So, what was his reasoning: technical analysis of wave counts? falling demand? a telling ratio? sun spots? No, he noted that upscale department store Harrods in London began selling gold bullion and coins “over the counter,” ergo, the top was in. Nice try, “Bert,” but this is amateurish. You really shouldn’t be playing with the big boys if that’s the basis of your call.

Yes, gold will someday put in a top, and since the gold price is largely determined by psychology, the end of the bull run will be marked by behavioral types of signals. But calling a top in gold now is like declaring that WWII was over because the Allies won a small skirmish in early 1942. To have made such a statement, based on a small, isolated event, ignored the greater forces that had yet to play out and would have made any journalist or military strategist look foolish indeed.

And here’s why Bert looks equally silly today…

If the top were in, we’d be in the midst of an all-out Mania. Are we? Do you get the impression there’s a rush into gold by the greater public right now? Are headlines blazing the covers of major magazines pronouncing gold as the new investment king? Has Wall Street gone gaga over gold and silver? I ask because these are the true signs that a trend has entered its final blow-off top and would signal it’s time to get out.

I decided to put Bert’s prognostication to the test, and I invite you to play along.

First, I struck up casual conversations with my friends, neighbors, relatives, acquaintances, my wife’s co-workers – heck, even my seatmates on airplanes – angling to learn how much gold they were hoarding, about the killing they were making in gold stocks, and how they were getting rich from all their precious metal investments. (In fairness, I had to exclude my dad, who is an award-winning gold panner, but he’s the only one.)

I found no one – not one person – who is actively investing in anything gold or silver, let alone rushing to buy or hoard the stuff. I had two people who confided that they did own gold, but in both cases it was inherited. A few were curious how they would go about doing such a thing, and fewer asked if I thought they should. Most everyone looked at me blankly when I asked; they didn’t seem to know what I was talking about. When I got a reaction like that, it was pointless to ask about gold stocks. Of the handful I did ask, most had never heard of Barrick Gold, the world’s largest gold producer.

Now ask yourself the same thing: how many of your family, friends, neighbors, and co-workers are buying gold and silver coins? Are any of them giving you hot stock tips about a fantastic gold producer, or telling you about the latest gold discovery made by a company in China? Have any fellow investors told you they’re dumping their brokers because they can select gold stocks better on their own? Anyone telling you they’re going to night school to learn the gold mining business?

Next, I surveyed a large sampling of print media looking for some of these signals that Bert surely had spotted. Over the past couple weeks, not one of the major business magazines I reviewed had anything on the cover about gold or silver. Further, there were no articles on precious metals, such as the best ways to buy or store all this gold everyone is buying.

One magazine ran an article about ways to prepare for inflation, and gold wasn’t even mentioned! I did see an ad from the U.S. Mint in another, along with a couple small ads in the back that said they had the best prices on bullion (right beside the teasers for buying a Russian wife), but that was it. Even the portfolio allocation models recommended in the articles I read made no specific mention of precious metals (one recommended a “resource” fund, but their discussion of it was centered around energy investments).

Other than the articles you seek out, how many mainstream magazines do you see extolling the virtues of gold and silver on their cover? How many bestsellers are prominently displayed at your nearest bookstore that scream at you to buy gold stocks? Are you getting fed up with all the junk mail you get about gold and silver?

Last, I went out of my way to look for stories on gold and silver on TV and radio. About all I could find were the same ads that popped up after last year’s Super Bowl commercial by Cash4Gold. A couple programs quote metals prices, and I was able to find another that actually used the word “gold” in a sentence. It might just be me, Bert, but I can’t find any news anchors talking about the latest gold discovery or that “must own” gold stock. No in-depth special reports from investigative journalists on the hot Canadian junior mining sector. Nothing on my radio about the best ways to store all the silver every smart investor has been buying.

How about you – are you feeling bombarded by TV and radio ads and segments on precious metals? Do you have the clear impression gold and silver are the hot new investing trend around the world? Are you Tivo-ing certain TV shows because of all the great info they provide about picking the next great gold stock?

If we were in a Mania, Bert, all of this would be happening. But it’s not. Those who buy gold coins in the U.S. are still largely viewed as members of a fringe group. There is no public discussion on gold, no insider tips on the latest hot gold stock, no special reports on how to store all the bullion you’ve collected. The psychology isn’t on our side yet. One signal does not a Mania make.

Last and perhaps most important, Bert, are you sure the dollar is done falling? You’re absolutely convinced we won’t see price inflation? Our current debt load won’t pose any future problems? No more worries about foreigners buying all that debt? Obama and Bernanke really have saved the day?

Bert, send me your shorted gold positions, I’ll buy them from you. And although the gold price could see a correction in the near term, and several more along its journey to “the top,” remember that battle in early1942 and all that had yet to occur before the war was over.

And one more thing: when you finally become breathless to buy gold stocks, I just might be ready to sell them to you.

Regards,
Jeff Clark

November 6, 2009

Why Gold Has a Long Way to Go was originally featured on Whiskey and Gunpowder

First, let’s check out the chart below from the 2008 annual budget audit by the U.S. Government Accountability Office. It shows that the U.S. government must roll over $3.4 trillion in debt over the next four years. This $3.4 trillion does not include any additional borrowing that may be required for other government programs (wars, healthcare, wars, school lunches).

What’s the big deal? $3.4 trillion is a small number by today’s standards, isn’t it? Not exactly.

The chart shows how incredibly interest-rate sensitive U.S. government borrowing now is. Not only is it a big ask to ask the world’s creditors to continue funding such large deficits (there are only so many savings available to borrow, after all), but the interest expense on that debt is likely to go up as the fiscal position of America deteriorates.

And if America can’t find anyone willing to finance its deficits, what then? Well, the luxury of issuing debts in the currency you also print is that you can print money to pay for them. Technically, you can never become insolvent when you enjoy this privilege. The Fed, for example, can create new money to buy debt issued by the Treasury, funding deficits ad infinitum.

But this monetisation of the debt is another way of saying that international creditors are no longer willing to pick up America’s spending tab. They will be betting against the American economy, not on it. Even if the Fed takes the unusual step of moving out further along on the yield curve to set interest rates (and keep the bond vigilantes from sending yields to the moon) this is a clear signal to owners of dollar-denominated assets and holders of dollar currency reserves to get out.

Another scenario to watch for is when creditors begin asking the U.S. to issue debts in currencies other than its own (Yuan, Euros). That would be something. In the meantime, they will look to lessen their dollar reserves.

That may not be such an orderly process. And the urgency to get out of the greenback and into something better will only pick up pace as it becomes clear the politicians in America (along with the Fed) are not likely to suddenly rediscover fiscal prudence.

You never know. The Fed may assert its independence and baulk at more quantitative easing. But we wouldn’t count on it. And we reckon tangible assets and possibly emerging market equities would be the biggest beneficiaries of capital flows out of the dollar…and into anything else.

The next chart is for you, Paul Krugman. Krugman, among others, continues to insist that larger public sector deficits are necessary if the Western world is to avoid a Japanese-style deflationary “Lost Decade.” He claims the government must increase spending as households and businesses deleverage and reduce debts.

Advocates of this idea claim that public sector deficits, as a percentage of GDP, have no real limits. And the example they cite is Japan. As you can see from the chart below, Japan’s debt to GDP ratio is nearing 200%. America’s isn’t even half of that yet (it’s about 98%, or $13 trillion). If Japan can finance a deficit at 200% of GDP, then why are we worried that U.S. deficits half that size would threaten interest rates or the dollar?

First off, it’s worth pointing out that high public sector-debt-to GDP ratios haven’t worked in Japan, if by work you mean pave the way to a stable recovery. Advocates might say-as advocates of the stimulus here in Australia often say-that the public spending made things less worse. But the opposite is true. It’s made things more bad!

Or just worse, if you prefer. We mean that the public spending has done two things, neither of which is productive, and both of which, in fact, waste capital and resources. First, public sector spending to prop up financial firms with dodgy assets prevents the needed reckoning in asset prices that would produce market clearing prices for commercial and residential real estate. You get zombie banks and a zombie economy and zombie house prices.

Secondly, there’s no indication that all the infrastructure spending in Japan has produced any kind of lasting growth for the economy. It may have built some great roads and bridges. But we wonder if it solved any of the underlying problems? What’s more, the capital and resources that went into those projects was directed by political considerations and not available for the private sector, which could have put them to some use at least designed to produce a return on the capital.

The underlying problem which deficit spending does not solve is compounded by demographics. Japan’s government is hoping that continued borrowing can be financed at low rates by pensioners who will be cashing out of their pensions but seeking safety. However, we suspect that Japanese pensioners will begin to consume their savings as they downsize their lives into their twilight years (which tend to last much longer in Japan, as the number of Japanese centenarians shows).

That means interest on Japanese bonds-which already one fifth of the Japanese budget-will consume even more of the nation’s resources, if the older population clams up with its money. And like in the U.S., you’ll see the government borrowing more and more of every new yen spent, with more of that borrowed yen going to pay a previous creditor. That’s bordering on Ponzidom.

