addisonwigin_writingsamples

7/28/2019 AddisonWigin_WritingSamples

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Contents:

When Cooler Heads Prevail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

(Foreword to Chris Mayers Invest Like a Dealmaker: Secrets From a Former Banking Insider)

Foreword to Nathan Lewis Gold: The Once and Future Money . . . . . . . . . . . . . . . . . . . . . 7

Promises Will Be Broken . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8(registeredrep.com)

The Era of Fictitious Capitalism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17(dailyreckoning.com)

The Perils of Living for Today. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21(baltimoresun.com)

The Mystery of Wyndclyffe. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26(dailyreckoning.com)

The Housing Bottom, Lehman Crisis, Fannie and Freddie,The Best Countries, Chinese Stocks, and More! . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29(Agora Financials 5 Min. Forecast)

The Demise of the DollarAnd Why Its Even Better for Your Investments(Chapter 4) . . . 33

Could This Economic Crisis Nudge Americans Into a New Era of Responsible Saving?. . . . 35

Addison Wiggin has been an avid student, writer and commentator on financial markets and governments fornearly two decades. Through that time, he has acquired a unique macro-economic and historical perspective,authored three New York Timesbest sellers and founded a number of investment newsletters and on-line dailies.His body of published work has been translated into French, German, Spanish, Chinese, Japanese, Koreanand Russian.

Below are a few representative essays, op eds, forewords and daily excerpts of his writing:


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In October, the Congressional Budget Office estimated that the private retirement plans of Americans including 401(k) and IRA accounts dropped by some $2 trillion, or 20 percent in the 15 months endingSeptember 30. Yes, those are big, scary numbers, but the retirement savings crisis, as many call it, is actuallyworse than that. And as you probably know it wasn't caused just by the recent market meltdown thatsaw a record-breaking 18 percent drop in the Dow Jones Industrial Average and the S&P 500 in just oneweek's trading.

The United States has a severe savings problem, one so hardwired into our culture that it is institutionalized.Youve heard that before, perhaps you've even warned your clients about it. The bottom line is that if you are

using promised future cash flows from a client's defined-benefit plan in your retirement calculations employer-or government-sponsored you had better be careful. Retirement promises will likely be broken and soonerthan you think. In the private sector, more and more DB plans are shutting down or reducing their payoutsas future obligations are overwhelming companies' ability to pay. The government itself is also facing sometough times ahead: It is running historic deficits and, recently, the national debt has been growing at a pacenever before seen in this nation's history. (And that's saying something.) The promises on the books forfuture payments from entitlement programs from Social Security to Medicare already represent $53trillion. That works out to about $175,000 per person.

The trouble is, we haven't got $53 trillion. Social Security trust funds are a misnomer, and, in fact,they're an oxymoron, says Peter G. Peterson, a former secretary of commerce and chairman of the

Blackstone Group. They shouldnt be trusted and theyre not funded.Peterson and many other Wall Streeters, legislators and policy wonks have been singing this refrain for

some years. But nothing much has changed; governments continue to spend more than they take in, as doprivate citizens. Peterson, Warren Buffett, Alan Greenspan and many others appeared in my film,I.O.U.S.A., a documentary released this summer that outlines the fiscal challenges the U.S. faces as thenearly 80 million baby boomers begin to retire, to articulate the coming problem.

When we started researching the film (and book), we realized most Americans dont know how bad thiscountrys fiscal situation actually is. The only way to fix this mess is to demand fiscal responsibility fromour leaders and from each other. But lets face it: Most Americans would do better if they simply controlledtheir own personal spending, saved more and invested wisely for their own futures. On this issue, the financialadvisory community owes the investing public real leadership.

The message is ugly, but necessary. David Walker, a former Comptroller General and head of theGovernment Accountability Office, told me, By the time todays college graduates are ready to retire 40years from now, the only things our government will be able to pay for are interest on the federal debt andsome of the Social Security, Medicare and Medicaid benefits. All other parts of the federal government willbe closed and out of business. (Petersons nonpartisan Concord Coalition backed the film and Walker isCEO of The Peterson G. Foundation.)

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Promises Will Be BrokenNov 1, 2008, By Addison Wigginhttp://registeredrep.com/investing/altinvestments/finance_promises_promises_1101/index.html


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IMPAIRED PENSION PLANS NOT JUST FOR AIRLINE EMPLOYEES

You might warn clients that the crisis has already started in the private sector. Yes, it is true that promisesmade have been broken, says John McKeehan, an advisor with National Retirement Partners, in San JuanCapistrano, Calif., a broker/dealer and an RIA with about $50 billion under management. CorporateAmerica has frozen future benefit accruals for even the largest employers or have converted pension plans tocash balance plans which have the potential to significantly reduce benefits for older, long-serviceemployees. In addition, retiree health care plans have been virtually eliminated, putting the onus on Medicare.

In all, over 3,600 American corporations have terminated their pension plans since 1974, including somebig steel makers and a slew of auto parts companies. (See table on page 27.) Plenty more are expected tofollow in this financial mess. (All eyes are on the auto industry.) Sometimes companies are blindsided byunexpected problems for instance, no airline could have foreseen a terrorist act on the scale of 9/11 andthat it would scare droves of people away from flying for years. But often, these shortfalls occur because ofmanagement promises that were based on unsustainable projections for future growth.

Which is why some advisors discount the amount a pension plan might actually throw off in the future.

Some advisors tell high-salaried clients to discount future annual benefits by 30 percent to 50 percent or more. You almost have to act like a bondholder, analyzing the financial health (and not just the businessfundamentals) of the company for whom your client works. For financial advisor Robert Kramers clients,an impairment or loss of a pension is the big fear. And a reality. Thats because Kramer, executive vicepresident and managing director of Cleary Gull, in Milwaukee, specializes in airline pilots (of his 550clients, about 450 of them are American airline pilots).

