Bet Your Bootie

The man is talented, we already knew that…but today we discover that the MoGu is a rock star. For his latest hit song.

I can’t seem to pick up a newspaper off of a neighbor’s lawn, or take a magazine out of his mailbox, or turn on a TV that I borrowed off his porch last week without being bombarded with morons from the Left who are agitating for a rise in the minimum wage.

Take John Kerry for instance. The man is a typical odious and clueless Leftist chump who has spent decades as a Senator, and so is actually personally responsible for getting us in this pickle. And now, as he tries to take us even farther down this same tired path, it’s not surprising that he’s all gung-ho about raising the minimum wage.

With a weary resignation, I get into the Mogambo Mobile, rev it up, and I drive down there to politely explain to these cretins that raising the minimum wage is increasing the pain, as it makes prices rise. Minimum wage workers get no benefit, while the other guys, namely guys who get NO wages, raised or otherwise, and are on a relatively fixed income, get robbed. And in fact, raising the minimum wage actually ends up hurting the working poor as well, because prices tend to rise faster than their incomes.

And then they counter with "Oh, yeah? Well, what would YOU suggest, Mister Uptown Hotshot who thinks he can come down here, stinking up the place, and help himself to a free cup of coffee and who snags at least six donuts out of the break room when our backs are turned and who thinks he knows everything?" I am the epitome of grace when I answer that, first off, I would wear some clothes that fit me so I didn’t look like some retarded street bum, and second, I would keep prices from rising.

Deflation: The Productivity Miracle

And here’s my reasoning: if prices never rose, see, then nobody would have to raise the minimum wage, and everybody would be happy. And if prices gently floated down in a nice little deflation, which is the whole the damn promise of the "productivity miracle" that Greenspan keeps running his stupid mouth about, then you would be able to buy more and more stuff every week with the same income! And that is what I see as the goal of economics: raising the standard of living for everyone.

Lew Rockwell backs me up on this, even though if you ask him he will deny it. He wrote an essay entitled ‘Your Right to Deflation.’ Mr. Rockwell, who is the guiding light behind the Mises.com site where you can learn about real economics as it really works in the real world, writes "Our intuition tells us that falling prices are great for our pocketbooks because they leave more left over for savings or other forms of consumption. It is just as good for society at large. Our money becomes worth more and more, and hence our remunerative labors grow in value too. If inflation works as a stealth tax, deflation works as a tax refund."

And now they all crowd around my feet, some of them even clamoring to know how I can keep prices from rising and how everything will be wonderful as a result, and others wanting me to switch my long-distance carrier. I snatch the microphone from the stand, bring it close to my lips, and with a magnificent rumbling basso profundo voice from deep down inside my Manly Mogambo Chest, I say "Simple." My arm slowly rises until it stands directly out from my shoulder, and the only sound in the hushed stadium is the whir of videotape machines. Suddenly, with a flick of my wrist I motion to the band, and we launch into my rousing hit song, "Bring Me the Head of Alan Greenspan!" The first verse is kinda catchy, and it goes;

Deflation: Bring Me the Head of Alan Greenspan

"To keep prices from rising,
Don’t print up money,
And don’t print up credit,
Because if you do, I’m telling you,
You can bet your bootie you’re gonna regret it."

The boffo chorus was supposed to have these loud clashing, slashing chords with the drums going crazy, boom-a boom-a boom-a, and the lead guitar wailing some tasty blues-inspired licks high up in the background, and the lyrics were supposed to g

"Because all that new money makes prices rise,
Like those of houses and burgers and fries,
Because the money has to go somewhere, that ain’t no surprise,
But don’t tell Alan Greenspan, who is one of those guys
Who thinks those are lies.
And if you question him he replies
That interest rates have got to be low,
And then the economy will always go,
And inflation will always be low,
Because we say so
And if you say "no"
Then up we say "Up yours, Mogambo!"

But we were not talking about my becoming a rock star and cranking out hit songs like this, and what a talented guy I am. No, we were talking about raising the minimum wage. And, by extension, let’s talk about the people who have worked and raised themselves up to the point where they already make $7 an hour. What about them? Aren’t they going to be grumpy as hell that all their hard work, and butt kissing gets them exactly squat? "I’ve worked like a dog," they’ll say, "and now some new-hire off the street earns an identical wage from the get-go?"

