The Fed's Free Lunch Program

Mogambo on Monday! Your weekly lesson in Mogambo-nomics…

By now, you must be aware that the FOMC has met and decided to leave interest rates at once-in-a-lifetime lows. And all you hear is how this is supposed to be such hot stuff. Money is cheaply available for investing and hiring and purchasing and all of that wonderful economics-stuff. And when I say cheap, I mean CHEAP! Short rates are actually less than the rate of inflation, giving you real rates that are actually negative! Wow!

Offering money at rates that are less than the rate of inflation actually translates into an offer for a free lunch. But, as the savvy dude or dudette that you are, you smile knowingly to yourself, because you realize that there is no such thing as a free lunch. In this case, the people paying for the lunch of lusciously low interest rates are the people who are being forced to loan money at these rates. That is, loan money at rates that are less than inflation, forcing them to lose buying power for the privilege of loaning strange people their money!

And there will be a price to pay, of course, as there is always a price to pay. Because, as you have heard over and over and over, and in fact you just heard it again from me in the preceding sentence, there is no such thing as a free lunch. Even though the Fed makes it look like there is.

And the people who are being forced to loan out their money at these historic lows are going to get their money back one day, you can bet on that. They are already making plans about how they are going to get that money back. Perhaps something (cue ominous music) unconventional.

Ben Bernanke: Unconventional Means

The term ‘unconventional’ apparently comes from Ben Bernanke, who is now an appointed, fully-fledged Federal Reserve weenie, against my advice. Although, to be fair, my literal advice was to get everybody to gather together and go down to the Fed and use pointed sticks to run everybody out of there, and make them disperse into the woods, and then burn the building, and everything in it, to the ground, and then scatter the ashes.

But Bernanke says that he will be happy to achieve monetary policy objectives by unconventional means, and nobody gets all shook up, except me. So I figure that we bedeviled savers out here ought to emulate Bernanke and his Fed, and commit ‘unconventional’ acts of our own. We have got to get our money back here! We are suffering deflation in our discretionary spending account! We demand the same rights as the Federal Reserve! We demand the right to commit unconventional acts and get away with them!

As for me, I have noted that food expense is one of those big-ticket items, and I have thus made a management decision to achieve gains in that area. Unwilling to reduce my consumption of Oreo cookies, although my wife spying on me already makes it difficult to sneak a few of those tasty chocolate morsels, I must make gains with other, unconventional methods. One will certainly be to walk around the grocery store until I see a full shopping basket that has a lot of good stuff in it. When the person isn’t looking, I shove a few bags of Oreos into it, and then it is a simple matter to follow them home from the grocery store and park down the street a ways.

Then they will have to make many trips carrying the grocery bags into the house, and there will be times when the car, which is still filled with bagged groceries, will be unguarded! Then I will run out take a few bags, and leave a five-dollar bill as payment! Now I realize that five bucks is not enough to pay for three full bags of groceries, but these are unconventional methods! I paid five bucks for the damn groceries, and now the person I bought them from is whining!

Ben Bernanke: The Same Damn Thing

"Hey!" I say. "The Fed, without your permission, takes your valuable dollars away and hands you cheaper ones, so it is the same damn thing! And this Greenspan guy you think is some (and here is where I use a real nasal, whining, sarcastic tone of voice) hotshot hero, (back to normal voice) but you are throwing Chinese Ninja Death Stars at me, even though we are doing the same damn, dangity blang, jam blagged ding-dong thing! I’m not stealing your food! I’m giving you money for your groceries! So gimme a break! I’m just using standard unconventional methods!"

Another of my brilliant unconventional plans is a classic Plan B, which is to sneak over to my neighbor’s house with a long extension cord and tap into his electric power, and then I can run my whole house on free electricity!

