Freedom Lawyers of America

1]
Ponzi Economy by Kurt Richebacher 13 Sep 2003
http://www.goldcentral.com/qry/backgroundstories.taf?_function=detail&NEWS_u
id1=6009&_UserReference=40DCE264CA43BE413F698156&_nc=559aa71315792b62284d847
7ef3c7ff8

Hope and hype are again triumphing over reality.

The primary preoccupation in economics worldwide is the U.S. economy's
"recovery", presently hyping the markets. We note three different views.
First, a cocksure bullish consensus; second, doubtful voices, among them
the Federal Reserve, stressing the lack of conclusive evidence; and third,
a few lonely voices, ours among them, who flatly repudiate the possibility
of a full-scale, self-sustaining economic recovery in the United States.

We see years of Japanese-style sluggish growth for America, if not worse.
Yet, the latest American Association of Individual Investors poll showed
71.4% bulls and a miniscule 8.6% bears. The gap between the two is the
highest since August 1987, just weeks before the crash. Merrill Lynch
surveys show institutional investors more fully invested than at any time
in the past two years, and heavily overweight high tech.

The case of the bullish community rests crucially on the assumption that
the U.S. economy is basically in excellent shape. Fed Chairman Alan
Greenspan, and with him the large bullish community, have actually never
seen anything seriously wrong with it.

In their view, its failure to return to normal economic growth is mainly
due to a series of exogenous shocks inflicted one after the other on the
economy: the stock market crash, the September 11 terrorist attack, the
corporate governance scandals and the Iraq war. Rather, they consider it a
sign of health that the economy has not weakened more in the face of this
unusual sequence of shocks.

Yet compared to the extraordinary exuberance prevailing in the markets, the
Fed has been remarkably hesitant in declaring the economy's impending
recovery. In his testimony to Congress, Greenspan acknowledged that the
"economy is not yet showing convincing signs of a sustained pickup in
growth." In the same vein, Richmond Fed President Alfred Broaddus said a
bit later in an interview, "We still don't have a critical mass of hard
evidence that the economy is accelerating," defining "hard evidence" as
increases in employment, production and capital spending.

Now to our own opinion: after careful analysis both of recent economic data
and also of basic micro- and macroeconomic conditions for the resumption of
strong economic growth, we have come to two conclusions:

* First, the U.S. economy neither improved nor accelerated in the second
quarter. The reported GDP growth of 2.4% is grossly misleading. From the
perspective of quality, it has distinctly deteriorated.

* Second, as we shall explain in detail, the crucial macro- and
microeconomic conditions for a self-sustaining and self-reinforcing
economic recovery remain flatly missing. Necessary economic and financial
adjustments of past economic and financial excesses implicitly involve
pain. But pain is not accepted in the United States. In essence,
policymakers are trying to cure past borrowing excesses by more of the same
and new excesses.

Trying to assess the U.S. economy's prospects, the first thing to realize
is that past cyclical experience offers no guidance to the present downturn
because it has completely different causes and also a completely different
pattern.

All past recessions had their main cause in monetary tightening. As soon as
the Federal Reserve loosened its shackles, the economy promptly took off
again, propelled by pent-up demand. For the first time in history, the U.S.
economy went into recession against the backdrop of most rampant money and
credit growth.

Manifestly, the forces depressing the economy this time are radically
different from past experience. The typical, major imbalance in post-war
business cycles has usually been in inventories. To correct it, retailers
and manufacturers temporarily sold from stock, depressing production. Once
the stocks were down to desired levels, production came into its right
again. At the heart of the regular V-shaped business cycles was the
inventory cycle.

In contrast, the present downturn has its brunt in the combination of a
profit and capital-spending crisis. At the same time, there has accumulated
an array of economic and financial dislocations that tend to depress the
economy in many ways, such as extremely poor profits, badly ravaged balance
sheets, a variety of asset bubbles in different stages of development,
excessive leverage in the whole financial system and shrinking cash flow.
There is nothing normal anymore in the U.S. economy and its financial
system.

For the old economists, investment in tangible assets - factories,
commercial buildings and machinery - was paramount in creating both
economic growth and wealth. It creates demand, employment and income as the
capital goods are produced. And with their instalment, all these new
buildings, plant and equipment create increased supply along with
increasing employment and income with increased productivity.

The United States has always been a low-savings and low-investment economy.
Putting it in reverse: a high-consumption economy. But all three went to
unprecedented extremes over the past several years. Savings and investment
have been run down to atrociously low levels that are typical for
underdeveloped countries.