Japan has been able to run a higher-than-average public debt-to-GDP ratio because it has had such a high personal savings rates. This kept borrowing costs low for the government. But we’d expect that to change soon. A debt-to-GDP ratio of 200% will be very difficult to finance in the world as it is-much less in a world where those rates begin to rise and when Japanese savers begin to consume their savings.

Finally, what about Europe? Our argument here is simple: Europe’s monetary union is going to come unstuck. Why? Europe has one interest rate for twelve different economies. That does not leave national governments with the flexibility to print money and inflate away political problems. This will be intolerable, the monetary union will break up.

The sign to watch for is a spike in the yields on euro-denominated debt. As the chart below (from Stratfor) shows, earlier this year bond yields did in fact begin to widen. Germany Bunds have the most stable rates, as Germany has traditionally the most stable fiscal and monetary policies in Europe (they did not go hog wild for stimulus).

But for Spain, Ireland, Greece, Portugal, Italy and Austria (whose banks lent large for real estate in Eastern Europe), another round of falling asset values really would show that the GFC has become a sovereign debt crisis. And will Germany bail out these nations? Can it afford to?

We don’t know the answer to those questions. But it is worth pointing out that by assuming or guaranteeing the liabilities of the financial sector, national governments have also assumed the risk. And the bond markets will be left to decide how to price this risk.

How it ends is anyone’s guess. But our take is that the Super Cycle in fiat money is at its peak. And as it unwinds, it’s going to take national governments and their financing model with it. They will be forced to adopt a new model and take a new form to survive.

This means a great deal of political and economic upheaval. It’s no coincidence that the last time the world faced such monetary upheaval was when it went off the gold standard and straight into essentially thirty-two years of military and economic conflict (1913-1945). If the world is about to become that disordered again, you’ll need a plan to deal with it.

Regards,
Dan Denning
Daily Reckoning Australia

November 5, 2009

Debt to GDP Ratios Indicate Governments Going Bankrupt was originally featured on Whiskey and Gunpowder

Our views are different, but not extraterrestrial. Once upon a time, not so long ago, they were even respectable. The gist of our message two weeks ago was that debt is dangerous. It feels good at first. But give a society too much debt – either in its private sector or the public sphere – and someone’s going to get killed. That’s why the present situation is such a delight to serious economists; it offers more data points. We get to see how much straw the feds can add before the poor camel’s back breaks.

What’s the best way to get through a debt crisis? Straight through was our advice last week. For at least a thousand years, the business cycle went round and round without help from central bankers or economists. It is only since these geniuses have been on the case that really serious problems have arisen. The Panic of 1920 – in which the US government did nothing but cut taxes and spending – was quickly forgotten. The Panic of 1929, on the other hand, was followed by massive rigging and jiving by the authorities. It took 20 years and a world war to overcome; today it is still remembered today as the Great Depression.

Martin Wolf, speaking, gravely, for the world’s intelligentsia in The Financial Times last week, proclaimed that: “the only thing worse than rescuing the system would have been not rescuing it.” But he is wrong; of all the many blessings economists may bestow upon a grateful people, improving the economy is not one of them. An economy is a natural thing. It can be improved by the striving of entrepreneurs, the prudence of bankers, and the sweating of field hands. But when it comes to the macro-economic policy, forbearance is the quality that pays. Any initiative on the feds’ part inevitably makes things worse.

The Bubble Era, like the Great Depression, was largely -but not completely – the result of government initiative. Artificially low interest rates – intended to counter the modest downturn of 2001 – sent the wrong message. Consumers – notably those in Britain and America – bought things they couldn’t afford. Producers – notably those in Asia – made things for which there was no real market. Debt piled up. Mountains of it.

As consumers bought more and producers made more the economy grew. But much of the economic “growth” of the 2001-2007 period was fraudulent. It was based on debt spending, not on genuine increases in purchasing power. Debt pretends to be real money. It looks like the real thing, but it is not. It stimulates the economy like counterfeit money. It causes production and consumption, but of the wrong sort. Former Reagan era Office of Management and Budget director David Stockman estimates the level of “counterfeit GDP” at $4 trillion in the US alone.

The fraud was discovered, though misunderstood, when sub-prime debt began to implode. The economy had been kissed hard; millions of houses had been built, bought and sold. Now, owners couldn’t pay for them. All of sudden, the counterfeit money began to shrivel up. Lenders, investors, and householders all began to de-leverage; paying down the debts as fast as they could, defaulting on those they couldn’t.

Rather than come to the obvious conclusion, that they should never have meddled with the economy in the first place, the feds began rescue operations on a breathtaking scale. The British government increased spending to 140% of revenues. America now runs a stimulus program nearly equivalent, in economic impact, to WWII. Not since 1945 have the two pages of its ledgers – debits and credits – told such different stories, with almost $2 of spending for ever $1 in tax receipts. Britain will add almost 50% to its government debt in the next three years. David Stockman expects the publicly held US national debt to almost double in the next five years.

Even at those levels, many economists think the government should do more. Nobel Prize winner, Paul Krugman is one. Richard Koo is another. They’ve warned that the US (and by extension much of the rest of the world) could suffer a Lost Decade, like Japan, if the government slacks off before consumers have finished de-leveraging. At least they understand what is going on. Too bad they missed the point of it. The problem is too much debt, not too little spending. Leveraging up the public sector doesn’t help. Even government debts must be paid – if not by the borrower, then by the lender. The feds are smooching more ardently than any debt lover in history; next, we get to see who dies…or at least who defaults.

Regards,
Bill Bonner

November 4, 2009

Editor’s Note: The above article originally appeared in The Daily Reckoning as “The Kiss of Debt.”

Debt Is Dangerous, Especially of the Government Kind was originally featured on Whiskey and Gunpowder

Right now, Detroit is as close as any city in America to becoming a food desert, not just another metropolis like Chicago, Philadelphia, or Cleveland with a bunch of small- and medium-sized food deserts scattered about, but nearly a full-scale, citywide food desert. (A food desert is defined by those who study them as a locality from which healthy food is more than twice as far away as unhealthy food, or where the distance to a bag of potato chips is half the distance to a head of lettuce.) About 80 percent of the residents of Detroit buy their food at the one thousand convenience stores, party stores, liquor stores, and gas stations in the city. There is such a dire shortage of protein in the city that Glemie Dean Beasley, a seventy-year-old retired truck driver, is able to augment his Social Security by selling raccoon carcasses (twelve dollars a piece, serves a family of four) from animals he has treed and shot at undisclosed hunting grounds around the city. Pelts are ten dollars each. Pheasants are also abundant in the city and are occasionally harvested for dinner.

Detroiters who live close enough to suburban borders to find nearby groceries carrying fresh fruit, meat, and vegetables are a small minority of the population. The health consequences of food deserts are obvious and dire. Diabetes, heart failure, hypertension, and obesity are chronic in Detroit, and life expectancy is measurably lower than in any American city.

Not so long ago, there were five produce-carrying grocery chains—Kroger, A&P, Farmer Jack, Wrigley, and Meijer—competing vigorously for the Detroit food market. Today there are none. Nor is there a single WalMart or Costco in the city. Specialty grocer Trader Joe’s just turned down an attractive offer to open an outlet in relatively safe and prosperous midtown Detroit; a rapidly declining population of chronically poor consumers is not what any retailer is after. High employee turnover, loss from theft, and cost of security are also cited by chains as reasons to leave or avoid Detroit. So it is unlikely grocers will ever return, despite the tireless flirtations of City Hall, the Chamber of Commerce, and the Michigan Food and Beverage Association. There is a fabulous once-a-week market, the largest of its kind in the country, on the east side that offers a wide array of fresh meat, eggs, fruit, and vegetables. But most people I saw there on an early April Saturday arrived in well polished SUVs from the suburbs. So despite the Eastern Market, in-city Detroiters are still left with the challenge of finding new ways to feed themselves a healthy meal.

One obvious solution is to grow their own, and the urban backyard garden boom that is sweeping the nation has caught hold in Detroit, particularly in neighborhoods recently settled by immigrants from agrarian cultures of Laos and Bangladesh, who are almost certain to become major players in an agrarian Detroit. Add to that the five hundred or so twenty-by-twenty-foot community plots and a handful of three- to ten-acre farms cultured by church and non-profit groups, and during its four-month growing season, Detroit is producing somewhere between 10 and 15 percent of its food supply inside city limits—more than most American cities, but nowhere near enough to allay the food desert problem. About 3 percent of the groceries sold at the Eastern Market are homegrown; the rest are brought into Detroit by a handful of peri-urban farmers and about one hundred and fifty freelance food dealers who buy their produce from Michigan farms between thirty and one hundred miles from the city and truck it into the market.

