We are all doomed, doomed, doomed
...the angriest guy in economics
July 7, 2004
Something weird is going on. For one thing, one of the neighbors
abruptly moved during the night, and for another thing the Treasury
printed up and distributed $4.45 billion in real, ink-and -paper
currency. I don't know if these two things have any connection
with each other. But this is a big chunk of money all of a sudden,
and I think the neighbor badly needed some money, because every
time I saw him, I tried to borrow some money from him, and he
always said he didn't HAVE any money! Coincidence? Maybe.
But lately things had been kinda nowhere as far as national debt
is concerned. I mean, you hear about it, and you read
about it, and you get hysterical about it, and you take the cushions
from the couch and make a fort in the living room and kind of
curl up in that cozy darkness into a tight little fetal position
and whimper about it, but it is not really showing up in the
figures. Then, Thursday, as I was waiting for some e-mail to
download from some girl I never met who said she was a beautiful
college coed and she has some "special" photographs
of herself that she is just dying to send me as soon as I send
her my credit card number, I absent-mindedly clicked the button
that took me to the official National Debt figures provided by
the government, and was astonished to see that the debt had ballooned
to $7.274 trillion, up from $7.206 trillion, in one day. One
day! $68 billion dollars in new debt in one freaking day!
Now, as a guy who can spend money with the best of them, and
am married to a woman who can put me in the shade in that regard,
I bill myself as somewhat of an expert on how to spend money
foolishly. But I gotta tell ya that I have never, even on my
worst day, even way back there in the distant past when I was
drinking heavily and acting like an even bigger moron than I
am right now, I never spent $68 billion in one freaking day!
But, then again, we are talking about the Federal Reserve,
and the Federal Reserve itself is seemingly always happy to commit
any kind of monetary fraud you can name. And to prove it they
bought up another $2 billion in government debt last week. Thus,
with this one stroke of a computer button-- beep! --they extinguished
$2 billion in government debt and instantly created the same
amount of money in the coffers of member banks. Money out of
thin air. This is, of course, the ultimate central bank fraud.
In a related vein, we turn to Rob Peebles, in his Random Walk
column on the Prudent Bear site, and read his new essay entitled
"Don't Stop The Stimulus." He seems to agree with me
when he says that not only have we had massive stimulative fiscal
and monetary policy, but he concludes that, like me, "They
have been so stimulative it's hard to imagine taxes getting cut
any more, the government spending any faster, or Alan Greenspan's
Fed getting any looser."
But in a news flash to Mr. Peebles here, it does not take imagination,
but the ugliness of stark reality and the sour attitude that
you get by reading history and what the central banks and the
government in that same sordid history did when they got to this
point, that it is more apropos to believe "You ain't seen
nothing yet." For instance, we haven't even gotten really
started down the road of Tariff and Trade Taxation yet!
Bill Buckler of The Privateer newsletter says that he has taken
a look at the first quarter 2004 "Z-1 flow of funds,"
the report on US credit and financial flows, and his nerves are
shot as a result. He notes "The total US credit market debt
expanded at a seasonally adjusted $US 2.733 TRILLION (in ONE
year) to $US 34.625 TRILLION."
Stupefied by such impossibly huge numbers, in my stunned incoherence
I grab the calculator, and I punch in, let me check that figure
again, 2.733. Notice that I am NOT talking about $2.73. No, I
am not even talking about $2.73 million. I am not talking about
$2.73 billion. But I am tossing trillions of dollars
around here ! Trillions!
So, for every dude and dudette in the country that has a non-farm
job, all 131 million of us swinging our Roy Rogers lunchboxes
on our way to work where we slave all day at a job we hate, surrounded
by morons, working for chump change, and I can't even leave my
lunch in the refrigerator like everyone else because they put
stuff in my sandwich when I am not looking, this increase in
debt comes to $20,865 each. Each! This is just the damn increase!
Now, if we take GDP to be eleven trillion
bucks [corrected], and notice we are still in this trillions
mode, then divide that into the $2.73 trillion. My guts twist
into a knot when I look at the calculator, and it finally impresses
onto my tiny little brain that this increase in debt is equal
to a quarter of GDP! A fourth of total annual income is borrowed
and spent! In one year! One! Year! In one lousy freaking year!
My mouth goes dry in my panic.
I am lying in my bed in the hospital, IV lines dripping clear
fluids into each arm, and a snotty little doctor is looking at
my chart and telling me that my abnormally small brain has, according
to the X-rays, exploded again, and probably for the last time,
and I will probably never work in economics again because the
next time this happens it could be fatal. Then the phone rings.
