Uncomprehending Disbelief

Deeper and deeper in debt, the U.S. founders…as the straw approaches the camel’s back…

The Fed, the Treasury and their willing co-conspirators have all suddenly waded much deeper into the swamp of monetary irresponsibility. The latest reports indicate that they are still there, wading around in fetid and feculent water up to their noses, but seem to be enjoying themselves immensely.

For example, let’s saunter over to the government debt area and ponder the news that John Snow’s Treasury borrowed another $38 billion in one lousy freaking week! One week! One! That’s thirty billion, plus another eight billion, for a total of thirty-eight billion dollars, in five business days! If I was a Southern Belle instead of the Manly Mogambo, I would surely catch the vapors at the news, and would raise the back of my hand to my forehead as I gently swooned, crying "Oooooh! Surely we are undone!" with a voice that dripped honey, with an accent thick as molasses and twice as sweet. But, of course, being the Mogambo, I stomp around the house fully armed in a state of terror mixed with anger, and just a touch of vengeful hatred for piquancy, dressed in full-body armor, psyching myself up for the assault by the government goon squad, which I figure is probably pulling up in the driveway right about, oh, now.

Like a little kid with a new toy, I think that I am getting the hang of using a calculator and would like to, you know, show off a little bit, so I had an interesting session with a calculator. But for some strange reason, whenever I multiplied $38 billion a week times 52 weeks in a year, I got a wrong answer. Guess what I got? I know you are going to laugh when you see it, and remember that the calculator was obviously broken, as I kept getting the answer $1.976 trillion!

Monetary irresponsibility: A Sledgehammer to the Skull

Seeing a number that huge is like getting hit with a sledgehammer to the skull, as you realize that no sane person would voluntarily plunge his own country farther into debt at that rate – and I am talking about amassing debt to the tune of 20% of GDP here! – so that is when I realized that the calculator was obviously broken.

And then, and this is the really weird part, not wanting to waste this opportunity for fame and glory, and maybe a little interest from pretty girls would be a nice touch, but I get up and start rummaging around in the house for another calculator, and whenever I found one, I would, with a single-mindedness and focus rarely found outside of the chronically mentally ill, again enter those same two numbers, and I would always get that same wrong number! After this happened four times in a row, a little light bulb went on over my head, and I said to myself "Hey, doofus! All the calculators in the house are broken!" All of them! I mean, don’t you think this is weird, weird, weird?

Anyway, the point is that all those calculators broke the exact same way, and at the exact same time, and whenever you multiply $38 billion dollars in one week times 52 weeks in a year, every last one of those calculators all give the ridiculous answer of $1,976 billion, which is $1.976 trillion. Dollars! In one year! Hahahaha!

And that comes to $7,057 for every man, woman and child in the country. Every living being in the nation is being plunged into more debt at an annual rate of $7,057. So if you are a family of four, meaning you, your spouse and your two charming children, then your total indebtedness is increasing at a rate that would equal $28,228 a year. Nice going!

But, and I find this hard to believe, no matter how hard I rub my eyes, it never goes away, the really interesting part is that the Congress, and this is one for the books, just passed the Prescription Drug Welfare Plan, or whatever it is called. Which is not even a temporary stimulus bill in the usual sense, but a gigantic new permanent entitlement, described by some as "the most sweeping expansion of the Medicare system since its inception." Hell, even the most wild-eyed, goofy optimists admit it will cost $40 billion a year forever! And by "forever" I mean "never," as this is just the start of a long, long and expensive, expensive road, and we have many, many layers of hell to transcend before we reach The Final Cost. And then I look at the short one-year time frame wherein all this borrowing would be taking place. And then I look at the $7,057 per man, woman and child in the country. And then I look at the one-year time frame. And then I look at the money. And then at the time. The money. The time. Money. Time. Money. Time.

Monetary Irresponsibility: Making a Huge Mistake

Suddenly overcome by a dizziness that appeared out of nowhere, I try and gather my senses, and I happen to notice that a nice chunk of the money, which bought all that new debt, came from foreigners with deposits at the Fed. And when I try and imagine who the people are that decided to buy that much U.S. debt, and who were so confident in themselves that they are apparently not the least bit timid or embarrassed to use $12 billion of their valuable money to buy U.S. debt, which is denominated in the dollar, which is a depreciating currency, meaning that it is not as valuable as it was yesterday, and one that will be even less valuable tomorrow and for many, many more tomorrows, I am struck by the realization that these self-same foreign morons are making a huge, I mean huuuuuuuuge, mistake.