To repeat: Investment in tangible assets is paramount in creating
everything that is decisive in generating our wealth and raising our living
standards. Given the low levels of saving and investment in the United
States, American policymakers and economists in recent years have elevated
productivity growth to the single most important achievement of an economy.
But just by itself, productivity growth creates only unemployment. It is
the normally associated capital spending that makes for the necessary,
simultaneous demand and employment growth.

This simple recognition - gross lack of saving and capital formation - is
really at the root of our controversial and highly critical view of the
U.S. economy's sanity and vitality. True, its growth rate has been the
highest among the industrial countries for years. But it has all the time
been economic growth of the most miserable quality. The striking hallmarks
of this extremely poor quality were collapsing savings, low rates of
business fixed investment, a profit carnage that began at the height of the
boom, exploding consumer and business debts and an exploding trade deficit.

Today's economists have at their disposal information in quantity and speed
as never before. But reading numerous reports, we have the impression that
very few are making use of it.

Particularly shocking in this respect were the immediate euphoric reports
about growth acceleration in the second quarter.

During the 1960-70s, by the way, the U.S. accumulated on average about 1.5
dollars of additional debt for each dollar of additional GDP. Just
extrapolate this escalating relationship between the use of debt and
economic activity. And think of it: the GDP growth of today is tomorrow a
thing of the past, while the debts incurred remain.

Plainly, Greenspan's policy has collapsed into uncontrolled money and debt
creation that has rapidly diminishing returns on economic activity. The
late economist Hyman P. Mynsky would call this a Ponzi economy, where debt
payments on outstanding and soaring indebtedness are no longer met out of
current income, but through new borrowing. Soaring unpaid interests become
capitalized.

Kurt Richeb�cher,
for The Daily Reckoning 13 September 2003

P.S. We keep asking the question of the American economists: Are they
providing deliberate misinformation or simply performing slipshod work? In
our view, as usual, the latter rings true.

The whole economic discussion today is fixated on the next economic data
with one single question in mind: is it better than expected? Careful, more
detailed analysis with a longer-term perspective is completely missing.
Obviously, most economists and journalists read no more than the brief
summaries provided by agencies, like Bloomberg and Reuters, that only
rehash the summaries preceding the official releases.


2]
http://www.prudentbear.com/internationalperspective.asp

The Fed's flow of funds data that was released last week more than ever
highlights America's acute dependence on the kindness of strangers,
particularly those of the Asian variety. Globalisation has been turned on
its head. Instead of the centre lending capital to the developing
periphery, capital is flowing back to the centre--that is, the United
States. Even poor nations are lending the United States huge quantities of
surplus capital, mainly to keep America afloat as the world's buyer of last
resort. China is the new "bad boy" of the global economy, having displaced
Japan as the aggressive emblem of a trading system ferociously out of
balance. Congress has begun making increasingly loud protectionist threats;
the latest example is legislation that threatens to impose 27.5% across-the
board tariffs on Chinese exports into the US if the RMB peg is not
abandoned.

Even traditional American champions of globalization (including Federal
Reserve Chairman Alan Greenspan) have begun scolding China for excessive
ambitions, just as they once criticized Japan, to no avail. The National
Association of Manufacturers issued a report warning that 2.3 million US
manufacturing jobs have disappeared since 2000, largely due to
international competition (not entirely from China). The United States
risks losing "critical mass" in manufacturing, says the NAM. A Defense
Department technology-advisory group confirmed that so much "intellectual
capital and industrial capability" has been moved offshore, particularly in
microelectronics, that the Pentagon is dangerously dependent on foreign
producers to make its high-tech weaponry.

If the United States falters and can no longer act as the engine of global
growth, the entire system is in deep trouble. Of course, the corollary also
applies: With the current account deficit at 5% of GDP for the first time
in history, America's dependency on Asia's central banking fraternity is
gargantuan. China, Japan, South Korea and Hong Kong now own a combined
total of about $696 billion in Treasuries at the end of June. China alone
now holds $290 billion in US government debt, more than any other foreign
lender, according to Chen Zhao of the Bank Credit Analyst Research Group.
"The flow of Chinese savings has enabled Americans to borrow and spend
more," he explained in the Financial Times. "China is glad to see Americans
going on another shopping spree. Its factories are cranking up production
at an unprecedented pace.... China's exports to the U.S. jumped 35 percent
in the first quarter" compared with the first quarter of 2002. The drive
for China to export more will increase as measures to slow down the
domestic capex and real estate booms begin to bite, and Chinese
manufacturers increasingly look to America as a potential growth offset.

If the US were a developing country, there would already be widespread
speculation as to how long before the IMF was wheeled in to help. Compare
the situation to that of Argentina: Argentina's problem was too much debt
for too small an economic engine. When foreigners stopped investing in
Argentina, the music stopped and there were no chairs. The fervent hope of
US policy makers is that the US economy will surge, its debt repayment
capacity will grow, as the country grows its way out of a looming debt trap
dynamic. But the arithmetic is hardly compelling support for such a benign
outcome.

