In Praise of America's Bureaucrats

In Praise of America's 

Bureaucrats 

by Bill Bonner, Chairman, Bonner & Partners

Editor’s Note:

Will Bonner here again, publisher of Diary of a Rogue Economist.

It’s Boxing Day. So, no regular Diary entry.

But if you’re in the mood for appreciating the nation’s bureaucrats, here’s an essay you might enjoy!

Enjoy!

Will

It’s been “Bureaucrat Appreciation Week.”

Just when we had lost all respect for them, we notice a counter trend. It’s time for us to get in step. So, today, we take time out from our regularly scheduled programming to thank the people who rule us…

To the TSA agents at airports… to the IRS agents who audit our tax returns… to the NSA agents who read our emails… and to zombies everywhere…

To all of you, we’d like to say a heartfelt “Go f***k yourself.”

No… no… no…

We meant to say THANK YOU!

Yes, dear reader, we’ve got to bring our thinking in line with the prevailing trend. And today, the US is developing a real affection and respect for authority!

Americans seem to like to have people rifle through their luggage and pat down their grandmothers at airports. It makes them feel safer.

The Fed’s Dirty Little Secret 

Americans want someone “in charge” of the US economy too. That’s why the new chairman of the Fed is so important.

What are the requirements for the job? It has to be someone who can keep a secret and tell a joke with a straight face.

The secret is that the Fed can’t really control the economy. It can influence it. But the influence it has is all negative. That’s the joke.

Fixing interest rates at any level other than that chosen by willing borrowers and lenders, the Fed distorts the price of credit… and the price of just about every other financial asset that is priced off interest rates.

And distorting prices always leads to problems – either shortages or surpluses.

Also, by fixing rates at ultra-low levels, the Fed is stealing from one group and giving to another. The middle class, savers and working people lose wealth. Hedge fund managers, bankers, zombies… and, of course, those lovable feds… gain.

That’s why the rich are getting richer as everyone else loses ground. They call it a “stimulus” program. And they’re right: It’s very stimulating for those who get the money.

As for the rest – well, the joke’s on us!

A Message to Obama

As you know, the best candidate to take over at the Fed, after Ben Bernanke leaves, is yours truly. But so far our phone has not rung. And the person not calling is the POTUS, Barack Obama. (We’re hoping that this very sincere note of appreciation, respect and thanks to the feds will help our candidacy.)
As the end of Bernanke’s term approaches, if things seem to be going well in the economy, President Obama will go with the safe choice: Janet Yellen.

If they are going badly – as in the scenario we’ve outlined above – he will go for the bolder candidate: the “brilliant” Larry Summers.

Alas, your Diary editor is unlikely to get the nod. The president is too busy claiming to “save the middle class” to spend any time trying to figure out what’s wrong with the middle class. Since he hasn’t figured it out, he won’t call the only candidate who could turn things around (albeit in an unpleasant way).

If Larry Summers takes over, we can expect some real excitement. He is less sure of the benefits of QE than Yellen. But he is more sure of himself. He will be more direct…

And when the sound of helicopters reaches the news media, you will wish you had taken our advice and done your gold shopping now.

We don’t know what will happen… or when. But no fiat monetary system has ever survived a full credit cycle. This will be no exception.

Charm Offensive

But enough of that. Let’s talk about something else…

Besides, it is not very civic minded of us to kvetch about our authorities this week. The feds have mounted a full-on charm offensive. From what we read, the progress of mankind depends on them.

No kidding…

From Edward Luce in the Financial Times: “Washington ain’t that bad.”

From Clyde Prestowitz in Foreign Policy: “Thank Washington for shale oil.”

And from Martin Wolf, also in the Financial Times: “The state is the real engine of innovation.”

What these headlines have in common is a breathtaking cloddishness… an appreciation of government that is so naïve you wonder about the species itself: How could the brightest people in the human race be so dull witted?

Of Martin Wolf, we would expect no less. Said to be one of the “100 most influential people” on the planet, it raises questions about the other 99.

