Hairshirt Economics

There is one group of people that The Mogambo despises almost as much as the Federal Reserve – journalists. And now, one has dared to challenge Mogambo’s views on Greenspan…this scrivener has no idea who he’s messing with…

Christopher Farrell, writing the essay, "Greenspan: Wizard or Villain?" on, divides people into two camps. On the one side, we have what he calls "The hairshirts," which "believe that for the health of the economy to be restored, the inevitable bust that follows a boom must be at least as great as the boom."

Apparently we, speaking for the hairshirts everywhere, are the stupid scumbags of the world. On the other hand, we have what he calls: "Growth proponents – and there’s none greater than Greenspan – believe that it’s better to limit the fallout of a bust and get the economy growing again as quickly as possible." Did you note that one side is dismissed as the pejoratively labeled "hairshirt" idiots, and the other side is gloriously called "growth proponents" instead "raving lunatics"?

So it is better to let my daughter speed dangerously in her car and clean up the mess when she inevitably crashes, rather than stop her from speeding? And it helps the economy for me to constantly put bigger and bigger engines in her car the whole time? Wow! No wonder I always win the "World’s Worst Dad" award!

Christopher Farrell: Greenspan’s Great Mistake

Then to make sure that you understand that he is a "journalist" and not an economist, he goes on to say, "To the hairshirts’ way of thinking, the great mistake Greenspan made was not allowing for a vicious economic and financial downturn to purge the speculative excesses built up during the heady ’90s." No, you little twerp! That’s not it at all! The great mistake was allowing the damned speculative excesses in the first damned place! But nooOOoooo! Greenspan is directly responsible for the creation of so much, so excessively much, so incomprehensibly much, so impossibly much money and credit, which financed every damn one of the damn speculative excesses, which now need to be purged, because there is nothing else to be done with them, and with all of the attendant misery.

So we are NOT quibbling about how best to correct huge boneheaded and criminally stupid mistakes with monetary policy. What we should be quibbling about is where in the hell YOU were, you and your rapier-like journalistic wit and vast economic-savvy, the entire time this Greenspan putz was doing this monetary insanity? And now we are supposed to think that this Greenspan fool, who caused our misery, is the best person to correct the mistakes he himself made? Hahahahaha! Journalists! Hahahahaha!

To prove that Alan Greenspan is a real first-class bonehead, Richard Schlessel sent me this snippet of an interview, where Alan Greenspan was asked, "Do you believe that personal retirement accounts can help us achieve solvency for the system and make those future retiree benefits more secure?"

Greenspan is reported to have said "Well, I wouldn’t say that the pay-as-you-go benefits are insecure, in the sense that there’s nothing to prevent the federal government from creating as much money as it wants and paying it to somebody." This is exactly right, they are secure. Although he leaves it to the reader to extrapolate to the correct conclusion that the money that the government will print with such insouciance will be, as a result, worthless, as far as using it to buy things is concerned.

But then he goes immediately to a non sequitur when he says, "The question is, how do you set up a system which assures that the real assets are created which those benefits are employed to purchase?" What in the hell is THAT supposed to mean? Is he asking, "How do you keep inflation from destroying everything when all that money, that staggering, gigantic towering mountain of money, flow into the economy?" Is he saying that he wants to somehow direct all of that money into the stock market and the bond market and the housing market? What? What is he saying?

Christopher Farrell: Money Overflowing

Marc Faber of the Gloom, Boom And Doom Report, is another guy who also believes that the Federal Reserve is incapable of dictating where money goes. He writes that the Fed creates money like water, and "when there is a problem they just replenish the water level of this fountain, or of this lake, and then it overflows. And whereas the Fed controls the quantity of money that comes into the system – more or less, they don’t control it 100%, but more or less – what they certainly don’t control is where water, or the money, then flows to. It can flow, as I mention, in the 60s into wages, in the 70s into commodities, and consumer prices in the 80s, notably into Japanese stocks and real estate, and then in the 1990s into the NASDAQ, and now more recently into the real estate market."

That is bad enough, but even worse is that it is, as he says, "uncontrolled – and if the door is open, or the system, then the money can one day also flow out of that door, which leads to weakening currency."

Jim Puplava, seeing Mr. Faber and me yammering back and forth and getting all the attention, says that he agrees, too. "When central banks stimulate, or print money – it stimulates something: sometimes production; sometimes employment; sometimes assets." The worse part is that "it annihilates thrift; it destroys, in my opinion, moral and intellectual values; it creates the wealth disparity."

Mr. Farrell then writes, "The critics say Greenspan has transformed the economy into a giant bubble, concocting one even greater than the one that already burst. The longer he delays the day of reckoning, the worse the fallout will be when the bubble pops." Yes, that is EXACTLY what I say, and that is exactly what history process, and that is what everybody who knows the least bit about economics says.

