Wealth International, Limited

Finance Digest for Week of January 12, 2004


In a balanced economy, credit expansion is fully matched by available domestic savings. This used to belong to the elementary knowledge of economists. Mr. Greenspan shocked us with his public remark that an asset bubble can only be recognized after it has burst. Outrageous credit inflation was the infallible and most spectacular hallmark of America’s equity bubble in the late 1990s. But instead of feeding into the price indexes of goods and services, which continued to fall, it fed into soaring imports and soaring stock prices.

To repeat: All asset bubbles and bubble economies have their highly visible and also compelling trademark in exploding credit. The distinction between the two is important. An asset bubble simply reflects a rise in asset prices out of proportion to underlying yields. A bubble economy is an economy where soaring asset prices fuel a borrowing/spending binge that may be concentrated in real estate, business fixed investment or consumption.

Link here (scroll down to Kurt Richebächer piece).


“The way to make money in Wall Street is to calculate on what the common people are going to do, and then go and do just the opposite.” ~~ Legendary speculator Daniel Drew

“I like China,” a broker told me at a neighborhood Christmas party, “and nanotech...What do you think?” Oh boy. Here is “the common wisdom” Daniel Drew was talking about all wrapped up in a nice blazer and khakis. My companion then went on to tell me that he focuses on “safe stocks like Microsoft and Wal-Mart.” This guy is in trouble. How do I know? It is because you never make and keep extraordinary profits by doing what “the common people” are doing. You have got to do something extraordinary... and different. In particular, you have got to be willing to buy what nobody else wants.

I gave the broker my honest answers... that China is a bubble like the Nasdaq in 1998, and that nanotech is a long way off. Both could double from here, of course. But both will likely end badly. Specifically, about China, the common people are now buying China without thinking, just as they did in late 1993. The story today is exactly the same story I heard in 1993. China stocks peaked in early 1994, and then the MSCI China Index fell 90% from 1994 to early 2003. Now it has taken off again. The easy money has already been made...

As for “safe stocks like Microsoft and Wal-Mart”... all I could think of in my head was the maxim, “things appear the safest when they are the most risky.” In particular, I thought of the awful bear market of 1973-1974, when the “safe stocks” all lost over 50% of their values. Microsoft and Wal-Mart are trading at similar P/Es to the “safe” stocks of 1973 (Microsoft is at a P/E of 30 and Wal-Mart is at a P/E of 27), and, as were the “safe” stocks then, they are thought to be the “safe” place to hide after a speculative peak a tech-stocks.

Link here (scroll down to Steve Sjuggerud piece).


One-way bets should be treated with the same healthy suspicion as racing certainties. In the same spirit of scepticism, one wonders whether the time has come to start making a few more encouraging noises about the beleaguered and, it seems, almost universally reviled dollar. Bearish sentiment about the greenback seems to have increased in proportion to the currency’s sharp fall, and if your columnist has learned anything about financial markets over the years, it is that when everybody thinks that assets can only go in one direction, the reverse often happens.

The dollar’s fall from grace, and the reasons for it, are well known. America lives beyond its means, which is to say that it saves too little and spends too much. The infamous twin deficits -- its huge and growing budget and current-account shortfalls -- are a reflection of this. But the decline has been orderly so far. As a result, the Federal Reserve has been able to keep interest rates at a 45-year low since it does not have to raise them to attract foreign capital or to stomp on inflation.

The odd thing about this adjustment, however, is how unbalanced it has been. The euro has risen by half against the dollar from its low of 83 cents in July 2001 -- and this a currency that was almost as universally hated as the dollar is now. The yen, on the other hand, has risen by less than a fifth over the same period. The Bank of Japan, unlike John Snow, America’s treasury secretary, really does believe in a strong dollar policy and is prepared to put its money where its mouth is. As, indeed, have central banks almost everywhere in Asia, not least China’s. The region’s foreign-exchange reserves now amount to $1.8 trillion, a tidy sum.

The dollar has already fallen a lot, but how much further does it need to fall to correct America’s imbalances? How long will European policymakers be content to see the euro rise so sharply when Asian currencies are not? And how long will Asian countries continue to spend money building up foreign-exchange reserves that earn next to nothing and carry the risk of currency losses, rather than use the money to invest in their own region, which seems set to grow an awful lot in coming years. Fund managers’ view of the dollar is at an all-time low -- reason enough, one might have thought given their track record, for being a bit more bullish.