Wolf’s influence comes from his post as chief economics commentator at the Financial Times, where he leads the “pink paper” to most of its wrongheaded ideas.

In his article this week… in the first sentence… with no hesitation nor even a qualification… he sets out in the wrong direction: “Growth in output per head determines living standards.”

He should have hesitated. Imagine an economy in which everyone is given a tiny shovel and told to turn the Earth. Then, in an effort to improve output per head, each is given a bigger shovel. Will living standards improve? Not a bit. They are all wasting their time, no matter how much dirt they turn over.

Having set out in the wrong direction, naturally, Wolf soon arrives at the wrong destination. There, he discovers a world well suited only to simpleminded intellectuals – where molecular research, Google’s search engine, the Internet itself and even hydro-fracking are the products of what he calls “state-supported innovation.”

Of course, the people who supposedly benefit from these innovations are the taxpayers.

Do they want them? Do they get their money’s worth? Is this the best way to get these benefits? Are they actually beneficial at all… and how does anyone know?

The questions never seem to occur to Wolf. Instead, he accepts the feds’ storyline without quibble or irony. And he regards the failure to appreciate the feds’ contributions as “the greatest threat to rising prosperity.”

What?

Greater than the lack of real savings? Greater than the burden of crushing debt? Or unfunded pensions? Or overfunded, overleveraged, overhyped speculations? Or jackass economists?

Standing on the Shoulders of the State?

Nevermind.

Meanwhile, here comes Clyde Prestowitz, an agreeable and intelligent man whom we met in Georgetown just last year.

“The truth,” says Prestowitz, “is that virtually none of America’s great inventors and entrepreneurs did it on their own. In the overwhelming majority of cases, they received taxpayer-supported federal help along the way.”

When we started our publishing business we looked around for a place to put it. At the time Baltimore was such a rundown dump that the city was giving away buildings for $1. We took two of them.

Was our business also “supported by government”? You bet.

It is almost impossible to do anything without receiving some form of taxpayer support. The feds pass out money as though they were seeking re-election.

Support the universities? Support research? Support everybody! As long as it’s not your money, why not?

But does that mean that government funding is an efficient or effective way of allocating capital resources?

With hundreds of billions of dollars’ worth of taxpayer money running in every direction, some of it is bound to rub up against something useful.

But why would public officials, with no skin in the game, do a better job of investing it than the people who earned the money in the first place?

It’s easy to piddle away money. It’s hard to get a good return on it.

Nevertheless, Edward Luce looks on Washington with favor. It is “home to some of the brightest people in the US,” he says.

Hmmm… We lived in and around Washington for many years. As we recall, the gas station attendants and bootblacks were about as clever as those in any other city. But the closer you got to the halls of power, the more you ran into real nincompoops.

Imbecilities and Indignities

Years ago, we shared a car with a member of Congress from California…

At first, we thought he was just stupid. But after a while, we began to wonder. His conversation was so mindless, it like elevator Muzak playing in a continuous loop. Soothing. Senseless.

When he turned his head, we took the opportunity to peer in his ear, thinking we might catch of glimpse of the electronic gear that made him work. (We saw nothing but a normal ear… which just goes to show what great advances in bionics the feds have made!)

But at least Washington has “the decency to apologize for itself,” says Luce.

Huh?

We can’t remember getting an apology. During our lifetime, I estimate that the feds may have squandered as much as $30 trillion.

And in Vietnam, Iraq, Afghanistan and Pakistan they have gotten roughly 2 million people killed… for no apparent gain.

Over the years, we have suffered countless imbecilities and indignities, from pointless gas lines and “Whip Inflation Now” buttons in the 1970s to the TSA, NSA and a silly War on Terror today.

The war in Iraq alone cost an estimated $5 trillion (most of it still to be paid) and some 100,000 lives.

Apology? Public hangings would be more appropriate.

But respect for authority is cyclical. And presently, the authorities are enjoying an upswing.

People look to the feds to get things they can’t get on their own. Health care paid for by someone else… a retirement they can’t afford… and foolish pride they don’t deserve.

