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Mogambo sez: Ugh!

Richard Daughty
The Mogambo Guru
The Daily Reckoning
Nov 7, 2003

Last week the banks suddenly soaked up $30 billion in government debt. This is very fortunate, as the Treasury issued another $15 billion in new debt. However, overall bank credit and savings are both still heading lower and lower. And apparently the Treasury has announced that they are going to auction off another $61 billion within the month.

I can't let the 7% rise in GDP, annualized, pass without comment. To wit; how much is 7% of GDP in dollars and cents? Well, the usual figure for GDP is ten trillion dollars. So 7% growth in GDP is, by mathematical imperative, a $700 billion dollar growth in GDP. The economy, in other words, grew by $700 billion. Sounds kind of impressive.

But, and you knew there was going to be a "but," the federal government has borrowed and spent $600 billion in the last year, and doofus Americans increased personal debt, mostly mortgage refinancing, to borrow and spend at least another $800 billion in the year. And when you add in mortgage refinancing, then the amount borrowed and spent easily surpasses a trillion dollars.

And let's not forget all the corporate debt that has been floated, so that corporations could borrow and spend. And the states and municipalities also borrowed and spent a load of cash, too. And out of all this borrowing and spending, which totals, almost certainly near $3 trillion, the damn GDP only expanded by $700 billion? You spend four bucks to get one buck of growth? GDP grew at about a lousy fourth - a fourth! - of all the money that has been borrowed and spent? So why in hell am I supposed to get all worked up about a lousy 7%? Jeez!

What was missed by most people is, of course, the predicted inflation, as the price index for personal consumption rose at a 2.4% rate, which is up dramatically from 0.8% in the second quarter. As the WSJ put it, "In addition to the climb in... consumer prices, other familiar signposts, such as rising commodity prices and a depreciating dollar seem to indicate brewing inflation."

I cannot keep my eyeballs from rolling back in their sockets whenever I hear that inflation is low. But apparently I am the only guy in the whole freaking country that is watching the prices of insurances, cable TV bills, telephone bills, commodities, houses, taxes, fees, and damn near everything else I consume going up at double-digit rates. So for YOU maybe this is some wonderful world of low inflation, but for me it is a whole different ball game.

And I note with a certain shudder that I am reading more and more references to economics-forecasting people starting to predict HYPER inflation. Not ordinary inflation. But the real thing, the big thing, the old Reichmark thing, where it took a wheelbarrow of money to buy a loaf of bread and caused the absolute collapse of the German currency. It is not inconceivable to me. Maybe not right now, but soon enough.

Martin Weiss, Safe Money Report, "For many months, the stock market and the economy have been driven by the most desperate, emergency government rescue of all time - 13 successive interest-rate cuts, two massive tax cuts, hundreds of billions in extra federal spending. But now, the long joy ride is coming to an abrupt end.

"The Fed demonstrated yesterday that it's impotent, unable to cut rates by one more iota. The government's tax-cutting power is exhausted, its last round of tax refund checks already mailed, received and spent. The best possible earnings week in years is now behind us, and there can be no encore."

Well, there is where Mr. Weiss and I part company, where he goes off to make intelligent arguments with his high-toned friends and I take the lower road with my hoodlum friends down into the sewers of the government heart, and I can tell you that I am absolutely sure, which is a lot more that just your run-of-the-mill "sure," that the government will mail out more checks, or pass some more enabling legislation, or both, or something, to put more money into people's pockets so that they can continue to make fools of themselves, and then pay for the whole thing with printing more money. Much more money. Oodles of money. Or maybe even oodles AND oodles of money.

But Mr. Weiss, like most intelligent people, doesn't listen to me or even answer the phone when I call, and says, "It's over, and the forces we've been warning you about are about to hit hard: The worst dollar collapse in 16 years... the sharpest bond market decline since 1987... the worst job creation of any recovery in more than half a century... the biggest federal deficits in history!"

"Now, the fantasy is about to be replaced by reality; the stock market euphoria, by stock market panic." Ho-hum. Now, if he was talking about replacing these damn fat-free crackers with delicious fat-filled chocolate cookies, I would be more attentive. But my reverie about those luscious morsels is smashed when he follows all of that up with, "Late last week, critical chart support for the Dow was shattered, flashing red sell signals."

