| THE END OF MONEY? THE DAILY RECKONING PARIS, FRANCE
TUESDAY, 23 NOVEMBER 1999 * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
In Today's Daily Reckoning: *** The spike turns into a needle
*** Iraq shuts the valve...and oil gushes...
*** The jackals circle in California * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *** I can almost see him...the wily bear with a
whetstone...sharpening the Nasdaq spike, polishing
it, honing it...The Nasdaq hit yet another record
yesterday as investors took even greater leave of
their senses... *** The Internet average...the IIX...was up, well,
sharply...Internets are selling at an average of
20 times sales. Earnings? Forget it. Twice as
many Internet stocks are losing money as making it. *** And when you look at any individual company
carefully...such as the figures we examined for
TheStreet.com yesterday...you see that it is a
bad business. Heck...if I could spend $50 a month per
sub acquiring readers...I'd have beaucoup of them...
and lose $49 on each one. What's the point? *** The Dow rose 83 points, too. But it is a
bear market...with 908 advances...2,190 declines. Most
stocks are still going down...and yet...if you
listen to the financial news, you'd think people were
making a lot of money... *** Some people are...those who invest in the
leading tech and Nets..."People don't care about cash
flows," says Keith Mullins at Salomon Smith
Barney. "They don't care about earnings. They care about
momentum...You have every signal, every sign, of a blow-off." *** Among the investors aiding the blow-off is
cab driver Carlos Rubino. New York City cabs have long
been a threat to public safety. This one is a
threat to the financial system, too. Rubino day trades
from his dashboard while driving...making him
doubly dangerous. And he made 35% on his money last
year. "I've been trading for three years...and this
is a brand new car...and it doesn't have any
dents," he says. Yet. *** Iraq turned off the oil valve yesterday...halting
2.2 million barrels/day. This drove oil to a
nine-year high...and helped cause a collapse in
bond prices, utilities and transport stocks. Oil is
nearly at $27. *** Gold, however, was almost unmoved...and
nearly immovable. It sits. It waits. *** I hope I don't do anything to make Alan Abelson
at "Barron's" mad at me...Lou Rukeyser, whom I
see dining at Tony Chang's in Baltimore from time
to time...got on Abelson's angry side by firing one
of the "elves" in an ungentlemanly fashion. "The
prattling panjandrum...smirking at his own feeble
jokes," Abelson describes Rukeyser. And the show?
"Pretty boring..." The "elf," by the way...Gail
Dudack...committed the unpardonable sin of turning
bearish. *** "This is the end of politics for Jeffrey Archer,"
declared Tory leader William Hague. Would that
we could end other political careers so decisively.
Pat Buchanan. Al Gore. Hillary Clinton. George W.
Bush...dream on... Fortunately, Archer has another
career -- writing novels. (I got a fact wrong
yesterday...Archer won a judgement of only 500,000
pounds, not millions of dollars, from the London
paper the "Daily Star.") *** The New York Fed has gotten into the derivatives
business...selling $370 billion in "liquidity
options" as protection against Y2K problems. *** The Russians say they will have Chechnya under
control by Christmas. The whole campaign recalls
the "pacification" of the Chechens by Red Army troops
in 1925. The "bandits" were disarmed. The men
were killed. The women and children were deported
to the East. No wonder the Chechens resist so
determinedly. *** The Presbyterians have decided that gay couples
can get hitched...but they can't call it a
marriage. *** But lawyers in California are still permitted to extort
money from public corporations and call
it a "class action suit." An action suit, maybe.
Classy...not a chance. The jackals are going after
Microsoft on the grounds that the company overcharged
for software sold in the state. This is the
inevitable effluent of Judge Jackson's finding of fact --
that MSFT has abused its power in the
marketplace. *** I feel an attack of clairvoyance coming on as I look
into the future and see what will happen as
a result of this suit. MSFT will settle. Consumers will
pay more for software. Stockholders will lose
money on MSFT shares. The lawyers will pocket their
millions and announce that the cause of justice
has been served. * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
THE END OF MONEY This engaging idea was taken by Richard Rahn
for the title of his book. It raises the most profound
questions about the nature of money itself...the
role of gold...and the future of financial
transactions. It would be unkind to say of a one-armed economist
that he "could not grasp" the complex issues
involved...or to say of a one-eyed economist that
he lacked "depth of vision...or perspective." Yet
Rahn, who looks very distinguished, if not a little
rakish, with his eye patch...seems to merit the
comment. His book agitates the questions...but
it does not answer them, nor even explore them.
