Housing, Hostess and High Heaven

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The Daily Reckoning | Saturday, November 24, 2012 Bill Bonner on the inner workings of the biggest scam of them all, Readers weigh-in on housing, Hostess and high heaven, Plus, all this week’s reckonings archived for your in-flight entertainment... --------------------------------------------------------------- CUSTOMER SERVICE ANNOUNCEMENT: My records say we could owe you, dear subscriber, exactly $1,044 in subscriber benefits. You are eligible to claim this amount due to your loyalty as a subscriber. However, you have only until midnight November 29th to let me know whether you want to receive these benefits... or simply let them expire. Please let me know as soon as possible. To learn how to claim these benefits, simply click here. Sincerely, Andrea Michinski Customer Service Director, Agora Financial Joel Bowman, checking in from somewhere high above South America... Joel Bowman From our modest little pied-á-terre in Recoleta, Buenos Aires, we savor the slightest hint of a river view. We have to peek between the buildings to see it...but we know it’s there just the same. On a clear Saturday afternoon, we sometimes take a book — and/or a cocktail — out to the terrace, where we can watch the planes taking off from Aeroparque. They climb ferociously...impossibly...and then, invariably, bank a hard left before roaring off, over the Rio del Plata and on northward up over the enormous continent. But we’re not on the terrace today. Instead, we are on one of those planes, heading north... We have a few stops to make before we rendezvous with Eric Fry, Chris Mayer and a handful of Fellow Reckoners in Rancho Santana, Nicaragua, for our semi-annual “Sessions” conference. Panama is on the to-visit list. As is Costa Rica. We want to see what advantages, if any, these locales offer individuals looking to “internationalize” their investments...and their lives. We’ll let you know what we find... In the meantime, we were excited this week to be able to deliver the next three installments of Bill’s upcoming book. His essay, How Government “Works” serves as this weekend’s feature essay. Please enjoy... [The following article originally appeared in these pages on Wednesday, November 21, 2012] The Daily Reckoning Presents How Government “Works” Bill Bonner There are many theories to explain government. Most are nothing but scams, justifications, and puffery. One tries to put something over on the common man...the other claims it was for his own good...and the third pretends that he’d be lost without it. Most are not really ‘theories’ at all...but prescriptions, blueprints for creating the kind of government the ‘theorist’ would like to have. Not surprisingly, the blueprints flatter his intellect and engage his imagination. The “social contract,” for example, is a fraud. You can’t have a contract unless you have two willing and able parties. They must come together in a meeting of the minds — a real agreement about what they are going to do together. But what is the ‘social contract’ with government? There was never a meeting of the minds. The deal was forced on the public. And now, imagine that you want out. Can you simply “break the contract”? You refuse to pay your taxes and refuse to be bossed around by TSA agents and other government employees. How long would it be before you got put in jail? What kind of contract is it that you don’t agree to and can’t get out of? They can dress it up...print out a piece of paper...have a solemn ceremony in which everyone pretends it is a real contract. But it’s not worth the paper it’s not written on. Also, what kind of a contract allows for one party to unilaterally change the terms of the deal? Congress passes new laws almost every day. The bureaucracy issues new edicts. The tax system is changed. The pound of flesh they got already wasn’t enough; now they want a pound and a half! Here are the critical questions: Why do we let other people tell us what to do; are we not all equal? What is the purpose of government? What does it cost and what benefits does it confer? A theory should explain something without reference to something else. That is, a metaphor doesn’t work. It’s just a description. If you say that government is a kind of ‘social contract,’ you are merely describing how it seems to you...or what you think it might be comparable to. Let’s try a simpler insight: government is a natural phenomenon, an expression of power relationships, in which some people seek to dominate others by force. These dominators gather ‘insiders’ together so that they can take money, power and status away from other people, the ‘outsiders.’ Many people think that government provides some service. That is true, but it is incidental. Governments often deliver the mail. But they don’t have to. They would still be governments even if they didn’t control the Post Office. And what if they didn’t have a department of inland fisheries, or a program to teach retarded democrats to count to 20? They would still be in the government business...and still have their helicopters, chauffeurs and expense accounts. But if they lost control of the police or the army it would be an entirely different matter. Force is the essence of government, not a decorative detail. Without armies and police, they would no longer be governments, but voluntary associations like the Kiwanis Club or the Teamsters Union. In 2012, the US faced a major presidential election. Several men came forward offering to take charge of the US government. What exactly were they going to take charge of? Government is a fact. It exists. It is as common as stomach gas. It is as ubiquitous as lice and as inescapable as vanity. But what is it? Why is it? And what has it become? We know very little about the actual origins of government. All we