CRACKED
Bill Bonner
"There is a crack in everything God made..."
- Ralph Waldo Emerson
"No man ever had a point of pride that wasn't injurious to him," was another of Emerson's remarks. And by the end of the 20th century, Americans had discovered enough points of pride to practically annihilate themselves. They had the most magnificent military machine the world had ever seen. They had the world's most dynamic and resilient economy. They had Microsoft and Hollywood. And Howard Stern. And Will & Grace.
For the last couple of weeks, we have been comparing America and France. Our point has been that the two nations are not nearly as far apart as they think:
In France, a much larger percentage of the GDP is spent by the government than in the U.S. - 53% compared to 32%. But the difference is smaller than it appears, because in France, health and education are almost exclusively run by the government, and workers in these industries are on the government payroll. Government also has a big position in the transportation industry in France. The trains, the metro...even some trucking business is done by state employees.
And here we run into one of those delicious little confusions that keep life interesting. The average person in France would say that health and schooling are 'free' in France, but expensive in America. Whereas the average intellectual in America would say that they are 'free' in America but state-monopolies in France. In both cases, the word 'free' makes them sound like a good thing. But in both usages, it would be a complete lie. For in France, the services are hardly free; they are paid for by taxpayers. Nor are they free in America, in the American sense; both health and education have so many government strings attached that they resemble state-run industries. Just talk to a doctor or to a school teacher. You will find few differences between one in Paris, France and one in Paris, Texas. Both take the guff of centralized bureaucrats and do as they are told.
And which system is better? Your editors have tried both. We have sent our children to French schools and American ones. "The hospital here was much better than the one in Baltimore," says Addison, whose wife just had a baby in Paris. "But it was the American Hospital."
We see differences, but no clear winners. Maybe the U.S. health system is more advanced, but the French live longer.
When the costs of health care and education are added to government spending in America, the resulting percentage of GDP is within a few percentage points of the French total. Americans spend about 14% of their GDP on health. They spend nearly another 3% or so on post-secondary education. They don't spend much on train tickets, because the trains in America don't trundle anywhere Americans want to go.
Government debt in America is 70% of GDP. In France, it is 60%. Private debt, by contrast, is 162% of GDP in America. We don't know how much it is in France, the number seems impossible to find, but we'll bet it's a lot lower. The French don't even have credit cards; they use debit cards. And the idea of refinancing a mortgage in France is almost absurd.
On one side of the Atlantic, the newspapers rant about the 'ruthlessness' of American capitalism. On the other, the papers rag about the 'rigidity' of French socialism. But on both sides of the great oceans, throughout the entire 20th century, the high tides of central planning, paper money, debt and social-welfare promises slapped the shore in the same corrosive way. The maligned ideas of German intellectuals and French philosophers drifted across the North Atlantic in a matter of weeks. Soon, both continents were drenched in politics...until every sod in the nation depended on the runoff of money from Paris or Washington, and was ready to vote for whichever clod promised more.
Almost no matter where you are in the modern world, for every transaction, there is a tax. For every act, there is a regulation. And for every idea held by the masses, there is a massive fraud.
"It's the whole system of social protection put in place by Bismarck at the end of the 19th century that we have to take a look at," professor Peter Losche of the University of Göttingen was quoted in Le Monde, explaining why the whole shebang is doomed.
"If we change nothing, it will be necessary to pay 2/3rds of our salaries in order to support the [government's] health, retirement and unemployment systems."
And thus we come back to the printing press in Washington's basement and America's unique situation at the debut of the 21st century. It is the Dollar Standard that separates the U.S. from France, and gives Americans an immeasurable boost towards ruination. While California and France are being forced to come to terms - honestly or dishonestly - with their predicaments, the U.S. still has the world's reserve currency.
Americans have had the rest of the planet bamboozled; the foreigners sent them nearly $2 billion worth of goods and services, every day, even though Americans couldn't afford them and had nothing to give in return except little pieces of green paper. The poor huns, frogs and wogs...it cost the U.S. Bureau of Printing and Engraving less than a penny to produce a dollar bill, but the foreigners took it as though it were worth a hundred of them.
The dollar undergirded all of America's good fortune. Upon it rested the whole hullabaloo - the lopsided trade, its effervescent markets, its national and private debt. An entire generation of Americans had come of age with the strong dollar. They took it for granted that the strong dollar, like the Rolling Stones, was neither cyclical nor circumstantial, but eternal.
The American dollar broke records. There was nothing else like it in the world. There was nothing like it in history. It seemed even to defy God Himself. For God had planted his own 'money' in the Earth, scattering a bit on the surface and more deep down, where it was hard to get out. For thousands of years, ever since there was money, gold had served as money. And who complained about it? The yellow metal couldn't be bribed, flattered, seduced, or flimflammed. Nor did it interrupt dinner with moronic, self-serving announcements. It said nothing. It went nowhere. It held no press conferences and no opinions. For centuries, it just sat there, as quiet and serviceable as a graveyard.
But since 1971, Americans seemed to have no use for it; they had invented something better.
Men had previously appreciated gold because it was hard to come by - in fact, the world's supply of it increased almost in exact proportion to the growth in the world's other goods and services. In the time of Christ, a Roman could buy a respectable suit of clothes for about an ounce of gold coin. So could an American 2000 years later.
But the dollar was an improvement on gold, they believed, for precisely the opposite reason: because they could create an infinite quantity of them. In effect, Americans thought the dollar gave them a line of credit that was inexhaustible...and a credit card that never had to be paid off.
America has become "the world's mouth," said a source quoted by James Grant - the ultimate consumer, ready to eat up the world's excess production like a fat man going to work on a pile of cream puffs.
"We can pay off anybody by running a printing press," said Thomas Gale Moore, a member of the president's Council of Economic Advisers. He was speaking in the late '80s, just about the time the U.S. net international investment position slipped below the waterline separating debtor from creditor. In the beginning of the great boom in 1980, the U.S. enjoyed a net positive investment position of about 7% of GDP. By the end of the century, the nation was soaked in debt, with a net negative position equal to 25% of GDP. "Frankly," Moore continued, with Bernanke-like candor, "it's not clear to me how bad that is."
Here at the Daily Reckoning, it is not clear to us either. But give us time. Our hunch is that the cracks in this Dollar Standard system are spreading. Within another 10 years or so, the whole thing may fall apart.
Already, dollars spent by Americans end up stimulating economic development - not in the homeland, but abroad. Overseas competitors, with much lower labor costs, little debt and few of Bismarck's promises to keep, become more and more able competitors with every dollar spent. Meanwhile, Americans sink deeper and deeper into the debts they thought they'd never have to pay.
But every bill gets paid somehow. If not by the borrower...then by the lender.
Bill Bonner
Editor's Note: Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter publishing companies, and the author of the free daily e-mail The Daily Reckoning (www.dailyreckoning.com). He is also the author, with Addison Wiggin, of "Financial Reckoning Day: Surviving The Soft Depression of The 21st Century" (John Wiley & Sons) due out in September.
26 July 2003
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