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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  Bogus Room

*** Will Americans copy the Japanese? 

*** Adjusted savings rates still plummeting...

*** P/Es soaring...Greenspan boring...and more...including 
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*** "Let's Hope Americans Don't Copy the Japanese" says a 
headline in the NY Post. "If we suddenly become cautious 
savers, like the Japanese," writes John Crudele, "the tax 
cut won't make us go on a shopping spree...the folks in 
Washington would like Americans to remain spendthrifts."

*** Japan's banks disclosed that their loan balances fell 
again - for the 37th month in a row. People in Japan just 
don't want to borrow. And who can blame them? With stocks 
down and the economy limping along - why take chances?

*** But are Americans really spendthrifts? Many economists 
argued that the saving rate did not tell the whole story. 
For while Americans did not put much money in banks - they 
enjoyed capital gains from their stocks that replaced 
traditional savings. Thus adjusted, savings rates were said 
to be about as high in '99 as they were in '92 - about 8% 
of income.

*** But then the stock gains disappeared, says the Dismal 
Scientist at, and "even when adjusted for 
realized capital gains, the saving rate is declining and 
declining at the fastest pace in recent memory."

*** "Another factor that is driving the saving rate down:" 
continues the Dismal Scientist: "energy prices. Households 
have been spending more and more of their income on 
gasoline and home fuel since 1999 when energy prices began 
escalating. In 2000 alone, consumer outlays on energy goods 
and services and on gasoline fuel have soared by over 20%, 
increasing by $89 billion to $504 billion. Additional 
spending on fuel accounted for 18% of the increase in 
consumer expenditures last year, while fuel outlays 
comprise less than 5% of total expenditures." 

"While the worst may be over for fuel price inflation, 
income growth will slow and the stock market is unlikely to 
go far. Indeed, expects realized capital gains 
to decline this year and next. Thus, unless consumers stay 
on their more sober path of spending of the last quarter, 
the saving rate could actually decline further, with very 
negative implications for household balance sheets." 

*** What's so bad about not having any savings? See 
"Phantom Boom"...below...

*** Reuters reports the obvious - "Consumer Credit Quality 
to Worsen on Layoffs." People who lose their jobs find it 
harder to repay loans.

*** Even though Greenspan & Co. are trying to encourage 
Americans to remain spendthrifts, the dynamics of a 
deflation work in the other direction. People don't want to 
borrow if they think they are going to lose their jobs; and 
lenders are reluctant to make loans. Without anyone wanting 
it, Americans may begin to 'copy the Japanese.'

*** The Dow rose 164 points yesterday. GE rose 4%. Walmart 
also had a good day - up $3.

*** 3 stocks rose on the NYSE for every one that fell. Even 
Cisco managed a bit of a comeback - up 5.8%. Cisco sold at 
a P/E of 20 from '93 to '98. Now its forward P/E ratio is 

*** Earnings are collapsing - with many companies taking 
big write-offs and posting big losses. This has the curious 
effect of boosting P/E ratios.

*** Floyd Norris reports in the New York Times that the 
Nasdaq 100 now sells for an astounding 811 times the 
combined earnings of the group. The P/E for the Nasdaq 100 
was only 127 at the end of December and has never before 
exceeded 165. 

*** The index itself has fallen more than 50% since last 
March. But the problem isn't in the numerator, it's the 
denominator - reflecting big losses among the tech and 
Internets that make up the index. In fact, net earnings for 
the entire index could even go negative. If so, it will be 
the first time since 1933, the bottom of the oh-so-Great 
Depression, when a major index (the Dow) posted a net loss. 

*** "Companies are buying garbage," said Bruce R. Bent of 
Reserve Funds. He was quoted in a NY TIMES article with the 
headline: "Defaults Sound Alarm About Money Funds." Money 
market funds hold $644 billion of commercial paper - such 
as loans to California utilities. AMEX Cash Management, for 
example, has 91% of its assets in commercial paper. 

*** "To get a sense of the current economic slowdown," 
write the Grant's Investor duo Rose Ann Tortura and Mary 
Levai, "one need only pick up a slimmed-down Sunday edition 
of The New York Times -- heavyweight, as always, in 
editorial content, but lighter in ad pages. ... of all 
those suddenly haunted by the specter of declining ad 
revenues, the New York Times Co. occupies the position of 
greatest esteem, making its predicament of more than 
passing interest." (see: Help Needed)

*** Oil fell 50 cents. Gold fell 70 cents. And the euro 
climbed back over 93 cents. 

*** Alan Greenspan will go before Congress today. All eyes 
will be on the great man as he repeats his confidence in a 
policy of destroying the dollar and encouraging Americans 
to spend more than they can afford.