There are more visionaries in Detroit than in most Rust-Belt cities, and thus more visions of a community rising from the ashes of a moribund industry to become, if not an urban paradise, something close to it. The most intriguing visionaries in Detroit, at least the ones who drew me to the city, were those who imagine growing food among the ruins—chard and tomatoes on vacant lots (there are over 103,000 in the city, sixty thousand owned by the city), orchards on former school grounds, mushrooms in open basements, fish in abandoned factories, hydroponics in bankrupt department stores, livestock grazing on former golf courses, high-rise farms in old hotels, vermiculture, permaculture, hydroponics, aquaponics, waving wheat where cars were once test-driven, and winter greens sprouting inside the frames of single-story bungalows stripped of their skin and re-sided with Plexiglas—a homemade greenhouse. Those are just a few of the agricultural technologies envisioned for the urban prairie Detroit has become.

There are also proposals on the mayor’s desk to rezone vast sections A-something (“A” for agriculture), and a proposed master plan that would move the few people residing in lonely, besotted neighborhoods into Detroit’s nine loosely defined villages and turn the rest of the city into open farmland. An American Institute of Architects panel concludes that all Detroit’s residents could fit comfortably in fifty square miles of land. Much of the remaining ninety square miles could be farmed. Were that to happen, and a substantial investment was made in greenhouses, vertical farms, and aquaponic systems, Detroit could be producing protein and fibre 365 days a year and soon become the first and only city in the world to produce close to 100 percent of its food supply within its city limits. No semis hauling groceries, no out-of-town truck farmers, no food dealers. And no chain stores need move back. Everything eaten in the city could be grown in the city and distributed to locally owned and operated stores and co-ops. I met no one in Detroit who believed that was impossible, but only a few who believed it would happen. It could, but not without a lot of political and community will.

There are a few cities in the world that grow and provide about half their total food supply within their urban and peri-urban regions—Dar es Salaam, Tanzania; Havana, Cuba; Hanoi, Vietnam; Dakar, Senegal; Rosario, Argentina; Cagayan de Oro in the Philippines; and, my personal favorite, Cuenca, Equador—all of which have much longer growing seasons than Detroit. However, those cities evolved that way, almost unintentionally. They are, in fact, about where Detroit was agriculturally around one hundred and fifty years ago. Half of them will almost surely drop under 50 percent sufficiency within the next two decades as industry subsumes cultivated land to build factories (à la China). Because of its unique situation, Detroit could come close to being 100 percent self-sufficient.

First, the city lies on one hundred and forty square miles of former farmland. Manhattan, Boston, and San Francisco could be placed inside the borders of Detroit with room to spare, and the population is about the same as the smallest of those cities, San Francisco: eight hundred thousand. And that number is still declining from a high of two million in the mid-nineteen fifties. Demographers expect Detroit’s population to level off somewhere between five hundred thousand and six hundred thousand by 2025. Right now there is about forty square miles of unoccupied open land in the city, the area of San Francisco, and that landmass could be doubled by moving a few thousand people out of hazardous firetraps into affordable housing in the eight villages. As I drove around the city, I saw many full-sized blocks with one, two, or three houses on them, many already burned out and abandoned. The ones that weren’t would make splendid farmhouses.

As Detroit was built on rich agricultural land, the soil beneath the city is fertile and arable. Certainly some of it is contaminated with the wastes of heavy industry, but not so badly that it’s beyond remediation. In fact, phyto-remediation, using certain plants to remove toxic chemicals permanently from the soil, is already practiced in parts of the city. And some of the plants used for remediation can be readily converted to biofuels. Others can be safely fed to livestock.

Leading the way in Detroit’s soil remediation is Malik Yakini, owner of the Black Star Community Book Store and founder of the Detroit Black Community Food Security Network. Yakini and his colleagues begin the remediation process by removing abandoned house foundations and toxic debris from vacated industrial sites. Often that is all that need be done to begin farming. Throw a little compost on the ground, turn it in, sow some seeds, and water it. Water in Detroit is remarkably clean and plentiful.

Although Detroiters have been growing produce in the city since its days as an eighteenth-century French trading outpost, urban farming was given a major boost in the nineteen eighties by a network of African-American elders calling themselves the “Gardening Angels.” As migrants from the rural South, where many had worked as small farmers and field hands, they brought agrarian skills to vacant lots and abandoned industrial sites of the city, and set out to reconnect their descendants, children of asphalt, to the Earth, and teach them that useful work doesn’t necessarily mean getting a job in a factory.

Thirty years later, Detroit has an eclectic mix of agricultural systems, ranging from three-foot window boxes growing a few heads of lettuce to a large-scale farm run by The Catherine Ferguson Academy, a home and school for pregnant girls that not only produces a wide variety of fruits and vegetables, but also raises chickens, geese, ducks, bees, rabbits, and milk goats.

Across town, Capuchin Brother Rick Samyn manages a garden that not only provides fresh fruits and vegetables to city soup kitchens, but also education to neighborhood children. There are about eighty smaller community gardens scattered about the city, more and more of them raising farm animals alongside the veggies. At the moment, domestic livestock is forbidden in the city, as are beehives. But the ordinance against them is generally ignored and the mayor’s office assures me that repeal of the bans are imminent.

About five hundred small plots have been created by an international organization called Urban Farming, founded by acclaimed songwriter Taja Sevelle. Realizing that Detroit was the most agriculturally promising of the fourteen cities in five countries where Urban Farming now exists, Sevelle moved herself and her organization’s headquarters there last year. Her goal is to triple the amount of land under cultivation in Detroit every year. All food grown by Urban Farming is given free to the poor. According to Urban Farming’s Detroit manager, Michael Travis, that won’t change.

Larger scale, for-profit farming is also on the drawing board. Financial services entrepreneur John Hantz has asked the city to let him farm a seventy-acre parcel he owns close to the Eastern Market. If that is approved and succeeds in producing food for the market, and profit for Hantz Farms, Hantz hopes to create more large-scale commercial farms around the city. Not everyone in Detroit’s agricultural community is happy with the scale or intentions of Hantz’s vision, but it seems certain to become part of the mix. And unemployed people will be put to work.

Any agro-economist will tell you that urban farming creates jobs. Even without local production, the food industry creates three dollars of job growth for every dollar spent on food—a larger multiplier effect than almost any other product or industry. Farm a city, and that figure jumps over five dollars. To a community with persistent two-digit unemployment, that number is manna. But that’s only one economic advantage of farming a city.

The average food product purchased in a U.S. chain store has traveled thirteen hundred miles, and about half of it has spoiled en route, despite the fact that it was bioengineered to withstand transport. The total mileage in a three-course American meal approaches twenty-five thousand. The food seems fresh because it has been refrigerated in transit, adding great expense and a huge carbon footprint to each item, and subtracting most of the minerals and vitamins that would still be there were the food grown close by.

I drove around the city one day with Dwight Vaughter and Gary Wozniak. A soft-spoken African American, Vaughter is CEO of SHAR, a self-help drug rehab program with about two hundred residents recovering from various addictions in an abandoned hospital. Wozniak, a bright, gregarious Polish American, who, unlike most of his fellow Poles, has stayed in Detroit, is the program’s financial director. Vaughter and Wozniak are trying to create a labor-intensive economic base for their program, with the conviction that farming and gardening are therapeutic. They have their eyes on two thousand acres in one of the worst sections of the city, not far from the Eastern Market. They estimate that there are about four thousand people still living in the area, most of them in houses that should have been condemned and razed years ago. There are also six churches in the section, offering some of the best ecclesiastical architecture in the city.

I tried to imagine what this weedy, decrepit, trash-ridden urban dead zone would look like under cultivation. First, I removed the overhead utilities and opened the sky a little. Then I tore up the useless grid of potholed streets and sidewalks and replaced them with a long winding road that would take vegetables to market and bring parishioners to church. I wrecked and removed most of the houses I saw, leaving a few that somehow held some charm and utility. Of course, I left the churches standing, as I did a solid red brick school, boarded up a decade ago when the student body dropped to a dozen or so bored and unstimulated deadbeats. It could be reopened as an urban ag-school, or SHAR’s residents could live there. I plowed and planted rows of every imaginable vegetable, created orchards and raised beds, set up beehives and built chicken coops, rabbit warrens, barns, and corrals for sheep, goats, and horses. And of course, I built sturdy hoop houses, rows of them, heated by burning methane from composting manure and ag-waste to keep frost from winter crops. The harvest was tended by former drug addicts who like so many before them found salvation in growing things that keep their brethren alive.

That afternoon I visited Grace Lee Boggs, a ninety-three-year-old Chinese-American widow who has been envisioning farms in Detroit for decades. Widow of legendary civil rights activist Jimmy Boggs, Grace preserves his legacy with the energy of ten activists. The main question on my mind as I climbed the steps to her modest east side home, now a center for community organizers, was whether or not Detroit possesses the community and political will to scale its agriculture up to 100 percent food self-sufficiency. Yes, Grace said to the former, and no to the latter. But she really didn’t believe that political will was that essential.

“The food riots erupting around the world challenge us to rethink our whole approach to food,” she said, but as communities, not as bodies politic. “Today’s hunger crisis is rooted in the industrialized food system which destroys local food production and forces nations like Kenya, which only twenty-five years ago was food self-sufficient, to import 80 percent of its food because its productive land is being used by global corporations to grow flowers and luxury foods for export.” The same thing happened to Detroit, she says, which was once before a food self-sufficient community.