Imagine that we turn on the TV, snuggling down in the sofa, and are looking in on an episode of Jackie Gleason and the Honeymooners. The scene opens with Ralph Kramden, entering stage left, who just came home from his job of driving a city bus. Throwing his jacket on the chair, he announces to his wife Alice, played by Jerry Mathers, oops, I mean Audrey Meadows, "Well, dear, I made a gigantic investment in a debt asset today! I am proud to say that it is one that is grossly overpriced, and so it already yields less than the rate of inflation, which is good, because I want to get away from that inflation stuff! And it is denominated in a currency that is going down in relation to ours, which I am told is a really classy move! So that in the future when we cash it in to pay for golden years, we will almost certainly get back less than we put in, in terms of purchasing power!"

Now, being a real stupid guy myself, I am very familiar with the scent of stupidity, and my sensitive nose – sniff, sniff! – detects one that is particularly ripe. But it is the look of stupefied, uncomprehending disbelief in Alice’s face that gets all the laughs.


The Mogambo Guru
For the Daily Reckoning

December 01, 2003

P.S. As Doug Noland reports, "foreign issuers of dollar- denominated debt continue to revel in unprecedented global dollar liquidity." Hey! Maybe those doofus foreigners are smarter than we thought! Borrow valuable dollars, with the promise to pay back worthless dollars in the future!

But foreigners are not the only ones at that game. Bloomberg figures almost $23 billion of corporate bonds were issued this week, "one of the strongest weeks of the year and the most in two months." Not to be outdone, "Year- to-date junk bond flows of $25 billion are easily a new record." And we already looked into the Treasury doing it, too.

—Mogambo Sez: This is all insane, as I have read many things about economics off and on through the years, and a program to print money to finance borrow-and-spend consumerism is pure lunacy.

And just because I can’t remember the last time that I ever heard of a lunatic’s ideas working out, doesn’t mean that lunatics don’t have a contribution to make on the altar of diversity-for-diversity’s sake. But, and you can’t help but notice, that they were also the ones who said that gold was a barbarous relic, and which had no value. And now gold is the best-performing asset for the last five years running! Makes you scratch your chin and say "hmmmm" about all the other things that they say, doesn’t it?

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.

"You Americans did it right," said the taxi driver this morning. "You cut interest rates quickly. So, you were able to keep employment up and keep the economy working properly. Here in Europe, I don’t know what’s the matter with our central bank. They don’t seem able to cut rates. They don’t seem to do anything."

When taxi drivers begin giving macro-economic advice, you know it is time to sell. But what?

Listening to the radio, our taxi driver, originally from Morocco, had picked up the rudiments of the economist’s game. If Ben Bernanke ever injures a muscle from cranking on the printing press too hard, he could fill in for him. When growth turns sluggish, cut interest rates. What more do you need to know?

"It’s not quite that simple," we tried to tell him. "When you have a consumer economy where everyone is already deeply in debt, all cutting rates does for you is coax people even more deeply into debt. People can’t go deeper into debt forever; they’ll run out of money to make the payments. Sooner or later, they have to cut back – and then, they’re in worse shape than ever."

"Worse, in the U.S….since American consumers buy so much from overseas, when consumer spending increases…it doesn’t really help the domestic economy very much. Only a third of the additional consumer spending, since the recession, has been used to buy U.S.-made goods. The rest went to create jobs overseas…and stimulate foreign economies."

The driver looked puzzled. It was as if we had told him that Santa Claus did not really exist. Then, where did all the presents come from, he wanted to know? "Maybe, but the U.S. economy is doing much better than Europe," he replied.

Reuters tells us that sales using Visa (that is, on credit) are up 12%. "Shoppers swarm to Bargains," reports another article. "U.S. retailers heartened by holiday sales," adds the Financial Times.

European shoppers, according to the International Herald Tribune, are shirkers and malingerers in comparison. IHT notes that industrial production in Europe is recovering (Addison has more details, below,) but that consumers remain "wary."