And what about the guys above THEM? Thus the pressure reverberates up the income ladder, one pay scale after another, until it reaches guys at Dick Grasso’s level, the disgraced former head of the NYSE, whose buddies let him make over a hundred million dollars a year, plus benefits, as an employee of a non-profit organization in an oligopoly marketplace. And after all, this higher labor cost has to be factored into prices, which forces prices up.

In conclusion, the actions of these greedy CEOs, the stupid politically-driven minimum wage ideas from the likes of John Kerry and all the Fed tinkering, when combined, blaze like a Fourth of July fireworks display, with those rockets that explode into huge displays of streaming bright lights, and those screaming things that go "eeeeeeee!" and the kind that go "bang!" with a loud report, and the kind that whooshes up "shhhhhhhhhuuuuuuuuuu!" all drawing your undivided attention to the fact that inflation in prices is like a gigantic asteroid getting ready to smash into the Earth, and it is going to come and whack us in the head big time, or more accurately Big Time, or even better yet, Big Freaking Time (BFT)

…and let me tell you, it will hurt.

Regards,

The Mogambo Guru
for The Daily Reckoning
July 5, 2004

—Mogambo Sez: Interest rates are rising, but people are actually bidding up stock and bond prices. It’s too, too weird.

Homeland Bound.

We came to Europe nearly 10 years ago – a family of Maryland naifs, innocents abroad.

We return to the New World this summer for a 6-week Grand Tour. But we are no longer the same people who left. We’ve become insufferable euro-snobs, Parisian sophisticates who speak French at home and compare the $6.95 Sea Food Platter at Nick and Tony’s with the ‘Risotto aux fruits de mer’ from Chez Leon at the Porte Maillot. More below…following the news:

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Eric Fry, from the Westchester suburbia…

– As fireworks lit up the night skies from Bangor to Berkeley yesterday, Americans celebrated 228 years of independence from the tyranny of British rule. We Americans would not be bullied into paying low, single-digit taxes to some distant authority, no sirree! We would rather fight to the death to protect our freedom – the freedom to impose taxes upon ourselves 10 times greater than those ever imagined by King George III…and we would fight for the right to shackle ourselves to massive credit card debts, or to bind ourselves to a lifetime of indentured servitude to mortgage debt…let freedom ring!

– The Federal Reserve tightened the shackles of adjustable-rate financing last week by hiking the fed funds rate to 1.25% from 1.00%. Immediately the nation’s major banks hiked their "prime" lending rates to 4.25% from 4.00%, which caused interest rates across the Land of the Free to ratchet higher.

– Initially, investors – like a 5-year old staring down a serving of broccoli – tried to like what everyone says is good for them. They tried to like the higher interest expenses imposed by the Fed. But the effort to exert mind-over-matter failed, as stocks slumped toward the end of the week. The Dow Jones Industrial Average slipped 89 points to 10,282, while the Nasdaq Composite dropped nearly 1% to 2,006.

– "America’s future – a nation of bed and breakfasts?" muses Northern Trust economist Paul Kasriel. "Since 1999, U.S. households have become a net demander of funds. That is, our expenditures on consumer goods and services and our expenditures on the net value-added in the residential real estate sector have exceeded our disposable (after-tax) personal income.

– "So, why is the U.S. household sector running persistent net deficits?" asks Kasriel. "To paraphrase President Clinton, ‘Because we can.’ And how is it that we can? Because Alan Greenspan and his Asian central bank brethren have been holding U.S. interest rates at artificially low levels…

– "Having gone deeper into debt to purchase McMansions and SUVs in recent years, how do baby boomers intend to spend their golden years? I predict that we baby boomers will turn our McMansions into bed and breakfasts for the increasing number of Chinese and Indian tourists who will be visiting our shores in the next fifty years. And we will provide complimentary shuttle services to our guests with our SUVs."

– At the moment, however, the cavalier American consumer seems to be retreating from the front lines of reckless consumption, as evidenced by recent news of slack sales at Wal-Mart, GM, Target and others…Could the housing market be next in line to feel the ill-effects of a consumer retrenchment?

– The shares of Washington Mutual tumbled last week on news that the giant mortgage lender will post a smaller per-share profit than expected – something like $3 to $3.60 for the year instead of the $4.24 a share predicted by Wall Street analysts.

– Meanwhile, new applications for U.S. mortgages fell more than 4 percent last week, as purchase applications and refinance applications both slumped.

– "It now appears to us that the shift in the interest-rate environment in recent months, with a sharp increase in long-term rates and a related reduction in mortgage volumes, will continue through the rest of the year," said Chairman and CEO Kerry Killinger, in a company statement. "The effects of these changes are likely to outpace the timing of ongoing cost reduction plans in our mortgage-banking business."

