The Daily Reckoning

A Torrent of Darkness, Part II

The Daily Reckoning

London, England

Wednesday, June 28, 2006

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*** With so many dollars around, the odor of money is overpowering...using
the war to get something for nothing...

*** Wealth Without Work...you never know what's waiting around the
corner...

*** Don't get caught up in the inflation worries - what we might have is
the recipe for deflation...and more!

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Frederick the Great was once asked why it was that he chose his officer
corps only from the Junkers of Prussia, rather than other groups. Why not
a clever baker's son from Dresden? What's wrong with a solid farmer from
Pomerania?

"Nein," he replied, explaining his preference for the Junkers, "Because
they will not lie and cannot be bought."

Great empires depend on a reliable professional class of military
officers, administrators and businessmen. Britain had them when it ruled
the waves. They came out of the public (we would call them private) school
of "Tom Brown's School-days," and were packed off into the Her Majesty's
civil service. Many were incompetent. But few were dishonest.

America never really had a specific class of civil servants; the place was
always too big and too mobile. As good a military man might spring from
the coalmines of West Virginia as from the citadels of the East Coast
elites. So might a good businessman arise from the cattle ranches of Texas
as from the counting houses of San Francisco. The history of World War II,
for example, is the tale of how they came together and got the job done.
They too were often hopelessly naïve and incompetent - compared, say, to
the more experienced Germans. But very few stole. Very few lied. Very few
shirked, ducked, or jived.

But now, more than half a century later, they have all got the scent of
the dollar floating in their nostrils. The fumes of it seem to intoxicate
them; they'll say anything to catch the smell of the green. A heavy
whiff...and they're ready for an offer.

There are so many dollars around; the odor of money is overpowering.

Thus, we hear the stories of outrageous executive compensation in America.
They are no Junkers. Instead, they pack "compensation committees' with
cronies and crooks who throw them juicy contracts. They juggle quarterly
earnings and pull out bigger bonuses from the hat. They twist the numbers
so much you'd think they worked for the U.S. Labor Department - where, in
the throes of what once was quaintly called "public service," we find
other figure-benders at work, bamboozling the public.

And even out on the periphery of empire, where U.S. soldiers risk their
lives, the incorruptible Junkers have died out. According to the press
reports, the lure of money is irresistible. Billions of dollars are being
squandered. Sweetheart contracts with Bush supporters, bids that are
rigged or jigged, products never delivered, jobs never completed...or even
begun. It is as if the money-grubbers realize that the war were not real,
and use it only another chance to get something for nothing.

Back in the homeland, the common man has picked up the scent, too. He has
sniffed his way to Wealth Without Work in the form of housing price
increases. He does not have to build a better mousetrap. He no longer
needs to work harder or save more. Honesty doesn't seem to help him. Can
he be bought? Are you kidding? It is just a question of price. As long as
house prices keep rising 10% per year, anyone can have his vote. And so,
house prices rise, and he takes the money and binds himself - like slave
to master, like knave to lord - to mortgage payments, Social Security and
federal handouts. He is no sturdy, independent Junker. He cannot afford to
be. Instead, he too has become a Fed-watcher, for he knows that another
couple of rate-rises will wipe him out.

But every bad thing finally comes to an end. That this too will pass we
don't doubt. How it will pass and what will pass with it, we wait to find
out.

More news from the Desidooru Saloon...

---------------------

Justice Litle, reporting from Reno, Nevada:

"The takeaway from this rambling is that private enterprise developments
are sowing the logistical seeds for the next evolutionary step in the
global financial system."

For the rest of this story, see our blog:

Evolution in Global Finance
http://www.dailyreckoning.us/blog/

---------------------

And more views from Mr. Bonner...

*** Has it been four years ago already? Are we really that old?

It seemed so simple back then. We watched the bubble in Japan pop at the
beginning of the '90s. Then, we watched as the U.S. stock market, led by
techs, repeat the same pattern. Every excess, absurdity, and extravagance
that had made fools of the Japanese made cretins in America - only 10
years later.

