The Daily Reckoning PRESENTS:
An intriguing mystery... What was the crime? Theft? Fraud? Counterfeiting?
The Grandest Larceny
Bill Bonner
First, Bill Bonner with a review of the clues...
Behind every big financial headline is a crime, we wrote earlier in the week.
Today, we open the police ledger and follow up.
August, 1971 is the date on the top of the file. It is the date the administration of Richard Milhous Nixon did something extraordinary; it crossed the Rubicon in monetary history. Henceforth, foreign governments would not be able to redeem their surplus dollars for gold.
Mention the late president's name and the average person recalls the crime with which he is so often associated: B&E at the Watergate.
But while the public's attention was distracted by the breaking and entering of Nixon's fumbling sidekicks, another team of Nixon goons was pulling off the biggest bank heist of all time.
A lumpen investor, a university economist, or a Federal Reserve governor might have read the headlines of the last 30 years without noticing how they tucked together. He might have seen the boom in gold of the '70s...or the bubble in Japan in the '80s...or the subsequent bubbles throughout the rest of Asia...as events as independent of each other as a stolen hubcap in New Orleans and a stolen kiss in Boston.
He might also have looked upon the boom and bubble in the U.S. as unrelated...and mistaken the run-up in stock prices as a consequence of the New Era wonder-age...or of the new productivity of information age technology...or of the newfound wisdom of the guiding hands at the Federal Reserve. He may even have referred to the 'productivity miracle' as the source of such a wonderful thing. Never, on the other hand, would he have imagined that all the great economic and market events of the past 3 decades found their inspiration in the same sordid place and time: at the hands of Nixon's henchmen in the early '70s.
What was their crime? Breach of contract? Theft? Fraud? Counterfeiting? Weren't they the ones who began the practice of printing up Federal Reserve Notes by the trillions - and passing them off as real money? And had they not breached the promise of the U.S. government to settle its debts in gold? And did they not set in motion a pattern of robbery - stealing away the value of every dollar-based asset in the entire world?
Imagine an investor who bought a 30-year U.S. Treasury bond in 1970. Did he not have a right to expect to receive a dollar back for every dollar lent? And shouldn't he have been able to expect that each of those dollars he received - in the year 2000 - would be worth about as much as those he had given up?
We can measure the damages by looking at the price of gold. In 1970, each dollar would buy an investor 1/34th of an ounce of gold. Thirty-three years later, Mr. Market, sitting as judge and jury, tells us that a dollar is worth less than 1/10 as much, or 1/360th of an ounce of gold.
Even so, our guess is that Mr. Market has more punishment in store.
Investors, taking the U.S. government at its word, have lost trillions. Still, so subtle was the theft that the victims have practically applauded the crime for the last 20 years; they seemed to think it was making them rich!
Printing up trillions of dollars worth of new money was bound to have an effect. After the initial shock and adjustment in the '70s, most investors smiled; the effect was quite pleasant. Cash and credit flooded out upon the world; everywhere it gushed, asset prices sprouted and economies turned green. The year after Nixon 'closed the gold window,' commencing the Dollar Standard era, the Dow rose over 1,000 for the first time in its history. This began what Richard Duncan describes as the "Great End-of-the-century Stock-market bubble." By the time it was over, the Dow has risen 11-fold. It was absurd, even grotesque. But who traces crime leads when no one complains?
Of course, this was not the first time America had felt the effects of a flood of extra money. Nor was it the only country to benefit. Richard Duncan describes the process in his book, The Dollar Crisis, which we strongly recommend:
"The breakdown of the classical gold standard at the outbreak of World War I set off a chain of events remarkably similar to that which occurred following the collapse of the Bretton Woods system. Once the discipline inherent in the gold standard was removed, trade imbalances swelled and international credit skyrocketed. The result was prosperity...followed by depression."
When war came in 1914, France, Germany and England were in positions not so different from that of Richard Nixon in 1971 - their backs were to the wall. Cornered...trapped...they erred and strayed from the classical gold standard and reneged, as Nixon later did, on their promises to pay for what they bought in currency backed at a fixed rate by gold. At the time, the American economy was much like the Japanese economy of 1980; it was growing quickly and ready to sell to the war-mongers anything they wanted to buy. Orders rushed into American companies. Soon, the country was awash in with commercial activity...and then with foreign currency and gold. This tide of new money, says Duncan, did for the American economy of the '20s about what the flood of dollars did to the Japanese economy of the '80s - it caused a boom, which turned into a bubble, which then blew up and was resolved in a long recession/depression.
Now the process is being repeated. Japan boomed and busted, then Thailand, now China. But the real crime was committed in America, and it cannot escape punishment, says Duncan. The 'boomerang currency' leaves the U.S. to buy goods - causing booms and busts wherever it goes - but it comes back home. What can the foreigners do with their dollars except buy U.S. stocks and bonds...and hope the dollar doesn't fall?
And now the biggest boom in the world...in the U.S....is about to turn into the world's biggest bust. We have been predicting it here for the last 4 years. We have harped on it. We have bored readers and ourselves with it. But it is inevitable and inescapable -- a kind of divine justice that no rate cut or fiscal stimulus can avoid.
Since 1971, the U.S. has added trillions to the world's supply of dollars and credit. During this same time, only about 58,000 metric tonnes of gold have been brought from the ground. Many are the calculations showing how much the dollar should fall. All we know is that it should fall a lot...which would effectively end the Dollar Standard period, lower standards of living in the U.S., bankrupt 20 million Americans, put an end to the U.S. consumer-driven growth, collapse stock and bond prices, and send America and most of the world into a long slump from which it might not emerge for another 10 to 20 years.
Some adjustment is irresistible. Every crime gets punished, somehow, and because there is no way the U.S. can continue adding to its trade deficit at the rate of $1 million per minute, it's misconduct will be no exception.
"Balance of payments deficits of an unprecedented magnitude have resulted in credit-induced economic overheating on a global scale," explains Duncan. "The foundations for sustainable economic growth will not be restored until this flaw is corrected and the U.S. trade deficit ceases to flood the world with U.S. dollar liquidity.
"Now," he continues, "the engine of global growth is flooded and beginning to stall. Too much credit has been extended that can't be repaid. Businesses have baldly misallocated capital, and consumers have grown accustomed to living beyond their means. Bankruptcies are soaring as share prices plunge. The U.S. economy is coming in for a hard landing...perhaps even a crash landing..."
Of course, it hasn't happened yet. Investors are tempted to look out their windows, see the sun shining, and think the good times will last forever. They have no interest in the financial crimes of the Disco Age...nor in the balance of trade during the reign of Bush the Younger.
They might be tempted, says Duncan, to reply to our worry like Caesar to the soothsayer. "Beware the Ides of March," the seer warned. Later in the day, spotting the soothsayer, Caesar pointed out that the day had come and all was well.
"Yes, the Ides has arrived," the soothsayer replied, "but it has not yet passed."
Bill Bonner
22 August 2003
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).
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