I asked her whether the city government would support large-scale urban agriculture. “City government is irrelevant,” she answered. “Positive change, leaps forward in the evolution of humankind do not start with governments. They start right here in our living rooms and kitchens. We are the leaders we are looking for.”

All the decaying Rust-Belt cities in the American heartland have at one time or another imagined themselves transformed into some sort of exciting new post-industrial urban model. And some have begun the process of transformation. Now it’s Detroit’s turn, Boggs believes. It could follow the examples of Pittsburgh, Cleveland, and Buffalo, and become a slightly recovered metropolis, another pathetic industrial has-been still addicted to federal stimulus, marginal jobs, and the corporate food system. Or it could make a complete break and become, if not a paradise, well, at least a pretty good place to live.

Not everyone in Detroit is enthusiastic about farming. Many urbanites believe that structures of some sort or another belong on urban land. And a lot of those people just elected David Bing mayor of the city. Bing’s opponent, acting mayor Ken Cockrel, was committed to expanding urban agriculture in Detroit. Bing has not said he’s opposed to it, but his background as a successful automotive parts manufacturer will likely have him favoring a future that maintains the city’s primary nickname: Motor City.

And there remains a lasting sense of urbanity in Detroit. “This is a city, not a farm,” remarked one skeptic of urban farming. She’s right, of course. A city is more than a farm. But that’s what makes Detroit’s rural future exciting. Where else in the world can one find a one-hundred-and-forty-square-mile agricultural community with four major league sports teams, two good universities, the fifth largest art museum in the country, a world-class hospital, and headquarters of a now-global industry, that while faltering, stands ready to green their products and keep three million people in the rest of the country employed?

Despite big auto’s crash, “Detroit” is still synonymous with the industry. When people ask, “What will become of Detroit?” most of them still mean, “What will become of GM, Ford, and Chrysler?” If Detroit the city is to survive in any form, it should probably get past that question and begin searching for ways to put its most promising assets, land and people, to productive use again by becoming America’s first modern agrarian metropolis.

Contemporary Detroit gave new meaning to the word “wasteland.” It still stands as a monument to a form of land abuse that became endemic to industrial America—once-productive farmland, teaming with wildlife, was paved and poisoned for corporate imperatives. Now the city offers itself as an opportunity to restore some of its agrarian tradition, not fifty miles from downtown in the countryside where most of us believe that tradition was originally established, but a short bicycle ride away. American cities once grew much of their food within walking distance of most of their residents. In fact, in the eighteenth and early nineteenth centuries, most early American cities, Detroit included, looked more like the English countryside, with a cluster of small villages interspersed with green open space. Eventually, farmers of the open space sold their land to developers and either retired or moved their farms out of cities, which were cut into grids and plastered with factories, shopping malls, and identical row houses.

Detroit now offers America a perfect place to redefine urban economics, moving away from the totally paved, heavy-industrial factory-town model to a resilient, holistic, economically diverse, self-sufficient, intensely green, rural/urban community—and in doing so become the first modern American city where agriculture, while perhaps not the largest, is the most vital industry.

Sincerely,
Mark Dowie

November 3, 2009

Editor’s Note: This article originally appeared in the August 2009 edition of Guernica. To view the original article, “Food Among the Ruins,” please click here.

Urban Farming in Detroit and Big Cities Back to Small Towns and Agriculture was originally featured on Whiskey and Gunpowder

Friday, October 30, nine (9!) banks failed and were taken-over by the FDIC. That brought the total bank failures to 115 so far in 2009. This number of failures hasn’t been exceeded since 1992 AND we still have two months to go in 2009 to probably set an all-time record. What a wonderful record at which to look forward.

Not to worry, though. U.S. Bancorp bought all nine of the failed banks. Specifically, they picked up $18.4 billion in assets and $15.4 billion in deposits. The bankrupt FDIC picked up the losses. Is this a great system, or what?

We haven’t even begun to recover from the imbecilic big-bank shenanigans of the recent past; yet here we are creating still more “Too-Big-To-Fail” banks.

Excuse me but if big banks created the problems were now facing, wouldn’t it be a tad more prudent to, say, limit the size any one bank could attain? Hello Barney, Chris – anyone home?

Oh, I forgot. On Friday, Barney Frank did address the problem. He decreed that the TBTF banks would henceforth be charged a “fee” during good times in order to cover potential losses during bad times as the TBTF bank problems are unwound.  I guess size does matter. Apparently all this will be done in secret:

A. There will be a secret club of financial institutions that will be considered “Too-Big-To-Fail.” So if you’re a member, what incentive do you have to act in a prudent manner? Do you not, in fact, now have a license to steal? Can you not do any foolish thing you wish? You know you’d be punished if you simply acted prudently but would benefit with a bailout if your wild schemes failed. Moral hazard? Naw!

B. The public will not be informed of who the members of this private club are. And you thought you had some semblance of privacy in financial matters? The FED still refuses to identify which banks were subjected to the so-called “Stress Test.” Why should we be surprised that they won’t tell us the names of the TBTF club members?

C. A fund will be established by taxing these financial institutions in good times to pay the costs to protect them in the bad times. Anyone really think these fees will cover the bad times? Who will determine when the “good times” are here? And when there are insufficient funds in the kitty, guess who will pay the difference? Moral hazard? Naw! License to steal? From guess whom?

D. The Federal Reserve will have the power to determine and therefore change what the definition of “solvency” is. Oh great, try playing the game when the ground rules keep changing. I’m going to take my bat and ball and go home now!

Did it occur to you that, by omission, the Too-Small-To-Matter banks will continue to be thrown to the wolves? Let’s see; we make big banks even bigger but we close small banks and merge them into already big banks making the big banks even bigger. Figures! First we experience a meltdown in our banking system due to too much debt. We then “solve” the problem by creating still more debt. Part of the fallout of the banking collapse was that we were told we had banks that were too-big-to-fail. Now we “solve” this problem by creating still more and even bigger too-big-to-fail banks? Wow! The logic underwhelms me. Next time my house catches on fire, I guess I’ll try pouring gasoline on it to extinguish the fire. Well, water is just “so-yesterday” a solution. Might as well be innovative.

Currently on the front burner is CIT Financial. Here is an institution that services Middle-American business. CIT apparently no longer qualifies as a TBTF bank, even though they did receive over $2 billion in bailout money a year ago. As a result, CIT finds itself in the middle of bankruptcy proceedings. The intent is reorganization under Chapter 11. Regardless of the outcome, small and medium-sized business will suffer. The Wall Street Journal estimates that perhaps only 20% of the prior level of financial services will be available, and that’s “IF” CIT is successful in reorganization. At best, it’s obvious that any attempt to replace these lost “services” will require much higher financial credit-worthiness and there will be fewer funds available for this process. Well…the TBTF banks have all the money so what’s left for small and medium-sized business? Now tell me this isn’t a License To Steal? Can you estimate how many small and medium sized businesses will be forced into bankruptcy? That really helps our recovery-NOT. Small business creates 90% of the new jobs Obama keeps looking for but, hey, why worry? Privatize the profits and socialize the losses. Just keep the big boys happy.

Every economic problem we face can be directly traced back to the Federal government and the interfering laws that they continuously pass. Remember the Resolution Trust Corp. back in the 1980s? It became “necessary” to bail out the Savings & Loan industry because so many of the S&Ls gambled wildly with their depositors’ money. Sound familiar? How could the S&Ls of the 1980s and the too-big-to-fail banks of the 00s make such horrible business decisions? Were/Are the management teams just stupid or are they also incompetent?

Consider this: We’ve had a 115 bank failures just this year. Are you worried? Why not? Oh, your account is insured. By whom? So when the management of the bank that controls your deposits makes stupid business decisions, you don’t care? The FDIC will bailout your account. Not only that, the “insured” amount was increased from a “mere” $100,000 per account to $250,000 this year (this extra coverage expires at the end of 2013 and reverts back to the $100,000 figure in 2014 as currently scheduled). Do you see a slight problem here? Isn’t the FDIC just another government agency that gives the banks a License To Steal?

Just for giggles, suppose there were no FDIC and your deposits at any bank or S&L were simply not insured. Would you then perhaps have a slightly different outlook as to the safety of your money? Would you perhaps behave somewhat differently when selecting a bank in which to deposit your funds? Why? Do you now see that the FDIC is a Federal Government sponsored insurance scheme to protect you from greedy and stupid bankers? Or do you perhaps see that the FDIC actually facilitates excessive risk-taking on the part of the bankers since they have nothing to loose? Do you suppose there might be a slight moral hazard hiding somewhere in this mix? If the bank did not have the FDIC insuring your deposit and that same bank had to compete in the open, free market for your deposit account, would you suppose that the bank management might behave in a slightly more conservative manner? Wouldn’t you behave in a slightly more conservative manner when selecting a bank?

