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Investors Buoyed, Markets Soothed by the Big Mac

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My newspaper has such precious headlines, particularly in the business section. Today’s offering was no surprise, but typical;
Stocks Rise As Exports Help Trim Trade Deficit
McDonald's, GM Aid Rally as Fed Decision Looms


(Tomoeh Murakami Tse, Washington Post) NEW YORK, Sept. 11 -- Stocks rallied Tuesday as a surge in U.S. exports and upbeat news from several big companies including McDonald's gave investors hope that the economy could withstand the stress resulting from the credit market turmoil.

Helped by a weak dollar, the value of goods and services the United States provided to the rest of the world in July rose by $3.6 billion, or 2.7 percent, the Commerce Department said. It was the fastest pace of growth in more than three years and helped narrow the U.S. trade deficit to $59.2 billion from a revised $59.4 billion in June.

Shall we parse that? The stock market rallied because two companies (one a failed automaker and the other a fat-food purveyor in the midst of an obesity crisis) had upbeat news. Well, we live in a society where the beat beats the content, where it don’t mean a thing if it ain’t got that swing, so why not?

Parsing further, exports were helped by a weak dollar. We sold more because we are worth less. The fastest pace of growth is running neck and neck with the fastest plummet in our currency. We have narrowed the largest trade deficit in history by the smallest of margins—less than half a percent.

We are in financial OZ. Our failing currency helps, companies not having yet gone under is looked upon as upbeat news and a half percent drop in a $1.8 billion dollar a day deficit is cause for celebration.
The export growth "was pretty spectacular, and it was a reminder of just how fast growth conditions are globally," said James Paulsen, chief investment officer of Wells Capital Management. "Some of the consumer slowdown in this country will be offset by trade improvement."
There you have it. When chief investment officers are so far divorced from reality, the market is likely to do almost anything on its way to the sewer. I would remind Paulsen that the dollar by which he measures ‘pretty spectacular’ export growth is pretty spectacularly in the toilet.

The dollar that was handed to George Bush by an impeached president who balanced the budget and paid down the national debt, has been devalued by half. The unimpeached president who gave his buddies $2 trillion (and will give them another trillion if we don’t stop him), dragged us into two of the most expensive unfunded wars we have ever fought (and are far from done with), along with losing most of that unfunded money and putting record deficits on the national credit-card, trumpets these disasters as if they were victories.

A 50% dollar decline in six years. Helluva job, George.

Everything in the United States; every business, every bank account, every car and home and lawnmower is worth half of what it was when this man was imposed upon us as president by the Supreme Court. And the ultimate resting place of the American dollar is far from bottoming out.


One of George’s daddy’s businesses is on the profit wave of that decline. The Carlyle Group is one of the big hitters in taking public companies private. That’s the big new thing, in case you haven’t been paying attention lately.

Private equity groups, having amassed additional trillions from the Bush, Junior’s tax refunds, are busily buying previously publicly traded firms and taking them private—where the federal nose doesn’t get into the company books. They do that with massive amounts of debt.

Time out for a moment to look at that old bugaboo debt and see how it works to advantage and disadvantage.

Debt is an advantage if what you borrow can be paid back more cheaply when it comes due. Borrowing a dollar today is an slam-dunk (sorry), if ten years from now you expect to repay that dollar with one that is worth, say 50 cents. Carlyle Group thinks that’s exactly what will happen, along with Mr. Kravis, Goldman Sachs and a number of other high-rollers.
$10 billion for ten years at 5% simple interest comes to $15 billion. A today’s dollar worth 50 cents in ten years makes the payback $7.5 trillion in steady dollars, plus $5 billion of that is a tax deduction.
The key of course is currency fluctuation and currency today is no longer local, it’s international. Actually, it always has been, but the dollar was always king, so it seemed local. So Carlyle (and others), their money in Euros and perhaps pounds (but certainly not dollars) are able to float enormous debt and buy almost anything at almost any price and come good. That's if their bet is right and the dollar drops some more. It's a bet George Senior's son is working hard to make come true.

National debt, the kind of thing ‘conservative’ Republicans have run us hell-bent into, is also a pretty good deal, as long as you can find a patsy to loan to you. So far the patsy has pretty much been China, with a liberal dash of Japan, but the jury is very much out on how long that may continue. Foreign investors and foreign governments are not fond of lending to be paid back at 50%. Without us, the Chinese engine stalls, so they are the gift that keeps on giving.
Aldous Huxley has famously said, "Facts do not cease to exist because they are ignored"
Ordinary citizens like you and me are not able to operate the levers of international finance to our advantage. We kid ourselves that the house we bought ten years ago is worth twice what we paid, even though the dollar we paid with is worth half. The same is true of the $22,000 Chevrolet and a salary that has doubled although we have trouble paying our bills.

Conservative Republicans are no longer the wire-rimmed glasses wearing vice presidents of the local chapter of the Better Business Bureau. They’ve gone long downfield after the hail-Mary pass, their community responsibilities long since turned over to Wal-Mart and Best-Buy.

Second homes and prison terms are the currency of today's law schools and a hard-earned Harvard MBA. We are the poorer for it, both intellectually and financially, but it is the inexorable path of too many years without boundaries. Somehow we have come to think that the dog that does not bark is on our team, when in actuality he is on the other side of the fence, teeth bared.

Unprotected by the likes of Carlyle Group, Hank Paulson, Ben Bernanke and our equally complicit political parties, what are we to do?

My own best guess would be to get out of debt. Debt, when you are not on the money-making side of it, is ruinous. Pay off the mortgage, own your car (or cars) outright, get square with your credit-cards and hold your securities without margin.

You can live on almost nothing if you don’t have debt.

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http://www.jim-freeman.com

Jim Freeman's op-ed pieces and commentaries have appeared in The New York Times, Chicago Tribune, International Herald-Tribune, CNN, The New York Review, The Jon Stewart Daily Show and a number of magazines. His thirteen published books are (more...)
 
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