Independence Day finds Americans less independent than ever before.
- From: periodistalibre@xxxxxxx
- Date: Wed, 04 Jul 2007 12:57:36 -0700
Today is America's national holiday. But we've always been indifferent
to
the appeal of patriotism and idleness. So, we put on our tie and raise
our
standards just as we do every other day.
Reckoning is our métier. And there is always something to be reckoned
with
- even on holidays. Today, we reckon with a familiar subject, but in a
new
way.
On this day, 232 years ago, a sweaty group of rich lawyers and
planters
gathered in Philadelphia, plotting mischief. They were determined,
they
announced, to overthrow the lawful government of the American colonies
and
replace it with something more to their liking. They acted, not in the
name of their own self interest, they said, but on behalf of liberty
and
independence, which they all claimed to cherish more highly than life
itself.
What they wished to do was to give up one George in London in favor of
another George in Virginia. This was no sure thing; George III was not
going to give up without a fight. George Washington would have to
raise an
army and boot him out...or else the signers of the Declaration of
Independence would probably hang.
"We must hang together," remarked Franklin, "or we will surely all
hang
separately."
Luck was with them. None of them hung. Instead, Franklin himself went
to
Paris and convinced the French to help. They gave them money to buy
war
materiel. More importantly, a French squadron blockaded the entrance
to
the Chesapeake Bay, cutting off the British troops from their lines of
supply. The British commander had no choice; he had to capitulate. And
so,
America became independent of England.
But there is nothing like a long stretch of good luck to ruin a
nation.
Americans went from strength to strength, victory to victory, coast to
coast - always struggling to preserve and extend their precious
independence. And now, here we are, more than two centuries later. We
have
a new George in the White House...and Americans have never been more
dependent on others. But now it is not to the English that they are
bound...but to their creditors.
On Monday, the dollar fell near to a 26-year low against the English
pound. Against the euro, it dropped to near its lowest level ever. Why
this should be happening is both a long story and a short one. The
short
story is that currencies go up and down all the time; the long story
is
the subject of so many of these Daily Reckonings that readers are
getting
bored with them.
Dollars are losing their appeal, generally, because there are so many
of
them. One of the great laws of economics is that quality and quantity
vary
inversely in many things, not the least of which is money. Each paper
dollar represents an I.O.U. from the U.S.A. As the United States
increases
the quantity of dollars, their credit quality comes into question.
Logically, each new dollar is worth less than the last one.
This little insight has not been particularly useful to dollar bears.
Many
have lost their shirts, their girlfriends and their minds waiting for
the
laws of economics to be enforced. Today, we are not predicting when or
how
law and order will be restored to the world's markets. But in the last
couple of weeks, at least it looked as though the sheriff was back in
town.
What also makes the dollar suspect is that Americans, themselves, seem
to
be in such a hurry to get rid of them. Piles, mountains, Himalayas of
them
are building up overseas. China may have almost a trillion dollars in
its
reserves. Russia's foreign exchange reserves - mostly dollars - are
growing at an astonishing rate of 63% per year. At the present rate,
Russia will accumulate additional reserves of more than $200 billion
in
2007.
These I.O.U.'s are stacking up outside of the United States because
Americans can't keep them at home. Every day, U.S. consumers spend $2
billion more on overseas products and services than they receive in
payment for their own exports. This leaves the typical American
household
a little short of cash. It has to borrow to fill the gap between
income
and outflow. Since it saves almost nothing, it depends on the savings
of
foreigners.
The balance of investment income - the difference between what U.S.
investors receive from overseas and what the U.S. pays out in interest
and
dividends to foreigners - also turned negative last year, for the
first
time since 1915.
"Foreigners now earn more on their U.S. investments than we do on our
investments abroad," Warren Buffett explained "In effect, we've used
up
our bank account and turned to our credit card. And, like everyone who
gets in hock, the U.S. will now experience 'reverse compounding' as we
pay
ever-increasing amounts of interest on interest."
Whole books have been written on this subject - at least one of them
by
your author (with Addison Wiggin)...they all tell the same story -
that
there aren't many people on the planet who can afford Americans'
luxury
lifestyle...not even Americans themselves!
Debt and dependence stalk young and old. Back in the late '70s the
cost of
college began to rise sharply. Lenders rushed to provide credit to
help
the masses pay tuition. Educational debt exploded...rising more in the
'90s than it had in the three previous decades, and three times faster
than college costs. By 2007 the average student graduates with about
$19,000 worth of student debt...and $2,000 in credit card debt.
Even before they are out of school, they are trussed up with debt like
a
pervert in a cheap motel. Credit card debt almost tripled between '85
and
'05. Now, the average family owes about $9,000 on its plastic "safety
net."
But the biggest increase has come in mortgage debt. It's been
increasing
at a half-trillion dollars per year. Never have so many homeowners
owned
so little of their own homes. Even during the biggest boom in housing
prices in history, Americans took money out of their equity so fast
that
the ratio of mortgage debt to housing value dropped - from 70% in the
early '90s to 52% in 2007.
Meanwhile, U.S. government debt has grown at a sprinter's pace too. By
our
calculation each and every American household has the weight of half
of
million in extra debt on its back - its share of the U.S. "financing
gap,"
an amount that includes not only the official debt, but also the
present
value of future commitments less anticipated revenues.
All of which is to say, that this Independence Day finds Americans
less
independent than ever before. They count on the Arabs for energy. And
they
depend on the Asians for money to pay for it. Soon, they will not be
able
to go to the bathroom without out asking permission from their Chinese
creditors.
But for you, dear reader, the situation is not hopeless. You have an
edge
on Joe Average American - after all, you suffer through this missive
on a
daily basis, and so you must heed some of our economic warnings and
forecasts. Why not use them to your advantage? Turn a nice profit...or
at
least protect your portfolio from whatever today's volatile market
throws
at us next.
By Bill Bonner
.
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