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In the final week of August, I had the rare privilege of meeting Kurt Richebcher on invitation. He had read my “Ass-Backward Economics” series of articles. In a trans-Atlantic telephone call, he stated his appreciation for my grasp of the gravity of the situation. We each believe a breakdown in the US Economy is a certainty, our government statistics are replete with deceptive fraud, current imbalances are beyond remedy, and the world investment community is being drawn into a trap. He extends his view, expecting a catastrophic outcome for the world economy and its financial markets. All this time, in the back of my mind, I harbored a little voice telling me that I am a kook. In my recent article series, I had referred to Herr Richebcher as a “savvy former German banker, longstanding banking critic, and consistent maverick.” I was flattered when he confirmed the legitimacy of my thought process and analysis. Now that little voice speaks in hushed tones. We are both mavericks, it seems. In the next few months, we will work on a new
pursuit. When in Cannes on the famed French Riviera where he has lived in a resort home away from his native Frankfort, I took ample notes in a diary. It was clear after the first day that our conversations would be voluminous, touching on diverse economic topics, some political areas, cultural issues, personal backgrounds, and views of the world we live in. Although benefiting from a strong memory, I felt the need to record daily discussions, major events, mundane events, and personal observations in a diary. I am glad I did. This article will crystallize many thoughts and memories in a way that will stand in time more effectively, enabling others to gather in his many pearls of wisdom. At the same time, in no way will I compromise Kurt’s privacy. So many humorous and other occurrences are etched in my mind, only a few to find their way to a printed page. I respect him too much, and besides, his anger is not what I wish to incite. I greatly appreciated his generosity and shared experience, with deep wisdom. This was a contrast in style to be sure. A continental patriarch with a serious demeanor came face to face with an irreverent (but adaptable) iconoclast, forced to suspend all slang of diction and off-color slings of language. Despite a gulf of culture between us, we saw eye to eye on almost everything. Imagine explaining the nickname of “Golden Jackass” and my description of official economic policy as “ass-backwards.” On more than one occasion, I found myself to be the
only person laughing. He warmed up to my
style soon after I fell in line with his. Neither of us possesses high regard for the United States insofar as its economy and monetary system are being managed by truly inept leaders, unaware of where they direct this nation. We also share a deep concern for a trend underway within the US toward greater state power, erosion in personal freedoms for its citizens, and deceitful use of military force. We each expect conditions to worsen. After reading several of his past “Richebcher Letters,” I was simply amazed how much our economic analysis is in concert, on the same wavelength. At one time leading up to my trip, I suspected that some readers might actually have suspected that I stole and plagiarized material. In early August for the first time in my life, I realized the benefit of reading some of his famed Letters. They are incisively written as though by a surgeon, with sound arguments, ample supporting data, focused logic, and defensible conclusions. I knew I was to meet genius, and was not disappointed. Within his many stories, I
learned of the origin of his Letter publication. analysis, citing similar evidence. He delves deeper into supporting data, with a specific focus on the US arena. I cover the world, and offer less depth of data. The parallel is so uncanny, that we drive the same model car. But let nobody be mistaken. I am a young pup in this trade with some measure of acumen armed with an active pen, and a certain brash style. This man is a mastermind over the years, a gentleman with a track record of foreseeing calamity that will go down in history. I hope to learn from this man, and did just that in my week with him. I learned plenty, and will record it here. However, to my pleasure, I exposed him to a few things. It was certainly a 90-95% tilted flow of wisdom and knowledge, with ample meeting of the minds. I was able to help him to understand the American mindset, and the fear factor within the American worker. There are certain advantages to living inside the developing inferno.
At least one analytic position was sold to
him with a solid line of reasoning. In what follows, I will attribute to Kurt several quotes. If they are not exact verbatim, they at least capture his beliefs closely. His words were repeated often and in varying contexts. The meaning will be clear to the reader. I will do my level best to properly represent his thinking, although I may err in small ways that are unintentional. I will be especially careful in portraying his views on America and its present path. I am only human, most of the time. Also, my account cannot be complete, but it will contain most of the essential marrow of our
many conversations. Economic
principles and erroneous thinking : KR:
“The idea of an economic recovery with such a huge trade imbalance is utterly
ridiculous” This refrain was heard at least a dozen times, sometimes out of left field, from Kurt’s lips, spoken with dismay, even disgust. By the third day, the quote evoked my laughter, from mere repetition. By the fifth day, I reminded him that it had been over 24 hours since he last uttered the line, which evoked his laughter. How on earth can a nation expect or realize an economic recovery when $500 billion is sent abroad to pay its trade bills? The cost can support millions of jobs. Since the jobs are not returning to our shores, how can the economy recover? It cannot, yet Americans buy into the nonsensical notion of a “jobless recovery.” He sees debt rising, consumption continuing, and jobs that are generated going to Asia. I called it a hemorrhage of capital, with jobs following the capital flow. He agreed. We talked about how Americans have been conditioned to regard trade gaps as normal, big federal deficits as normal, large debt levels as normal. I made an analogy regarding debt, whereby American households sit on living room couches, with the water level rising to within one foot of the ceiling. The couch floats up, but the breathing room is severely restricted. He nodded. I told of stories in the mid-1970’s when the first $100 billion trade deficit was registered. Back then, economists warned that the capital loss was dangerous, while foreign dependence possibly could lead to instability. Such concerns are not now evident. KR: “There is no foundation for recovery, which is made impossible by a huge trade deficit, balance
sheet destruction, over-emphasis of the financial speculation, poor capital equipment
