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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

TUESDAY, 17 JULY 2001 


Today:  Mr. Lincoln's War

*** Huge new dollops of cash in the U.S. economy...but not 

*** "the implosion has begun" recovery in 
semiconductors this year...

*** Incredible Baltimore real estate...drunken 
sailors...fewer house refinancings...and more!

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Let's begin with The Big Picture.

Investors continue to lose money. In the first 
quarter of this year, Schwab reported, its customers lost 
$200 billion from the previous year. The S&P 500 is down 
over the last 3 years. The Dow is down over the last two. 
And the Nasdaq is still about 60% below its level of March 
2000. The stock market meltdown that began last year has 
erased as much as $10 trillion in paper wealth worldwide. 

The Fed is desperately trying to replace that lost 
paper wealth with new paper. In a single week in late June, 
the Fed added $42.8 billion in new cash. This year, more 
than $1 trillion will be added. Interest rates have been 
cut 6 times in the first 6 months of this year - to the 
point where the real cost of borrowing for Fed members is 
near zero.

Despite this, the price of gold goes nowhere. You can 
buy an ounce today for about what you would have paid two 
years ago. And long bonds - which should be falling in 
anticipation of an inflation threat - cling to 5% yields.

Meanwhile, all over the world, economies are 
weakening. And American consumers - upon whose broad backs 
the entire world's economic growth seems to rest - grow 
more feeble and more likely, day by day, to shrug off the 

All of this points in a single direction - towards 
the worst possible denouement - deflation. The Levy 
Institute: "The U.S. economy is probably now in recession, 
and a prolonged period of subnormal growth and rising 
unemployment is likely..." 

Over the past few years, The Levy Institute has 
argued that, "...the expansion of aggregate demand had been 
structured in an unusual and unsustainable way - 
unsustainable because it relied upon a continuing growth of 
private spending in excess of disposable income. It has 
become pretty clear during the last six to nine months that 
the process of implosion that so concerned us has now 

Eric, what say ye?


- Well, no one said it would be easy to be bullish about a 
market full of stocks without any earnings. Six interest 
rate cuts and a lucky rabbit's foot can only take you so 

- Yesterday's body-blow de jour was dealt by semiconductor 
stocks, or more precisely by Applied Materials CEO, Jim 
Morgan - normally an upbeat sort of guy.

- But, as Bill Fleckenstein of reported, 
when "Sunny Jim" addressed the Semicon West trade show 
yesterday, "[He] acknowledged that the [semiconductor] 
recovery might not occur till the second half of 2002." 

- Thanks to the dire auguries, Applied Materials' stock 
fell 9% yesterday, dragging down the Sox (semiconductor 
stock index), which fell about 7% on the day. The NASDAQ, 
Dow and S&P 500 all finished the day in the red as well. 
The Dow surrendered 67 points, while the NASDAQ fell more 
than 55 points to 2,029.

- From the "Whom should we believe" files: Motorola 
Chairman and Chief Executive Christopher Galvin predicts 
that semiconductor industry will resume double-digit growth 
next year. Yet, Japan's five largest computer chip 
manufacturers have all slashed their capital investment 
plans by more than 25% this year. You decide.

- "U.S. households are more indebted than they had ever 
been, and total debt is greater than total disposable 
income," Bridgewater Associates reports. "Despite 
relatively low interest rates, household debt service 
payments eat away a near record 14.35% of disposable 

- Charles W. Peabody, bank analyst with Mitchell 
Securities, points out that the current debt service burden 
is "the highest level since the fourth quarter of 1986, 
which, at 14.38%, was the highest level ever since the Fed 
started tracking these data."

- My friend, Frederick J. Sheehan, Jr. of John Hancock's 
Asset Management, writes, "U.S. consumers have spent money 
like drunken sailors. That is, if the drunken sailors had 
sold the U.S.S. Nimitz and spent the proceeds in addition 
to their paychecks."

- Nevertheless, most banks are turning a blind eye and 
continuing to lend with abandon to household borrowers. 

- "While banks are cutting off corporations," says 
Bridgewater, "only a relatively small percentage of banks 
are tightening standards on households. In the most recent 
Federal Reserve survey, a mere 4% of banks were tightening 
standards on mortgages, 19% on consumer loans and 20% on 
credit cards."

- However, Peabody says there are signs already of 
developing weariness in the mortgage market. "Earlier this 
week, the Mortgage Bankers Association announced that its 
refinancing volume index had fallen to 1,200, down 21% for 
the week ended July 6. This index has now been cut by over 
half since peaking at over 2,803 on March 23, 2001. This 
weakening refi trend was echoed in recent days by other 
financial institutions. 

- Countrywide Credit announced that its 'refinance' loan 
volume fell in June (from record levels in May) for the 
first time in 2001." 

- Pity the mighty Fed chairman. He tries to lead, but 
neither the economy nor the stock market care to follow. 
The second-half rebound anticipated by nearly every market 
strategist on Wall Street is MIA.

- "This is now the most aggressive monetary easing in the 
Federal Reserve's 88-year history!" says James Stack of 
Investech Research. "Never before - with interest rates 
already at single-digit levels - has the Fed cut the 
Discount Rate by a full 2.75 percentage points in less than 
six months...this is true panic."

