Government Economic Malfeasance

The Mogambo Guru takes "a nervous look at the things that are going to kill us"…

I cannot remember the last time I read that any country was expanding the narrowest measure of its money supply by 24% percent in some heroic-yet-suicidal effort to keep its currency from appreciating against the dollar and the euro.

But the Swiss are doing it right now.

The Swiss, who are relative newcomers to the area of currency debasement and acting like idiotic, brain-damaged children, are making up for lost time by continuing to drive their currency into the toilet by the expedient of printing up humongously more currency, sorta like we are doing and the Japanese are doing and the Germans are doing and the French are doing and the Canadians are doing and the Chinese are doing and like every other freaking country on the freaking planet is doing as far as I can tell. It’s just that when you line everybody up according to size, then somebody has to be the Numero Uno on the list, and right now the Swiss are it.

Predictably, inflation in Switzerland is rising. Last year it was the Australians who were the poster-children for money supply madness. Now their inflation rate is rising, too.

Currency Debasement: Inflation Comes Tootling Along

And how is the USA doing as concerns the money supply? Well, lately it seems to be cooling off, but the trend has been running at about 7% annually, which is about 500% faster than the economy has been growing. And, of course, that means that inflation is sure to come tootling down the expressway to a price tag near you. Bet on it.

And the amazing thing to me is the almost complete lack of concern, especially when it is within recent memory that the Gnomes of Zurich were supposedly such economic and financial hotshots and everybody went "Ooohhh! Ahhhh!" and nodded their heads in solemn agreement whenever the Swiss had something to say about money.

But not anymore. It is almost like all the economic hotshots around the globe, who can usually be counted on to prance and preen and run their mouths about how educated and smart they are, are completely unaware of what is going to happen to generalized, aggregate prices in just a little while, measured in a few days or weeks or months, as all this huge freaking global oversupply of money works its evil, horrible way into rising prices.

And when prices rise so high that us proletariat trash can no longer afford to eat or pay the rent, this is typically when the course of civilization is suddenly altered. And perhaps that is why the ownership of guns is always under attack by the forces of the Left, which love to remove barriers to total government control. And if there is one thing that the government wants to control, it is crowds of us unthinking, uneducated, ill-tempered, bankrupt, starving bozos, like me and you, well, maybe not you since you are so sophisticated and wealthy, but me anyway, running around armed to the teeth and in a very bad mood, being angry about what the government weenies have done to us.

Currency Debasement: $500 per Month, Each

Taking a nervous look at the things that are going to kill us, like the condemned prisoner who morbidly looks out of the window of his cell to watch the scaffold being built that will be used to hang him, we note that the Treasury is still issuing debt at the rate of about $52 billion per month, and therefore about five hundred bucks a month is added to the burden of every lunchbox-toting private-sector job-holder in the country. Five hundred bucks a month! Each! PER MONTH!

So the recent rises in capital investment can be, I figure, chalked up to managers and CEO’s desperate for something, and who are thus susceptible to the hypnotic siren-call of a Fed’s bullish bias, money that is extraordinarily cheap, with foreign central banks willing to participate in the fraud, at the same time as the Bush Administration is gearing up one monumental swindle after another to make sure that Dubya will be re-elected in November 2004, although for the life of me I cannot think of a reason why ANYONE would want to be the President for the next, oh, fifty years, much less for the next term.

All this at the same time as a coordinated global expansion of budget deficits, printing of excess money, granting of excess credit, bank reserves being lowered to insignificance, blatant lying and deceit on a monumental scale, selling of gold by central banks, and just about every other government economic malfeasance you can name. So why not be bullish, too? It we don’t borrow and expand, we go bankrupt. If we DO borrow and expand, we will still go bankrupt. So what’s to lose? Which alternative course of action is more fun and more popular?

This is the kind of scary stuff I have been thinking about, and so I decided that I needed to get my mind on something else, and overcoming my paralyzing paranoia with a superhuman effort and handfuls of psychotropic medications of every hue, I decided to try to finish up another home- security perimeter-control project, in this case wiring a flame-thrower into the doorbell circuit on the front door.

Currency Debasement: The Swiss Will Get Burned

So I’m trying to figure out what in the hell this green wire is for, see, and out of the corner of my eye I see, coming up the walk, the know-nothing busy-bodies who work in the city’s code-enforcement department, who seem to know zilch about even the basics of the theory and practice of self-defense, and I just know that they are going to get into another snit about this flame thrower thing. So I quickly just tie the mysterious green wire into the first circuit that is handy, namely the nearest hot circuit where the electrical tape is coming unwound and I can easily see exposed bare wires, and then I hang a sign on the doorbell that says, "If you are from the City Building Code Enforcement Department, or are a Swiss monetary official, ring the bell."

Of course, at this point there is nobody locally in the whole county who would dare to ring my doorbell, which saves me a bundle by not having to buy any candy every Halloween, and rumor has it that new city employees are actually given a special in-service training about me, but the Swiss are not so wise to the ways of Mogambo. So either I get them, or their debasement of their currency gets them, but in any event the Swiss will get burned.

