Mosey to the Hills

The largest debt load any country, anywhere, in any era has ever seen…and a U.S. consumer that just might have reached his limit.

It has happened. Foreign holdings of U.S. debt held in custody at the Fed increased that teensy, weensy, last little bit, that last 6 billion smackeroos, and finally topped $1 trillion last week. They had been waffling around, probably trying to stay under that milestone because it looks so bad. But last week, the need to keep the dysfunctional U.S. economic system liquefied, and the need to do something with all those dollars, that huge tsunami of dollars, that avalanche of dollars, that humongous freaking huge mountain of dollars that keeps sloshing into the system, got to be too much, I suppose.

The Treasury printed up another $1.24 billion dollars for the week (probably to give to Iraqis). The U.S. is literally paying people their salaries, month after month, for which many of them do literally no work. So while it may be all humanitarian and all, it is, after all is said and done, still giving money to people who do not lift a finger to do any work. And the only reason I am so angry about it is that I am eminently qualified to get paid for doing no work, and often do no work at all for hours and sometimes whole days at a time, and sometimes even when I AM working I am doing it badly and am generally incompetent in every thought and deed, like when I am writing the Mogambo Guru for instance, but every time I go to the mailbox, there ain’t no check there.

And speaking of the Treasury, that bunch of government spendthrift losers also floated another $15 billion in debt for the week, hitting another new record for national indebtedness, for the jillionth month in a row, I might add. At this rate, the national debt will surpass $7 trillion just about Christmas time.

National Indebtedness: More IOUs

Now, it used to be that little boys and girls got toys, or candy, or a piece of coal in their Christmas stocking that was so carefully hung by the chimney with care. Now we get a toys and an IOU from Santa Claus, played by Jerry Mathers, oops, I mean played by John Snow, Secretary of the Treasury. Which he will never pay, except with more IOU’s, and he is using the money to give toys and candy to his little friends, who make the toys and candy. And then the jerk sends us a bill for the whole amount.

But, hell, we Americans are so busy running up debts of our own, and the government doling out money and benefits to an entire constellation of various special-interest groups, that we figure "What is one more big bill to pay? We’ll just tap equity in our houses, or borrow against our retirement plans, or lobby Congress to give us more tax credits, or just borrow the money outright, or something. The government will think of something. The government ALWAYS thinks of something."

Anyway, holidays are always Happy Holidays for low-IQ losers like us! For example, September Consumer Credit increased $15.1 billion, or 9.7% annualized, to $1.975 trillion. So it looks like that particular indicator of debt will surge past its milestone, namely the $2 trillion mark, pretty soon, too.

As the illustrious Martin Weiss expresses it, "Right now, American consumers are more deeply in debt than any other population in the history of mankind. But instead of helping people find a way to dig themselves out of debt, our government is perpetually looking for new ways to get them to borrow, spend and speculate more."

In a similar vein, your own illustrious editor, Bill Bonner, recently remarked: "For nearly 100 years, the ratio of debt to GDP was between 120% and 160%. Only in the 1929 bubble did it ever become really grotesque…peaking out at 260%. Guess what it is today? Over 300% and growing."

National Indebtedness: Throwing Money with Abandon

Normally, I would hyperventilate and have some cardiac event when I read something like this. But I am getting older, I had heard it before, and had seen the graphs of the same thing, so I am somewhat inured to the whole mess. Nowadays, instead of co-workers trying valiantly to get my heart started by jumping up and down on my chest with their damn heavy boots, or that time where they threw me out the window under the theory that the shock would re-start my heart, I now calmly walk around checking to make sure the doors are all triple-locked and the intruder alert/intercept system is on and armed, if you get my drift.

But that’s not even close to all. Yes, the Fed is throwing money at the economy with abandon. And yes, consumers have lined up to get their greedy little hands on it as fast as they can. But – a portentous, foreboding, ominous thought fills my brain! – even as the Fed keeps the money spigot pumping, could the consumer queue be growing shorter?

