Last week, we discussed the real secret of success. As you knew all along, there is no secret. Hard work over a long period of time pays off – just like compound interest does the job on your savings.

“Compound Effort Over Time,” is how we put it.

The longer and harder you work at something, generally, the more success you have.

But we left an intriguing idea dangling. What if you could work at something longer than a single lifespan? What if you could keep compounding for more than one generation? What if one generation could help the next succeed?

The idea is both self-evident…and shocking. In America, you are supposed to be self-reliant, self-sufficient and independent. You should believe that you are responsible for your own success. You are supposed to be able to do whatever you want to do…and go as far as your luck and pluck permit.

What if it weren’t true? What if your success in life depended largely on your parents and grandparents?

Driving across Baltimore recently we went through a working class neighborhood called Dundalk. Fifty years ago, it was a neighborhood of white, blue-collar factory workers and their families. Men earned good wages at the GM plant…at Bethlehem Steel…in the ship terminals, mills and factories. Women stayed home and raised their families.

And today? The factories are largely gone. Now, men work in lower-paying jobs in the service sector. Women are single mothers. But they’re still in Dundalk.

We have no facts. Just observations and guesses. But fact-finders have already concluded that America has much less ‘social mobility’ than it used to have…even less than Europe’s sclerotic social-welfare states.

Why do people stay in Dundalk? Are they genetically programmed for the lower middle class? Are they culturally suited for low-skill, low-income employment? Are they educationally prepared for nothing else?

Sociologists argue over the causes. What interests us are the effects. For whatever reason, the next generation picks up where the last one left off.

We know that wealth is accumulated over many generations. We know that just by looking around. Our generation did not build many of the edifices we see…nor clear the fields where crops are planted…nor invent the automobile, the aeroplane, the television or the toaster. We inherited those things, and much more besides.

We know too that if you’re born in New York rather than New Delhi, you’re likely to be richer. And we know that if you’re born to a rich family in midtown Manhattan, you’re likely to be richer as an adult than if you’re born to a poor family in Harlem.

And yet, how many people take responsibility for their children’s wealth? How many figure out how to compound their success into the next generation…and beyond?

There are many things that take more than a single generation to accomplish. If you want mature oak trees lining your driveway, for example, you had better think in terms of generations…or start very early. Olive trees can take an entire generation – 35 years – before they produce a decent harvest. Then, they live for centuries longer.

And what about a skill or a reputation? How long does it take to build a reputation as a great beer maker? A great winemaker? A great guitar maker? Or a great banker?

Not years. Generations.

The Martin family started making guitars in 1811. Now, everyone has heard of Martin guitars. The family is still making them.

The Beretta family is still making guns; the business was begun in 1526.

The Rothschilds have been in banking since the 18th century.

The Lemoine family started publishing books in Paris in 1772; they’re still at it too. And the Hoshi family in Japan has been running a hotel for 1,200 years!

Of course, these are rare examples. But there are a lot of businesses that involve delicate judgments, unusual habits, or the kind of specialized knowledge that is very hard to come by in a single generation or learn in school.

Parents mortgage their houses to send their kids to school. But the parent who advises his child to stay in school or graduate school may be doing him a big disservice.

The common belief is that people who get advanced degrees earn more than people who don’t. Statistically, this is true. But it is misleading. It doesn’t mean that any individual who gets a degree or advanced degree will earn more than if he didn’t. All it means is that taking the whole population, average people who have more education tend to earn more than average people who have less education. Doctors earn more than carpenters. Engineers earn more than backhoe operators. But the average person earns an average salary. Obviously, if you want to earn an average salary you are better off in a field where the average is high.

But what about earnings that are not average? What about the fellow who was going to be a doctor…and instead decides to start a business of his own…or goes to work for a pharmaceutical company? Would he be better off with more years of book learning…or more years on the job?

To ask the question another way, would Bill Gates have had more success if he had stayed in Harvard and gone on to law school? We don’t know. But it is unlikely.

To turn to a more common example, what about the child who is destined to enter the family firm? Is he better off spending more time in school or going right to work? Almost every parent would say – ‘let him stay in school as long as possible.’ If pushed to identify the merits of further education, the parent would say ‘it can’t hurt.’

But maybe it can hurt.

People learn, no matter where they are and what they do. So, the real question is, where are they likely to learn more…or which kind of learning will be more valuable?

Book learning has a value – especially in the sciences. But if the hypothesis of “Compound Effort Over Time” is correct, it may be more valuable to begin early accumulating the instincts, experience and hunches that prove so valuable in real life.

Plus, time spent in school may not only be less productive…it may be counterproductive. Much of what is taught – depending on the discipline – is not knowledge at all. It is nothing more than intellectually fashionable claptrap which later proves to be completely false. Imagine the poor family that sends a child to an Ivy League school so that he may get a degree in economics or finance. Then, it sends him to a business school so he may deepen his understanding of the subject. By the time the kid finishes school, the family has spent nearly $300,000 on his education.

Then, when his studies are finally completed, he comes back and applies the latest theories of finance to the family fortune. Had he arrived on the scene in 2005-2007, for example, he might have loaded up the family with a portfolio of mortgaged-backed derivatives, in order to earn higher yields from ‘safe’ investments.

He might have applied Modern Portfolio Theory too…like the geniuses running Harvard’s endowment…and wiped out half the family fortune.

Or maybe he would turn his education to the business itself. You can imagine him telling dad and the old-timers that there were new and better ways to do things…and that they should be trying to ‘maximize shareholder value’ by leveraging the firm.

The old timers would shake their heads.

“No… Debt doesn’t seem like a good idea…” they would say.

Or, “Hmmm… Something doesn’t seem right…”

But asked to explain why they were reluctant to put the new learning to work, they would have a hard time arguing the point. They would only have hunches and habits, the accumulated wisdom of decades; it wouldn’t stand up for long against the mathematical proofs offered by the young MBA!

Finally, the old guard would give up:

“Well, I guess you’re right. We can increase our return on equity by borrowing money… I guess that makes sense.”

And it did make sense – for a while. In 2006, the firm might have been more profitable than ever…and maybe even have bought a corporate jet and begun expanding into new markets.

“Well, I guess Sonny was right,” the old man could say to himself. “It is a new era.”

