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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  Bells Ringing

*** Consumers still 'hanging in there.' In May, spending 
grew twice as fast as income. How long before they are 
hung out to dry?

*** The financial news is not good...but not as bad as 
it might be. Is that good?

*** Cheer up, things could be worse. In fact, they are 
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Consumers are 'still hanging in there.' Personal 
spending rose in May by 0.5%, more than twice the 0.2% 
increase in incomes.

How can you spend more than you make? You have to 
dip into savings. If only there were some savings in 
which to dip! The savings rate, a pathetic negative 1% 
in April, fell to a negative 1.3% in May. Lacking 
savings...and expenses exceeding income...Americans made 
up the difference with more debt. 

"Bankers more careful on all but mortgage loans," 
notes a headline at The Prudent Bear. Why? Because, as 
the article explains, mortgage loans are easily 
securitized - allowing banks to pass risk on to 
investors, often foreign investors. And Fannie Mae and 
Freddie Mac, chartered by the federal government, have 
effectively turned private debt (mortgage loans) into 
government bonds. Lenders and investors can't lose, can 

From the dark mist of the above facts, one obvious 
question emerges: how long can this go on? And then, 
another: if markets give people what they deserve, 
rather than what they want or expect, what will befall 
such a nation of debtors? 

Ah, the sun is beginning to burn off the fog. And 
what do we see? Deflation...what debtors deserve but 
least desire.

Eric Fry reports from Wall Street:


- Yesterday's report from the National Association of 
Purchasing Management (NAPM) reminded me of my 
grandmother's cheese souffle - bad, but not as bad her 
well done pot-roast. And if it's the pot-roast you're 
expecting, the cheese souffle is a pleasant surprise.

- "The manufacturing sector continued to decline in 
June," the NAPM reported. But, "the rate of decline 
slowed somewhat during the month." Specifically, US 
manufacturing declined for the 11th month in a row. But 
the good news is that the Purchasing Managers' Index 
improved to 44.7 in June from May's 42.1. Any reading 
under 50 is bad...but at least it wasn't as bad as in 

- Trouble is, "less bad" is a long way from "getting 
better." And until orders pick up - something that isn't 
happening - "getting better" is still a ways off. The 
NAPM's Backlog of Orders Index shows that order backlogs 
have declined 14 months straight.

- No matter, thanks to the okay NAPM report, the giant 
industrial stocks inside the Dow grabbed the baton from 
the Nasdaq and raced ahead 91 points. An apparently 
fatigued Nasdaq took the day off - falling 12.

- "The Economist [cited] various studies suggesting that 
the decline in the U.S. household saving rate is the 
result of a faulty definition of saving," writes Paul 
Kasriel, head of economic research at Northern Trust Co. 
"The message of the article is: 'Cheer up. Things could 
be worse.' [But] My message is the punch-line to an old 
joke: 'So, I cheered up. And sure enough, things got 
worse'... [A]ll you have to do is look at the behavior 
of the current account deficit in recent years to know 
that Americans are spending more than they are 

- Kasriel notes that between 1952 and 1982, total debt 
as a percent of the nation's total capital "ranged from 
approximately 42% to 51 1/2%. But national leverage 
started on an uninterrupted upward trend in 1983. Debt 
as a percent of the capital stock has moved up from 
about 48 1/2% in 1982 to 92% in 1999."

- Given our rising indebtedness, Kasriel expects the Fed 
to err on the side of inflation, rather than risk 
deflation. "There are more voters who are debtors than 
who are creditors. As a result, it's politically correct 
now to inflate."

- Debtors might love inflation, but the US dollar does 
not. The greenback has been weakening lately against the 
Canadian dollar. Does the Canuck buck "know" something?
Weldon's Money Monitor traces the Canadian dollar's 
recent strength to Canada's "high and rising trade 
surpluses with United States." Helping to boost Canadian 
exports, Weldon notes, are exports of electricity and 
natural gas into the U.S. Northwest and California.


*** "You can forget the Nasdaq," Fleet Street Letter 
contributor, John Mauldin wrote recently. "That was a 
bubble and that 50% drop had nothing to do with a 
recession. It was mass insanity or momentum investing 
gone amok. It will drop another 20%-40% if we do, in 
fact, go into recession."

*** "What worries me are non-tech stocks..." Mauldin 
continues, "They have not fallen by anywhere close to 
20%, let alone 40%. If you measure just non-tech stocks, 
you could make a strong case that we have yet to enter a 
bear market. Will we see a drop in the market [from 
here]? History tells us yes." 
(see: Is That Churning Sound My Stomach - Or The 

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"Dr. Greenspan's medicine may be starting to work," says 
a Washington Post editorial. "And if not, the Fed can 
always cut again."

No need to roll your eyes. What follows is not another 
polemic about the ineffectiveness of rate cuts. Instead, 
today's reverie begins where others have ended: suppose 
the Fed does cut again...and again...and again...and 
things don't get better. What then?

