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| Short-Term Safety, Long-Term Problem | ||
| Why the Current Strength of US Bonds Will Be Short-Lived | ||
Stocks down...gold down...bond yields flattened...world markets roiled... And yet, all this pales in comparison to the very real world horror going on right now in a small group of islands in the Pacific Ocean. Tens of thousands of people in one of the world's most developed economies are without access to clean drinking water tonight and without power in sub zero temperatures. Families huddle together, not knowing if or when the next disaster might be visited upon them. Millions more around the world watch on with sorrow, horror, perhaps even guilt, at what they see unfolding across Japan. Some will point to the failings of man...others to the mystery of a god...and others still will simply sit and scratch their heads... "What's the reason?"..."What does it mean?"..."Why there and why now?" Before we begin to assess the financial implications of Japan's 9.0 monster earthquake, we first offer our heartfelt condolences to those who suffered this most recent expression of nature's blind wrath. Callous as it must surely seem, sometimes the only thing to do in these situations is to keep on keeping on. Carpenters keep building...engineers keep designing...scientists keep searching for cures...doctors keep administering them... And reckoners? Well, those of us with little better to offer than our thoughts and words...well, we keep on reckoning...crude and searching as our words must at this time appear... So we return to our post; to stocks, gold and bonds. Where to from here? To be frank, it's probably too early to comprehend the extent of the damage wrought by the quake in Japan with any measure of certainty. We'll have to see what comes of this in the weeks and months ahead. However, it's probably not too early to begin trying to understand what Japan's crisis might mean for long-term US bond yields. Dan Denning, the Daily Reckoning's "Man Down Under," pondered this very question in his Aussie DR musing this morning. "The Japanese are one of the largest holders of US Treasuries and continue to buy them," observed Dan, before adding, "That capital might be put to a lot better use in the coming years rebuilding from the quake and tsunami damage." Dan raises a very important point. We're seeing a flight to "safety" right now, no question. US Treasuries rallied yesterday, more or less in sync with the horrific images coming from the Fukushima and Sendai newsreels. The yield on the benchmark 10-year note briefly touched 3.2%, its lowest level this year, reflecting the "safe haven" appeal of bonds. (Bond prices and yields move in opposite directions.) But what happens when the dust settles a little and Uncle Sam wakes up to find one of the go-to buyers for his ever-accumulating debt has put in a no-show? What happens, in other words, when the second largest holder of US debt discovers he has his own, 9.0 earthquake-sized problem to deal with? According to data released by the Treasury on Tuesday, Japan held $886 billion worth of Treasuries at the end of January, the second largest foreign holder behind China. That's a big gap to fill...even by fractions. "Of course in the short term, the 'risk off' trade is bullish for US bonds and the US dollar," continues Dan. "People are cashing in their chips and storing up their cash. But longer term, the US may find it a lot harder to fund deficits without the help of at least one major foreign buyer. This will put more pressure on the Fed to monetize debt right away." What then will the Fed do? Well, exactly what the Fed always does, of course; precisely that which it shouldn't. The Fed will, as Dan points out, continue its attempt to "monetize" (read: print) away its debt. It goes without saying that this strategy is a complete non-starter, as far as any measure of logic is concerned. Academic types like to argue that a weaker currency and/or more liquidity are great ways to jump- start flailing economies. They argue that a flaccid currency gives exporters an edge abroad and that a blast of paper money stimulates spending back home. In reality, all this does is perpetuate a weakening confidence in that particular currency as a store of value and, thereby, discourage those with whom the offending government might wish to trade from wanting to accumulating them. Who, after all, wants a vault full of Zimbabwean dollars, Hungarian pengos or US Continentals? And lo! Always on the ball, Addison writes in this morning's edition of The 5, "Easy money is already having its affect in the US. Wholesale prices, which trotted upward in December and January, reached a full gallop in February." The upward-trot-to-record-gallop to which Mr. Wiggin is referring is, at least according to a story we saw coming across the wires this morning, the steepest rise in food prices in 36 years. Continues Addison, "The producer price index (PPI) rose 1.6%. Even after the usual statistical sleight of hand applied by the Bureau of Labor Statistics, the number is more than double what the Street expected. Annualized, it's 19.2%. "That's for finished goods. If you move further back in the production chain, prices for crude goods rose 3.4% last month. And February was no fluke. PPI for crude goods has risen 20.7% over the last six months. Of course, the Fed's own measure of inflation - that nebulous, periodically redefined, terminally elastic non-statistic - remains, according to the Fed itself, "subdued." Hooray! Alas, this news comes to us from an institution that actually admits - with a straight and serious face, no less - that it actively targets a 2% erosion in the value of your money per year. The Feds guarantee, in other words, that they will steal, or do their best to steal, via inflation, 2% of anything you earn or own every year for the rest of your life...or for its. That is its stated "sweet spot." It's enough to make one think of the term "greed" in a whole new light...which is exactly what today's guest essayist offers in today's column, below. Please enjoy... |
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| The Daily Reckoning Presents | ||
| Enterprise, Not Greed, Creates a Better World | ||