When a private DB plan is terminated, the Pension Benefit Guaranty Corp. (PBGC), a government entitythat protects the pensions of 44 million American workers and retirees in 30,000 DB plans, takes over.While it is a backstop, pre-retirees can expect a much smaller annual benefit as a result. On average, thePBGC pays about 84 percent of retirees pensions. But if you make too much money as did manyUnited Airlines, USAirways and Delta Air Lines pilots when those companies filed for bankruptcy and reor-ganized you receive a fraction of your promised annual benefits. Obviously, the discount is different foreach employee, but pilots, who on average make more than other airline employees, usually get just abouthalf of what theyd expected or even less.

If youre an airline pilot making $250,000 a year and your calculated lifetime benefit is $150,000, youregoing to take a hit, Kramer says. A big hit. Consider this real example of a Cleary Gull client: A Unitedpilot was expecting $150,000 annually but was told by PBGC, which had assumed the United pension,that hes only guaranteed $34,000; he may get more, but thats all PBGC can guarantee him. Kramer saysthere is no across-the-board fix for everyone and that savings goals and spending projections are unique toeach client. The flipside is that you have to be careful about forcing clients to live a parsimonious existenceneedlessly. But, on the other hand, Kramer says, We tell all of our clients to be careful and not depend toomuch on contributions to a DB plan. What if it isnt there in the end?

One shouldnt necessarily count on PBGCs solvency, either. Because of economic contraction in certainindustries that traditionally pay out pensions, inadequate minimum contributions and other challenges,PBGC has been in a deficit position for most of its existence [since 1974], Charles E. F. Millard told aU.S. House of Representatives committee this September. While PBGC had an accumulated deficit of $14.1billion at the fiscal year end of 2007, the agency is fine for now. Said Millard: Fortunately, the current

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deficit does not pose an imminent threat; PBGC has sufficient funds to meet its obligations for a numberof years. Nevertheless, over the long term, the deficit must be addressed.

Millard also told the assembled House committee members that even by PBGCs own 10-year forecast, itwould be in the hole by about $10 billion a year, on average. Even more significantly, the model indicatedthat there was only a 23 percent chance that PBGC could reach full funding at the end of that 10-year period.

PBGC is funded by premiums from corporate pension plans. As the premiums rise, says McKeehan,more DB plans are terminated. This becomes a death spiral. Today, there are no provisions for funding thePBGC with additional tax dollars.

In short, as the private sector goes, so too will government backstops such as PBGC. The problem mayeven be worse, more widespread than just individual agencies. The one sector where DB plans haveremained is for government workers, but those plans are in jeopardy as state and county revenues comeunder intense pressure, says McKeehan.

Many state and local governments obligations have swollen even as their options for raising money have

narrowed (think of Californias current troubles funding its operations). Not even the almighty federal gov-ernment is immune. (One wonders how long Treasuries will be considered risk free?) The federal government,as we all know, is groaning under war debt and future entitlement spending. On a gross level, the U.S. federaldebt passed the $10 trillion dollar mark on October 9 of this year, several months before projections. Butthats just the beginning. Passage of the Paulson rescue plan required the national debt ceiling to be raised for the second time in 2008 to $11.3 trillion. When the debt breaks that threshold, it will represent morethan 70 percent of the nations GDP. In the depths of the Great Depression, the governments debt-to-GDP level only reached 45 percent. Never in the history of the nation has the U.S. faced such high levels ofdebt during times of relative peace.

SOCIAL INSECURITY

By 2017, just nine short years from now, the Social Security Trust Fund will itself begin running a deficit.Congress will no longer be able to tap Social Security to pay its bills. In fact, All we have in [the trustfund] is a bunch of liabilities, Peterson told me.

At the current rate, its inevitable: Most Americans are going to have to rethink what they expect fromtheir government. Do politicians need to be held accountable for the promises they make during electioncampaigns? Seems like a no-brainer, but individuals need to take responsibility for their own financialfutures, too. Private citizens are going to have to plan better, save and invest prudently. For the first time in ageneration, Americans are going to have to readjust their expectations of what the government can provide,and learn how to pay for what they expect the government to.

The answer is probably not higher taxes. The government would have to raise income tax rates across theboard by about 2.5 times todays levels to close the financing gap. Besides, in the future, there will be fewerworkers to tax. Along with much of the Western world, the United States is entering a demographic trans-formation to an older society. Between 2010 and 2030, the 65-and-older population will spike. By 2030,when the last of the baby boomers turns 65, nearly one in five U.S. residents will be 65 or older. The per-centage of the population in the working ages of 18 to 64 is projected to decline to 57 percent, from 63percent today.



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The facts arent Democrat or Republican, says Walker, the former U.S. comptroller general, the factsarent liberal or conservative the facts are the facts. Our financial condition is worse than advertised. Weneed to act soon because time is working against us.

Ultimately, it means an unprecedented level of belt-tightening for government and citizens alike.Americans are going to have to begin saving for their own retirements out of their regular earnings ratherthan just counting on, say, a home-run appreciation of their houses.

Generally, people dont change their behavior until theyre forced to. With respect to the fiscal crisislooming out there in the future, former chairman of the Federal Reserve Paul Volcker says in I.O.U.S.A.,Well see whether a democracy can deal with an obvious problem thats going to be present in not toomany years. The earlier we take action to deal with it the better.