investment, and monstrous imbalances” In his September “Richebacher Letter” a final section title stands as “No Foundation for Recovery” which was the result of banter back and forth, pushing a title to the top. For fully three years the US consumers, leaders, and bankers have systematically resisted the natural process of cleansing excesses and rectifying imbalances. Far from it. Instead, the trade deficit has increased. Corporate balance sheets are every bit as much loaded with debt. Household balance sheets are burdened by greater debt. Financial speculation has produced a Treasury bond bubble, a mortgage bond bubble, and its flipside housing bubble. A consumption bubble continues unabated, fed by debt. Capital investment is lacking in the face of idle antiquated mfg plant. Economic structures are horribly out of balance, perhaps to a greater degree than in 1999 and 2000. We talk incessantly about a recovery without preparing for one. With little thought, we await a knee-jerk reaction to federal stimulus and monetary stimulus, without the results. Instead of questioning why the last two years of stimulus failed, we prescribe even more extreme measures of the same, inviting disaster. We have no foundation for anything but a more monumental bust, this time led by the much larger bond markets. KR:
“Workers spend what they earn, and business profits only when they spend” This is a central principle of Friedrich Hayek, whom Kurt respects highly. I can go out on a limb and claim that he admires and follows Hayek’s principles of economic thought, and not so much his tolerance for state power. Kurt was remarkably apolitical, except for certain deep concerns which will be addressed later in this article. Americans believe, quite mistakenly, that if consumption levels can be elevated, resuscitated, that business spending and investment will come back to life and complete the economic recovery. No way, he says. In the 19th century United States, the railroads were not constructed after demand encouraged investment. Other way around. Savvy industrialists felt the conviction that if the nation’s shores were connected, commerce and distribution would lead the way toward historical development of the New World. Investment could lead and create demand. They were right. In a similar fashion, the information highway was built in the 1980 and 1990 decades. Fiberoptic lines, high-speed internet, and vast computer networks all witnessed demand catch up to supply. For sure, imprudent debt extension had to be checked, and it was in 2000. In parallel, long-distance telephone connections were established across nations, traversing ocean floors, complemented by wireless telephone tower coverage across the continents. That too had to be called into check, as colossal debt brought about a correction and natural selection process. The lesson here is that American businesses are still spending on capital investment, but not very much. Demand must catch up to supply. The reality is that profits and business expansion drive more profits. But worse, what investment we do commit to is largely devoted to Asian plant and equipment. The stories of expansion into China and India are everywhere, which produce jobs there, not here. KR:
“Savings and investment, not consumption, will ensure a true lasting economic
recovery” Somewhere around the mid-1980’s, we allowed the opposite cancerous notion to invade and find a home in the Americans mindset. Since then, debts have risen out of control, savings have disappeared and are actually negative, and consumption has taken root as a national addiction. Furthermore, jobs have disappeared, and a gigantic trade gap has appeared. Yet our national leaders, our press, our media continue to parrot mindless pop culture pseudo-wisdom that we must keep consumption strong. We must do the exact opposite. Our investment capital is all borrowed capital, thoroughly dependent upon Asia. A nation’s wealth can be traced to its propensity to save and invest, to build engines of wealth in the form of manufacturing plants, mines, drill rigs, farms, service centers. These are not springing up in our nation for many reasons. The cost structures are unfavorable inside the US. Our Fed Chairman implores the populace with irresponsible advice to raid home equity in order to perpetuate a spending pattern that is both unsustainable and highly destructive. His words are wholly inappropriate for a central banker, and represent grounds for dismissal. Meanwhile, our savings rate has turned negative, if you remove fraudulent govt adjustments to income. We as a nation are gradually achieving an impoverished condition, and in no way are creating the foundation for a recovery. Our consumption has gone completely out of control, and will invite disaster. We cannot continue to issue credit, extend debts, and expect foreign nations to supply the necessary capital to maintain the system. This is bona fide insanity that will end tragically. KR:
“The real economy always exerts its dominance over the financial economy, all in time” This present ominous development is a major concern of his. The principal beneficiary of recent debt extensions is the financial sector, for mortgages, for car loans, for speculation in financial instruments, both ordinary and exotic. This anomaly depicts the distortion within our economy. No capital investment is required. Jobs which are created can easily disappear upon a downturn in the bond markets. Growth evident is confined within the great casino. Significant portions of profits for large corporations are now coming from financial operations. Fully 75% of General Motors profits come from their mortgage operations in a recent quarter. Many corporations are following this pattern. The nation has largely foregone its mfg capability, in order to join the casino driven by Fed liquidity. This wholly aberrant development is hailed by press pundits, ignorant of the galloping cancer that it represents. When the bubble grows beyond its ability to find funds, and beyond what prevailing inflationary expectations will allow, the financial sector will contract naturally. For a time, alchemists at the Federal Reserve appear to have the upper hand, but that will change before long. The real economy, where businesses are built, jobs are performed, and products are made will eventually prevail. It always does. Kurt stressed the importance of the car mfg industry, where American firms are unable to make any profits. It acts as a good indicator to watch for the real economy, in fact a vital sector since it employs so many workers in vertical integrations. With all the vast new Fed-driven liquidity flowing into the economy, the US firms not only cannot make a profit, but are losing market share steadily to the Japanese. I tried to add that apart from not benefiting from liquidity infusions, US firms have competitive problems owing to poor reliability, higher labor cost, huge debt load, pension obligations, and union strangles. KR:
“Americans will soon learn that in a housing bubble, there are two losers – the
borrower who purchases the property, and the