It is true that the potentially dire effects on the level of activity since
2001 has been mitigated by a transformation in the stance of fiscal policy,
accompanied by a radical change in attitudes to budget deficits, which have
suddenly became respectable (even under an ostensibly "conservative, small
government" Republican administration). The expansionary fiscal policy
initiated by President Bush was reinforced by a further aggressive
relaxation of monetary policy so that short term interest rates have fallen
almost to zero, thereby giving the consumer boom a last gasp. Yet, with all
this help, the recovery from the recession of 2001 has not been
particularly robust. Growth has generally been below that of productive
potential and there is a widespread sense that all is not well.

Today, the US private sector financial balance is almost back to neutral
after a long stretch since 1997 in deficit spending territory. Because low
interest rates encourage households to keep borrowing and spending, the
private sector has yet to return to its traditional net saving position of
1-2% of nominal GDP. Virtually all of the improvement has been on the back
of the largest fiscal stimulus in history, as opposed to genuine balance
sheet repair.

The deepening trade deficit has confounded the ability of fiscal deficit
spending to push the private sector back into a net saving position. That
means fiscal policy has had to go alarmingly deep into deficit spending to
prevent a private income growth collapse. This is inherently
unstable: the rate at which foreign debt has been accumulating is such as
to generate a further, accelerating, flow of interest payments out of the
country, which might necessitate even larger budget deficits in subsequent
years.

Such is the current state of affairs that we now have the reappearance of
the "twin deficits" so feared by bond investors during the Reagan
Administration. Investors used to fret perpetually about this condition.
The dollar's trend each month was largely determined by widely scrutinized
trade reports which highlighted growing imbalances, even though the
external condition of the US was nowhere near as dire as today. Then,
America was still a net creditor, the current account at its worst never
exceeded 3% of GDP, and the US could still grow its way out of the problem,
given the robust economic condition of some of its major trading partners,
such as Japan.

Equally significant was that the geopolitical circumstances of the era
largely ensured the maintenance of the status quo, no matter how
economically untenable longer term. The nations of emerging Asia built up
their manufacturing apparatuses during the Cold War when they abutted major
sites of "communism", which gave the United States an overriding interest
in fostering their state-led capitalisms in order to prove that capitalism
was superior to the communist systems next door. By the start of the 1980s,
when the U.S. began to move from competing in manufactures to dominating
through finance-and importing a rising fraction of manufactured
goods-capitalist East Asia was well placed to ride the surge of U.S. import
demand and even to provide out of its growing financial surpluses the
savings needed to cover escalating U.S. current account deficits.

Things have changed somewhat today in the post cold war era. Asia is no
longer a cold war ally, but a "strategic competitor", particularly China.
Yet, in the economic sphere the US still relies on this old cold war
construct: Asia exports its goods into a relatively open American consumer
market, and then recycles its savings back into Treasuries. But as
countless analysts are now warning, the risk of an external creditor
revulsion may finally force foreign investors to demand a higher required
return (that is, higher interest rates and lower stock prices) in order to
both continue holding their massive US dollar denominated assets, and
continue to purchase any new financing issued by US public or private
entities. It is possible such demands could derail the US economic
reacceleration, and this must be considered the major downside risk at the
moment.

The challenge ahead with regard to US financial balances is pretty clear:
the US trade deficit must be reversed before the fiscal deficit peaks.
There is no indication the Administration recognizes this challenge, or is
even exploring options to address it, beyond the current protectionist
rumblings in Congress and the ineffectual if not counterproductive
jawboning of Asia, especially China, on the issue of currency pegging. In
fact, threats of increased protectionism to counter China's alleged
"unfair" pegged rate monetary regime, might well prove counterproductive,
given the extent to which the Chinese are now continuing to provide the
fuel to motor further US economic growth, the very dynamic American policy
makers hope will allow them to escape their debt conundrum.

It is highly unlikely that the Chinese authorities will accede to such
pressure imminently. However, it is certainly dangerous for Washington to
raise the issue so publicly at this time. Investors the world over may
rapidly come to believe that eventually the US will get its way, as it
usually does, and there is no telling how big or how fast the downward
adjustment to the dollar could be at that stage. It would be natural for
investors to want to immediately start padding the marginal return demand
for buying US dollar assets if American political pressure becomes too
extreme.