For now, McKeehan, senior vp of National Retirement Partners, says, Our advice to clients is to assumethat there is risk to these plans solvency and to supplement retirement savings through DC plans or IRAs.While there is concern that deferring todays income for retirement may result in taking distributions in ahigher tax environment, the employer matches attributed to these plans is a known and clearly mitigates

that risk.



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The very real need to address the nations immediate economic crisis has drowned out meaningful debateon how to address the much more serious long-term fiscal challenges the nation faced before the collapse ofhousing, credit and stock markets. Because of the economic crisis and the splurge in federal spending duringthe last year, the terms of discussion from just a year ago have changed drastically.

The Obama administration has claimed the right to use extraordinary measures spending a lot ofmoney, and spending it now to get the economy back on track. But the economy was on the wrongtrack even before the crisis emerged. There's no rainy day fund, just borrowed umbrellas. Issues that willmatter most over the coming decades for our nation's macroeconomic well-being large and growingentitlement programs, an inefficient and unfair tax system, and others are off the table (or, at best,tucked away on a little table in a side room).

The real nub of the problem is cultural and political as much as it is economic: It's a state of mind thathas come to envelop America during the waning decades of the 20th century. One could call it the tyrannyof the here and now. Or, in the words of a 1960s song by the Grass Roots: Sha-la-la-la-la-la live for today,and dont worry bout tomorrow. But unless we embark on long-term reform, when AIG and GM arelong forgotten, well still be confronted with tens of trillions of dollars in unfunded liabilities for Medicareand Social Security, a nearly trillion-dollar trade deficit, a near-zero personal savings rate and the reality that40 percent of Americans say that they save nothing for retirement.

True leaders in both parties have a chance to get it right, but it will require hard choices. What about

keeping Medicare costs down by mandating basic health insurance for all Americans at the state level, withmanaged competition among insurance plans and government subsidies for only those who most need it?Could we impose stricter government controls on the prices that medical providers charge and require theplans to pay for quality (rather than quantity) of service?

Similarly, unless we are willing to see the demise of Social Security, we need to take a hard look at theoptions for keeping it solvent. With Americans living far longer and healthier lives than when the programwas created, should we gradually raise the retirement age by indexing it to increasing life expectancy? Orestablish mandatory retirement savings programs that foster personal responsibility, reduce governmentexpenditures and yet could be supplemented by public funds for low-income Americans? What, if any, policychanges are being discussed to encourage individuals to take a larger role in saving and providing for their future?

Neither the American public nor our elected leaders seem willing to seriously consider the options includingthe sacrifices, whether personal or political necessary for financing the future, yet that is precisely what theymust do. As it is now, were living on borrowed time. The credit crisis of 2008-2009 is just a shot across the bow.

As former Treasury Secretary Paul H. ONeill one Republican who was unceremoniously cast aside bythe Bush administration said in I.O.U.S.A.: When you get to a point where you cant service yourdebts, youre finished.

We dont want get to that point, and so, despite the current crisis, we can't afford to simply live for today.


The Perils of Living for TodayBy Andrew L. Yarrow and Addison Wiggin | April 8, 2009http://www.baltimoresun.com/news/opinion/oped/bal-op.future08apr08,0,3209249.story


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...When real value is no longer what seems to matter...you can be sure it matters more than ever...

Perspective.

While doing radio interviews this fall regarding themes in our book, Financial Reckoning Day: SurvivingThe Soft Depression of the 21st Century, the question invariably arises: France? Nice place to visit, but whythe heck do you live there?

The short answer is, of course, the wine is cheap and the woman areum, elegant. The long answer is,

we gain perspective. Its the long answer, because it requires an explanation. One could gain perspectivefrom just about anywhere, of coursebut why not do it in a place where the wine is cheap and the womenpleasing to look at?

An English reader, who also lives in France, recently passed on an interesting article written by a Chinesebureaucrat, published on a non-profit website hosted in Italy, sponsored by the government of Singapore.The aim of the site is to increase amicable relations between Asia and Europe in a U.S.-centric world. Thepurpose of the article: A strategic recommendation on how China ought to position itself while the UnitedStates and Europe as the major players in the two-bloc international system the author predicts willeventually emerge gear up for eventual war.

If we were writing our daily missives from our offices in Baltimore, would such a site, and such an article,be interesting? Probably. But wed likely judge the origin of the site through Murdochs lens at Fox News,like so many TV-addled minds do, and dismiss it out of hand. Away from influence, living as foreigners, ina country where they dont pronounce words as they are spelled, we take to the extraordinary like gnats to asugar bowl. We are addicted to the taste and go there often to get a buzz going. But we are under no illusionsthat it has nutritional value.

Wang Jian: Clouds of War

What could possibly interest us about a Chinese bureaucrats white paper on impending global war? Firstof all, his conclusion: In the last century, writes Wang Jian, American people were pioneers of system andtechnology innovation. However, the interests of a few American financial monopolies now lead this countryto war. This is such a tragedy for the American people.

Clouds of war are gathering. Right now, the most important things to do for China are:

1.) Remain neutral between two military groups while insisting on an anti-war attitude.

2.) Stock up in strategic reserves

3.) Get ready for a short supply of oil


The Era Of Fictitious CapitalismBy Addison Wiggin | November 4, 2004http://dailyreckoning.com/the-era-of-fictitious-capitalism/


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4.) Strengthen armament power

5.) Speed up economic integration with Japan, Hong Kong, Korea and Taiwan"

Its a rather unsettling idea. China as the neutral power in a war between the United States and a unitedEurope. How did Wang get there? Thats the subject of the second part of the article, which we find

intriguingand even more unnerving. Wangs view is disturbingly similar to our own understanding of theway the global economy works.

