Something Rotten in the State of America

• April 20th, 2012
• 5 Min Forecast
• Daily Issue, Issue

Dave Gonigam – April 20, 2012

• Something “rotten in the state of America,” says renowned historian… with the eye-popping numbers to prove it
• Marc Faber sees an ill omen after dinner with “super-wealthy money shufflers”
• From a smear article to an SEC notice: War escalates against the tiny rating agency that bucked the S&P/Moody’s consensus
• North Korea’s tiny bow toward the free market… assuming any Westerner wants to buy its swag
• A tiny blow struck against federal tyranny… an inquiry about derivatives… a major announcement about the future of Laissez Faire Books… and more!

   “We are in the midst of a grave deterioration in the quality of Western institutions,” declares the historian Niall Ferguson.

“The institutions that used to be the best in the world are no longer,” he said during a recent summit at Stanford University.

   The “decline of the West” meme is, dare we say, quickly becoming old hat. But Ferguson brings new insights to the table.

More than others, Ferguson understands what made the West so prosperous for so long — namely, the rule of law. And the rule of law is unraveling in an age when banks foreclose on properties whose owners paid cash… when judges arbitrarily hose the bondholders of GM and Chrysler… or when the government limits your ability to travel overseas if you’re in arrears to the IRS.

   Even the power elite recognizes something is amiss. Each year, the World Economic Forum — the outfit that holds an annual shindig in Davos, Switzerland — issues an annual ranking of the world’s countries and how competitive they are.

The standards are cut and dried: Are property rights protected? Are officials easily bribed? Are the courts independent? Is organized crime a problem?

The United States ranked No. 1 as recently as 2008. By last year, it had slipped to No. 5. And the overall rankings don’t tell the whole story:

   In several critical subcategories, the United States is now a middling player…

• No. 40 in financial auditing and reporting standards
• No. 50 in the absence of political favoritism
• No. 36 for the efficiency of the law in mediating private disputes.

Professor Ferguson, assessing the WEF report, finds Hong Kong tops the United States in all of the top 15 categories related to the rule of law. And mainland China has better rule of law in two of those categories.

In fact, the United States made the top 20 in only one category.

“What this tells you,” says Ferguson, “is something is rotten in the state of America.”

   “People of privilege,” says Marc Faber, “tend to prefer to risk their own destruction than surrender their advantages.”

The good doctor, in the current issue of his Gloom, Boom & Doom Report, recounts a recent dinner he attended featuring people he describes as “super-wealthy money shufflers.”

He did not come away feeling sanguine about their willingness to support the sort of policies that would restore America’s place on that list of the world’s nations.

“Such measures,” he writes, “would include supporting tight monetary policies and far less government regulation, which would contain the rapid escalation of cost-of-living expenses (notably, for food, energy, insurance and educational prices).

“Obviously, these policies would be stock market unfriendly because they would increase interest rates.”

So what’s the endgame? And how should you prepare?

“What if collapse,” posits Ferguson, “does not arrive over a number of centuries but comes suddenly, like a thief in the night?”

“Great powers and empires are complex systems, which means their construction more resembles a termite hill than an Egyptian pyramid . . . including the tendency to move from stability to instability quite suddenly.”

This year’s Agora Financial Investment Symposium will bring together both Marc Faber — back after a two-year hiatus — and, for the first time, Niall Ferguson.

Ferguson will answer some of your most-pressing questions: Can China keep up its growth? What might the world look like with China at the top of the economic heap? And what does that mean for the investments you hold now?

Dr. Faber will tell you which asset classes will perform best if the “super-wealthy money shufflers” insist on retaining their privileges. (Here’s a hint he recently dropped: “Social deterioration over the last 20 or so years is unlikely to have escaped the attention of wealthy Americans. The shift into relatively safe assets is, therefore, likely to continue.”)

We’ll have other new faces, not as familiar, but who offer insights into opportunities as diverse as farmland and Southeast Asia. We’ll have “regulars” like Doug Casey, Rick Rule and Agora Inc. founder Bill Bonner. The trailblazing and always-colorful oil geologist Marcio Mello is back for a return engagement. And your “usual suspects” of Agora Financial editors — King, Mayer, Cox and company — will be on hand, too.

We’d love to see you for our annual gathering in Vancouver — our 13th, to be exact. Online registration is available now. And if you sign up before Monday, April 30, you secure the lowest available fee.