Further complicating the picture is that too much growth abroad, ostensibly
helping the trade deficit, creates other potential problems. Clearly,
America's interest rate structure is closely tied to how well growth and
investment demand proceeds overseas. This is why the pickup in the
Japanese economy is probably the biggest story in global finance, yet it is
getting only moderate attention. If that nation ever really did right its
economic ship and sail off on a three or more year period of strong growth,
the amount of upward pressure the US would experience on market-based
interest rates could be astonishing, particularly in the absence of genuine
balance sheet repair.

Thus, there is a troubling circularity to US economic policy
making. Growth, which is an essential prerequisite to continued debt
repayment, is largely fuelled by further debt accumulation. And the
countries that continue to perpetuate this paradoxical state of affairs,
notably China, still face unremittingly hostile pressure from American
policy makers to revalue the currency, thereby potentially precipitating
the sort of dollar crisis that could well induce sharply lower growth in
the US; foreign creditors may well demand correspondingly higher risk
premiums (through higher long term rates) to compensate for a fall in the
external value of the greenback.

Given the precarious nature of America's predicament, one would have
thought that a prime objective of diplomacy would be to cement good
relations with its largest creditors, so as to minimize these economic
vulnerabilities. Yet, just two years after the September 11 attacks, the
opposite appears to be the case. Traditional alliances in Europe are
marked by increased friction; for all of the talk of new "friendships" with
Russia, the global economic system's prosperity ultimately rests on the
US-EU alliance which, if it really breaks down, will take the global
economy down with it.

As in Europe, the United States today is finding a new coolness in its
relations with old friends in Asia. Whether in Tokyo, Beijing, Jakarta, or
Bangkok, the analysis of US objectives and motives is sharply at odds with
the standard American rationale. In their view, the US wants a strong and
prosperous Asia, but only on American terms - economically sound,
politically obeisant to Washington, and largely accepting of the American
economic model.

This was also being reflected in the country's current negotiating stance
in the global trade talks at Cancun. The rights of foreign capital and
corporations are to be expanded; the rights of sovereign nations to decide
their own development strategies steadily eliminated. A country must not
require multinationals to form joint ventures with domestic enterprises. It
must not limit foreign ownership of its natural resources. Capital controls
are to be abolished. National health systems, water systems and other
public services must be open to privatization by foreign companies.
Underdeveloped countries must, meanwhile, enforce the patent-rights system
from the advanced economies to protect drugs, music, software and other
"intellectual property" assets owned by wealthy industrialists. Any poor
nation that dares to resist the WTO rule will face severe "sanctions"--huge
cash penalties--and possibly de facto expulsion from the trading club. On
the other hand, any talk by developing countries to eliminate the west's
agricultural subsidies is quickly shot down and left as a vague subject for
future negotiations. It was on the basis of this widely perceived double
standard, that the negotiations ultimately foundered.

America's hard-line stance might be understandable were its military
dominance matched by comparable economic might. But such a position is far
less tenable when the US is the world's largest supplicant for global
capital flows and fighting an increasingly expensive global war on
terror. It is premised on the misconceived notion that the US remains an
economically vibrant country that can easily press the weak to accede to
their terms or else get nothing back at the bargaining table, and very
possibly lose their access to foreign capital or development aid. But who
is it that is most dependent on foreign capital at this stage?

Asia in particular appears to have learned its lessons well from
1997: policy makers in the region have concluded he who holds the credit,
gets to choose when to pull the rug out from under the dependent debtor,
and on terms fairly non-negotiable. At best, then, the imperial debtor can
try to be cordoned of his consumers of global goods from such blackmailing
creditors, thereby undermining their ability to accumulate further claims
against him. But since it is in no small part US based corporations or
subsidiaries operating out of export platforms in China and other Asian
nation, this would be a hard one to pull off without the imperial debtor
power slitting its own throat. Lenin's "sell them enough rope and
capitalists will hang themselves" theory was incomplete. As China may have
figured out, you have to sell them the rope on credit to really hang the
little piggies high (or, at the very least, to keep the protectionist
wolves at bay).

But the nexus between China and the US is fundamentally unhealthy and
ultimately points to the fragility at the heart of the global economy right
now. China's "kindness" is in effect killing America, although in the
absence of Congressional disruption this curiously symbiotic death spiral
could continue for a while longer. By allowing the US to buy more than it
produces and borrowing to do so, it will eventually force an ugly
reckoning. With its ever-swelling trade deficits, the moment of painful
adjustment draws closer, but the debt cycle is unlikely to stop until
creditor nations conclude that the US debt position is too dangerous and
start withholding their capital. Alternately, if China's overheated economy
gets mired in financial disorder or inflationary pressures, as appears to
be the case today, it might need to bring its capital home--thus pulling
the plug on American consumers and the "buyer of last resort" for the
global system at large. The paradoxical relationship between China and the
US provides a clear illustration as to why the global economy is so
precariously placed. The two epicentres of growth both exhibit tremendous
structural problems, so a multitude of things could go wrong in the months
ahead. Ironically, Congress might turn out to be the author of America's
own misfortune. That is, if the Chinese don't beat them to it first.