War is the extension of politics and politics is the extension of economic interests, Wang asserts.Americas wars abroad have always had a clear goal, however, such goals were never made obvious to thepublic. We need to see through the surface and reach the essence of the matters. In other words, we need tofigure out what the fundamental economic interests of America are. Missing this point, we would be misledby American governments shows and feints.

Wangs argument in a nutshell: By the mid 1970s, the United States, the United Kingdom, France,Germany, Italy, Japan and other major capitalist countries had completed the industrialization process now

underway in China. In 1971, when Nixon closed the gold window, the Bretton Woods system collapsed,and the dollar the last major currency to be tethered to gold came unstuck. Economic growth asmeasured by GDP was no longer restricted by the growth of material goods production. Toss in a fewfinancial innovations, like derivatives, and the "fictitious" economy assumed the central role in the globalmonetary system.

Wang Jian: A Plummeting Ratio

Money transactions related to material goods production, writes Wang, counted 80% of the total[global] transactions until 1970. However, only five years after the collapse of the Bretton Woods, the ratioturned upside down only 20% of money transactions were related material goods production and circu-

lation. The ratio dropped to .7% in 1997.As we note in our book, since Greenspan assumed the central role at the most powerful central bank in

the world, he has expanded the money supply more than all other Fed chairmen combined. From 1985-2000, production of material goods in the United States has increased only 50%, while the money supplyhas grown by a factor 3. Money has been growing more than six times as fast as the rate of goods production.The results? Wangs research reveals that in 1997, before the blow-off in the U.S. stock market, mind you,global money transactions totaled $600 trillion. Goods production was a mere 1% of that.

People seem to take it for granted that financial values can be created endlessly out of nowhere and pileup to the moon, our friend Robert Prechter writes in his book, Conquer the Crash. Turn the directionaround and mention that financial values can disappear in into nowhere and they insist that it isnt possible.The money has to go somewhereIt just moves from stocks to bonds to money fundsit never goesawayFor every buyer, there is a seller, so the money just changes hands. That is true of money, just as itwas all the way up, but its not true of values, which changed all the way up.

In the fictitious economy, the values for paper assets are only derived from the perceptions of the buyerand seller. A man may believe he is worth a million dollars, because he holds stocks or bonds generallyagreed in the market to hold that value. When he presents his net worth to a lender, a mortgage banker forexample, and wishes to use the financial assets as collateral for a loan, his million dollars is now miraculously



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worth two. If the market drops, the lender, now nervous about his own assets, calls in the notethe borroweronce thought to be worth two million discovers he is broke.

The dynamics of value expansion and contraction explain why a bear market can bankrupt millions ofpeople, Prechter explains. "When the market turns down, [value expansion] goes into reverse. Only a veryfew owners of a collapsing financial asset trade it for money at 90 percent of peak value. Some others mayget out at 80 percent, 50 percent or 30 percent of peak value. In each case, sellers are simply transformingthe remaining future value losses to someone else."

Wang Jian: Deer in Headlights

As we saw in the 2000-2002 bear market, in such situations, most investors act as if they were deer beingapproached by a speeding truck at night. They do nothing. And get stuck holding financial assets at lower or worse, non-existent values. Anyone suffering glances at their pension statements over the past fewyears knows their prior value was a figment of their imagination.

Back to Wang: In the era of fictitious capitalism, a fictitious capital transaction itself can increase the

book value of monetary capital; therefore monetary capital no longer has to go through material goodsproduction before it returns to more monetary capital. Capitalists no longer need to do the painful thing material goods production.

Real-life owners of stocks, bonds, foreign currency and real estate have increasingly taken advantage ofhistorically low rates and applied for mortgages backed by the value of these financial assets. Especially sincethe rally began 8 months ago, they then turn around and trade the new capital on the markets. Duringthis process, writes Wang, the demand of money no longer comes from the expansion of material goodsproduction, and instead it comes from the inflation of capital price. The process repeats itself.

Derivative instruments, themselves a form of fictitious capital, help investors bet on the direction of capital

prices. And central banks, unfettered by the tedious foundation set by the gold standard, can print as muchmoney as is required by the demands of the fictitious economy. You can, of course, trade the marginal valuesof these fictitious instruments and do quite well for yourself.

But Wang sees a darker side to the equation. Fictitious capital is no more than a piece of paper, or anelectric signal in a computer disk. Theoretically, such capital cannot feed anyone no matter how much itsvalue increases in the marketplace. So why is it so enthusiastically pursued by the major capitalist countries?

The reason, at least until recently, is that the major capitalist countries have been using their fictitiouscapital to finance consumption of "other countries" material goods. Thus far, the most major of the capitalistcountries, the United States, has been able to profit from the system because since the establishment of theBretton Woods system, and increasingly since its demise, the world has balanced its accounts in dollars.

Wang Jian: The Fictitious Economy

Until now, writes Wang, U.S. dollars [have counted] for 60-70% in settlement transactions and currencyreserves. However, before the fictitious capital era, more exactly, before the fictitious economy began inflatinginsanely in the 1990s, America could not possibly capture surplus products from other countries on such alarge scale simply by taking advantage of the dollars special status in the worldLured by the concept ofthe new economy, international capital flew into the American securities market and purchased American



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capital, thus resulting in the great performance of U.S. dollar and abnormal exuberance in the Americansecurity market.

And here we arrive at the crux of Wangs argument that a war is brewing. While [fictitious capital] hasbeen bringing to America economic prosperity and hegemonic power over money, he suggests, it has itsown inborn weakness. In order to sustain such prosperity and hegemonic power, America has to keep uni-lateral inflow of international capital to the American marketIf America loses its hegemonic power overmoney, its domestic consumption level will plunge 30-40%. Such an outcome would be devastating for theUS economy. It could be more harmful to the economy than the Great Depression of 1929 to 1933.

