The Greenback Gets Around
What is romance, after all...but the willingness and eagerness to see something more than is really there... or overlook something that really is? We look into our lover's eyes...and see what we want to see, something grander, sweeter, nicer than others might notice. And why not? No matter where we look, we see what we train our eyes to look for. If we want to see evil and cupidity...we will open our eyes and they will be right in front of us. If we want to see beauty and benevolence, we will see that too. And the most remarkable thing...sometimes, looking is creating. Because we are looking for it...and seeing it - suddenly, it is really there. But enough riddles...we don't know what we are talking about. And we don't have time to figure it out. So, let's move on... Yesterday, the Dow rose another 178 points. This has been a good week, so far, for the feds. The Dow has risen. Buffett has stepped in to rescue the bond insurers. And Bush and Paulson inaugurated their plan to save Americans from the humiliation of getting kicked out of their houses for nonpayment of the mortgage. The smart money, we are told, is taking big positions in bank debt; their sense is that the banks have been oversold. "It's not smart to short the United States," said Buffett. A lot of people - probably most people - believe him. They think that now is a good time to go long on America...and bank debt as a good thing to go long with. They may be right. We have no opinion on bank debt. But we do have an opinion on the currency in which the bank debt is calibrated - the U.S. dollar. In short, we don't like it. Yes, it may be going up against the euro. But we still don't like it. And we don't care for the euro much either. The problem with both paper currencies is obvious. When Buffett buys a business, he says he wants a 'business with a moat around it.' What he means is that he wants some protection from competition - either a trade secret, a patent, or a brand. Without a moat, the barbarians can attack. They may be able to run you out of business...or simply force you to trim your profit margins. Either way, it's not a good position for a business to be in. The problem with the dollar is that it has no protection at all. Worse, the people in charge of it have no interest in protecting it. Each new dollar that comes into existence competes with every old dollar. Inevitably, they all fall in value. This insight is of no particular concern to people who don't have dollars. But it comes as a recurring nightmare to those who have a lot of them. And who has dollars? The monetary system of planet earth, circa 2007, is simple. Arab nations export oil. Europe exports luxuries. Asia exports autos and gadgets. America exports dollars. Yes, dear reader, the buck gets around. It has more stamps in its passport than we do. The Treasury Department tells us that most of the world's dollars are now outside the 50 states. Sixty percent of them pass from hand to hand without hearing an English word or getting a chance to go to a baseball game. The same is true for U.S. government debt. There's three times as much of it in the hands of foreigners - $2.11 trillion - as there is in American mitts. The trouble, as we've pointed out on many occasions, is that there is no moat around this money. It takes a whole chain of supply...machinery...capital...and skilled labor...to produce an automobile. An automaker has a moat - because the costs of entering the business are so high. But it takes almost nothing to make a dollar. And as the greenback sinks in value - thanks to the competition from billions of new dollars all bidding for the same oil, gold, wheat and autos - many of these foreign dollar holders are going to look for other places in which to park their wealth. *** "Mortgage crisis spreads to those with good credit," says a front page headline in yesterday's International Herald Tribune. It was bound to happen. "As the world's largest economy grapples with the worst housing slump in two decades, people with good credit histories are falling behind on house payments, auto loans and credit cards at an accelerating pace," says the article. "This collapse in housing value is sucking in all borrowers," said economist Mark Zandi at Moody's. House sales in Southern California are at a 20-year low. And foreclosures are on the rise. This is having the obvious consequence - more houses on the market...sold at distress prices. In 2007, 17.5% of all the houses sold in Nevada were ones that had been foreclosed. The figure was 15% in Colorado and 11% in California. These foreclosed house sales are pushing prices down further. As prices go down, more people are tempted to walk away from their mortgages and their homes. Bloomberg provides an estimate: by the end of this year, 15 million U.S. households will be "upside down," meaning, their houses will be worth less than the value of their mortgage loans. Almost half of the people who took out subprime loans over the last two years have no equity in their houses, says Bloomberg. And of the people who bought two years ago, 39% are already upside down. Over the last five years, trillions of dollars was "taken out" of U.S. housing values. In 2006, for example, owners took out $318 billion by refinancing their houses, and another $142 billion from home equity lines of credit. We predicted that the day would come when they'd have to put back money into their houses. That day is now here. Of course, how much they'll have to ante up...how many will go into foreclosure...and how many will walk away depends on how far houses go down. Estimates are all over the place - maybe 5% more...maybe 15% more...maybe 50% more. The total value of U.S. housing is $20 trillion. A 10% loss takes $2 trillion of implied wealth out of the economy. Ten percent is no big deal to the fellow who owns his home outright...or has substantial equity. But one of the starry eyed delusions of the bubble era was that Americans were really saving much more than the numbers reported. They were buying houses and the houses were going up in value. This was the equivalent of savings, we were told. Well, not exactly. Those savings are now disappearing...causing huge problems for the heavily leveraged, marginal housing speculator of the '97-07 period. *** Medieval Europe was a rough place. The ruling aristocracy didn't get its position at the top of the heap by virtue of its social graces. It got there by fighting...killing...and conquering. The Grimaldi clan, for example, scrambled into Monaco disguised as monks...then, threw off their robes, slaughtered the people in charge, and took over. A thousand years later, they were able to bring a rich American actress into the family and brighten the place up. The first of the Merovingian kings of France, such as it was at the time, was Clovis - a barbarian. Clovis won the Battle of Soissons in 486 and the famous Vase of Soissons, a holy vessel from the church, fell into his hands. The Bishop of Reims sent an envoy to try to get it back. Clovis agreed, though he was not yet Christian himself. But the barbarians had their own codes - which included dividing up the spoils of war. So outraged was one of Clovis's soldiers, at having to give up the vase, that he whacked it with his battle axe and broke it. Clovis was not one to forgive and forget. A year later, reviewing his army, he saw the soldier, grabbed his battle axe, the same one that had crushed the vase, and slew him with it. Clovis later was baptized. The barbarian chiefs and captains followed his lead. Then, they developed new codes - including chivalry. "Chivalry might be called the baptism of Feudalism," says Chesterton. "It was an attempt to bring the justice and even the logic of the Catholic creed into a military system which already existed." And from chivalry came the idea of romantic love...and St. Valentine's Day. Until tomorrow, Bill Bonner
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First, we turn to romance. We're talking about money...nowhere is the sky more full of stars and the streets full of more starry-eyed romantics than the wide-open spaces of the financial world. Investors are willing to overlook wrinkles and sags...morning tempers and evening fatigue. And they are willing to believe anything.
Bill Bonner is the
founder and president of