Old-People Economics

The Daily Reckoning PRESENTS: Today, the Mighty Mogambo manages to illustrate the “pain and utter ruination” that those at work on Capitol Hill have caused – and he probably offends an entire generation of Americans. Read on…


The Lipper Mutual Fund Performance Index for the first half of the year came out, and gold lead the pack by a long shot. Their 10-fund index was up 27%, and the World Equity Funds Index showed that the 54 gold-oriented funds were up 25% for the last six months, too.

By contrast, when Lipper considers all 12,675 equity funds, the average return was less than four percent. Hahahaha! Official “trust me” government-reported inflation alone is running more than that! And the real, old-school way of measuring inflation is running at least to nine percent, being as conservative as I can.

So, that means that the average mutual-fund holder made four percent, on which capital gains and income taxes are levied. But even assuming that the mutual-fund holder pays no tax at all, he or she is still losing at least five percent a year in spending power! Losing! Losing five percent a year! And that is the optimistic scenario!

You can bet that this interesting statistic is showing up on the screens of all kinds of fund managers, and the screens of all kinds of people who are looking, with an increasing feeling of unease, at their pathetic quarterly statements.

And with the G-7 (or G-8 or whatever they call themselves these days), of which we are a member, continuously agreeing to work together to make the dollar go down in value, that means that domestically produced commodities will be cheaper on the world market. That will pressure higher-priced foreign competitors to lower their prices in response, but it will also, unfortunately, give domestic producers the leeway to dramatically raise their prices. And they will.

But we were talking about the dollar, and Robert McHugh, of Main Line Investors, Inc., has taken a look at the chart of the dollar index and says, “The U.S. dollar has started its descent. It should nestle around the 82 area +/-. All this is the start of a protracted move into the 60’s, one that will no doubt be stair-step rather than freefall as central banks around the world work in orderly fashion to devalue the dollar.”

Dramatically raising prices is also defined, oddly enough, in the Mogambo Economic Encyclopedia (MEE) as: “The stuff of which revolutions are made and people riot over, because their devaluated money can’t buy much anymore. Eventually, mobs come rumbling over to the Mogambo’s house because he has gold, and he is always hiring people who will track down Alan Greenspan, every economist who ever worked for the Federal Reserve, all members of Congress (except Ron Paul, R. Texas), and every living Supreme Court justice so as to slap their stupid, traitorous, corrupt, despicable faces.”

And then, we should confiscate all the aforementioned people’s assets as punishment, so that they, too, can experience the pain and horror of utter ruination that they caused.

I was just working myself into a fit of exasperation about the “pain and horror of utter ruination,” when a pleading reader asks, “Please do a piece on the plight of the retired people in America. Most people I personally know realize this current scenario will not go on indefinitely. They just don’t know what to do about it.”

I think to myself: “Perfect! Now I can illustrate the ‘pain and horror of utter ruination’ and act surly at the same time! And, against people who are smaller and weaker than me!”

Emboldened, I enthusiastically start off by saying, “Old people? What a bunch of whiners! It reminds me of my own kids. They know they are reaching the age when I can legally kick them out, and they know that their allowance will stop. Thus, they too realize that the ‘current scenario will not go on indefinitely.’ So, for both of these groups, I am supposed to, I guess, get up off my fat, lazy butt and, oh, I dunno, wave my Magic Mogambo Wand (MMW) around in the air a few times, thus solving their problem of how to keep getting a free lunch? Hahaha! Thanks for the compliment that the stupid Mogambo could fashion a remedy that has evaded the greatest minds of economic history! Hahaha!”

Anyway, there is no need to wave magic wands, which is so old-fashioned. Let’s, instead, rely on that infallible source of good advice, the Chinese fortune cookie. After making goo-goo eyes at the pretty waitress at the Chinese restaurant and flirting with her while ordering (“Everything with pork in it, my little Chinese won ton cutie!”), I finally get my food, which I notice she has spit on again, although I don’t remember actually ordering “spit sauce.” I figure it must be how ethnic Chinese girls flirt with men who are old enough to be their grandfathers.