3]
HOMELAND
The Daily Reckoning

London, England

Wednesday, 17 September 2003

--------------------

*** Phony...absurd...laughable...fraudulent...we may have to start coining
new words to describe it...and them...

*** The Fed does nothing...the lumps swoon...even hurricanes are bullish...

*** Slick Willy headlines the London press...Shui Pao! Shui Pao! Shui
Pao!...swanky Shanghai digs...

--------------------

It is all so phony...so absurd...we scarcely know what to laugh at first.

The recovery...the echo boom on Wall Street...Amazon.com at $45...the
Demopublicans...the Republicrats...the Clintons...

The Clintons?

Yes, for some reason the Times of London has been doing a series on Bill
Clinton. Yesterday, for example, we discovered that it was a bald-faced lie
that got Bill Clinton the White House. The Clinton spin team decided to go
on prime-time TV to deny Jennifer Flowers' claim that she had had an affair
with the man who was now the democratic candidate for president.

"It necessitated lying by the Clintons and collusion in such lying by the
entire campaign team," says the Times article. No problem there...

And so on January 26, 1992, following the Super Bowl, a relatively unknown
scoundrel from Arkansas went on 60 Minutes. "Wait a minute," said the
much-rehearsed candidate to the interviewer, his wife by his side, "you're
looking at two people who love each other."

"The interview gave the Clintons the national exposure they needed, as a
couple - and the result was beyond all expectations..."

We don't know why it was beyond expectations. Nearly every president wins
office by fraud of one sort or another. Woodrow Wilson promised to 'keep us
out of war,' and then sent troops as soon as he was able. Franklin
Roosevelt pledged to balance the budget and maintain the gold standard; he
promptly went on a spending spree and made gold illegal. George W. Bush
said he was a conservative. And though all presidents pledge to respect the
constitution, the last to do so was probably Calvin Coolidge.

At least back in the days before 1971, that is, before gold was removed
from the international monetary system...a president faced limits on how
much fraud he could afford. 'Guns, or Butter?' was the question. An
administration could not do both. But then, along came Lyndon Johnson, who
tried to fight the war in Vietnam and the war on poverty at the same time.
He lost both - at huge expense. Nixon was caught in LBJ's trap; putting the
nation back on sound financial footing would be expensive...and politically
almost impossible; it would require a leader willing to tell the truth.

Instead, Nixon slammed shut the 'gold window' at the U.S. Department of the
Treasury...and the rest is history. Ronald Reagan was able to offer
taxpayers more guns and more butter than ever before - even while cutting
marginal income tax rates. A huge boom began...which finally reached its
ebullient stretch in the Clinton years. And now, we have reached the reign
of the younger Bush and the biggest, most expensive Guns & Butter budget
ever.

Every real growth spurt in the U.S. economy has been fueled by savings and
a current account surplus. But now, the papers tell us the U.S. economy is
recovering...beginning a great new phase of growth...with the largest
current account deficit in history. In effect, the U.S. has to pass the hat
among foreigners...and look under the seat cushions...to find about half a
trillion dollars annually. That is the amount needed just to continue
current consumption levels. Where will the money for growth come from?

We don't know, dear reader, we don't know.

Like everyone else...we wait to find out. Or, more likely, wait to discover
that the recovery is as big a fraud as Bill Clinton.

Meanwhile, over to Eric Fry for more news:

-------------

Eric Fry in New York...

- The Fed's inactivity, coupled with Hurricane Isabel's hyper-activity,
whipped up a gale-force buying frenzy on Wall Street yesterday. The Dow
swirled to a 119-point gain at 9,567, while the Nasdaq whooshed 2.3% higher
to 1,383. Gold stayed in the doldrums, dropping $1.00 to $374.60 an ounce.

- As widely reported, the FOMC governors convened in Washington yesterday,
and then did...well...nothing. The governors pulled up to the Federal
Building in their respective stretch limousines, schlepped their briefcases
up the steps, strolled through the metal detectors and then sat around
jawboning for several hours. After all that, the pinstriped FOMC governors
decided to do what everyone already knew they would do: absolutely nothing.
They left the fed funds rate unchanged at 1%.

- Meanwhile, about 700 nautical miles southeast of the Federal Building,
Hurricane Isabel was bearing down on the coast of North Carolina. As the
New York office of the Daily Reckoning files this report, the category-2
hurricane is packing 105-mph winds and - to hear Wall Street analysts tell
the tale - a heaven-sent bounty of economically stimulating devastation.