know, and this from the archeological records, is that one group often conquered another. There are skeletons more than 100,000 years old, showing the kind of head wounds that you get from fighting. We presume this meant that ‘government’ changed. Whoever had been in charge was chased out or murdered. Then, someone else was in charge. Tribal groups, or even family groups for that matter, probably had “chiefs.” They could have been little more than bullies...or perhaps respected elders. Over the millennia there were probably as many different examples of primitive ‘government’ as there were tribes. Some elected their leaders. Some may have chosen them randomly, for all we know. Many probably simply conferred leadership by consensus. Some probably had no identifiable leaders at all. But it seems to be a characteristic of the human race that some people want to be in charge...and many people want someone to be in charge of them. In adversity, there was probably an advantage to having a leader. Hunts were often collective enterprises. There were also group decisions to be made...about how food was stored up or rationed out, for example...that would affect the survival of the whole group. Under attack from another group, a strong, able leader could make the difference between life and death. We can guess that people enter into leader/follower roles today because they are programmed for it by evolution. Those who can’t or won’t...well, perhaps they died out many millennia ago. We don’t have to look back to the Last Glacial Period to see what happens in small political units. We can see them today. They are all around us. Every church has its governing board. Every community has some form of government. Every corporation...group...club...every place where humans get together seems to develop rules and power relationships. Leaders arise. Informal groups typically yield to the strong personality. Juries try to control it. Families resist it. Dinner parties try to avoid it. But that’s just the way it is. Some people seek to dominate. Others like being dominated. Trouble is, there is usually more than one person or one group that wants to do the dominating. This leads to conflict. Treachery. Murder. Rivalry. And elections. But let’s not get ahead of ourselves. We’re talking about the origins of government and trying to guess what they were like. On a small scale, we conclude, governments were both extremely variable in form...and extremely limited in scope. That is, how much governing can you get away with in a small group? Not much. You can boss people around, but they won’t take too much bossing. And there is always a rival bosser who is ready to topple the big boss if he should lose his popular support. In a tribal setting, we imagine that the strongest, fiercest warrior might have been able to set himself up as the governing authority. But he could be stabbed in the back as he slept...or even shot with an arrow in a ‘hunting accident.’ Even in the best of circumstances, his reign wouldn’t last much longer than his own strength. In a small town, government proceeds tolerably well. There is not much distance between governors and the governed. The latter know where the former live...and how they live...and how little difference there is between them. If the governors overreach, they are likely to find themselves beaten in the next election...or in the middle of the street. But as the scale increases...as the distance between the governed and the governors increases...and as the institutional setting grows and ages...government becomes a bigger deal. More formal. More powerful. It can begin governing more grandly. The first large scale, long-term government we know about was in Egypt. After the unification of the upper and lower kingdoms in about 3,150 BC, the dynastic period began. It continued for two millennia, not ending until the Romans conquered Egypt in 30 BC. We don’t know exactly how government worked during those many centuries, but we know that a theory of government arose out of them. At the time, it was not considered a theory at all, but a fact. The ruler was divine. A god. As a theory, it is a good one. It answers the question: why should you take orders from another human being? In Ancient Egypt, the question didn’t arise. Because Pharaoh was not another human being. He was something else. Precisely what he was...or what people thought he was...is not clear. But the archeological record shows that he was treated as though he was at least a step or two higher up on the ladder than the rest of us. If not a full god, he was at least a demi-god...on the mezzanine between Earth and Heaven. If that was so...and who are we to doubt it?...the theory holds together perfectly well. The divine authority is transmitted from heaven to man via his intermediary...the pharaoh. You might think that would be the end of the story. It was not. There were Asiatic settlers moving in the delta area — the Hyskos — who apparently had a different idea. And the Thebans. And the Nubians. And the Assyrians. And the Hittites. There arose hundreds of years of internal warfare against dozens of different groups...not to mention the struggles within the divine families themselves. If God had wanted His man on the throne, you’d think he would have done more to help him. Or at least you’d think he would have been a little clearer about who His man was. Why let people guess and rumble, trying to decide who really is God’s choice? But who can figure the mind of God? Maybe the whole divinity hypothesis was just a lie. Maybe God liked to see His man get a workout. We can’t know. Pharaohs may have lived like lords. They may have governed like gods. But they died just like everyone else. And after the 30 dynasties, as counted by Menes, the whole system was kaput. Cleopatra Ptlolemy got herself rolled up in a carpet so she