Straining against the straps where they have me tied down to
the bed, I do a McGyver trick, and with one foot I kick the water
pitcher against the wall, which ricochets across the room, hits
the phone, and knocks the receiver up onto the pillow by my ear.
I say "Hello?" Imagine my surprise when I find it is
Bill Buckler calling me! And he tells me that my wife says that
I would love it, just love it, if he would call me up and finish
talking about the increase in debt. I look at the doctor. I think
about what he said. I look at the phone. And then I say to Bill,
"Sure! I'd love to hear about it!" And so he goes on
to say, "Since the beginning of 1998, total US borrowings
have climbed from about 255% of US GDP to 302%!"
302% of GDP! My puny little brain is kicked into action, as I
think to myself "This is a new record!" Amazingly,
I think I know why he ended the sentence with an exclamation
point! And look! I'm doing it, too! And since there must be some
reason why those exclamation points are suddenly everywhere,
I will remark that this is higher than the 260% of GDP recorded
at the height of the market in 1929, and we all know how well
THAT turned out! This is real scary stuff to me, and not just
because I am a scaredy-cat little coward with a yellow streak
down his back. Suddenly, I feel all woozy, and I need to lie
But he is not done with us yet, and so no sooner had I closed
my eyes and gotten my snoring machinery into gear, than here
he comes charging up, and he hits me with a rolled up newspaper,
and orders me to stop making that horrible noise and get up off
the floor. Staggering to my feet, he gives me one more slap across
the face when he reports, "Total US mortgage debt now stand
at $9.618 TRILLION."
I stagger and I swoon, but I do not fall. In my best Rocky performance
I am out on my feet, but still coming out slugging, animated
by sheer instinct. My brain swirls with the nagging notion that
there is something vaguely familiar about that number. $9.618
trillion. Hmmm. What is it? Then it hits me. This is almost as
much as total Personal Income! So I turn around and pick up the
copy of Barron's off the floor, and I discover where that pencil
with the good eraser went! So on top of that bit of good fortune,
I also discover that total Personal Income is $9.686 trillion!
So, in mortgage debt alone, we owe everything we make!
What to do? What to do? I suggest that we all run around screaming
how the sky is falling, and how we should all be loading up with
large-caliber weapons and running for our lives because we are
all doomed, doomed, doomed, as that is what I typically do. But
Mr. Buckler has also looked at things, as I have, and has concluded,
as I have, that there is nothing that CAN be done, except running
around screaming that the sky is falling and that we are all,
as I alluded to earlier, doomed, doomed, doomed. As I am too
busy wailing and cramming boxes of ammunition into a backpack
to continue right now, I will leave it to the clever Mr. Buckler
to come up with a simile to beautifully sum it all up. Rising
to the challenge, he writes, "There is no 'solution' to
this dilemma, just as there is no 'solution' for a man who finds
himself in a barrel on the lip of Niagara Falls."
Now, try and picture yourself inside a cold, metal barrel on
the lip of Niagara Falls. It's noisy and dark. But the deafening
roar of the water crashing into the rocks cannot muffle the cry
of despair from the watching crowd lining the shore, which is
reaching a frightening, cacophonous crescendo! Now, quickly get
out a pad and pencil! Holding a flashlight in your mouth to provide
illumination, write down some possible solutions to extricate
yourself from this mess before you go over the falls, where you
will soon be dropping down, down, down in a gut-wrenching plummet,
slowly turning end over end, gaining speed the whole way, until
finally, after what seems like an eternity of hearing yourself
screaming your guts out in the raw fear of sheer terror, you
smash onto the rocks below. So, quick! Think!
Too late! Hahaha! You are now dead! While you were fumbling around,
scratching your head, you went over the falls! You fell, you
hit the rocks, and you are splattered all over place, making
a big mess. But the joke's on you, because there is nothing that
you could have done! Hahaha! Get it? You spent the last moments
of your life trying to do something impossible!
And this same fatal inevitability that exists for the a guy in
a barrel going over a waterfall also fatally exists for an economy
that allows a central bank to create excess money and credit.
That is why it is imperative that you NOT get your economy into
trouble to start with, and why it is important that you NOT get
into a barrel and float downstream to a waterfall. There are
some situations where you get to a point where there are no solutions.