You will recall that an interlocking system of military 
alliances in Europe seemed reassuring a century ago. 
Today, it is a cross-rigged web of financial alliances 
that offers the mirage of safety. 

In 1914, all of Europe was trussed up together, like 
climbers roped one to another on a dangerous rockslide. 
Tethered to the line, each felt safer. But, if any of 
them lost his footing, all would be pulled down.

That is, of course, what happened: 

"The mobilization began with bells and drums," according 
to a book by Pierre Miquel, Les Poilus. "In the 
villages, where half of the French lived, the sound of 
bells ringing seemed to announce a cataclysm."

Farmers came in from the fields, merchants from their 
shops... Mothers, wives and children looked out at the 
town squares all over France with a mixture of 
fascination and dread. 

The bells rang as they did when the Vikings approached 
in the middle ages, or when the Cossacks attacked in 
1814. But ever since 1870 - when the Prussians invaded 
France - the bells of war had been silent. For nearly 
half a century, France had enjoyed peace.

And what an extraordinary time it had been! Trains, 
electricity, automobiles and tractors, Mr. Eiffel's 
tower - never before had France enjoyed such prosperity. 
And Paris, what a spectacularly beautiful city it had 
become. Baron Haussmann had knocked down what must have 
seemed like half the city in order to build it up again 
- grander and more beautiful than any city ever was. The 
rows and rows of apartment buildings you see all over 
the city - including the one in which I live - were 
constructed during this period. 

In the Belle Epoque, it seemed as though things just 
couldn't be better. New technology was transforming 
every aspect of commercial life - making things faster, 
more efficient, and more productive.

These new innovations were supposed to guarantee 
prosperity - perhaps forever.

And peace? Would the proletariat of one nation ever 
again be willing to take up arms against their fellow 
workers in other nations? Or, would not the new 
bourgeois ideals - democracy, compulsory public 
schooling, support for the arts, a free press, and 
liberal trade policies - make war a thing of the past? 
Was not war a creature of ignorance, envy and retrograde 

And yet, in August of 1914, the bells tolled, summoning 
the French to arms. After 44 years of peace, Europe 
began a very mean regression. 

Soldiers rushed to their assembly points, fearful that 
they would miss the action. French troops might already 
be on the other side of the Rhine before they got there, 
they worried. Almost everyone was sure that the war 
would be over by Christmas. Whatever the outcome, they 
were confident of a 'second half recovery.'

The peace of the world's financial systems has been 
threatened many times in the late '80s and 90s. Paul 
Kasriel lists a few of the archdukes who have fallen: 
"Mexico/the oil patch/Continental Bank, the U.S. stock 
market, banks and S&Ls, Mexico again, Asia, Russia, 
Brazil, Long-Term Capital [Mis]management, the US stock 
market, Turkey, Argentina." 

Each time, financial analysts held their breath as the 
web of financial connections stretched. But, each time, 
it held. And Greenspan and other central bankers added 
more threads of easy money and credit, which seemed to 
reduce the risk of loss still further.

American consumers did their part too. Throughout the 
entire post-war period, Americans tended to be the 
world's consumers of last resort. But as Greenspan made 
more cash available, American consumerism shifted into 
overdrive. Overseas nations found that they were able to 
'export their deflation' as U.S. shoppers stepped up to 
the cash register to buy excess production - on credit, 
of course.

By the first quarter of 2000, Americans were running a 
current account deficit equal to about 4.5% of GDP, 
which Kasriel notes, is "the highest absolute and 
relative borrowing from the rest of the world in over 40 

What would happen if U.S. consumers ever took their foot 
off the gas pedal? As late as early this year, it was 
still believed that the slowdown in the U.S. would be 
offset by strong growth in Europe and Asia. 

Instead, one by one, the world's economies are being 
drawn towards recession as they were drawn to war 100 
years ago.

"What Happened to Economic Growth?" asked last week's 
headline in the Figaro in Paris, where unemployment is 
rising again and GDP growth and consumer confidence 
figures are falling. 

To the east, economist Anirvan Banerji reports that 
"Germany may also be headed toward a recession. German 
Economics Minister Werner Muller warned last week that 
the German economy could see zero growth in the current 
quarter. You can read between the lines.. If Germany 
goes into recession, which now appears to be a serious 
possibility, it would be the first time since the first 
oil shock a quarter of a century ago that the world's 
three largest economies would be in synchronous 

All over the world, economies are slowing down: 
"Australia, Korea, Taiwan and Mexico are clearly in 
recession and getting worse," writes my friend John 
Mauldin. "The US is in a global economy. If the rest of 
the world slows down, it will affect us. We have only 
seen the beginnings of woes on the international front."

What's next? 

"They left as though on a crusade," writes Pierre Miquel 
of WWI French draftees. But each man knew, deep down in 
his heart, that the days of plenty were over...and that 
the hour had come to pay tribute to death."

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: July 04, 2001

Published By Tulips and Bears LLC