Today is America’s national holiday. But we’ve always been indifferent to the appeal of patriotism and idleness. So, we put on our tie and raise our standards just as we do every other day.
Reckoning is our métier. And there is always something to be reckoned with – even on holidays. Today, we reckon with a familiar subject, but in a new way.
On this day, 232 years ago, a sweaty group of rich lawyers and planters gathered in Philadelphia, plotting mischief. They were determined, they announced, to overthrow the lawful government of the American colonies and replace it with something more to their liking. They acted, not in the name of their own self interest, they said, but on behalf of liberty and independence, which they all claimed to cherish more highly than life itself.
What they wished to do was to give up one George in London in favour of another George in Virginia. This was no sure thing; George III was not going to give up without a fight. George Washington would have to raise an army and boot him out… or else the signers of the Declaration of Independence would probably hang.
“We must hang together,” remarked Franklin, “or we will surely all hang separately.”
Luck was with them. None of them were hanged. Instead, Franklin himself went to Paris and convinced the French to help. They gave them money to buy war materiel. More importantly, a French squadron blockaded the entrance to the Chesapeake Bay, cutting off the British troops from their lines of supply. The British commander had no choice; he had to capitulate. And so, America became independent of England.
But there is nothing like a long stretch of good luck to ruin a nation. Americans went from strength to strength, victory to victory, coast to coast – always struggling to preserve and extend their precious independence. And now, here we are, more than two centuries later. We have a new George in the White House…and Americans have never been more dependent on others. But now it is not to the English that they are bound…but to their creditors.
On Monday, the dollar fell to a near 26-year low against the English pound. Against the euro, it dropped to near its lowest level ever. Why this should be happening is both a long story and a short one. The short story is that currencies go up and down all the time; the long story is the subject of so many of these Markets and Moneys that readers are getting bored with them.
Dollars are losing their appeal, generally, because there are so many of them. One of the great laws of economics is that quality and quantity vary inversely in many things, not the least of which is money. Each paper dollar represents an I.O.U. from the USA. As the United States increases the quantity of dollars, their credit quality comes into question.
Logically, each new dollar is worth less than the last one.
This little insight has not been particularly useful to dollar bears. Many have lost their shirts, their girlfriends and their minds waiting for the laws of economics to be enforced. Today, we are not predicting when or how law and order will be restored to the world’s markets. But in the last couple of weeks, at least it looked as though the sheriff was back in town.
What also makes the dollar suspect is that Americans, themselves, seem to be in such a hurry to get rid of them. Piles, mountains, Himalayas of them are building up overseas. China may have almost a trillion dollars in its reserves. Russia’s foreign exchange reserves – mostly dollars – are growing at an astonishing rate of 63% per year. At the present rate, Russia will accumulate additional reserves of more than US$200 billion in 2007.
These IOUs are stacking up outside of the United States because Americans can’t keep them at home. Every day, US consumers spend US$2 billion more on overseas products and services than they receive in payment for their own exports. This leaves the typical American household a little short of cash. It has to borrow to fill the gap between income and outflow. Since it saves almost nothing, it depends on the savings of foreigners.
The balance of investment income – the difference between what US investors receive from overseas and what the US pays out in interest and dividends to foreigners – also turned negative last year, for the first time since 1915.
“Foreigners now earn more on their US investments than we do on our investments abroad,” Warren Buffett explained “In effect, we’ve used up our bank account and turned to our credit card. And, like everyone who gets in hock, the US will now experience ‘reverse compounding’ as we pay ever-increasing amounts of interest on interest.”
Whole books have been written on this subject – at least one of them by your author (with Addison Wiggin)…they all tell the same story – that there aren’t many people on the planet who can afford the luxury lifestyle Americans enjoy…not even Americans themselves!
Debt and dependence stalk young and old. Back in the late ’70s the cost of college began to rise sharply. Lenders rushed to provide credit to help the masses pay tuition. Educational debt exploded…rising more in the ’90s than it had in the three previous decades, and three times faster than college costs. By 2007 the average student graduates with about US$19,000 worth of student debt…and US$2,000 in credit card debt.
Even before they are out of school, they are trussed up with debt like a pervert in a cheap motel. Credit card debt almost tripled between ’85 and ’05. Now, the average family owes about US$9,000 on its plastic “safety net”.
But the biggest increase has come in mortgage debt. It’s been increasing at a half-trillion dollars per year. Never have so many homeowners owned so little of their own homes. Even during the biggest boom in housing prices in history, Americans took money out of their equity so fast that the ratio of mortgage debt to housing value dropped – from 70% in the early ’90s to 52% in 2007.
Meanwhile, US government debt has grown at a sprinter’s pace too. By our calculation each and every American household has the weight of half of million in extra debt on its back – its share of the US “financing gap,” an amount that includes not only the official debt, but also the present value of future commitments less anticipated revenues.
All of which is to say, that this Independence Day finds Americans less independent than ever before. They count on the Arabs for energy. And they depend on the Asians for money to pay for it. Soon, they will not be able to go to the bathroom without out asking permission from their Chinese creditors.
But for you, dear reader, the situation is not hopeless. You suffer through this missive on a daily basis, and so you must heed some of our economic warnings and forecasts.
Markets and Money