The Grip of Death

THE GRIP OF DEATH
by Adrian Ash

It's been a fool's errand run amongst dusty old books.
But then your City correspondent's never been known for his common sense.
And he's wasted the last four months trying to figure out what money is.

Frozen desire, says James Buchan. An institution or a measure of value
prescribed and regulated by law, says Alexander Del Mar. The root of all
evil, says Horace Andy, misquoting 1 Timothy, chapter 6, verse 10. It's a
unit of account, a store of value, and a medium of exchange, say the text
books...an illusion and a fraud, say the gold bug conspiracists. Dirt cheap,
says my bank.

And then there's Michael Rowbotham.

"Money is a man-made device," he writes, putting the root of all evil
alongside wool-knit jumpers, swivel chairs, and chiken tikka masala
sandwiches. When his book 'The Grip of Death' was published nine years ago,
Rowbotham shared his publisher with David Simmons, author of 'The Third
Way'. Remember that?

A tasty catchphrase for the New Labour project, Simmons' book showed -
according to the blurb - how Margaret Thatcher and then John Major "traded
on a deliberate falsification to discredit the left-of- centre consensus in
Britain."

Yes, the Tories only pretended we didn't want a welfare state,
redistribution of income, and government meddling in the economy, said
Simmons. So just as the British state was about to break even on its
spending versus tax receipts, he urged a return to "demand management" -
Keynesian spending, in other words, the very thing that hadn't worked in
'30s America, '70s Britain or '90s Japan.

But Simmons made his point well enough where it mattered most, right at the
heart of the New Labour project. Since 1997 Gordon Brown has spent more
money tinkering with the UK economy than every other chancellor put together
since the end of WWII (when the official data starts). But this was no
peace-time spending binge. The money has all gone on war - a war against
terror, on drugs, poverty, against smoking, fox-hunting, a lack of gambling
facilities, and smacking your kids.

Simmons' book, 'The Third Way', was a "powerful indictment of New Right
policies" according to an academic at Yokohama University - and she
should've known. Back then, 10 years ago, Japan was bang in the middle of
the most expensive make-work programme in history.

The Tokyo government concreted over Japan's hills and mountainsides...dumped
huge wave-breaks onto its beaches...and built roads to nowhere ending in
bridges to cliff-faces.

Wages and shop-prices still sank, however, and the salarymen still slipped
into joblessness and then depression. Yet the New Left pushed on, destroying
what little natural beauty Japan owned between the East China Sea and the
Pacific. The world-improvers in Tokyo lost out to recession for more than a
decade.

But enough of Simmons and Japan's wasted trillions. We were picking a fight
with Michael Rowbotham. And according to him, money is just "bits of paper
with numbers on them."

So what harm can it do to print more?

"Along comes a 'Grey Suit'," fumed Rowbotham, only a few months after the
smart-casual suits of New Labour took over running the UK, "who tells us
that the hospital, college, library, post office, coastguard station,
research laboratory, swimming pool or whatever has to be closed for lack of
money...

"But in what possible sense can we not afford what we already have, and
which is already there? A town can be in desperate need of a school,
community centre, or repairs to its roads and drains. The raw materials may
be lying idle in a builder's yard, people may be desperate for work, but
there isn't enough money...so we can't do it."

If this whine sounds familiar, take a glance at the NHS today. New Labour
has more than doubled annual spending on Britain's so-called "free" health
service. Gordon Brown, our Dear Chancellor, went at it like money really was
bits of paper with numbers on them. The more the merrier. It's only paper,
after all.

Yet now the Health Service, that monster employing more souls than any other
enterprise in Europe, is broke. By summer '06, the NHS deficit in England
had reached £512m - more than double the amount in 2005. Nearly a third of
NHS organisations failed to break even. The lack of funds meant that more
than 12,000 jobs had been cut, with wards closed and operations delayed.

All those bits of paper, a total of £434.6 billion since 2000, just weren't
enough. Britain's health service has enjoyed five years of 7% annual real
rises in spending. But somehow, racing ahead of inflation like that, it's
still failed to keep ahead of its own costs.

Maybe there's a link?

"There is only one player in the game that is legally entitled to print
money," writes Paul McCulley for Pimco, the world's biggest bond fund, "and
that is the Fed." He could just as easily be talking about the Bank of
England, the ECB or the Bank of Japan. Only central bankers can create money
today. Or so the theory goes.

"Thus short-term interest rates are not market- determined," McCulley goes
on, "but rather the result of a fiat decision by the Fed. Thus, we in the
private sector must anticipate what the Fed will do with its awesome fiat
power. We really have no choice."

The US Federal Reserve, many internet scribblers will tell you, has failed
to do its job. It's neglected to protect the value of the US Dollar. Since
the Fed's foundation in 1913, in fact, the greenback has lost 98% of its
purchasing power. Since leaving the Gold Standard once and for all in August
1971, the Dollar's dropped 80% of its worth. The Fed is therefore a fraud
and a con, say the gold bugs. The proof is there in the numbers.