"No matter how much the Fed inflates, it can’t force businesses to borrow or banks to lend money," writes Jim Puplava on Financial Sense online, looking at the decline in the money supply numbers and the lack of lending going on at the banks. "When the appetite for credit evaporates, the money supply starts to contract, which is what it is doing now."

Well, that explains why the M’s are going down. But there is a downside to all of that, as Mr. Puplava explains: "Now that the supply of money is contracting, there is less money to keep the economy and the markets expanding. This will become critical in the months ahead because this is a liquidity driven market. As the supply of money and credit contracts, so will the markets."

National Indebtedness: Oodles of Money

And that little bit of economics arcana explains one reason why the government is not waiting for us doofus slackers to borrow money and expand our businesses and keep the old economic ball rolling. They are, instead, printing up the money and spending it themselves. Lots of it. Oodles of it. Lots and lots of oodles of it.

And why aren’t we borrowing money and getting with the economic expansion program? Mr. Puplava explains, "In summary, debt remains one of biggest impediments to a sustained economic recovery and continuation of this bear market rally. It is one reason why we still remain bearish. All of the malinvestments of the previous boom have yet to be liquidated. The Fed has merely postponed the day of reckoning not eliminated it."

And because he used the world "Fed," it calls for my usual knee-jerk reaction, which it to heap a little gratuitous disrespect on Greenspan and the Fed, with a really rude and disrespectful undertone, since I am always looking for an opportunity to do just that, because that is just the kind of guy I am, and which probably explains why nobody likes me and why everybody is out to get me. Mogambo fans sit in rapt fascination, watching mesmerized as I draw back my lips in a sneer of raw contempt, like Marlon Brando in "The Wild One," only more cool, more rude, and much more disrespectful, and say "They are all a bunch of jackass chumps whose idiocies will culminate in the ruination of the USA, you dig? Just as the idiocies of all other print- the-money morons in" (insert waving of arm to signify a broad expanse) "all of history have always ruined the economies that pursued such a bizarre and thoroughly discredited agenda."

And to add a nice little coda to the piece, I turn to the audience, wink with my charming boyish charm, and say "QED."


The Mogambo Guru
for the Daily Reckoning

Novemeber 17, 2003

P.S. Don’t take it from me. In an article called "The Dollar Crisis: An interview with Richard Duncan," posted on the Prudent Bear website, Mr. Duncan is right on:

"This state of affairs cannot continue indefinitely. The United States cannot continue increasing its net indebtedness to the rest of the world at the rate of 5% of GDP per year. And, not even the US government can continue running $500 billion dollar a year budget deficits forever."

Mogambo Sez: I’m not saying it is time to run for the hills, but maybe moseying over in that direction would be a really good idea.

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.

It all seems so calm. So ordinary.

Like Europe before WWI, everything seems to be going so well…

…but just 4 short years after the Archduke went down, practically everything else had fallen, too. Millions of soldiers and civilians…currencies…manners… architecture…and all the major governments of Europe. Gone were the Hohenzollerns from Germany, the Hapsburgs from Austria, and the Romanoffs from Russia. The Ottoman Empire collapsed in Turkey. The British Empire was badly damaged; it would fall, too…but it would take another World War to bring it down.

Even more remarkable, hardly a single, solitary, sentient human being saw it coming.

For what it is worth, here we are. Not quite single. Not exactly solitary. And more or less sentient. And what we see coming is not the equivalent of the Great War…but a Great Disappointment. Americans are in the process of ruining themselves. They are transforming assets into liabilities, trading the real wealth that was built up over generations for the quick fix of debt. The ‘equity’ they own in their homes has fallen to its lowest level since the government began tracking it in 1965. The asset – the home – has been replaced by mortgage debt.

While new houses are going up on every empty lot, new factories and office buildings are rarely built in America. Instead, consumers borrow from foreigners in order to buy foreign-made goods…thus stimulating a boom in factories and offices overseas. Even the cash in our pockets has been replaced – first with paper money of no real value, then with credit cards, which allow the spender to pay for his hamburger for the rest of his life.

You will recall, dear reader, that at the beginning of this new millennium, it looked as though things were going to change. The bubble on Wall Street had blown up. Americans would be forced to cut back on spending…and save money, we thought.