Instead, Rahn merely strolls through the well-settled,
well-lighted neighborhoods with which we are
all so familiar. Naturally, any discussion involving the end of money
has to take into account its beginnings. Rahn
takes no notice of the issue. Instead, he is
interested in financial privacy. Money, as we are often told, arose as a means
of exchange and a store of value. Anything could be
used for these functions...as long as people believed in
them. Gold turned out to be the most
enduring money...because it is handily fashioned
into different-sized coins...it doesn't rush or
tatter...and it is precious, without being rare.
Gold has another advantage. It is private. You can
bury it in your backyard. You can pass it along to
your grandchildren. You can buy things. And you
can do all these things without a paper trail. The
ironic metal is curiously not even considered money
today. So you can put on all the gold jewelry you
want and stagger through customs without, presumably,
being forced to check the box and provide
details on cross-border financial transactions exceeding
$10,000. Rahn's idea is that financial privacy is necessary
to a free and prosperous society. He notes that
"full fledged currency controls...are a 20th century
invention, first developed by Hitler's economic
minster, Hjalmar
Schacht. Hitler effectively extinguished all personal
freedom in Germany, including all financial
freedom, with his Emergency Decree of February 28,
1933, `For the Protection of the People and the
State.'" Gold was a handy thing to have in 1933. You could
take it with you..hide it...or put it in a Swiss
bank. He also tells us that there are only a few countries
left still practicing Schachtian...or
Stalinian...control of money. One of them is a country,
Belarus, of which I am -- believe it or not
-- still, officially, an "economic advisor." Every once in
a while, Belarus makes the news. But
rarely is it good news. The country is run by Alexander
Lukashenko, an unreconstructed communist, who
practices "soft-core Stalinism...people have their houses
searched. Tax inspectors harass opposition
businesses. Police beat demonstrators." Rahn provides the interesting example of what happened
in Bulgaria after the communists took over in
1947. There was no longer any need for financial
privacy, since the government owned all the property
and made all the financial decisions. For the good of
the people, of course. But even in America, more and more financial decisions
involve the government, which has tremendous,
nearly arbitrary power over citizens' lives. There are
so many rules and regulations on the
books...and such esoteric tax and reporting requirements...
that almost anyone could be targeted for
abuse. (In fact, everyone is.) This will all change in the new electronic age,
Rahn believes. His view in this regard seems a little
dated. Jim Davidson and Lord Rees-Mogg argued a
few years ago that the Internet would destroy the
ability of the government to collect taxes. So far,
we've seen no evidence of that. But there is
hope. Encryption is now available to anyone...cheap,
effective encryption. You can go on the Internet
and get Phil Zimmerman's PGP... So you can theoretically conduct your financial affairs
in total privacy...if you wish. But the
banking sector is greatly, and increasingly, regulated...
operating almost as an arm of the
government. Ultimately, almost all financial transactions
have to go through the bank's clearing
system. Thus, in the last few years, despite the spread
of the Internet, financial privacy appears to
be in retreat. And government revenues have gone up. But the provocative assertion Rahn makes is on
the nature of money itself. As he points out, any medium of exchange is, by
its nature, inefficient. It is costly to deal with cash...handle it, store it,
sort it...print it. Businesses want to get the
cash out of their tills as quickly as possible so that
it can be put on deposit at the bank and earn
interest. Otherwise, it is dead inventory. And in
the new electronic age, money will disappear
altogether..."because a circulating medium of
exchange is needed only when a time interval is
required between the liquidation of an earning or
useful asset and the acquisition of a new asset or
service. In the digital age, such time intervals are
no longer needed, hence there is no need for
traditional money."
In this respect, he is surely right. Cash is already
disappearing. People use credit cards. They do
not save money in banks. Every cent is in some
interest bearing...or speculative...account. Rahn
imagines a world where everyone carries a smart card...
linked to mutual fund accounts. There is no
cash in the system. Every dollar is in an active
investment account...or used to purchase some good
or service. Even inflation will be eliminated, he says, since it represents
an expansion of the money
supply...and there will no longer be a supply of money
to expand. The national currencies, too, will
become irrelevant...as the smart cards can instantly
quote the quantity of "money" in any measure you
choose. You will not have a supply of dollars. You will
have a supply of investments...or
assets...and no need to keep an inventory of money for
any purpose. You will own a share of stock...which you will trade,
instantly and electronically...for a movie
ticket. (Or, if it is an Internet stock...maybe a piece of
gum...) Your employment earnings, too,
will be immediately realized in an investment account.
There will be no need for cash. And what role could there be for gold? Will it also
become completely irrelevant? Will Lenin's dream
be finally realized...and gold be used to cover the
floors of public lavatories? Were the central
banks right, after all, in wanting to get rid of it? Is it
only a dead inventory item for them, too? I was disappointed with "The End of Money" for not
addressing these issues. So, I'll have to address them myself...in upcoming
letters. But that's all for today... Bill Bonner =========================================================
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