Link here.


In the past two years, the dollar has tumbled about 44 percent against the euro and has hit multiyear lows against other major currencies. The result: Even relatively conservative foreign investments are delivering big returns to U.S. investors just now. Traditionally, Americans play a weakening dollar by buying foreign stocks and foreign-stock funds, which they are still doing. But foreign bonds -- which tend to be less volatile than stocks -- can offer a safer way to play a weakening dollar. That is a draw for investors who want to play the currency market without the risks and hassles of directly trading currencies.

World bond funds, even though they often include a bit of U.S. bond exposure, are up 16% in the past 12 months. Emerging-market bond funds, which invest in more volatile debt like the bonds of Brazil and other emerging nations, climbed more than 32%. Is it too late to jump on the bandwagon? Certainly, if the dollar rebounds, any investments in foreign bonds -- or any foreign-denominated investment -- would be pinched. Still, currency movements often last for years.

Investors can buy bonds directly or foreign bond funds. Both have quirks to consider. Foreign-bond mutual funds come in a variety of styles, and if investors are not careful, they will not benefit from the dollar’s slide. Many funds are hedged to offset the risks and volatility of currency movements. Many “global-bond” funds own U.S. bonds, diluting the foreign currency exposure. Does the fund invest in government or corporate bonds, or both? Does it invest in big industrial markets like the United Kingdom -- or in volatile emerging markets like Argentina?

Link here.


The ideal investment portfolio is designed around a careful evaluation of the economy and interest rates. However, there is another factor you must keep in mind -- one that receives almost no attention in the mainstream media, but which is nevertheless a determinative influence in the investment world: political risk. Nowhere is political risk more pronounced, and less acknowledged, than in the U.S., where investors must consider: (1) Legal risks -- laws such as the USA Patriot Act give the government power to secretly confiscate property without a hearing. (2) Regulatory risks -- government regulations can devastate an industry or adversely affect property rights. (3) Tax risks -- changing the tax treatment of an investment can dramatically affect its value. (4) Monetary risks -- U.S. monetary policy overshadows all investments. We believe monetary risks will have the most immediate impact on investors in 2004.

The most obvious way to minimize political risk to your investments is to diversify your portfolio internationally -- particularly through offshore investment options. Yet many investors are uncertain how to choose offshore investments. Part of the problem is confusion about what it means to invest offshore. A second and greater part comes from a failure to understand how to structure a rational financial plan.

Link here.


In a surprise announcement last Thursday, the Indian government revealed that it has cut indirect taxes and customs duties on a range of goods and services. The tax cuts are effective immediately and the most significant moves included a decrease in the peak duty on nonfarm goods from 25% to 20%, and the removal of a 4% additional import duty on all goods. Analysts predict that the tax cuts will not only boost India’s growing technology sector by reducing the cost of goods such as computers, mobile phones and pharmaceutical products, but that they will also encourage greater participation by foreign firms in the domestic economy as they target an increasingly wealthy middle class.

Other measures announced by the government include exempting taxpayers earning less than 150,000 rupees (US$3,300) per year from filing an income tax return.

Link here.


An annual survey of economic freedom shows despite the constant threat of terrorism, overall the world is moving toward greater liberty. The 2004 Index of Economic Freedom, released yesterday by the Heritage Foundation and The Wall Street Journal, shows the continuation of an encouraging trend in Europe, with seven more countries indicating an increase in freedom than a decline.

Reflecting on the 10 years of the index’s existence, the publishers note “former Eastern bloc countries are now among the most economically free, and former leaders of the industrialized world have slipped in the standings.” Seven of the world’s 10 most liberal economies are in North America and Europe, but the top three are in the Asia-Pacific region -- Hong Kong, Singapore and New Zealand.

Link here. Background on the Heritage Foundation Index here.

Hong Kong remains the world’s most open economy.

Hong Kong has been found to be the world’s most liberal economy for the tenth consecutive year, according to the results of the 2004 Index of Economic Freedom survey released by the Heritage Foundation.

Hong Kong’s strengths as cited by the Heritage Foundation are its duty-free port, very low level of government involvement in business activities, very low inflation, very low barriers to foreign investment, very low level of restrictions in banking and finance, low level of intervention in wages and prices, strong property rights, very low level of regulation, and low level of informal market activity.