What’s to restrain the management of those banks today? If they mess-up, the government will protect them. And as we’ve all observed, the very folks that made the stupid and reckless business decisions will still get their multi-million-dollar bonus.’ Would you be willing to make a wild guess that maybe there is a slight moral hazard hiding somewhere in this scheme? Isn’t that a License To Steal?

You don’t want to hear this, but you and I are responsible. Yes we are. We grumble about politicians and yet we continue to re-elect the same folks who continuously lie to us. They tell us what they think we want to hear, and then go do whatever they want. As Walt Kelly’s eminent philosopher of the 1960s, Pogo, opined, “We have met the enemy and they is us.” Don’t we rationalize that “our representative is okay but it’s the other guy’s rep that needs to be voted-out? Well guess what? Our rep needs to go, too. They all need to go. We don’t need term limits. We just need the gumption to vote “no” every time we see the term “incumbent” after a candidate’s name. It’s that simple. I’d guess that the message would be heard loud-and-clear very quickly. Isn’t it about time we put an end to what seems to be an unlimited License To Steal?

Regards,
Tex Norton

November 3, 2009

Bankster’s Cartel: Licensed to Steal was originally featured on Whiskey and Gunpowder

I find it perplexing that only 20 years after the collapse of the Berlin Wall, the West continues to implement laws that mimic all of the failed policies of our former “communist” foes. In fact, our current president won the election by promising to “spread the wealth around.” But… truth be told… we don’t have to look to Eastern Europe or the Soviet Union to find a society destroyed by coercion, socialism, and the overreaching power of the State. We could just look at Detroit…

In 1961, the last Republican mayor of Detroit lost his re-election bid to a young, intelligent Democrat, with the overwhelming support of newly organized black voters. His name was Jerome Cavanagh. The incumbent was widely considered to be corrupt (and later served 10 years in prison for tax evasion). Cavanagh, a white man, pandered to poor underclass black voters. He marched with Martin Luther King down the streets of Detroit in 1963. (Of course, marching with King was the right thing to do… It’s just Cavanagh’s motives were political not moral.) He instated aggressive affirmative action policies at City Hall. And most critically, he greatly expanded the role of the government in Detroit, taking advantage of President Lyndon Johnson’s “Model Cities Program” – the first great experiment in centralized urban planning.

Mayor Cavanagh was the only elected official to serve on Johnson’s task force. And Detroit received widespread acclaim for its leadership in the program, which attempted to turn a nine-square-mile section of the city (with 134,000 inhabitants) into a “model city.” More than $400 million was spent trying to turn inner cities into shining new monuments to government planning. In short, the feds and Democratic city mayors were soon telling people where to live, what to build, and what businesses to open or close. In return, the people received cash, training, education, and health care.

The Model Cities program was a disaster for Detroit. But it did accomplish its real goal: The creation of a state-supported, Democratic political power base. The program also resulted in much higher taxes – which were easy to pitch to poor voters who didn’t have to pay them. Cavanagh pushed a new income tax through the state legislature and a “commuter tax” on city workers.

Unfortunately, as with all socialist programs, lots of folks simply don’t like being told what to do. Lots of folks don’t like being plundered by the government. They don’t like losing their jobs because of their race.

In Detroit, they didn’t like paying new, large taxes to fund a largely black and Democratic political hegemony. And so, in 1966, more than 22,000 middle- and upper-class residents moved out of the city.

But what about the poor? As my friend Doug Casey likes to say, in the War on Poverty, the poor lost the most. In July 1967, police attempted to break up a late-night party in the middle of the new “Model City.” The scene turned into the worst race riot of the 1960s. The violence killed more than 40 people and left more than 5,000 people homeless. One of the first stores to be looted was the black-owned pharmacy. The largest black-owned clothing store in the city was also burned to the ground. Cavanagh did nothing to stop the riots, fearing a large police presence would make matters worse. Five days later, Johnson sent in two divisions of paratroopers to put down the insurrection. Over the next 18 months, an additional 140,000 upper- and middle-class residents – almost all of them white – left the city.

And so, you might rightfully ask… after five years of centralized planning, higher taxes, and a fleeing population, what did the government decide to do with its grand experiment, its “Model City”? You’ll never guess….

Seeing it had accomplished nothing but failure, the government endeavored to do still more. The Model City program was expanded and enlarged by 1974’s Community Development Block Grant Program. Here again, politicians would decide which groups (and even individuals) would receive state funds for various “renewal” schemes. Later, Big Business was brought into the fold. In exchange for various concessions, the Big Three automakers “gave” $488 million to the city for use in still more redevelopment schemes in the mid-1990s.

What happened? Even with all of their power and all of the money, centralized planners couldn’t succeed with any of their plans. Nearly all of the upper and middle class left Detroit. The poor fled, too. The Model City area lost 63% of its population and 45% of its housing units from the inception of the program through 1990.

Even today, the crisis continues. At a recent auction of nearly 9,000 seized homes and lots, less than one-fifth of the available properties sold, even with bidding starting at $500. You literally can’t give away most of the “Model City” areas today. The properties put up for sale last week represented an area the size of New York’s Central Park. Total vacant land in Detroit now occupies an area the size of Boston – Detroit properties in foreclosure have more than tripled since 2007.

Every single mayor of Detroit since 1961 has been a Democrat. Every single mayor of Detroit since 1974 has been black. Detroit has been a major recipient of every major social program since the early 1960s and has received hundreds of billions of dollars in government grants, loans, and programs. We now have a black, Democrat president, who is promising to do to America as a whole what his political mentors have done to Detroit.

Those of you with a Democratic political affiliation may think what I’ve written above is biased or false. You may think what you like. But there is no way to argue that what the government has done to Detroit is anything but a horrendous crime. You may think what I’ve written above is merely a political analysis. Perhaps so, but politicians drive macroeconomic policy. And macroeconomic policy determines key financial metrics, like the trade-weighted value of a currency and key interest rates.

The likelihood America will become a giant Detroit is growing – rapidly. Politicians now control the banking sector, most of the manufacturing sector (including autos), a large amount of media, and are threatening to take over health care and the production of electricity (via cap and trade rules). These are the biggest threats to wealth in the history of our country. And these threats are causing the world’s most accomplished and wealthy investors to actively short sell the United States – something that is unprecedented in my experience.

Regards,
Porter Stansberry

November 2, 2009

Editor’s Note: A big thanks to Porter Stansberry for this article. We here at Whiskey were very eager to run it. If you would like to read more from Porter and find out about his investment research, just take a look here.

Detroit’s Socialist Nightmare Is America’s Future was originally featured on Whiskey and Gunpowder

“Cometh the hour, cometh the man,” I’ve said many times during this narrative of the life and wars of General Curtis Lemay (1906-1990). And when the hour has passed? Well, so passes the man, one might think.

But the muse of history seldom lets go of a good story. Recall, as I’ve counseled before, the first words of Virgil’s Aneid. “Arma virumque cano.” I sing of arms and the man. Though time and history overtake the man of the hour, can he ever really exit the stage?

In the last article, about Lemay and what he told President Lyndon Johnson, we left the general as he retired from the Air Force in 1965 and moved to the tony Bel Aire section of Los Angeles. Lemay took a good job with a fine technology firm. He and Mrs. Lemay settled in, and — it being Los Angeles in the mid-1960s — life was good.

1968 – Vietnam

But time passes, and by 1968 Lemay was frustrated with the direction that the U.S. was taking. The country’s social fabric was fraying. There were riots on college campuses, as well as in the streets of major cities. What was happening to the nation that Lemay had served for his entire career?

Much of the national discord crystallized around opposition to the war in Vietnam. It’s certainly fair to say that Lemay’s frustration came from watching the Johnson administration bungle the fight. And this was no abstract or academic matter to the old bomber pilot from Ohio.

That is, in 1964 Johnson rejected the military advice of his Air Force Chief of Staff, a certain General named Curtis Lemay. Lemay counseled Johnson that if the U.S. was going to fight the North Vietnamese — a big “if,” in Lemay’s view — then the U.S. needed to hit North Vietnam hard and up front with air power. “Throw a punch that really hurts,” said Lemay, and wreck the means by which North Vietnam was waging war against South Vietnam.

This advice was not what Johnson wanted to hear. Instead, Johnson and his counselors escalated the war gradually, on land, sea and in the air, and by 1968 waged it to a bloody stalemate. (“I g****m told you so,” Lemay surely thought.)

Strategy, Operations and Logistics

There were many reasons, at many levels, for what happened in Vietnam. First of all, at the strategic level, the North Vietnamese Communists actually knew what they wanted and what they were doing. The North Vietnamese were serious students of the theory of war, from Sun Tzu to Mao Zedong. They had a plan and an end-game, and it was all quite simple. It was to unite North and South Vietnam into one large, Communist state.

At the operational level, the North Vietnamese also had a thoughtful plan to implement their strategy. They took massive aid from the Soviet Union, Peoples’ Republic of China, and other like-thinking Communist and Socialist nations. Well-armed by the outsiders, the North Vietnamese intended to pour troops and equipment into the South, build up forces and capabilities, and fight for as long as it took to prevail.