And so, the firm – like Lehman Bros. – that had done business successfully ever since the War Between the States, loads up with debt. And then, when the next major cyclical downturn comes, it goes broke!

Julius Caesar never earned an MBA. Nor did Cornelius Vanderbilt. Or Henry Ford. Or Andrew Carnegie. Or practically any of the great successes of business and financial history. MBAs hadn’t been invented!

Caesar learned his trade by following in his father’s footsteps. His father showed him how to be a praetor, a senator and governor of an Asian province. Caesar learned how to talk to people. He learned how to think. He learned who he could trust. His father made the introductions. His father set the pace. Then Caesar was able to step into his father’s footsteps, and keep on walking.

Caesar did not start from nowhere. He did not start with nothing. He started off where his father left him. He launched his career with the capital his father gave him – skills, reputation, experience, money, and contacts.

One of the many under-rated legacies a parent can leave a child is a good reputation. Trust can take generations to build. We trust Mr. Martin to build guitars because his family has been making them for many, many years. We trust Mr. Ford knows how to make cars and Mr. Hershey knows how to make chocolate.

“The thing about doing business in China,” said a man sitting next to us on the plane, “is that it can take a very long time to build up trust. And without it, you’re lost. They don’t trust you. So they won’t treat you very well. That’s how they protect themselves, by cheating you first.”

Trust reduces the cost of doing business. Less need for lawyers and contracts. No need for insurance, bonds and hold-backs. That’s one reason ethnic groups tend to prefer to do business internally. They understand one another. They know what to expect. They know who they can trust…and how much.

Even in well-known, open careers such as filmmaking, banking and politics, trust, contacts and ‘brand’ awareness are extremely important. It’s tough to break into acting or politics, for example, but it’s a lot easier if your parents had already opened a breach in the wall. The number of people in the trade today whose parents and grandparents were also in it prove the point; there are far more of them than would be predicted by pure chance. Of course, it’s easy to see why. The children know how the business works; outsiders don’t. They have the contacts; newcomers don’t. People in the business trust them to know what to do and how to do it. So, it’s much easier to gain entry for someone such as Angelina Jolie (father: Jon Voigt), Michael Douglas (father: Kirk Douglas), Jeff Bridges (father: Lloyd Bridges)…or dozens of other well-known political figures.

Of course, that could be said of almost every career and every business – whether it is plumbing or haberdashery. One generation lays a foundation. The next can build on it.

Regards,

Bill Bonner
for The Daily Reckoning

Generations of Wealth originally appeared in the Daily Reckoning. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Bill Bonner, the founder of the the Daily Reckoning released his latest book Dice Have No Memory: Big Bets & Bad Economics From Paris to the Pampas in April 2011.

Read more here:
Generations of Wealth

The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

From the fans at Citi Field in Flushing to the mobs at the White House gates, “USA, USA,” was the chant heard across the nation. Jubilant Americans celebrated the breaking news that Public Enemy No.1, terrorist mastermind Osama bin Laden was dead.

Ten years have passed since the Twin Towers toppled and the Pentagon was whacked. After two failing wars and billions of dollars spent on the global manhunt to bring in Bin Laden “Dead or Alive,” America has now claimed victory. “This is bigger than the moon landing, this is huge,” exclaimed Fox News’ Geraldo Rivera.

“Justice has been done,” intoned President Barack Obama announcing Bin Laden’s death. He not only called it “a good day for America,” but also declared that “The world is safer. It is a better place because of the death of Osama Bin Laden.”

While Secretary of State Hillary Clinton echoed the sentiment that “justice has been served,” she evidently took issue with the Presidential vision of a “safer” world, warning that terror “won’t stop with the death of Bin Laden, we must redouble our efforts.”

If it’s a “safer” world, why the need to “redouble our efforts”? These were but two of the contradictions coming from the White House in the early hours of the breaking story, and many discrepancies would follow. Some of them would be noted and debated, but totally absent from the 24/7 news coverage, political “high-fives” and patriotic triumphalism was the simple question: Why did Osama Bin Laden, former mujahedin ally of the United States, turn against it to become Public Enemy No.1?

Was it that he and his Al Qaeda fighters suddenly decided to hate America’s “freedom and liberties” as George W. Bush maintained? Or was it remotely possible that the attacks were motivated by US foreign policy – with its unconditional support of Israel and concomitant support of the same Middle East monarchs, autocrats and dictators now being toppled in the wave of revolution?

Also absent from America’s non-stop exultation and self-congratulation, absent from the acres of newsprint and the countless hours of air time, was any discussion of the practical consequences of the death of Bin Laden who, before making it back into the headlines, had been both a fading memory and a non-issue.

Osama Bin Who?

So irrelevant had Bin Laden and his jihad rhetoric become that, in the months preceding his assassination, every one of the uprisings occurring throughout the Middle East and North Africa was secular and in direct opposition to Bin Laden’s militant pan-Islamic vision.

In a sentence: There were no practical consequences whatsoever attending the death of Osama Bin Laden. It would do nothing to:

• Help America win losing wars in Afghanistan and Iraq.
• Lower the unemployment rate.
• Stop the US or European nations from sinking deeper into recessions and depression.
• Revive failing real estate markets or solve the debt and deficit crises.
• Lower oil and food prices.
• Reverse the damage or stop the radioactive fallout from Fukushima.

What Osama’s death did do was boost the President’s sagging poll numbers and deflect public attention from the news that really mattered.

On Wednesday, April 27th, just four days before Bin Laden was killed, a new Public Enemy No.1 held his organization’s first ever press conference. Federal Reserve Chairman Ben Bernanke told the world that the United States would continue its low interest rate polices and, in effect, continue to flood the world with cheap money.

The global equity markets immediately responded to the predictably destructive consequences. Before Bernanke ended the press conference, gold prices shot up $20 an ounce, silver $2, and the dollar fell to a 3 year low against a trade-weighted basket of currencies. Despite the Chairman’s claims to the contrary, the US dollar would continue to devalue and subsequently dollar based commodity prices would soar.