And if the illustrious Gnomes are getting burned, you know what’s in store for us…and the Japanese and the Germans and the French and the Canadians and the Chinese and every other freaking country on the freaking planet as far as I can tell.


The Mogambo Guru
for the Daily Reckoning

August 11, 2003

P.S. No matter what anybody does from here on out, there will be many more losers than winners, and it will get worse and worse and worse with each passing year, until one day there is some cataclysmic event which kills the last lingering spark of life. And then we will be conquered or something by somebody, probably the Chinese, and then history will have made one of its famous discontinuities. And I say this not because I am such a hotshot, but because I can read. And this calamitous misery is the lugubrious result of what happened every time in all of history when governments acted so bizarrely, so predictably poorly, so brazenly brainless as regards money and economics.

Richard Daughty is general partner and C.O.O. for Smith Consultant Group, serving the financial and medical communities, and the editor 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.

We have so much to look forward to!

The real bear market in stocks hasn’t happened yet. Before it is over, stocks will sell for P/Es of 6-8…the Dow will fall to 3,000 or so…and you’ll be able to buy the entire Dow for a single ounce of gold.

Neither has the bust in refinancing. It’s begun…but it has a long way to go. Refinancings are down sharply…but when it is over, almost no one will refinance anything.

Nor has the total collapse of the dollar and the bond market happened yet. Eventually, the dollar will probably fall below 1.5 to the euro…bond yields will reach double digits.

And the real recession is probably still ahead of us, too…

The nation has been in a slump for 20 months, we’re told. But such an odd slump it has been. Jobs were lost. Stocks went down; some crashed. The newspapers reported the sad news…and commentators went around with long faces. But if times were tough, the lumpen didn’t seem to notice; consumers just kept spending money…and debt just kept growing.

As far as they were concerned, it was like a funeral with a punchbowl, but no stiff; so they might as well enjoy themselves.

Since 1994, mortgage debt doubled to $9 trillion. Total debt almost doubled, to $32.5 trillion. And, of course, that doesn’t include the shortfall in federal revenues…estimated at up to $44 trillion.

The big numbers don’t bother us. For every debit there is a credit on the other side of the ledger. We expect both sides to disappear at once. And won’t that be something to see!

Not to worry, says the New York Times. "Business spending helps offset lag in refinancing," explains last Friday’s headline.

Ah…everyone, including us, has worried what would happen when the refi boom ended. How would the consumer economy grow when consumers run out of money?

The NY Times thinks it has the answer – the spending would come from business. But business spending is as big a fraud as the slump. Here’s the juicy twist; you’ll like this:

According to Stephen Roach, most business spending is concentrated on buying computers and peripherals…and more than 80% of it is not spending at all – but make-believe spending implied by falling prices! If a company spends $10 on a gizmo that is 5 times as powerful as the one he might have bought a few years ago, the government treats it as though he had spent $50! Deflation produces inflation, get it? We’re sure the gods are chuckling. Falling prices in the technology sector now lead to overstated growth numbers!!

The inflated numbers then get factored into the nation’s GDP, which was said to rise at a 2.6% pace in the 2nd quarter. This, by the way, was only half the rate of typical GDP growth in a recovery. In the last 6 cyclical recoveries, GDP was growing at a 5.4% rate at this stage.

Not only that, but 70% of the GDP growth alleged for the 2nd quarter came from increased military spending. Contrary to popular delusion, military spending does not make people rich. Instead, it consumes precious savings and leaves them with pockets as empty as a congressman’s head.

Who can make sense of it? And who can fail to be amused?

Not us.

And now we learn that the consumer is getting his house in order. "Credit card debt dips as consumers cut back," says a Chicago Tribune headline.

The Fed says total consumer credit fell in June. But the Fed doesn’t include mortgage debt…so, as consumers switch from expensive credit card debt to cheaper mortgage debt, total debt actually rises.

But as we pointed out, every mortgagee has a mortgagor somewhere…so it all balances out. Besides, you could wipe off all the world’s credits and debits all at once…but what would really change? Our houses would still be there. We’d still have our cars, our friends and most of our favorite restaurants. So what’s the problem?

Millions of people would probably go bankrupt in the transition…thousands of businesses, too. People who considered themselves rich would find out that they have less real money than they thought. Foreign holders of U.S. treasury bonds would get back pennies on the dollar, in real terms. Americans would be less able to buy imports. The foreigners, no longer willing to feed ‘the world’s mouth,’ would have to do some consuming themselves.

Do you have a problem with this, dear reader? We don’t. In fact, we look forward to it almost as we look forward to Humpty Dumpty falling off a wall.

Heck, if we could…we’d give the egg-man a little shove and get it over with.

Right Eric…?


Eric Fry, checking in from Manhattan…

– In a departure from recent trends, bonds rallied last week…while tech stocks tumbled. But neither bonds nor stocks have gained any ground since Captain Greenspan and the FOMC cavalry last rode to the economy’s rescue on June 13th with their 13th consecutive interest rate cut. Since that date, 10-year Treasury yields have skyrocketed from nearly 3% to more than 4%, and the stock market has limped along.