What would it take to prevail? In one word, logistics. “In large part the history of the (Vietnam) war,” wrote U.S. intelligence analyst Cynthia Grabo in her insightful book Anticipating Surprise: Analysis for Strategic Warning (Defense Intelligence Agency, 2004), “was a chronicle of ingenious and unrelenting North Vietnamese efforts to sustain their logistic movements and of our (U.S.) attempts to disrupt them.”

It gets back to the old military saying that amateurs study battles, while professionals study logistics. Lemay’s advice to Johnson had been to “disrupt them” by bombing North Vietnamese supplies at the source. Kill the logistics, and you kill the enemy’s ability to wage war.

Thus in 1964 Lemay presented Johnson with a plan to bomb the ports of North Vietnam, and mine the harbors through which Soviet and other Communist-bloc aid poured into North Vietnam. Lemay advised mining the coastline to prevent infiltration. Lemay also advised destroying North Vietnamese oil supplies at the storage facilities.

Johnson did none of this. Instead, Johnson’s operational plan was to bomb the jungle trails, through which North Vietnamese supplies and troops poured south. At the end of the so-called Ho Chi Minh Trail, Johnson’s operational plan was to “disrupt” North Vietnamese efforts via direct action against an armed invasion force. It was as if someone was squirting you with a fire hose. But rather than turn off the hose at the source, you stood there trying to soak up the water with a towel.

To top it off, Johnson pursued his operational plan gradually. Johnson escalated the Vietnam war slowly. In particular, there was on-and-off bombing, punctuated by well-publicized “pauses.” While the aircraft were chained down, the North Vietnamese rearmed their gun pits and recalibrated their antiaircraft tracking radars.

A Proxy War, a Long War, and Many Mistakes

In the larger scheme of things, the Vietnam war was a proxy war. Other powers — Soviet Union, Warsaw Pact, Cuba, China, et al. — waged war against the U.S.

North Vietnam was the proxy in this proxy war, of course. But the prize was conquering the South and defeating the U.S. So the North Vietnamese were OK with their role.

Indeed, the North Vietnamese “gradually” adapted to the gradual war escalation of the Johnson administration. The Northerners dug in and took their hits. They wanted to win. They were patient and ruthless. In a war, that helps.

On the U.S. side there were fundamental misperceptions and misunderstandings. At many levels of command – starting in the Oval Office and moving down the chain — there were geostrategic blunders, strategic errors, operational miscalculations and tactical mistakes.

After he retired, whenever Lemay was asked for his opinion on how the war was playing out, he answered honestly and with characteristic bluntness. Primarily, Lemay criticized Defense Secretary Robert McNamara and his crew of “whiz kids” at the Pentagon. The McNamara team was “mirror-imaging” its values onto the North. For as smart as they were — and many dripped with academic wax and ribbons — these geniuses couldn’t make hard choices. They let things drag out.

For most Americans, by 1968 the central point of the Vietnam war was that it was a televised meat grinder, killing hundreds of U.S. soldiers per week. The war cost untold billions and wrecked both the U.S. military, and the larger American economy, from the inside out. So much for Johnson’s “coonskin” that he was going to “nail to the wall.”

The U.S., Painted into a Corner

The year 1968 was a historical tipping point for the U.S. and the Vietnam War. It started with the Tet Offensive in Vietnam, in January and February. Overall, the Tet campaign was a battlefield defeat for the Communists. But the Tet Offensive crystallized one overarching idea inside the head of many an American. The Vietnam War had lasted too long and cost too much.

As the Tet fighting wound down, U.S. leadership and decision-making was paralyzed, starting with the top echelons of the Johnson administration. It dawned on the U.S. political classes that they were painted into a corner. The historical record is that Americans will fight a war. But not a long war.

By stringing out the Vietnam fighting over many years, Johnson had squandered the political will of the nation. Where could the U.S. go from here? Who could untie this Gordian knot? The battleground of the Vietnam War spread to U.S. campuses and streets. It was a mess.

A Year of Living Dangerously

Add to this, that the nation was living dangerously. On the worst day of the Vietnam war, there was never a military threat from Hanoi against the U.S. homeland, or towards U.S. allies in Europe and Asia outside Indochina.

But from what Lemay knew – and he knew a lot because he received regular classified briefings as a courtesy extended to a former Air Force Chief of Staff — the Soviets were building a powerful nuclear force with which to challenge the West. At the strategic level there was a “breakout” in the making.

In Lemay’s opinion, with the focus on Vietnam and the accompanying policy paralysis, the bulk of the policy-making class in Washington was oblivious to the Soviet nuclear threat. (Looking ahead to the 1970s, a Soviet nuclear breakout occurred. The top echelons of the U.S. political-media classes eventually figured it out, for the most part — except for some of the supremely stupid ones.)

On March 31, 1968 Johnson announced that he wouldn’t run for reelection. At the national level the Democratic Party descended into chaos. By August the Democrats pulled their party together and nominated Vice President Hubert Humphrey as their candidate for president.

Lemay knew Humphrey, but didn’t trust him because of events that dated back to Lemay’s Air Force tenure during the Johnson presidency. “I thought that Humphrey was as big a liar as Johnson,” remarked Lemay at one point.

The Republicans in turn nominated Richard Nixon, with whom Lemay had worked during the Eisenhower administration when Nixon was Vice President. Nixon had his flaws, Lemay thought, but at least he understood foreign and military affairs.

George C. Wallace

In response to the Vietnam War, and a long list of other national issues, a relatively obscure, but smooth-talking lawyer named George C. Wallace (1919 – 1998) appeared on the national horizon.

Wallace had served in the Army Air Corps in World War II. He was part of the 20th Air Force under Lemay in the Pacific, although then-Gen. Lemay and then-Staff Sergeant Wallace never met. After the war Wallace returned to his native Alabama and made a career in politics. By 1968 Wallace was a former governor of Alabama, and his wife Lurleen held the job after Wallace could not run due to term limits.

Wallace offered a Southern-fried version of segregationist populism. Wallace preyed on the social and economic fears of lower-class and working-class white people. Wallace particularly touched nerves with peoples’ fear of the unfolding civil rights movement.

“When I talk about roads and schools,” Wallace once remarked, “nobody cares. But when I talk about black people moving in down the street, people listen real hard.” On this point, Wallace made political hay out of federal efforts to integrate the races. In one famous comment about federal efforts to promote racial integration, Wallace stated “there’s not a dime’s worth of difference between the Democrat and Republican Parties.”

Wallace believed that there was a market for his brand of political moonshine outside of Alabama. Hence in 1968 Wallace campaigned as a third-party candidate for president. In order to qualify for the ballot in most states, Wallace needed a running mate.

Wallace went through a long list of possibilities for VP. All of the candidates turned him down, including a private citizen living in Los Angeles named Curtis Lemay, Gen., USAF, Retired.

Vice Presidential Candidate

But Wallace pressed on. He needed somebody to balance the ticket and get on the ballot in most states. And oh, Wallace was smooth. He was slick. He could turn on the charm.

In one call after another, Wallace urged Lemay to become the VP candidate. Wallace enticed Lemay with the idea of speaking to a national audience. Lemay could help, said Wallace, with getting out the message to resolve the Vietnam War. Lemay could focus on national security and defense preparedness.

Finally in October, towards the end of the 1968 campaign, Lemay rose to Wallace’s bait. The reason? In September Lemay learned that, if elected, Nixon planned to negotiate over “arms control” with the Soviets. Lemay didn’t trust the Soviets to negotiate in good faith. Lemay believed that the Soviets would wage a propaganda battle. The Reds would talk nice and smile in public, and then build nuclear missiles in secret. (This is exactly what happened.)

Lemay disagreed profoundly with the direction in which he believed Nixon was heading. So in early October, about 30 days before the election, Lemay agreed to be Wallace’s running mate. Many members of Lemay’s family were shocked. Old friends and colleagues could scarcely believe the news. What the hell was Lemay doing?

Irony of ironies, it’s fair to say that George Wallace was soon shocked as well. From Lemay’s very first day on the ticket, the old warhorse started discussing the possibility of “thermonuclear exchange with the Soviet Union.” Huh? People couldn’t believe what they were hearing. Say again? Sure enough, there was Lemay on national television, talking about “radioactive crabs” at the nuclear testing site at Bikini Atoll. Say what?

Lemay Was No Politician

It dawned on Wallace – too late – that Lemay was no tub-thumping, stump-talking, man-of-the-people politician. Not only was Lemay no politician, but he was reverting to his inner-SAC general. Lemay went out on the campaign trail to meet the voters, but he acted more like he was giving a seminar about nuclear war at the RAND Corp.

For all his image as the gruff, profane war-general, Lemay was an exceedingly intelligent man. When it came to airplanes and weapons, he knew his stuff. Actually, he knew his stuff inside out, down to the last technical detail.

It came naturally for Lemay to talk like he was running a SAC staff meeting, where his targeting cells planned the nuclear strike packages. Even worse for the Wallace campaign, Lemay wouldn’t shut up. Nuclear war? Lemay was an expert. Lemay wrote the book on nuclear war — several of ‘em, in fact, and all classified. Sweet Jesus! Now Lemay was talking up a nuclear storm. And the press loved it.