Japans example suggests, as your editors have oft reminded you, that a collapse in asset values in a fictitiouseconomy can adversely affect the real economy for a long time.

In the era of fictitious capital, Wang surmises, America must keep its hegemonic power over money inorder to keep feeding the enormous yaw in its consumerist belly. Hegemonic power over money requiresthat international capital keep flowing into the market from all participating economies. Should the financialmarket collapse, the economy would sink into depression.

Americas reigning financial monopolies, he believes, (whoever they may be), would not stand for it.



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Guys, heres a rich metaphor for you, writes friend and colleague Porter Stansberry. The house thatoriginally spawned the term keeping up with the Jones and which led to the building of gaudy mansionson the Hudson River is collapsing and in disrepair

The story was printed in yesterdays Wall Street Journal. It was the original McMansionso grand ithad its own name: Wyndclyffe. The house was built in 1853 by Edith Whartons spinster aunt, ElizabethSchermerhorn Jones, and kicked off a flurry of mansion building up the Hudson River Valley. Wyndclyffesported a four-story tower, 24 rooms, 80 acres of lawn and sweeping river views.

After the completion of the Jones house, turret towers and extra wings began appearing on nearby homes

hence the now-famous phrase, keeping up with the Jones. Nowadays, the maxim illustrates the moderndesire of suburban Americans to keep up appearancesby taking out home equity loans to buy Humveesand home theater systems.

Last week, as youll recall, we had to save face for arriving late to a symposium conducted here in Paris byeconomist Hernando de Soto - by running his overhead projector. Wed like to return to the scene of thecrime for a moment. De Soto is doing some of the most interesting work in economics todayand havingpicked up his book The Mystery of Capital, weve become intrigued with the question he poses in Chapter5: What became of the missing lessons of U.S. history? (Andwe also still feel like we owe him some-thing for interrupting his speech.)

Hernando de Soto runs a think tank called the Institute for Liberty and Democracy. With a name likethat, youd think it was a half-cocked Washington-based fundraising scheme invented by friends and associatesof Richard Perle. Its not. Headquartered in de Sotos native Peru, The Economist magazine called theInstitute for Liberty and Democracy one of the most important think tanks in the world. Over the pastfive years, de Soto explains in The Mystery of Capital, I and a hundred colleagues from six differentnations have closed our books and opened our eyes and gone out into the streets and countrysides offour continents to see how much the poorest sectors of society have saved. The quantity is enormous.

Hernando de Soto: A Lack of Usable Capital

The poor inhabitants of [Third World] nations, explains de Soto, "some five-sixths of humanity, do

have things, but they lack the process to represent their prosperity and create capital. They have houses, butnot titles; crops, but not deeds; businesses, but not statutes of incorporation. It is the unavailability of theseessential representations that explains why people who have adapted every other Western invention, fromthe paper clip to the nuclear reactor, have not been able to produce sufficient capital to make their domesticcapitalisms work.

The inability of poorer countries to transform their assets into usable capital is not the endgame of somesort of neocolonial monopolistic conspiracy, de Sotos argument goes. Rather, the West is oblivious to thedeveloping nations dilemma: Westerners take this mechanism so completely for granted that they have lost


The Mystery of WyndclyffeBy Addison Wiggin | October 27, 2004http://dailyreckoning.com/the-mystery-of-wyndclyffe/


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all awareness of its existence So much so that its history is all but undocumented.

De Sotos search for the reasons why capitalism thrives in the West but is the target of scorn elsewherein the world has led him through thousands of pages of archived material, much of it detailing the west-ward expansion of U.S. pioneers in the late 18th and early 19th century. Going back as far as 1783, forexample, George Washington complained about Bandittiskimming and disposing of the cream of thecountry at the expense of the many. These banditti were squatters and illegal entrepreneurs occupyinglands to which they had neither title nor deed.

Americans and Europeans, says de Soto, "have been telling the other countries of the world, You haveto be more like us. In fact, they are very much like the United States of a century or more ago, when it toowas an undeveloped country. Western politicians were once faced with the same dramatic challenges thatleaders of the developing and former communist countries are facing today."

Hernando de Soto: The Doctrine of Pre-Emption

In the United States, it wasnt until the application of the doctrine of pre-emption that Americas back-

water culture began picking up the steam that would empower it to become the foremost economic poweron the planet. Pre-emption allowed a squatter who had made improvements on a piece of land, simply bybuilding shack or a mill there, first right of refusal on its purchase. Once the deed became legal, it alsobecame a commodity.

Henry Clay, a senator from Kentucky in the early 19th century, explained the process: They build houses,plant orchards, enclose fields, cultivate the earth and rear up families around them. Meantime, the tide ofemigration flows upon them, their improved farms rise in value, a demand for them takes place, they sell tothe newcomers at a great advance and proceed farther westin this way, thousands and tens of thousandsare daily improving their circumstances and bettering their conditions. The squatters, banditti and flagrantneer-do-wells thus became the vaunted pioneers of American history.

Unfortunately as were wont to say here at The Daily Reckoning nothing fails like success.

The pioneers successors, de Soto observes (that would be you, me, the Fed, etc.), have lost contact withthe days when the pioneers who opened the American West were undercapitalized, because they seldompossessed title to lands they settledwhen Adam Smith did his shopping in black markets and Englishstreet urchins plucked pennies cast by laughing tourists on the banks of the Thameswhen Jean-BaptisteColberts technocrats executed 16,000 small entrepreneurs whose only crime was manufacturing andimporting cotton cloth in violation of Frances industrial codes. That past is many nations present.