But Mr. Farrell is not interested in any of that. In fact, he dismissed me with a wave of his hand, as if shooing away a pesky fly, as he goes on to say "That’s a severe indictment – but not necessarily a valid one. A problem with the anti-Greenspan mindset is that hairshirt economics was largely discredited during the Great Depression." Huh? It was? Excitedly, I pull my chair up closer, because this is big news to me! I am on the edge of my seat to hear how this was "discredited during the Great Depression"!

Christopher Farrell: One Long, Heavy Lesson about Economic Booms

Seeing that I am at full attention, ready to hang on his every word to soak up this important new knowledge like a sponge, he says, "Mainstream economists of all schools, from Keynesianism to monetarism, turned away from hairshirt economics after the Great Depression." Huh? Another new revelation! I never heard that before, either! Sensing my stupefaction at the enormity of what he is saying, he explains, "They realized that the government could play a positive role in counteracting contractionary forces in the economy." Hahahahaha! I laugh in contempt at such a statement!

Wiping the tears of laughter from my eyes, and it is difficult for me to stop laughing, because everyone, in all periods of history, all know from the cradle to the grave that the government can cause a boom! This is because history is essentially one long, tiresome lesson in how all governments did this very thing, at one time or another, and the economy always got the boom, and then they all paid a heavy, heavy price, sometimes literally destroying the economy. And then every government, facing the inevitable economic contraction, then went after more money, usually by declaring a war, so that they could, as he says, "play a positive role in counteracting contractionary forces in the economy." And yet this Farrell guy thinks that only after the Great Depression, not even eighty years ago, (which was caused by the newly-formed Federal Reserve acting like profligate jackasses even then, creating huge amounts of money and credit to counteract, supposedly, the recessionary slowdown following WWI, and thus financed the Roaring Twenties), did people realize, and pardon me from laughing out loud, but I can’t seem to help myself, that deficit-spending by a government could counteract "contractionary forces"? Hahahaha! I can’t help myself! Hahahaha!

But, to be fair, Mr. Farrell is, after all, just a journalist. And we have learned that nobody requires journalists to know what in the hell they are writing about, but only that they write something to fill up empty pages.


The Mogambo Guru
for The Daily Reckoning

July 11, 2005

P.S. The Mogambo Sez: I am surprised at how gold is going down here lately. From the various lease rates for gold, it looks like to me that that money is being put into a calendar spread.  Inescapable conclusion: I have no idea what I am talking about.  But if I did know what I was talking about, I would say that this looks extremely, extremely bullish for gold, and that the temporary fall in the price of gold is a fabulous buying opportunity.

But it is more than that, as Billy, one of the guys I play racquetball with and who likes trying to make a little money by playing in some market or another, or hatching some business deal, or exploiting some price discrepancy, or some exploration or something, it’s always something, but never gold, is suddenly interested in gold.  After all this time.  He says he has heard some good things about gold and is convinced enough to get some.  This is how manias begin, not how they end.

Editor’s Note: 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.

Oscar Wilde once commented on a man who knew "the price of everything and the value of nothing."

Most Americans would be surprised to realize that there is a difference. And yet, with the advance of the U.S. housing bubble, the gap between the two widens.

A housing bubble is very different from a stock market bubble. A stock market bubble is a financial phenomenon; a real estate bubble is an economic one. When a stock bubble explodes investors are hurt. When a property bubble pops, ordinary people feel extraordinary pain. That is when prices collapse back to real value and we will find out what stuff we are made of.

We say that because it will come as a great disappointment to many people to discover what their houses are really worth. When tech stocks crash, most people read the news with approval; they never bought the stocks anyway and are pleased to find that they weren’t such idiots after all. But when property goes down, the shock of it is likely to upset them deeply.

"There are five separate social classes in American society," explains Richard Benson of Specialty Finance Corp. "They are the Upper, Professional Upper-Middle, Middle-Middle, Lower-Middle or ‘working poor,’ and the Lower. America used to be a land with a few upper class, some lower middle class and the rest were somewhere in the professional upper-middle and middle-middle category. Factory workers were middle-middle. Now when a worker loses their job at the factory and takes a job at Wal-Mart for one-third of his previous wage, are they still in the middle?

"A new class seems to be developing. I call it the ‘House Poor.’ In this over-heated real estate market where homes are selling above list prices and speculative buyers are quickly flipping properties at a record pace, the House Poor are keeping up with the rising cost of living by paying the bills through home equity extraction, home-equity loans and cash-out refinancing. While many homeowners believe they can live like the upper class and appear to be wealthy, they’ll be the first to end up in the poor house. Those easy money real estate speculators who purchased several investor properties are now beginning to see that renters are more difficult to find these days but the bills to maintain their properties keep coming in.