Link here.

Tang reaffirms Hong Kong’s commitment to low taxation.

Hong Kong Financial Secretary Henry Tang has confirmed that he will not raise taxes in the coming year, preferring to find other measures in order to cut the city’s increasing budget deficit. “I believe very strongly in a low-tax regime because that’s why Hong Kong has been successful and that’s what we will continue to do in the years ahead. I think if we move away from a low-tax base, we will be in real trouble,” warned Mr Tang.

Link here.


President Vladimir Putin has always been a critical part of the investment case for Russia, and despite the strength of the economy and accumulated fiscal reserves he remains very much the decisive factor that will drive investment returns this year. This is because the government is planning to deliberately cap growth in the most efficient part of the economy (oil and other natural resources), by taking financial resources from these industries in the form of taxes, including the probable imposition of a special “windfall tax”. This money will be used in an attempt to seed growth in industries that currently represent the least efficient part of the economy (such as manufacturing, services and consumer businesses).

That has potentially serious negative implications for the valuation drivers of the oil sector and for the market as a whole (as oil shares account for over half of the total value of all Russian equities), while allowing for a more optimistic view on stocks in domestically focused industries. Whether this strategy for the economy makes sense or not is irrelevant.

Russian equities have outperformed the global emerging-market average in each of the past five years based on the relatively simple investment case of cheap assets (after the 1998 crisis) getting less cheap as investment risk slowly decreased in response to high export earnings, improved domestic confidence and better management of the economy. The hope is that in the future the investment case will be based on a combination of strong domestic and export earnings growth plus the stock market expansion that will come from a successfully restructured economy.

Link here.

Russian PM critical of retroactive fine handed out to Yukos.

Mikhail Kasyanov has expressed disapproval over the government’s handling of the Yukos affair and argued against the current policy of handing out retrospective fines for firms who have used tax loopholes in the past. In an investigation report released last month, the Tax Ministry accused Yukos of actively employing tax evasion schemes in the year 2000 to avoid paying some 98 billion rubles ($3.35 billion) in taxes.

Link here.


Canadian investment in the Caribbean jurisdiction of Barbados has increased dramatically in recent years, and the country now ranks as the third most popular jurisdiction for Canadian firms investing offshore, after the U.S. and the U.K. According to research by the US News & World Report, the amount of investment flowing from Canada to Barbados has leapt from C$628 million in 1998 to C$23.3 billion in 2001.

Link here.


Canada’s Finance Minster Ralph Goodale has ruled out the possibility of tax hikes in the near term despite increasing demands on public finances. Although the Canadian government’s finances remain in surplus, the level has been in decline in recent months, and reports suggest that the surplus will narrow to C$300 million this year. Indeed, Prime Minster Paul Martin has pledged to reduce taxes, by promising to retain a $4.4 billion corporate tax cut in spite of his government’s emphasis on increasing public spending to fund improvements in public services.

Link here.


THE CBI in Washington has warned that new passport requirements for entering the US and other travel restrictions may harm trade between the two countries, with British travelers facing disruption for at least two years. The travel hurdles stem from Washington’s demand that, from 26 October, all visitors must have biometric passports or lose visa waiver privileges. But Whitehall insiders say the British Government is years away from providing the passports.

“A few years ago, doing business in the US was a no-brainer for the British. Now, they are having to weigh up the options to see if they really want to do business here,” said a CBI spokesman.

Link here.


First came California’s Silicon Valley, then India took the honors. Next, if all goes according to plan, the tiny Indian Ocean nation of Mauritius hopes to lead the way in Africa, by transforming itself into a “cyber island”. The dream is to create a hi-tech paradise, dubbed “cyber city.” The 12-story tower, surrounded by a ring of mountains, rises out of the sugar cane plantations that were once the bedrock of Mauritian economic prosperity.

But it is not to the West that Mauritius is looking for its example of cyber supremacy. That falls to India. The island may be a dot on the map in the Indian Ocean, but it is strategically located between Africa and the east and has close links with India. “Through the cyber city project, we want to forge triangular cooperation involving India, Mauritius and Africa, to develop synergy and facilitate Africa’s march towards an e-economy,” then finance minister, Paul Berenger, told a conference last year, before he became the island’s prime minister in September.

