»The Daily Reckoning by Bill Borner

The theme that underlines capitalism

Baltimore, Maryland

Last week came and went. As near as we could tell, nothing was settled. The trends in motion stayed in motion... No end in sight.

On Friday, Americans were still convinced that they were never going broke. The Europeans were still squabbling about how they were going to keep from going broke And the Japanese were telling each other that going broke wouldn't be so bad.

For the United States of America, the road to hell has never been so smooth. The country has been borrowing its way to ruin for many years. But now, the skids are greased. The wheels are oiled. Strap on your seat belt. Whee!

Lenders practically insist that the US government take their money. Reuters reports:

The U.S. government may ask investors to pay for the privilege and safety of holding short-term debt issued by its Treasury Department.

In response to clamor from investors, the Treasury said on Wednesday it was looking closely at allowing negative-yield auctions. This would mean bidders who want the security of U.S. government debt in the face of global insecurity, might have to pay a premium for it.

Doing so would allow the U.S. government to benefit from something that is already occurring on the secondary market, where investors have accepted negative yields in recent months to protect their cash from financial strains.

Remarkably, Wall Street is asking to be able to pay a premium for U.S. debt even after the United States lost its prized AAA rating last year and as the government heads for a fourth straight year with $1 trillion-plus budget deficit.

"It is the unanimous view of the committee that Treasury should modify auction regulations to permit negative rate bidding and awards in Treasury bill auctions as soon as feasible," according to minutes of the Treasury Borrowing Advisory Committee, which includes 21 financial institutions that make markets for U.S. government securities.

On Tuesday, the nonpartisan Congressional Budget Office said the United States was headed for a fourth straight year of $1 trillion-plus budget deficits, a condition that Republicans want to use as ammunition to hammer President Barack Obama's spending record in the November voting.

Debt is still rising. At some point, it has to stop. Then, the feds go broke.


Because they are all living on borrowed time and borrowed money, only paying current expenses - including the interest on past borrowing - by borrowing more and more money. When the borrowing stops, they will no longer be able to pay their bills. And when that happens, their bonds will drop in value - fast. Governments will go broke. So will all the people who depend on the feds and their I.O.Us. Banks. Insurance companies. Retirees. Investors. The defense industry. The education industry. The healthcare industry.

Will this be a bad thing? Not necessarily. What has to happen sometime might as well happen now; get it over with. The longer debt builds up, unchecked, the more debt there is to liquidate when the end comes. Better for the end to come sooner, rather than later, in other words. If the end were allowed to come, we'd soon be at the beginning again.

But if there was one theme that ran through all the "Capitalism in Crisis" essays it was this: the end must be prevented, at all costs. Capitalism is inherently unstable, the writers agreed. Governments must use their power to keep it from going nuts. Otherwise, it may put an end to things.

We disagree. Markets - free markets - are meant to be unstable. They are meant to crack-up from time to time. And thank God they do. Otherwise, we'd be stuck forever with zombie industries and dead end investments. Every once in a while, capitalism throws a tantrum. But so what? Crises, breakdowns, crashes, washouts, liquidations - they're just fast and efficient ways to get rid of the zombies.

And it's not just developed countries that are subject to the temper fits of capitalism. Even China - a country still run by people who call themselves communists - is subject to capitalism's mood swings.

Here's a report from Bloomberg:

China's economy is headed for a "hard landing" this year as weaker demand overseas chokes off exports, said Gary Shilling, who correctly forecast the U.S. recession that began in December 2007.

A Chinese government report yesterday showed that export orders fell last month even as manufacturing expanded. The Shanghai Composite Index (SHCOMP) dropped 1.1 percent yesterday as stronger manufacturing boosted concern that the world's second - largest economy will decelerate further as the government refrains from loosening monetary policy to tame inflation and curb property prices.

"They slammed on the brakes," Shilling, president of A. Gary Shilling & Co., a Springfield, New Jersey-based consultancy firm, said at the Bloomberg Link China Conference in New York yesterday. "Transition is not easy because they are geared up to exports."

China's economy expanded 10.4 percent annually in the past 10 years, five times the pace of the U.S., as the government boosted spending on roads and bridges and manufacturers exported everything from toys to socks. Shilling defines a hard landing as a growth rate below 6 percent.

The economy grew at a 9.2 percent rate in 2011 and its expansion will slow to 8.5 percent this year, according to economists' estimates compiled by Bloomberg.

Shilling, 74, has been calling for a hard landing in China since at least a year ago, advising clients to sell copper and the Australian dollar as a play on the downturn.

Shilling forecast the U.S. recession in 2007 and warned investors a year earlier that residential real estate was a bubble about to burst. As the Standard & Poor's 500 index fell a more-than 12-year low in March 2009, he said that higher unemployment would curb consumer spending, leading to "weaker stocks." The gauge has since rallied 96 percent.

Nobody can be right all the time. Even here at the Daily Reckoning, our timing is occasionally off - by a year or two. After all, we figured the US stock index, the Dow, would be down to 6,000 by now. We thought the post-crisis bounce would have come to an end years ago. Instead, the Dow is over 12,000...and still bouncing along.