Needing neither a mountain lair nor sequestration behind closed Fed doors, the new Public Enemy No.1, “Osama” Ben Bernanke committed, in broad daylight, an act of financial terrorism that would have far reaching and long lasting implications for the American public. As the value of the dollar went down, the cost of nearly everything would go up…excepting the cost of “risk.”

This meant that financiers could continue to speculate and exploit the equity markets, with the profits going only to the 10 percent of Americans that owned 90 percent of the stocks, bonds and mutual funds. Moreover, the Fed reasoned the cheap dollar would also give a competitive edge to big US exporters. But as exports rose, so did the price of imports, putting further strains on average consumers whose real wages fell ever further behind the pace of inflation.

Bombs Away

What Osama Bin Laden’s death also did was to deflect attention from the US/NATO “humanitarian” mission in Libya, which, just two days earlier, had delivered several humanitarian bombs upon the home of Muammar Qaddafi’s son, killing him and three of his children.

The bungled attempt to assassinate Qaddafi (who had been visiting his son) was condemned by Russia, brought recriminations against NATO from other UN members for overstepping the UN mandate, and called into question the legality of the air strike.  With a groundswell of public sympathy building around the world for Qaddafi’s murdered grandchildren, the very purpose and future of the entire mission was being called into question.

Trend Forecast: With the death of Osama Bin Laden, the restored, rebuilt, new and improved terror bandwagon rolls again…and it will keep rolling until Election Day 2012. Whether a real terror attack happens or not, Barack Obama, as he has done before, will take a page from the G.W. Bush playbook and keep the American public in a state of fear and hysteria.

And should terror strike the US, UK, France or other NATO ally, their governments, media “presstitutes,” pundits, and the public at large will debate and deplore the “cowardly act” and demand “swift justice.” They will blame Bin Laden sympathizers, Al Qaeda cells, Muammar Qaddafi, radical Islamists…but never will they blame themselves. They will refuse to acknowledge that what they called “terror” was nothing more than “revenge”; reprisal for foreign meddling in the domestic affairs of other nations, or retaliation for military invasions launched by the US, UK, France or other NATO ally upon a sovereign nation.

Meanwhile, back in DC, the Chairman of the Fed, Public Enemy No.1, “Osama” Ben Bernanke, will mastermind the destruction of the American dollar, the US economy and the purchasing power of the American people.

As we have been forecasting for years, gold, despite its recent pull back, is on-trend to reach $2000 per ounce (and possibly higher). And while Ben Bernanke claims that inflation is merely “transitory,” considering his penchant for printing trillions of digital dollars not worth the paper it’s not printed on, we see inflation as both entrenched and rising.

Regards,

Gerald Celente
for The Daily Reckoning

[Editor's Note: The above Trend Alert is available as part of a subscription to The Trends Journal, which is published by Gerald Celente. The Trends Journal distills the ongoing research of The Trends Research Institute into a concise, readily accessible form. Click here to learn more about and subscribe to The Trends Journal.]

Bigger than Bin Laden – America’s New Public Enemy No.1 originally appeared in the Daily Reckoning. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Bill Bonner, the founder of the the Daily Reckoning released his latest book Dice Have No Memory: Big Bets & Bad Economics From Paris to the Pampas in April 2011.

Read more here:
Bigger than Bin Laden – America’s New Public Enemy No.1

The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

In a previous Daily Reckoning, we offered dear readers a look at one of our principles of financial success. “Financial Escape Velocity” we called it.

Today, we give you one of the principles of success in life: “Compound Effort Over Time.” You’ve heard of the ‘miracle of compound interest.’ Well, there’s a similar miracle at work in the rest of life…

“I’m about ready to give up,” said Jules (23) over the telephone.

The young man graduated from college two years ago. He could have easily entered the family business. Instead, he decided to try to make his career in one of the world’s most difficult métiers – as a singer, musician, songwriter.

He moved to Brooklyn, which seems to attract young musicians like London attracts fund managers. He took courses at Julliard conservatory. He wrote songs. He put them on the Internet. He sang at ‘open mic’ nights in clubs and bars.

But after 6 months, it didn’t seem to be going anywhere.

Meanwhile, his sister, Maria, voices similar disappointment and impatience.

She too has chosen a difficult career; she trained as an actress, moved to LA, and had – like her brother – approached her career in a disciplined, organized way.

But these are not careers where discipline and organization come easily or pay off readily. There are no fixed hours. And no fixed route to professional advancement. Half the work you do, at least it seems to us, is just figuring out what work to do.

Maria has had some success on TV and the movies. But she hasn’t gotten the major roles she hopes for.

“I’ve been in LA for two years already. I’m going to keep at it for another 3 years, according to my plan. But if it still isn’t working, I’m going to have to find something else to do.”

It’s a rough life. Maria lives in a tiny studio apartment and works from dawn to dusk trying to get acting jobs. She supports herself, barely, by doing modeling work on the side. Jules, meanwhile, is literally a starving artist, working one day a week as a handyman to help pay the bills.

We don’t know how others do it, but our children couldn’t afford to be starving artists without family support. Rents are too high. Health care…transportation – if they were forced to pay 100% of their living costs, they’d have to give up on their artistic careers and find other lines of work.

The point we are making is that success doesn’t always come immediately. And it’s not easy to sustain a career that doesn’t provide quick, positive feedback. But in our experience, it pays to stay the course.

Starting out in life, young people are practically interchangeable parts. They leave school not knowing much of anything. If they can read and write clearly, they have an advantage over most college graduates. But school doesn’t prepare them very well for real life. School problems are bounded, controlled, and simplified. Usually, they are idealized, with the confusing parts taken out. In history, for example, they are taught broad themes…and specific ‘facts.’ But the sequence of events in real life doesn’t follow simple scripts. Instead, it is endlessly complex.

Historical characters are like stick figures, heroes or villains according to the storyline. In real life, they are like the people we know personally – they have their positive qualities and their negative ones; they perform well in some circumstances and poorly in others. They are neither good nor bad…but subject to influence.

That’s why you cannot make a good history out of recent events; you know it too well!

In every discipline, the phenomenon is the same – in school, the complexities of real life are removed so that students can be tested on set groups of memorable, learnable, understandable bits of stripped-down, sanitized ‘knowledge.’

That is why more education does not always lead to more success in the real world. In fact, it could go in the opposite direction. The better you get at handling the artificial world of academia, the worse you may do at solving the real world’s infinitely nuanced challenges.