Yet the very first sentence of the Federal Reserve Act of 1913 commanded it
to furnish the United States with "an elastic currency". And what could be
more elastic than a currency losing 98% of its value inside 94 years? Pity
it's never snapped back.

Elasticity has only stretched one way here in Britain, too. The purchasing
power of the Pound in your pocket has vanished over history. One decimal
penny in 1750 would have had greater purchasing power than £1 in 2005, says
research for the House of Commons Library.
The cost of living has gone up every single year since 1945, rising 30 times
over by 2005.

Indeed, the last time prices actually fell in the UK was during the
Depression...back when banks couldn't or wouldn't lend money to businesses
that couldn't or wouldn't borrow to invest.

Again, maybe there's a link? Nine years ago, Michael Rowbotham thought he'd
found the answer:

"When banks and building societies make any loan, they create new money.
Money loaned by a bank is not a loan of pre-existent money; money loaned by
a bank is additional money created."

The point bears repeating: bank loans create magic money out of thin air.
The idea of a bank only lending money that other customers already have on
deposit is so naive as to be laughable.

The evidence? "The March 1997 statistical release from the Bank of England,"
says Rowbotham, "shows that the total money stock in the United Kingdom
currently at approximately £680 million...The total of money created by the
Treasury on behalf of the UK Government [was] a mere £25 billion of notes
and coins...[so] 97% of all money in the United Kingdom has been created
entirely by banks and building societies, and that they have created this
staggering quantity of money out of nothing."

Fast forward to Feb.2007, and the notes and coins in circulation in the UK
today account for just 3.1% of the total money supply. The rest - all £1.496
trillion of it - remains only so many digits on the banks'
computer systems.

Rowbotham charges that the vast bulk of this unreal money has been created
through the mortgage market.
Hence the title of his book - 'The Grip of Death' - which he puts forward as
a literal translation of "mortgage". By issuing a mortgage loan, the banks
and building societies create money out of thin air which then sits on their
books as an asset, awaiting repayment by the borrower.

Literally, the banks lend themselves richer - and they control the money
supply. Or so Rowbotham claimed. His book led to questions in the House of
Lords...the foundation of a lobby group...and nearly 1,000 websites
supporting radical monetary reform.

Your City editor can't vouch for the idea either way, not yet at least. We'd
simply wanted to find out how the money supply had mushroomed...up nearly
13% year on year in the UK. UK house prices, meantime, have trebled in the
last 10 years. The value of money and the volume of debt look to be more
than just casual friends.

Adrian Ash
The Daily Reckoning

Bill Bonner from Paris:

There's a lot of money out there.

And it has to go somewhere, said one hedge fund manager last week. Where
it's not going, for sure, is into American savings accounts.

Last week, a report from the Commerce Department told us what we already
knew - that Americans are saving money at a lower rate than at any time in
the last 73 years. Yes, dear reader, the last time Americans stored away so
little of their earnings was back in the deepest depths of the deepest
depression the country ever had. That was when a quarter of the workforce
was unemployed...and when most women weren't even counted in the workforce.
In other words, the last time savings rates were this low it was because of
a major, major financial setback. People couldn't save back then; they had
no money. Now, they could save...they just don't want to.

Where the money IS going is easier to figure out.

The Dow took a small step back...more like a hesitation than a
back-step...and remains in record-high territory, thanks to the U.S. Federal
Reserve.

But the NY-London financial industry is not the only culprit.

Seventeen years after the collapse of the Nikkei Dow...with Japan's key
lending rates still down near zero and the Nippon economy growing, the Bank
of Japan splashes around credit as if it were still fighting deflation and
recession. What's a hedge fund to do when it's offered all that free money?
The same thing as a homeowner. Take it.

More than $1 trillion of mortgage debt was added in the U.S. last year -
thanks largely to low lending rates worldwide. And the carry trade - where
speculators borrow yen in order to buy higher-yielding assets - has risen to
an estimated $1 trillion in naked exposure.

Where does all that money go? As our anonymous source put it, it has to go
somewhere.

How do you say 'bubble' in Mandarin...or Hindi? Stocks in China, Singapore
and India are all exploding to the upside. The Chinese money supply,
measured by M2, is rising at a rate of 16.9%.

And for now, at least, this wash of cash and credit shows no sign of ebbing.
In fact, even in the UK, New Zealand and Australia, where property prices
seemed to peak out a year ago, consumers did not stop spending...they just
kept borrowing more!

And we keep turning up our warnings:

.. that you can't get something for nothing...

..that never was there a bubble that didn't pop...

. and that the force of a correction is equal and opposite to the deception
that preceded it.

But who listens? Who cares? We are in an age of Mammon.
People want money, success, stuff...and they want it now.

And they're going to get it...as we keep saying...good and hard.

But maybe not today...or tomorrow.

More news from Eric Fry.

------------------------

Eric Fry, who burns less alcohol than he drinks, reports...

"Unsustainable subsidised food-burning."
That's how David Pimental, a researcher at Cornell University, characterises
corn-based ethanol production.

