The currency of last resort and the Kondratieff cycle
Part two, one year later (Part One)

How, exactly is it different?
Never before have all the world's economies been so inter-connected - buying, selling, and loaning to each other. Merchandise, food, fresh fruit is jetted around the world, around the clock. Everyone's money hooked together on computers, able to move around at the flick of a key, measured in Trillions.

Never before has a Mania become so large as to suck in the whole world. Of all the past manias, the size and scope of the U.S. Stock Mania is without precedent, in this regard. Al Newman's great work documents this. History indicates that ALL the past manias eventually correct back to about where they started. The NIKKEI has dropped from 39,000 to 11,000. NASDAQ is down to 1,500 from 5,000, after starting up at 300!. DOW and S&P indexes appear to be magically held aloft with PE ratios of 45, with 15 the norm. Never seen before. Crash of 1929 PEs were only 33. The mantras out of the sell side are these: "I believe in the Market, I believe in me, " "The bottom is in buy the dips," "Be patriotic, buy stocks." Mr. Schwab counsels, "Leave your funds with us, just relax, stay diversified."

Why not push bonds or gold? Simple. Everyone knows what bonds and gold are worth, relative to the particular currency. The unknowing are still buying equities in bankrupt companies at PEs in the stratosphere; they will be severely punished for rewarding the marketers of the bull market propaganda. If it looks like a Mania, walks talks and acts like a mania, it probably is one.

Where Are We Now
Never before have 50% of all USA households had all their worldly wealth in the stock market, and houses and cars they do not own. Banks, Fannie and Freddie own the houses, GMAC et al, the cars. The magnitude of the packaging, repackaging, selling and reselling of these liabilities, and the derivatives on them, is literally beyond imagination or comprehension - in excess of $100 Trillion.
The only place to find any rational analysis of this current situation is the weekly update of Doug Noland's "Credit Bubble Bulletin." Never before, that I know, have we had a continuing series of Total Defaults, and total repudiation on the debt of several Sovereign Countries. One every few months. See Ian Gordon's Pie accompanying chart for the list.

Never before has there been a grand experiment to try to get all the warring tribes of Europe to agree on a single currency. You know the one, where they had dancing girls and bands on the streets of Paris to sell the grand scheme. The U.K. has not bought in just yet, and the Germans are crying for their Marks back. Maybe it will work out and maybe not.

The last piece, a year ago, began with a question "How do we get out of this Mess," that is the mess of a minor stock market correction. The question was posed well before the tragedy of 9/11 by Carol Baum in her Bloomberg column. Our comment was that we did not have a mess yet, such as Japan, Indonesia, Turkey, Russia, etc. Now, months later, we well and truly know what a real mess is, by the events in Argentina. THAT'S a mess! Human tragedy beyond belief. Simply borrowed more than they could service - that is they borrowed more dollars than they could service with a shrinking peso. Now unemployment is 20-50%, the middle class destroyed, the banks denied the people their savings. "Cannot use dollars any more, they are all gone, have to go back to Pesos, but no one likes those, so how about a new Argentinero." No one wants those, so Pesos it has to be. One lady interviewed on the street suggested just use toilet paper, or newspaper. I suppose any strong and lasting paper with ink on it will do, right?

It is now reported the people are going to IOU chits in a barter system similar to what is being reported in some small villages in Japan. The bank is two or three people behind a small table with boxes of chits from the butcher, baker, the bicycle repairer.

Amazingly, the trusty international bailer-outer, (re-paperer), of all bad debts, the IMF, did not jump in and save the banks' bonds in Argentina. Why not? It is important here to note that in the past, the IMF did not jump in and save any country, ever! The IMF, (Uncle Sam) does not give a hoot for any of the countries, they only jump in to save the banks' bonds. What is different this time? Why didn't the IMF toss them a few Billion to cover the interest for another year or two? Too much to reimburse Spanish banks, or just too much period? Is the IMF out of funds for bailing out $150 Billion? Remember the IMF was started with only 100,000,000 Oz of gold, when that was a LOT of Real Money. Today at $300 gold that equals a mere $30 billion. Is much of that gone, or unavailable, via the disappearing SDR'S, per Mr. Turk?

Greenspan's FED - The Great Experiment
How can we keep the party going? Spending and Borrowing. Stimulate consumption by flying thousands of helicopters over the land and dropping money on the populace. Great plan, but the problem is the cost. Not the cost to print the paper with the ink, the cost to service the interest at 6% - 25%! Remember that compounding at 7.5% doubles principal in 10 years. The money helicopters are the high cost credit cards, and the refinancing of homes. People using houses for ATM machines. Free cars with free financing, plus furniture, appliances, etc. As Mr. McTeer of the Dallas FED urged everyone to, "Just all hold hands and buy an SUV". No down, no interest, no payments, no doubt. Japan has tried the helicopter monetary stimulus. It did not work.

Money
When Greenspan acknowledged Senator Ron Paul's question, "What is Money?" he said he did not know what money was, much less how to regulate it. Then some months later he said, "If the evident recent success of fiat money regimes falters, we may have to go back to seashells or oxen as our medium of exchange. In that unlikely event, I trust, the discount window of the Federal Reserve Bank of New York will have an adequate inventory of oxen." No one was aghast, especially not him. Houses, cows, seashells, chits with ink on them, Will the experiment work? Maybe, maybe not. Maybe it's out of his control, or anyone's ability to know or control.