The folks at the Daily Reckoning have not forgotten bond owners,
and they bring the news that bonds have had the worst showing
in 24 years. Addison Wiggin does the heavy lifting and adds the
details "Treasurys are heading for their worst quarterly
loss since 1980. The 10-year note started April at 3.84%. Yields
had risen as high as 4.90% on the 14th June." And since
bond prices move inversely to rates, you can see how bond owners
got whacked. If you stand real still and listen as hard as you
can, you can hear the hearts of creditors breaking. I am sure
that these boneheads, who bought bonds at the highest prices
in a quarter of a century, will not learn anything from this
fiasco, because they are obviously the dimmest stars in the investment
And who are these morons that bought the worst thing at the worst
time at the worst prices? Well, if you have any mutual funds
that own any bonds, even in the most roundabout way, then that
chump is, and I hate to be the one to break it to you like this,
And they figure that a one percent increase in rates causes a
10% loss on the prices of bonds. Interest rates are headed up,
and by a hell of a lot more than one lousy percent increase.
So how much will these bondholders lose? You do the math.
Peter Schiff of Euro Pacific Capital is apparently also one of
those guys who, like me, fears inflation more than he fears his
wife coming at him with a meat cleaver in her hand and revenge
in her eyes, because you can turn around and run like a scared
cat from her. But there is no running from prices that rise higher
and higher. He notes "Monday's 0.5 gain in the Personal
Consumption Expenditure Index (the largest increase in 14 years)
and today's unexpected sharp decline in the Chicago Purchasing
Manager's Index (the biggest drop in 30 years), which included
a sharp rise in its prices paid index (the highest percentage
reporting higher prices in 16 years), continues to provide compelling
evidence that the Fed is well behind an accelerating inflation
curve in an already decelerating economy (stagflation)."
Stagflation, which is a term meaning "Economic stagnation
and price inflation." Either one is bad, and together they
are the worst of all possible worlds.
To show you what a liar I am, I now say that stagflation is NOT
the worst of all possible worlds. I regret to report that wages
are rising, but less than prices are rising. So with economic
stagnation, AND rising prices, AND falling real wages, it would
surely seem that now, at last, we have the worst of all possible
There are those, of course, who actually think that things will
always work out for the best, and that all we have to do is be
patient, and things will, as they believe work out. They will
not. And you don't have to believe me, because Mr. Schiff is
standing right here, and without further ado I turn the microphone
over to him so that he can explain it to you. "The longer
rates stay too low," he says "the worse inflation gets,
and the higher future interest rates will have to climb to contain
it. Also, the longer the Fed keeps rates artificially low, the
more floating-rate debt Americans will accumulate, and the greater
the ultimate economic burden will be in servicing that debt.
If the Fed's measured approach is intended to spare the economy
from dealing with the full impact of this burden today, it succeeds
only at the expenses of imposing a far greater burden tomorrow."
And it is not just Mr. Schiff and me talking about this inflation
thing. Everywhere I look, inflation is beginning to be a serious
topic, and the central banks of the world are acting like they
are being taken completely by surprise. Some of them are making
face-saving, nervous, baby-step, precautionary protective moves,
but nobody is hitting the panic button but me.
That will soon change. Welcome to hell.
Richard Benson, writing in the June 30 issue of Bensons' Economic
and Market Trends, has turned in his latest essay. He starts
off by explaining the concept of money illusion. "Money
illusion occurs," he says "when you give the consumer
more money to spend, when it actually buys less. The consumer
is left thinking they still got something for their new money
because they are still thinking about yesterday's prices."
He continues, "If the real Fed Funds Rate is negative, savers
are getting robbed and borrowers are getting subsidized. Investors
should note that the Real Fed Funds rate started the year at
0.93 percent in January and has dropped to an even easier
2.01 percent in May! Surprise; the Federal Reserve has been
easing the first six months of 2004!"
Mr. Benson then shows that you should adjust interest rates for
the rate of inflation to give you the "real" rate of
inflation. And plugging that into a nifty chart that he helpfully
provides, he shows the probable progression of inflation and
interest rates through December. Putting down my beer and holding
one eye open with thumb and forefinger, I turn my bloodshot eye
to take a quick look at the chart, and it shows that while the
nominal rate goes up, so does inflation, keeping the real interest
rate at a negative number!