lender who underwrites the mortgage contract” In the sale of stocks at the peak, one wins with collecting a high price, one loses as buyer. With the housing bubble, not only is the market five times larger than the stock market, but each side of the transaction becomes a loser if property prices go sour from rising rates. The combined effect would be ten times as great as with the stock bust. Owners of the properties would see their equity eroded. Any heavy leverage in the debt extended against the property used as collateral would lead to amplified losses. Further credit drawn would not be possible. If housing prices badly falter, negative equity cripples the owner to cause stress. On the mortgage holder side, it is a simpler story. The bond investor watches the investment security decline in value as mortgage rates rise. The silver lining is thin, as reduced refinance activity would not enter the equation to disrupt value of the bonds. KR: “American economists have absolutely no
concept of macro-economics. The US is
attempting to re-invent macro-economics, instead of applying it from proven history. In time, results will prove to be absolutely
disastrous because of the accumulated debts involved.” Kurt had only contempt for the Harvard crowd, whom he called worthless, producing rubbish. He says they have no idea what is going on, totaling missing the effect of debts, and overlooking the extreme vulnerability in the USDollar. US policy bears no resemblance to the work of Keynes. Instead, US economists have implemented a “Destructive Keynesian” theory which John Maynard Keynes himself would disapprove of. I talked about Milton Friedman, and his absurd theory which states that monetary expansion control can be used to anticipate inflationary demand, thereby offsetting it with a surge in supply, employing newly created money. To this Kurt shook his head, laughed in disrespect, and said “he has no idea what inflation is all about, he knows nothing.” He believes the United States is conducting a highly destructive experiment with the world monetary system. It is theoretically deviant, aberrant, unsanctioned by other nations, rebellious, defiant, makeshift, made up as they go along. New Fed liquidity is released primarily toward the financial sector, which actively promotes speculation, not production and jobs. This is a key point missed by American experts and the media which follows. We talked about how the Austrian School of Economics is the only source whose theory and teachings can adequately explain the current conditions and justify the futility of monetary expansion. We are attempting to use monetary devices to rectify structural problems, met with the effect only “to spin gears.” Kurt had not heard this metaphor before, which I explained. He thought it was appropriate, earning a nod. He concluded that in 1930, the US had falling money supply. So the effect of pushing the monetary buttons was met with success. But now in 2001-2003, we have monetary expansion at levels never witnessed before, incredible debt levels, and extraordinary trade imbalances which have created structural problems. As a result, the monetary buttons are rendered useless. American economists are unable to discern why, since they subscribe to the discredited Harvard School approach instead of the Austrian School. The magnificent money supply growth now creates a higher cliff from which to fall. KR:
“Instead of a second-half recovery, the US Economy will stall, then decline, then
accelerate downwards. With Iraq fading as
economic news, no more excuses for poor US recovery now.” Kurt believes that rising interest rates and choking levels of debt will gradually erode the foundation pillars keeping the US Economy alive. Refinance operations has gone into decline, which tips the balance for imminent real estate property price declines. He had no firm opinion on any rapid reversal of interest rates, but did acknowledge the significant degree of derivative gearing on rates. I pointed out the GSE agency unwinding of hedge activities, and discussed their convexity problem which is exacerbated by reduction in cash flows from refinance payoffs. This forces closing out and sales of TBond futures contracts. He believes any rise in interest rates will be gradual at this point. Nonetheless, the effect will be corrosive, as it continues to kick out the pillars holding the economy up. Then came his dire forecast… “within 12 months, the US Economy will simply collapse, along with the USDollar.” For half an hour we discussed this threat. I wondered aloud how increasing desperation by the financial leaders would contain the decline for a time. He agreed. I was clear that I expected truly unprecedented and extraordinary policy changes in response to deterioration in the face of still greater money supply expansion. We covered how it took $5 of new money and credit back in 2001 in order to generate $1 in new GDP activity. Now that figure is $6.5 to one. Some measure it to be $8, with an alternate definition. I stated my belief that the figure would rise to $10 as desperation set in, confusion reigned, and banker authority was called into question on a widely disputed basis. His reply was as ominous and it was brief… “probably yes.” When I asked if the 12 months could be stretched to 18 instead, he agreed and said something about how to expect extreme responses that will simply fail to produce any remedy or positive results. He anticipates the euro will gain over 20% in the next year versus the USDollar. When the FOREX dust clears, he expects the USDollar to have lost at least half its value. This brief conversation brought a chill to me. I have come to envision the US Economy not as a supertanker, but rather as a fully loaded B52 flying fortress which is suffering engine failure even as it takes on additional cargo. In the late 1990’s we often spoke about the danger of a typical recession turning into a depression. If a stall occurs, the B52 will fall like a stone. Kurt calls ours a “bicycle economy,” one which falls when it stalls. KR:
“America is pre-occupied by low-cost solutions, which will be the death of America. In cutting costs, shedding workers, US firms put
themselves at great risk. They can no longer