- So what good is all this rate cutting? Not much so far. 
The Dow and the NASDAQ have both declined since the Fed 
started easing on January second.

- Nor is the bond market benefiting from Fed policy. Bianco 
Research calculates, "Despite the Fed easing 275 basis 
points this year, the 30-year bond lost 2.41% in the first 
half of 2001. The 30-year's return is so dismal that it 
even underperformed the Dow Jones industrial average, which 
lost 1.85% over the same time period." 

- Interestingly, Bianco points out, "The gold/silver stock 
index (XAU) has returned 4.4% [year-to-date] versus a loss 
of 6.70% for the S&P 500."

- "Some Fed officials still remember - and believe - that 
an easy monetary policy can have negative consequences," 
writes Andy Kashdan of "Fed Governor 
Laurence Meyer noted in a speech last month that "we have 
to be concerned that as we ease to mitigate the risks of a 
persistent slowdown or recession, we do not at the same 
time create conditions that would lead to higher inflation 
as the expansion gathers momentum." Meyer did not have to 
add that even worse would be higher inflation before the 
expansion has yet to appear.


And what else? [asks Bill...]

*** More evidence of a real estate boom in Baltimore. I 
walked across the square to look at a house for sale. Five 
years ago, the 19th century rowhouse could have been bought 
for $200,000. Now, the same owners are asking $400,000. 

*** Who would have believed that an investment in some of 
the most despised real estate in America would have 
performed better than the S&P? 

*** A thin, nervous man showed us around the place. He had 
the wary look of a compulsive worrier, frightened by the 
thought of any change. I saw the twitch of his mustache and 
the fear in his eyes when I described how we might be able 
to put a new staircase along the back wall. Of course, this 
only encouraged me to think more expansively. 'Yes, and we 
could knock down this wall completely..." I said, as the 
panicked look deepened. "and build an atrium all the way to 
the 4th floor...and tear down this brick wall and rip out 
these partitions...."

*** He could not take it any more. He turned around and 
took refuge in a dark, quiet corner until we had left.

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We have been searching for the 'why?'

Why does no one say "the United States are...?" Since the 
War Between the States, the United States has become 

Before 1860, the United States were not even a nation. 
Instead, they were a union of sovereign states. But Lincoln 
used the word 'nation' five times in his Gettysburg 
address. And now it is 'one nation, indivisible.'

Before that time, Americans had assumed that free people 
had the right to take a union apart just as they had the 
right to put one together. Even Lincoln favored the right 
of secession, when it suited him. After Virginia seceded 
from the union, Lincoln plotted with unionists in 
Virginia's western counties - and thus encouraged them to 
secede from Virginia, forming the new state of West 

You may recall how this series of letters began. Why, in 
the land of the free and home of the brave, I wondered, do 
people give up a third of their usufructs to the tax 
collectors? Why do they let themselves be bossed around by 
every half-wit regulator with a GS number? Why do they 
allow politicians to tell them what money they shall 
use...and permit public servants to set - by decree - the 
rates at which banks borrow from the central banking 

In searching for the why, we have - so far - only stumbled 
upon the 'when.' But I feel we are on the trail of 
something big. For we are looking into the heart of 
darkness - the 'Chaos and Dark' of the human condition. 

Going back to the 'when,' we have discovered the birth of 
central banking and managed paper currency in America. 
Today, we look again at that period - when the whelp was 
still newly born and still dewy and wet...soft as a sponge 
and fragile as a campaign promise.

Let us see what sired this hound...and what bitch delivered 
it...and then, perhaps we will even get a glimpse of the 
'what' it may become...before it darts into the dense 
forgotten underbrush of financial history..

After his inauguration, had Mr. Lincoln allowed the Deep 
South to go its own way, commented The Times of London, 
"the result might fairly have been quoted as illustrating 
the advantages of Democracy, but when Republicans put 
empire above liberty, and restored political oppression and 
war rather than suffer any abatement of national power, it 
was clear that nature at Washington was precisely the same 
as nature at St. Petersburg...Democracy broke down not when 
the Union ceased to be agreeable to all its constituent 
States, but when it was upheld, like any other Empire, by 
force of arms."

The force of arms is expensive. Unlike a good business deal 
or a good marriage, a political transaction (that is, one 
that relies upon the force of arms) is never a win-win 
situation. Nor is it even a win-lose situation, such as a 
gambling wager - in which the amount won by one party is 
equal to the amount lost by the other. Instead, political 
deals involve what economists call 'deadweight losses." 
Though one side may gain an advantage at the expense of the 
other, the net result to the whole society is negative. In 
the aggregate, everyone loses.

This was true of slavery, and of the war that was 
supposedly fought to end it. 

Plantation owners - the south's antebellum aristocracy - 
were the only winners from slavery. Most whites, even in 
the South, gained nothing. Instead, they were forced to 
compete with unpaid slave labor.