Problem solving in the academic world typically involves a part of the brain – but only a part of the brain. It is the ‘rational’ part…the part that remembers facts, reads, writes, and connects the dots. That is the skill measured by the SAT tests, for example. They are tests of ‘scholastic aptitude.’ And they are pretty good at measuring what they are supposed to measure. If you able to do the kind of tricks the tests require, you’ll be able to handle the kind of work they give you in school.

But life sends very different tests your way. Life’s tests involve many, many more variables – so many that your ‘rational’ mind is frequently overwhelmed. The human face, for example, is capable of hundreds…or thousands…of different expressions. Some people seem better able to read these messages than others.

In the world of textbooks, other people scarcely matter. You read. You write. You check the boxes. But once you get into a workplace, you are faced with an entirely new test. How well can you get along with others, motivate them, lead them?

In school, tests are anticipated. In real life, you never know when you will be tested. You never know what you will be tested on. And even when you are in the middle of an important test, you often don’t know it.

In some careers you are able to apply the body of knowledge you picked up in school, but not many. In most careers, you have to learn on the job – a new body of knowledge, often additional, sometimes completely new and different. And unless your job is to throw the switch on a toll bridge, or to collect tolls on a toll road, your new knowledge is likely to involve a great many things that are uncertain…unknowable…and variable.

Even in ‘routine’ careers there is still plenty of room for career advancement and money-making. But it requires you to step beyond the routine. If you are a schoolteacher, for example, you might have to write a book on education…or start a school of your own. Or, if you are a carpenter, you could set up a carpentry business…or use your skills to build something rare and interesting enough that it could be sold at high margin…or mass produced.

Generally, the more formulaic the work, the less scope for making money at it. The more limited, that is to say, the more like school any job is, the less likely you are to turn it into a source of wealth, power, or outsize success.

But assuming you are doing something that is not routine, not formulaic, and not limited (an assembly-line worker, for example, may be able to earn a good living…but it is not a way to build a fortune), what is the secret to making a success of it? Ah, glad you asked. At least part of the secret is sticking to it. Here’s why…

If your work is not simple and not formulaic, you need to use a fair amount of creative thinking, innovation and entrepreneurship to get ahead. Sometimes your work can be reduced to simple, school-like thinking. More often, it is more complex…involving subtle judgments about people…guesses about how others will react…mastering new technology and leadership skills needed to get others to follow your plan, and so forth. It may involve raising money…’selling’ your ideas…taking a chance on a new career or a new business…convincing clients to leave their habitual sources…or convincing employees to work harder…or better.

You may have to develop a new product. Or, maybe you have an insight that tells you how to invest your firm’s resources more productively.

Whatever it is, it is likely to require more than your ‘school brain’ to make it happen. It is likely to involve wisdom…intuition…and ‘people skills.’ It is likely to require more of you – your brain…your personality…your heart. And maybe soul too.

It is likely to require trusted contacts, seasoned hunches, educated guesses…

Where do these things come from?

Malcolm Gladwell’s book, Outliers, makes the point that there is no secret to success. Successful people just put in more hours than other people. Our point today is similar. Success is usually the product of compound effort over time. It takes time to develop contacts. It takes time to develop trust – both of your own team and outside clients/customers/associates. It takes time and experience to develop the hunches and instincts that are useful in real life. It takes time too to understand other people and learn how to work with them. It also takes time to build a foundation of human and financial capital that allows you to take advantage of the insights and opportunities that experience bring you.

Time does not work in a linear, mathematical way. As with compound interest, time pays off geometrically. As contacts, experiences, wisdom, innovations and intuition are added one to another, your opportunities multiply. A $100,000 deal that you might have done when you were 25 grows into a $1 million deal 5 years later. And instead of doing two deals a year…you might do 10 a year.

This is also why it is so important to put in lots of time. Gladwell refers to the Beatles, major league athletes and people such as Bill Gates. In every case, he found that the leading figures in their industries put in thousands of hours – usually far more than their competitors. They may appear to be ‘gifted.’ Their achievements may seem effortless. But they are almost always the product of time.

Not only that, but the time spent at the end is much more powerful than the time at the beginning. You can see this by looking at charts of compound interest. Starting from a low base, the first series of compound interest produce little difference. But at the end, the results are spectacular.

Start with a penny. Double it every day. At the end of a week you are still only adding 32 cents per day. By the end of the third week, however, you’re adding more than $10,000 per day. So you see, the last increments of time are much more important than the first.

It doesn’t exactly work that way in real life, of course. Hang around too long and you get tired…and the lessons you’ve learned might not be applicable to the new realities. Suppose, for example, that you had learned to make the perfect buggy whip, at age 55, in 1910! Or imagine that you were the leading expert on silent movies…just before the ‘talkies’ started. Or maybe you were cornering the classified advertising market…just as Craigslist and eBay made their appearance.

But aside from that kind of a setback, time compounds your advantages. At age 20, you may know less than everyone in your business. But then, you work 10 hours a day, while others only work 8 hours. In 20 years, you may know more than just about anyone. Then, who gets the new contracts? Who finds the new opportunities? Who has pricing power?

Who makes money?

Compound interest works because each addition is then put in service to earn another increment of gain. Compound effort works the same way. Every insight, innovation and useful contact helps bring on another, bigger and better one.

Remember, success is competitive. While you are adding to your business capital, your competitors tend to wear out…move on…or retire. Sticking to it is not easy. People tend to get distracted. They often want easier, simpler, faster opportunities. They give up their accumulated capital…and take up something new. That leaves you in a commanding position.

Stick to it.

Regards,

Bill Bonner
for The Daily Reckoning

Compound Effort Over Time originally appeared in the Daily Reckoning. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Bill Bonner, the founder of the the Daily Reckoning released his latest book Dice Have No Memory: Big Bets & Bad Economics From Paris to the Pampas in April 2011.

Read more here:
Compound Effort Over Time

The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Breakfast was a real drag, as the kids were whining more loudly than usual about money, and how they needed some money, and how they didn’t have any money, and how they were the only people they knew that were not dripping with cell phones and iPods and reader tablets and all that stuff, like this was supposed to make me rush out and buy them these things so that I don’t damage their fragile self-esteem and ability to make friends, so that they can call and text each other all day and night about how much they hate me, and hatch their little plans to put poison in my food or something; you never know with kids, you know what I mean?

