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An Empty Belly is a Dangerous Thing It is the best of times...it is the worst of times...
This morning, oil is over $120...and the price of gold is pushing back up to $875. That's good news, say the headlines. Oil is up because people think the United States will avoid a recession. "Oil tops $120 a barrel as U.S. optimism rises," says a headline in the Financial Times. And many think the Hillary/McCain summer gas tax holiday concept may be implemented - which would encourage people to use more gasoline! John...Hillary...good thinking. Get people out on the road...using more fuel. Great idea. Even Thomas L. Friedman can see what vote-pandering imbeciles you are (more below...). Need we say more? But say more we will...because, on page 1 of the Financial Times is a photo of a mob in Africa... What has stirred them to riot? The latest election result? Someone dissing their religion? No, high food prices! It is the worst of times for people with big appetites and little money. Many of them will go hungry. And an empty belly is a dangerous thing. First, people develop a "lean and hungry look." Then, they stab you in back. Ah yes...predictably...inevitably...the world's intellectuals, economists, yahoos, and pandering politicians are having trouble following the trail. They ought to look down at their feet. They would see the breadcrumbs...from the door of the Fed's headquarters in New York...through the deep woods of subprime and leveraged derivatives...and right up the hill of soaring commodity and gold prices. That's right...the Fed is trying to keep the money and credit moving. But it is going where it wasn't supposed to go - into commodities, food, oil and gold. Still, the experts can't see it. Instead, they read the polls, watch the TV, and come to the wrong conclusion. What is the cause of the rise in food prices, they ask? Speculators! Another lead story today: "India targets food futures." India imagines that food prices are being driven up by greedy hedge fund managers. It is considering a "blanket ban on food futures trading," says the FT. Why not? Nothing is too absurd or too counterproductive to escape the notice of the world improvers. Just look at John McCain's big idea - a "league of democracies." More about that coming up soon too... For now, let's stick with the financial news... The big story seems to be the idea that, as our chief financial researcher in London, Theo Casey, put it: "doom and gloom has been overplayed." Since the drama of Bear Stearns, no other major financial firm has failed. Quick action by the Fed and other central banks seems to have saved the world. "Has the worst of the financial crisis passed?" asked Le Monde yesterday. "Yes," said the world's richest man over the weekend. Warren Buffett told his shareholders that the "worst of the credit crisis on Wall Street is over." Maybe he's right. But let's look at the numbers. In 2006, alone, nearly $7 trillion of new debt was issued worldwide. Maybe double that amount in the entire five-year period - 2002-2007. So far, says Bloomberg, since the beginning of 2007, less than $200 billion has been written off. You can do the math yourself, but Fred Y. Jones guesses that total losses so far probably don't exceed 1% of the debt sold in the last 5 years. So far, so good, in other words. This is the best of times. The Fed has cut rates 7 times. And it now takes on its balance sheet - as collateral for loans - the very credits that are likely to go bad...credit card debt, student debt, and even car loans. It has only 200 basis points left, before it gets to zero, and there are approximately $10 trillion (just guessing) worth of credits that still could go bad. If just 5% of them went bust...the loss would be $500 billion. Maybe the doom and gloom is underplayed. Moving bad debt from the people who deserve it to the Bank of All the Americans - the Fed - doesn't turn the bad credits into good ones. It merely allows everyone to keep doing what they've been doing...that is, to keep pretending that everything is all right. But everything isn't all right. Far from it. And budding out in our brain is a little idea about why the situation can't be fixed...and why a major breakdown may be on its way...more to come...about how democracy and modern, state-guided capitalism really work. Interestingly, Buffett is famously pro-America. You bet against American business and you will go broke, he says. But over the last 10 years, betting against American business was the best thing you could do. The dollar sank...and foreign markets - particularly emerging markets - soared. Buffett hasn't missed the point. He paid $4 billion for an Israel-based metalworking company in 2006. And now he's coming to Europe to scout for opportunities. He'll no doubt want to stop by The Daily Reckoning headquarters in London for our advice. Warren, look for the building with the golden balls. We're waiting for you. *** "He must have hired a new ghost-writer because this is actually good," writes colleague Byron King. "On energy, Friedman is nailing it exactly." Thomas L. Friedman...writing in the New York Times: "...If you are going to use tax policy to shape energy strategy then you want to raise taxes on the things you want to discourage - gasoline consumption and gas-guzzling cars - and you want to lower taxes on the things you want to encourage - new, renewable energy technologies. We are doing just the opposite. "The McCain-Clinton gas holiday proposal is a perfect example of what energy expert Peter Schwartz of Global Business Network describes as the true American energy policy today: 'Maximize demand, minimize supply and buy the rest from the people who hate us the most.' "This is not an energy policy. This is money laundering: we borrow money from China and ship it to Saudi Arabia and take a little cut for ourselves as it goes through our gas tanks." *** Boris Johnson is the new mayor of London. He's also the former editor of the British magazine, The Spectator, for which we occasionally contribute an article. Our old friend, Sue Easton, writing in Human Events has this to say about Boris: "He is somewhat of an odd duck. Alexander Boris de Pfeffel Johnson (born in New York City in 1964) is the grandson of a liberal Turkish Muslim journalist who was welcomed into Britain as a political refugee during World War 1. Boris made his mark as the editor of the conservative magazine, The Spectator, and has been a regular guest on British telly. Often portrayed as a buffoon by the media, Johnson was elected as the Member of Parliament for Henley. The town is famous for its yuppie population, gentrified residents, their piles (as aging mansions are known in England) and for rowing races on the river that runs through it. The Thames. "When the prospect of becoming Mayor of London surfaced, by all accounts, Johnson decided on a course of self-discipline. He found himself a stern group of advisers and put his Oxford education to work for him. Of late, he's taken to referring to his classical hero, Pericles, in campaign appearances. Pericles had quite lofty ideals about civil life and responsibilities in ancient Greece." The nice thing about Boris Johnson is that he has a sense of humor. Sue continues: "He says that if he does well, [as mayor] he might like to run for President of the United States someday. He is (technically) Constitutionally eligible to do just that as he was born in New York City. Of course, he'd have to reapply to renew his recently relinquished American citizenship." *** "I don't think I'm going to like it," said Elizabeth yesterday. She was referring to the next stage of her life - the empty nest stage. It is the best of times and the worst of times at home too. We have had children in the house for the last 25 years. But, suddenly, the house may become strangely quiet. Henry has heard from the colleges to which he applied and made his decision. He might have stayed on with us in Paris and gone to medical school here (where it would be free!). Instead, he's going to the University of Virginia next year. Meanwhile, after a year in London, our actress daughter, Maria, is headed for Hollywood. We also have an older son in South America...and another daughter in London. "Jules will be in Boston...Henry will be in Charlottesville. Maria in California," Elizabeth lamented. "And now Edward is talking about going to boarding school. If he goes, I'll be an empty nester sooner than I planned. I don't know if I can stand it. "Now I think of all those times I just wanted a little peace and quiet...I wished for some time to myself...some time when I didn't have to listen to children...didn't have to find their clothes or help them with their homework. Now, I'll have all the time I want...all the time to myself. I'll come home and there won't be any children waiting to ask me questions...or waiting for me to fix dinner. I'll be all by myself. It sounds dreadfully lonely." "Don't worry," was our reply. "Edward doesn't really want to leave us. He's just trying out the idea to see how it sounds...and to see how we react to it. If we seem to like the idea, he won't do it." "Yes, but I don't like the idea. I hate the idea." "Well, just try not to show it." Until tomorrow, Bill Bonner
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Bill Bonner is the
founder and president of 