Zero tolerance
"It used to be an elementary truism among economists that a healthy economy is rich in savings, rich in productive investment and rich in profits. The US economy is extremely poor in all three. But it is extremely rich in financial speculation and corporate malfeasance."
Dr Kurt Richebächer for
The Daily Reckoning,
March 30, 2005
Throughout their history, Americans have remained an optimistic people and they still firmly hold on to the belief that next year will be better than the present one, and that they will export their ideals of freedom, democracy and opportunity to the rest of the world.
This belief has some foundation, as America became the leading exponent of capitalism. Max Weber tried to explain this phenomenon in The Protestant Ethic and the Spirit of Capitalism (1904). His conclusion was that since many of the Protestant sects believed in predestination - that God has already determined who is saved and who is damned - they harbored a deep psychological need for clues while the individual was still alive.
The simplest way was to associate wealth with salvation. Thus the Protestant ethic provided religious sanctions that fostered a spirit of rigorous discipline, encouraging men to apply themselves rationally to acquire wealth. They developed a work ethic and a pattern of thrift in order to achieve it.
Fall from grace
Therefore the Depression that followed the mania of 1929 had a profound effect on the American psyche as poverty indicated a fall from grace. When President Roosevelt took office in 1933 he created program after program to give relief, create jobs, and stimulate economic recovery in order to re-create the Garden of Eden. Because the involvement of commercial banks in securities underwriting was seen as having contributed to banking instability, he forced the separation of commercial and investment banking by the Glass-Steagall Act of 1933.
But salvation was an individual thing and although the first generation were granted State benefits, those who survived the Depression and the Second World War still borrowed reluctantly, saved eagerly and made America the greatest power on Earth through the production of goods, especially arms and automobiles. Unfortunately, they also paid in almost nothing and received benefits for as long as they lived.
No limits
Upon bearing witness to the munificence of the State, the second generation began to use the ballot box in order to increase the range of benefits provided to the group as a whole. Salvation became the preserve of special-interest groups. The second generation also began to shun the demands of physical exertion and, with the active participation of the State, began to expand the service sector. They still talked their parents' talk of thrift and virtue but didn't mind lapsing when it suited, for peace reigned, employment was secure and debts were repaid.
In the early years of their lives, the Bretton Woods agreement forced the respective governments and banks to limit their debt and spending. But once this was abandoned in 1971, men became free to conceive and believe and achieve; to create dreams, extend credit and print money in earnest.
The men from the Land of the Rising Sun led the way. At first they produced and by 1987 their trade surplus reached $87 (zł.279) billion, the highest previously recorded by any country. Then they invested in production and assets in other countries.
Japanese warrior
Finally, they colluded with the US to create a prosperity based on inflated asset prices. In 1990 the four biggest banks in the world were Japanese. By the time the domestic bubble burst on December 29, 1989, and the Nikkei peaked at 38,957, perhaps 50 percent of total reported profits from Japan's largest corporations were derived from 'financial engineering'. (The Nikkei declined by 80 percent reaching a low of 7,607 on April 28, 2003 and is currently at 11,667. Property prices peaked in 1990 and have since plummeted over 60 percent on average, with falls of almost 80 percent in Tokyo.)
Anything they can do ...
The leaders of the original 13 colonies were incensed, as a system they had helped to create for a people they had defeated had overtaken them. And since anything anyone can do America can do bigger and better, they started to liberalize their own banking laws and, under the leadership of Sandy Weil, Citigroup CEO, developed financial supermarkets; one-stop shops for all financial needs, from banking to investments to insurance.
Within a twinkling of an eye, and with the active support of the Fed, the cream of the third generation quit working for a living and became 'facilitators' of aspirations raised and universalized by the mass media and purveyors of instant gratification made possible by 'fractional reserve lending' and funded by debt.
Today, Citibank is the premier world bank. The US has three in the top 10, the same as Japan, and France and the UK have two each. Asset mania coupled with financial engineering has spread throughout the world with the worst culprits being governments.
Debt cycle
From 1995 to 2002 the US accounted for 98 percent of global growth and today the US consumer has massive debts and negligible savings (0.6 percent in February) whereas the Japanese were saving 11 percent of their salaries when their bubble popped. At that time, Japan had a world-record trade surplus of $87 (zł.279) billion while America has a world-record trade deficit of $666.2 billion.
In the mid 1980s manufacturing profits in the US were about four times those of retailers, but today they are equal and the 'facilitators' are providing an ever-increasing share that is now over 20 percent of most national indexes.
On the Ides of March, General Motors, the canary of the US, revealed that it could not make a profit even though it provides zero-percent financing. The Fed has also intimated that it is no longer prepared to provide zero-percent lending (when adjusted for inflation) and the prices of the basic necessities of life continue to soar. What will be the inevitable outcome when debt accumulation grinds to a halt? Cycles repeat.