Of course, I will dutifully go over to him at the beginning of each month and give him, oh, let’s say, ummm, ten bucks cash. Now, I realize, and you realize, that my electrical power usage is much, much higher than that, especially considering my latest scientific research attempts to use extremely high-voltage magnetic fluxes to turn lead into gold, highly secret scientific experiments that have all been, I am sorry to report, utter failures so far.

But, and this is a big plus, I have that sunny optimism that flows naturally from being crazy and stupid, and I have plenty of both of those! So expect good news any day now!

You want unconventional methods? Buster, I can give them to you in spades!

One of the nagging questions about the Fed’s free lunch recovery scenario, is, oddly enough, the same nagging question that my wife has. Namely, "Where is the money going to come from?" To her, I readily list my personal sources of where this money is going to come from, namely maybe we’ll win the lottery or maybe a long-lost relative will leave me some money in his will, or maybe we will find an oil well in the back yard. To hear my wife tell it, it is all crazy talk, and she has some mindless, simplistic idea that there is one easy answer to all questions, one pithy Philosopher’s Stone that will solve all the riddles, and that Easy Answer is for me to, you know, go out and get a real job. "Oh, sure, if you want to take the EASY way out. But you don’t really want people to say that we are so lazy that we always take the easy way out, do you dear? Really?"

Ben Bernanke: Rising Bankruptcies

But I will admit, after long stretches of relentless grilling, that these are not truly viable sources of money on which to base our family economy, much less an entire national economic recovery.

According to the reports, I am not the only one asking this question. People are having such a hard time paying off their current debt load that they are going bankrupt in rising, and record-setting, numbers. The number of mortgages in arrears is also high and rising.

So where are we proletariat boobs out here going to get the money to buy all the stuff? Huh? Answer me that one freaking question, and I can tell you what the future will bring.

And since we can’t seem to come up with anything, we all agree that we will NOT be buying any stuff. And thus we must also agree that this is only natural, since borrowing money for the purpose of current consumption merely moves the Modigliani life-cycle stream of purchases forward to the present.

Stepping to the blackboard, I say in a voice that is far too loud and with my patent-pending, irritating nasal whine, "Here we are at the Present, P and we are proceeding through time to" (and I make a great big arrow leading all the way to the other end of the blackboard} "the future, F. And this implies, by mathematical imperative," (and here I write 2, subtract 2, equals zero, to show the mathematical imperative that I had just alluded to) "that there be LESS consumption, C, in the future, F, because you, Y, consumed, C, that future stuff, or FS, today, N. The future, F, being, of course, where this Big Economic Recovery Thing, or BERT, is supposed to take place, or TP. Which is, and I define ‘is’ to mean exactly what even Clinton knows it means, today, T, or P sub zero, or N, depending on which one I was using before I lost track of where I was, but anyway this is where the past, P sub minus N, and the future, F, meet."

By this time the blackboard is filled with N’s and P’s and T’s and all kinds of letters, and scribbled arrows linking them together in some psychedelic, madness-induced web of interconnections.

Ben Bernanke: Everything Happens in the Present

My voice rising in excitement and anticipation, I simultaneously beat and grind that poor little piece of chalk into the very surface of the blackboard with strength born of anger and betrayal, and, my voice rising to a fevered pitch, I continue: "And it is here, at the present, which is P, or N, or whatever in the dang-blanged hell you want to call it, THIS, and I mean right freaking HERE, is where all the crap happens!"

"It never happens in the past," I continue, absolutely convinced I’ve lost everyone in the class, but pushing ahead nonetheless, "P sub T minus 1. Ooohhh noooo! That would be too damn convenient! And your whole world doesn’t collapse around your ears in the future, F, either, ohhh noooo! It always happens right freaking now, RFN, in the present, which we angrily denote with that dagjabbity, blangity blang P, P, P, P!"

And then I draw a lot of arrows coming in from every angle to converge on the present, P. And then I hastily draw a B- 52 bomber flying above it all, and have it dropping bombs on that cursed letter P, too, and make very realistic explosion noises as the bombs explode.