This would seem to be a perfect recipe for borrowing money to
buy something that goes up in an inflation. Which is just what
the Fed is hoping! Mr. Benson explains "For the economy,
current debt burdens have now reached levels so high they can't
be paid back from current cash flows in real dollars. The Fed
can only choose between system-wide bankruptcy of debtors or
a 'measured debasement' of the U.S. currency, allowing inflation
to forgive old debt and raise wages, salaries, corporate revenues
and tax receipts. The money spigot is wide open and not only
is money free, but the Fed will actually pay anyone who wants
to take a drink of this free money!" And with all that borrowing
and spending on stocks and bonds, their prices will hopefully
rise, and everybody will be making money again! It's just too
bad about the inflation thing
The International Energy Agency proves that there is at least
one set of guys who understand how things really work. They said,
referring to how the price of crude oil has risen recently, "Prices
have also increased because of surging oil demand." Well,
And they also admit that prices have also increased because of
the falling dollar and the threat of interruption in supply due
to terrorist threat and a lot of other variables. And none of
those seem to be in any hurry to disappear, but are actually
getting worse and worse.
Which brings up the sad news about oil prices, and that is that
they will, on average, get worse and worse as you grow older,
which coincides with things getting worse and worse with YOU
because you are getting older and older, and then people you
don't even know start sending you e-mail spam about Viagra. And,
in fact, an argument can be made that the real, inflation-adjusted
price of oil is VERY cheap right now. And in fact, not only can
this fact BE made, but it is being made every day! As if this
is some good news or something.
The reason they, and by "they" I mean guys who need
to convince you to keep spending money and buying stocks, are
doing this is to make the higher at-the-pump price of gas seem
less onerous. They say "When you factor in inflation, then
the price of gas is actually very cheap compared to 1973! You
are so lucky!" But what it really does, when you stop to
think about it, is to tell you that prices will continue going
up every day, up every week, up every month, year after year,
until it is no longer cheap in inflation-adjusted terms, and
in fact it is very expensive in inflation-adjusted terms, and
then these same blowhards will then come on TV and say that inflation-adjusted
gas prices are the highest in history, and so that means that
the price has to start coming down some day, and how we are so
lucky to have the prospect of lower gasoline prices!
As a point of reference, Osama bin Laden, the terrorist, thinks
that oil should be priced at $144 per barrel right now, so we
are probably safe to use his estimate as the most hostile, pessimistic
one. That would put gasoline at, hmmm, around $7.50 a gallon?
And so what does the future price of oil work out to be? Hmmmm?
On the numismatic news front, and if you are one of those over-achieving
people with a big brain and you want to Do Your Bit To Help America,
try and solve this dilemma; it now costs more than a penny to
make a penny. That's right! The Federal Reserve System, which
is a horrible system whereby the damn banks all collude together
to create money so as to enrich themselves and their friends
at the expense of everyone else, has now debased our money so
much that it has lost almost 98% of its purchasing power since
the Fed took over in 1913! In more prosaic terms, although the
penny is already being made of the cheapest materials possible,
our money has been so debased that we must produce the smallest
unit of coin at a net loss!
Thanks to Pete Spina at Goldseek.com, who headlined the Bureau
of Labor Statistics site that revealed the number of jobs that
were statistically added through the birth/death model. This
is where they come up with the number of jobs that they figure
were added by, among other things, brand-new businesses, less
the number of jobs that were loss through business owners cleaning
out the money from the company safe and leaving the country.
There were 182,000 of these "assumed" jobs added.
Most of the jobs, 81,000 of them, were in "Leisure and Hospitality."
This is that category of happy American workers that are lucky
enough to work in the glamorous, high-paying career of Food Service
Employees and Amusement Park Workers, and you can imagine how
my heart leapt with joy when my daughter announced that her goal
in life, after a lengthy and expensive college education, is
to make a career in the lucrative Leisure and Hospitality field
as she pursues her goal of becoming an itinerant merry-go-'round
But enough of my psychic pain. Let's get back to work here, so
that if the boss comes by we can look like are working, and are
not playing computer solitaire like usual. So, let's see if we
can find a little seasonality in the data, shall we?
I suggested it because this is easy to do, because the BLS actually
provides a handy little table on the same page! And believe me
that if it were not for these nice BLS people doing this, I would
not be talking about it now, because to otherwise assemble this
same data would have required actual work on my part, and even
then I would screw it up and eventually reach conclusions that
are not supported by any data whatsoever, except maybe at the
very beginning, which is always shortly before my reasoning goes
wildly off the track, and then things sort of collapse into a
predictable angry, obscenity-laden diatribe about the morons
in Congress and the Federal Reserve and the United Nations and
how I hate all of them.
So we go to the chart, and we quickly locate the particular row
and column intersection that defines this same category and the
same time last year, which we accomplish by merely raising my
eyes a little, and we note, saying "Hmmmm!" in delighted
surprise, in that charming way that I have that indicates both
an interesting curiosity and child-like surprise, that a similar
83,000 birth/death jobs were added last June. Out of 182,000,
83,000 were in this same fabulous Leisure and Hospitality category.