The process of change, according to de Soto, is unquestionably a political one: revolution. In mostnations of the West, says Hernando, the major task of widespread property reform was completed onlyabout a century ago; in Japan, it has been in place for less than 50 yearsLaw [has thus been made] toserve popular capital formation and economic growth. This is what gives the present property institutionsof the West their vitality. The property revolution was a political victory. In every country, it was the resultof a few enlightened men deciding that official law made no senseif a sizeable part of the populationlived outside it.

The neocons have taken the political lesson to heart and, like the Leninists of the early 20th century, areusing Iraq as a test case to see if revolution can be had at the point of a gun. In the meantime, the Fed and



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the Treasury have lost their way altogether. Gone are the days when self-reliance meant busting your gut tobuild a house, a factoryor even a fine piece of furniture. Now credit lines grow ever longer and homeequity loans more ubiquitous.

Hernando de Soto: Know-How to Nowhere

Boobus Americanus to borrow a phrase from H.L. Mencken, by way of our friend Doug Casey hasregressed along the line from know-how to nowhere. And judging from the reader mail we expect toreceive upon publication of this letter, theyre quite belligerent about it.

Bill Gross calls it hegemonic decay. In his September Investment Outlook for PIMCO, Gross writes,Pretend you are the head of a household. You earn a good living, but it never seems to be enough. Thereare bills to pay, the Jones to keep up with, youve had your eye on that goofy Hummer for at least threemonths now. Youd like to save money, but you cant or you wont, so you dont. In fact, each year for thepast decade youve had to borrow 4%, 5%, 6% of your annual income to pay for what you want. Yourerunning a personal deficit, not a surplus.

People are no different than countriessooner or later, the bill comes due. Gross: With no savings and aboatload of debt, the wheels all of a sudden go into reverse. Creditors are not so friendlyForget theHummer, pal. Youre thinking of survival, not staying up with Jones. This hegemon with a facehas startedto decay.

The great mystery, at least from the vantage point of your puzzled Parisian pontificators, is how is it thatthe country from whence naturally arose the property rights that helped unlock de Sotos dead capital and serves as a model for emerging nations today - is also the current site of the most egregious credit-goosed spending binge and bust in economic history? The answer, we fear, lies somewhere in the ruins ofWyndclyffe.



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American housing still crashing two new data points show no bottom in sight

Three U.S. economic crises the Fannie and Freddie rescue wont resolve

Another government bailout? Lehman Bros. ready to fail will Uncle Sam pay the check?

The best countries to do business, and a curious list of up-and-comers

Chinese investors pull the plug China suffers massive decline in trading volume

00:00 One in every 416 U.S. households was in some form of foreclosure in August, a record high.Thats over 300,000 properties warned of default, a pending auction or foreclosure. Year over year, foreclosurefilings are up 27%, said RealtyTrac today. August filings were 11% higher than the previous record, in May.

The housing bottom? Still nowhere in sight.

00:11 So its no surprise there are 3.9 million unsold existing family homes on the market.Thats easily the most since at least 1982, when the National Association of Realtors started keeping track.

According to the latest from the group, there is a 11.1-month supply of homes on the market, two and a

half times the number from this time in 2005.

00:21 The mortgage-backed securities that that Fed has been buying are only as good as the mortgagesthat back them, Eric Fry reminds us. And many of those mortgages are no good at all. Thats because thecredit crisis that is sweeping the country has become a mortgage-default crisis. Or maybe its the other wayaround. But whatever the precise cause, twice as many California homeowners are defaulting on their mort-gages this year compared to last year. And default rates are climbing across the rest of the country, as well.

The Housing Bottom, Lehman Crisis, Fannieand Freddie, The Best Countries, Chinese Stocks,and More!By Addison Wiggin & Ian Mathias | September 12, 2008

http://www.agorafinancial.com/5min/the-housing-bottom-lehman-crisis-fannie-and-freddie-the-best-countries-chinese-stocks-and-more/

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Meanwhile, home prices continue tumbling and the inventory of homes for sales continues rising. Thistoxic cocktail is (almost) certain to produce another wave of mass defaults and foreclosures.

Our reasoning is as simple as it is frightening: Since most of the folks who cannot afford to keep theirhomes cannot sell them, either they will hand their keys to bankers.

The nations ailing housing market and soaring foreclosure rate is not merely a problem for the U.S.government now the largest mortgage holder in the country these woes are also a problem for hun-dreds of private banks that are struggling to survive. Many of these private banks will NOT survive. Weagree. For more on this matter, including a list of banks likely to fail, read this issue of Rude Awakening.More on one of those institutions in a minute.

01:06 What will be the real effects of the Fannie Mae and Freddie Mac rescue? asks our colleagueDavid Galland of Casey Research. In his latest writing, David outlined three things the GSE seizure certainlywont do:

The rescue wont resuscitate the housing market. As much as prices have declined, they still havent come

down enough to make houses affordable. (They seemed affordable for a while only because of the artificiallylow interest rates the Federal Reserve engineered during the housing boom through its inflationary policies.)Dont expect the rescued Fannie and Freddie to revive the housing market; the governments rescue packagerequires them to shrink their operations.

The rescue wont end the credit crisis that is pulling the economy into recession. Fannie and Freddie areperhaps the biggest, but certainly not the only, institutions that overcommitted to risky mortgages. Banks,insurance companies and pension funds are holding billions in the same kind of dangerous stuff. And theystill must get through another two years of interest resets on subprime mortgages created during the housingboom. As those resets occur, there will be more defaults on mortgages that borrowers can no longer afford or no longer want because the loan balance exceeds the value of the house.