The consumer economy would have to do a little less consuming and a little more producing, we hoped. But along came the heroes at the Federal Reserve and U.S. Federal government; with even easier credit terms, tax cuts and billions more in new spending, the Feds managed to avoid sanity for a while longer.

How much longer, we don’t know. But for the moment at least, frugality, prudence, and good sense have been staved off. The perverse economy of Squanderville seems to be recovering; its residents are squandering their assets at the fastest pace in history.

Debt increases at the rate of 10% of GDP per year. Wal- Mart, where Americans do much of their squandering, reports that sales are not growing as well as expected. Buyers seem to be shopping for cheaper alternatives and "timing their expenditures around the receipt of their paychecks, indicating liquidity issues."

Consumer sentiment rose in November. Consumer sentience continued its decline.

Here’s Addison with more news…


Addison Wiggin, from the banks of the Seine…

– Just as moving away from a painting in the Impressionist school helps sharpen the image, so reading the day’s financial news through the magnifying lens of a ‘debt- detective’ helps bring the big picture into focus. Only, you have to do the investigating in reverse…

– Let’s take a look. Using your lens from a wide angle, you get a fuzzy picture…what a well-dressed man the U.S. economy is. Nearly everyone agrees the economy is in recovery. The Wall Street journal surveyed 53 economists and found that they expected things to continue as they are. Following the 7.2% growth in GDP in the 3rd quarter, GDP growth of 4% is anticipated for the 4th quarter…and 4% again for the first quarter of ’04.

– "House prices sizzle," reports the Dallas Morning News. For the first time in 20 years, adds the LA paper, home sales are up in every single state.

– Things are going so well that according to their plan, the Fed sees no point in raising rates for a "considerable period." Said Mr. William Poole, head of the St. Louis Fed: "The standard forecast is still for good, but by no means gangbusters, growth, which means we’re only going to make modest gains in reducing unemployment."

– "The real issue is," remarked Anthony Santomero, Philadelphia Fed chief, fleshing out the details in the Fed’s PR campaign in the Financial Times, "to allow the economy to grow and use up those unemployed and under- employed resources."

– That’s the fuzzy picture: The economy is expanding. But not fast enough to put people back to work. So the Fed has to keep rates low enough, long enough for Mr. Economy to buff up a little under the suit.

– Let’s move in a little closer. The magnifying glass picks up a strand of hair, a bit blonde perhaps, and certainly not intended to be found on the lapel. Food prices, something you might expect to cause concern, rose at their highest rate in almost 20 years. The Producer Price Index grew by nearly one percent overall, revealing the effects of the Fed’s policy…in furniture, prices grew by one percent…restaurant and drinking places were up nearly 2%…and building materials were up one and a half percent.

– Yet the Fed remains steadfast. "We had a bad PPI this morning, higher than anticipated," William Poole told Bloomberg last Thursday, "but one month doesn’t make a trend." (You might think they’d apply the same reasoning to the October job report, eh? Oh, well…)

– A closer look still, and we find a smudge of lipstick on the collar of the shirt…and a small scratch on the shoulder. "Home foreclosures soaring in Wichita," the Kansas City Star tells us. "Bankruptcy filings swell in Colorado," reports the Rocky Mountain News. Both Kansas and Colorado are suffering the after-effects of collapsing interest in technology companies. Through aggressive tax incentives, Denver invited many of the nation’s most beloved techs to set up shop in their city. Wichita, Kansas wooed some of the Boeing operation away from Seattle.

– They have subsequently suffered similar fates. A Denver bankruptcy puts it this way: "During good economic times, Colorado grew quickly, and people borrowed liberally for new cars and to fill new homes with expensive appliances, furniture and other luxury items. And if they get laid off, it’s hard to make a quick turnaround because they’ve still got these purchases in place. Some of these large-ticket items people have are locked in, and even though they see the need to make short-term adjustments, they can’t."

– "Filings [for foreclosures] have picked up and become more volatile since the recession began," said Stanley Longhofer, an economist with Wichita State University, describing the rise in foreclosures in his state to the Kansas City Star. "But the increases started long before then. It is not the housing market going into the tank that is causing foreclosures. It is people that have allowed themselves to get in way over their head."