*** The big excitement yesterday was in the biotech area, 
after Celera Genomics announced that there were only 30,000 
genes to deal with in the human body...of which only 800 
seemed to different from one person to the next. The 
implication of this is that it will be easier to find the 
critical genes. 

*** Science, though, like stock prices, goes in cycles. 
Each breakthrough discovery leads eventually to the 
realization that we haven't a clue.

*** "The moon is the moon," said Mr. Deshais, our gardener, 
yesterday. He is becoming agitated, nervously walking 
around while talking to himself. He's worried that he won't 
be able to finish his grafting before the moon changes her 
favorable regard. "If it doesn't get done right 
will have to wait until next year," he told me. 

*** So, I stopped my own work in order to drive him around 
the countryside (his driver's license was taken away by the 
local gendarmes in the interest of public safety). "Stop 
here," he ordered, as we drove along deserted country 
lanes. Mr. Deshais got out...let out his little dog, 
Tina... and hopped over a fence to clip a few branches... 
and then got back in the car with his twigs. This scene was 
repeated several times - until we had enough kindling to 
start an orchard...and we turned homeward. You can't argue 
with the moon.

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There is far more in question for the U.S. economy than
just the possibility of a conventional recession. At
stake is whether the whole U.S. new paradigm economy has
ever been for real or just a Wall Street hoax and 
marketing story.

Dr. Kurt Richebacher

Today, the most powerful man who ever lived will take 
center stage...or perhaps ring center...speaking not to a 
dignified audience of paying theatre goers, but to a circus 
of the US Congress. 

I speak of the illustrious chairman of the world's most 
successful banking cartel - the Federal Reserve, which is 
not federal and has no reserves. 

Of course, most people will take no notice. I will do my 
work as always. Mr. Deshais will splice and dice the 
various fruit tree cuttings that he gathered yesterday. 
Indeed, billions of people will go about their business as 
they always have.

And yet, Mr. Greenspan, it is believed, has the power to 
make us all rich by adding trillions of dollars to our 
collective net worth. Merely by manipulating a few simple 
levers of interest rate and monetary policy, the Fed 
chairman can induce people - at the margin - to borrow 
money that they might not otherwise have borrowed....and to 
spend money that they might otherwise have saved. And upon 
these actions - again, at the margin - the entire world 
economy hangs in the balance. 

For if the U.S. falls into a deep, prolonged fit of 
financial rectitude, in which its citizens forebear from 
spending money they don't have, the whole world is doomed. 
Who will buy the surplus autos of Japanese automakers? Who 
will take on the burden of purchasing the designer jeans 
stitched in Asian sweatshops? 

Consumer spending is softening. Banks are tightening 
lending requirements. The Nasdaq, which rose so splendidly 
following his surprise rate cut on January 3rd, has now given 
back all its gains. The capital gains, which disguised and 
offset so much bad news - negative savings, marginal income 
gains, reckless spending, weakening balance sheets - have 
now disappeared. People still have faith in Greenspan and 
in stocks. But they are beginning to worry. At the margin, 
they are beginning to become more cautious.

The great man is on the spot. Two thirds of his 'committee 
to save the world' have gone on to other pursuits. He must 
now save the world single-handedly.

Today, Mr. Greenspan will repeat his commitment to fight 
this upsurge in financial responsibility. He will propose 
to combat it with the same weapons he used to create the 
boom in the first place - making more money available.

But how is it possible, dear reader, that with no 
additional effort on our part we can become richer merely 
by decree of a banking cartel? 

The burden of today's letters - as of so many recently - is 
to prove that it is not possible. Looking for symmetry in 
all things natural, we suspect that the U.S. boom of the 
last 10 years is as bogus as the Japanese bust. 

What does it take to create wealth? Time. Work. 
Imagination. Skill. And real savings. 

But the Fed has none of these things. It can no more 
increase the amount of time available to us than it can 
improve our skills. 

All it can do is to offer us mock 'savings' upon which to 
draw for capital investment. The trouble is that the 
resulting boom is as fraudulent as the savings upon which 
it is built. 