The rescue helps keep bad decision makers in place. Managers of banks and other financial institutionsthat invested heavily in Fannie and Freddie paper get let off the hook. They get another chance to make morebad decisions about how to deploy trillions of dollars of capital. And the politicians who passed the laws thatencouraged Fannie Mae and Freddie Mac to take all those wild risks? Theyre up for re-election.

01:42 Producer prices fell 0.9% in August, says the Labor Department. The latest government infla-tion report was a bit of a mixed bag. The recent drop in energy and commodity prices allowed the headlineinflation reading to fall quite a bit in August. But the Feds core PPI reading inflation stripped of foodand energy prices rose 0.2%, to a 17-year high.

For the year, producer prices are up 9.6%, just a hair below a 27-year high.

01:57 Even though inflation is still rising, the sudden drop in energy costs has given consumer senti-ment a kick in the pants. The Reuters/University of Michigan consumer confidence survey popped up15% in August, to a score of 73. Thats way, way above the consensus forecast of a 1-point rise, to 64.Respondents lowered their 12-month inflation outlook substantially, from 4.8% to 3.6%.

02:11 Only in I.O.U.S.A. according to a careerbuilder.com survey, 21% of people earning $100,000 ayear or more say they live paycheck to paycheck. 10% of the same respondents say they save nothing $0 each month.


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02:15 Oil is creeping back up today. Its inched nearly $2, to $102. Hurricane Ike is causing quite a scareon the Gulf Coast, as we mentioned yesterday. Well let you know the extent of the damage on Monday.

Also in play in the oil trade today is the ol greenback:

02:25 The dollar has fallen substantially. The dollar index shed nearly a full point after the PPI reading

combined forces with another lousy U.S. retail sales report. (Sales fell 0.3%, more than expected.) Thus, thedollar index reads 79.2. The euro shot up nearly 3 cents, to $1.41. The pound fared even better, up 4 pennies,to $1.78. The yen is about the same, at 107.

02:32 The binge and purge trading we described Wednesday continued in U.S. markets yesterday.Wall Street kicked off the day with a big retreat. The S&P 500 opened down 1.7%, but instead of aban-doning trading altogether, investors restarted the commodities trade with a particular focus on transportersand refiners. Most major indexes ended up over 1.3%.

02:40 Gold has stopped the bleeding this morning. The spot price is hovering at yesterdays level,around $755 an ounce.

02:46 In the stock market today, its all Lehman Brothers, all the time.As you know by now, Lehmanis circling the bowl. Shares are under $4. Bonds are yielding 20%. CEO Dick Fuld is openly shoppingaround for someone anyone to buy the firm before it goes bankrupt. (For what its worth, Bank ofAmerica is currently the most forecasted suitor.) Like Bear Stearns before it, Lehmans seemingly imminentfailure poses a big systemic risk to the whole stock market, other financials, in particular.

Were sure Lehman is working with the Treasury and/or the Fed. But this time, a government bailout isfar from certain. People briefed on the matter told Bloomberg that the Fed and Treasury will assist thesale or teardown of Lehman, but arent likely to offer any cash.

Since were in the business of making forecasts, and since the government seems to be in the business ofbailing out financials over the weekend, we offer you this: The Lehman Brothers you know today probablywont be the same business on Monday.

02:46 Keep an eye on Washington Mutual, too. The bank announced it has added $4.5 billion in loanloss provisions for this quarter. Of those provisions, $3.4 billion will be set aside for residential mortgage-related losses.

WaMus been touting all the well capitalized rhetoric all week, but investors arent buying it. Shares ofWM opened down 4%, to $2.72, today. Thats an 18-year low and 96% below its price this time last year.Moodys and S&P have both downgraded WaMu debt to junk ratings. Four different investment bankanalysts cut their ratings on WM today, too. Ouch.

Like Lehman boatloads of systemic risk in this one. Washington Mutual is the biggest savings and loanin the U.S.

02:46 Balance sheets of many of these financial institutions are still terribly impaired and there aremore problems to come, superstar investor Jim Rogers told Bloomberg this week. We had the worstcredit bubble in the history of the world. You dont clean that out in a year or two or three.

Rogers went on to tell Bloomie that even though he has cashed in on his short sale of Citigroup, he is



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still betting against U.S. financials. If you seek advice in doing the same, we recommend you check outStrategic Short Report.

04:00 Maybe Jim Rogers is right about this, too Singapore is the best place in the world to do busi-ness. According to the World Banks annual study, Singapore takes the crown as the most business-friendlynation. New Zealand, U.S.A., Hong Kong and Denmark round out the podium, in that order. If, for somereason, its the worlds worst business conditions you seek, the World Bank suggests you punch your ticketfor Congo.

But perhaps most interesting, to us anyway, were the major up-and-comers. Here are the biggest improve-ments from last year thanks to the Wall Street Journal for the table:

04:20 Chinas industrial production grew at the slowest pace in six years during August.Yesterday, wementioned signs of the housing slowdown there. Today, the Chinese statistics bureau says industrials areexperiencing a similar decline. But before you get too sold on the Chinese downturn, we note that indus-

trial production there is still growing at an annual rate of 12.8%. Olympic-related shutdowns surely skewedAugusts data. We look forward to seeing how the same measure fares over the next few months.

04:33 The Japanese economy contracted sharply last quarter, the Nipponese government reportstoday. GDP there shrank at an annualized rate of 3% from April to June, the worst quarter in seven years.Just about everyone and their mother is betting on Japanese GDP to contract again this quarter, thus send-ing the economy into recession.