Anyway, I said, my mouth full of fabulous fried eggs and crispy bacon (instead of the usual fruit and whole-grain cereals with no-fat milk crap I usually have to eat, because my wife was out of town), “You brats can have the biggest, baddest electronic gizmos made. You can have so many of the freaking things, in fact, that you will need a cart to carry them all around. Just get jobs and then use the money to buy them, like everybody else, ya little blood-sucking parasites!”

This is where my wife would usually intervene, chastising me for yelling at them and telling me to be quiet and consoling the kids. But (and this is the important point) she ain’t here now.

So, finally, I had the chance to, uninterruptedly, explain to what appear to be congenital idiots, for the thousandth time, how the horrible Federal Reserve creates excess money, see, which increases the money supply, which increases prices.

“This,” I explained, “is just the ‘prices side’ of the problem. Now let’s look at the ‘income side’ of the ledger. I don’t make any more money than I made three years ago. Something has got to give, and in this case, it is you. Simple as that!”

I naturally left out the ugly part about how I make the same money, and am lucky to get it, because I am lazy and incompetent, unless I want to pay attention to what I am doing, which I do in inverse relation to how well my golf game is going, like after that unexpected, beautiful, soaring 4-iron I hit last week!

Straight as an arrow flew the gleaming ball, shining in the sun, right at the flag, landing picturesquely perfectly on the green before rolling magnificently to 3 feet from the cup, which I then 3-putted for a bogie and happy to get it. But what a memory!

Back from my delightful reverie to the disagreeable pouting faces of the kids, they let me know that they still do not see the problem.

Suddenly, I hit upon the idea of explaining, “If I make $1,000 per day, but my expenses are $1,200 a day, and getting higher every day, where am I going to get money to buy you stuff?”

At this they started laughing at me, and mocking me, and saying, “You never made a thousand dollars a day in your life! And you never will, either, because you are stupid and mean and cheap and a terrible father who enjoys seeing his children suffer! Boo hoo hoo! Look at us suffer!”

The point was well taken, and I quickly rephrased that to “If I make $200 a day and my expenses are $220 a day, how long can I last?”

Again they started laughing in hooting derision, saying, “$200 a day? Don’t make us laugh, you liar!”

As a last resort, I resorted to the truth. I said, “Okay, if I make minimum wage of $7.25 an hour and I spend $8 an hour, how long can I continue before I am bankrupted and I have to send you kids to foster homes?” which thankfully diverted the conversation as to the pros and cons of that shocking happenstance, where I took the “pro” side.

I was happy not to have to explain it to them that I am using so much money to buy gold and silver as a desperate, frantic response to the price inflation that is guaranteed by the Federal Reserve creating such inflation in the money supply, especially by committing the Big Unholy Sin (BUS) of using freshly-created money to buy government debt.

Keeping from having to confront the kids about it is the hard part, because buying gold and silver is so easy that people say (fill in the blank).

If you answered, “Whee! This investing stuff is easy!” then congratulations! You are waaaAAAAaaaay ahead of the vast majority!

The Mogambo Guru
for The Daily Reckoning

The Long and Short of Spending More Than You Make originally appeared in the Daily Reckoning. The Daily Reckoning recently featured articles on stagflation, best libertarian books, and QE2

.

Read more here:
The Long and Short of Spending More Than You Make

The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Ehow.com relates a piece of history in that “Since the creation of the Federal Reserve in 1913, the money supply had increased 240 percent from 1913 to 1920, because of a relaxed gold standard, and prices had risen by an identical amount.”

Gaahhh! Prices rising 240%! In seven years, the money supply increased 240%, meaning it more than doubled, as did prices! No wonder they had a recession!

Parenthetically, it is surprisingly hard to Google-search that 1913-1920 period of time to find anyone saying, “We’re Freaking Doomed (WFD)!”

However, this is not a critique of the powers of a Google search nor, alternatively, the apparent stupidity of the people back then who did not realize how important it was to buy gold and silver when the Federal Reserve was doubling the freaking money supply.

Instead, the important point is the “prices had risen by an identical amount”, in that it is inflation that is The Thing To Be Feared (THTBF) and here is what appears to be a handy gauge to estimate how bad the price inflation is going to be!

Given that the money supply has tripled since 2003, and is rising at a faster rate thanks to the Federal Reserve’s insane-yet-new QE2 program that lets the federal government pump $100 billion per month into the economy through its many, many programs and many, many beneficiaries.

The worse news is that prices do not tend to come back down, and the evidence shows that “These higher prices and the expanded money supply remained even as the economy recovered from the early 1920s depression.”

Fortunately, things got dramatically better, thanks to Federal Reserve goosing, and thus were born the Roaring Twenties, where everybody was named Zelda and the beautiful people were roaring around in big cars with running boards, making tons of money in the stock market and having fun until, as current Federal Reserve Chairman Ben Bernanke believes, the Federal Reserve caused the “market crash in 1929 and the Great Depression that followed,” all because “in the two years leading up to the crash, the bank steadily raised interest rates, tightening the money supply, which triggered the crash on Wall Street.”

Crash! Well, raising interest rates and tightening credit to stop an expansion of the money supply will do it almost every time! The whole point is, and which the clueless Ben Bernanke of the Federal Reserve misses completely, is that there is NO way to tighten credit, shrink the money supply and raise interest rates without harming the economy, so it is important that you not loosen credit and drive down interest rates in the First Freaking Place (FFP) so that they won’t need to be tightened and raised later!

And here is another interesting fact, in the sense of perhaps quantifying things to estimate how bad things will get, is that after the crash on Wall Street, “The money supply dropped 30 percent from 1928 to 1931.”

If you can’t see where I am going with this, then you are as clueless as my children, whose remarks I condense to “Are you ever going to stop insulting the Federal Reserve, neo-Keynesian econometric crap, Congress, the Supreme Court, or the moron voters who elected the weenies, who appointed the weenies, who did this to us, or ever stop yelling at us to get jobs to buy gold and silver to capitalize on their colossal folly of allowing such irresponsible increases in money created by the Federal Reserve that it will, because it must, destroy us with inflation in prices?”

