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The Daily Reckoning | Saturday, August 25, 2012 Bill Bonner on the make-believe world of leading economists, Readers weigh-in with what liberty means to them, Plus, all this week’s reckonings archived for your consensual consumption... --------------------------------------------------------------- Amazing... But True! Tobacco is being resurrected — making it the profit opportunity of the decade. It turns out that one man’s quest to help people quit smoking has led to what could be the most important “accidental” health discovery since penicillin. And for you — it could be the biggest potential “profit bonanza” since Pfizer accidentally discovered Viagra. Discovered by accident: A chemical compound in tobacco that doctors are now recommending to slow aging! BUT because Wall Street inexplicably thinks the biotech firm that owns the patent — and is already selling this miracle product without a prescription — is a nasty, dirty tobacco company, you still have a little time to load up before the truth is finally revealed! Learn more about this amazing opportunity right now, right here. Joel Bowman, checking in today from Lisbon, Portugal... Joel Bowman “It’ll all be in my new book,” Bill told us, “about the declining marginal utility of things.” Our Reckon-in-Chief was explaining, over dinner, the slow collapse of the western world...and of governments getting less “bang for the buck.” “The whole debt-based model of the welfare state, for example, is a good illustration of this phenomenon. It was rotten from the beginning, of course...but to your average man on the street, it probably seemed like a good enough idea at the time...a system to help people from ‘falling through the cracks.’ “We know now it doesn’t work. And that it never really could. But world improvers are a stubborn breed. Especially when they’re wrong. Today, governments around the world put more and more money they don’t have into their failed programs...getting less and less for every dollar they spend... “Well, it’ll all be in the book...which I’m planning to write in the pages of the Daily Reckoning. I’ll send the first installment along soon.” And that he did. In fact, his essay (the first of the new book series) serves as this week’s feature column. Please enjoy... [Nota Bene: This column originally appeared in these pages on Monday, August 20, 2012] The Daily Reckoning Presents Too Much of a Good Thing Bill Bonner In the years 2007-2012, Nobel Prize winning economists Paul Krugman and Joseph Stiglitz — along with celebrity economist Jeffrey Sachs and practically all their colleagues — failed to notice the most- important thing to happen in their field. But not noticing things came naturally, easily to them. In fact, you might say they had built their careers on not noticing things, especially the most- important thing in economics. It was part of their professional training. It was what allowed them to be economists and to win coveted prizes and key posts in a very competitive occupation. Had they been more reflective...and more observant...they would probably be teaching at community colleges. But that is just a part of our story. By the late 20th century, economists — especially leading economists — had ceased being useful. They had become a nuisance. They closed their eyes to what an economy actually is...and to how it works...and focused on their own world — a make-believe world of numbers and theories, with little connection to the world that most people lived in. And now in the 21st century, they are up to mischief. And part of the mischief involves not noticing things that are right in front of their noses. The most-important single feature of modern economies is growth. Without it, neither businesses, households nor governments can pay their bills. Without it, pension funds...private and public...go broke. Without it, the stock market is doomed....and bonds get crushed when debtors can’t pay. In fact, without growth, every government in the economically developed world faces catastrophe. Its revenues stagnate while its costs — largely driven by open-ended health and pension obligations to aging populations — continue to expand. By the year 2012, in fact, every major government in the developed world is already in trouble. Some more than others, depending on their ability to borrow money... or to print it. The US, Japan and Britain are still technically “solvent” because they control the currency in which their debts are calibrated. They can always print money to pay their debts; creditors do not have to worry about a simple default. Greece, Italy, Spain, Ireland, Illinois and California, on the other hand, are already keeping lenders up at night worrying that they will not and cannot pay their bills. Even on these terms, Japan and Britain stand out, each with total debt of more than 500% of GDP. But even this Everest of debt was overlooked by most economists. Rather than look out the window, they hunched over their computers and studied their formulas and their numbers, apparently unaware of the avalanche that was headed their way. Ultimately, an economy must pay its bills. And it can do so only by drawing on its own savings and output. Debt is money that has already been spent. It is like sin; it may be fun when you are doing it, but there’s always a price