   After slipping below 13,000 yesterday, the Dow has pushed back above that level today. As of this writing, all the major indexes are up.

Yesterday’s market action delivered another substantial gain to readers of Options Hotline. Steve Sarnoff’s recommendation on a stumbling telecom firm traded at a level good for a 40% gain in one month. And that’s on top of the 156% gain on a surging pharmaceutical maker.

Options Hotline comes with the boldest and most-unique guarantee in the business… and through this weekend only, you can access this service at half off the regular fee. The deal comes off the table at 5 p.m. on Sunday.

   Precious metals are once again going nowhere fast today. Gold is at $1,641, while the bid on silver is $31.65.

   The war against the boutique rating agency Egan-Jones is being cranked up a few levels.

As we mentioned on Wednesday, the firm was the subject of a hit piece in The Wall Street Journal intimating that Egan-Jones is understaffed, and the people it does have on hand might not be fully qualified. We noted this coincided with the firm’s downgrade of U.S. Treasuries two weeks ago… to two notches below AAA.

Here’s what’s new: Yesterday, the firm revealed it got a notice from the SEC. Supposedly, Egan-Jones made “material misstatements” when it applied for SEC permission to rate sovereign debt, municipal debt and asset-backed securities.

“In what would be an unprecedented move,” the Journal reports, “the SEC could seek to punish the firm by stripping it of its ability to issue officially recognized ratings on securities tied to government debt and asset-backed deals.”

“Here, we have an allegation of a specific error, made in good faith by Egan-Jones, over the course of doing business,” says Fusion IQ chief and Big Picture blogger Barry Ritholtz.

“At the same time, we have a broad set of systemic errors made by the two much-larger competitors, Moody’s and Standard & Poor’s. These two firms, by design, gave AAA ratings to piles of junk paper. They did so because that was what they were paid to do by the underwriters.”

“These were not good faith errors. They were instead a reflection of a wholly corrupted industry, designed to mislead investors and legitimize junk paper. Somehow, these two whales of corruption get a pass. I don’t get it…”

[Ed. note: Symposium attendees have become accustomed to Mr. Ritholtz’s candid — and frequently hilarious — comments. And he’ll be back with us again this year.

If we can persuade him to take part in this year’s Whiskey Bar, we sense the potential for a knock-down, drag-out fight over the U.S. housing market with Chris Mayer. Or maybe not — the unpredictability is itself one of the attractions. One more time, here’s where to register.]

   After yesterday’s frankly depressing laundry list of assaults on liberty, we owe you some good news: Virginia is standing up to the depredations of the National Defense Authorization Act.

The NDAA was signed last New Year’s Eve when nobody was paying attention, authorizing the indefinite detention of U.S. citizens on the say-so of the president.

On Wednesday, the Virginia legislature passed a bill forbidding state agencies from cooperating with federal attempts to enforce the indefinite detention provision of the NDAA. The governor has promised to sign the bill after the legislature agreed to a couple of minor changes.

Several state legislatures have passed toothless resolutions condemning the NDAA. Virginia’s done something else altogether. “In the 1850s, northern states felt that habeas corpus was so important that they passed laws rejecting the federal Fugitive Slave Act,” says Michael Boldin of the Tenth Amendment Center, offering historical perspective.

“The bill passed in Massachusetts was so effective, not one single runaway slave was returned south from that state. Today, Virginia joins in this great American tradition.”

   At the risk of sounding premature, North Korea might be tiptoeing away from Marxism. For the “Democratic Republic” now has its own CafePress shop.

“Here, you can find official art merchandise from North Korea,” says the Web page. “Show your support to our country!”

You find the usual assortment of T-shirts and coffee mugs. Heck, for $29.99, you can even get an iPhone case depicting the people’s glorious victory over capitalist running dogs:

Clearly, the irony is lost on the regime, that it’s hawking accessories for an item most of its citizens are forbidden to own…

   “Some time ago,” a reader writes, “you mentioned that investment firms were moving poor-performing investments from the investment arm of the firm to the banking side of the firm, to have them shielded or protected by FDIC insurance.”

“Can you clarify how you know this to be true, and is this legal?”

The 5: You’re talking about Bank of America. Last fall, BofA won approval from the Federal Reserve to move billions in derivatives off the books of its Merrill Lynch subsidiary and onto the books of BofA’s commercial arm.

Merrill cannot borrow from the Fed’s discount window. Nor is Merrill backed by FDIC deposit insurance. BofA’s commercial unit has both of these advantages.