"Kapow! Boom!"

And I draw lots of squiggly lines to illustrate bombs exploding and destroying everything. And then I draw a few bolts of lightning striking it, with the appropriate sound effect, and then I just viciously smash the poor little piece of chalk into it over and over, over and over, until the air is filled with a cloud of atomized chalk dust.

"But we just showed that Americans borrowed heavily, BH, to bring future more-consumption, FMC, into the present, P, which exported present less-consumption. PLC, into the future, F, which is now the present, P, whereas it was once the future, F, but now it is already the past, N sub T minus one. So what we have, canceling terms, collecting variables, is that current consumption, C, has been exported to the past, JQR, and less consumption, PMV, has been imported from the past, XCB, into the present, zippity doo dah, and that is why the future, FMXJRB, is, is, the, is…"

My voice trails of, and I collapse to my knees, head sunk to my chest in weary resignation, exhausted and spent by my valiant efforts. Confused and depleted, I am ready to just assume that the United States will win the lottery.


The Mogambo Guru,
for The Daily Reckoning

September 29, 2003

Mogambo Sez: The market will probably hold up until the end of the month as the end-of-quarter window dressing takes place, and as loser money managers sell their losers and buy the stocks that were winners.

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 takes 70% of the entire world’s savings just to keep Americans in the same place. Never before in history has so much money and credit been brought to bear on such a misbegotten project.

Just scroll down the headlines. The first to catch your eye might be:

"Second quarter GDP revised up…" According to the new numbers, GDP rose at a 3.3% rate during the 3-month period. Of course, dear reader, we know the numbers lie.

Housing prices – the biggest single consumer expense item – are going up nearly 10% per year. But government statisticians put the rate of inflation at only 0.4%.

What a marvelous, imaginary little world they describe!

Homeowners get to extract the inflationary ‘equity’ from their homes and spend it. If they buy a computer, every dollar they spend gets magnified 600% by a statistical legerdemain known as a ‘quality enhancement.’

All this fictional spending makes it look as though there were a boom. And inflation? The number crunchers seem not to notice that the whole hopeless boom can be traced to inflation in the housing market. But no one complains when his house goes up in price. Instead, he happily enjoys the phony boom – until he loses his job.

Here are the headlines that tell the important story:

"California median home price hits new high."

"Spending strong."


"US income fell, poverty rose in 2002…" (Addison elaborates below…)

"134,000 Lost Jobs in August Mass Layoff."

"Second-quarter after-tax profits fall 5%."

Consumers are still spending…thanks to rising house prices, low prices and EZ credit. But business profits are falling. Naturally, companies are laying off workers.

How can people with lower incomes and fewer jobs continue to borrow most of the world’s available savings? Good question. And two more: why do the lenders keep lending…and when will they stop?

We wait to find out.

Over to you, Addison:


Addison Wiggin, on the other side of the desk…

– "Despite the effects of the economic slowdown and recession," Republican shill from New Jersey, Jim Saxton, told the Washington post over the weekend, "terrorist attacks, and wars, the comprehensive measure of the household income has not plunged." Excellent…great news. Household income has not plunged!

– Median U.S. household incomes dropped for the third year in a row, according to a report filed by the U.S. Census Bureau on Friday. Nearly 1.7 million people in the U.S. fell into ‘poverty’…some 2.7 million jobs in the manufacturing sector were lost. The report sent politicians and spin-doctors of all stripes, flavors and stages of decay to the chalkboard. "How can we get [our guy] on the right side of these numbers?" Tom Daschle said this…Saxton said that. Who really cares?…Really!?

– The idea that the economy is producing rising incomes has been a fraud for several decades. As we point out (on pages 206 through roughly page 209) of Financial Reckoning Day, during the 1980s and 1990s median family income stagnated. For men, it fell…and the average family had to punch the time clock for an increasing amount of time each week just to keep food on the table. In 1979, for example, a man took home $677 a week on average. In 2000, at the height of the ‘boom’ 21 years later, he earned $33 a week less.