But could nuclear war really be a campaign issue? This was hardly the kind of thing the American people wanted to hear during a presidential election. In every election, as the saying goes, “It’s the economy, stupid.” But in 1968 there was more on the national plate. Vietnam and civil rights worried people — and angered a lot of them. A candidate could talk about those topics out on the campaign trail. Nuclear war, however, was over the top. That scared the voters.

Furthermore, many public opinion surveys indicated that the core of Wallace’s supporters – his political base — were former enlisted soldiers from World War II and Korea. And here was Wallace, the former staff sergeant, choosing a retired general officer as his running mate. It didn’t balance.

Wallace’s ploy backfired. While many Americans admired Lemay the war hero, many old troopers didn’t like him on first principles. Wallace’s political problem boiled down to the fact that Lemay was a general. In the minds of many old soldiers, he was one of those “brass hats” who made their lives miserable for several years during the war. (Many old soldiers did like Lemay, to be sure. Particularly the troops who served with him. Many of “Lemay’s boys” revered their former boss.)

And the train rolled on. Throughout October 1968, the Wallace-Lemay ticket fell in the polls. By Election Day in November, the Wallace-Lemay ticket was adrift. Wallace-Lemay picked up a lot of votes, and even won entire states in the South — which broke the back of a century of Democrat political dominance in Old Dixie. But at the end of the day, Nixon was the one.

Tarred By Association

Lemay was a national political candidate for all of about a month. In his entire life, he never planned to enter politics – and it showed. Yet there was something worse for Lemay than losing his one and only election. He was instantly tarred with the label of racism that accompanied much of Wallace’s political baggage. The media-historical complex promptly turned its darkest lights onto Lemay. Now it was Lemay’s turn to get firebombed.

After a mere 30 days on the campaign trail, Lemay’s career and accomplishments of almost 40 years went down the memory-hole. Lemay’s long list of accomplishments was replaced by the simple notation that he was “George Wallace’s running mate.” Period.

Lemay Confined WHO to Quarters?

By all accounts Lemay was a tough-as-nails general, but entirely fair-minded and non-biased over issues of race. During World War II in England, for example, Lemay went out of his way to ensure that black troops in the then-segregated Army had access to the same opportunities for housing, food, recreation, training and advancement as did the white troops. One time when Lemay learned that there was a racial fight off base, he confined all the WHITE troops to quarters.

Lemay did much the same thing with black troops in the 20th Air Force in the South Pacific. Everyone got a fair shake from Lemay. He judged people by work ethic and performance.

Pres. Harry Truman officially desegregated the U.S. military in 1948. And during Lemay’s tenure at SAC, in the years after 1948, he made great strides in recruiting and training black personnel to work on and fly the world’s most advanced bomber fleet. Indeed, Lemay was a leader in implementing the Truman desegregation order.

There’s no body of evidence that Lemay shared Wallace’s racial views. But still, Lemay ran on Wallace’s presidential ticket. He spent a month talking about Vietnam and the Soviet military threat. Then the election was over and Lemay returned to private life.

Footnotes to 1968

There’s a short footnote to the story. In 1969, newly-elected Pres. Nixon ordered an IRS audit of Lemay’s taxes, just to send a message. Typical Nixon.

Oh, and there’s one more footnote. In 1972, Nixon implemented Lemay’s old plan to bomb the tar out of North Vietnam and wreck the logistics effort at the source. For about two weeks in December, near 200 heavy bombers of the Strategic Air Command (SAC) — B-52s commissioned by Lemay, with pilots trained and doctrine designed by Lemay — pounded targets in North Vietnam. The effort was called Linebacker II. By the end of the Linebacker II, the North Vietnamese came to the peace table and made a serious effort to end their battle with the U.S.

According to accounts by American prisoners held captive in North Vietnam, the North Vietnamese could not believe that the U.S. had such awesome firepower as SAC delivered, yet had not used it earlier in the war. One North Vietnamese officer told an American prisoner, “If we knew you could have done this to us, we would never have fought against you. Why did your government wait so long?” Why indeed?

Thanks for reading. Until we meet again…

Byron W. King

November 2, 2009

The Life and Wars of General Curtis Lemay, Part V: Vietnam, Wallace and Nuclear War was originally featured on Whiskey and Gunpowder

The idea is that supply chains are only as strong as their weakest link. The fact is that many thousands of technologies — electronics, aerospace, military, automotive, clean-tech and renewable energy, to name just a handful — rely on a small number of specialty metals, or what some call “technology metals.” These metals have obscure names, but in many cases, there are simply no substitutes.

United States of Windmills

Some so-called “technologies of the future” are destined to fail due to lack of critical metals with which to effect buildout. Take the rare earth, neodymium, for example. It’s a component of strong permanent magnets — which are made out of a mixture of neodymium, iron and boron.

Strong permanent magnets are critical to gaining efficiency in rotating power-generation units like, say, windmills. Y’know… we’re going to replace burning fossil fuels with windmills, right? Isn’t that the idea? We’re going to live in the United States of Windmills, right?

Except one fact of physics is that without strong permanent magnets, you can’t generate nearly as much power with each turn of the large blades. So neodymium — in the magnets — is critical to our windmill future. There’s NO substitute for neodymium, and believe me, people have tried to figure a way around it.

But with neodymium, as with a host of other relatively obscure substances from the periodic table, the global supply is precarious. In some cases, the supply chain is at great risk because there are but a few sources. For some of those sources, we see things like a major mine playing out due to depletion (Baotou, China, for rare earths) or shut down due to environmental issues (Mountain Pass, Calif., again for rare earths). With other metals, many mines are effectively off-limits due to political problems (in the Congo, for instance).

Looking Ahead with Critical Metals

Most of the strategic and critical metals are just plain “different” than other major industrial metals, like copper, aluminum, lead and even gold and silver.

From the standpoint of nuclear physics, for example, rare earths are not like the other elements. They are brilliant, stubborn and complex, and at the same chemically similar and uniquely individual. You take each rare earth atom the way it was formed in a nuclear reaction within some long-gone, exploded sun, billions of years past.

Another more mundane aspect of the critical metals is that few are exchange traded. For the most part, there’s no futures market, other public market or well-defined transparent price discovery mechanism. There has never been sufficient volume to build up a worldwide market for futures in these obscure elements. So most of the critical metals that get used in world commerce are sold under one-on-one, long-term contracts.

Lacking a forward market, industrial users can’t lock in future prices or deliveries through traditional hedging. They have to sign a contract and agree to pay for future product. It sounds straightforward, but the reality is different. The firms that use many specialty metals live in the worst of both worlds. There’s no futures market, but they are still vulnerable to supply interruptions, spot shortages and price squeezes in the market.

Dealing with Risk, and Virtual Hedging

One technique for users — as well as strategic-minded governments — is simply to pay upfront and stockpile material. This leads to issues with the costs of storage, ensuring physical security, the cost of money and the usual problems with inventory accounting and taxes. Also, with some metals, there are insurmountable storage problems with the rapid deterioration of product due to oxidation or other chemical deterioration.

In other words, in a world where supplies of critical metals are spotty, the traditional tools of costing and forecasting are unreliable. There’s just more risk in the critical metals biz, in some cases rising to “bet the company” levels.

The newest trend in the industry is what’s called “virtual hedging.” This is a term to describe a menu of techniques for developing forward prices and assured deliveries of critical raw materials. Firms use virtual hedging where a futures market does not traditionally exist.

One tool of virtual hedging is to make a direct investment in a mine and get payback via guaranteed metal deliveries (also called off-take agreements). Other kinds of virtual hedging are wide ranging, from stockpiling (for oneself or others), synthetic and/or over-the-counter hedges, material leasing, strategic reserves (i.e., get the government to do it for you) and closed-loop recycling.

Meanwhile, users are hard at work trying to work around issues of physical supply. There are aggressive efforts going on with traditional programs like critical material “thrifting” (use less and see what happens), material substitution, pricing index selection (gear the amount of input to the cost), flexible transfer pricing (charge the customer a surcharge for the extra costs of critical inputs) and in-house waste stream recoveries. The idea is to develop an overall strategy and methodology to mitigate price and supply risk of critical raw materials.

Similarly, producers and industrial processors may also employ these tools as a way to assure adequate income streams for debt retirement, more assured profitability and funding for future expansion and production. Virtual hedging truly has the ability to be the elusive win-win formula that most Western businessmen publicly promote, but are rarely able to employ.

Living Off Past Stockpiles

With one particular element — which I’ll decline to name just now — there’s already a severe supply crunch. This is an element that’s used in a wide variety of electronic products. The supply chain could run dry soon.

Thus, the industry that uses this item is “living off past stockpiles,” according to one inside player. Last year, the general estimate was that there’s enough product in the supply chain to last for two years. So the pipeline will be dry by 2012.