Come the year 2000 and we thought we knew what would happen next. In fact,
we were so sure of it we wrote a book arguing that the United States would
follow Japan's example...with a long, slow slump that would take stock
prices down 80% and make consumer prices fall and push the economy into
recession.

Everything that should happen eventually does. But fortunes are lost
betting when and how. The market can fail to do what it is supposed to do
longer than you can stay solvent.

In the event, tech stocks did fall 80%. The Dow was going down, too, and
the U.S. economy went into a recession. But then, peculiar and irregular
commandos struck the World Trade Center towers in New York with commercial
jets and the American public with panic. George W. Bush and Alan Greenspan
joined forces to unplug the biggest gush of liquidity the world has ever
seen. Taxes were cut. Spending was increased. And the Fed cut the price of
money to below the prevailing rate of consumer price inflation. The
resulting tide of cash and credit swirled all boats up.

But did the feds actually side step the correction the country needed? Or,
did they just postdate it and make it worse? Inflation is now the big
worry, say the papers. We say, don't believe it.

*** Robert Reich, Labor Secretary under Clinton, seconds us.

"Deflation, not inflation, is what Ben Bernanke should be worried about,"
Reich says.

"Each generation, in its determination to avoid the nightmare it does
remember, runs the danger of over-reacting, and thereby bringing on the
opposite trauma. A generation ago, economic policy makers paid too little
attention to inflationary forces then building in the American economy.
Eventually, Paul Volcker had to break the back of inflation by raising
interest rates sky high. That put the economy into a severe recession. Now
Bernanke and company are paying too little attention to deflationary
forces building in America and the global economy.

"Bernanke fears that today's economy resembles the one that began to
overheat the 1970s. But he's wrong. Labor unions today don't have nearly
the power they did then to get wage increases. Big companies don't have
nearly the power they did then to raise prices. Global wage competition is
keeping a lid on American wages, just as global price competition is
pushing down on American prices. Meanwhile, fancy computer software is
allowing rivals all over the map to erode almost anyone's market share.
Who's going to raise prices in this environment?

"What's more, there's no reason to raise prices. Productivity has been
soaring over the last five years while the median wage has been stuck in
the mud. Wages, remember, constitute about 70 percent of the cost of doing
business. So how can price pressures be building? Bernanke and company
worry the U.S. labor market is heating up. They're wrong here, too.
Despite what look like rosy employment numbers, a smaller proportion of
the American labor force is employed today than it was in 2000. Millions
of people don't show up on the unemployment rolls because they're too
discouraged even to look for work.

"The price increases we're now witnessing are not due to excess demand
over limited productive capacity, which causes inflation. They come mainly
from soaring prices for energy and raw materials. These commodities are
being bid upward because of China's rapid growth, but take a closer look
and you see something else going on. Much of the increase in commodity
prices is being driven by speculators who expect prices to continue to
rise. In other words, part of what we're seeing are speculative bubbles.
Such bubbles can burst any time. The fact is, the global market is glutted
with productive capacity, and that's not chiefly because of the huge gains
in American productivity. If you really want to see a glut, take a look at
China.

"If anything, there's too much capacity relative to demand. This is a
recipe for deflation. Prices can begin to drop because buyers hold off,
expecting further price decreases. It happened in Japan in the 1990s. It's
already starting to happen in certain housing markets in the United States
that had been red-hot but are now cooling so fast home prices are
dropping. Deflation is often accompanied by stagnant or falling wages,
which make it harder for consumers to afford to buy. Look what's been
happening to American wages.

"The Fed and other central bankers around the world are raising interest
rates because they're fighting the last war. But they already won that
war. Inflation is no longer our biggest threat. They ought to be worried
about the war before the last one, and the specter of deflation. They're
in danger of losing that war even before they know they're in it."

Maybe we were not wrong, just early. Pushing up interest rates to fight
inflation and "load the gun," the Bernanke Fed could help trigger the
Japan-style slump we saw coming five years ago.