You may recall the explanation of Dr. Frank Shostak of what 
savings really are - a "pool of funding" that allows us to 
invest in new, more productive industry. "Essentially," 
writes Shostak, "the pool of funding is the quantity of 
goods available in an economy to support future 

These resources are real - not imaginary. Real production 
requires real investment - of time, material, skills and so 

"When a saver lends money, what he in fact lends to a 
borrower," Shostak elaborates, "is the goods he hasn't 
consumed. Credit then means that unconsumed goods are 
loaned by one productive individual to another, to be 
repaid out of future production."

"The existence of a central bank and fractional reserve 
banking permits commercial banks to generate credit that 
isn't backed up by real funding - i.e. credit out of 'thin 

"Trouble erupts," Shostak explains, "whenever the banking 
system makes it appear that the pool of funding is larger 
than it really is. When a central bank expands the money 
stock, it doesn't enlarge the pool of funding. It gives 
rise to consumption of goods, not preceded by production. 
It leads to less means of sustenance."

"Loose monetary policies give the impression that they can 
boost economic activity. That this is not the case becomes 
apparent as soon as the [real] pool of funding begins to 
stagnate or shrink. Once this happens, the economy begins 
its downward plunge. The most aggressive loosening of money 
won't reverse the plunge [fictitious money cannot 
miraculously create real resources]."

Thanks to the biggest expansion of credit in history, the 
U.S. economy enjoyed an unprecedented boom. But it was a 
boom of a strange sort. Families were able to maintain 
their standards of living - and enjoy the illusion of 
financial progress only by going more deeply into debt and 
working harder.

At its peak, Americans could look at their stock portfolios 
and think themselves rich. But at the same time, debt 
levels were at record highs. Americans - believing 
themselves on top of the world, like the Japanese in 1989 - 
bid up asset prices to absurd levels. But unlike the 
Japanese, they also allowed themselves to become the 
world's biggest debtors, owing more money to more people 
than any nation there ever was.

Incomes barely increased during the whole boom period - and 
still, in real, after-tax terms personal incomes are lower 
than they were more than 20 years ago. Americans work more 
hours for less pay than the citizens of Japan and several 
European countries. And more couples than ever before 
require both spouses to work in order to maintain their 
standards of living.

Meanwhile, corporations practiced what Dr. Richebacher 
calls "late, degenerate capitalism." Instead of investing 
in new plant and equipment to produce future profits, U.S. 
corporations slashed costs and engaged in various forms of 
financial engineering to bring profits forward at the 
expense of the balance sheet. Like consumers, they went 
deeply into debt, often purchasing their own shares at 
outrageous prices, in order to provide the illusion of 
growing, current profits. 

Phony credits introduced by the Fed encouraged consumption 
and bad investment decisions, both of which ate into the 
real 'pool of funding' available for future growth. This, 
combined with the collapse of earnings, savings, and 
capital gains means that the resources available for growth 
and development actually shrank during the boom...and may 
actually be smaller today than when the boom began.

Thanks to the Fed, Americans are poorer than they would be 
otherwise, not richer. The boom was a sham.

Your correspondent, on semi-vacation in the beautiful 
French countryside,

Bill Bonner

About The Daily Reckoning:

Daily Reckoning author Bill Bonner

Bill Bonner is, in spite of himself, a natural born contrarian. Early each morning, Bill writes The Daily Reckoning—his take on the financial markets and what’s going on in the world—and sends it off by e-mail before most Americans’ alarm clocks have buzzed. Many readers say it's the first thing they want to read when they get up—not only because it's informative and thought provoking, but also it's inspiring, in its own quirky and provocative way.

Of course, there's much more to Bill than his daily market commentary. He's also the founder and president of Agora Publishing, one of the world's most successful consumer newsletter publishing companies. Bill's passion for international travel and big ideas are reflected in the company he's successfully built. In 1979, he began publishing International Living and Hulbert's Financial Digest . Since then, the company has grown to include dozens of newsletters focusing on health, travel, and finance. Bill has vigorously expanded from Agora's home base in Baltimore, Maryland since the early ’90s—opening offices in Florida, London, Paris, Ireland, and Germany.

Agora's publication subsidiaries include Pickering & Chatto, a prestigious academic press in London and Les Belles Lettres in Paris, best known as a publisher of classical literature in bilingual editions.


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Last modified: April 01, 2001

Published By Tulips and Bears LLC