- "The approaching Hurricane Isabel is likely to destroy property and claim
lives, but it'll probably be a positive for the nation's economy," a CBS
Marketwatch headline declared (without the slightest hint of irony). "The
storm, currently believed by forecasters to be taking aim at the North
Carolina coast, will disrupt commerce, industry and travel for a few days -
or even months in some cases." But fret not, the online news service
counsels, "[The storm] is likely to actually increase overall economic
activity in the coming weeks as individuals and businesses repair and
restore their damaged property."

- Unfortunately, those of us living far from the Hurricane's path will miss
out on the storm's devastation- induced prosperity. We'll have to do the
best we can, even if Isabel does not annihilate our homes and communities.
Alternatively, we could take matters into our own hands - and contribute to
the country's GDP as well as we can - by crashing a bulldozer through our
living rooms.

- "According to the National Oceanic and Atmospheric Administration, the
most expensive storm to hit the United States was Hurricane Andrew in 1992,
whose category 4 winds caused $35 billion in damages.

- "But when adjusted for inflation, the most expensive storm was in 1926,
back before the practice of assigning names to hurricanes and tropical
storms. That category-4 storm caused $87.1 billion in damages, measured in
2000 dollars, when it struck southeast Florida and Alabama.

- Of course, Hurricane George will likely be the most expensive
environmental disturbance on record, costing more than $150 billion just by
blowing through the Iraqi desert. Not to worry, though, Hurricane George
could be even more bullish for the economy than Hurricane Isabel.

- Will the hurricane derail the stock market rally when touches down on the
Carolina coast? "Heck, no," Wall Street's finest maintain. "Storms are
bullish!" Indeed, destruction in any form is bullish. The only event more
bullish for the stock market than a natural disaster is a man-made
disaster, like war - especially a distant war against a feeble army.

- According to the FOMC, however, the economy doesn't need much help. "The
Committee continues to believe that an accommodative stance of monetary
policy," the FOMC's post- meeting statement declared, "coupled with robust
underlying growth in productivity, is providing important ongoing support
to economic activity...[blah, blah, blah...blah, blah, blah]."

- While it's true that the FOMC left interest rates unchanged, and that it
believes the economy is improving, the committee did not fail to provide
one particularly riveting insight: "The Committee perceives that the upside
and downside risks to the attainment of sustainable growth for the next few
quarters are roughly equal." Funny, those odds don't seem too much better
than when the Fed first started cutting rates two and a half years ago. The
Fed has cut its federal funds target rate 13 times since January 2001 by a
total of 5.50 percentage points.

- Finally, after nearly two years of non-stop interest rate cuts, the
economy is starting to recover somewhat. But it is recovering without
pulling the job market along with it. The U.S. economy has lost 2.8 million
jobs since the latest recession began in March 2001. And just last week,
the number of people applying for unemployment insurance jumped to a
two-month high.

- Maybe the 14th rate cut will do the trick.

-------------

Bill Bonner, back in London...

*** Eric's comment about the approach of Hurricane Isabel reminds us that
at market tops, all events are given a bullish spin. In Japan, in the late
'80s, investors were so optimistic that they bid up stocks following an
earthquake in Tokyo!

*** The price of gold fell $1 yesterday. But gold stocks are doing better
than the S&P.

*** "Greenspan and Bernanke appear to be willing to sacrifice bond traders
for the 'greater good'" writes Addison. "Every time Greenspan speaks, or
the FOMC meets, bonds get hammered."

The following is more from Addison's report on his luncheon with Jim Bianco
and the Arbor Research crew: "According to Bianco & co: 'Since the FOMC
adopted the 'Bernanke view' on May 6, every time the FOMC/Greenspan speaks,
the bond market has collapsed. It's a record that would make G. William
Miller jealous. Witness:

'On June 25, the FOMC cut the targeted federal fund rates 25 basis points
to 1.00%. Bonds fell over three points - their worst reaction to an ease in
the history of the Greenspan Fed (Since Greenspan became chairman, the Fed
has moved the funds rate 77 times - 45 eases and 32 hikes).

'On July 15, Greenspan spoke about the economy. In his testimony, twice he
said: "The FOMC stands prepared to maintain a highly accommodative stance
of policy for as long as needed to promote satisfactory economic
performance."

'That day, bonds fell over two points, their worst reaction to any of
Greenspan's 171 testimonies since becoming Fed chairman in August 1987.

'On August 12, the FOMC re-iterated its dovish talk of June 25. The next
day, bonds collapsed over 2 1/2 points.