service debts as they reduce cash flow with such cutbacks.” Kurt bristles at the suggestion that low-cost solutions have solved anything. Quite the opposite. The effect on cash flow has been and will continue to be very detrimental. He has no respect for US understanding of macro-economics, managing nationwide aggregates. He has almost as little respect for their micro-economic comprehension of policies to put into practice at the firm level in order to generate business, create growth, produce jobs, and earn profits. Going to Asia with large tracts of contracts is damaging. Shedding the very workers which provide leverage of skills is damaging. He believes firms should seek the highest paid and highest skilled and most proficient workers, from whom to gain leverage in the same manner as they would seek the finest and most versatile machine. Do we purchase the cheapest machines? No. My firm held onto two much lesser skilled workers, as it shed me in August. Those two workers will not be capable of bringing in new business. They are good people, but young and possessing skills limited to rudimentary statistics. So where is the gain? Pursuit of low costs brings about low flows and low potential to service debt. Just another economic belief which is truly backwards. Kurt cited the “Fallacy of Decomposition” which states that what is good for a single firm might be disastrous for the aggregate, if practiced widely or universally. The pursuit of low-cost solutions, the dispatch of mfg operations to Asia for over 20 years, these are such disastrous practices. It has resulted in colossal trade imbalances, foreign dependence, horrible debt, and a great weakening of our nation. Rather than progress, this is dismantlement. KR
reply: “The Chinese are the real capitalists now, not the Americans” I related a conversation I had with one sharp fellow about Chinese machine tools, my friend Jay from Hong Kong. A delegation from the US Congress visited a series of Chinese machine tool factories. Most American reps viewed the trade with these firms as positive. A few regarded the trade as detrimental to US jobs. The Chinese firms harnessed the next generation robotic control systems, one level ahead of US firms. This state-of-the-art equipment comes from Japan, which enjoys a hefty trade surplus with their new trade partner China. The machine tool firms require fewer workers than US firms, and pay their most expert workers less. These firms float almost zero debt, having grown organically and gradually, converting profit into new equipment over time. The US competitors simply cannot stand against such competition. At the end of the tours on location, the American contingency was very impressed, sobered by the experience, convinced of the extreme situation. We are only talking about one sector, machine tools. To which, Kurt replied what is cited above. KR:
“Japan has the most primitive mercantile economy in the world” Kurt was visibly upset when talking about the subservient Japanese, who willingly and eagerly debase their yen currency, thus perpetuating the destruction of their economy. He claims that Japanese businesses could weather a currency appreciation with a minimum of cost via futures contracts in hedge programs. The cost incurred would be 3% of the unhedged consequence if subjected to the harsh winds of the FOREX market. The Bank of Japan on almost a monthly basis commits large sums of their own counterfeit money in order to purchase USTBonds. This is a horrible waste, and does damage to their economy. Clearly, Japan still buys into the notion that their fate is tied to continued profligate American consumption. In this respect, Japan is part of our problem. An aside, he wonders why few are aware that Germany boasts three times the export trade as Japan, on a %GDP basis. KR:
“I am not an expert on gold, politics, or complex derivatives” I had asked him about the inverse relationship between the USDollar and gold, which will surely benefit in a great way as our currency badly falters. Kurt admitted that he did not possess much knowledge of the details behind gold vis ā vis derivative gearing and currency stabilization schemes. When I expressed suspicion of massive gold dumping to subsidize USTBond purchases throughout the Rubin reign at the Dept of Treasury under Clinton, he admitted again not to have followed the gold trails of evidence. I claim ed that perhaps half or more of the US gold treasure has been depleted. He did not summarily dismiss this possibility. I went on to describe the derivative links between bonds and the dollar, between bonds and gold, all complicated by Treasury spreads and corporate spreads and corporate rate swaps. He is aware of these derivatives and their heavy gearing, and realizes the danger if they all begin to turn on their creators. I shared some of my opinions, but not all, concerning how these engines of growth can turn destructive. He agreed in principle. He regards gold as a reserve asset commodity, but in no way a critical medium for commerce. When I asked why he was so genteel in his Letter toward our politicians, never an insult, he said he refrains from politics. JW: “Despite all efforts by the Bank of Japan, the yen will surprisingly rise against the USDollar later
this year, and bring attention to rising import prices” Kurt had many times stated that the US Economy and USDollar would be in much worse shape right now, if not for the BoJ intervention efforts. I agreed completely, but mentioned that the incurred cost was rising with each episode. With an American trade surplus amounting to 2.5% of its entire Japanese GDP, a tidal flow becomes harder to fight with official BoJ action. I claimed furthermore, the first nation to feel the harsh effects of systemic price deflation is the most likely candidate to emerge as a nation into a legitimate and sustained economic recovery. With moderate bank reform, with enormous personal savings, with two decades of liquidation if not absorption into keiretsus, this nation has recently endured a bond revolt which could be the precursor to a fledgling recovery. Capital is finally arriving into the Japanese financial market s from abroad. China has its largest trade deficit with Japan, sure to add strength to any yen revival. Kurt heard my arguments, which he was free to shrug off. He nodded in contemplation, implying credence. JW:
“Much of American commerce and culture is part of an addiction system” Kurt used the description of Chairman Greenspan as “a monetary drug dealer” in his September Letter. This was at my suggestion, which he enthusiastically accepted in agreement. I extended the analogy much further. The Federal Reserve supplies the credit drug. The enablers externally are the Asian creditors, who supply capital lent. Immediate gratification leads to quick gains in financial securities and leveraged instruments, otherwise labeled as gambles. Street “drug pushers” are the brokerage houses and the press & media, whose self-serving motives are at times questioned, but usually embraced. Current bond bubbles are a sanctioned creation in response to the 2000 stock bust and the experienced “delirious tremens” symptoms. Official denial comes in reporting data, directly in opposition to the statistical reality. Worse, denial might come from not opening monthly account statements, or not bothering to listen to reports of fraud in accounting for the national economy. Little or no investigation into depth of details, or adjustment distortions. Stirred fears of deflation deflect attention away from continued monetary inflation, which can be identified as propaganda by the drug dealer himself. Kurt listened, heard, and gave it thought. I believe it sunk in. That is one big bitter pill to swallow. I went on to identify parallel consumption indulgences. Nationally we have large federal and trade deficits, leading to foreign credit dependence. Our corporations went crazy with mergers & acquisitions, in addition to much prudent debt issuance, leading to heavy debt loads. Households consume material goods and products, filling basements, attics, and garages. This has led to heavy debt. We consume fatty foods, leading to a prevailing 40% obesity rate, even among adolescents. We purchase 45% of new vehicles in the form of sport utility vehicles (SUV), which leads to excessive gasoline fuel consumption. It is all consumption excess, with damaging consequences. Our national addiction is in an advanced stage. Deceptive