Curiously, this shift does not appear to have occurred as of year-end 2011 — the most-recent figures available from the Office of the Comptroller of the Currency. Indeed, the derivatives book on BofA’s commercial side fell during the fourth quarter, from $55.1 trillion (yes, with a “t”) to $50.1 trillion.

We’ll stay on top of it…

   “You say that you have 107 days from the start of the year before ‘Tax Freedom Day,’” writes a British reader. “Pity, then, us in the U.K. with 151 days!

“It is not only our pump prices — now over $8.53 per gallon — our government costs more, too. All this and letting the pound slide so far that it is becoming almost as useless as the dollar in terms of a global currency.

“I truly believe that running a country is far too important to be left to politicians.
Does democracy mean we HAVE to go this way?”

   “When the CFTC,” writes a reader conflating a couple of recent themes in The 5, “gets all these new people that Obama wants to control and those greedy oil speculators, will they have access to the training and ammo from Homeland Security and raid the commodity brokers with SWAT teams?”

   “With all these changes to our liberties,” writes a reader after yesterday’s episode, “is there any parallel to when Hitler came to power? The Germans voted him in, but it took certain consolidations of power for him to become total dictator.”

The 5: Ah, you touch on question that’s crossed this editor’s mind often: At what point is Godwin’s law — the notion that if you invoke the Nazis, you automatically lose an argument — effectively repealed?

We refer you to a passage from Milton Mayer’s book They Thought They Were Free: “To live in the process,” a university professor told Mayer, “is absolutely not to notice it — please try to believe me — unless one has a much greater degree of political awareness, acuity, than most of us ever had occasion to develop.

“Each step was so small, so inconsequential, so well explained or, on occasion, ‘regretted.’… Believe me, this is true. Each act, each occasion is worse than the last, but only a little worse. You wait for the next and the next. You wait for one shocking occasion, thinking that others, when such a shock comes, will join you in resisting somehow…

“Suddenly, it all comes down, all at once. You see what you are, what you have done or, more accurately, what you haven’t done (for that was all that was required of most of us: that we did nothing).”

If you feel compelled to take a stand… and you know in your bones that political action is a futile means to do so… we urge you to read the special message from Laissez Faire Books Executive Editor Jeffrey Tucker in today’s Overtime Briefing, below.

Have a good weekend,

Dave Gonigam
The 5 Min. Forecast

P.S. We knew the streak couldn’t last forever. With the British pound trading strong at $1.612 this morning, it looks as if Abe Cofnas’ “mock trade” this week won’t work out.

Still, it’s hard to argue with the track record to date — seven winners out of eight plays. Nor can we deny the allure of always knowing the outcome in four days or less. Look for a new opportunity on Monday…

P.P.S. Final reminder: Discounted access to Options Hotline — one of the longest-running services of its kind — expires at 5 p.m. on Sunday. Here’s where to act.

As you might be aware, Agora Financial purchased Laissez Faire Books in 2011. This institution, launched 40 years ago in New York, carries a legacy we’ve labored long and hard to sustain and revive.

But events since our acquisition have compelled us to make a significant and dramatic shift… which LFB’s executive editor, Jeffrey Tucker, describes below in this statement released to customers yesterday…

Dear Laissez Faire Today reader,

Today, I’d like to introduce you to a major change we’ve decided to make to Laissez Faire Books’ 40-year history of doing business — a change that I believe will directly impact your knowledge of economics, the way you protect your liberty against the police state and even how you look at your personal freedom (or lack thereof).

I’ll explain this change — and its benefits — in a moment. But first, a quick apology…

Normally, we reserve the pages of Laissez Faire Today to explore economic theory policy, to tip you off on threats to your personal liberties or to share protection strategies.

This missive doesn’t directly focus on any one of those things.

Instead, I’d like to focus on the intersection of all these things and how they all add up to affect your life. I’d like to take you from the “analysis” we normally offer in these pages to a whole new world of “actionable ideas” that you can put into place today to make you smarter, happier and wealthier.

For the first time, we’ve found a way to deliver you the knowledge base of all the classic economic ideas and combine that knowledge with legal things you can do to work around laws that affect your personal liberties.

For example… although you may not know this, the government passed a law in 1993 that’s surely cost you thousands of dollars in new clothes. The law removed a vital ingredient from detergent that kept clothes clean and white. They claimed the ingredient created algae growth in streams and ponds. Their claim has never been proven. Even to this day, nearly 20 years later.