'On August 29, Greenspan spoke at "Fed camp" (the Jackson Hole, WY Fed
gathering). Over the next two trading days, bonds slumped almost 3
points...'"

*** Yesterday, after the FOMC decided to leave rates unchanged, the 10-year
Treasury note ending trading in the red - down a slight 6/32. But if bonds
follow the trend set this summer, they will fall some more today... [Ed
note: Following their chat, Dan Denning executed some remarkably promising
trades consistent with Bianco's analysis. If you'd like to learn more, see:

Strategic Options Alert ]

*** Shui Pao! Shui Pao! Shui Pao! Want proof? Look in Forbes. You will find
an ad for luxury condos in Shanghai! No ads for luxury condos in Baltimore
have been spotted.

*** Bloomberg columnist William Pesek: "Calls for China to let the yuan
trade freely - in other words, let it rise - are about politics, not
economics. The Bush administration has failed to create jobs in an economy
that's lost 2.6 million jobs since January 2001. The search for excuses has
led the White House to China.

"It's hard to keep a straight face as a nation with per capita income more
than 10 times that of China tries to play the victim. Yet that's exactly
the game Washington politicians and lobbyists for companies including
Boeing Co. and Nucor Corp. are playing...

"Next year, many elected officials - including President George W. Bush -
will need to explain why the U.S. isn't creating jobs. The last thing
politicians are going to admit is that their efforts aren't boosting U.S.
living standards. They're also loath to remove U.S. farm subsidies, which
do more harm to developing economies than politicians may realize.

"Against that backdrop, China makes a convenient scapegoat. Corporate
America used to blame the Japanese for its deficiencies. The Chinese are
now playing that role. And U.S. politicians know it's a winning strategy
for them at the polls. Chances are, more than a few voters from Seattle to
Miami will buy the idea that communists in Beijing are stealing their
jobs..."

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---------------------

The Daily Reckoning PRESENTS: The blow to the average American's balance
sheet from the crash of the stock market has been greatly softened by the
boom in housing prices...but should you continue to buy real estate? "Not
to build wealth," suggests Doug Casey.

HOMELAND
By Doug Casey

We've discussed property fairly often in these pages in recent years - but
mostly in the context of smart speculations outside the U.S.. And I
strongly urge readers to have property outside their 'homeland'. But how
about prices within the U.S.?

The Aspen Times recently ran a short note which I suspect is a straw in the
wind. It seems that in Franklin Township, NJ, near Princeton, there's a
34,000 square-foot house on forty-eight wooded acres that's been on the
market now for over a year, at $12 million.

Considering its size, location, the boom in property, and the fact that
construction costs were about $10 million, $12 million doesn't sound
outlandish. In the hope of moving it, the owners put the house up for
auction, but it failed to attract even the minimum reserve of $3 million.

It's apparently an unusual house, although when something is that far off,
we're talking about a weak market indeed. Which is probably why the Aspen
paper took note.

Aspen is a town of about 6,000 people, where it's literally impossible to
buy a detached house for under a million dollars. The average house goes
for about $2.6 million, making 81612 the most expensive zip code in the
U.S. (with the exception of the anomalous Jupiter, FL). That's the good
news, if you already own a house.

The bad news is that there are presently about 50 houses being offered for
over $5 million in Aspen, and not one has a contract. It's the softest
market in memory, and Aspen runs on real estate. Most of the people that
own houses in this price range do so for cash, so they don't have the
interest clock ticking, like the average American. But prices are actually
dropping.

This is strictly anecdotal evidence. There really isn't any such thing as
'the housing market'; rather, there are thousands of micro markets. But my
question is, with mortgage rates at historic lows (perhaps 4.75% for an
ARM), what is likely to happen when rates cyclically (inevitably) go back
up?

Should you be a buyer or a seller of property in the U.S. today? Perhaps
that's a question best addressed to a financial planner. And long-time
readers know I have little interest or inclination towards that discipline.
Of course property is always going to have value (possibly unlike other
popular investment classes, like stocks, bonds, futures, or even cash). And
property has always been very, very good to me.

I'm favorably inclined towards real estate as an investment class. But as a
means of growing wealth, the party is over, for now at least.

The way I see it, there are two ways to play real estate. Either sell, and
do something better with the capital; or borrow heavily against it with a
fixed-rate, long-term loan. Do something intelligent with the proceeds, and
count on inflation to decrease the value of the loan faster than the market
can decrease the value of the property.

In a time of rising interest rates, staggering debt loads, declining
economic activity, growing unemployment, and rising property taxes, real
estate just isn't a good holding. Especially at the end of a manic boom.
Sure, there are exceptions, like farmland, which will be bolstered by
higher commodity prices. But, except for properties I want to own strictly
for personal reasons, all my stuff is on the block. I hope to buy it back
in some years for substantially less, and have substantially more money
with which to do it.

