Agora Financial’s Rude Awakening

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Ouzilly, France

• The aftermath from five summers of credit love,
• The anatomy of “zoo capitalism” – how so many got suckered,
• The Reserve doors are open…for now, the riddle of the traveling
  toilet seat and more…

Joel Bowman, repenting from the Middle East…

Before we get into today’s column, we must apologize for a faux pas in our
last issue. In our rush to get the Weekend Edition to you, we forgot to
hyperlink a vital piece of information.

We have a limited number of seats available for a free subscription to Dan
Amoss’ much anticipated Strategic Short Report. It’s part of the Agora
Financial Reserve countdown, which expires on Jan 1. The popularity of the
offer has seen our inbox flooded by anxious readers, asking if our mishap has
cost them the opportunity to secure themselves a position.

Luckily for you (and us) the offer is still open for a short while…but
you’ll have to hurry. If you’re interested, take a few minutes before you get
into today’s column to review the details. The (hyperlinked) offer is right
here. Agora Financial Reserve – Complimentary Options Service Offer.

And now, today’s Rude. Enjoy…

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To Err is Human
By Bill Bonner

Mistakes are always being made. In a properly functioning economy, these
errors are made…and corrected. People go broke. Investments go bad.
Projects are cancelled…discarded…and rejected.

But in the last quarter century, interest rates were generally falling. It
was a very forgiving economy. Mistakes were still made. But the cost of being
wrong went down. You could pay more for a house than you should have
paid…but no problem; you could refinance at lower interest! And then, the
price would go up – problem solved. Or, you could overpay for a stock. Again,
falling interest rates were generally pushing up stock prices – you almost
couldn’t lose.

Then, in the five years from the summer of ‘02 to the summer of ‘07, mistakes
practically vanished. People might have wanted to go broke – but the credit
industry wouldn’t let them. Central banks and the lenders kept showing up
with more money! You could buy a house…or a Structured Investment Vehicle;
no matter how dumb you were, you’d be rescued by easy money and rising asset
prices. You might even look like a genius.

Looking at the economy itself, as the flood of money gushed in…mistakes
disappeared beneath the surface. Typically, in the United States, there was
about one quarter of correction – with negative growth – to every four or
five quarters of expansion. But more recently, the ratio of correction to
growth fell to only one quarter out of every 19. Are we approaching the
perfection of the human race, with fewer errors than ever before…or are
there a lot more mistakes in need of correction?

We will not leave you on the edge of your seats. An unanswered question is
like an unconsummated marriage; you have the burden of it without the
satisfaction. So here it is:

Instead of fewer errors in the last six years, investors made more of them.

It is not from success that we learn, but from failure. So, we are grateful
to the Soviet Union. It showed what you could do with central planning and
price controls. At first, prominent economists in the West believed the
numbers coming from Moscow. Then, they noticed that the figures were a little
fishy. Finally, with the Soviet economy on the brink of collapse, they
realized they had been bamboozled. The Soviets had managed to create a value-
subtracting economy. They took raw materials from the ground…added labor,
organization, skills and capital…and transformed them into finished
products – which were worth less than the raw materials themselves! The
harder they worked, the poorer they got.

They weren’t the first to prove that price controls don’t work. Every time
they are tried – by everyone from Emperor Diocletian to Richard Nixon to
Robert Mugabe – the result is disaster. Why? Because controlled prices are
liars. They will tell you whatever you want to hear; they mislead investors,
businessmen and consumers.

Once, almost three decades ago, we were on a plane from Moscow to Minsk, in
White Russia. Seated next to us was a young woman with a toilet seat on her
lap.

“What are you doing with the toilet seat,” we wondered.

“Oh…I couldn’t find one in Minsk. So, I went to Moscow to get one.”

Further investigation showed that price controls had caused toilet seats to
disappear from the market in Minsk…while they had reduced the price of an
airline ticket to about $10. The young woman did the reasonable thing, under
the circumstances. So did the Soviet economy; it self-destructed a few years
later.

Western economists love to tell tales like this. It makes them feel superior.
But few notice that their own central banks control the most important price
of all – the price of credit. Nor do they notice that an artificially-low
price of credit caused an entire generation of Americans – and Englishmen,
too – to make errors. They borrowed too much and spent too much. So great
were these errors that their entire economies started walking backward –
destroying wealth for the average person, subtracting value from Americans’
houses…wages…and other assets.

Yes, it’s true. The average person in America is poorer now than he was five
years ago…and maybe even poorer than he was 30 years ago. As we have
pointed out many times in The Daily Reckoning , he has more debt…higher
expenses (prices of food and fuel have soared)…but he had more or less the
same real income.

How is it possible for a booming economy to make people poorer? Well, that is
what mistakes are all about. Setting the price of credit too low, the feds
caused a whole generation of Americans to misjudge how rich they were. They
did what people do when they think they are richer than they really are –
they over-spent. Over-borrowed. Over-leveraged themselves. In short, they
over-did it.

And even if they saw they weren’t actually richer…they believed the
promises of modern ‘zoo capitalism.’ Since the Reagan/Thatcher revolutions,
people have come to believe in a new kind of capitalism – in which the
dangerous beasts were all behind bars. It was Capitalism Without
Fear…growth without recession…boom without bust…creation without
destruction. It was capitalism presided over by central bankers – with the
power to set the price of money wherever they want. Deficits didn’t matter,
people believed; Dick Cheney said so. It was capitalism without mistakes,
where no matter how stupid you were…no matter how high you reached…or
whatever dopey thing you jumped into…you landed in honey.

It was almost too marvelous.

[Joel's Note: Bill Bonner is the founder and editor of The Daily Reckoning .
He is also the author, with the 5’s Addison Wiggin, of the national best
sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st
Century and Empire of Debt: The Rise of an Epic Financial Crisis .

Bill’s latest book, Mobs, Messiahs and Markets: Surviving the Public
Spectacle in Finance and Politics is available now by clicking here:

Mobs Messiahs and Markets

—- The Strategic Short Report: Complimentary Offer —-

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Rude Endnote: If you would like to share any thoughts on misspent riches,
miscalculated wealth or flying toilet seats, please send them to the address
below.

Cheers,

Joel Bowman
Rude Awakening

aussiejoel@the-rude-awakening.com

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