I say, with an exquisite brilliant explosion of brevity of wit about which I could go on and on, mesmerizing you in exacting detail for hours on end, “No!”

I mean, why quit something that is so easy? Whee!

The Mogambo Guru
for The Daily Reckoning

The US Federal Reserve: A Rich History of Financial Folly originally appeared in the Daily Reckoning. Daily Reckoning founder Bill Bonner recently wrote articles on stagflation and introduced his new book Dice Have No Memory: Big Bets & Bad Economics From Paris to the Pampas.

Read more here:
The US Federal Reserve: A Rich History of Financial Folly

The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Whenever I am confronted with some new monetary or fiscal outrage, I go through the 5 Stages of Shock, namely starting with Denial (“Nobody is that stupid!”)

Then I quickly move to the Anger (“Those bastards!”) stage, followed by Fear (“We’re Freaking Doomed”) and Bargaining (“I’ll use my votes for the persons who are as against this outrage as I am, and who campaign on a platform of tracking down the banker and neo-Keynesian economist trash that did this to us, and put them in jail so that I won’t have to personally get up off my fat, lazy butt to rise up and lead a popular rebellion to abolish the Federal Reserve, put the United States back on a gold standard and re-establish the Glass-Steagel separation of banking from investing”).

Finally, the 5th stage is Acceptance (“Alas, there’s nothing I can do, except to scream in outrage about the satanic Federal Reserve until I die, and then I can come back from the dead as some malevolent demon from hell to haunt them all, and vex their descendents with spooky crap all the time so that they never get any sleep, their children grow up weird and everybody ends up being crazy and locked away someplace”).

But no matter which stage I am in, or what it is about, I have consistently warned that there is no government outrage so great that the government will not do something even more outrageous.

Sure enough, on the front page of The Wall Street Journal was the headline “Mortgage Deal Takes Shape,” which is the most socialist, communist piece of lowlife crap that the government ever undertook (so far), which is that the government wants mortgage servicers to “reduce the loan balances of troubled borrowers who owe more than their homes are worth.”

No sooner had you clasped your hands to your chest as sudden shooting pains radiate down your left arm and your heart is going “boom boom boom” at this unbelievable crap than it was immediately followed by, “The cost of those writedowns won’t be borne by investors who purchased mortgage-backed securities.”

“Well,” you have to ask yourself, “If they won’t have to eat the losses, who will?” The Wall Street Journal said that the losses will be borne by the banks, as a result of the new, raw extortion of “some state attorneys general and federal agencies are pushing for banks to pay more than $20 billion in civil fines or to fund a comparable amount of loan modifications for distressed borrowers.”

Interestingly, anyone classified as a mortgage servicer who “mishandled foreclosure procedures” will have to “eat losses” by writing down loans, too, for any loans that they “service on behalf of clients,” which turns out to be – surprise! – “Fannie Mae and Freddy Mac, as well as investors in loans that were securitized by Wall Street firms.”

I say that the answer to the question, “Who will pay for all these reductions in mortgages?” is that everyone will. Losses are always ultimately passed along to customers in the form of higher prices, and passed along to the taxpayers, too, in the form of losses being expenses, and are thus deductions from taxable income.

Apparently, I have my head up my bazoo, as The Wall Street Journal says that banks and mortgage servicers will be required to literally operate at a loss, as “under the administration’s proposed settlement, banks would have to bear the cost of all writedowns rather than passing them on to other investors.” Hahaha!

Of course, I figure that this is just more of the staggering, suicidal stupidity that is so rampant in the world today, and thus another reason to buy gold, silver and oil stocks in pure self-defense.

And with the guaranteed inflationary horror and economic collapse inherent in the Federal Reserve creating more than a trillion dollars a year in new money so that the federal government can increase the national debt by an estimated $2 trillion in that selfsame One Freaking Year (OFY), the decision to buy gold, silver and oil is such a no-brainer that you can’t stop yourself thinking, “Whee! This investing stuff is easy!”

The Mogambo Guru
for The Daily Reckoning

No Writing Down the Taxpayer’s Role in the Mortgage Crisis originally appeared in the Daily Reckoning. The Daily Reckoning has published articles on the impact of quantitative easing, bakken oil, and hyperinflation.

Read more here:
No Writing Down the Taxpayer’s Role in the Mortgage Crisis

The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

I’ve written many times about the importance of internationalizing your assets, your mode of living, and your way of thinking. I suspect most readers have treated those articles as they might a travelogue to some distant and exotic land: interesting fodder for cocktail party chatter, but basically academic and of little immediate personal relevance.

All very well, you may say. But there are practical issues, you also say. A person can’t just pick up and leave and go where he wants and do what he wants…can he? Get real, Casey. There are reasons a person has to stay where he is, aren’t there?

Let’s look at some of those reasons.

“America is the best country in the world. I’d be a fool to leave.” That was absolutely true, not so very long ago. America certainly was the best – and it was unique. But it no longer exists, except as an ideal. The geography it occupied has been co-opted by the United States, which today is just another nation-state. And, most unfortunately, one that’s become especially predatory toward its citizens.

“My parents and grandparents were born here; I have roots in this country.” An understandable emotion; everyone has an atavistic affinity for his place of birth, including your most distant relatives born long, long ago, and far, far away. I suppose if Lucy, apparently the first more-or-less human we know of, had been able to speak, she might have pled roots if you’d asked her to leave her valley in East Africa. If you buy this argument, then it’s clear your forefathers, who came from Europe, Asia, or Africa, were made of sterner stuff than you are.

“I’m not going to be unpatriotic.” Patriotism is one of those things very few even question and even fewer examine closely. I’m a patriot, you’re a nationalist, he’s a jingoist. But let’s put such a tendentious and emotion-laden subject aside. Today a true patriot – an effective patriot – would be accumulating capital elsewhere, to have assets he can repatriate and use for rebuilding when the time is right. And a real patriot understands that America is not a place; it’s an idea. It deserves to be spread.