But give it time!

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*** Several of the 'Capitalism in Crisis' thinkers - even those who should have known better -- thought the government needed to invest more money in education.

Kenneth Rogoff, for example, concludes that "improved education alone will not resolve the flaws inherent in today's capitalism, but it in essential first step down any path to a solution."

Oh? We never quite figured out the connection. The problem in a nutshell is that developed countries have too much debt and not enough growth. And their debt is growing faster than their output. How then does spending more on non-productive behavior increase GDP output or decrease debt?

Contemporary education is a dead end. The industry has been taken over by zombies. Huge amounts of money - public, private, charitable, debt, savings, earnings -- are invested. The output is small, dubious and perhaps even negative.

We know that in some fields, such as economics, the more instruction a person has, the less he knows. Economics - as taught in many universities - is a valued-subtracting discipline. As to other fields - politics, sociology, literature, gender studies - we are suspicious.

We have also noted that despite huge increases in per capital, inflation adjusted spending over the last 40 years, test scores have not increased. This suggests that the money was wasted.

But our suspicions run deeper. We suspect that - outside science and engineering -- most education, from the first grade to a PhD, is at best a costly luxury...at worst, a big waste of time and money.

Here is evidence, a letter from a former slave to his former master, written only a few years after the War Between the States came to an end. We don't know, but it is unlikely the former slave had any formal education. But you will notice that today's typical university graduate could not match his clear thinking or his polite, funny, sarcastic style:

Dayton, Ohio,

August 7, 1865

To My Old Master, Colonel P.H. Anderson, Big Spring, Tennessee

Sir: I got your letter, and was glad to find that you had not forgotten Jourdon, and that you wanted me to come back and live with you again, promising to do better for me than anybody else can. I have often felt uneasy about you. I thought the Yankees would have hung you long before this, for harboring Rebs they found at your house. I suppose they never heard about your going to Colonel Martin's to kill the Union soldier that was left by his company in their stable. Although you shot at me twice before I left you, I did not want to hear of your being hurt, and am glad you are still living. It would do me good to go back to the dear old home again, and see Miss Mary and Miss Martha and Allen, Esther, Green, and Lee. Give my love to them all, and tell them I hope we will meet in the better world, if not in this. I would have gone back to see you all when I was working in the Nashville Hospital, but one of the neighbors told me that Henry intended to shoot me if he ever got a chance.

I want to know particularly what the good chance is you propose to give me. I am doing tolerably well here. I get twenty-five dollars a month, with victuals and clothing; have a comfortable home for Mandy,-the folks call her Mrs. Anderson,-and the children-Milly, Jane, and Grundy-go to school and are learning well. The teacher says Grundy has a head for a preacher. They go to Sunday school, and Mandy and me attend church regularly. We are kindly treated. Sometimes we overhear others saying, "Them colored people were slaves" down in Tennessee. The children feel hurt when they hear such remarks; but I tell them it was no disgrace in Tennessee to belong to Colonel Anderson. Many darkeys would have been proud, as I used to be, to call you master. Now if you will write and say what wages you will give me, I will be better able to decide whether it would be to my advantage to move back again.

As to my freedom, which you say I can have, there is nothing to be gained on that score, as I got my free papers in 1864 from the Provost-Marshal-General of the Department of Nashville. Mandy says she would be afraid to go back without some proof that you were disposed to treat us justly and kindly; and we have concluded to test your sincerity by asking you to send us our wages for the time we served you. This will make us forget and forgive old scores, and rely on your justice and friendship in the future. I served you faithfully for thirty-two years, and Mandy twenty years. At twenty-five dollars a month for me, and two dollars a week for Mandy, our earnings would amount to eleven thousand six hundred and eighty dollars. Add to this the interest for the time our wages have been kept back, and deduct what you paid for our clothing, and three doctor's visits to me, and pulling a tooth for Mandy, and the balance will show what we are in justice entitled to. Please send the money by Adams's Express, in care of V. Winters, Esq., Dayton, Ohio. If you fail to pay us for faithful labors in the past, we can have little faith in your promises in the future. We trust the good Maker has opened your eyes to the wrongs which you and your fathers have done to me and my fathers, in making us toil for you for generations without recompense. Here I draw my wages every Saturday night; but in Tennessee there was never any pay-day for the negroes any more than for the horses and cows. Surely there will be a day of reckoning for those who defraud the laborer of his hire.

In answering this letter, please state if there would be any safety for my Milly and Jane, who are now grown up, and both good-looking girls. You know how it was with poor Matilda and Catherine. I would rather stay here and starve-and die, if it come to that-than have my girls brought to shame by the violence and wickedness of their young masters. You will also please state if there has been any schools opened for the colored children in your neighborhood. The great desire of my life now is to give my children an education, and have them form virtuous habits.

Say howdy to George Carter, and thank him for taking the pistol from you when you were shooting at me.

From your old servant,

Jourdon Anderson.

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