– "Without savings," we quote liberally from ourselves, "there can be no real capital investment – because there is nothing to invest. Instead there is only make-believe investment paid for with credit. Without real capital investment in profit-making new machinery, new plants and equipment people do not have high-valued added new jobs. Wages cannot increase, for companies are not really producing more and better goods and services. People are forced to work longer hours and go into debt, while their stock and real estate investments rise in value. This gives the illusion of financial progress."

– Once everyone thinks they’re getting rich…in a self- reinforcing vicious cycle…they’re encouraged to take on more and more debt, spend and consume, until the whole economy gets distorted. As if on cue, a CNNMoney article this morning confirms the severity of the problem – at least for your cranky and cynical editors. "Nationwide household liabilities," says the article, citing, "have grown 24% since the start of the recession, which is 10 percentage points more than during the last recession in 1991."

– But, keeping up with the Joneses can get rather expensive. The average consumer household in the U.S., according CNNMoney, carries $8940 in overall credit-card debt, holds 16.7 cards and owes $1363 per card. Likewise, the average homeowner owes $90,000 on his home by way of mortgages and an additional $30,000 in equity loans. The average vehicle loan is now in excess of $20,000. (Don’t even get us started on college loans.) As we’ve pointed out on occasion in these pages, personal debt as a percentage of GDP has risen steadily since 1982 – to more than 70% mid-2002.

– But for politicians, reports that suggest a high- consumption, low-saving economy is unsustainable in practice, like the Census Bureau report issued Friday, are simply annoying disturbances that need to be explained away…or used to blame the incumbent, sitting duck. Well, at least we’re used to it, huh? It is, after all, the eve of an election year. Who really cares? Really?!?

– Like politics, the lumps barely noticed…on Friday, the Dow closed down slightly…-30 to 9313. The Nasdaq fared slightly better…-25 to 1792…and S&P slightly better still…-6 at 996.


Bill Bonner, back in Paris…

*** The real investment risk comes from not knowing what you are doing, says Warren Buffett.

Insiders have been dumping stocks at a record rate. The smart money is using the rally to get out of its most woebegone investments. The outsiders have been buying them up.

"Bull market 2003: The worse the company, the better the stock," notes Floyd Norris in the NY Times. Just as the smart money shucks its mistakes, the dumb money takes them up with such enthusiasm the insiders are probably wondering if they should have held on.

Rarely does the lumpeninvestoriat know what it is doing. But today, it seems especially accident-prone, racing into the stock market at particularly dangerous moment. The floor is slimy with high prices. Profits are falling from the ceiling. And the whole structure is so full of gaseous credit it could blow up at any time.

*** Oh là là…Our book is selling well – hitting the best- seller lists of the New York Times,, and the Wall Street Journal. Of course, it is a new release…still not available in bookstores; sales are sure to decline after people get a chance to read it. (In the interest of honesty in advertising, we warn readers that it is a book of moral philosophy that is being offered in the investment section.)

Addison reports that on-line sales are so strong that ran out of copies. So, Addison directed buyers to our old friend – that Big River of No Returns bookseller, We have frequently made fun of AMZN, pointing out that the company was an imbecilic investment…and that Jeff Bezos seemed to have no clue what he was doing…besides separating investors from their money. Well, now that Amazon is selling OUR book, we have been forced to reconsider: Great company. Great stock. Love that Bezos fellow.

But what’s this? On Friday, the link that was supposed to direct buyers to Amazon where they could buy the book, didn’t work! How do you like that!? Error? Or sabotage? What are we to think?

*** The only person we know who has actually read the book is your editor’s mother.

"I read every word," she reported this weekend. "I thought it was excellent. Very well written. I just hope you don’t get sued."

"By whom?"

"By all those people who you call morons and imbeciles. They may be imbeciles. But they have smart lawyers."