representation of US Economy : All through the 1990 decade, the financial and corporate leaders badly misrepresented productivity, profitability, as they promoted a “New Economy” myth. The effort was a charade. Productivity has led primarily to lower product prices, that is, the actual productivity, when excluding the fraudulent hedonic lifts for faster computer equipment. Profitability has been in decline for 20 years among US firms. During the expansion, any productivity rise contributed little to increased profits. During the contraction within the economy in recent quarters, productivity measured went hand in hand with a shedding of jobs on a large scale. The heavily distorted economic statistics supported the myth, which was founded upon American arrogance and claims of technological superiority. The entire fraudulent lure would not have been possible without the very real burst of technological developments. Claims of financial engineering were largely founded on accounting fraud, off-shore concealment, which masked executive theft and stock option dilution. Greenspan was the chief spokesman of the great con game crime. He talked about reduced risk from rapid information flow, and higher justified stock valuations. Talk of such risk-related valuation made Kurt laugh openly as he spoke. The deception continues to this day, as the economic recovery is greatly exaggerated. Japan, on the other hand, admits to its sluggishness honestly. He handed me a report on Japan which was clear, honest, and not very encouraging. The contrast with American deceptive reports is stark and clear. The Japanese are very open in their admission of failures, ineffective govt stimulus programs, and heavily distressed banks. The United States, in sharp contrast, perpetuates an image of efficiency, productivity, systemic capitalist advantage, and superiority that may have little basis in reality. Corruption remains rampant among US corporations and govt alike. This misrepresentation angered Kurt to a great degree. He was incensed that Daimler Benz fell victim to a purchase of Chrysler, that Vivendi went on a mindless acquisition spree, much of which was motivated by the lure of superior American assets. I cited Time Warner and their purchase of AOL. Each venture proved horribly disastrous. He had angry comments that implored Germany to develop more of a backbone to stand up to American pressure tactics, and false claims of superiority. Current
threats to US Economy and financial markets : Kurt did not have in mind any specific fault lines which would prove to be crucial cracks in the system. Maybe he was feeling me out, but such would not seem his style. He is certain of the outcome, but has no vivid preconceived notion of its pathogenesis, as far as I know. My words must be chosen here very carefully. I shared my view that with a bond bubble, the USGovt would defend the Treasury securities, perhaps with some obstacles. The mortgage bubble would be far more difficult, as such extreme leverage and risk is concentrated in the govt agencies. Their foundation is severely undercapitalized. Their structured finance is built upon a system containing woefully insufficient controls and audit transparency. The combination of heavy leverage gearing, poor controls, and rising rates makes for a witch’s brew which could annihilate Fanny Mae or Freddie Mac overnight. He tended to agree that the mortgage agencies were the weakest link in the entire bond system. I cited a 40-yr low in interest rates, but a 40-yr high in both mortgage delinquencies and defaults. I mentioned the aggressive marketing of home equity credit lines, alarming even mortgage industry experts. He countered that in Europe, people are not given the chance to extend credit in such ways. We were in agreement as to the agency primary risk location. The same day we discussed Fanny and Freddie, his evening CNBC news wrapup mentioned the Fitch downgrade of Freddie Mac debt. Great timing, made me look good for sure. I shared my other view that an external risk lies with Asia holding such a large slice of our debts. They also are depended upon for supplying the needed capital on an ongoing basis. Acting in their own best interest, they might slow their supply, which would cause our rates to rise. Worse, reacting to our trade and currency objections, they might retaliate and sell enough of our debt securities to make the point that the creditor is the true master. Now we have Trez Secy Snow on a mission to Beijing to relieve some stress, to no avail. Congressmen are talking tough, as they grandstand on rickety soapboxes fashioned on debt. Two threats, implosion of mortgage debt inside our framework, and denied supply outside its borders, these are most probable powers to force the cracks that I believe are most likely to shake the perilous American financial system. Perceptions
of nations of the world : Kurt has seen much in this world. He has seen many cycles. He survived the war. He has seen the rise of dangerous political leaders, who gain popular support, but who also undertake reckless and destructive paths. He believes the current American president has embarked on a course which will be difficult to reverse, and easy to develop into a much more dangerous pattern of behavior, both domestically within the United States, and externally within the Middle East and the rest of the world. The American Empire is over-extended, in every imaginable respect. Troops are in nations too numerous to count. Currency and bonds are held in reserve in countless central banks. Our influence is in extension to a degree totally out of proportion to the foundational strength traceable in our financial system or economic health. He believes the United States leaders have quickened their pace on a path to fascism. This man knows fascism. Most Americans have no idea what fascism is. The challenge to capture and contain terrorism, their agents, their funds, their activities, this will enable govt leaders to sacrifice citizen rights to a degree unexpected in the future. He expressed concern that “Americans will become the last Fascists.” The Soviet Union no longer can thwart abuse by the other superpower. On Asia, he believes China has become and will become a greater obstacle to economic progress in the United States, only to the extent that Americans allow it, encourage it, and actively assist it. By this he means that Chinese corporations and mfg plants have received willing help from American firms. Our firms have climbed over each other to exploit the lower