But I’ve found a natural element that works around this boneheaded regulation legally. Add a cup of this to your next wash and it will whoosh away stains and dirt, leaving clothes clean and smelling fresh. Best of all, you can buy this from the paint department at your local Home Depot or Lowe’s. It’ll cost you less than a dime per wash, yet it could save you thousands of dollars in clothes over the years.

You may not think government regulation on laundry detergent is a huge problem. But it’s these small laws that, added up, really put the boot on our throats.

Over the course of my 20-year career, I’ve found roughly a dozen of these small workarounds. Each of them can help you take back control of your own life, despite the efforts of Uncle Sam and the legions of regulators who believe they’re in a position to tell you how to live your life.

I’ve written up all these loopholes in a new report called Hack Your Showerhead: Plus, Nine Other Ways to Get Big Government out of Your Home.

As executive editor of Laissez Faire Books, I’ll gladly send you a copy of this report, free of charge. In return, all I ask you do is agree to be part of an exciting new change in our business…

I’d like to invite you to become a charter member in the brand-new Laissez Faire Club — the first comprehensive, digital-age society of big ideas.

As a member, you’ll have everything you need to cultivate learning and living a free life. And best of all, everything included with the club comes to you for free with your membership, potentially saving you hundreds of dollars in expenses.

Your membership starts with the report I’ve just told you about, Hack Your Showerhead: Plus, Nine Other Ways to Get Big Government out of Your Home. This report shows the best ways that you can fight back against other ways the regulators are trying to wreck your way of life. The way to receive the report is to become a club member.

You’ll also receive our new Economics in One Library box set of books, mailed directly to your doorstep. This carefully selected set includes the great work by Henry Hazlitt, Economics in One Lesson; plus Garet Garrett’s A Bubble That Broke the World (the true story of the Great Depression); and F.A. Hayek’s A Tiger by the Tail. Each includes fantastic introductory material to explain what it is all about.

In addition, this set will include a new edition of Frédéric Bastiat’s classic essay The Law, with an introduction by Agora Inc.’s founder, Bill Bonner. Having reread this monograph recently, I’m amazed at just how timely it truly is. I can see why it has inspired so many over the course of a century and a half. In some ways, this one essay is all you need to understand the social, economic and political orders. It opens eyes as nothing else.

Together, these four books help you understand the world in a whole new way, providing greater clarity on politics, economics and personal life management. Never again will you be confused about terms like Keynesian spending, quantitative easing or credit default swaps.

This Economics in One Library set will be for sale in the Laissez Faire Bookstore for more than $30. But as a charter member to the Laissez Faire Club, you’ll have it delivered to your doorstep at no charge.

In addition, your charter membership to the Laissez Faire Club:

• provides you with free, high-quality e-books that we publish every week. You can access them from your laptop, e-reader, smartphone or desktop. Read just 1/10th of these books and you’ll be the smartest person on your block
• grants access to videos and podcasts that allow you to read and absorb the ideas in those books more quickly, saving you hundreds of hours of reading time
• connects you with fellow members in business, finance and the world of ideas. This allows you to leverage hundreds of years of experience as you learn, discuss, socialize and share and pass ideas back and forth
• saves a boatload of money on every printed book in the Laissez Faire catalog, with a clean 20% discount on all 1,000 titles.

Those are a lot of benefits, I know. So let’s cover some of those things in more depth…

FREE E-BOOKS: When you become a charter member to the Laissez Faire Club today, you’ll enjoy one new book per week. But it doesn’t come in a packet. It is delivered through the website and arrives for your e-reader. It could be an early release of a new book by one of today’s most-remarkable writers. It could a great classic.

Regardless, each one will be what is called an “essential read.” Each one is custom-built with new introductory material and other tools.

This weekly delivery will cause the digital bookshelf to fill up fast. That is just fine. A digital reader can carry whole libraries in a thin package. Members will have access to an archive that will add books as fast as we can make them.

And if you don’t have an e-reader, don’t worry. You’ll be able to download each of these books directly to your computer, should you choose to read that way.

We’ll sell these e-books through the Laissez Faire Bookstore for anywhere between $5–20 each. But as a member, these will all come your way at no charge.

But a bigger benefit than just being free is the fact that these books will provide you with an education unrivaled by any Ivy League university.