Dr Kurt Richebächer for
The Daily Reckoning,
March 30, 2005
Throughout their history, Americans have remained an optimistic people and they still firmly hold on to the belief that next year will be better than the present one, and that they will export their ideals of freedom, democracy and opportunity to the rest of the world.
This belief has some foundation, as America became the leading exponent of capitalism. Max Weber tried to explain this phenomenon in The Protestant Ethic and the Spirit of Capitalism (1904). His conclusion was that since many of the Protestant sects believed in predestination - that God has already determined who is saved and who is damned - they harbored a deep psychological need for clues while the individual was still alive.
The simplest way was to associate wealth with salvation. Thus the Protestant ethic provided religious sanctions that fostered a spirit of rigorous discipline, encouraging men to apply themselves rationally to acquire wealth. They developed a work ethic and a pattern of thrift in order to achieve it.
Fall from grace
Therefore the Depression that followed the mania of 1929 had a profound effect on the American psyche as poverty indicated a fall from grace. When President Roosevelt took office in 1933 he created program after program to give relief, create jobs, and stimulate economic recovery in order to re-create the Garden of Eden. Because the involvement of commercial banks in securities underwriting was seen as having contributed to banking instability, he forced the separation of commercial and investment banking by the Glass-Steagall Act of 1933.
But salvation was an individual thing and although the first generation were granted State benefits, those who survived the Depression and the Second World War still borrowed reluctantly, saved eagerly and made America the greatest power on Earth through the production of goods, especially arms and automobiles. Unfortunately, they also paid in almost nothing and received benefits for as long as they lived.
No limits
Upon bearing witness to the munificence of the State, the second generation began to use the ballot box in order to increase the range of benefits provided to the group as a whole. Salvation became the preserve of special-interest groups. The second generation also began to shun the demands of physical exertion and, with the active participation of the State, began to expand the service sector. They still talked their parents' talk of thrift and virtue but didn't mind lapsing when it suited, for peace reigned, employment was secure and debts were repaid.
In the early years of their lives, the Bretton Woods agreement forced the respective governments and banks to limit their debt and spending. But once this was abandoned in 1971, men became free to conceive and believe and achieve; to create dreams, extend credit and print money in earnest.
The men from the Land of the Rising Sun led the way. At first they produced and by 1987 their trade surplus reached $87 (zł.279) billion, the highest previously recorded by any country. Then they invested in production and assets in other countries.
Japanese warrior
Finally, they colluded with the US to create a prosperity based on inflated asset prices. In 1990 the four biggest banks in the world were Japanese. By the time the domestic bubble burst on December 29, 1989, and the Nikkei peaked at 38,957, perhaps 50 percent of total reported profits from Japan's largest corporations were derived from 'financial engineering'. (The Nikkei declined by 80 percent reaching a low of 7,607 on April 28, 2003 and is currently at 11,667. Property prices peaked in 1990 and have since plummeted over 60 percent on average, with falls of almost 80 percent in Tokyo.)
Anything they can do ...
The leaders of the original 13 colonies were incensed, as a system they had helped to create for a people they had defeated had overtaken them. And since anything anyone can do America can do bigger and better, they started to liberalize their own banking laws and, under the leadership of Sandy Weil, Citigroup CEO, developed financial supermarkets; one-stop shops for all financial needs, from banking to investments to insurance.
Within a twinkling of an eye, and with the active support of the Fed, the cream of the third generation quit working for a living and became 'facilitators' of aspirations raised and universalized by the mass media and purveyors of instant gratification made possible by 'fractional reserve lending' and funded by debt.
Today, Citibank is the premier world bank. The US has three in the top 10, the same as Japan, and France and the UK have two each. Asset mania coupled with financial engineering has spread throughout the world with the worst culprits being governments.
Debt cycle
From 1995 to 2002 the US accounted for 98 percent of global growth and today the US consumer has massive debts and negligible savings (0.6 percent in February) whereas the Japanese were saving 11 percent of their salaries when their bubble popped. At that time, Japan had a world-record trade surplus of $87 (zł.279) billion while America has a world-record trade deficit of $666.2 billion.
In the mid 1980s manufacturing profits in the US were about four times those of retailers, but today they are equal and the 'facilitators' are providing an ever-increasing share that is now over 20 percent of most national indexes.
On the Ides of March, General Motors, the canary of the US, revealed that it could not make a profit even though it provides zero-percent financing. The Fed has also intimated that it is no longer prepared to provide zero-percent lending (when adjusted for inflation) and the prices of the basic necessities of life continue to soar. What will be the inevitable outcome when debt accumulation grinds to a halt? Cycles repeat.
