and gone, as have conservative ones.
It has made no difference. Everyone in government, it would
appear, is primarily dedicated to making it bigger.
The toll on the Constitution has been heavy. Largely
because of the misguided War on Drugs, Fourth Amendment
prohibitions regarding search and seizure have,
essentially, ceased to exist, while asset forfeiture
statutes have made a mockery of the Fifth Amendment's due
process clause. And the courts have gone along, siding
almost always with the government against the individual,
allowing the Bill of Rights to be gutted.
Soon, yet another extension of government power is to be
tested before the Supreme Court, and its decision will have
far-reaching implications for property rights. The case is
Susette Kelo v. City of New London, and at issue is the
meaning of the final clause of the Fifth Amendment: "nor
shall private property be taken for public use without just
compensation."
In 2000, Ms. Kelo, along with everyone else in the Fort
Trumbull section of New London, CT, suddenly found their
entire neighborhood condemned in the name of "economic
development." This was not the kind of "blighted" urban
landscape that governments routinely seize through eminent
domain in order to bulldoze them. It was rather an area of
older homes and small businesses that happened to occupy
some prime riverfront real estate near a newly constructed
Pfizer pharmaceutical plant.
The city - thinking that hotels, expensive offices and more
upscale residences would help with job creation and
(probably more important) generate greater tax revenues -
attempted to help itself to the land, with the intention of
transferring control to the private, though non-profit, New
London Development Corporation (heavily backed by Pfizer).
The NLDC would, in turn, lease back the property at a buck
a year to private, for-profit developers.
Affected homeowners, asserting that this governmental
action hardly qualifies as taking private property for
"
public use," filed suit to stop it. The case reached the
Connecticut Supreme Court, which ruled 4-3 in favor of the
city. Final appeal was made to the U. S. Supreme Court,
which agreed to hear arguments during its next session.
The stakes are high. As the Property Rights Foundation of
America points out in an amicus curiae brief filed in this
case, the Connecticut Court's decision "gives government
carte blanche to take private property from one person and
transfer it to another person, limited only by the
government's willingness or ability to proclaim that its
intent is to promote economic development."
Whether the Supreme Court will see fit to overturn the
Connecticut ruling remains to be seen. Given its usual bias
in favor of government and business, one might think the
chances are slim. However, the Justices may take into
account recent rulings by both the Michigan and Illinois
Supreme Courts that decided similar cases in favor of the
plaintiffs. Said the Illinois Court as it invalidated a
taking of private land to create additional parking for a
racetrack: "To constitute a public use, something more than
a mere benefit to the public must flow from the
contemplated improvement."
Seems like a sound principle to us
Regards,
Doug Hornig
For The Daily Reckoning
P.S. Your nefarious Daily Reckoning editor, Addison Wiggin,
once attended a lecture by De Soto. He arrived late, and
ended up operating De Soto's overhead projector! Here's a
link to the essay he wrote immediately afterwards...
The Mystery of Wyndclyffe
http://www.dailyreckoning.com/Writers/Wiggin/Articles/102704.html
Editor's Note: Doug Hornig is the author of nine books
whose work has also appeared in Business Week, Playboy and
more. He is a regular contributor to "What We Now Know" -
the FREE weekly e-letter from Casey Research covering
trends in geopolitics, the economy, investments, health and
technology.
To learn more about Casey Research, and how to receive 6
FREE special reports, click here.
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