to be paid later on. Debt repayment is a painful part of the cycle. And sometimes it is so painful...so enormous...that the bill can never be settled. Britain and Japan had had their spending sprees. They had their carefree days. How will they now pay their debts? You can forget paying them “off”; no one even imagines that such a thing is possible. But they must be serviced. A lender must get something for his trouble, even if it is a pittance. Typically, lenders demand a pound of flesh for every 20 or so pounds they lend. The present period is unusual in that regard. Growth rates are so slow, savings rates so high and lenders so fearful, that they no longer require much in the way of yield. They are happy to take no real flesh at all. The U.K. 10-year bond yielded all of 1.68% in mid-August 2012, well below the rate of consumer price increases. As for the Japanese equivalent, investors were content with 0.8%. If there were any consumer price inflation at all, investors would lose money. Inflation rates have been going down for more than 30 years. Ever since the CPI hit a high of 11% in 1980. Investors must think they will continue going down forever. If that is so, nations such as Japan and Britain will continue to carry their debt at vanishingly low interest cost. But it would be a strange world in which markets went only in one direction. And it will be an even stranger world in which foolish investors fail to get what’s coming to them. What to Expect in 2013... Between 2004-2007, Bill Bonner and Addison Wiggin did their best to alert their loyal readers to the dangers of the housing bubble well before the mainstream said anything about it. Well, today, they see something even worse looming just over the horizon. It’s not often our Reckoner-in-Chief agrees to appear on-screen, but this was just too important. Click here (or the image below) to see what they’re talking about now... The word normal is in the language for a reason. It was coined to describe what usually happens after something very extraordinary has happened. It is rare for lenders to lend below the rate of consumer price inflation. In effect, they are consenting, at the get-go, to a loss. What normally happens after investors do such a thing is that they do lose money — far more than they expected. Interest rates normally give lenders a 2-4% real return on their money. So if inflation rates were to hit the mark central bankers have set for them — about 2% — and if lenders were to want the interest payments that they normally expect, Japan and Britain would have to devote about a quarter of their entire annual output just to service debt. That’s another way of saying that one out of every four dollars of GDP must be used to pay for things that were consumed...used up...and probably already amortized...years ago. There’s another word, in English, that describes the likelihood of that happening — zilch. But deeper than the numbers or the words themselves or the particularities of the situation circa 2012 was a whole theory of government...a “social contract” now in jeopardy. The modern social welfare state was invented by Otto von Bismarck in the mid-19th century. The idea was simple. Governments required the consent and support of the masses. That was the lesson that Republican France had taught the world and that Bismarck had learned. You could get a lot more out of “citizens” than you could out of “subjects.” The subjects of Frederick the Great might reluctantly pay their taxes...and might join his armies. But they would always keep a distance — emotional and physical — between themselves and their masters. War and government were Frederick’s business, not theirs. Monarchs might retain the loyalty of their subjects. They could claim some of their money, too. But even the Sun King, Louis XIV, the man for whom the term “absolute monarch” was coined, was lucky if he collected 10% of the kingdom’s GDP in taxes. As for his soldiers, every one of them wanted payment. In real money. In the course of the 19th century, monarchy was gradually replaced by some form of representative democracy or republicanism. Not that democracies were necessarily better in any moral or practical way. They did not necessarily improve the lot of the people who lived in them, neither materially nor judicially. Why were they such a hit? It may have been that defensive weapons — repeating rifles — had become cheap and effective. It was much more expensive to keep an armed, subject population in line. Or it may have been a result of the spread of ideas via cheap newspapers and books. Or it may have been merely that because of the Industrial Revolution, people were getting richer and could afford more government. Readers will find more on the role of government, its growth and efficiency, later. For now, let’s just note that parliamentary, participatory democracy became fashionable in the 19th century. The main reason was probably because it is easier to squeeze and bamboozle a citizen than it is a subject. The real genius of modern democracy is that it makes the citizen feel that the government and its workings are somehow the product of his own aspirations. If he wants more money for his retirement, he presumes he can get is — provided only that enough fellow citizens share his desire. If he wants to go to war, that too is up to him and his fellow