Bloomberg reports, in a article entitled "British Pound Gains to Five-Year High on Rate-Increase Optimism," that the British are raising their key interest rate by a quarter of a point, even though their "borrowing rate," which I assume means some inter-government rate, is at 3.5%, while ours, the Fed Funds rate, is stuck at 1%. The impetus for this was the latest read on mortgage lending and consumer credit statistics, which shows that the Brits are acting as foolishly as us Americans, by going farther and farther into crippling debt.

But there is an ocean between the Continent and the USA, in more ways than one. To illustrate what I mean by that enigmatic remark, I offer the following to show the depths of depravity into which American economic thought has sunk: "In contrast to expectations of higher U.K. rates, the U.S. Federal Reserve yesterday said a lack of inflation remains a concern, bolstering the view it won't soon raise its key rate. The U.S. central bank kept its benchmark rate at 1 percent, the lowest in 45 years." Didja get that? "Lack of inflation remains a concern." What a profoundly stupid thing to say, and if there is one thing that categorically brands American economists as dim-witted, low-IQ fools, it is their lack of criticism for something that is so obviously stupid beyond words.

So let me get this straight: The British have a Fed Funds rate that is already three times as high as ours, with the same inflation figures, with the same rate of citizens going into debt, and comparable debt loads. They, paragons of virtue and responsibility, are raising rates to prevent more of this insanity. But we, paragons of suicidal profligacy, have a Federal Reserve that figures Fed Funds at 1%, the lowest in forty-five freaking years, which is one-third of inflation of at least 3%, is not enough? And that we need MORE inflation?

Who the hell ARE these Federal Reserve jackasses? And why is the everybody going along with this madness?

A perfect example of why I stridently say that Democrats are stupid people, or probably more accurately that stupid people are Democrats, is found last Wednesday on the op-ed page of the St. Petersburg Times, which I call the "St. Pinko Times," where we find a little piece of classic Democrat stupidity they titled "Unfair tax treatment." It seems that some outfit named Nabor Industries corporation moved its headquarters from Houston to Bermuda. Nabor then was able to cut its taxes by 80%, and saved itself $10 million dollars in corporate taxes last year. According to the Leftist dim-bulbs who write editorials for that newspaper, this is unfair.

What these commie-pinko, big-government-loving, Leftist losers never stop to consider is: What happened to the ten million bucks? We all understand from the article is that they did not send it to the US Treasury as taxes. But, then what happened to it?

Well, in all likelihood, it went for capital investment and salaries. And with the standard multiplier of 4, that means that it is entirely possible, if not probable, that $40 million in economic activity was created with that ten million bucks! And with a hypothesized tax bite of 30% on that $40 million, then the damn government tax collectors saw an increase of $12 million dollars on that $40 million! So, net net, Nabor did NOT pay ten million in taxes, but other people had an upsurge in business, and they ended up paying, collectively, $12 million in taxes! By not taxing Nabors they increased tax collections! It's the Laffer curve all over again!

And yet as these shameless loudmouth Leftist Losers are predictably whining because Nabor did not pay ten million, but they do not care about making twelve million! They would rather that the government get less money because it is somehow "fair!"

I mean, jeez!

The Yahoo site had a little biography of Trichet, the guy who is taking over from Wim Duisenberg as head of the European Central Bank. "A graduate of the prestigious Ecole Nationale d'Administration (ENA), Trichet served as an advisor to former French president Valery Giscard d'Estaing and was chief of staff of then finance minister Edouard Balladur in 1986-1987. He also held key posts under the Socialists and was treasury director from 1987 to 1993." Okay, so right off the bat we know he is an insider to the socialist conspiracy to rule the world. But perhaps there are worse things. There are, as we find when we read on, "In 1993, Trichet became the first governor to run the Bank of France after the central bank was made independent. It was during his term as treasury director that the then state-owned Credit Lyonnais was bailed out by the government at a cost of 100 billion francs (18 billion dollars) and Trichet allegedly falsified and published inaccurate information on the bank, though he insists he made no personal gain."

So he is a liar, and a socialist, and he bails out corrupt and bankrupt institutions. So, as we see, it DID get worse!

Getting out our crayons and connecting the dots, the three largest members of the EU, France, Germany and Italy, are all in budget deficit that surpasses the Maastrict maximum of 3% of GDP for the fourth year in a row. And now we suddenly see why this French socialist jackass Trichet was maneuvered into the position to destroy the EU central bank.

