ANIMAL STORY
From Tandil, Argentina, comes an arresting story.
A man walked into a bank armed with a hand-grenade. He meant to leave the bank with more money than he entered
with. In that sense, he was no different from any other man pulling a bank job. In fact, he could have been any
one of us, couldn't he? Who hasn't tried to rob a bank at least once in his life?
What made him unusual - and of interest to us here at the Daily Reckoning - was that the money with which he
intended to leave was his own.
Such is the state of things on the pampas that bank depositors are forced to resort to extreme and
controversial methods to make withdrawals. That is what
happens in a real slump, dear reader: Forget about making a profit on your money...you're lucky if you can
just get it back.
Argentina is in the midst of a financial crisis. So many people want to get their money out of banks...out of
pesos...and out of Argentina...that the government has imposed a ban, limiting the amount a person can
withdraw. The bank tellers in Tandil tried to hue to the law, even with a grenade in front of them. They
dutifully called the head office in Buenos Aires and asked permission to give the poor man his money.
Finally, the clerks gave him his cash (which he needed
to pay for medicine)...but also called the cops, who collared him soon after.
Markets are like electric fences, we think.
But are investors sheep? Certainly, for many investors, calling them dumb as sheep slanders the mutton. But on
the whole, men, like sheep, get along and go along with whatever wishful thinking is popular at the time. Like
sheep, they tend to roam around haphazardly most of the time...and eventually go too far, needing a good jolt to
bring them back where they belong.
You may protest that men are not sheep...because men have the power of reason. Thus do we flatter ourselves,
dear reader. What process of reason would lead a man to buy a stock such as Webvan? Or to attack Russia? Or
declare war on the U.S. while already conducting a war against both Russia and Great Britain? Or go to a
Britney Spears concert? What reason could produce parachute pants, Michael Jackson, Survivor, P. Diddy,
the anti-globalization movement, Marmite,
Rosicrucianism, and andouillette sausage?
I could go on. But you get the idea. Most of the things that most people value in life has nothing to do with
reason.
Even the U.S. dollar is a stranger to reason. It is nothing but a piece of paper, an "I.O.U. Nothing" from
an issuer who retains both the right and the power to
renege at any time. As General DeGaulle noticed back in the early '60s, the U.S. can pay off its debts in
dollars. Who determines how much those dollars are
worth? Americans do...up to a point. Why do people accept them? Indeed, why have they favored them, over
gold, for more than two decades?
Because, because, because, because, because...We humans think. But our thoughts are little more than arrieres
pensees - after the fact justifications, excuses, simplifications and bowdlerizations of reality. The
explanations work - until we make the fence.
South of the Rio Plata, Argentines have already run into the electric fence. They are shocked to discover that
their currency has lost 40% of its value in the last 3
months.
We Americans are still smug.
Of course the Argentines are in trouble, says U.S. Treasury Secretary Paul O'Neill, because they tried to
operate an economy without producing anything for
export. No one seems to notice or care that America's number one export is dollars - with which we pay for the
growing list of things we don't produce.
The difference between what we export and what we import grows almost daily. It is nearing half a trillion
dollars a year. This is the amount by which America's
net debt to the rest of the world grows.
One of the most remarkable features of the recent recession (it is over now, isn't it?) was that U.S.
indebtedness continued to expand...even as the economy
shrank.
"Looking back," writes Dr. Kurt Richebacher, "1998 stands out as the great inflection point in the U.S.
economic and financial development under Mr. Greenspan. From then on, everything went to new extreme excess,
particularly the financial system. Over just three years, from mid-1998 to mid-2001, financial and
nonfinancial borrowing erupted $6.5 trillion, or 36%...
"Leaving the New Economy propaganda aside, what was the most momentous change in the U.S. economy after [the
LTCM bailout in] 1998? One thing: the literal collapse of personal saving from $311 billion, at an annual rate,
in the 3rd quarter to virtually zero in 2001, reflecting the wildest consumer borrowing and spending binge in
history.
"What we are witnessing since then is unprecedented in history: an economic slide into recession with exploding
credit."
But no matter which side of the equator you stand on, you cannot get rich by borrowing and spending. You get
rich by saving and capital investing. Honest businessmen use savings to build new plant and equipment and thus
produce profits. With these profits, they hire new workers, build new productive capacity and add to the
world's wealth.
You need look no further than America's corporate profit picture to see that the problem in the U.S. is not going
away any time soon. According to the Economist, U.S. profit margins are at their lowest levels since the
Depression. As a percentage of GDP, corporate profits through the 3rd quarter of last year were down 26% from a
year earlier, to a level of 7.5% of GDP. Five years ago, they were at 12.5%.
"The Fed has, through swift interest-rate cuts," says The Economist, "succeeded in saving the economy from
deep recession - so far. Lower interest rates reduce
debt service and so allow a more gradual adjustment, but they cannot stop the pressure to reduce excess debt.
That could imply several years of sub-par growth...But for many American consumers, and for investors, who have
been living thoughtlessly on the never-never, the next couple of years could deliver a rude shock."
Reducing saving, flooding the world with credit, and creating a "get rich quick" atmosphere in the capital
markets typically leads to Buenos Aires, not to wealth.
But even on the pampas, there are electric fences.
Eventually, a shocking limit is reached.
Even in the vast expanses of the dollar-based economy, there are limits. The dollar itself, the world's biggest
credit, is not worth an infinite amount of goods and
services. And, as anyone who remembers the mid-'80s can attest, it is not necessarily worth tomorrow what it was
worth yesterday. Argentines are worried not so much about the quantity of cash available to them, but the
quality of it. Dollar holders will one day have the same soucis.
Your editor, still predicting a decline in the dollar,
Bill Bonner
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