could spin out at the feet of Julius Caesar. She had a child by him...but then went over to Marc Antony’s side. That proved a mistake. Caesar’s nephew, Octavian, was better organized and a shrewder politician. Antony’s army was beaten at Actium. But the idea of a divine ruler survived. Antony had already begun to feel the blood of divinity pumping in his veins when Octavian cornered him. His omniscience failed. Thinking Cleopatra was dead, he stabbed himself to death. Then, hardly had the half-god pharaohs gone to their graves in Egypt than the half-mad Caesars in Rome started to sprout wings... You may have doubts about the divinity of the Pharaohs. Certainly, either the Egyptians had some doubts themselves, or they were among the most impious people who ever lived. Pharaoh was supposed to be a god. He was supposed to be in charge of everything, even the annual flooding of the Nile, the weather...life, death, you name it. But that didn’t stop him from getting the old heave-ho from time to time. Rival groups didn’t wait for God to decide who would sit on the throne. Men fought it out. We don’t have any way of knowing about the pharaohs’ divine bona fides. But as a theory of government, it does the job. Government claims the right to tell you what to do. Using the blunt instrument of ‘government’ some people are able to direct the energy of a whole society to where they want it to go — categorizing, regulating, taxing, inspecting, dragooning, conscripting, enslaving, bullying, incarcerating, murdering and pushing around other people. There must be at least 10,000 commandments we Americans are expected to obey. The IRS code probably has that many alone. We cannot build a house or cash a check without fulfilling hundreds of (often invisible) requirements. We pass through an airport and we submit to indignities, usually without question. We know the TSA agent is a moron. But “dress’d in a little brief authority,” as Shakespeare put it, “most ignorant of what he’s most assur d, glassy essence, like an angry ape, plays such fantastic tricks before high heaven, as make the angels weep.” For the two thousand years of the 30 dynasties, men killed each other to determine who would hold the pharaonic power. The last of them was clearly an interloper. The Ptolemies weren’t even Egyptian. They were Greeks, who conquered Egypt with Alexander. Then, finally, Julius Caesar and his nephew Octavian put an end to the divine tradition in Egypt forever. God either abandoned His man on the Nile, or he is playing tricks with us. Caesar took the role of emperor of the whole Roman world. He did not seem to be too concerned about the theory of it. People bowed to him and paid tribute. That was how an empire worked. And he never had too much time to think about it anyway. He was cut down on the Ides of March at the age of 55 in 44 BC. But the appeal of divinity did not die with the Ptolemies. Four score years after Cleopatra’s death the emperor Caligula declared that he was a god. This didn’t seem to take him very far. Romans came to the conclusion that he was not divine at all, but insane. He was murdered soon after by his own guards. Rome struggled on for another 4 centuries. If there was a theory to dignify one man’s bending to another we aren’t aware of it. It was considered normal and natural. Those who got control of the government of Rome were able to exercise the rights of governors. They were victors on the field of battle...and in the halls and assemblies of Roman government. What did they do with this power? “Ad victorem spolias.” Simple enough. You defeat someone. You take his stuff. His land. His wife. His children. At least there was no humbug about it. And the rules were simple. Government operated its naked form. As Mao described it two millennia later, political power came “from the barrel of a gun,” not from the Rights of Man or the Social Contract. In the exploits of Genghis Khan and Tamerlane, too, we find a very pure form of government at work...and a very clear theory about it. Genghis announced his theory of government as follows: “Man’s greatest good fortune is to chase and defeat his enemy, seize his total possessions, leave his married women weeping and wailing, ride his gelding, use his women as a nightshirt and support, gazing upon and kissing their rosy breasts, sucking their lips which are as sweet as the berries of their breasts.” Tamerlane was no less direct. He saw government as a legitimate enterprise. He raised troops with the intention of conquering other peoples and replacing their governments with his own. His warriors were paid in booty — jewels, coins, horses, women, and furs. He was paid in loot, tribute and taxes. This is not to say that there was anything wrong with running a government in such a way. We are not giving advice or making suggestions. We are just trying to understand the essence of what government is and how it careens to the downside. Regards, Bill Bonner for The Daily Reckoning Grab Your Share Of Big Oil’s Paycheck... Pictured below is a map many Americans have never seen. That’s a shame, because today it holds one of the best profit opportunities the market has to offer. Big oil knows this map well — heck, it’s one of the reasons they always seem to turn a profit! Today, thanks to a little-known loophole, you could start grabbing your share. Click the map to find out how... ALSO THIS WEEK in The Daily Reckoning... How Government “Works,” Part II by Bill Bonner In the case of Egypt, people listened and obeyed — at least, as much as they did — because Pharaoh was, in theory, a god. In the case of Rome — with the exception of Caligula’s claims — and the Mongol empires, the theory was similarly simple, though different. Tamerlane made no claim to divinity... The Rule of the Downside by Bill Bonner Energy is a good thing. But it is as obedient to the law of