04:40 China and Japans recent downturns have left a huge void in the global equities market. Globalequity trading volume fell 37% last month, year over year. According to a Citigroup study, the value ofglobally traded stocks fell to $5.8 trillion in August, the lowest monthly volume since December 2006 andthe first overall decline since Citi starting keeping track in 2002.

04:50 The Shanghai Stock Exchange suffered the most a 78% crash in trading volume comparedwith a year ago. The U.S. was down 29%.

04:55 Our inbox of reader mail is empty today the way the news has been this week, we dont blameyou for taking a three-day weekend.



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CHAPTER 4: SHORT UNHAPPY EPISODES IN MONETARY HISTORY

History is a vast early warning system. Norman Cousins

The whole basis for money itselfcurrency as a means of commerceis based on tangible value. Inother words, money is not thegreenbacks we carry around, it is supposed to be the gold or othermetal backingit up. The dollar is a promissory note. Check what itsays at the top of the bill itself: Federal Reserve Note.

Today, the American dollars in circulation are just a bunch ofIOUs. That would be fine if the goldreserves were sitting in FortKnox to back up those IOUs . . . but they are not. The Fed justkeeps printingmore and more money and it will eventually catchup with us. The day will come when we will have to pay

off thoseIOUs, not only domestically but to the ever-expanding foreign investors,too.

We can look at gold in a couple of ways: as the basis for solid assetvalue, or as a tangible investment withits own supply and demandmarket. Many people today shy away from gold because of theincredible pricemovement between 1971 and 1980. This occurredfollowing two important and critical events. In 1971,PresidentNixon took the United States system off the gold standard (meaningwe could print as muchmoney as we want, right?). And then in1974, President Ford removed a 40-year restriction onAmericansright to own gold.

Looking back to 1933, the Great Depression caused a seriousgold shortage. The Emergency BankingRelief Act of 1933 waspassed to provide relief in the existing national emergency in bankingand for other

purposes. . . .

The bill required all citizens to turn over gold coin and currencyin exchange for Federal Reserve notes.Refusing to turn over goldcarried a $10,000 fine and 10 years in jail. This unusual move wasintended toprevent the public from hoarding gold bullion. The solutionwas a simple one: make it illegal to own golddirectly. But as isoften the case when a government acts under emergency powers,this critical law started theball rolling toward the trouble our dollaris in today.

Once Nixon removed currency from the gold standard and Fordremoved the restriction on owning gold,the price shot up from theregulated $35 per ounce. It topped out above $800 by January 1980and then fellrapidly back to $253 by 1999, its low point. But weshould not look at this price gyration as any market-driv-

en force behindgold as an investment. The climb and subsequent fall werecaused by government interventionover a 40-year period. We haveto look at the price movement as an overreaction to the wholegold-to-currencyrelationship.

On January 31, 2008, gold hit $936 per ounce, climbing once more not inoverreaction mode but, finally,in market mode. Take a look at goldas a strong defensive investment given the current economic situationandtrend. Some compelling arguments:

1. The trade gap. The U.S. trade surplus of years ago has disappeared.Is it a coincidence that the change


The Demise of the Dollar And Why Its Even Betterfor Your InvestmentsBy Addison Wiggin


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from surplus to deficitoccurred in 1977? After years of strong surplus in trade, it allchanged only a fewyears after the removal of the gold standard.Heres what is troubling about all of this: Because the Fedis free todecide how much money to print up, it means that our ever-growingIOUs are becomingworth less and less.We buy more and more oncredit, and our IOUs are piling up. The days whe

currency wasbacked by gold are gone and the United States has become a riverboatgambler, drunk and

losing, demanding more and more credit tocontinue playing. Lets not overlook the historicalreality:When thedollars value falls, golds value rises. As our trade deficit gets everhigher and as the Fedcontinues printing IOUs, the value begins tosoften.The more currency put into circulation, the greaterthe dilutionand the worse the situation becomes. But for the value of gold,this is good news.

2. The budget deficit. Where is the government getting all of thatmoney it continues to spend? The $759billion budget deficit is dependenton those incredibly low interest rates that are the centerpieceof AlanGreenspans monetary policy. What happens when ratesstart to climb? Each years deficit spending onlyadds to the nationaldebt, and that means the budget itself sinks deeper and deeper intothe hole. Whois going to make those interest payments in the future?The math is not encouraging. The higher thedebt, the higher the interest.And the higher the interest rate, the greater the impact on thetaxpayer

(that would be you and me and our children).

3. A limited world supply. Gold is a limited commodity, unlikecurrency. As long as the Fed has access toprinting presses, it is ableto continue pumping adrenalin into the economy. But gold is realmoney inevery sense, and it has value because there is only somuch of it. This is the most important differencebetween currencyand money. Now that we are off the gold standard, the Fedbelieves it can ignore cur-rency valuation and continue on the fullfaith and credit system. As an investment, the dollar isbecomingmore and more suspect. In comparison, as dollar troubles getworse, the limited supply ofgold will become more valuable.Cause and effectthat is what drives market values. Dollars fall,goldrises. Its unavoidable.

4. The currency value of gold. Most people can appreciate the differencebetween an IOU and actualmoney. If your boss handed youan IOU on payday, you would not be happy. Youd rather be abletocash a check and use the money. But in fact, the dollar is an IOUand were all trading these IOUs ascurrency without any real backingWe are going to see an increasing trend among foreign centralbanksto buy gold in exchange for dollars. This gradually increasingdemand for gold will have the unavoid-able impact of increasinggolds market value. How high can it go? Only time will tell, but theweaken-ing dollar is encouraging for the future market in gold.



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