Borrowing to Get a Better Bargain

The Mogambo has a rare and unprecedented need to, from time to time, punish stupidity by being rude, sarcastic, insulting, arrogant, argumentative and truly hateful. It’s a good thing the subject of borrowing money came up. Now prepare yourself for the Random Mogambo Attack Mode (RMAM)…

A reader of Agora Financial’s 5-Minute Forecast wrote, "You spend a lot of time talking about the loss of purchasing power of the dollar – and rightly so. Therefore, I fail to see the problem with anyone spending dollars as quickly as possible and incurring debt. That dollar spent today will be worth less, if not worthless, tomorrow, and the dollar repaid will be of lower value than the dollar borrowed. Can’t have the argument both ways."

I was hoping that someone would ask me to field that question, as I was really chomping at the bit at the sight of a potential target for a test-drive of Random Mogambo Attack Mode (RMAM), where I take strange, unnatural delight in punishing stupidity by being rude, sarcastic, insulting, arrogant, argumentative and truly hateful, as is implied by the words "Attack Mode".

And my reply would have been a real bargain, too, as it was a "two-fer"; not only would I have rebutted the argument, but I would have also been entertaining in a horrifying, embarrassing way, for no extra charge! Free!

For those who wish to hear my entire reply, I have handily expurgated the screaming obscenities, malicious lies, various libels, incoherent words and phrases, personal attacks and random death threats, and now the entire 50-page essay is boiled down to just the paragraph, "If you can guarantee that you will have an income that will rise faster than inflation, interest and taxes for the rest of your future life as your debt rises for the rest of your future life, then you are right; borrow as much as you want and party down, dude! You will, indeed, be paying back with cheaper dollars, handing yourself a bargain in the process, which is no problem for you because you are so smart and important that your employer will no doubt be happy – happy! – to pay you more and more wages and benefits at a rate that is actually higher than inflation in prices and taxes, for all the rest of your life! Lucky you!

"But if you are like the rest of us miserable creeps out here who are living hand-to-mouth and are one lousy ‘written reprimand in our employee file’ away from being fired and probably sued for sexual harassment or that whole embezzling thing, then no; borrowing for the sake of getting more of a bargain on some consumer item is really, really, really stupid."

And I say this because a study by the University of Central Florida found that, as reported by the St. Petersburg Times, "56 percent of low-income respondents said they could not pay their bills if they missed one month’s pay", which is not very remarkable since these are low-income people. But the startling part is that "38 percent of middle-income respondents" also said that they could not pay their bills if they missed one month’s income, and that "24 percent of upper-income respondents made that same claim"!

And what percent of each class felt like they were so far in debt that "they will never be able to get out"? Oops! Low income: 25 percent. Middle income: 14 percent. Upper income: 10 percent!

And they are not going to get any help from their houses going up in value, as Martin Weiss of moneyandmarkets.com reports that, "The S&P/Schiller Home Price Index plunged 9.1% in December. Worse, the median price of new homes sold has tanked 15.1% from January of last year, the biggest drop in any month since at least 1964, when they first began tracking this measure."

And so it is obvious that the reason nobody has any money is because they have no more money or credit after paying higher prices for everything else, as you can surmise from Ambrose Evans-Pritchard at Telegraph.uk.co, who reports that "40pc of the world economy has an inflation problem", which he proves by reporting inflation of consumer prices in China (7%), Vietnam (15%), Russia (12%), Bulgaria (12%) Romania (8%) Estonia (11%), The Emirates (12%), Qatar (14%), and India (5%).

And where did all of this inflation in prices come from that is making people hungry and angry? Mr. Evans-Pritchard is right on the money when he says, "I totally agree with those who blame the debt crisis on the irresponsible policies of the Fed and fellow central banks from 2003 to 2006, and indeed for [the] better part of fifteen years. They stoked this bubble by artificially holding rates too low (by government fiat). The money leaked into asset prices, just as it [did] in the US in [the] 1920s, and in Japan in the 1980s. (Two other low inflation eras).

"In effect", he says, "central banks rigged the price of credit. In doing so they caused massive ‘inter-temporal misallocations’, to use the posh term of the BIS. Or put another way, they stole prosperity from the future."