Remember how ugly things were at the bottom of the national property market
in 1975, or 1982? Or regional busts later on in places like Denver,
Calgary, and California? I suspect it could look that bad again. Could it
get as bad as it did in the 30s when, believe it or not, property
(including residential) dropped as much as the stock market, but was less
liquid? I'm not making any predictions, except to say that anything is
possible...

The property market correlates closely with long-term interest rates. Bonds
correlate with them exactly. As much as I dislike property now, I'd rather
own property than bonds. I've always considered bonds primarily a
speculative vehicle. They're a triple threat to capital as long-term
holdings. They're affected by interest rates, the creditworthiness of the
issuer, and the value of the currency. Right now - although this has really
been true for several years - bonds are a gigantic accident waiting to
happen. The general belief is that U.S. Treasury bonds would benefit from a
catastrophic deflation. Although (and I know this runs counter to
prevailing wisdom), maybe not.

Even though trillions of dollars wiped out by deflation would arguably make
each remaining dollar more valuable, the size of the Government's debt
relative to the economy at that point might bring the whole issue into
question.

But as much as massive inflation or catastrophic deflation are both
possible (possibly in sequence and possibly in different parts of the
economy at the same time), I'm of the opinion that inflation will win out.

The argument for deflation hinges on whether the market can wipe out
dollars faster than the Fed and the banking system can create new ones.
It's an interesting problem. After all, trillions of make-believe assets
have vanished in the stock market meltdown since 2000. Yet there hasn't
been deflation. That blow to the average American's balance sheet has been
greatly softened by the boom in housing prices and bond prices. So a great
deal of what people have lost in stocks (assuming a reasonably balanced
portfolio, which most people with assets in fact maintain), they've made
back in bonds and property. I don't think the housing and bond markets are
going to soften the next plunge in stocks. The chances are better they're
going to aggravate its effects.

So far, therefore, things haven't been all that bad. The problem lies with
interest rates. When rates head back up, bonds will crash. Housing prices
will inevitably weaken. And stocks will get even worse. Trillions more will
probably be wiped off American balance sheets as a result. And the Fed is
going to create more dollars, twenty-four hours a day, seven days a week.

So the question then becomes: what will make interest rates rise? The
single biggest factor would appear to be inflation (used here as the rise
in the general price level). And what will bring back inflation? I've made
the argument for years that what is actually holding the whole house of
cards together is America's gigantic trade deficit, now running about $500
billion annually. It's worth going over again. And again. And again, since
people naturally just don't think of the real macro picture. It's
theoretical; you don't see it before your eyes every day.

Americans export paper dollars, and import shiploads of Mercedeses, Sonys,
and oil. Foreigners use many of those dollars to buy U.S. stocks and bonds,
so the deficit keeps financial assets high. Many more of the dollars are
held as reserves by foreign central banks, and private savings by foreign
citizens. At some point, however, this moving paper fantasy must come to an
end, simply because, as Fed Governor Bernanke famously pointed out, the
U.S. Government can create an infinite number of dollars out of thin air.

As far back as October 2001, I came to the conclusion that the dollar was
likely at a peak, and was headed down. Since then, the Australian dollar
has risen 29%, and the standout New Zealand dollar 41%.

When the U.S. trade deficit turns around and becomes a surplus, inflation
in the U.S. will soar, and the value of the dollar will collapse. And so
will the value of U.S. stocks, bonds, and property. It's going to be like
what happened in the 70s - except much worse.

In this context, the average American doesn't have a clue how the value of
his house relates to things like foreign exchange and the trade deficit. If
I'm right, he's likely to be blindsided.

I hesitate to recommend that anyone sell their house, take the money and
run. Even if it turns out to be the most remunerative thing to do. It's by
far the most important asset most people have, and everyone needs a place
to live - entirely apart from the fact that they might fritter, or
malinvest the proceeds. Maybe that's an academic point, though, in that
practically everyone seems to be refinancing their home. And sometimes
taking out loans for an unbelievable 125% of the market value of their
house when they do so. That amounts to more than selling one's house.

What's going to happen when rates go up significantly? A lot of people are
going to have their houses foreclosed on. It will happen exactly when
unemployment starts hitting serious highs...and it's going to happen in the
face of a weak market. Both the lenders and the borrowers are going to be
in a lot of trouble.

Regards,

Doug Casey,
for The Daily Reckoning

P.S. I really can't think of any conventional financial assets I want to
own. Stocks, bonds, property - they're all off their highs, but they've
just started their slide.

The way I see it, the precious metals - gold and silver - are really all
you need to know for at least the next few years.