Mauritius, with 1.2 million people, is home to a large population of Indian descent, which accounts for most of the island’s political elite, though Berenger, a veteran politician, is himself a Franco-Mauritian and, therefore, a notable exception. Although the country is officially bilingual in English and French, the local language Kreol is even more widely spoken by islanders. Hindi and other Indian languages are also popular among the different communities.

Link here.


A tax bombshell has blown up in the face of thousands of Britons who have bought property in Portugal over the past 30 years. A municipal property tax of 5% a year on the value of corporate property taking effect this month could hit up to 200,000 British expatriates. Large numbers of Germans and Austrians are also exposed, though some have escaped by heeding the advice of accountants.

The trouble for the expatriate community arises for those Britons who bought homes in Portugal using UK lenders for their mortgages. These banks and building societies routinely attributed ownership to an offshore company set up for the purpose. If the borrower defaults, Portugal’s consumer protection laws made it difficult to repossess the property with a British-style mortgage based on individual ownership. Corporate property presents no such problems. It also makes sale of the home easier and could help avoid inheritance tax.

This system of using UK lenders worked well for expats until last July when tax officials published a list of 83 countries they regarded as “undesirable” tax havens. Corporate property owners based in these countries were in future to come within Portugal’s new tax regime. Among the countries blacklisted were much-used tax havens Gibraltar, Jersey and the Isle of Man. Three states were not listed; tax advisers have therefore been advising homeowners to switch the registered office of their company to Malta or, in some cases, the US state of Delaware or New Zealand. A simpler approach for expats might be to transfer ownership from the company to their own name. However, this attracts a transfer tax of 6% on the value of the house as well as tax on any capital gains.

Link here.


In his first three years as president, George Bush has cut taxes three times and yet orchestrated a sharp rise in public spending -- not just, or indeed mainly, on foreign wars and “homeland security”, but also on domestic matters. For instance, spending on education has jumped by three-fifths since 2000, and spending on transport has risen by nearly half. Lower taxes, higher spending: the outcome is that the federal government, despite a steep fall in the interest it pays on its debt, has swung sharply into deficit -- $450 billion this fiscal year, by most accounts. Democratic presidential hopefuls want, to a greater or lesser degree, to repeal Mr Bush’s tax cuts. Yet they aim to use the money not to bring down the deficit, but to expand public programs. A bipartisan conspiracy exists, it seems, to ignore the risks of a widening deficit.

Holding back the growth in non-entitlement (or “discretionary”) programs, such as defence and transport, will not be enough to ensure a sustainable budget in the long run. Unless entitlement programs are cut too, or taxes raised to unprecedented levels, or both, the country is on a financially unsustainable path over the next half-century. “An ever-growing burden of federal debt held by the public”, a Congressional Budget Office report concludes, “would have a corrosive and potentially contractionary effect on the economy.” Others warn more directly of a full-blown, third-world-style financial crisis. Given the resistance to cutting government programs, it is more likely that higher taxes will play the largest part in plugging the deficit.

Link here.

American debt: $34 trillion, or $119,442 per man, woman and child

In the period 1957 to mid 1970s total debt was increasing close to the growth rate of national income, despite paying war debt for WW II, Korea and Vietnam. But, in the last 20 years total debt ratios have zoomed up, up and away -- growing much faster than national income. It has now reached $34 Trillion ($26 trillion private household/business/financial sector debt PLUS $8 trillion federal & state/local government debt).

Foreign interests now own about $8 trillion of U.S. financial assets, including 13% of all stocks and 24% of corporate bonds, according to Bridgewater Associates. According to the Federal Government Debt Report, foreign interests also own 40% of U.S. government Treasury bonds & notes and 14% of U.S. government agency debt (such as household mortgages financed by Fannie Mae), up from 5% in 1995.

Link here.

America’s fiscal policy is dangerous, says the IMF. Europe’s is illegal, say the bureaucrats in Brussels.

While America’s fiscal shenanigans will be tried in the court of public opinion (and the markets), Europe’s will be tried in a court of law. How will the case unfold? The facts are undisputed. Under the stability pact, euro members agree not to run budget deficits greater than 3% of GDP. France and Germany will breach this ceiling for the third year in a row in 2004. The commission, which polices the pact, insisted they bring their deficits back into line in 2005 and find extra cuts in their budgets for 2004. Under the treaty, the commission can recommend, but it is the council of finance ministers that decides.