"Ethanol does not provide energy security for the future," he says. "It is
not a renewable energy source, is costly in terms of production and
subsidies, and its production causes serious environmental degradation."
According to Pimental's research, ethanol production actually CONSUMES
energy. "The total energy input to produce one gallon of ethanol is 129,600
BTU [British Thermal units]," Pimental asserted in a 1998 research paper.

"However, one gallon of ethanol has an energy value of only 76,000 BTU.
Thus, a net energy loss of 53,600 BTU occurs for each gallon of ethanol
produced. Put another way, about 71% more energy is required to produce a
gallon of ethanol than the energy that is contained in a gallon of ethanol."

Over on the pro-ethanol side of this debate, a variety of industry experts
dismiss Pimental's findings, while insisting that ethanol production does
yield a net positive quantity of energy, albeit a modest one.
Even in the best of circumstances, however, corn-based ethanol production
contains significant drawbacks. It does, in fact, consume food to produce
fuel; but it does not, in fact, yield a tremendous amount of energy relative
to the energy it consumes.

-------------------------

And more views from Bill:

*** What is the 'Age of Mammon' all about?

Elizabeth explained it the other day. People have been disappointed with
ideas and 'isms'. They want things...material success...money...status. It
doesn't matter to them whether their government is communist - like China;
or free market - like Hong Kong; or a mixed welfare/warfare empire like the
U.S. Just so long as it delivers the goods.

The New York Times reports on a new book called "Money Changes Everything,"
an anthology edited by Elissa Schappell and Jenny Offill.

The New York Times: "... issues of money - and the envy it causes - is
creating more financial and psychological distress than we can imagine,
psychologists and social scientists say. We overspend to keep up with
neighbours and friends; take jobs we're not happy at to keep up a lifestyle
we think we should have; and compulsively watch television shows that flaunt
multimillion-dollar homes and exotic vacations."
One of the results of the credit explosion is that it makes it hard to tell
who is rich and who is not.

People can live as though they had money, even when they have none, which
puts a strain on the whole system of envy. A man tries to keep up with the
Joneses...who may be only trying to keep up with him. Neither may realise
that the other has no money. Both go into debt chasing a mirage.

All the ready credit gives of the illusion of living the American
dream,"says Ms. Schappell. "Economists report that middle-class families are
now carrying record levels of credit card debt, going without health
insurance and filing for bankruptcy at several times the rate of the early
1980s."

"Turns out those McMansions and shiny S.U.V.'s have us mortgaged up to our
eyeballs, but until the wolf is truly at the door, you won't find many of us
admitting it."

And get this: "Schappell said she now believes... that the old-fashioned
ideal of working hard, saving and gradually making it is a bankrupt one.
Instead, the way people envision growing rich, she said, is through a
windfall: "a malpractice lawsuit, the lottery or going on a reality show -
it's the new American dream."
What do you expect when for more than a decade, anyone who saved was
penalised with miniscule interest rates.

*** While most people rush to spend all they have...and more...a small, but
perhaps growing group of "voluntary simplifiers" is attempting to spend
less. These are people with the means to spend, but the will to save.
Why? Probably for a number of reasons. Many may merely desire to save more
money so they will have it available later. Others, though, want to turn
away from the 'Age of Mammon.'

We are trying to do so in your editor's own household.
But so far, it is an uphill battle.

"How come we don't get a new car," Edward asked on Sunday.

"We don't need one."

"But it would be nice to have a better car."

"It's not necessary...and it would cost a lot of money.

"What's the point of saving money," the 13-year-old wanted to know.

"So, we can give it to you when you grow up," answered his mother.

"But I'll just buy a new car. What's the point? Why not buy one now so you
can enjoy it?'

We wondered the same thing.

***It is too bad the masses don't read more Xenophon, Thucydides, and
Suetonius. We live under an imperial power; it might be nice to know a
little about how it works.

What the classics teach - in fact, what almost all history and literature
teach - is scepticism and humility. Whenever some leader sets off on a
crackpot plan to improve the world, the result is almost always disaster -
if not immediately, eventually.

Yes, in the interim, fortunes are made by military contractors, politicians,
and military leaders themselves. Reputations are burnished, before they are
ruined. Statues are chiseled. Medals are handed out.
There are often short victory parades - 'Mission accomplished!' - before
there are long humiliating retreats.

Besides, who are we to know God's Own Plan? Maybe, in some poetic way, the
sturm and drang of it - or the tales told by dying men and the tears wept by
lonely widows - are worth the expense and suffering.
And who cannot feel prouder of his entire race when he sees a genuine hero?

Suetonius admired Caesar greatly, and reported that he never lost a battle:

"Caesar was perfect in the use of arms, an accomplished rider, and able to
endure fatigue beyond all belief.
On a march, he used to go at the head of his troops, sometimes on horseback,
but oftener on foot, with his head bare in all kinds of weather. He would
travel post in a light carriage without baggage, at the rate of a hundred
miles a day; and if he was stopped by floods in the rivers, he swam across,
or floated on skins inflated with wind..."

Now, there was a real war president!
The Daily Reckoning PRESENTS: If only there were more debt in the
world...ten years after New Labour came to power...we'd all be richer today.
Right?