US troops patrol the streets of towns we never heard of… US drones wipe out families we never met… the NSA listens in on the world’s conversations…

Yes, thanks to the NSA, TSA, CIA, IRS, FBI and the Pentagon. No sparrow can fall anywhere in the world without it setting off alarms in America’s command centers.

Larceny, bullying, eavesdropping, assassinations – they all help us to stand a little taller and hold our heads a little higher.

Thanks, bureaucrats… really.

Regards,

Bill

The Story of How America Was Packaged and Sold

The Story of How America Was Packaged and Sold

By Porter Stansberry

Friday, October 25, 2013 A building – One Chase Plaza – was sold last Thursday in New York for $750 million.  Not surprisingly, the building was bought by a Chinese asset-management firm, Fosun.  Today's essay is about this deal… and the massive economic forces that lie behind it. The story of One Chase Plaza is the story of how America was sold to its bankers. It's the story of how inflation plundered our wages. It's the story of how credit, rather than savings, came to dominate our economy and transform our way of life.  It's the story of how America was packaged and sold to our foreign creditors – mostly the Chinese… Since 1996, the Chinese have made 51 major acquisitions in America, including deals to own or control iconic U.S. assets like computer giant IBM, carmaker GM, meat producer Smithfield Foods, U.S. power company AES Corp., major airplane lessor International Lease Finance Corp., investment bank Morgan Stanley, and private-equity firm Blackstone Group. They've also bought trophy real estate around the U.S., like the GM Tower.  These deals didn't happen by accident. They happened because the U.S. continues to consume far more than it produces. We finance this consumption with debt that's owned in large measure by foreign creditors. Take the U.S. Treasury debt, for example. At nearly $17 trillion, this is the world's largest pile of obligations. If you exclude Treasury obligations held by the U.S. government and the Federal Reserve, 54% of the remaining obligations are held by foreign creditors. And these foreign debts continue to grow rapidly – at about $500 billion annually.  Debt service on these obligations allows our foreign creditors to continually buy America's best assets. Today, foreign creditors directly own and control U.S. assets worth more than $25 trillion. That's roughly a third of all the wealth in America. And that's far more than what Americans own overseas: Americans only own about $20 trillion of foreign assets.  Every year that goes by, our foreign rivals will earn more on their American assets than we're able to earn on our foreign investments. They will grow wealthier and wealthier… while we become poorer and poorer in comparison.  As Warren Buffett famously said about this situation 10 years ago: "We have entered the world of negative compounding – goodbye pleasure, hello pain."  How did this happen? Why is it continuing? And why is it almost certain to lead to an enormous currency crisis? The story starts with One Chase Plaza…  In 1957, America was the most powerful country in the world. We controlled roughly 75% of all of the world's economic activity, and we owned the three most important corporations in the world: General Motors, Exxon (Standard Oil), and Chase Bank (the Rockefeller Bank). Our country's products – like the '57 Chevy – were the finest available in the world. We dominated every foreign competitor in manufacturing, energy, banking, and just about every other industry, too.  At the time, you might recall, our dollar was literally as good as gold: By international agreement, our foreign creditors could exchange their dollars for gold for $35 per ounce at the Federal Reserve Bank of New York. This firm limit on the value of the dollar protected the middle class in America, guaranteeing that every wage-earner in the economy would share in gains from increased productivity. As productivity increased, the dollar bought more goods and services. As a result, real after-tax income increased. What was good for GM actually was good for America, too.  The firm value of the U.S. dollar also protected America from the temptation of credit. By linking the dollar to gold, expansion of credit required an increase in gold reserves. Under these rules, the supply of additional gold bullion (through new production or trade) limited the banks' ability to create new credit.  This made credit expensive (in real terms) and encouraged savings. Those savings then powered stable investment into our economy. Thus, the U.S. government debt actually declined in 1957, falling by $2.2 billion. Surely, no sane person in 1957 imagined that would be the last time the total debt of the U.S. government would ever again decline on an annual basis.  