The Rude Awakening
Laguna Beach, California
Thursday, June 1, 2006 ------------------------- - Foreigners got richer and we got poorer...where did
all your dollars go?
- 58 billion dollars is a lot of money, even for an
empire to foot,
- All the markets so far this week, the end of the road
for a Rude jaunt and plenty more...
------------------------- [Joel's Note: As you would be aware, your vagabond junior
editor and his misfit compadre, Whiskey & Gunpowder's Greg
Grillot, have been traversing this great land for the last
couple of weeks. [Check it out here: http://www.dailyreckoning.com/map.html] Riding shotgun across the empire was truly an eye-opening
experience. Never would I have thought to visit a town like
Wheeling, in West Virginia or Hayes, Kansas...but I am glad
we did. We spoke to American's from all walks of life and
had an absolute ball doing it. We asked folk about real
estate prices, wages, quality of life and, of course, debt.
Responses were many and varied but all enlightening. I have included below an extract from Empire of Debt: The
ride of an Epic Financial Crisis, the timeless tome that
spawned this ambitious jaunt, for your reading pleasure.
Please read on and send your own opinions to your travel-
weary editor at aussiejoel@the-rude-awakening.com Enjoy. --- Special Investment Alert --- Special Situation Alert: How to Make 658% from the Iran
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-------------------------
The Great Conceit
By Bill Bonner & Addison Wiggin While foreigners got richer, U.S. passport holders became
delusional. This gargantuan conceit allowed Americans to
believe that they could get richer without saving or
earning more money. Household debt soared to $10 trillion—
115 percent of earnings. After World War II, it was only 20
percent of earnings. Indeed, Americans came to think that
the more they borrowed and spent, the richer they got. In the United States, household consumption is 71 percent
of GDP. People think they are getting richer because they
have money to spend— borrowed money. But what makes a man,
or a nation, rich is not spending—it is not spending. We
wouldn't think it necessary to say so except that so many
people still seem to believe the opposite. They see the GDP
numbers as signs of a "healthy, growing" economy. But what
is growing in the United States is the very thing that
makes the economy unhealthy— consumption. For every dollar
of product that the United States sells abroad, it buys
$1.60 worth of imported items, almost all of it consumer
goods. China, as we all know, is on the opposite side of the
planet. Over there, people make the things that we buy and
don't buy the things we make. American households are rich
and buy a lot. Chinese households are poor and buy little.
Americans save little; the Chinese save a lot. Only 42 percent of Chinese GDP is domestic consumption.
Another 35 percent is devoted to exports. And nearly half
of all the money spent in China, according to Stephen
Roach, is for fixed investment. Both economies are preposterously imbalanced. Both will
probably fall down and break apart. But when the pieces are
picked up, the Chinese will find themselves with the
ability to produce wealth—things that people are willing to
buy. America will find itself with less money to buy them
with and fewer people willing to provide credit. So, what does the trade deficit mean? The big number came in mid-April 2005—$58.3 billion. It sat
on the weekend news like a bum at a wedding. Where did he
come from? Where was he going? No one wanted to ask
questions; he might be a member of the other family! Fifty-eight billion dollars is a lot of money. In fact, it
was a record. It was the difference between what Americans
sold to foreigners in the month of January and what they
bought from them. It was a negative number. On a chart of
the nation's accounts, it would be in red. Or in brackets.
Or preceded by a minus sign. If it were divided between the nation's families, it would
come to about $600 for each one. This represents only a
single month's trade deficit, so we should multiply it by
12 to the get the measure of damage on an annual basis,
giving us $7,200 per family per year. That is roughly the
amount of money the family spent each year that it didn't
have. It is such a big number, compared to the average
family's income that we wonder if we've done the arithmetic
correctly. In the old days of the gold standard, the nation on the
plus side of this exchange would pile up its excess foreign
currency and take it to the other nation's central bank.
Gold was the common reference and an uncommon restraint. It
was real money. If a nation ran out of gold, it ran out of
money. It could no longer borrow. It could no longer run
trade deficits, because when the foreign currencies were
presented to it, it would have no means of settling up. It
would have to declare bankruptcy, which happened from time
to time. But it has been 34 years since the United States settled
its overseas obligations in gold. Since then, it has found
it far easier to offer U.S. dollar-denominated Treasury
bonds. Remarkably, the foreigners have accepted them as if
they were as good as gold. More remarkably, for most of
that time they were not only as good as gold—they were
better. Gold fell in price for two decades following Ronald
Reagan's first presidential election. Overseas central
bankers took the Treasury bonds and felt grateful to have
them. America was just too lucky. It could spend without
really paying. It could borrow without ever really paying
back. It could dig itself into such a deep hole of debt, it
might never get out. Yet, that long, lucky trend seems to be reaching for some
kind of comic ending. We simplify the world economy of
2005. They [mainly Asians] make. We take. They save. We
spend. They lend. We borrow. They sell. We buy. Most observers see a kind of
symbiosis is this arrangement. But what we see is
parasitism. On the subject of the deficits, every
politician, economist, and goofball analyst with access to
an editorial page seems to have an opinion.
Here we offer an anti-opinion. The trade deficit reached
over $650 billion last year, requiring 80 percent of the
entire world's savings to finance it. The world has never seen such a huge red number in
international trade and doesn't know what to make of it. It
is a sign of the "decline of the American empire," say some
of the commentators. Others took it as an emblem of
America's strength. [Joel's Note: The above excerpt is from Empire of Debt: The
Ride of an Epic Financial Crisis. "If you value your
financial health, you'll read it from cover to cover," says
Doug Casey, author of the highly acclaimed "Crisis
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