Hans Sennholz, the god-father of the Austrian school of economics here in the USA, writes, "In just five years, total financial as well as non-financial American debt has surged by 51 percent or $10.9 trillion to more than $32 trillion, three times the annual Gross National Product. During the last quarter alone American households added $397.6 billion in mortgage debt and another $40 billion in credit card debt."

And all this at the same time as Saturday morning as I drove to the store, and happened to hear two stock market jackasses talking about their theory of why the economy showed such growth in the last quarter. They were all a-tingle about the tax cuts and the rebates, and how things are just peachy. I didn't catch the names of those two doofuses, but that is not important, because they are all that way.

And in case you are wondering, the gigantic increase in GDP was the result of morons, like you and me, but not you and me, and not nearly as good looking as us, well, you anyway, borrowing money that they cannot pay back to buy things they cannot afford and should not be buying. It is just that simple.

And now that these ugly morons have spent the money, the other doofuses in charge of businesses all decided that the one-off increase in sales in some permanent thing, and so they borrowed to ramp up production to meet the anticipated demand! How in the hell we got to be the number one superpower in the world is beyond me, unless the rest of the world has more idiocy per capita, or IPC, than we do. Which is truly horrifying in itself.

John Mauldin, taking about P/E ratios, says, "I believe we are going to single-digit ratios. I also believe it will take a decade or more, just as it did in the 70's and in past secular bear markets."

He also shows that he reads history when he adds, "No bull market has ever started from such high valuation levels."

There is a treat on the site, as H.A. Scott Trask wrote a really nice piece entitled "Reflation in American History." He writes, "Since the early seventeenth century, American governments (colonial, state, and federal) have tried and failed to restart business expansions by reflation. That is, they have tried to revive an inflation-driven economic boom that has stalled or collapsed by pumping new money into the system. In other words, they have tried reflating as the cure for the evils introduced by inflating. They have not yet succeeded in skipping over the inevitable contraction of the business cycle, but they have succeeded in worsening its severity and length and delaying sound recovery."

Not content with that, he goes on to show "Hoover was a corporatist, an inflationist, and a statist who tried every policy in the interventionist playbook. He denigrated economists who urged him to follow the examples of such laissez-faire presidents as Van Buren, Buchanan, and Cleveland as 'reactionaries' and 'bitter-end liquidationists' whose advice, if followed, would lead to 'utter ruin.' Such a passive policy was not for the 'great engineer.' Hoover did something. He declared 'war' on the depression. It led to utter ruin."

But history is re-written, as "Chicago school monetarists, however, contend that Hoover and the Federal Reserve passively allowed the money supply to shrink and so starved the economy of the funds and credit necessary to restart ailing businesses and financial institutions. The truth is that the Federal Reserve tried to inflate but was frustrated by the public's lack of confidence in the banking system and by the bankers' reluctance to extend credit to marginal enterprises. In the weeks and months after Black Monday, the Federal Reserve both cut interest rates and poured liquidity into the banking system." Didja get that part about how the Fed cut interest rates and poured liquidity into the system? Just like now! And since it worked so well then, guess it will work equally well now, eh?

Of course, there have been plenty of times when the business cycle had the inevitable downside of the cycle. "During those periods, there were sharp reductions in bank deposits, bank notes, wages, and prices. Bankrupt and marginal firms, farms, corporations, and banks failed in large numbers.

"This did not happen after the stock market crash of October 1929 because Hoover's proto-Keynesian fiscal policies and inflationary monetary policies drove down interest rates, kept up wage levels, prevented deflation, and delayed the liquidations and adjustments needed to lay the groundwork for a sound recovery." And, at the risk of repeating myself, it worked so well then, I guess it will work equally well again.

Bush is insisting that the taxpayer's money that he wants to give to Iraq be in the form of a grant, and not a loan. If it was a loan, then one day in the future, Iraqi dudes are going to be sitting around cleaning their Kalishnikov rifles and say, "Hey! Wait a minute! You say that we owe you American infidel oppressors a hundred billion dollars because you took out a loan in our name, forced us to buy American products, put money into the pockets of Halliburton and other friends of vice-president, and now we owe you more money than we can possibly pay out of our GDP, since the per capita income of Iraq is a lousy $600 per year? Death to the infidel!"

But if the money is in the form of a grant, then Iraq wins, Halliburton wins, all the other friends of Dick Cheney win, and so, to paraphrase, "What is good for Halliburton is good for America!"