Anyway, after eating, along with the bill and a lot of burping, we get the fortune cookie. With trembling fingers we crack it open to retrieve that little scrap of paper inside. It says, “Get a job; scrimp along for a few years so that you can buy as much gold and silver as you can afford. Then, you will take an ocean voyage and gain 10 pounds eating like a pig.” Sounds about right to me!

The real problem with these old people:

1.) They stupidly believe that Social Security is a retirement fund and they are supposed to be able to live on it, when it is not and never was.

2.) They stupidly believe that inflation nowadays actually measures all of the increases in prices that they pay.

3.) They stupidly believe that their Social Security checks are going to go up as fast as inflation. (As a caveat to that last point, Social Security checks are actually going up as fast as the “official, government-declared” rate of inflation. It’s just that the rate of inflation they use to administer the Cost Of Living Adjustment (COLA) to Social Security checks happens to be a lie that was cooked up by the horrid Alan Greenspan, former chairman of the Federal Reserve, and aided by the equally detestable Michael Boskin, economics professor at Stanford, who got his degrees at Berkeley, which probably explains a lot).

And old people (although they are supposed to be the ones with all the smarts, and who proudly call themselves “The Greatest Generation”) stupidly believe that a central bank (the Federal Reserve) is not a horror that will destroy their money, a fiat currency is not a horror that will be destroyed, and that fractional-reserve banking is not a horror that combines them into economic Armageddon, contrary to the lessons learned during the entire history of all the countries in all the world ever since cavemen were selling mastodon steaks over the Internet.

In short, old people are the very ones who continuously voted into office the Congressional creeps who perpetuated this disaster (and who picked the members of the Supreme Court that let them get away with it, contrary as it was to the clear strictures of the Constitution), and then stood around with their hands out, joining the growing crowds of people gobbling up more and more cash and benefits. And now that the inevitable inflation in prices, caused by the monstrous increase in the amount of money created by the Federal Reserve to finance all of this largesse is wiping them out, they cry out, piteously, “Help us! We cannot live a comfortable life at public expense anymore!”

The biggest mistake the old people made is thinking that the government they elected is looking out for them. Ha! In his paper titled “Is the United States Bankrupt?” Laurence J. Kotlikoff of the Federal Reserve Bank of St. Louis Fed said, “The most the government can do for the elderly is to set h equal to (1 + r)w/r.” Hahahaha!

And speaking of stupidity, my buddy Phil S. sent me a couple of immortal quotes that I think are the root cause of all of our troubles. Norman Douglas said, “Education is a state-controlled manufactory of echoes,” which means that after a short while you get ignorant, trusting buttheads for a citizenry because the guy with the loudest voice is seldom the smartest guy trying to make echoes. Just louder.

The other one that tickled me is from Professor Irwin Edman, who said, “Education is the process of casting false pearls before real swine,” which is oddly similar, when you stop to think about it.

And stupidity permeates the majority of American universities, too, as I gather from Dr. Kurt Richebächer’s remark: “The folly is in the categorical assumption of American monetarists that sufficient monetary ease can never fail to stimulate sustainable economic growth. With this assumption in mind, they have rewritten the history of America’s Great Depression of the 1930s. American monetarists’ lack of thinking starts with the absurd assumption that whatever happens during the boom is irrelevant. The one and only thing that matters is swift easing when the economy weakens, essentially implying that proper monetary easing solves any possible problem. It is an absurd view.”

And the result of believing in such absurdities is inflation in prices, which the old people are complaining about. And along those lines, George Ure at UrbanSurvival.com notes, “the current three-month running average of CPI inflation pencils out to 8.29% per year.”

And, if it is any consolation, it ain’t just us, as he reports that the Russians are officially expecting inflation to run around nine percent this year, the Philippines are suffering 6.7% annual inflation, and the “(central) Bank of Indonesia has rates pegged around 12.25%.” Of course, he is too polite to mention Zimbabwe’s 1,200% annual inflation (which is getting worse exponentially), or the fact that inflation is now present in every freaking country in the freaking world, and this inflation is running, on average, about three percent. Every one.