wages from Chinese workers, who are virtually limitless in sheer number. The only limits are on training and skills. Recent burgeoning trade deficits by the US versus China will result in friction, all in time if not already. This is the consequence of American eagerness to exploit China. The longstanding destructive practice has sought out low-cost solutions, only to find the pursuit wreaked incredible damage in aggregate to our economy. He discussed the “Law of Decomposition” in this context, pointing out that nowhere has the backfire been more damaging, more rapidly, than with China since Most Favored Nation status was granted in 1999. He made numerous comments about how the United States has forgotten what capitalism is, how capitalism works, and how to produce wealth. The result has been that Asia is now the center for capitalism, wealth production, and real growth. The great exception is Japan, which is reeling from their own bubble aftermath, and which remains subservient to their American masters, despite continued destruction which might be coming to an end, just possibly. The
Richebacher Letter : When Kurt was with Dresdner Bank many years ago, he was outspoken on policy matters. He opposed official German economic positions, even his own bank positions. This man speaks his mind, relying on high ideals such as truth and sound economic principles. At one point in 1973, his adversaries took their stand and enlisted support from the bank’s executives. Certain vice presidents wanted, as Kurt put it, “to have me sacked.” A compromise was struck, wherein his views, opinions, and analysis would be confined to a newsletter under his control, with full freedom. Eventually, due to accuracy in forecasts and soundness of analysis, the letter flourished. He was very pleased, felt vindicated and liberated. Thirty years later, his letter continues, with over 360 issues being written and released. On a couple of occasions. I heard “work is the first priority.” It certainly is, witnessed by a record that Cal Ripken would be envious of. Friends
and contacts : Kurt remains personal friends with former Fed Chairman Paul Volcker, a contemporary of his. He was an invited guest of Richard Russell a couple years ago to LaJolla California for a meeting of minds. He has many friends and contacts still in Germany and England, including the central bank for each nation. His is a personal friend of Martin Weiss, the defender against teetering banks and debt-burdened corporations. He expressed admiration for Paul Krugman, who used to post editorials in the New York Times. He also respects Stephen Roach, whose work he reads regularly. He has not met either Krugman nor Roach. In the 1940’s and 1950’s, he knew as friends all the Austrian economists who emigrated in earlier years to the United States, Jews one and all. He expressed sadness and dismay that their sound and clear expertise failed to permeate the walls of economic policymakers. The post-war years saw a departure from counsel amidst development, as expansion was the name of the game in reconstruction. Fast forward many more years, and most if not all of Kurt’s elder statesman members of the European economic community have passed away. Doug Noland once worked with him, but moved on to the Prudent Bear. I asked if he knew the prominent and expert Frank Modigliani of Italy. He knew of him, but not personally. Kurt is now the person whom people turn to for his perspective and opinions, even counsel. He feels alone at the top as the elder patriarch. He did not seem unwilling to sit in this post, only very aware of the lack of peer-to-peer collegial opportunity, and unavailability of counsel which he himself might find. So he turns to his timeless books written by the masters who taught him well. My friends make up an army of soldiers, but no executives. I explained a lulu of an avenue recently brought to my disposal. I have been invited to indirectly pose questions to Alan Greenspan himself. A college roommate of mine used to work under House Rep Bernie Sanders in Vermont. He has urged me to write a white paper for Sanders, accompanied by 3-4 pointed questions. The time has come to put maximum pressure on our Fed Chairman. We mavericks must stick together. The topics Kurt and I arrived at for grilling Greenspan during the next Humphrey-Hawkins testimony would be: 1. hedonic pricing of computer system spending to distort and elevate GDP growth 2. money supply growth rising over 6 times faster than GDP, evidence of futility 3. dominance of financial sector debt growth, which yields no real economy benefits 4. concept of economic recovery with 5% trade gap is utterly ridiculous 5. systemic consequences of moral hazard --- low rates, bond supports, speculation Our
interaction and relationship : From the first day, I put on my game face and was very serious, thoughtful in my choice of words. Kurt made it simple though, as he would introduce one topic after another for free flowing discussion. The USGovt and Federal Reserve offer up ample material to discuss and sharply criticize as either absurd or insane. We talked at great length about a long list of topics over five days. I made him laugh on numerous occasions, which was neither an easy task nor my main objective. It is my style to mix levity with profundity. People tell me I do it well. At lunch on our first day together, I told Kurt that a few friends had expressed concern that I might react badly, overly sensitive to criticism of the United States, out of national pride. We both laughed hard. We talked easily together, roaming from one topic to another. I asked about his early years, and he eagerly shared. His past is not without mild firestorms. Such is the price to be paid for functioning as a system gadfly. On the second day, I told him about the California tragic comedy, where Schwartzenegger has a real chance at governor. Warren Buffet now offers to give financial counsel to Arnold. I related a Buffet quote, another in a long list of great quotes. Warren was asked about the recent economic signals of promise, to which he replied, “give me a trillion dollars and I will show you a good time also.” Kurt erupted in laughter. He could sense the unusually odd American political climate that would allow a former Austrian athlete and Hollywood actor to attempt a parallel path to Ronald Reagan. I called the state a travesty, and cited to him the numerous fiscal examples of irresponsible spending. I claimed that our political arena was a blend of an advertisement promotion, a well-heeled fund raiser, a media blitz, and a beauty contest that usually resulted in an inexperienced man at the helm. I claimed that the next president will be a man whom the public knows the least about, a claim he found to be a curious phenomenon. See Kennedy, Carter, Clinton, Bushy, and next Dean (a virtual unknown who leads the polls). I said America elects what they deserve, since most pay no attention to politics, but reserve the right to complain anyway. We easily discussed the circus culture, carnival atmosphere, consumption craze, with no