So my wife, intrigued by my saying "Hmmmm!" says, "What?"
and I say "Well, according to the BLS jobs report"
and then suddenly she jumps up, just like that, and out of nowhere
she starts screaming "No more economics! No more! I have
freaking had it up to here with you and your damned economics!"
and then she storms out.
But the sudden silence in the house is a nice change, and in
looking back over the last year, we can't help but notice that,
ummm, about this same time last year we had a similar increase
in birth/death jobs in that high-paying Leisure and Hospitality
field! Very mysterious! Then, in subsequent months, the number
of these assumed jobs went down. And then collapsed starting
in August! It registered MINUS numbers, meaning job LOSSES, for,
let me look that up again, three months until December, when
the number finally went back up. Perhaps this is because the
lucrative Santa Claus job market opened up again, where lucky
guys make the Big Money dressing up like Santa and sitting in
a chair all day, asking confused little brats what they want
for Christmas, and probably half of them have crapped in their
pants, and pretty soon you are discovering that this is a hellish
job description and the only survival skill that makes any sense
is to get really, really drunk and stay that way all day.
So it looks like there is a seasonality to the hot job opportunities
in the fascinating Wonderful World of the Professional Waitress!
That means that next month's jobs number is going to be, in the
original Spanish, el stinko. Oops!
The funniest part for me, if you define "funny" to
mean "the way it made the eyes of the Mogambo spin around
in his head and he makes those gagging sounds like he is going
to die or something" was the footnote at the bottom of the
graph. It said "Note: There is no net birth/death model
adjustment for the government supersector."
Well, that makes sense, as there is no "death" side
to the birth/death model, as what government program ever dies?
But the scary thing is that I don't think I ever HEARD of a "supersector,"
government or otherwise, and I CERTAINLY did not know that there
was a "government supersector." Now I am really, really
I was flipping through the channels and eventually I got to the
end of the dial and there was C-Span, and who did I see? The
horrid Paul Krugman, the laughable little Leftist economist and
stinker-upper at Princeton University, where he is a professor
of economics, which does not say much for Princeton, which I
say only because it is the Way Of The Mogambo (WOTM) to be gratuitously
rude and insulting, so that if anybody ever asks me about Princeton,
I will say "Well, all I know is that they made Paul Krugman
a professor of economics there, so how good can it be?"
He was apparently finishing a speech and I was finishing up a
bowl of chips and dip, and he was fielding a few softball questions.
He stammered and floundered around, his eyes darting back and
forth like a rat in a trap, and I figure that the CIA told him
that I was watching, and so he knew that I was probably hurling
insults at the TV screen. But I wasn't. No, I was quite civil
until he admitted that increasing the minimum wage was NOT a
good idea at $15 an hour, but that he was not so sure at $7 an
hour. Wrong, bozo! This is the level of sophistication of Princeton
University, of American economics as a profession, of the New
York Times who hires this guy to write his worthless economic
opinion and then they print it, for crying out loud, and then
we stand around as a nation shaking our heads in bewilderment
and wondering what in the hell went wrong to get us to where
we are now, and at the same time expecting these idiot-savant
simpletons to fashion a marvelous solution, which involves simply
doing more of the same thing that got us here, only more so.
---Mogambo Sez: In keeping with consistent historical
precedent, I will not try to summarize with some witty epigram,
because I grow weary of having people e-mail me with their snotty
observations that I have never come up with anything
original in my whole life, like this is some big news to me or
So it is my pleasure to quote one of the guys at Daily Reckoning,
I don't know who exactly. But all of them can write better than
me, except when they are busy squabbling good-naturedly amongst
themselves about things like who has the better taste
in wine, or who is the better writer, or who is the better
looking, or who seems to write in these long, continuous, stupid
run-on sentences that never seem to get to the point, or who
was the darling little rascal that cleverly took the last six
donuts and stuffed them all into his mouth at one time
so that his cheeks were puffed out like a chipmunk and there
were crumbs all down my chin and staining the front of my shirt.
So it is my pleasure to immortalize one of their most profound
phrases. "Mother Nature is a hanging judge." And you
can take it from me, the Mogambo, that no truer words were ever
Jul 7, 2004
The Daily Reckoning
is general partner and C.O.O. for Smith Consultant Group, serving
the financial and medical communities, and the writer/publisher
of the Mogambo Guru economic newsletter, an avocational exercise
the better to heap disrespect on those who desperately deserve
it. The Mogambo Guru is quoted frequently in Barron's, The
and other fine publications.