– The steep drop in the price of "WaMu" shares suggests that investors were surprised by the news. How could they have been surprised, we wonder? Is there anyone left in America who does not expect interest rates to rise? And yet, despite the most telegraphed rising rate trend in modern American financial history, investors have continued to snap up shares of mortgage lenders as if they were buying some sort of safe-haven asset on par with gold.

– The shares of one prominent mortgage lender touched a new all-time high last Monday. If WaMu says times are tough, how long until other mortgage lenders feel a similar sort of pain? And how long until the housing market itself begins to feel the adverse effects of waning mortgage demand?

– Not long, according to HSBC…"A bubble-psychology has manifested itself in very rich valuations," writes HSBC chief U.S. economist Ian Morris in a report entitled, "The U.S. Housing Bubble – The case for a home-brewed hangover."

– Not to worry, dear reader. A new 12-page study by the Federal Reserve says the rapid increase in home prices is itself not evidence of a bubble. Of course, neither are rapidly rising rates NOT evidence of a bubble.

– House prices relative to income, rent, replacement-cost and home-equity have all set new highs, HSBC’s Morris observes. "Expectations of future house price appreciation are spectacularly, and unrealistically, high." He writes. "We think the party stops by mid-2005. A series of rate hikes will cause a reassessment of likely future house price risks and its associated debt, thereby triggering housing’s fall."

– For the moment, dear reader, your New York editor abstains from the Great Housing Bubble Debate. Although he sympathizes with the arguments advanced by the bubble contingent, he owns a home he does not intend to sell and would prefer, therefore that the non-bubble contingent proves to be correct. In short, your editor opts for the path of denial.

– He imagines the prospective housing bubble being outgunned by a prospective inflation. In other words, home prices may fall in "real" terms, even while continuing to appreciate in "nominal" terms. Such an outcome would be quite convenient for those Americans who, like your editor, hold a long-term fixed-rate mortgage.

– One thing is certain – or almost certain – housing bubble or no, rising short-term interest rates will put the squeeze on those American families who have built their homes – and their financial foundations – on the shifting sand of adjustable-rate financing.

– Fannie Mae projects rising rates through the end of the year and estimates that the monthly payment on a typical one-year ARM will jump 17% by year-end. In other words, a homeowner who pays $926 a month on a $200,000 adjustable-rate mortgage would be paying $1,086 by New Year’s Eve…Happy New Year!

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Bill Bonner, back on the road…

*** "So what?" asks old friend Jim Cook.

He was echoing the sentiments of technology stock guru George Gilder, commenting on the huge amount of U.S. debt held by foreigners. Cook continues:

"That pretty much sums up the sentiments of most Americans. In fact, plenty of Americans don’t even know about the country’s debt burden, and don’t care in the least to learn.

Contemporary economics bores people. If you really want to put people to sleep, lecture your friends with the negative aspects of the ballooning trade deficit. Or talk a lot about money creation, credit excess and artificially low interest rates next time you’re at the country club and see how your golf partners begin to shun you. Nobody knows or cares much about these complex economic subjects. People don’t believe that anything can cause a crisis, and they write off those who warn about the future as kooks.
Most Americans want stocks and real estate prices to keep going up, and that about covers their economic thought process.

All of these boring economic problems that nobody cares about are tied to inflation. "So what?" Mr. Gilder might ask once again. We’ve come to believe that a little inflation is good. In fact, purposeful inflating has become a national policy promoted by government, business and the public in general.

Money and credit heat up the economy, but an inflationary boom must eventually lead to a bust. A credit-induced expansion is inevitably doomed. That’s an economic certainty. The greater the credit excess, the greater the economic pain. The answer to Mr. Gilder’s question will come with the worsening of everyone’s economic conditions. No one will ask "so what?" in the midst of panic and crisis, bad business and depression.

Exactly when this necessary and certain outcome will unfold depends on the success of the monetary authorities in containing and augmenting the greatest money and credit expansion in history. The more we inflate, the longer the collapse will be postponed. However, this policy is not without risks. Eventually, the flood of money makes people believe this policy will go on endlessly, and the amount of money in circulation will increase beyond all bounds. That causes everyone to get out of money and into assets. We have the good fortune of being able to flood the world with dollars, induce price inflation in other countries, and mitigate inflation at home. However, inflation is a policy that terminates itself. The whole world can, at some point, rush to exchange dollars for goods. Such a flight from the currency means we no longer have the option of taking the cure (recession). Instead, the dollar’s value shrinks to the point that nobody wants it.