“I can’t leave my aging mother behind.” Not to sound callous, but your aging parent will soon leave you behind. Why not offer her the chance to come along, though? She might enjoy a good live-in maid in your own house (which I challenge you to get in the US) more than a sterile, dismal and overpriced old people’s home, where she’s likely to wind up.

“I might not be able to earn a living.” Spoken like a person with little imagination and even less self-confidence. And likely little experience or knowledge of economics. Everyone, everywhere, has to produce at least as much as he consumes – that won’t change whether you stay in your living room or go to Timbuktu. In point of fact, though, it tends to be easier to earn big money in a foreign country, because you will have knowledge, experience, skills, and connections the locals don’t.

“I don’t have enough capital to make a move.” Well, that was one thing that kept serfs down on the farm. Capital gives you freedom. On the other hand, a certain amount of poverty can underwrite your freedom, since possessions act as chains for many.

“I’m afraid I won’t fit in.” As I explained a little earlier, the real danger that’s headed your way is not fitting in at home. This objection is often proffered by people who’ve never traveled abroad. Here’s a suggestion. If you don’t have a valid passport, apply for one tomorrow morning. Then, at the next opportunity, book a trip to somewhere that seems interesting. Make an effort to meet people. Find out if you’re really as abject a wallflower as you fear.

“I don’t speak the language.” It’s said that Sir Richard Burton, the 19th-century explorer, spoke 10 languages fluently and 15 more “reasonably well.” I’ve always liked that distinction although, personally, I’m not a good linguist. And it gets harder to learn a language as you get older – although it’s also true that learning a new language actually keeps your brain limber. In point of fact, though, English is the world’s language. Almost anyone who is anyone, and the typical school kid, has some grasp of it.

“I’m too old to make such a big change.” Yes, I guess it makes more sense to just take a seat and await the arrival of the Grim Reaper. Or, perhaps, is your life already so exciting and wonderful that you can’t handle a little change? Better, I think, that you might adopt the attitude of the 85-year-old woman who has just transplanted herself to Argentina from the frozen north. Even after many years of adventure, she simply feels ready for a change and was getting tired of the same old people with the same old stories and habits.

“I’ve got to wait until the kids are out of school. It would disrupt their lives.” This is actually one of the lamest excuses in the book. I’m sympathetic to the view that kids ought to live with wolves for a couple of years to get a proper grounding in life – although I’m not advocating anything that radical. It’s one of the greatest gifts you can give your kids: to live in another culture, learn a new language, and associate with a better class of people (as an expat, you’ll almost automatically move to the upper rungs – arguably a big plus). After a little whining, the kids will love it. When they’re grown, if they discover you passed up the opportunity, they won’t forgive you.

“I don’t want to give up my US citizenship.” There’s no need to. Anyway, if you have a lot of deferred income and untaxed gains, it can be punitive to do so; the US government wants to keep you as a milk cow. But then, you may cotton to the idea of living free of any taxing government, while having the travel documents offered by several. And you may want to save your children from becoming cannon fodder or indentured servants, should the US reinstitute the draft or start a program of “national service” – which is not unlikely.

But these arguments are unimportant. The real problem is one of psychology. In that regard, I like to point to my old friend Paul Terhorst, who 30 years ago was the youngest partner at a national accounting firm. He and his wife, Vicki, decided that “keeping up with the Joneses” for the rest of their lives just wasn’t for them. They sold everything – cars, house, clothes, artwork, the works – and decided to live around the world. Paul then had the time to read books, play chess, and generally enjoy himself. He wrote about it in Cashing In on the American Dream: How to Retire at 35. As a bonus, the advantages of not being a tax resident anywhere and having time to scope out proper investments has put Paul way ahead in the money game. He typically spends about half his year in Argentina; we usually have lunch every week when in residence.

I could go on. But perhaps it’s pointless to offer rational counters to irrational fears and preconceptions. As Gibbon noted with his signature brand of irony, “The power of instruction is seldom of much efficacy, except in those happy dispositions where it is almost superfluous.”

Let me say again, time is getting short. And the reasons for looking abroad are changing.

In the past, the best argument for expatriation was an automatic increase in one’s standard of living. In the ’50s and ’60s, a book called Europe on $5 a Day accurately reflected all-in costs for a tourist. In those days a middle-class American could live like a king in Europe; but those days are long gone. Now it’s the rare American who can afford to visit Europe except on a cheesy package tour. That situation may actually improve soon, if only because the standard of living in Europe is likely to fall even faster than in the US. But the improvement will be temporary. One thing you can plan your life around is that, for the average American, foreign travel is going to become much more expensive in the next few years as the dollar loses value at an accelerating rate.

Affordability is going to be a real problem for Americans, who’ve long been used to being the world’s “rich guys.” But an even bigger problem will be presented by foreign exchange controls of some nature, which the government will impose in its efforts to “do something.” FX controls – perhaps in the form of taxes on money that goes abroad, perhaps restrictions on amounts and reasons, perhaps the requirement of official approval, perhaps all of these things – are a natural progression during the next stage of the crisis. After all, only rich people can afford to send money abroad, and only the unpatriotic would think of doing so.

I would like to reemphasize that it’s pure foolishness to have your loyalties dictated by the lines on a map or the dictates of some ruler. The nation-state itself is on its way out. The world will increasingly be aligned with what we call phyles, groups of people who consider themselves countrymen based on their interests and values, not on which government’s ID they share. I believe the sooner you start thinking that way, the freer, the richer, and the more secure you will become.

The most important first step is to get out of the danger zone. Let’s list the steps, in order of importance.

• Establish a financial account in a second country and transfer assets to it, immediately.
• Purchase a crib in a suitable third country, somewhere you might enjoy whether in good times or bad.
• Get moving toward an alternative citizenship in a fourth country; you don’t want to be stuck geographically, and you don’t want to live like a refugee.
• Keep your eyes open for business and investment opportunities in those four countries, plus the other 225; you’ll greatly increase your perspective and your chances of success.

Where to go? The personal conclusion I came to was Argentina (followed by Uruguay), where I spend a good part of my year, and even more when my house at La Estancia de Cafayate is completed.

In general, I would suggest you look most seriously at countries whose governments aren’t overly cozy with the US and whose people maintain an inbred suspicion of the police, the military, and the fiscal authorities. These criteria tilt the scales against past favorites like Australia, New Zealand, Canada, and the UK.

