Let the good times roll
dailyreckoning.com
LET THE GOOD TIMES ROLL
by Bill Bonner
Foreign workers seem to be able to make anything we can make - but much cheaper...foreigners save their money...and these savings give them huge piles of capital with which to build more modern factories and more convenient infrastructure.
What this means is that U.S. labor is suddenly over-priced. Americans' real hourly wages have gone nowhere in the last 30 years. They're likely to go nowhere in the next 30 years too - since so many jobs can be done overseas by much cheaper workers.
While the foreigners got richer, U.S. passport holders became delusional. Let the Chinaman sweat, they said to each other. We'll think! This gargantuan conceit allowed Americans to sink into one of the most flattering fantasies the world has ever seen: That they could get richer without saving...or without really earning more money. Household debt soared to $10 trillion - 115% of earnings. After WWII, it was only 20% of earnings. Indeed, Americans came to think that the more they borrowed and spent, the richer they got.
For a long while, it seemed almost to be true. The world's financial plumbing has become so curiously put together that the oddest things have been mistaken for commonplace. We turn on the stove and champagne fizzes out. We open the faucet and it runs with Kentucky bourbon; the whole thing is strange, but it doesn't take long to get to like it.
The U.S. economy has been so strong for so long, people all over the world have come to accept its currency as though it were real money; they took it and asked nothing in return. In exchange for a shipment of TV sets, for example, the Japanese would take a wad of $100 bills and call it even. The bills tended to stay overseas - or they were used to buy another form of U.S. paper, Treasury bonds. The U.S. can print as many $100 bills as it wants. So can it issue as many bonds and notes as it pleases. As long as people don't try to exchange them for other forms of wealth - all is well.
Until very recently, the foreigners seemed perfectly happy merely to hold the U.S. paper. They liked the feel of it. They felt richer and more secure with each bundle that came their way. By the end of 2004, they had racked up some $10 trillion worth - nearly $3 trillion more than Americans had of their assets. And because Americans continued to spend more than they made...each day the foreigners tossed nearly $2 billion more on the pile. Some began to wonder how they would eventually get rid of it - and at what price.
One of the wonderers was, of course, poor Mr. Asakawa in Tokyo. The man controls the biggest stash of U.S. paper in the world. His life has come to imitate a popular joke. "A man who owes his banker $100,000 can't sleep at night," the joke begins. "But when a man owes his banker $1 million, it's the banker who can't sleep." Mr. Asakawa is the central banks' banker. He holds an estimated $700 billion worth of U.S. dollar-denominated paper assets in his vault. Beside his bed is a monitoring device that goes off like an alarm clock when the dollar falls out of a given trading channel. Mr. Asakawa, needless to say, does not sleep soundly.
Something else is new in this new millennium. Not only does America face economic competition; it faces monetary competition too. Drug dealers and central bankers have a choice. They could just as well fill their stomachs and safes with euros as with dollars; besides, the higher-denomination euro bills are easier to swallow.
We understood why Mr. Asakawa would be alarmed. What bothered us was why no one else seemed to be. With as much as $100 trillion of the world's wealth denominated in dollars, how did the world watch so complacently as the value of its main asset was marked down? The dollar went down. By 10%. Then 20%. And then 30%. When Warren Buffett began putting his money in euros, he could buy one for just 86 cents. Now, the euro costs nearly $1.36. In Europe, the dollar has lost about 40% of its purchasing power.
Today, nearly all the experts agree: The dollar will continue to go down. But no seems to want to connect the hipbone to the thighbone. No one seems to want to look beyond the dollar's decline. Somehow, the dollar has been decoupled from almost all other financial transactions: it can go down while the assets it measures do not. The dollar falls; U.S. stocks and bonds go up. Go figure.
We figure it is pretty strange. But we have become used to strange things in the financial world. One additional oddity, more or less, shouldn't make any difference. But there is something especially strange about this new strangeness.
Here at The Daily Reckoning, at the beginning of the year, we thought we saw a tsunami coming. The dollar would collapse, we believed, under the weight of the twin deficits - trade and federal. The financial seabed would tremble, we believed....and the consequent tsunami could wash away capital values of everything that was in its path - bonds, stocks, real estate...everything. Investors, sunning themselves on the beach, would soon be underwater.
We are masters of hyperbole. But even we couldn't seem to find words to match the impending doom. And yet, we might as well have been a black-frocked deacon standing on a pier in Long Beach, warning sailors that, coming ashore, they might be tempted by loose women and free booze. Never did such a warning fall upon such deaf ears. In the sailors' minds, as in investors, the risk could be hardly understated. A falling dollar would only make our products more saleable overseas. The trade deficit problem would be solved. The U.S. economy would boom. The foreigners would be happier than ever to hold U.S. dollar assets.
Americans thought they had merely discovered another sailors' paradise - a Tahiti with women in grass skirts and liquor trickling down the rocks. For years, the kind strangers had offered merchandise at Everyday Low Prices, taken their I.O.U.s, in payment and used them to buy U.S. Treasury bonds - thus keeping U.S. lending rates exceedingly low. Then, just at the moment when the foreigners begin thinking about unloading some of this debt - which, as everyone knows, would be a disaster for the United States since - along comes a decline in the dollar. America's overseas debt burden is being marked down, day after day. Not only did Americans never have to make good on their overseas I.O.U.s, they never will have to. So you see, dear reader, the pessimists and doom-mongers were wrong again...there really is a free lunch, after all. Or so it would appear on the last day of Anno Domini, 2004.
Let the good times roll.
Best wishes for 2005,
Bill Bonner
The Daily Reckoning |