Europe’s famed “stability culture”, which tries to enshrine fiscal prudence in law, is in the end not much better than America’s fiscal framework. Fiscal scolds, whether in the EC or in the IMF, can harangue governments for busting their budgets. They can insist that deficits matter. But until deficits matter to the governments that run them, there is little anyone can do about it.

Link here.


China is the world’s most dynamic economy, and hopes for vigorous global growth in the coming year hinge in part on a continued expansion there. By one estimate, China, while it represents just 3% of world gross domestic product, will account for 10% to 15% of any expansion the global economy will see this year. But China is still a developing country, fraught with social instability and a financial and industrial infrastructure that is often rickety at best.

Can China cope with the challenges? Some analysts see reasons for concern. Recent electrical brownouts raise new questions as to whether China’s energy-hungry manufacturing industries are taxing the ability of China’s power sector to feed them. The government preaches the need for economic reform, but actual reform, especially in the financial system, is slow to materialize. How much should Western governments and investors worry? Here are some key questions and answers.

Link here.


In the new book Perfectly Legal: The Covert Campaign to Rig Our Tax System to Benefit the Super Rich -- and Cheat Everyone Else. In it, David Cay Johnston, a Pulitzer Prize-winning reporter for The New York Times, makes a powerful case that since 1980, Congress and successive Presidents -- politicians of every stripe -- have deliberately undermined the fairness of the tax system. It is biased to favor big companies and a few superrich individuals, Johnston claims.

The book warns that any American who makes $50,000 to $500,000 a year is going to get hurt. Remember those huge tax cuts rammed through by the Bush Administration over the last three years? Most -- and in some cases all -- of the benefits are likely to be eaten up by new taxes, Johnston asserts, even if the official tax rate is not raised. People making less than $50,000 will not be spared, either. At the same time, the tax burden on the wealthy has plunged. People in the top fifth of the income scale now pay only 19% in taxes -- and that figure takes into account state, federal, sales, property, and all other levies. The poorest fifth of Americans pay 18%. The people in the middle presumably pay considerably more.

How did America come to this pass? Much of Johnston’s tale is familiar. Big cuts in dividend and capital-gains taxes have mainly benefited the wealthy, and powerful corporations have slashed their tax burdens. Far more surprising is the pattern Johnston documents in largely overlooked changes in income tax and Social Security rules. Politicians of both parties have consistently stuck it to average taxpayers, usually while loudly proclaiming that they are cutting taxes.

Link here.

Alternative Minimum Tax represents number one taxpayer problem.

National Taxpayer Advocate Nina Olson released a report to Congress which identified AMT as the most important problem being faced by US taxpayers. “Although the AMT was originally enacted to prevent wealthy taxpayers from avoiding tax liability through the use of tax avoidance techniques, it now affects substantial numbers of middle-income taxpayers and will, absent a change of law, affect more than 30 million taxpayers by 2010,” Olson writes in the report.

According to the report, by 2007, nearly 95% of AMT revenues will be attributable to personal and dependent exemptions, the standard deduction, state and local taxes, and miscellaneous itemized deductions.

Link here.


State securities regulators have identified 10 top investment frauds, with improper mutual fund practices, scams targeting seniors and variable annuities new to the annual list, accompanying perenial members such as Ponzi schemes and “prime bank note” (high yield) schemes. Regulators say they are concerned that investors are not being told about high surrender charges or are being misled with claims of guaranteed returns. Variable annuities are not suitable for many retirees who cannot afford to lock up their money for a long time, regulators say.

Link here.


Citibank has warned customers not to fall for an e-mail fraud that urges them to log into a bogus Web site to verify that their accounts have not been tampered with. The new e-mail, purporting to be from Citibank, said that on January 10, the bank blocked some accounts “connected with money laundering, credit card fraud, terrorism and check fraud activity.” It said the bank sent account data to government authorities, and may have changed some accounts. The e-mail is similar to one last August when an Internet scammer threatened to close Citibank checking accounts if customers failed to divulge personal information.

These are examples of “phishing” -- the use of spam, or junk e-mail, to lure people to bogus Web sites that look like those of reputable companies, and deceive them into divulging personal data. The term is derived from the act of computer thieves “fishing” for private data.

Web surfers should be deeply suspicious of any e-mail that requests personal information, such as Social Security or bank account numbers, or common questions used to verify your identity such as your mother’s maiden name. Companies will never ask for such information over the Internet.