voters. If he wants to spend more money on space exploration or ban people from saying prayers in bars, the majority — of which he feels he should be part — can do that too. There is hardly anything he and his fellow lumpenvoters cannot do — just so long as they are of one mind on the subject. That is why you so often hear people say, ‘If we could only get together on this...” They believe solidarity is the key to success. Whatever the majority wants, it gets. Even kings had bits in their mouths and a hand on the reins. According to the “divine right of kings” doctrine, a king was a servant of God. A king was subject as well as monarch. God himself had given them the post; they could not refuse it. Nor could they refuse to carry out the job on the terms that they believed God had prescribed. God could pull on the reins whenever He wanted. Often, monarchs were ridden by those who claimed to represent God. In the famous example from the 11th century, Pope Gregory VII got into a dispute with Henry IV, the Holy Roman Emperor. Henry was excommunicated. How much harm Gregory’s excommunication would do him, Henry might not have known. But he didn’t want to find out. He dressed as a penitent and waited three days outside the Pope’s refuge at Canossa. Then he was admitted and forgiven. The democratic majority, on the other hand, recognizes no authority — temporal, constitutional nor religious — that can stand in its way. And thus it deludes itself to thinking that it is the master of itself, its own government and its own fate. “The government is all of us,” said Hillary Clinton. More to come... Regards, Bill Bonner for The Daily Reckoning External Advertisement Something you should know about your local bank There’s a wild rumor going around about a major loophole in the US retail banking system... One that enables you to get real, “hold-in- your-hand” silver from practically any bank in the US. All you do is say five specific words and — according to this rumor — you could walk out with a handful of silver. Click here for the full details. ALSO THIS WEEK in The Daily Reckoning... What Does Liberty Really Mean to You? By David Galland For some time now — years actually — I have pondered the nature of liberty. Or more specifically, what liberty actually means to me. And to be extra clear, I am not talking about the meaning in abstract or philosophical terms, but tangibly — in much the same way I might answer if asked what my wife means to me. What Does Liberty Really Mean to You? Part II By David Galland Freedom to come and go is the core principle of my personal liberty. What else? Well, part of that freedom has to do with personal finances. Namely, you can have all the liberty in the world, but if you don’t have the money necessary to actually travel, you probably aren’t going to get very far... Markets are Rigged...So What? By Chris Mayer Gaithersburg, Maryland I hear more and more people say the market is rigged against them. They say it is a game for insiders to fleece gullible outsiders. Wall Street has not helped this image at all. There seems to be no end to lurid scandals or crises of confidence in the system. Too Much of a Good Thing, Continued... By Bill Bonner Ouzilly, France Economists cannot know what is ‘better.’ They can only know what is ‘more.’ They have numbers. They can count. They can add up ‘more’. As for ‘better,’ they have no idea. So, in their little minds, more is better. New breakthrough fuel could power your car It took the earth 300 million years to make the oil we burn. Imagine if we could squeeze that whole process into just a few months... a few weeks... or even a few days. Because that’s exactly what could be happening. At least a half-dozen labs and companies are working on this, right now. If they get it right, we could literally “make” as much gas for your car as you need. We could make fuel for planes, trains, and diesel trucks this way too. Find out more by clicking here. The Weekly Endnote... Earlier in the week, we asked readers to tell us what liberty means to them. Some of their responses follow, for your consideration... First up, Reckoner Ray D. writes... Most of us are free as in we are not confined or under physical restraints. In the US however, remaining so gets more complex every year. Liberty on the other hand, as in freedom from arbitrary government control or freedom from control, interference, obligation, restriction, hampering conditions, etc.; power or right of doing, thinking, speaking, etc., according to choice, is quite limited in the world today. We all know freedom and liberty are not free. However, the price paid is less and less under our control. In US history we paid for freedom and liberty with blood and hard work. Now we pay in taxes and time and energy spent on regulation. Most people do not object giving up some freedom and liberty in order to have an orderly society. The problem is, much like a frog in a pot of cold water over a flame, you do not realize how much freedom and liberty you are giving up until too much has been lost. In short we have lost control of the flame and are likely to boil in our own pot. Now hopping into a different pot may keep you out of hot water for a time but without control of the flame you are just delaying dinner. And if you do not fight and educate today your heirs will not have the luxury of changing