"Indeed, homes have a tendency to actually make you poor because they need to be finished and furnished; older homes become deep money pits; roofs need replacing; drains clog; termites gnaw at foundations while squirrels and mice move in; pipes break; furnaces fail, and, in the south, mold and mildew can’t even be insured; walls need paint; bricks cry out for tuck-pointing and yards need constant care. Worse yet, when it comes to the state and local government, they are always looking for someone to tax. As soon as you buy a house, you have just raised your hand and announced, ‘please tax me’! While some localities offer tax breaks to primary residents, second home and investor property owners get hit full bore on tax increases!"

In California, the typical person lives in a box with neither grace nor charm. But it is worth $522,000, according to the latest figures. The man figures he is half way to being a millionaire. He might as well spend a little of his fortune, he believes, before it gets away from him. And so he "takes out" what Benson calls the "phony equity" and uses it to improve his standard of living. Which is to say, he spends money. Whether the spending actually improves his quality of life or not is hard to say. Until now, he didn’t have to worry about it. The money was almost free. It came without work or sacrifice. Getting rid of it as fast as possible only seemed appropriate.

But there’s nothing quite as expensive as free money. Home ownership has reached a record 69% in the U.S. Trouble is, the homeowners don’t own much. Most houses are heavily mortgaged. As many as one in ten "homeowners" have no financial stake in their houses. A typical mortgage payment for a typical California house is over $3,000 a month. You would need an income of $122,000 per year to get a conventional loan for that amount. Not many people earn that much; it’s more than twice as much as the median family income. That’s why many people are spending half their income on shelter. But as long as prices rise, they don’t worry about it.

It’s when prices stop rising that real values show up. Then, the homeowner has only the expenses…and the debt…to think about. Then he begins to wonder what it’s really worth to him to live there.

How much? We don’t know. But the value of the typical California house is probably much less than today’s asking prices.

More news, from our currency counselor:


Chuck Butler, reporting from the EverBank trading desk in St. Louis…

"Yes, grasshopper, recall that once the unemployment benefits run out, the U.S. no longer counts them as ‘unemployed.’ So, you can have jobs still below the level they were before the last recession, and the unemployment rate falling. Unbelievable, eh?"


Bill Bonner, with more comments:

*** August crude is trading at the lowest level since July 1 – at $58 a barrel. Resource Trader Alert’s Kevin Kerr was quoted on as saying; "With Dennis quite literally blowing over and little damage left in his wake, workers should be returning to their rigs and platforms and production will resume pretty quickly with no noticeable interruption."

But don’t get your hopes up just yet – Kerr warns, that there may be "$3 to $4 of sway to either side of $60 depending on market conditions, and the crude-oil market is extremely volatile right now, and any sign of something out of place could jolt it right back above $60."

He reminds us, "We are only at the start of hurricane season, so the worst may be yet to come for the Gulf Coast."

*** This morning, all is calm. Out on the lawn, Maria and an actress friend are practicing what sounds like Buddhist chants. Or maybe it voice training. The younger children are playing in the gravel…or chasing the cat with a squirt gun. Henry and his mother are riding horses. Edward and his cousin are playing tennis in town. And up in a bedroom, our own dear mother lies in bed, recovering from a blow to the head.

We are getting to know the local emergency ward. Last night, after a fireworks display, the 84-year-old pitched backward in her chair and hit her head on a granite step. It looked for a moment as though she were a goner. But then, the lights came on and the doctor rushed in.

After a quick test, it was decided that we should take the woman to the local emergency room for stitches. We got to the place at 1AM and walked mother to a bed, where a foreign doctor who looked a little like Gunga Din proceeded to sew her up, assisted by a pretty blonde nurse. Then, all of a sudden, the young infirmiere pitched over and fell onto the floor as if she were having a seizure. We forgot about Mother and went over to try to help the girl. We held her head off the floor and wondered what to do next…

The doctor came over.

"Put her head down," he said. We obeyed.

He then slapped the poor girl on the cheek. Smacking an unconscious girl may or may not be effective. But the man seemed to be enjoying himself…we held our tongue.

Then, when his first blow failed to revive her he took another whack at her, harder than the first time. We know as little about emergency medical procedures as we do about economics. But that doesn’t stop us from having opinions. We decided it was time for a second opinion

"Nurse!" we yelled down the hall.

Two nurses came running. Just as they arrived the young woman came to her senses.

"She just fainted," said the doctor. "It is probably the first time she’s seen someone getting stitches."

The two nurses escorted the nurse into an adjoining room and the doctor went back to work.