These are 'Cereal Revolutions'
23 FEBRUARY 2011
Paris is gray and cold. It reminds us of the first time we came. It was back in 1969...
Nothing much has changed in the City of Light, physically. There are few new buildings. The cafes are the same. The streets, the traffic, the theatres, the restaurants - everything is more or less as we left it 42 years ago. In fact, we sat down in the very same cafe...at what seemed like the very same table...we used to go to when we were 19 years old.
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We came as a student at the Sorbonne, enrolled in a program called the course on "la civilization francaise." Ideas always sound grander in French than in English... More about that later...
Let's turn to money. That's what these Daily Reckonings are supposed to be about...so let's get to work.
What happened yesterday?
The Dow fell 178 points. Gold shot up $12 to close over $1,400.
The word on the street was that investors were nervous about oil and Libya. Gaddafi says he will 'fight to the death.' He refers to his opponents as "gangs of rats."
But the rats seem to be multiplying. Who knows where this will lead?
And what does it mean?
The American press hallucinates that the people of North Africa and the Middle East have suddenly woken up...as if from 1,000 years of sleep. Stretching their arms and rubbing their eyes, they yearn for 'liberty' as though it were a cup of coffee. The Herald Tribune refers to "winds of freedom" supposedly blowing across the hot sand.
But here at the Daily Reckoning, we see the picture differently. These are 'Cereal Revolutions,' we say. The idea came to us from our old friend, Jim Davidson. He believes the real cause of the uprisings in the Arab world is the rise of cost of food...and the real revolutionary rabble-rouser is none other than our own Ben Bernanke.
The problem with trying to understand what is going on in the world of money is that it is like a very complex puzzle. But much more difficult. You study the pieces. You try to fit them together. You begin to see the image...and then, the pieces change shape!
In Bernanke's simpleminded view, all he had to do was to put more money into the system and it would soon be running along nicely. But then the piece that seemed to fit so neatly into Bernanke's childish puzzle - increasing the money supply - started to look like something else entirely. The picture became distorted, grotesque. Instead of bringing about real economic growth in the US, it is causing bubbles in the markets, and riots and revolutions in the Arab world!
The Fed helped to inflate the bubble in high tech stocks at the end of the '90s. Then, almost single-handedly, it caused the bubble in housing and finance in '05 -'07. Now, it is at it again. Putting trillions more dollars into the world's economy, Bernanke hopes to 1) raise stock prices, 2) lower the cost of borrowing long term, and 3) raise US employment. So far, check on #1; the stock market is about twice as high as it was when his ZIRP (zero interest rate policy) and QE (quantitative easing) programs were revved up. As to #2 and #3, well...there is always tomorrow.
The problem, we keep pointing out, is that the feds can put money into the speculative, global financial system...but they can't make debt go away. Nor can they create real prosperity by introducing counterfeit new money.
But that's a long discussion...the same one we've been having for the last 10 years. For right now, let's just observe that the Great Correction in the private economy continues.
Savings rates seem to be sticking around 5% -- much higher than they were in the bubble years.
(And this is despite of the Fed's efforts to make saving unpopular. You earn very little on your savings, thanks to the Fed. So investors are forced to reach for yield and capital gains by taking more risks. This will surely end badly...just as it did following the bubbles of '98-'99 and '05-'07.)
Americans need to increase savings much more. A piece in the Wall Street Journal tells us that the typical person of 60 - 62 has only about a quarter of the money he needs for retirement in his 401k.
Most Americans were counting on the 'equity' in their houses. But that continues to evaporate. Here's the latest:
WASHINGTON (AP) - Home prices in a majority of major U.S. cities tracked by a private trade group have fallen to their lowest levels since the housing bubble burst. Did you notice that the only city to see any price increase was Washington? Why? Because it's the zombie city. Zombies use the political system, rather than the real economy, to get what they want. Sweetheart contracts, above-market pay scales, better retirement and healthcare packages...they get it all.
The Standard & Poor's/Case-Shiller index fell in December from November in all but one of the 20 cities it tracks. The 20-city index declined 1 percent. The only market to see a gain was Washington.
"There's just way too many homes out there relative to demand and we're not going to see that change anytime soon," said Joshua Shapiro, chief U.S. economist for MFR Inc.
Eleven of the markets hit their lowest point since the housing bust, in 2006 and 2007: Atlanta, Charlotte, N.C., Chicago, Detroit, Las Vegas, Miami, New York, Phoenix, Portland, Ore., Seattle and Tampa, Fla.
The damage from the real estate bubble now spreads well beyond the Sun Belt, where new homes cropped up at a frantic pace during the mid-2000s. In many places, prices are expected to keep falling for at least the next six months.
Apart from the zombies, Americans are not in any position, financially, to take advantage of all this EZ money coming from the Fed. There is no real economic revival - and certainly no 'recovery' - happening in America.
But the Fed's money has to go somewhere. Where?
Inflated by trillions in new cash and credit, the pieces of the puzzle change shape. Bubbles appear.
And then riots and revolutions.
*** We wouldn't speak of an "American civilization." It sounds pretentious and absurd. "Western civilization" sounds more plausible.
But put an idea in a Latin language and it sounds much more profound than it does in English...which is probably why French philosophy was so popular in the '60s. English speaking philosophers thought the high toned, scholarly language must mean something. A whole generation of them wasted their careers trying to figure out what.
Paris was new and exciting back then - at least to an American country boy. Now, it seems drab and tired - a victim of its own 'civilization.' In the '60s, French cars were world leaders - with new front wheel drive, pneumatic suspension and radial tires. In the '60s, French films were closely watched and studied. French filmmakers were the lions of the industry - Godard, Truffaut, Rohmer and Chabrol. Today, they are toothless. Who can name a single one? In the '60s, people wore French fashions, drank French wine, and even spoke French in elite circles. Today, French exports are collapsing...we drink wine from Argentina and people are learning to speak Chinese.
The French were ahead in communications technology too. As early as 1982 they introduced the Minitel - a forerunner of the internet. The advanced system was set up - would you believe it - by the Post Office!
And philosophy? Who are the leading French philosophers? What new ideas do they have? We don't know. Perhaps they don't exist.
What happened that turned France so gray? In the '70s and '80s, the welfare state expanded its net of protections and zombie privileges. Just try to start a new business in France today. Try to hire someone...or fire them. Try to get through the labyrinth of rules and regulations - all designed to protect someone at someone else's expense.
But the French Providential State is headed for a crisis. It is as indebted as the US. And the young are expected to shoulder a heavy burden so the gray heads can retire in comfort. Youth unemployment is high. And, if they are lucky enough to get work, social charges are high. Some day, they will take to the streets too.
And now, as the final test approaches, French intellectuals close ranks. New ideas are taboo. We must be 'solidaire,' they say....meaning, we all have to think the same thing. Even if it is idiotic.
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