Declining Marginal Utility as everything else. The point is obvious, but I’ll prove it anyway. The real question on the table in this section is this: does it also obey the Rule of The Downside? Do you ever reach the point where further inputs of energy are actually negative...or even disastrous? The Road to 7 Billion Secessionists By Joel Bowman Revolt is in the air, Fellow Reckoner! You can smell the gunpowder...taste the whiskey...feel the virtual ink blotting dot.gov petition forms. That a movement is underway, there can be no doubt. But to where will it lead? Our guess is that it will end where all revolutions (by definition) must end...right back at the beginning. One Real Estate Indicator is Yelling, “Buy” By Chris Mayer I just locked down a 2.875% interest rate, fixed for the 15-year term of the mortgage. No points. With rates like these, I find myself rethinking the idea that I want to pay off my mortgage. I can do a lot better than 2.875% investing the money. If I just sock it away in gold, I bet I’ll come out way ahead. Only 62 People Know Exactly Why These 4 Companies Could Change the World Now you’re No. 63 “on the inside” — and you’re on the verge of raking in lasting wealth. This could go down in history as the story of our era. Click here for all the details. The Weekly Endnote... And now, it’s over to a few readers for some thoughts, ideas and rumors... First up, Reckoner Tom W. responds to our Twinkie piece, “Hostess Shrugged”... I found your article on the venerable Hostess Twinkie interesting and thought-provoking. I do have to take note of one thing that I did take exception to. I have worked in the retail food industry for almost 40 years now, and one of the truths that I have learned about this business is that you must constantly strive to improve the processes you use to stay ahead of the game. The fine folks at Hostess brands have now gone through the bankruptcy process three times since 2008. One of the things that first put them into bankruptcy was our fine government insisting that they no longer be a part of a larger company, Interstate brands. Because of “anti-trust” concerns, Hostess was forced to separate from Interstate, and lose the economies of scale that came from producing Butternut and Wonder breads in the same bakeries. Once that happened, Hostess eventually wound up in bankruptcy court. The sad part of this is that the union gave concessions during the last three bankruptcies, in 2008, 2010 and the present — I believe those dates are close, if not exact. While the unions gave concessions, including pay cuts, the elimination of pension contributions, and higher health and welfare benefit employee contributions, the executives that took the company through bankruptcy were given bonuses each time in the 100k to 250k range, which even you take note of in your article. The money from those bonuses could have been put to better use by investing in newer equipment and more efficient methods of manufacture. The sad result of this was that the company produced their product on equipment that ranged from 30 to 50 years of age. The product was delivered to retail outlets in trucks that were 1960s and 1970s vintage. The company’s route salesmen used handheld computers that were the oldest in the industry. While it can be argued that there is enough fault on all sides to go around, I can’t help but think that this situation is reminiscent of the plight of the US steel industry in the 1960s and ’70s and how they got left behind by being complacent and not investing for the future. By failing to invest profits back into the business to keep it competitive and efficient, the management underwrote their own demise. It is always interesting to me to note that the blame is always put on the “cost of labor”. While there is some truth to that argument, I think the company leadership needs to take a good long, hard look in the mirror before pointing fingers at the people that came to work each day and helped to build the reputation of the mighty Twinkie. Next, Reckoner Rick B. writes in response to Chris Mayer’s housing article... I’m looking for a house to live in — not an investment. I’ve been looking for almost 2 years now. I have super credit and have no problem getting ridiculously low rates. Here in St. Petersburg, Florida, there are very few houses coming on the market. Almost all of them are repos. On average, they stay on the market for three days. They are purchased by investors, with cash, for (usually) 20% over market value. In my area it is a seller’s paradise — not because there aren’t empty houses, but because most are being held off the market. Maybe I should widen my search area — to South America! And finally, Reckoner AC shares some thoughts on Bill’s How Government “Works” article, above... All complex systems careen to the downside, ultimately. Since government, or supra-individual forms of organizing a “society” are as prevalent in history as, well... humans, or religion, or clothing, we can assume there’s something intrinsic to the system that requires the presence of “government”. And while I wholeheartedly agree with the “minarchism” theme, I would say that just going against the government will not ultimately solve “everything” with regards to avoiding the careening to the downside of the entire system. I would then hypothesize that the most productive pursuit of a person who wishes to avoid such catastrophic outcomes is the pursuit of self-doubt, which will lead people to see themselves as what they are: “most ignorant of what he’s most assur d, glassy essence, like an angry ape, plays such fantastic tricks before high heaven, as make the angels weep.” --- Hmm...lots to unpack in this week’s mailbag. Feel free to send your own thoughts 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. 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