The problem is the indiscriminate use of the word has blurred its meaning. Those on the left use the word as an epitaph against the successful as epitomized by Sen. Bernie Sanders "When is enough enough?" he asked in his impassioned plea for raising tax rates "on the rich." But at the same time, those on the right embrace "greed" as vital to the functioning of our economy. Economist Walter Williams, for example, wrote in his essay "The Virtue of Greed," "It's greed and not compassion that gets things done." This lack of moral clarity threatens our liberty. It destroys our ability to distinguish between theft and the pursuit of happiness; between vice and virtue, and undermines our ability to be a self- governing people based on the norms of ethical behavior. We instinctively know that greed is bad for society and see it in its original meaning as a vice, an action that should be condemned in all of its forms. What, then, should we make of 13th century theologian Thomas Aquinas' claim: "...one man cannot over-abound in external riches without another man lacking them"? Is the desire for wealth, or the accumulation of wealth, per se, evidence of greed? In the time before capitalism, the aristocracy for the most part lived high by taking from the poor. Even today in some countries such as North Korea where the "dear leader" does not lack any human comfort while most of his country faces starvation, this statement holds true. But many of the world's richest - such as Microsoft's Bill Gates, Google's Sergey Brin and Larry Page, and even the NBA's most valuable player for the past two years, LeBron James - gained their wealth by making valuable and/or unique contributions to society, either through the products they invented, or the entertainment they provided. They became rich, not at the expense of others, but through voluntary commercial exchanges. Calling those who are wealthy "greedy," solely because of their wealth, or to suggest that the human drive for a better life is the same as greed, muddles our thinking. Muddled thinking is dangerous because it can lead to policies that punish both virtue and vice, that interfere with our inalienable right to pursue happiness, and lead to more, not less, poverty. For guidance on what class of actions constitutes greed, we can start with three of the Ten Commandments, which prohibit killing, theft and lying. These "shalt nots" deal with the use of coercion or deception to advance one's well-being at the expense of another through involuntary or fraudulent exchanges. This more narrowly focused notion of greed is coherent with the law, which since antiquity has penalized murder, theft, embezzlement, extortion and fraud. I could find no similarly evocative word for virtuous behavior that may generate extraordinary wealth for those who contribute to our society and gain their riches through voluntary exchanges. The word enterprise, however, is appropriate because it acknowledges the hard work and commitment required to achieve extraordinary success, and is therefore worthy of our praise. This distinction between greed and enterprise is consistent with the powerful negative implications associated with greed. Greed is a charge that implies sinfulness, a morally corrupt character, a crime against society at large. It should not be used to demonize the desire or drive for wealth, per se. Rather, it should be reserved for those who use coercion or deception to gain their wealth by reducing the wealth of the community at large. Greed implies a negative sum game. By contrast, enterprise implies a positive sum game. Those who achieve their goals through enterprise contribute to the wealth and opportunities, incomes and living standards of others. Google's founders realized their wealth through the hard work and creativity necessary to transform their vision of making all of the content on the web easily accessible for free into reality. In the process, they have created a company with a market value of $200 billion and enriched the lives of not only their employees, but also millions of people who use their search engine every day. They have earned our praise and honor. Their wealth is a just reward for their virtue. Knowing the difference between greed and enterprise empowers us to distinguish clearly between those who achieve wealth through theft and deception, such as Bernie Madoff, the perpetrator of the largest Ponzi scheme in history, and those who achieve their wealth by expanding the opportunities of others, including those who are successful in their chosen profession or field of play. It is also consistent with the observation that greed is demonstrably bad for capitalism. The fraud and deception - e.g. greed - associated with the collapse of WorldCom and Enron in 2001, for example, were associated with a sharp decline in the stock market as investors began to question the integrity of financial statements in general. With this distinction, we also can see that politicians too can be greedy - if not for money through corruption, then for the power to impose their will through the coercive power of the state. Taxes, rules and regulations, corporate bailouts, subsidies, protection from competitors and transfer payments are all one-sided exchanges and when excessive, reduce the wealth of our society. Finally, this distinction warns that enterprise can morph into greed. Sometimes the desire for success or wealth can cause us to cheat, whether it be an athlete who uses performance-enhancing drugs or an executive who uses accounting tricks to overstate short-term earnings in order to increase his bonus. Companies that use political connections as part of a strategy to cripple their current or potential competitors can also be considered greedy because their success is now at the expense of customers in that market. We can test the distinction between greed and enterprise by substituting the word "enterprise" for "greed" in the fictional character Gordon Gecko's famous speech from the 1987 movie Wall Street: "Enterprise, for lack of a better word, is good. Enterprise is right. Enterprise works. Enterprise clarifies, cuts through, and captures, the essence of the evolutionary spirit. Enterprise, in all of its forms; enterprise for life, for money, for love, knowledge, has marked the upward surge of mankind and enterprise, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA." Ask yourself: Doesn't this make more sense than the original? Regards, Charles Kadlec, for The Daily Reckoning |
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