*** A dear reader offers a look into the not-so distant future...

"A bit of clarity seems to be boiling out of the soup," he writes.

"The fed bares its chest to fight inflation (hasn't anyone
noticed-inflation is already here, how can they be hiding it in reports,
anyone who buys anything must certainly see huge inflation in everything
that is purchased).

"They raise rates 2 or 3 times more (almost stalling the economy). U.S.
debt, and thus U.S. dollar become much in demand as 'emerging markets'
looking for some Rock of Gibraltar flock to the U.S. dollar and the
relatively high rates.

"Now as the economy starts grinding sideways at best...the Fed prints a
few trillion dollars to 'pay debt' and then everyone in the world is left
holding a bunch of dollar denominated instruments that are now suddenly
worth 20% to 30% less due to dilution.

"Of course, they go on another round of interest rate drops to spur the
economy, dropping demand for T-bills, and increasing demand for
stocks...but of course, the E part of P/E is already challenged. So now
what? Excess liquidity going into art?

"Nearly simultaneously, ARMs are up, people start struggling and
defaulting on loans and being just tight on money. Now housing begins
being sold by banks and in fire sales to avoid bankruptcy. Those who don't
default will be upside down on their mortgage, and even the remaining
'value' of the too big house, too quickly depreciating and too expensive
to maintain, will have lost 20% to 30% of its value (related to U.S.
dollar)

"Looks like a great plan to me, I think it can work. It gets the rest of
the world to share in some of our costs as world policeman, also cost
shares our excesses of living beyond our means, and then puts the middle
and lower class into 30 years of indentured servitude as they are locked
into an upside down house.

"Only trouble is turning all my USD denominated stuff into other stuff,
and quickly."

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---------------------

The Daily Reckoning PRESENTS: First there was Peak Oil, and now,
especially with the release of Al Gore's Inconvenient Truth, the
phenomenon that has many people worried is global warming. While it is
easy to brush this off as gloom and doom, Byron King explains that just
because there are problems in our future, it doesn't mean there are no
viable solutions - or even ways to make a little money...

A TORRENT OF DARKNESS, PART II
by Byron King

[Ed. Note: Whiskey and Gunpowder's intrepid correspondent, Byron King,
will be speaking at the Agora Financial Wealth Symposium in Vancouver,
British Columbia on July 25-28. For a sneak peek of the topics Byron will
cover, see the essay below. And be sure to secure your spot at the
conference soon - spaces are filling up fast!

Agora Financial Wealth Symposium - July 25-28
http://www1.youreletters.com/t/378986/12296005/788458/319/

As I have mentioned before in articles in Whiskey & Gunpowder, gloom and
doom is our stock in trade at Agora Financial. But our distinction at
Agora Financial is that we like to think we do gloom and doom better than
anyone else. That is because not only do we present you with the problem,
we offer you some semblance of a solution, even if it is just investment
advice. (Hey, don't knock it just because you can only make money off of
it.)

Up until lately, it has been easy for a large segment of the political and
intellectual leadership in the developed world to look down their
collective noses and to dismiss the "global warming crowd" as a bunch of
fringe kooks. For example, for many years, it has been possible for some
segment of the respectable scientific community to say that increased
levels of carbon dioxide were not a major threat because the world's
oceans would absorb most of the excess CO2 molecules. But on this subject,
the scientific jury has in recent times been walking back into the
courtroom, and those jurors do not look happy. Pretty soon, the accepted
scientific verdict will be that global warming is real and that carbon
dioxide buildup is among the guiltiest of guilty parties.

Thus, I believe that in the not-too-distant future, the big leadership of
the world is going to awaken to the seriousness of what I have just told
you about global warming in the previous few paragraphs. What do I mean
when I say "big leadership"? I mean all of it, the top honchos, whether
U.S. or Chinese or Russian or European, or whomever. The government of
Sweden is already there, with its active commitment to eliminate Sweden's
dependence on oil within 20 years. The other side of that
eliminate-oil-dependence coin is an overt Swedish commitment to mitigate
global warming.