And one more piece of sage advice: stop thinking like your neighbors, which is to say stop thinking and acting like a serf. Most people – although they can be perfectly affable and even seem sensible – have the attitudes of medieval peasants that objected to going further than a day’s round-trip from their hut, for fear the stories of dragons that live over the hill might be true. We covered the modern versions of that objection a bit earlier.

I’m not saying that you’ll make your fortune and find happiness by venturing out. But you’ll greatly increase your odds of doing so, greatly increase your security, and, I suspect, have a much more interesting time.

Let me end by reminding you what Rick Blaine, Bogart’s character in Casablanca, had to say in only a slightly different context. Appropriately, Rick was an early but also an archetypical international man. Let’s just imagine he’s talking about what will happen if you don’t effectively internationalize yourself, now. He said: “You may not regret it now, but you’ll regret it soon. And for the rest of your life.”

Regards,

Doug Casey
for The Daily Reckoning

Patriotic Expatriates originally appeared in the Daily Reckoning. The Daily Reckoning has published articles on the impact of quantitative easing, bakken oil, and hyperinflation.

Read more here:
Patriotic Expatriates

The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Psst…. Want to make some big money? We mean BIG money…

Watch this space. Later this week we’ll give you an update on our Trade of the Decade. It’s looking better and better. Because the situation is worse than ever…

“What’s your view on the revolutions in North Africa,” asked a Dear Reader.

Generally, we avoid having views on things we know nothing about. Which is almost everything. As to what is going on, we have no idea better idea than the State Department or the CIA. Maybe the revolutions are driven tribal rivalries. More likely, increases in food prices – caused by Ben Bernanke – are to blame. And who knows? Maybe people really do crave liberty, democracy and Starbucks’ frappacinos.

But man is a restless beast. Often, he is content with the way things are. And then, a stone gets in his shoe…and he begins to limp and complain.

Each has his own private itch. One man has a fat wife and wants a skinny one. One has a slender wife and longs for one with more meat. One wishes he could bring his deceased wife back to life. Another has a lively wife and wishes she were dead.

Ask any of them and he will give the acceptable public line: it’s “freedom” he is after, or so he’ll tell the news media. But what kind of freedom? Most often it is the freedom to boss others around. He will want to vote, but only so he can tell other people how they should educate their children, which gods they should worship, and how much money they should send his way.

The only sure thing is that no government survives forever. Francis Fukayama thought he saw the “end of history,” when democracy got a toehold in Russia. Dictators need to be toppled, often in bloody revolutions. But democratic governments come and go, without making history.

But democracy has a sell-by date too. Its fatal flaw was identified hundreds of years ago. When the majority realizes it can vote itself money from the minority –or from the next generation – the system is doomed. Elected governments change, but the system just goes deeper and deeper into debt –until it can go no further.

What happens then?

We don’t know. But we’re all going to find out.

In the meantime…

Stocks fell on Monday of last week…and continued falling until Friday. On Friday, the action reversed, with the Dow up 61 points and gold off $6.

What to make of it?

It’s too early to say. By week’s end it didn’t look like the big break in the market that we’ve been expecting. But who knows? This is a new week. Anything can happen.

But, no matter what happens, it’s best to expect what SHOULD happen. And the way we see it, stocks and bonds should go down. The time for making money in stocks and bonds is over, in other words. This the time for getting out, hunkering down, and waiting until the crisis blows over.

Why?

There are just too many things wrong with the market…the economy…and the political situation…

…and oh yes…the people trying to deal with these problems are a bunch of…what’s the technical word? Oh yes, clowns.

What’s wrong with the market? Well… Bonds have been going up for nearly 30 years. Yields have fallen from near 20% for 10-year Treasury notes in the early ’80s to 3.42% on Friday. Very nice, if you’ve been holding bonds. And it might lead you to think you can hold them forever. Thirty years is a long time.

Unfortunately, nothing lasts forever…and certainly not a bull market in bonds. Instead, trends in the bond market tend to last about a generation. Yields generally fell from the ’20s until the Eisenhower administration. Then, they rose until Paul Volcker finally got control of inflation in the early ’80s. Next, they fell for the next three decades.

Are they still falling? No one knows. But it looks to us as though they’ve found a bottom. And even if they haven’t, you’re probably better off thinking they have. Because the bottom can’t be too far off…and there could be Hell to pay afterwards.

Meanwhile, over in the stock market, stocks are expensive – close to the record highs of ’29, ’66, and ’99. In fact, nominal prices are about where they were in the late ’90s, after doubling over the last 2 years. If the bulls are right, these high prices are just the beginning.

But what could drive them higher? The consumer economy runs on two important pistons of prosperity. Employment gives consumers more money to spend. And rising housing prices increases their net worth. Neither of those pistons is firing now. There are half a million fewer people with jobs now than there were 2 years ago. And house prices are still going down.

How is it is possible for a genuine prosperity to develop under these conditions?

But wait…it gets worse. The fed are still adding debt to the system – even while the private sector desperately needs to off-load it. Not only that, they are making the entire system dependent on negative interest-rate financing. The Fed lends below the level of consumer price inflation. Businesses, consumers, banks and speculators soon NEED cheap money just to keep going. Most of all, government needs it. You can easily see how this works. Zero interest rate financing allows the US government to run a deficit of $1.5 trillion this year. But the feds only have revenue of $2.2 trillion. So, they’re spending roughly 60 cents more for every dollar they take in. And soon the official interest-bearing debt will be at $15 trillion – nearly 7 times revenues…

Now, imagine that the feds had to pay interest at just 5%. Let’s see, 5% of $15 trillion is what…$750 billion…or about a third of all tax revenues.

Do you see the problem? Low interest rates permit the feds to borrow. They run up huge debts…and then they have so much debt that they can’t afford to raise rates. They are stuck. They have to keep borrowing until it’s too late to stop…until we’re all busted.

Bill Bonner
for The Daily Reckoning

The Bond Market’s Search for the Bottom originally appeared in the Daily Reckoning. The Daily Reckoning has published articles on the impact of quantitative easing, bakken oil, and hyperinflation.

Read more here:
The Bond Market’s Search for the Bottom

The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.