defensiveness on my part. No way; I am a harsh critic myself. I sat at his side as he punched out paragraph upon paragraph for his September Letter. He would check with me for clarity of his point, inquire on choice of a word, seek a stronger one, and sit back to reflect on the next point to make. I appeal to the MSWord thesaurus. He pulls out a threadbare worn thesaurus book. At one point, he backed off on strong word choices. I shook my head in dispute as he looked my way, and said to him, “I have yet to see you hedge in your choice of words.” He nodded, then laughed, later to tell me “in this Letter I shall make the strongest possible warning.” We were getting along comfortably now. I dared to request the house keys one evening, eager to enjoy some freedom, seek a nightclub, walk, unwind, whatever. He took me aback with “here are the keys, let yourself in… if you lose them, I shall have to kill you.” To that I laughed and he grunted. After a couple days of attempting to negotiate the promenade and restaurants and shops, I admitted to Kurt over dinner that “I can speak some French, but unfortunately these people keep replying to me in French.” His capable French has allowed him to manage reasonably well in the area. When locals serve up a speedy tongue, he misses some words. I asked him if he thought in English, knowing he thought in German. Yes, he can think in English, which is remarkable. I found his English to be outstanding, but not so far as to include slang or certain imagery. One evening before going out to dinner, I chose to dress in slacks, a short-sleeved patterned shirt, and sandals. I reported for inspection, and said “I am trying to look more European tonight. We Americans stick out too much. How did I do?” He burst into laughter, realizing I put away my shorts with cargo pockets. I preferred those shorts since I could pack a passport, US bills, Euro bills, and valuable notes I kept, all in the ample pockets. I knew I stuck out as an American since shopkeepers or ice cream vendors would speak to me in English before I opened my mouth. One afternoon, I wanted to stress a point firmly, and showed him how to backup his few critically important files onto a diskette. Well, how shall I say? He lost interest, which is typical of a man of certain age (as the French so tactfully describe). He looked my way as I proceeded, and said “I trust you do nothing stupid on my computer.” I could not resist, shooting back with… “I do plenty of stupid things, usually spaced about a year apart, but nothing stupid today.” He smiled back at me in full trust. That day Kurt showed me the Peutz Letter, which often cites Kurt’s work. I inquired as to whether he minded that other writers sold newsletters which cited his ideas. “No, never” was his reply, to which I said “a man could make a good living citing your main thoughts.” Kurt laughed and uttered his usual “ya ya” known to roll off many a German tongue. I came to love hearing “ya ya” even when I was not nearby, since it meant Kurt was feeling quiet satisfaction or agreement with something. He had a couple favorite little restaurants, each offering a personal touch, and first-rate food. They offered outdoor tables, which I loved, not too common in the US. We were at dinner another evening, and with deadpan face I set him up for what came next, “Kurt, my only disappointment here is expecting to marry a nice young woman before I return home.” His initial look was of total disbelief, what one could expect to see when questioning sanity. Yes, Kurt had finally met a jackass! We dealt with more topics with each passing day. But after two dozen hours of deeper conversation, our attention was directed toward personal lives. He could see the pain I endured in the year 2000, as my pension was destroyed and a large stock account was decimated in tech stocks. He asked a good question, whether my anger was in response to the personal loss, or instead more toward the perpetrators on Wall Street and the USGovt statistical laboratories. I answered honestly, that sadness and occasional depression was the response to loss, but the anger was to the fraud that seemed endless, escalating, showing no signs of letup. He was surprised to hear that I had been aware of infotech hedonic fraudulent amplification of GDP and growth rates since the mid-1990’s. I shared with him my background of 13 years with a major computer firm, the object of IT hedonics being my own business sector. He revealed some of his past, fond memories of his deceased wife. He told of his love to work with his three children running and playing under foot. He shared with me his old home of one year Valbonne, a truly picturesque locale. He ventured another afternoon with me to share St Paul de Venve, urging me to go walk for 30 minutes, enjoy myself, peruse the historic little fortress town, and maybe see the church at the summit. I did, and bought a gift for a friend back home. He relaxed with some cocktail in a cozy outdoor restaurant out of the hot sun. This man really understood my distress when I admitted that at times I felt ashamed of my nation for its reckless leaders, its prevalent corruption, its incessant advertisements, its widespread obesity. We openly discussed the inner turmoil I feel. Our land grab in Iraq, our lunge for oil fields, under false pretenses, it all disgusts me, national interest or not. I own an Irish dual passport, a privilege from my mother’s birthright. I might someday rely on it for employment abroad in the European Union if our greatest fears come to pass. The United States might sooner than we know turn its anti-terrorist legislation on its own citizens, denying civil liberties like never before. One might someday risk US citizenship by having an acquaintance with an Arab who is not what he seems. Kurt is now aware of the Patriot Act, as well as its more controversial Act II. The whiff of diminished freedom is in the air. It in all likelihood will get worse, as the economy falters, more wealth is lost, military adventures are met with retaliation, and security concerns come to the fore with even greater urgency. Kurt and I have talked by telephone a few times since my return home. Something is clearly missing in the nature of the exchange. The distance is difficult. The lack of opportunity to sit near him and talk with ease, that is missing. This is a remarkable man with a great gift, who shares his keen view and vision to the world. With me, he shared much, and I am grateful. What a treat and privilege! I felt a growing warmth develop which was nice. I could never be a son to him, but a trusty understudy would be more than a rewarding path. My