FREE VIDEO SUMMARY NOTES: I’m often told that my own video reviews of books are wonderfully informative because I boil down hundreds of pages into small bites and explain the themes and ideas in the context of the current political and economic culture. As a Laissez Faire Club member, you’ll be able to download and enjoy as many of these video analyses for free, for as long as you’d like.

I will involve others in these video reviews as time goes on. I’ll interview authors, ask experts in various fields to weigh in and broaden the discussion to include older works.

LIVE ONLINE SEMINARS: Imagine if you could have studied under F.A. Hayek or Ludwig von Mises in the 1930s. Their modern equivalent will be made available to club members in real-time. Here’s how…

Technology today allows for live online seminars in which people can gather to hear lectures. This has been possible for only a few years, and in my view, this is an underused technology today. It has great potential to allow you to meet up in real-time with some of the best thinkers and experts.

But the vision of the club goes far beyond distributing literature…

Have you been reading about the government’s attacks on the Internet and how this is has alarmed advocates of free speech?

Well, the chilling effect has already arrived, and public spaces are becoming ever less useful and informative. That brings me to what I believe could be the most-exciting part of this club…

PRIVATE COMMUNITIES TO SHARE IDEAS: The Laissez Faire Club provides exactly what is needed right now: a free city within the digital world. This private city stays off the search engines, protects your privacy, keeps your browsing habits and discussions out of reach from prying eyes and allows you to form real friendships with safety and confidence.

A members-only forum provides an opportunity to read along with others and discuss the books, chapter by chapter, giving your reactions and considering them alongside other members.

This is a wonderful way to stay constantly in touch with people who share your values and contribute to your learning and knowledge. It will become your essential community, the basis of professional networks and great friendships.

Forums can form charming internal cultures and be thoroughly humane and friendly for everyone — provided they are set up properly. The big problem with most public forums, however: They are too public. Public forums invite drive-by commentators, trolls, lurkers, jerks, flame wars and worse. A very common complaint concerns profanity. Administrators work hard to keep the culture clean, and as a moderator of many forums for years, I can tell stories you wouldn’t believe. It is a full-time job that is never done.

But you know what solves it all? A wall, privatization, the formation of a “club,” the creation of a “gated community.” This is what lets a vibrant and healthy community develop, one based on civility, intelligence, mutual respect and genuine excitement about ideas. This is part of what the Laissez Faire Club offers.

Having built many Web properties from 1995 onward, I can assure you that there’s never been a better time to join this effort. And when you claim your charter membership today, you’ll be in fine company.

The initial “brain trust” we’ve assembled to lead this effort includes…

• Bill Bonner, founder of Agora, who has been called the Bastiat of our time
• Joel Bowman, the erudite essayist for The Daily Reckoning
• Gary Gibson, the radical voice of Whiskey & Gunpowder
• N. Stephan Kinsella, the attorney who revolutionized the theory of intellectual property
• Chris Mayer, world-traveling capital markets analyst who predicted the housing crisis
• John Papola, the genius filmmaker who immortalized the battle between Keynes and Hayek in brilliant videos
• Addison Wiggin, the entrepreneur who built Agora Financial into a commercial powerhouse.

I’m thoroughly convinced this club will change your life — putting you in place to take control of your health, happiness and finances — as nothing else ever has.

It’s the unity of actionable ideas, technology and private enterprise, all in one package. I know of no other “club” like this in the world.

That’s why I couldn’t be more excited to invite you to become a charter member. Give membership a try…

Take advantage of the ideas in your free report, Hack Your Showerhead: Plus, Nine Other Ways to Get Big Government out of Your Home. Read and digest the timeless theory in your free Economics in One Library box set. Download all your new e-books and video analyses… participate in the private idea-sharing forums… it’s all yours.

And through this offer, you can become a charter member for the monthly price you might pay for a fast-food value meal… just $10 per month.

I’m sure you’d agree that ideas are the most valuable commodity in the world — more valuable than riches and more powerful than governments. Ideas are real. They built civilizations and drive history. It’s time that we take them seriously and mix the right ideas with the right market forces. This can be a new beginning for all the things we believe in.

Simply click here to claim your charter membership to the Laissez Faire Club.

I hope to see your name on the membership list…

Sincerely,

Jeffery Tucker
Executive Editor, Laissez Faire Books

P.S. As soon as I hear from you today, I’ll email you your free Hack Your Showerhead report. In that email, I’ll include your club username and password. And finally, I’ll drop your Economics in One Library set in the mail for you to enjoy.