Until next we meet…

The Mogambo Guru
for The Daily Reckoning
July 17, 2006

Mogambo sez: Like a yakkity parrot, I say keep saying over and over, “Buy gold, silver and oil! Buy gold, silver and oil!” And, remember that while a yakkity parrot isn’t smart enough to think of smart things, it can be trained to say smart things. “Buy gold, silver and oil! Awwwk! Polly wants a cracker! And Mogambo wants a pizza loaded with yummy pork products!”

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.

Let’s begin today’s reckoning at the end.

Is the United States of America, asks Laurence J. Kotlikoff, professor of economics at Boston University, “at the end of its resources, exhausted, stripped bare, destitute, bereft, wanting in property, or wrecked in consequence of failure to pay its creditors?”

Or, abandoning the Oxford English Dictionary for Ray Charles, are Americans “busted, broke…no bread…I mean like nuthin’?”

Answering his own question in the affirmative, Professor Kotlikoff explains: “This partial equilibrium analysis strongly suggests that the U.S. government is, indeed, bankrupt, insofar as it will be unable to pay its creditors, who, in this context, are current and future generations to whom it has explicitly or implicitly promised future net payments of various kinds.”

We don’t know what a partial equilibrium analysis is. But since it supports our general view, we ask no questions. Instead, we merely probe more deeply into the report for elaboration and amusement.

“Unless the United State moves quickly to fundamentally change and restrain its fiscal behavior,” Kotlikoff continues, “bankruptcy will become a foregone conclusion.”

This does not particularly help us. We have no doubt that the nation will be bankrupt. What caught our eye was the assertion that it is already broke. But that, it turns out, depends on what you mean by the word ‘broke.’

“The proper way to consider a country’s solvency,” goes on the professor, “is to examine the life-time fiscal burdens facing current and future generations. If these burdens exceed the resources of those generations, get close to doing so, or simply get so high as to preclude their full collection, the country’s policy will be unsustainable and can constitute or lead to national bankruptcy.

“Does the United States fit this bill? No one knows for sure, but there are strong reasons to believe the United States may be going broke.”

Among the strongest reasons is a study of the total net “fiscal gap” that the country faces. This is the present value of the difference between the government’s future income and expenses – calculated using optimistic assumptions and not including any contingent liabilities, such as those that rise with the water level in New Orleans, or with insurgent activity in Iraq. No, these are the basics: interest payments, government operations, social security, and drug money. The figure, as negative and depressing as our Daily Reckonings occasionally are, is $65.9 trillion – or about 500% of the nation’s GDP.

We have reported this number before, more in mischief than despair. Somehow, that gap has to be closed. Otherwise, the feds will have to stop sending out checks. But what do we care; the government already sends out too many checks to too many people, in our opinion. Then again, we don’t depend on Social Security or have a safe full of T-bonds.

Besides, there is no chance that the gap will be closed, anyway. Kotlikoff has a sense of humor on this point. He notes that the government would have to cut discretionary expenses by 143%. Or, personal and corporate income taxes could be doubled. Just in case the reader missed the joke, he includes a chart that tells us that people at the upper end of the income scale already pay more than 50% of their incomes in taxes.

Now, a question: Which country do you think expanded its health care benefits most over the 32 year period – 1970 to 2002? Sweden, Japan or the United States? You probably can guess – America, the land of the free stuff. In fact, in the U.S. public health care benefits grew twice as fast as in Sweden during that period, which is a big part of the reason the United States is going broke.

With a problem this big staring them in the face, you might think the custodians of the nation’s financial health would be staying up late at night trying to come up with solutions. If you thought that, you would be an idiot. It is late in the cycle, dear reader. Patriots can no longer save the republic; it no longer exists. Instead, they spend their time trying to get what they can out of a decaying empire. Paul O’Neill was the first U.S. Treasury secretary to bother to calculate the “fiscal gap.” George W. Bush fired him for it and proceeded to sign every spending bill – no matter how preposterous – to come his way. For its part, Congress continues to add to the fiscal gap every day it is in session, which leads Kotlikoff to conclude:

“The most likely scenario is that the government will start printing money to pay its bills. This could lead to spiraling expectations of higher inflation, with the process eventuating in hyperinflation.”

