The Daily Reckoning
Tuesday, August 02, 2005
"I hear, but I don't listen," was what Wim Duisenberg used to say.
The poor man had to hear many people urging him to loosen up Europe's economy
with lower lending rates from the central bank. Except for a handful of crank
economists, such as Kurt Richebcher and your editors at The Daily Reckoning,
practically everyone thought he was making a mistake. Politicians, business
leaders, columnists and kibitzers - all wanted easy credit conditions so that
Europe could grow faster, like the United States.
But Wim held his ground... and as a result, the Old World seemed to grow much
slower than the New one. Few people bothered to look beyond the headline
numbers. If they had, they might have tipped their hats to the ECB chief.
European growth was sluggish, but real. At the end of the day, people had more
earning power with low levels of household debt. In America, by contrast,
higher levels of consumption - caused by the Fed's low rates, the lending
industry's innovations, and Anglo-Saxons' natural inclination to bankrupt
themselves - brought about a disaster. Americans now owe more money to more
people than any people ever did before. And their spending has helped to create
such huge new competitors - in Asia, mainly - that they will have a very hard
time earning enough money to pay the interest...let alone the principal.
But Duisenberg never got any thanks. Instead, he met his end two days ago in
the South of France. While his American colleagues drowned their countrymen in
liquidity, old Wim drowned only himself - in his own swimming pool. RIP.
There are times, dear reader, when you should think other thoughts. Here at The
Daily Reckoning, we have been thinking the same thoughts for a very long time.
We tried to explain it to a young woman at a dinner party the other day.
"There are two main branches of the economics profession," we began...as the
woman looked around nervously, searching for an escape. "There is the old,
withered branch of 'moral' philosophers...who think you can't get something for
nothing. And there are all the rest...the modern economists who spend their
lives pretending that you can. They think that if they can just come up with
the right policy at just the right time, they can improve the future before it
happens. A man may decide to sell his neighbor a bale of hay for $1. The old
crank economists would say - 'so be it.' But the new ones would find a way to
meddle - believing they could make the economy better by controlling the
transaction themselves. They'd raise the interest rate, or impose a tax, or
prevent the sale altogether.
Inevitably, their interference would make things worse. You see, there are two
groups of economists. But one group are a bunch of idiots."
That summary seems enough for us, dear reader. So we will think about other
things for the rest of the summer - or at least whilst we are on vacation.
Bill Bonner, with more views:
*** We talked yesterday about Kevin Kerr's dead-on insights...and apparently we
aren't the only ones who think so. One of Kevin's Resource Trader Alert
subscribers wrote this note to Kevin this morning:
"I read in the Aug. 1 Daily Reckoning about your accurate prediction that BP's
Texas City refinery was just another accident waiting to happen....I'm sure
glad I followed your recommendation and got into the Feb. 06 NY Crude trades.
Do the recent difficulties at BP, coupled with King Fahd's death in Saudi
Arabia, change our target price and related exit strategy? Also, with the
recent activity around the Yuan are you looking at any currency trades? Thank
you, and keep up the great work. I'm a relatively new subscriber who did his
homework before signing on with you. I've been extremely pleased with results
to date and have several open trades following your recent recommendations."
[Ed. Note: It's no wonder that Kevin's subscribers are so happy with his
service - he's got a perfect record, with an average gain of 90.7% on each of
his closed positions. There has never been a better time to get in on the
commodities boom, and Resource Trader Alert is the perfect way for investors
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Stephen Roach comments:
"To the extent that both the U.K. and Australia seem to have succeeded in
gradually taking the excesses out of their residential real estate markets
without seriously disrupting their economies, there is hope that the U.S. can
pull it off, as well. Anything is possible, but I think those presumptions miss
an important and very basic contextual point: The scale of U.S. property
holdings dwarfs housing values elsewhere in the Anglo-Saxon world. For example,
in 2004, the value of U.S. residential property hit $17.2 trillion - three
times the $5.8 trillion value of the U.K. housing stock. But it's not just the
disparities in real estate values that hint at macro vulnerability to
post-bubble adjustments. It's the link between property and consumption that
makes for the biggest difference of all.
"For my money, the U.S. has set the global standard insofar as excess consumer
demand is concerned - a consumption share that currently tops 70% of GDP. This
is well above the U.K. share of 63% and the Australian share at 60%. The
excesses of U.S. consumption stand out all the more in a climate of weak labor
income generation - with the worker compensation piece of U.S. personal income
currently running some $265 billion (in real terms) below the profile of the
typical expansion. The juxtaposition of excessive consumption and weak income
is manifested in the form of striking disparities in personal saving rates -
4.8% in the U.K. in early 2005 versus 0.9% in the United States.
(Note: Australia 's personal saving rate has been in negative territory since
2002; however, given its relatively low consumption share of GDP, the risk of a
major post-bubble adjustment is lower than that of the U.S.)
"On balance, the saving-short, asset-dependent American consumer has made a
much more aggressive consumption bet than has been the case in either the U.K.
or Australia. As a result, there is good reason to believe that the U.S.
economy would be much more vulnerable to a bursting of its residential property
bubble than might be implied by experiences elsewhere in the Anglo-Saxon world.
The United States relies on its property bubble far more than the U.K. or
Australia to square the circle of excess consumption and weak internal income
generation. This relative desperation of the asset-dependent American consumer
should caution us from drawing comfort from the seemingly gentle aftershocks of
other post-bubble workouts."