Link here and here.


The BCCI mega-trial, which opens this week in London, is the culmination of more than a decade of delays, pre-trial hearings and legal tussles over secret documents. Successive Governments have fought tooth and nail to prevent this case making it to the High Court. Now it is upon them, and no less a party than the Bank of England is in the dock.

This is not a criminal trial. Most of the real villains behind BCCI, which collapsed in 1991 with £7 billion of undeclared debts, were jailed long ago. But for the Old Lady of Threadneedle Street, this case promises to be momentous. It has been brought by BCCI’s creditors, who claim the Bank turned a blind eye to fraud at the Middle Eastern finance house and exposed them to the world’s biggest-ever banking con. The Bank was financial regulator at the time and BCCI’s creditors are claiming up to £1 billion in damages.

Not only that. By suing the Bank and challenging its statutory immunity against being sued, the creditors are breaking new legal ground. The Bank has statutory immunity against charges of negligence but, after a long legal fight, the liquidators have won the right to bring the case as a more demanding “misfeasance in public office” claim. This is a rarely-argued tort, although it has been invoked recently by Railtrack shareholders in their damages case against the Department for Transport. It requires the claimants to prove bad faith -- in effect, dishonesty -- on the Bank’s part.

Link here.


Something very strange is going on. Since August the U.S. money supply has been shrinking, as measured by “money of zero maturity” (MZM) and M2. The adjusted monetary base is the one that the Federal Reserve System controls. It reveals the FED’s holdings of assets, mainly U.S. government debt certificates, and is what Friedman has called high-powered money. This base supplies the reserves that the commercial banking system uses to create loans, and hence money. Here, things are less clear. The general trend was upward until November, it stabilized through December, and has now started down.

If the monetary base is stable, at least peak to peak, but MZM and M2 are falling, what is causing the disconnect between FED monetary policy and the market’s use of monetary reserves? One answer is the rise in the supply of currency, i.e., pieces of paper. There was a steady upward move until late July. Then the rate of increase accelerated. When a depositor goes to his bank and withdraws currency, that bank can no longer use his money to make loans. When he pulls out currency and fails to deposit it in another bank, the banking system cannot make new loans. The fractional reserve money-expansion process reverses, imploding the money supply by multiples of the face value of the currency withdrawn. The public is pulling currency out of the banking system by cashing in (i.e., cashing out) its small time deposits. While no one is using the terminology, we may be witnessing a bank run. This is not a panic-driven bank run, like something out of the Great Depression. This is a steady bank run that is motivated by something other than fear. The FED decided to stimulate the economy in 2001 by pumping in new money. Lo and behold, this policy is now backfiring. It has produced such low rates of investment return for savers that they are pulling currency out of the banks.

The economy seems to be recovering. The stock market is up. Gold is up. The euro is up. The dollar is down internationally. Yet from the statistics, we learn that the FED is not inflating, the money supply is falling, and prices are rising, but only mildly. The rise in gold’s price is not taking place as an inflation hedge. It is taking place parallel to the decline of the dollar against the euro. There is something more fundamental going on here than traditional inflation hedging, or so it seems to me. There is a move against the dollar that is not based on fear of inflation. I think we are seeing the beginning of a shift away from the dollar as the world’s primary reserve currency. What has prevailed since 1940 is beginning to change.

Link here.


Before the Reagan era, conservatives were clear about how they felt about deficits and the public debt: a balanced budget was good, and deficits and the public debt were bad, piled up by free-spending Keynesians and socialists, who absurdly proclaimed that there was nothing wrong or onerous about the public debt. In the famous words of the left-Keynesian apostle of “functional finance”, Professor Abba Lernr, there is nothing wrong with the public debt because “we owe it to ourselves”. In those days, at least, conservatives were astute enough to realize that it made an enormous amount of difference whether -- slicing through the obfuscatory collective nouns -- one is a member of the “we” (the burdened taxpayer) or of the “ourselves” (those living off the proceeds of taxation).