You can imagine the powerful cinematic effect when he added, with just the perfect touch of ominous undertones, and augmented by my adding a soundtrack of people screaming while being torn apart by ravenous wolves, "The future has now arrived." Ugh.

Until next week,

The Mogambo Guru
for The Daily Reckoning
March 17, 2008

The Mogambo Sez: "There is a darkness descending upon us." Well, that was my first thought, and with which I was pleased in a strange, pretentious little literati way, but upon reflection, now I change that to, "The thread holding the sword of Damocles suspended above our economic heads is unraveling", which suits the situation perfectly, but unfortunately doesn’t lead me to a clever segue to how you should buy gold and silver bullion, and oil stocks to save your financial butt, but which is, once you think about it, so obvious I don’t even have to mention it to someone as smart as you!

Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter – an avocational exercise 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.

"O mighty Caesar! dost thou lie so low?

Are all thy conquests, glories, triumphs, spoils,

Shrunk to this little measure?"

You will recognize that line, dear reader. It describes what happened to Julius Ceasar after he was stabbed to death by a group of rivals on the Ides of March in the year

The Ides of March came this past Saturday. When it had gone, the bloody corpse on the ground was that of one of Wall Street’s biggest players – Bear Stearns (NYSE:BSC).

Last week, we reported a rumor. That a large Wall Street firm was in trouble – which was said to be the real reason that the Fed announced its new $200 billion of loans.

By week’s end the news was out: the Bear had gotten the ‘Margin Call from Hell.’

The Fed and J.P. Morgan Chase (NYSE:JPM) rushed in to give aid and comfort. But officials were very worried that if a deal to rescue Bear Stearns were not completed before Asian markets opened this morning, there could be a financial meltdown.

"I’ve been on the phone for a couple of days straight, throughout the weekend," said U.S. Treasury Secretary Hank Paulson on television…"but I’m not going to project right now what the outcome of that situation is…"

"That situation" of course, was the situation at Bear Stearns. Early reports here in London say that a deal was finally struck with J.P. Morgan Chase to buy out the Bear for a reported $2 a share.

The background for this latest crisis is what we’ve been reckoning with in these Daily Reckonings for so many months. The geniuses at Bear Stearns had their calculators…their Black Sholes Option Pricing Model…their mathematicians…their risk figures… They had some of the finest minds in the country – or at least, some of the finest minds money could buy on Wall Street.

And yet, a year ago they also had a stock trading for $150. Now, it is down to $2…the shareholders have been largely wiped out.

When Wall Street got the news of the Bear’s predicament, stocks were sold off – driving the Dow down 300 points. Then came word that the Fed and JP Morgan Chase were on the case, and the index bounced back, closing down 194 points. Hardest hit, (this will come as no surprise) was Bearn Stearns itself – down 47%. Other financial stocks took a beating too.

We began last week worrying that we might be wrong. We begin this one worrying that we are probably right. At the beginning of the week, U.S. stocks seemed to be rising more than gold. By week’s end, things were happening as they should: God was in his heaven. The queen was on her throne. Gold was rising…and stocks were going down. All is right with the world…or as right as it can be after a 27-year credit expansion.

Little noticed in the Bear affair is the role of Chinese investment firm, Citic. The Chinese were going to put up some money to prop up Bear Stearns. There might be many explanations for why the Citic deal didn’t go forward, but here we suggest one that is the most far-reaching: the foreigners are growing wary of the United States. You will recall our friend in Geneva told us to "Sell the United States…sell its money…sell its stocks…sell its debt." That attitude is spreading – the belief that the United States is a short sale.

"For years," begins a report in the Wall Street Journal, "the US economy has been borrowing from cash-rich lenders from Asia to the Middle East. American firms and households have enjoyed readily available credit at easy terms, even for risky bets. No longer."

"Clearly, the whole world is focused on the financial crisis and the US is really the epicenter of the tension," the paper quotes Carlos Asills, at Globista Investments. "As a result, we’re seeing the capital flow out of the US."