In the North, whites didn't like the idea of competing with 
black laborers - even if they were paid market wages. So 
great was the Irish immigrants' indignation that they 
rioted in New York city in mid-July of 1863. In fact, the 
riot - in which mobs attacked rich white men and poor black 
men - left 1,000 people dead. It was put down on this day - 
July 17th - by federal troops coming directly from the 
battle of Gettysburg.

But even in the case of chattel slavery, the market works 
her own leveling wonders. A white man in the early 1800s 
might decide to use his $1,000 or so to buy a slave. Or he 
might buy government bonds. The return on either one would 
be about the same, according to Jeffrey Rogers Hummel in 
his book "Emancipating Slaves, Enslaving Free Men," between 
8% and 12% - or about what you might have gotten in stocks 
during the following century.

One of the big differences between a bond and a black 
slave, however, was that the bond had no legs. It didn't 
run away. 

How much would a bond be worth if it could get away from 
you and disappear down a dark alley? That was the problem 
with slavery. The South was sparsely inhabited and rich in 
swamps, hills and impenetrable thickets. Slaves often ran 
away and hid - sometimes intermarrying with local Indian 
tribes and forming whole new communities.

In the border states, runaways could make their way to the 
free states and be gone forever. So great was the risk of 
loss that in states such as Maryland, by the middle of the 
19th century, the capital value of slaves was in decline 
and slavery itself rapidly disintegrating. Who would pay 
the equivalent of $21,000 in today's money to buy an asset 
that could walk away to nearby Pennsylvania within a few 

Slavery, worldwide, was doomed in the 19th century. Even in 
Brazil, so many slaves escaped to the Amazon jungle that it 
became impossible to make a go of it. The value of slaves 
fell by 80% in mid-century and the institution was 
abolished in 1888.

Slaves would not long be a profitable investment in America 
either, without the cooperation of the entire union. The 
northern states had to agree to send back escaped 
slaves...or the 'peculiar institution' was finished.

"Slavery was doomed politically even if Lincoln had 
permitted the small Gulf Coast Confederacy [when Lincoln 
took office only a few states in the Deep South had bolted] 
to depart in peace," writes Hummel, "The Republican-
controlled Congress would have been able to work toward 
emancipation within the border states, where slavery was 
already declining. In due course, the Radicals could have 
repealed the Fugitive Slave Law of 1850. With chattels 
feeling across the border and raising slavery's enforcement 
costs, the peculiar institution's final destruction within 
an independent cotton South was inevitable."

"Slavery [is] much more secure in the Union that out of 
it," said Alexander Stephens, who would become Vice 
President of the Confederacy.

Thus, Abraham Lincoln, running for president and seeking 
votes wherever he could get them, pledged to enforce the 
slave recovery provisions passed by Congress. Northern 
abolitionists were appalled. They even suggested that the 
North should secede from the union - so that escaping 
blacks could find sanctuary north of the Mason-Dixon line.

There is no foolishness to which a man will not stoop, dear 
reader, if he has a mob at his back and a public office 
within his grasp. Instead of letting the Deep South do as 
it pleased...Mr. Lincoln decided he would tell them what to 

But Mr. Lincoln's war - like slavery - was expensive, and 
turned out to be the biggest lose-lose proposition of 
America's entire history. 

At first, the introduction of greenbacks and huge new 
demand for war supplies triggered an economic boom. "The 
farms teem, the workshops and the factories whir, and the 
bustle of trade fills the streets," the New York Times 
reported in 1863. 

But it was mostly an illusion - like the recent bubble in 
high tech. "Adjusting for inflation," says Hummel, 
"workers' wages actually fell by one-third... [and] The 
1860s saw the American economy's worst performance of any 
decade between 1840 and 1930, with real income per capita 
falling by 3%." 

Of course, that was just the beginning of the losses. The 
total cost of the war was about $6.6 billion, split more or 
less evenly between the two sides. "The North's side 
alone," Hummel observes, "was enough to buy all slaves and 
set up each family with forty acres and a mule."

Instead, Lincoln's war left one dead soldier for every 6 
slaves liberated. And it left blacks in the South as 
destitute as whites. 

It also provided inspiration for future wars. General 
Sherman, marching through Georgia as Ludendorf would later 
march through Belgium, issued an order to shoot Southern 
prisoners: "should a Union man be murdered, then a rebel 
selected by lot will be shot...In aggravated cases, 
retaliation will be extended as high as five for one."

Grant, meanwhile, decided to lay waste to the Shenandoah 
Valley. He wanted it stripped so bare "that crows flying 
over it for the balance of this season will have to carry 
their provender with them."

Hardly a single household in the South avoided the loss of 
life or property. Those in the North did little better. 

The number of people working for the Federal government 
rose almost five fold. Central banking was launched...along 
with unbacked paper money...and an income tax. And scarcely 
a single provision of the bill of rights was left intact.

"The civil war of '61," observed Harvard professor George 
Ticknor, "has made a great gulf between what happened 
before it in our century and what has happened since, or 
what is likely to happen hereafter. It does not seem to me 
as if I were living in the country in which I was born or 
in which I received whatever I got of political education 
and principles."

More on Thursday...on what is likely to happen hereafter...

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 17, 2001

Published By Tulips and Bears LLC