When this new consciousness dawns, almost overnight, the collective
national policies of reducing, mitigating, and controlling carbon
emissions are going to cause some sectors of global manufacturing to
become the leading growth industries in the history of mankind. Why?
Because it will have to be this way. Not controlling carbon dioxide
emissions will be tantamount to endorsing the inundation of large swaths
of the Earth's dry land, and the destruction of large segments of mankind.
Like I said before, gloom and doom.

So if you are an investor, can you spot the trend? Very simply, within the
next few years, we will see distinct movements in world energy markets.
There will be less investment opportunity in the growth of energy supplies
from sources that emit carbon dioxide and other greenhouse gases. And
there will be more investment opportunity in the growth of energy supplies
from sources that do not emit greenhouse gases. As one particular example,
the production and installation of windmills in the not very distant
future will simply explode.

The current worldwide production of electricity from windmills breaks down
along lines that over 86% of world generation capacity is split between
Europe (72%) and the United States (14%). But wind power still generates
only 0.7% of the world's electricity. This will have to change, and change
dramatically, as it dawns on leadership cadres and entire populations that
global warming is a reality.

Already, nations as diverse in traditional energy sources as Iran and
Costa Rica are investing in wind power. A nation such as Jamaica, favored
by year-round trade winds, could reduce its use of imported oil by as much
as 80% or more if it made an aggressive effort to install a base of wind
power for electricity generation. And as another example, and according to
figures in the recently published 2006 edition of the BP Statistical
Review of World Energy, in China, wind power generates less than 1% of
electricity, but use of wind power has increased by over 28% a year since
1995.

The overall targets in Europe for wind power growth are substantial, even
without taking into account Sweden's ambitious program to move away from
fossil fuels. By 2010, wind power is projected to deliver 33% of all new
electricity generation capacity and provide electricity for over 86
million people.

The offshore wind turbines currently on the market can operate at a higher
efficiency than their land-based counterparts. With blade rotors that
sweep an area as large as a football field and an overall reach as tall as
a 30-story building, these offshore wind turbines can be developed in
large-scale " wind farms." These wind farms can provide power for large
coastal population centers, where available land area is limited. A
100-megawatt wind farm over the course of 20 years will displace the need
for nearly 1 million tons of coal or nearly 600 million cubic meters of
natural gas.

Using the installed windmill base of one manufacturer alone as a basis for
comparison, using wind turbines, versus traditional fuel generation,
provides the benefit of keeping more than 11 million tons of greenhouse
gases from being emitted each year. This company's installed base of wind
turbines provides the same amount of electricity annually needed to power
about 1.5 million U.S. households. These turbines can generate an amount
of electricity comparable to the energy produced by 9.5 million barrels of
oil.

Thus, there is no question but that wind power, with its ability to reduce
the need to emit carbon dioxide into the atmosphere, is an investment
opportunity for the future. We will be discussing this in greater detail
in future articles in Whiskey & Gunpowder, and in other Agora Financial
publications.

Until we meet again...in Vancouver, best regards,
Byron W. King
for The Daily Reckoning

P.S.: The title of this article comes from the first line of the classic
romantic poem by Alfred Noyes, "The Highwayman," published in 1906. "The
wind was a torrent of darkness among the gusty trees," wrote Noyes, in
telling the tale of a mounted man who robbed people on the roads of
England. The poem has nothing to do with burning coal or harnessing wind
power, but I liked the ring and flow of the words in the context of this
topic.

Editor's Note: Byron King currently serves as an attorney in Pittsburgh,
Pennsylvania. He received his Juris Doctor from the University of
Pittsburgh School of Law in 1981 and is a cum laude graduate of Harvard
University. He is a regular contributor to the free e-letter, Whiskey and
Gunpowder, which covers resources, oil, geopolitics, military history,
geology and personal freedom. To get your free subscription, click below:

Whiskey and Gunpowder
http://www.whiskeyandgunpowder.com/Sub/DR.html

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Today's Daily Reckoning - A Torrent of Darkness, Part II