Paul Kasriel has noted how Greenspan is hoisted on the horns of his own dilemma.

The Problem is the Cost of Compound Interest for the Worldwide Malinvestment Into Over Capacity with Borrowed Money. I do not know where Argentina started, but it was not where they finished, against the wall for $150 Billion, still running at 6-7%. They probably started at half that, it does not matter. Russia was only $40 Billion, Daewo, the Korean conglomerate, $80 B's. Ford Motor Co. $260 B's. Wonder how much profit per unit it takes to service that?

In the USA, the Debt issue is reported, but is incomprehensible. Treasury is up against the debt ceiling of $5.9 Trillion, and has to get it raised by Congress to borrow more. What does it mean? No one on any Main street knows or cares. Yet. In Argentina, they now care. Dr. Kurt Richebacher figures that it now takes about $68 of new debt to create a dollar of GDP.

When you are too big to Bail, then you are NOT to big to Fail. Default ALWAYS comes. Except of course not just yet in Japan, and who knows, maybe never there. Can they can just keep printing the paper with ink on it? Have the government eat the defaulted loans? Maybe the tooth fairy will arrive and fix it if we ignore it long enough. Maybe not. If the printing of paper with ink on it created wealth, then Argentine Pesos, Indonesian Rupees, Turkish Lira, old Marks, would not be in such disrepute, or just gone.

The People's Timeless Solution to "No Confidence"
It has been reliably reported that in Japan, one of the largest volume consumer items for some time has been home safes. Naturally enough. A smart people would see no point in leaving their Yen in a bank if the bank was known to be broke, or was feared to be broke, and was paying no interest. Take it out and put it under your bed. Goods and services are costing 2% less every year, so cash is worth more by the day. Why risk anything while paying fees, to get no return with a bank?

Now the next step is being taken. Taking paper out of safe, from under the mattress, or out of the bank and buying gold. Just begun in the last few months. Paul Kasriel's piece at Northern Trust, on "Why Mrs. Watanabe is Buying Gold", spelled it out. Now there are reports on the "mattress money" in Europe, notably in France and Italy.

The poor Argentines, on the other hand, did not have a chance. It hit so fast there was no time for the man on the street to do anything to protect himself.

It seems that the Russians are moving in a positive direction, and resumed their Sovereign gold coin as currency, to go along with their new low flat tax. Low taxes and real money. What a novel idea.

Where to from Here
For those that wish further history and analysis, Mike Alexander has a three-part K cycle work and Ian Gordon's outstanding pie chart is included in this piece. It's a great illustration of the past and possibly an indication of the future. You can see that Japan's stock market rolled over 10 years ago. We are different everyone says. Yes we are. Our rules will shove a K-Mart, or an Enron through the system in months. Only a couple of little banks, and no insurance companies, or money center banks down, just yet.

It is important to realize that the cycle is NOT a date driven activity, but an event that defines the dates. This time the government intervention has stretched out the cycle by more than ten years. It further seems that the majority of the populace is horrifically uninformed on any facet of simple economic facts and has put full faith and confidence into the banks and stockbrokers. For example, Vanguard ran a survey on market knowledge of 1,500 folks, and the average score was 35%.

The Glass-Stegal law was enacted after the crash of '29, as the people realized that having banks owning stockbrokers, and vice versa, is very dangerous in a major bear market. Not surprisingly, it was repealed JUST before Clinton left office. New paradigm for a new age, of course.

Inflation / Deflation / Stagflation Question
We have NO inflation right? I do not recall there being a factor in the CPI or the PPI for compounding of debt. Is there a larger or more pervasive cost than interest in the system? Maybe taxes? Taxes do not compound. They are extracted and re-injected into the system.

Simplistic Summary
My favorite example of the supply demand price curve: In the 1982 recession, Porsche had the same experience as Sun, CSCO, Nortel, are now having on their products. Destroy the inventory. The bankrupt reseller of your goods is your main competitor. In about 12 months, Porsche went from selling about 45,000 units to about 4,500 units. They are now back to 48,000 units. Discounting has just begun. Amazingly enough Toyota, Lexus and BMW are still having their best volumes ever. Houses and cars on credit.

The best one of all is timeshare ownership of executive jets, while commercial airlines are on the ropes. Great photo of Warren Buffett at the conference table of his executive 757. One of a few hundred in the Net Jets fleet, and hundreds more on order. Remember the phrase, "A malinvestment into over capacity with borrowed Money."

Massive amounts of debt that cannot be serviced can only be defaulted. Japan has done an Enron and swept theirs under the rug for years now. We are truly different, our system will blow them out in a few months.

The primary activity of this Winter cycle is debt liquidation. Know any countries or corporations that are carrying to much debt?

Thanks once again to Ian Gordon, Bob Bronson, Mike Alexander, Doug Noland, and Kurt Richebacher, for the brilliant analysis to educate us unwashed masses.