Ed Hadas adds:

"The Fed’s rescue of Bear increases the odds of a generalized, taxpayer-funded financial bailout. Combined with superlow rates, that will add to pressure on the beleaguered dollar. Bear is the biggest firm so far to hit the wall this time around. But the biggest name in financial distress could eventually be the US."

*** How do you like those foreigners? We were nice enough to take their money…spend it on stuff they sent over…and ruin our own economy and our own balance sheets so theirs could grow at breakneck speed. And this is the thanks we get! Now that we really need their money, instead of opening their wallets, they ask questions: what’s that paper really worth, they want to know?

The United States emits a lot of paper – bonds, notes, SIVs, MBS, securities, repos, you name it – but one piece of paper is the one emitted most and the one the foreigners are probably most concerned about: the paper with pictures of dead presidents.

Colleague Manraaj Singh in London surveys the latest ungrateful grumbling:

"In Japan, Finance Minister Fukushiro Nukaga, today said abrupt currency moves are ‘bad’ for economic growth, while Economics Minister Hiroko Ota called them ‘undesirable’ and blamed them on dollar’s weakness rather than yen’s strength – those are strong statements from the normally reserved Japanese. Closer to home, European Central Bank President Jean Claude Trichet said on Monday that he [was] still concerned about the impact of the euro’s surge.

"In Brazil, they’ve already gone beyond talking about it though. They’ve taken action to stem the currency’s appreciation by reducing the flow of hot money into the country. Brazil has introduced a 1.5 per cent tax on purchases of real-denominated, fixed-income securities by foreign investors and will no longer require exporters to pay a 0.38 percent levy on currency purchases in order to cut the costs of sales abroad.

"’The [US] dollar is melting,’ Brazil’s finance minister Guido Mantega, said on Tuesday. ‘Our plan is to avert an abrupt impact on the foreign exchange rate and help mitigate, in a smooth way, the dollar’s freefall.’"

The Wall Street Journal fears a "rout" in the dollar this week. "Dollar poised to fall again," it says…pointing out that another rate cut is likely to send investors rushing to other currencies. It’s hard for us to believe that investors don’t already know about the coming rate cut and haven’t already sold off the buck.

It seems more likely to us that world’s central bankers will announce an effort to save the greenback – which will send the dollar up again. If that happens, dear reader, you know what to d sell it on the bounce.

*** David Walker, former U.S. Comptroller General (and one of the main focuses of our documentary, I.O.U.S.A.), gives us another reason to sell the United States.

The U.S. "financing gap" – the difference between what the U.S. government can reasonably expect in revenues and what it has committed to pay out – is growing by $2 to $3 trillion per year. Since George W. Bush took over in the White House, $20 trillion has been added to this deficit.

*** Politicians can’t get away with anything anymore – except killing people and destroying their nation’s economies.

"I don’t get it…" said a French businessman over lunch on Friday. "In fact, I don’t think any of us get it. You’ve got a guy – the governor of New York – who hires a prostitute. He gets caught and has to resign. But the President of the United States lied to the American people and started a war in which thousands have died…a war that is so expensive it threatens to bankrupt the entire nation. How come he doesn’t have to resign? Strange system."

We tried to explain. Getting caught with a prostitute is an unpardonable diversion. Starting a war is what politicians are supposed to do.

"You have to understand," we began, "that getting a call girl is a simple, understandable act. To most Americans, it’s a sin. They don’t want an elected official who does things like that. They want him taking care of their problems, not his own tawdry whims and desires.

"The war in Iraq is a very different thing. Was it a mistake…was it a lie? We don’t really know the details. It’s complex. Maybe it was in the national interest…or people thought it was. We don’t know if it was a good idea or not. You can’t know things like that.

"Besides, people come to believe what they need to believe in order to play their roles in history. The people of a great empire have to believe that sending their armies all over the world is worth the cost. Europeans are very much against war…and afraid of it. They’ve had their imperial ambitions…and the inevitable disasters that follow. But Americans are not. Most have no regret about the war in Iraq except they wish it had gone better. And the argument among America’s politicians is not about whether it was right or wrong, but about whether it was pursued effectively."

Until tomorrow,

Bill Bonner
The Daily Reckoning