pots. And when the takers exceed the ability of the producers to give then everyone loses as the flame goes out. Not everyone can stand on the front line but you must encourage and support those that can. Next up, Reckoner D.D. writes in from Maine... Thanks for your excellent thoughts on freedom. I have long been disgusted that although I can visit Pyongyang without asking my government for permission, it will penalize me if I visit Havana freely. I lived in Cuba in 1960 and want to visit it again, and may risk punishment by not kowtowing to the far right political power of Miami expatriates. And one from Reckoner Warren W., checking on from “The Belly Of The Beast”... As a former member of the armed forces I just wanted to throw my two cents in regarding your excellent article. I’ve spent the better part of my life in defense of this country because I truly believed it was worth defending. I’ve been to some of the nastiest places us human beings have created and all the time I believed I was doing the right thing. I’m proud of my service and I like to think I had a small role to play in the overall scheme of things. Today’s situation is a disaster and I can tell you the people in the military are no fans of being sent all over creation to deal with the messes politicians get us into. The majority of “first termers” get out as soon as their time is up having become disillusioned at the way things are run. I must also tell you I’ve become very disheartened about the state of the average voter over the last 20 years or so. I’ve become more and more libertarian in my views and I believe we are at a point of decision that will either build up or destroy what’s left of this once great country. Most of the people I speak with today have no real concept of freedom, (especially of the kind you described so eloquently), nor do they have any idea what the Founder’s wrote during the birth of this nation. Their answer to most every problem is to get government at some level involved to try and fix it. When pressed for their reasoning it becomes apparent they would fit in rather nicely in North Korea or Cuba. On a more optimistic note I do find the younger generation, (those 18 to 30 years old), to be less dependency minded and I’m hoping that will spread, and that it’s not too late. I was very disappointed Ron Paul didn’t get the nomination, but the crowds he drew, especially the young, are an indication to me that people may finally be waking up a little. On the topic of the freedom to travel where and when one wishes, I hadn’t really given that a lot of thought before. You’ve given me a lot to think about and my gut reaction is that you’re probably right; we should have the ability to travel wherever we wish without restriction. Lines in the sand are just that, and it’s interesting that the most oppressive places are also the least visited. Gee, wonder why that is? Thanks for a great article and I look forward to your next missive. Chimes Reckoner POTF... One’s lifestyle will play a big part in how the restrictions of government will impact them. Being 59-yrs old, living in a very rural area with plenty of land and being self-employed and working from home, not much the government does affects me. I am quite self-sufficient, well-stocked with supplies, have a powerful generator directly wired in which automatically starts up when the power goes out. The biggest impact any government decision has on me is how much I have to pay in taxes. I will feel the effects of inflation, a decline in the value of the USD and other such things related to the mishandling of the economy. I can’t do anything about the government’s policies so I try to invest based on policy and try to adjust how I manage my business accordingly. As long as we don’t see a complete economic collapse I can muddle through indefinitely, and if we do I can still muddle through for quite some time. My feeling towards the government is primarily one of disappointment, sort of like the parent of a child who made bad decisions and went down the wrong path. While I disagree with and am somewhat saddened/frustrated by many things the government does, since I can’t do anything about it I just try and stay out of the way. I keep a low profile and mind my own business. I hope for the best and plan for the worst. I have traveled extensively in my younger years and I have no interest in traveling anywhere now other than an occasional trip to pick up supplies. I am quite content to stay where I am. I am not wealthy but have all the material things I could want. There is nothing I would rather do from a career/employment standpoint and nowhere else I’d rather be. This goes a long way towards achieving peace of mind. And when it comes right down to it, isn’t peace of mind the greatest freedom of all? --- Feel free to email any thoughts you have on the matter to the address below and... ..enjoy your weekend. Cheers, Joel Bowman Managing Editor The Daily Reckoning ---------------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com Too Much of a Good Thing, Continued... Too Much of a Good Thing The Croquet Party Dollar Bounces Back to End the Week Euros, Oil and Gold Move Higher vs. US Dollars Japan Trade Deficit Hits Global Growth Campers The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. 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