– But the 10-year note closed higher last week for the first time in four weeks – its yield dipping to 4.19%. The 30-year bond also gained ground, dropping its yield to 5.23%, from 5.31% the week before. The rising bond prices seemed to prop up the shaky Dow Jones Industrial Average, as the blue-chip index added 37 points to 9,191. But the leaden tech sector dragged the Nasdaq about 4% lower to 1,644.

– Despite some decent second-quarter earnings reports from much of corporate America, the earnings reports out of the technology sector have been conspicuously underwhelming. Not surprisingly, therefore, few investors are rushing to add to their holdings of richly valued tech stocks.

– Nor are corporate insiders adding to their holdings of overvalued stocks. To the contrary, America’s pinstriped officers and directors last month bought a piddling $73 million worth of their own shares. At the same time, they unloaded a whopping $2.4 billion worth. In other words, insiders sold $32.21 worth of stock for every $1 worth of stock purchased. The typical sell-buy dollar ratio is 15 to 1, according to Thomson Financial.

– Thomson’s insider sell-buy index has been stuck in historically bearish territory for three months running, Barron’s Alan Abelson reports. "Over the decade, there’s been only one similar stretch," says Abelson, "and that was in the three months from July to September 2000. In the 12 months that followed, the S&P declined a mere 28% – the worst one-year return in the past 10 years. May not make you bearish, but it should make you think. As we’ve observed rather simple-mindedly before, no one ever sold a stock because he thought it was going up. And we are firmly convinced that’s true of CEO’s and CFO’s and all the other big O’s."

– "Signs of Upbeat Economy Abound," a missive from the ISI Group declared last week. Unfortunately, signs of a SUSTAINABLY upbeat economy remain fairly scarce. Unless one believes that debt-financed consumption will deliver economic salvation, the recent economic stats don’t provide much hope of an enduring rebound.

– July retail sales rose at the fastest pace in 13 months, as sales at stores open at least a year jumped 4.3% from the same month in 2002. But July’s strong retail sales are going to be a tough act to follow. Notwithstanding the nascent signs of renewed economic vitality, this economy simply refuses to add jobs.

– Layoff announcements shot up 43% last month from the two- and-a-half-year low set in June, according to placement firm Challenger, Gray & Christmas. And now that interest rates are rising, the mortgage industry will likely be shedding jobs at a rapid clip. "Inclusive of support staff and other mortgage-related employees," Contrary Investor estimates, "we could easily see a few hundred thousand folks potentially jumping aboard the jobless claims ranks if what happened in prior cycle conclusions is repeated again."

– We’ve said it before and we don’t mind saying it again: consumers without jobs don’t spend much money. "The age- old, or at least several-year-old, question is whether consumers can or will do enough to prop up the economy until the recovery takes hold," writes Andrew Kashdan of Apogee Research. "And the answer arrived at by Philip Arestis and Elias Karakitsos of the Levy Economics Institute will displease most people.

– "Even though real estate appreciation and frenzied mortgage-refinancing activity have offset losses in the equity market, the pair concludes in a recent working paper that ‘the short-term outlook remains uncertain,’ while ‘the long-term one is bleak.’ And as for the consensus view that tax cuts and low interest rates will support robust consumption until investment picks up, Arestis and Karakitsos doubt it. They point out that, despite a rise in real disposable income, job fears have curtailed consumer spending growth, and household balance sheets are in tatters, with debts continuing to rise as assets have fallen."

– In other words, the tepid recovery on Main Street bears faint resemblance to the robust recovery on Wall Street.


Bill Bonner, back in Ouzilly…

*** It is still hot. We have felt sorry for the local farmers. Working their parched land in the hot sun, we wondered how they could stand it.

Then, last week, Patrick asked us to give him a hand. Mounting the steps into the cabin of his big Case International tractor, we discovered it was air- conditioned!

"Hey, I thought you farmers were suffering out in the heat…" said we. "Now I find you’re living it up. You’ve got music, A/C, a cold drink…this is living…"

"I know," came the reply. "When it gets real hot like this, I don’t like to leave the tractor; it’s the most comfortable place to be.

"But when anyone is looking, I take out my handkerchief and mop my brow…I don’t want to look too comfortable…"

*** "Another dead person," said Damien this morning. "At 4:25 this morning, Madame Bugeau died. She was 82. One more down."

Damien seems to like precise numbers. He always tells us the exact time at which people died.

We have not asked why. Or even how he knows. We merely note it as a curiosity.

"Did you see Mars last night," he asked. "It is closer than it has been in 73,000 years. Better take a look; you might not be around the next time it is this close. Heh heh…"

*** We had seen Mars last night. The red planet was redder and brighter than we had ever seen it. At midnight, Jules brought out his telescope for a closer look.

"Do you see it?"

"No, I can’t find it. I mean, I see it over there, but I can’t find it in the telescope."

"It’s right above the telephone wire."

Aiming did seem to be a problem. But it looked as though the 15-year-old was pointing it in the direction of the little village rather than the night sky. Normally, the shutters are closed and the houses are buttoned up by midnight. But in the heat, windows are left open everywhere.

"What are you looking at," asked a suspicious father.

"Madame de Cremier," said the pubertal teen.