impressions of France and Cannes : No report from France would be complete without mention of four big items --- friendliness, natural beauty, food, and visible health. I was informed that the French people are basically friendly, far more helpful to struggling tourists than in past decades. This was clearly the case, as numerous attendants helped me deal with the difficult Paris train system. One young fellow spent 15 minutes willingly with me, located a handy map of the trains and metro for me, and sent me on my way with a smile of satisfaction. Hospitality was not perfect. After a nice lasagna dinner in Paris, I asked for some directions from the restaurant waiter. A simple request, after a generous tip placed on the table. He helped initially, then after a followup question, he snapped “assez.” I grunted, shook my head, and walked off, computer on the left shoulder, bag on the right. The bastard had said rudely “enough.” With pigeon French at the ready, I managed to succeed in finding my way to the Eiffel Tower after two train transfers. I must be the only man in the annals of history to ascend by foot the first two stages of the tower, roughly 25 floors, loaded down with a laptop PC on one shoulder, a bag of clothes and belongings on the other shoulder, and 20 lbs of Richebächer Letters a balanced burden to each parcel. There were no lockers anywhere, so my daily workout was laid before me, with a sweaty outcome the certain wage. The Eiffel Tower was breathtaking and spectacular. I purposely took the high-speed train to Cannes for the experience, never having traveled on such a vehicle. It runs at 185 km/hr, which is about 115 mph. It is fast, sleek, and smoooooth. From my bedroom window at Kurt’s home, I could hear the TGV (trčs grande vitesse = very great speed) each night. The TGV gives off a tremendously powerful, low-pitched roar, which is not loud, but is absolutely awesome to behold. The word “awesome” best describes it. It contains perhaps 20 cars, four locomotives, and epitomized sheer power with the grace of magnetic levitation. It leaves parallel highway car traffic standing still. Nothing like it can be found in the US. From the train I could see the beautiful uncrowded countryside, the well-kept villages, terra cotta roofs, the lack of trash, absent billboards, the orderly little farm plots. Cannes was gorgeous. It reminded me of a more laid-back Palm Beach, Florida. Comparisons to US sites bothered Kurt, so in time I kept the comparisons to myself. He would bark at me “enjoy it as France , and no more comparisons.” He was right, but it is only natural to picture a new place against a backdrop reference from a native land. Cannes was full of beautiful orchids along the main boulevard, La Croisette. The promenade was wide. Throngs of people walked the promenade by the beach. Many attractive people walked every day, young and old. The beach was clean and wonderful. Being more a family area, the beaches were occupied by far fewer topless women sunbathers than I would have preferred. But I managed to scout several shapely women who dared the sun’s rays. The hotel and apartment buildings all stood under ten stories high, each with distinctive and elaborate architecture and markings. Most shop attendants spoke at least a little English. At hotels, they spoke excellent English and did not hesitate to help. One particular ice cream vendor was absolutely effusive in her sexual appeal, a young blonde far too young for me. I went back to her at least 6-8 times, craving her product. Heck, it is a free country. I sincerely doubt she is aware that the dollar is suffering from oversupply. She much preferred euro slugs and tokens to American versions of the same counterfeit. On my second night in Cannes, the town treated the people to a wonderful fireworks display in commemoration of the liberation of Paris at the end of WW2. The duration and quality was every bit as fine as what I have seen on Memorial Day and Independence Day celebrations. Language is a challenge, as always. Once upon a time, I won a high school award in French. Two college courses fortified the conversational side, but not much. There is no question of the inadequacy of such education for the challenge of daily life immersion. I forgot my dictionary on this trip, where economics was the main course. Next time, I will want to be better equipped and in more control of the interaction. I will also want to see if I can meet up with that lovely Aurelie from Nice, whom I met on the train heading south. So many superlative traits. What a pleasant surprise to receive from her a reply to my recent email, curious about my return. They don’t make them like her in the ole USofA, at least none that I have met in many years. A nation of friendlies. In the course of one week’s time, I must have crossed paths with at least 2000 people --- tourists, regular people, workers, mothers, fathers, teenagers, children. I was astonished that I only caught sight of 4-5 fat people in all of my paths in France. In the US, one can spot 4-5 two-legged free roaming buffalos in no more than ten minutes, even with the observer half asleep. Men and women alike, almost without exception, kept themselves in good physical shape in France. The food was somewhat expensive, but all excellent. The attendant vegetable arrays on my dinner plates were delicious. These French people put a premium on food and health. We in the USA eat fried food, burgers, pizza, beer, and mainly talk about health. Marlboro cigarette packs were by far the #1 brand in litter on Cannes streets. Philip Morris would be proud. In fairness to the city, the litter was perhaps one-tenth as prevalent as in my native land. They can rest assured that I added not at all to their litter, and disposed properly of many items that lay on my path. I like to leave the place nicer than how I found it. Such is true of my parking lot, malls near my home, wherever convenient to lean down and retrieve trash. When I arrived at my airport boarding lounge in the Paris Charles de Gaulle Airport, I came across a man who tipped the scales at approximately 280 lbs, of height less than mine. I stole a short snooze under the seats for another hour with my big bag used as a pillow. When I awoke, I saw a woman on cell phone jabbering loudly, at least 60 lbs overweight. In line as we boarded, a man huffed and puffed under the burden of moving both body and baggage, perhaps close to 80 lbs overweight. It struck me. I can rest assured that, yes indeed, I was close to home in America. Myself, I am of slender dimensions, somewhat blessed with muscles draped on my 175-lb and 6-foot frame, with a waist size the same as in my college years. But then again, I have abstained for 20 years from the American national fruit, french fries. In plain terms, I find American obesity to be a national disgrace. A friend calls the US “the land of hippos and cows.” We have become a laughing stock to the world. Aboard the Air France jetplane, the obesity issue came close once again. An oversized woman caddycorner to me got into a heated dispute with her neighbor in front, who wanted to tilt her own seat back a little. The American woman’s massive girth did not allow it. An argument erupted. The French man next to me shook his head and said “in France, it is a crime to treat your body in this way.” I made a comment how the American obese require the world to adjust to them, and wear their excess baggage as an entitlement. Oh, the unaddressed problems of the United States. I sincere |