The Daily Reckoning on why things play out to the bitter end.
Last night, we read about Hitler's campaign against Leningrad and gave a start. What we had been wondering was why the dollar does not fall; why stocks remain high; and how come people still have faith in the U.S. economy, even though it loses money every day and has no reserves to draw upon?
We believe we can tell where we are in a financial (or even an imperial) cycle by studying the delusions of the participants. In the month of July, for example, the personal savings rate in America went to a negative 0.6%. Not in 70 years had the rate been so low. The last time it was so low was in the Great Depression, when Americans felt their backs to the wall; they had to dip into savings in order to keep going.
Now, they no longer dip into savings. Instead, every emergency sends them running to foreigners, asking for credit. Two nations effectively control the world's credit: Germany and Japan. Between the two of them, they provide more than half the world's surplus savings. If they ever decided to stop lending to the United States, the world economy would change quickly.
The cost of Katrina is now thought to go to $120 billion or beyond. Congress has already authorized $62 billion in supplementary spending. But since neither the American government nor its citizens had saved money for this very rainy day on the bayous, they are forced to borrow in order to fix the roof.
What makes the foreigners think they will get their money back? America is already the world's largest debtor. And it is already effectively insolvent. Add up all the debt and financial obligations of government and private citizens and they exceed the total value of the entire country and everything in it.
Why do they not sell the dollar, rather than buy it? People do not really operate on the basis of hard, rational calculations. Instead, they react to symbols, feelings, delusions and conventions.
In September of 1941, practically all the German high command and every foot soldier in the ranks believed the war was won. It was not a matter of whether or not the Russians would capitulate; but when, how and to whom. They did not seem to notice that they had stretched their lines of supply to the breaking point; that they had no real reserves to call upon; that they were wearing out their tanks and supplies in the opening months of the war; or that they were up against a nation capable of producing more war material than they could, with vastly shorter distances to go to put them into service. The tank factory still operating in Leningrad, for example, built four new tanks every day. They practically rolled out the factory doors and began firing at the enemy.
Instead of thinking hard about the fundamentals of the war facing them; in these palmy days of victory and self-delusion, German officers plotted against their commander-in-chief. They had seen what the S.S. troops were doing to civilians behind the front lines. They had seen, too, what the Nazis had done to Germany's military, subordinating it to amateurs with a loony political agenda. They saw the Fuhrer as a threat not only to Germany's battlefield success, but also to the nation's soul.
"I could have had him arrested," said one of his generals after the war. "It would have been easy." It would have also been the smart thing to do: Bring Hitler to justice. Get out of Russia while the getting was good. Make peace with Britain. Live to a ripe old age.
But Hitler was the lawful head of the German state. The army could never quite bring itself to do such a thing. Instead, the generals went along with the program. As a result, most died in combat, before firing squads, or disappeared in Soviet prisons. Germany itself suffered unspeakable horrors...and only recently has been reunified and normalized.
Most people, most of the time, go along with the program, no matter how bizarre and pernicious it is. That is why history runs in such broad currents.
All the world seems to be held together by flimsy webs of convention. You believe you own something, but it is only convention that makes you the owner. That is, it is only so long as others are willing to go along with the program. You might go to your house one night and find another family living there. How would you get them out, except with the aid of a vast network of conventions? You could go to the police, to a lawyer, and eventually to the courts. They might just as well decide that someone else is the real owner; or, as they did in communist countries, that private property cannot exist.
Dictators are said to control their nations by brute force, but what dictator has enough brute force to subdue a whole nation? Instead, he has to rely on an entire web of conventions: An army that willingly supports him, business groups, lenders, religious groups, and workers. Large sections of the population have to go along with the program or it won't work.
Kings, emperors, and Tsars all depend on the conventions that surround them. Genghis Khan may have ruled one of the world's largest land empires, but he wouldn't have ruled even his own tent if his bodyguards turned against him. That is true of business leaders, too. A corporate CEO or a field marshal may give an order, but his underlings could perfectly well ignore it if they wanted to. Factory workers could decide to take the day off. Soldiers could turn on their commanders (and sometimes do) and shoot them. If at any moment people decide to defy convention, the whole jig is up.
Hitler was protected by conventions. It was not customary to arrest the head of state. The campaign against Russia had to run its course to its dismal end. America's fantasy economy is protected by conventions. And the dollar, too. It was worth something yesterday; people expect it to be worth only a little less tomorrow. It is still the imperial money, the world's reserve currency. But who bothers to look at the fundamentals? And so, the dollar must run its course, too, to its dismal end. |