What happened? The problems originated with an unprecedented spike in the spot market price in 2000. In this thinly traded resource, supply fears caused many nervous dealers to sign long-term contracts and lock themselves into high market prices. Then when prices crashed for product off contract, across the user community, there were significant inventory write-downs, both current and future.

By 2006 and 2007, the industry returned to some semblance of normality. But with the crash of 2008, everything fell off a cliff as the economic meltdown jammed the brakes on consumer demand.

Meanwhile, the few companies that mine the substance suspended production. So now there’s a situation in which primary production of ore is all but shut down. There are stockpiles, and just a very limited amount of material coming out of a very small number of mines in faraway jurisdictions.

Thus, with this product, as with most other of the critical technology metals, the question to ask is what does is the downstream industry fear more? High prices for an essential, irreplaceable input? Or lack of physical supply from the mine and mill and widespread unavailability of any product at any price?

It’s a problem within the industry. And it’s just this kind of situation that gives us an entree into an opportunity for profit.

Until we meet again,
Byron King

October 30, 2009

Rare Earths and Other Critical Technology Metals was originally featured on Whiskey and Gunpowder

An insight on this question came from an unexpected quarter.

A gentleman by the name of Fernando Aguirre, who posts on Internet forums and his blog as FerFAL, has written voluminously about his experiences as an Argentine citizen during and after the economic cataclysm that wracked his country in 2001. I first found a long forum post, and then a Google search of “FerFAL” revealed a larger web presence, including a recently published book.

Mr. Aguierre shares his thoughts on all sorts of related subjects, from food storage to guns to politics (he appears to really like Rep. Ron Paul). I personally found a great deal of value among what I’ve seen so far.

One brief passage struck me, however, because it related to the mechanism by which middle-class people become poor during an economic meltdown. The mechanism may be obvious, but it is important to see how theory actually worked in the real world.

Mr. Aguierre shares (in “Part IV”) how, while studying architecture following the 2001 crisis, a social studies teacher illustrated Argentina’s middle class’ slide into poverty. Quoting the teacher from memory, Mr. Aguierre writes,

“[Those in the] middle class suddenly discover that they are overqualified for the jobs they can find and have to settle for anything they can obtain, therefore unemployment sky rockets: too much to offer, too little demand. You see they prepare, study for a job they are not going to get. You kids, you are studying Architecture because you simply wish to do so. Only 3 or 4 percent of you will actually find a job related to architecture.”

We all sat there, letting it all sink in. After a few months, it all proved to be true. Even the amount of students that dropped out of college increased to at least 50%. They either [saw] no point in studying something that would not make much of a difference in their future salaries, had no money to keep themselves in college, or simply had to drop college to work and support their families.

This reads like a premonition.

The USA’s middle-class includes lots of people whose careers rest on higher education and specialized certification. While plumbers, electricians, factory employees and truck drivers typically are among the middle-class, most of those populating suburbia are accountants, middle managers, sales people, financial consultants, teachers, nurses, writers, etc. In other words, as manufacturing and now building activity contract, more of the middle class is made up of the college-educated in white-collar careers.

Factor in our current economic pickle and it’s easy to see the most likely path ahead.

With the economic expansion built on mass optimism and debt rolling over, conditions are now fertile for questioning the college degree system as jobs for the college-educated evaporate en masse. The ability of technology to replace white-collar jobs is widespread, and an increasing need to cut costs is finally driving its use, just as changing economic (and regulatory) conditions also drive the replacement of manpower with robotics in the factory.

Across the economy, the need to cut employment costs (not just payroll, but payroll taxes and benefits) is resulting in mass layoffs of sales people and white-collar office staff. When one considers how much work can be replaced now by accounting software, electronic sales presentations, flatter organizational structures, and “news persons” filing reports for free on the Internet via blogs, it is obvious that vast numbers of middle-class Americans teeter on the precipice of unemployability, not just unemployment.

When the “unique” skill sets that commanded $50,000 to $100,000 (or more) annual salaries turn out to be in vast oversupply, the only course left is to compete with those with neither a college degree nor technical education for jobs that can’t support a middle-class lifestyle.

Hands-on service occupations like nursing and medicine are also far from safe. At the end of the day, it is productivity that pays for such work to be done, and when vast numbers of people cannot find economically productive work, economic reality will land on these occupations, too.

When the economic tide goes out, all boats sink into the mud.

Too many people were goaded into illusory occupations by tax subsidies for higher education, government (rather than market) demand, and other distortions like the credit-without-prior-production of the central bank. Political pandering and central planning replaced the natural balance of an economy growing organically through the honest signals of the price system.

As long as there was enough optimism and ignorance to sustain the illusion, the distortions only grew larger.

Though the ignorance largely remains, there’s no more blind denial left to sustain the burden of all that wasted effort. If your job disappears, it may not come back.

This time it really is different. The final stages of that blind denial included fiscal imprudence that bordered on insanity. The mirage economy can’t return until after the pendulum has swung its full travel to the other side of the arc. That path leads through the valley of a crushing economic depression, one that will radically and permanently alter the lives of middle-class Americans who are almost universally unaccustomed to hardship.

Regards,
David Calderwood

October 29, 2009

Economic Collapse Permanently Destroys Middle Class Jobs was originally featured on Whiskey and Gunpowder

I queried the ranger, “Why NOT feed the animals. It looks like they could use a bit of food.”

The ranger replied, “Well, there are MANY reasons. One reason is that we have many visitors here each year. If all the visitors routinely fed the animals, they would grow quite fat. Also, they would not have to forage for their food, and would become dependent upon the visitors for food. They would ‘forget’ how to forage for themselves and lose their independence. Not only that, but they learn to eschew their natural food and prefer ‘human’ food—which is not healthy for them. Also, since they don’t forage, they don’t get exercise, they develop health problems, and die early because of the improper diet and lack of exercise.

“If they become accustomed to being fed by the visitors, they will EXPECT to be fed by the visitors. As such, any visitor that did NOT give them food would disappoint them. A disappointed animal is a dangerous animal. The animal might well attack to secure the food to which he expects and believes he is ‘entitled’. This is not particularly hazardous if the animal is a squirrel—a bear is another story. Raccoons “vandalizing” garbage cans are quite common.

“If visitors were allowed to give out food, animals from all over would migrate here. The area would be overrun with various animals—which would lead to territorial fights among the animals. As more and more animals migrated and the supply of food remained constant, the animals would become very aggressive in their demands for food.

“Feeding such animals is fine if they are in some form of ‘captivity’, where the amount and type of food can be controlled, but it is not a good idea to feed such animals in the wild when they are free—particularly when the type and amount of food cannot be controlled.

“If an animal is injured in some manner, we often take them in and care for them and feed them—but it is strictly a temporary measure. We cut them off from dependency as soon as possible and place them back in their natural habitat.”

I asked the ranger if it wasn’t something like a “co-alcoholic”—a person that lives with and/or supports an alcoholic in his behavior. The support may be financial or moral or other, but it allows the alcoholic to continue to lead a destructive life. I asked, “When we feed the animals, is it that we do it to ‘feel good’ about OURSELVES that we are doing ‘something charitable’ by feeding the animals, when in fact we are doing great damage to their lives?”

The ranger agreed with me and said that in his opinion I was correct.

I left the park thinking about what I had seen and my conversation with the ranger. As I drove out the park entrance, a “street person” was there with a “please help” sign. I reached for my wallet for some money to assist this person in need when I recalled my conversation with the ranger. In a moment of insight, it was clear to me that I should NOT give this person money. In doing so, I was simply allowing this person to lead the kind of life he was leading—I was being a “co-alcoholic”. I was “Feeding the animals”.

I did not give the person money. Instead, I thought about our whole welfare system and the way is works (or does NOT work). It became clear to me that we are encouraging generation after generation to become dependent. They are essentially a slave to the welfare system. In some sense, they are in captivity.

I thought about the “families” of three and four generations of welfare recipients—many obese—living in poverty; people that have been “trained” to ask for “handouts” and have never learned how to “forage” for themselves.

I thought about the people in New Orleans during hurricane Katrina that had no ability or desire to fend for themselves and simply waited for the government to provide a handout and save them.

I thought about the “migration” of welfare recipients to various states where the welfare benefits are most generous—in particular to major cities in certain states. (Where the various politicians court their votes.)

I thought about how, as more and more people are receiving “subsidies”, each segment becomes more and more aggressive in their “claim” to “their share”.

I thought about the “demands” of the welfare recipients, the riots, the “welfare rights” organizations, the demonstrations, the court cases, and thought, “The similarities are so great they cannot be ignored.”

I thought about the “War on Poverty”, and wondered about the “exit strategy”, or the “definition of victory”.

I thought about all these things and thought, “What have we done through a mistaken notion of benevolence? In a sense, we have not only accepted inappropriate behavior and dependency, but we have encouraged and solicited it for our own purposes. We have been ‘co-alcoholics’ to these people. We have not helped them; we have domesticated them.”

May God forgive us.

Regards,
Anthony De Maio

October 29, 2009

Please Don’t Feed the Animals was originally featured on Whiskey and Gunpowder