The violent contraction that follows such a currency collapse, or the evolution of a boom into depression, will deprive consumers of goods, enforce widespread bankruptcies, cause business failures and spread impoverishment. Everyone suffers. People are quick to blame the monetary and political leaders. They vent their anger on those in charge and replace them at the polling booth. Radical agendas become mainstream as any kind of cure is sought. People become melancholy and depressed. They have found the answer to the question, "so what?"

*** Homeland Bound

"I confess that in America I saw more than America; I sought there the image of democracy itself, with its inclinations, its character, its prejudices, and its passions, in order to learn what we have to fear or hope about its progress."

– Alexis de Toqueville, beginning his visit to America in 1831

"Hurry up!"

The taxi arrived at 7:30 AM. Its mission was to collect your author and what remained of his family in Paris. He had already dispatched the older children to America – an advance party to warn the relatives that we were coming.

It is time we returned to America – at least for the summer. The older children only recall it dimly, sentimentally. The younger children barely remember it at all. Even for the adults in the family there are vast stretches of North America that have never been explored. We lived in the U.S. for decades. The country was all around us. But we never had time to look at it.

Now, we open our eyes – ready to be delighted, or appalled.

We passed through two airports on our way to Maine – Newark and Boston. Immediately upon hitting terra firma, we began to be ordered around by people who, themselves, seemed to have only arrived yesterday.

"Put shoes in," said a security guard, whose mother tongue was apparently not English. "No carts allowed," said another. Actually, we weren’t quite sure what she said.

"We’ve been away too long," we said to the kids. "We can’t understand what people are saying.

One of the things that must be surprising to arriving Europeans is to see so many flags. The French bring out the Tricolore for Bastille Day – at least they fly it from town halls and police stations. Individual Frenchmen rarely put out the flag. We’ve never seen a ball cap in France with the flag on it. Nor have we ever seen a Frenchman wear a shirt in which the drapeau was a design element. But here in America, the stars and stripes are everywhere. You find it on cash registers, lawns, bumper stickers and in-car windows. A pair of motorcycles going up I-95 each had large flags flying. A man wore a Hawaiian-style shirt, with Old Glory all over it.

"Why do they put the flag everywhere," Henry wanted to know.

"It’s the 4th of July," his mother replied. But most of the flags seemed permanent. They meant something. But what?

America is famously advertised as the ‘land of the free and the home of the brave’…but after only a few hours after your feet hit the ground, you begin to wonder. In Europe, at least in France, security is more relaxed. You land at Charles de Gaulle airport and you can breeze through customs in a matter of minutes – the cops often don’t seem very interested in you.

But getting into America is another matter. Even before you hit the ground, people begin warning you: "Fill out the forms correctly, or you’ll be in a lot of trouble,’ says a announcement. Once on the ground, the airport security guards are everywhere. Soon, the warnings turn into threats – stay behind the yellow line, remove all laptops – you can’t even tell a joke or they’ll put you in the hoosegow.

"How come it’s so much easier to travel in Europe," asked Henry.

"It’s the war on terrorism," his mother replied. "They don’t want another 9/11."

"Why aren’t they worried about that in Europe? There are millions of Muslims already in France. And it’s so easy to get in and out. If they wanted to you’d think it would be easier to blow up something in France than in America…and didn’t they just blow up a train in Madrid?"

"Well, for some reason, the Europeans are just much more relaxed about terrorism," his mother continued, venturing a guess. "Maybe its because they’ve had terrorism for so many years…I mean the Basques and the IRA…and so forth. Besides, maybe Americans feel more like they are the targets."

Homeland security is new to the U.S. In fact, the ‘homeland’ itself wasn’t even invented when we moved to Europe. When we left, there was only America. Now, there is the homeland…and the rest of the empire.

"Why would terrorists want to target Americans more than Europeans?" Henry wasn’t giving up. "Maybe it’s because Americans are the ones who are fighting terrorist!"

Whatever the reason, the gendarmes are everywhere in America. Even after leaving the airport, you can barely drive 20 miles in any direction without running into a speed trap.

"They’re there for the same reason as the security guards," Elizabeth explained to the children, "to protect you."

No one notices anything unseemly about it: America is now the only military super-power in the world. No other nation even comes close. But never have the denizens of the homeland of the brave been so concerned with their own safety.