In the Funny Times, there was a cartoon by a guy named Ted Rall, entitled "Everything Explained." It is the re-telling of the way gullible, stupid people are ready to do stupid things, especially stupid economic things, and are willing to tell themselves lies, namely that the stupid idea is not, you know, stupid.

The center panel has Ms. Everywoman saying, "Check out the nut! Mr. Paranoid would rather to nothing than something stupid," and onlookers join in at the degradation of a guy who had the temerity to say, "Hey! This is stupid! And the reason is because it is suicidal!"

Sure enough, after a panel with the comment "Years pass," we next see our nay-sayer hero sitting in front of the TV, as the announcer is saying, "Everyone thought the stupid idea was a smart idea. Now it's obvious that it's a disaster." In the background of the newscast is the backdrop saying "U.S.A. IN RUINS."

China is still being set up as the scapegoat for our problems, and I am sure that my thinning hair is part of their nefarious plan. And in other countries, it is America that is the scapegoat, and I am personally working on plans to make their damn hair thin, too, as part of my childish tit-for-tat attitude. In the olden days, we were the scapegoat because others were envious of our success. Today, on the other hand, we are actually at fault for a lot of the misery, and so it is only natural that others point accusatory fingers at us, and cluck their tongues as they look in the mirror at their receding hairlines. Of course, it is also only natural that we would point accusatory fingers at them, and cluck our tongues in smug condescension at their weird customs, and how they always speak English with those funny accents. As the latest Economist magazine put it, "The heart of rich country's complaints is an unwillingness to accept responsibility for their own economic faults. It is easier to point the finger at China."

They go on to say, "But the real cause of America's trade deficit is its low saving rate, the result of surging household borrowing and a big budget deficit."

Also in this week's Economist magazine is a chart on page 66, which shows the nominal and the real inflation-adjusted price. It looks like oil at thirty dollars a barrel is at the low end of the range! So, the lesson is "Don't look for oil to drop much in price!"

To show you the effect of inflation, take a look at the chart on page 4 of the special report in the middle on the magazine. It shows "CEO compensation per $ of net profit," a graph that they entitle "Amply rewarded."

Anyway, in using 1960 as a base =100, then in 2003 CEO compensation is $500. "Wow!" you say to yourself. "A hundred in 1960, and five hundred in 2003!" And when you look at the graph, it looks dramatic, alright.

But, and get ready for a lesson in inflation, that whole thing is merely 4.1% inflation! We almost have that now, and everybody you listen to or read says "Inflation is low! So low as to be benign! The current 3% inflation is insignificant, and in fact the Fed is turning open the monetary spigot, trying to achieve MORE inflation!" So, the lesson is that the humongous compensation of CEO's is just "benign" inflation.

I have been busy coming up with more "unconventional methods" for Ben Bernanke of the Fed. He is the guy who is willing to make every economic mistake in the book if it makes the economy go. So, if you are willing to accept horrific results down the road, then I have a solution to the big debt problem today. All Congress has to do is do two ridiculous things. The first one is to order the Treasury to print up $10 trillion in cash and simply buy up all the Treasury debt. It's a simple as that. At the end of the day, we will have no sovereign debt. Zero! Zip! And we will have about $3 trillion left over after doing it! And we can use the money to fully fund Social Security! And Medicare! And Medicaid! And full prescription-drug benefits for everybody!

And for the private debt in this country, simply let everybody declare a special bankruptcy, which I suggest they call Jubilee Bankruptcy, and pass a new tax law that says you can claim a juicy Tax Credit for every dime that went bad because the guy you loaned it to went bankrupt in the big Jubilee! And then Congress can just print more money to send everybody their tax refund checks! Suddenly, no more consumer debt! We have wiped all of the slates clean, and are ready to start again!

I mean, if you are going to have a fiat currency, then how come we aren't enjoying the fruits of it? If not, then what is the point of even HAVING a fiat currency if you are not busy having fun with it, by destroying it by printing up too much of it? As Richard Benson of Bensons's Economic Trends says, "A few month's growth can be purchased if the authorities are willing to pay any price."

He also writes "Our domestic policymakers had not counted on the 'dark side' of globalization in this economic cycle to send both new investment and job growth to Asia." Oops. The Congress, which the arch-jackass Robert Byrd of West Virginia once called "the greatest deliberative body in the world," and he was not trying to be funny, figured that everybody would always be willing to pay higher prices instead of lower prices, and to hire high-priced labor instead of low-priced labor.