In 1957, work also began on the first modern skyscraper in lower Manhattan. Commissioned by legendary banker David Rockefeller, One Chase Plaza featured space-age materials (anodized aluminum panels) and soared 60 stories high. Covered in glass, it reflected light, unlike the older sandstone buildings around it that absorbed light. The building would serve as a glowing new headquarters for Chase Bank. It was a towering statement proclaiming the bank's growing influence around the world.  Even today, One Chase Plaza is a signature piece of New York real estate. It remains the 15th-tallest building in Manhattan. Surrounded by Pine, Liberty, and Nassau streets, it offers tenants a direct connection to the Nos. 2 and 3 subway trains. It is even thought of as a key part of the infrastructure of the United States – housing the largest privately owned bullion vault, five stories underground.  Winston Churchill remarked that "we shape our buildings; thereafter they shape us." Just 10 years after the completion of Rockefeller's global banking trophy at One Chase Plaza (construction was completed in 1961)… the link between the dollar and gold would be permanently broken.  Richard Nixon closed the gold-exchange window in 1971. America reneged on its debts to foreign creditors. Even more important, banks no longer had to back up their loans with reserves linked to gold. Now, all public and private credit would be backed by "Federal Reserve notes" – so-called "fiat," or paper, money.  As a result, banks no longer faced any physical limit to how much credit they could extend. And the U.S. dollar no longer had any firm value. Nothing guaranteed the real value of wages. Nothing linked increases in productivity to increases in wages. Nothing protected the middle class from the rising tide of inflation… or the soaring power of the banks.  You can see how the change is destroying the middle class. Today, gains in productivity benefit our creditors… not our wage earners. Take a look at this chart, based on one originally published by the Economic Policy Institute think tank. Based on Bureau of Labor Statistics figures, the chart shows the cumulative growth in hourly productivity for the total economy compared with cumulative growth in inflation-adjusted hourly compensation…    These changes transformed our economy and the nature of capitalism itself. No longer would our economy be driven by investments fueled by savings. Instead, our economy is funded by debt.  Debt of every kind has soared. Measured in inflation-adjusted dollars, America's total debt has increased from $5 trillion in 1957 to more than $60 trillion today – a 12-fold increase. Meanwhile, our gross domestic product has only increased from $2.5 trillion to $16 trillion, a six-fold increase. As a nation, we've mistaken credit-fueled booms for true prosperity.  But there is a major difference, of course. Credit must be repaid. While real prosperity leads to greater abundances, increasing debt produces greater burdens. The cost of servicing our debts has become so large that our creditors now routinely buy our country's best assets using the debt-service payments we send abroad. Ironically… the "butcher's bill" of servicing our debts now includes the iconic building that launched America's credit bubble.  On August 16, the New York Times broke the story that One Chase Plaza was for sale. JPMorgan Chase & Co., the successor entity to David Rockefeller's bank, was shopping the building through CBRE, the international commercial realty firm. Speculation at the time was that the building might be converted into condominiums and fetch $1 billion. Last Thursday, news broke that Fosun bought the building for $750 million.  And so… America has become just a little bit poorer. Our ability to generate wealth has been marginally decreased. One of Manhattan's most valuable buildings has been sold. The rents will now be sent overseas to China. The real earning power of our currency has declined just a bit.  For now, the changes seem small and have such a minor impact that hardly anyone notices. But the compounding nature of this shift in wealth is incredibly powerful and very, very hard to stop. Over time… real wages will continue to fall. Over time… our ability to service our debts without additional inflation will erode. (That's why the Fed can't stop its bond-buying program of quantitative easing.)  One day, no one knows when, the world will simply decide that we're not creditworthy anymore. We will have burned too much of the family furniture trying to keep our house warm.  On that day, you won't want to be holding U.S. dollars or Treasury bonds… or be dependent on the U.S. government. When that day comes, people will look back on the sale of One Chase Plaza and realize… it was one of the last, most obvious warnings, that something had gone badly wrong with America.  Regards,  Porter Stansberry Source: Daily Wealth Follow us on Twitter: @blacklioncm