To think sensibly about the public debt, we first have to go back to first principles and consider debt in general. There is nothing “wrong” with private debt. As with any private trade or exchange on the market, both parties to the exchange benefit, and no one loses. In a free-market economy that respects property rights, the volume of private debt is self-policed by the necessity to repay the creditor. Most people, unfortunately, apply the same analysis to public debt as they do to private. When government borrows money, government commits not its own life, fortune, and sacred honor to repay the debt, but ours. This is a horse, and a transaction, of a very different color. Government sells no productive good or service and therefore earns nothing. It can only get money by looting our resources through taxes, or through the hidden tax of legalized counterfeiting known as “inflation”.

Deficits and a mounting debt, therefore, are a growing and intolerable burden on the society and economy, both because they raise the tax burden and increasingly drain resources from the productive to the parasitic, counterproductive, “public” sector. It is for all these reasons that the Jeffersonians and Jacksonians (who, contrary to the myths of historians, were extraordinarily knowledgeable in economic and monetary theory) hated and reviled the public debt. Unfortunately, paying off a (now $6.9 trillion) national debt would quickly bankrupt the entire country. I propose, then, a seemingly drastic but actually far less destructive way of paying off the public debt at a single blow: out-right debt repudiation. Although largely forgotten by historians and by the public, repudiation of public debt is a solid part of the American tradition. The standard economic argument is that such repudiation is disastrous, because who, in his right mind, would lend again to a repudiating government? But the effective counterargument has rarely been considered: why should more private capital be poured down government rat holes? If this scheme is considered too Draconian, why not liquidate the assets of the bankrupt federal government and pay the creditors (the government bondholders) a pro-rata share of those assets?

In order to go this route, however, we first have to rid ourselves of the fallacious mindset that conflates public and private, and that treats government debt as if it were a productive contract between two legitimate property owners.

Link here.


It is easy to wave off tales of upcoming economic collapse. After all, Chicken Little stories have been around since the beginning of time. In their new book Financial Reckoning Day, Bill Bonner and Addison Wiggin use demographic evidence and a substantial review of economic and political history to show that fiat currencies eventually collapse and suggest that the dollar is next. Bonner and Wiggin are certain that Fed Chairman Alan Greenspan is, at best, incompetent. In their view, Greenspan has made the almost total transformation from an Ayn Rand disciple, a free market adherent ne plus ultra, to the consummate Washington insider, one whose overarching concern at this point is his legacy as a master economic Sherpa.

The dictionary defines reckoning as “a time to account for or be punished for wrongs.” And according to Bonner and Wiggin, Americans have got it coming. We have been living gluttonously on debt -- personal, corporate, and government -- subsidized by the kindness of foreigners who take their truckloads of dollars and invest them in American assets. One cannot live forever on debt. Foreigners will not forever regard depreciating dollars as smart investments. Such debt bubbles will burst and then ... what?

If you are encouraged by the book’s subtitle to paw through the pages looking for investment advice, you will not find much beyond “Buy gold”. What they offer is an entertaining presentation of how money and markets work, and how people tend to react when the Fed’s dollars show up in every tree and cereal box.

Link here and here.


In the early 1980s, Harry E. Figgie, Jr. (the founder of Figgie International) became concerned that the United States’ Government was following the same destructive path that lead countries such as Argentina, Bolivia, and Brazil into hyperinflationary economic collapse. In the 1980s, each of these South American countries were running massive annual deficits, were accumulating unmanageable national debts, and each respectively had a central bank creating money (out of thin air) at a reckless pace. In looking at the frighteningly similar profligate behavior, on the part of the U.S. Government, Mr. Figgie became concerned that hyperinflation could emerge in the United States as well.

As a businessman and an entrepreneur, Harry Figgie was concerned that his business enterprises may not survive if his management teams were not prepared to operate under the unstable conditions wrought by heavy inflation. Since little had been written about managing a business under hyperinflationary conditions, Mr. Figgie initiated a research project to find out what a business must do to survive the ravages of inflation. A three-person team headed by Dr. Gerald Swanson, a University of Arizona economist and director of the Academy for Economic Education, went to South America four times over a two-year period to study the development of inflation and its impact on businesses, individuals and governments. They interviewed 80 leading bankers and industrialists and a considerable number of ordinary citizens throughout Argentina, Brazil and Bolivia.

As a result of this research, Dr. Swanson wrote The Hyperinflation Survival Guide: Strategies for American Businesses (which was first printed in 1989). The superb content of this book can be attributed to Mr. Figgie’s foresight and to the outstanding research and writing of Dr. Swanson. What follows are a brief “Austrian” perspective about this book and then specific details about the book’s content.