Jeremy Grantham, one of the biggest of the big shots running money around the world, was interviewed for an article in this week's Barron's, and he says, "This is not just a bear market rally, but the greatest sucker rally in history."

And as far a debt is concerned, he is in my camp when he says "Debt has not declined. It has, in fact, risen dramatically at the government level, quite dramatically at the corporate level, dramatically at the foreign level and very substantially and steadily at the consumer level. This is not a good picture."

But to show you that even biggie dudes like Grantham can say stupid things, he also says, "It is really seriously hard to get too excited in a population of 250 million about the eventual loss of an incremental 6 million jobs." For one damn thing, more than half of that 250 million he is talking about are children and other who do not work. In fact, there are only 100 million people in the damn country who work and whose job is not directly with a government. So 6 million people losing their private-sector jobs is another 6% unemployment of that cohort of Americans. And if you add that 6 percent to the existing 6 percent, using a very optimistic assumption, then that is a total of 12% unemployment. And whereas I can see where Mr. Grantham and his $48-billion-under-management-company may not get too grumpy about 12% unemployment, I am not as sanguine, since I have only $26.72 under management, and will probably soon have less than that since my wife says she is getting hungry.

And of course there are those who are so tacky as to dissect the government's massaged unemployment figures to show that unemployment is really closer to 12% already. And then when you add another 6% on top of that...

Jim Puplava had some very trenchant things to say on the website in a series of three essays, with the remark, "A major theme of these pieces is how government statistics present consumption funded by credit expansion as economic growth."

Well, what's new, huh? It's the old Say's Law saw about how increases in aggregate consumption will be matched by an increase in aggregate production. On the other hand, there is some nagging doubt in my little pea-brain mind that increases in domestic consumption and increases in foreign production will actually benefit anybody I know.

Following that line of thought, an un-attributed essay that accompanied a Contrary graphic notes "The fact is that there has been and continues to be a very strong recovery in industrial production taking place as we speak, with current acceleration rivaling experience seen during the best of economic times. Unfortunately for the domestic US economy, the big recovery and acceleration in industrial production is occurring outside of G7 economies. Quite simplistically, there has been no production recovery in the G7 economies at all over the last few years. For the US specifically, the latest industrial production reading is where the index stood in 1998."

Mr. Puplava goes on to say, "What is different about this recovery is that it has taken thirteen rate cuts, three tax cuts, annual credit growth of over $2 trillion, $1 trillion in home owner equity extraction and annual government budget deficits of nearly $500 billion in order to bring about a turnaround and keep the U.S. economy out of recession. For the 'new era' and the 'this time it is different' crowd, things really are different this time."

And what is different is the crux of the whole matter.

James Dines has been publishing The Dines Letter since 1966, and is now solidly in the gold camp. He lays out the reasons as being "economic earthquakes," the first of which is "A massive currency crisis is sweeping across the globe," which will unleash Economic Earthquake Number Two, namely "A rash of bankruptcies" that will send the world into a tailspin. This leads directly to E.E. Number Three, "Nearly all stocks - except gold and silver stocks - will sink much lower."

And he thinks, as in "take it to the bank," that gold will surely go to $3,000-$5,000 per ounce, at least, as mass fear makes everyone plow everything into gold.

The real estate market is still generating inflation in houses, which is a terrible thing. In a healthy economy, houses should have zero inflation. If houses were appreciating in price, then that would spur construction of more houses, bringing the inflation back down. But thanks to the jackasses in Congress who have unleashed the unholy Fannie Mae monster, tsunamis of money are still being thrown at houses, which will, of course, eventually lead to grief. And much more grief than any doofus stock market crash, simply because of size.

The news out of North Korea is very, very bad, as their economy is more riddled with morons than anybody else's, and they prove it by having a gigantic defense industry, a bankrupting socialist/communist government, and starving people. Hey! Wait a minute! You mean the only big difference between North Korea and the USA is that we don't have starving people? Yet?

But just as this whole Iraq thing is probably just an excuse to deficit spend and get the economy cooking again, like FDR is rumored to have done in WWII, and Lyndon Johnson did in Viet Nam, perhaps this is just the beginning of hostilities.


---Mogambo Sez: The recent pullback in gold is another buying opportunity, as the government continues printing money and thus debasing it. This is one of the Iron Laws of Economics in action.

Richard Daughty
November 4, 2003

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The Mogambo Guru Lives!

Richard Daughty 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 Daily Reckoning, and other fine publications.

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