– "U.S. consumer debt," reports the Rocky Mountain News, citing Federal Reserve figures, "through credit cards, auto loans and other non-mortgage personal borrowings, grew for a third straight month in September to $1.97 trillion." Throw in mortgage debt and Americans hold $8.4 trillion in personal debt. The entire nation’s GDP, by way of comparison, is roughly $10 trillion.

– Now the well-dressed gentleman doesn’t look so impeccable, does he? In fact, he looks rather like a fraud…hiding secrets…and telling more lies to cover up the truth from those who would hold him accountable. When, in fact, he already knows he’s going to a certain rendez- vous again, ce soir. He can’t resist.

– Our prediction: He’s about to get caught in the act. "No matter how much the Fed inflates, it can’t force businesses to borrow or banks to lend money," the Mogambo Guru quotes Jim Puplava on Financial Sense online, looking at the decline in the money supply numbers and the lack of lending going on at the banks. "When the appetite for credit evaporates, the money supply starts to contract, which is what it is doing now."

– But there is a downside to all of that, as Mr. Puplava explains: "Now that the supply of money is contracting, there is less money to keep the economy and the markets expanding. This will become critical in the months ahead because this is a liquidity driven market. As the supply of money and credit contracts, so will the markets." More from Mogambo, below…


Bill Bonner, back in Paris…

*** We are often accused of slandering our native land. An intrepid reader sends the following note:

"As a fact check to your Daily Reckoning column, I checked the economist country databank to verify exactly how the U.S. debt/GDP, deficit/GDP, and CA deficit stack up against other nations. I was a bit shocked by the results.

"Europe has essentially the exact same debt problem as the U.S. does. In both France and Germany, debt is 60% of GDP, almost exactly the same as the U.S.. Deficits are lower (3% versus 5%), but in the case of the U.S., at least *some* of that 5% is due to the war, which, like all wars, will eventually end. True, the current account situation is much better (+2% versus -5%), but I am not sure how much of that is already priced in to the current $/EURO exchange rate…

"On the other hand, Japan has an absolutely horrific 145% of debt to GDP, with annual deficits of 8% of GDP. I know it’s more fashionable to bash the U.S. these days, but surely this is no role model.

"A friend (and former hedge fund manager) of mine would also like to add that Italy has a 100% debt to GDP ratio and the eventual inclusion of eastern Europe in the euro- zone will clearly only make things worse.

"On the subject of pension liabilities – the situation is also worse in Europe and Japan, where the age demo is aggravated, and state pensions are bigger.

"Regarding equity valuations – it is very debatable whether either Japan or European equities are ‘cheaper’ than the U.S.. Both may have lower Price/Book ratios than the SP500, but in Japan much of that is (still) inflated property values and cross-holdings; in Europe growth rates are significantly lower – and should command a lower P/E. Not to say that the U.S. market is cheap, but neither is Sony at an 90 P/E, or German banks in the mid 20’s P/E, or the French luxury good makers at P/E’s of 30 or more…

"Clearly the U.S. is not the picture-perfect example of fiscal responsibility. But Europe is at least as bad, and Japan is worse. I would suggest including these two blocks as Daily Reckoning ‘editorial targets’ going forward, but I doubt it would increase your newsletter circulation."

Japan and Europe don’t look good from many angles; their economies are mostly in a pickle.

But our beat is America. We are American, and try as we might, we cannot view the world through any other eyes but our own. If we appear to be taking the fashionable route in bashing the homeland, it is because we cannot help but believe a nation that believes it can spend its way to wealth will get not what it expects, but rather what it deserves. And if it doesn’t, well then, it should. *** What is wrong with the forces of evil, dear reader? Good news…bad news…it doesn’t seem to matter; the price of gold edges up. It now stands within $2 of the $400 mark. We meant to buy more below $350. Then, below $370. And each time, the price rushed upwards, just before we could get a grip on it. Why can’t the people who are supposed to be holding it down do what they are supposed to do? We were counting on them!