This is not the only reason to buy gold, dear reader, but it is one of them.

More news from our counselor of currency…


Chuck Butler, reporting from the EverBank world-currency trading desk in St. Louis:

“Not all of the BOJ members agree with the slower pace of rate increases. After digging into the official release, I read three of the nine board members advocated raising the discount rate.”

For the rest of this story, and for more market insights, see today’s issue of The Daily Pfennig


And more views from Paris…

*** Meanwhile, as goes the U.S. government…so go its citizens and taxpayers. From Business Week July 12, 2006:

“The U.S. Labor Dept.’s job report on July 7 showed that retailers had shed 7,000 jobs in June, after a loss of 71,000 jobs in the previous two months combined (see BusinessWeek.com, 6/9/06, “Behind The Retail Jobs Numbers”).

“Strange Trend. It’s unusual that retailers are trimming their workforces when the rest of the economy is growing. For years, retailers have been the source of significant job creation in the U.S. During the 1990s, department stores, groceries, and other retailers added 2.3 million jobs, or an average of almost 20,000 a month, according to the Bureau of Labor Statistics.

“Now, the concern is that retailers, who are positioned to detect the pulse of consumers more quickly than many other types of companies, are sensing trouble ahead. ‘Something is screamingly wrong with consumers, and retailers are reacting,’ says Richard Hastings, economic advisor to the Federation of Credit and Financial Professionals and a senior retail analyst at Bernard Sands, a retail credit rating firm.”

What is screamingly wrong is the Great Dollar Paradox of the early 21st century is that Americans have too few dollars and foreigners have too many. Global prices increase – gold is back near $670. Gold may be getting ahead of itself, but it shows clearly what direction it wants to go. Oil is setting new records. Nickel has gone up 50% in the last month.

Meanwhile, domestic U.S. prices slump (see below).

This puts the United States in a bind. When it wants to go to war with someone – or offer free drugs to old people – it has to borrow the dollars from the people who have them: foreigners. If we remember the figure correctly, 75% of all new U.S. government borrowing this century has been financed from overseas.

Back at home, Americans are running out of money. The homebuilding stocks are falling apart. So, believe it or not, is that middle-class shopping mecca, Wal-Mart. The Dow had another big down day on Friday, its third in a row.

Rich Americans are still building houses in Greenwich and Palm Beach. They’re still buying art at auction and adding to their positions in hedge funds. But the middle and lower classes are having a hard time making ends meet. They are forced to use their few dollars to buy the most expensive gasoline they ever saw. Those dollars get out their passports, breeze through the metal detectors (there is no metal in them), and leave home. They go overseas, take up residence in one of the oil or trinket-exporting nations, and get ready for their next move.

No wonder the home folks are feeling a little lonely. “Consumer morale dips,” says a Reuters headline. Yes, it dips because people don’t have enough dollars to consume with. Many of them haven’t had a real pay increase since 1973. They need dollars to help make ends meet. And now, with rising energy prices and resetting mortgages, those footloose, fancy-free, globe-trotting dollars are sorely missed. Foreclosures are up 26% in the Dallas area. June retails sales were off nationwide.

*** You can still exchange your paper money for the real thing. The U.S. government is selling gold – in the form of a pure Buffalo coin. The price of the metal will probably correct before going much higher. But with civil war at hand in Iraq, regular old-fashioned war in Israel, brand new war on terrorism worldwide, a few buffalos and bankruptcy ahead for the world’s only remaining superpower…a few buffalos might give you a comfortable feeling.

*** “Did you know that there have been big improvements in working with genes?” said Henry at the dinner table last night. “Now, they can implant genes from one species to another…and the gene will be fully expressed.”

“What does that mean?” his father wondered.

“Oh, I know,” said Elizabeth, quick on the up-take, “they can take a gene from Eric Clapton and put it in a new variety of corn…so it will have a good ear for music. Or how about getting a gene from Warren Buffett and putting it in lettuce so the new strain will have a good head for figures?”

“Very funny, Mom,” said Henry.

But what happens if you accidentally put a gene from lettuce into Warren Buffet?