Link here.


This past Holiday Season, consumers were stricken with a severe case of Luxury Fever. One of this season’s biggest sellers was a $5,000 Emergency Watch complete with a beacon to summon rescuers. Buyers had to sign a waver absolving the manufacturer of responsibility if the alarm is set off accidentally and the Coast Guard responds en masse.

The urge to splurge is a central trait of the Great Asset Mania, and goes hand in hand with record-high bullish sentiment. Likewise, investors today are soooo confident in an economic recovery -- 40 years of Investors Intelligence surveys have never produced a bullish extreme like the current one -- that the $30 hamburger looks better than the $3 Happy Meal. What could be a more appropriate symbol of a boom? The other more important question is -- is a boom what 2004 really has in store?

Link here.


The thinking is that by increasing liquidity when gold falls and decreasing liquidity when gold rises, price stability will result, largely ending the business cycle. But inflation and deflation are a process which is manifest not first in commodities and gold, but different prices at different times depending on the circumstances. We indeed sustained a huge inflation from 1998-2000, but not one which affected commodities. And price inflation and deflation are not the real issue anyway. What matters is the SPREAD between costs and sales prices, not any aggregative price level, no matter how calculated. And that spread is affected by CREDIT. Indeed there can be credit contraction while overall prices rise and credit expansion while price fall. The late 1990s provide the most recent example demonstrating the errors in Supply-side monetary thinking.

It is instructive to realize that, depending on the usage of money, there is no direct relationship between more money and any aggregate price level in the shorter run. Price inflation OR price deflation can initially result from bad policy. There is just no one variable (like the gold price in dollars) that handles the complexity of economics! Forbes is forever talking about the “dollar price of gold” -- an important economic indicator to be sure, but certainly not an indicator for policy.

The authorities, being politicians, do not want to see a deflation. Neither does Wall Street and neither do Supply-siders. All would rather defer the day of reckoning. Supply-siders will forever call natural corrections “deflations”. The government will not be able to revive the market unless they are willing to either (A) massively inflate to continue offering new credit to replace the old credit and in effect destroy all private credit or (B) allow deflation. Japan was unwilling to take A or B, so they grind forward under a growing mountain of debt, none of which has allowed them to climb up from their recession. They will have to bite the bullet someday, too. Or risk losing a generation (or more) of capital that would make their lives better.

Link here.


As we all know with the benefit of hindsight -- but as many predicted a year or more ago -- the great short sale of 2003 was the U.S. dollar. The greenback surrendered roughly 15% of its value as measured by the U.S. Dollar Index -- and more against some currencies, including the euro. Virtually everything that should have accompanied the decline in the dollar did so. Gold, oil and other commodities denominated in the world’s shrinking reserve currency rose. Easy, and fairly safe, double-digit returns were reaped in virtually all manner of overseas bonds. Stock markets rose at a healthy clip, both due to needing to bounce (if only temporarily) from a three-year bearish grip and due to their choosing to focus on the beneficial effects of monetary easing. Corporate bonds -- the junkier the better -- turned in great years as well.

The one key market, though, that did not play out in 2003 as would have been expected given all of the preceding was the market for U.S. Treasury securities. The yield on Uncle Spendthrift’s bellwether 10-year note was recently around 4.1%, almost identical to its level of a year ago. Bond market bears -- of which I am unabashedly one longer-term -- have again watched this all in amazement, and wondered aloud, where are the “bond market vigilantes?” Over the last year, we’ve seen a torrent of news and developments that should have resulted in soaring yields for Treasuries, as investors tripped over one another to get out.

Well there is a theory that explains why the Fed may end up not raising rates for most (or all) of 2004 after all -- and why for the most part they just might get away with it. But especially if they do, this all also means that the aftermath of the Fed’s latest, and arguably grandest, moves to postpone the inevitable will be that much worse for the central bank to have to deal with.

Link here.


In my view, we are on the way toward what I recently dubbed a “70’s-lite” type of environment. The dollar will weaken further. Costs, led by commodities, will rise. Eventually, there will be upward pressure on long-term interest rates, in spite of the Federal Reserve’s gallant (but ultimately doomed) efforts to hold it off. None of these trends, mind you, is likely to be as extreme as those of the late 1970’s; at least not any time soon. However, the pattern will be the same; and Americans will re-learn the word “stagflation.”

Link here.
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