As a result, the world’s taxi drivers are convinced that America’s consumer-led economy is far more dynamic and buoyant.

Yes, the dollar hit an all-time low of $1.20/euro last week. "But that just hurts our exports and it helps you," our driver explained.

Daily Reckoning readers my be interested in this little comparison from Kurt Richebächer, an economist without a taxi medallion:

"We checked the numbers and found out that during the two- and-a-half years since end-2000, that is, since the creation of Europe’s common currency, America’s GDP has grown in nominal terms by a cumulative 9.9%, or 4% at annual rate. Cumulative, nominal GDP growth in the case of the Eurozone since then has been 11%, or 4.2% at annual rate."

Somehow, the chocolate-making countries of Old Europe manage decent growth – without luring their people into debt. So far, this little nuance has been missed by taxi drivers in Europe and central bankers in America. It is likely to come into vogue at about the time economics ceases to be such a popular subject.

Over to you, Addison…


Addison Wiggin with a look at the day’s financial news…

– Black Friday was "boring," a retailer in Connecticut told the NY Times. Taxi drivers in Paris might think the tide of spending in the U.S. is going to lift all boats, but retailers aren’t so sure.

– As you may recall, the day after Thanksgiving is traditionally known as Black Friday, because it helps retailers both shoot their accounts into the "black" and judge whether the holiday consumption fest is going to be a hit for the year…or not.

– "Consumers are telling me they don’t have money in their pockets," Marshal Cohen, senior analyst for the NPD Group told the Times, echoing sentiments made by Wal-Mart’s accounting department after they missed projections by a penny two weeks ago. "The economy is recovering, but they don’t see it yet." Total sales for the Black Friday weekend came in at 3% to 4% higher than last year’s…but that isn’t enough, say retailers. Last year’s 3-day spend-a-thon saw 12% growth over the year before.

– What’s at stake? Oh là là…dare we ask?

– "Why Americans Must Keep Spending" another NY Times piece attempts to explain. The almighty American consumer spends roughly $7.6 trillion a year in goods and services. By comparison, the government dumps $2.1 trillion into the nation’s tills each year; businesses another $1.2 trillion. "Nothing props up the economy more than consumers, and dips in their spending frighten forecasters," says the Times. Fortunately, for forecasters’ tickers, going all the way back to 1947 – 227 quarters worth of activity – the American consumer has been prepared to chip in and do his part.

– "In only 20 of these three-month periods," says the Times "did a drop or weakness in consumer spending curb economic growth or weaken an expansion. Most of that occurred in the early decades. Only three times in the last two decades has consumer spending faltered enough to damage the economy – twice during the 1990-1991 recession and once as the slow recovery got underway."

– But what will happen this year? As you might expect, the consensus view is nothing but, well, rosy. An outfit who’ve called themselves Blue-Chip Economic Indicators published a survey in which all but 51 economic forecasters "grow more strongly in 2004 than [they have] in the past 33 months." The chief economist at Bank of America confidently proclaims: "The economic upturn does have staying power."

– Of course, your editors can spot a wilting petal on any short-stemmed American Beauty. "It is hard to construct a happy story for 2004," says Mark Zandi at Economy.com, "unless we consistently create a significant number of jobs, which we have not yet." The Fed’s Bernanke says we need about 150,000 jobs a month for an "considerable period." Jared Bernstein at the Economic Policy Institute says that figure is probably closer to 300,000. That’s how many it’s going to take to put income back in the mits of over 3 million would-be consumers who’d be more than happy to get back work.

– While after-tax disposable income has risen by 3.2% over the past year, the Commerce Department says most of that comes from mortgage financings and tax cuts. "Real wages" have been stagnant since the nation was mesmerized by the term ‘dimpled chads.’ "Nonlabor sources have been the sole driver of real disposable [income]," the EPI’s Mr. Bernstein reports.

– The rest, of course, comes from the dreaded ‘D’ word. Ever since 1973, personal consumption has risen at a faster annual rate than personal income. "What happens when income falls short," the Times quotes Elizabeth Warren, author of The Two Income Trap, "is that people start increasing the risks they take to keep up their spending…Cut off from mortgage refinancing, they turn to home equity loans…[and] if they [still] cannot pay their debts, to personal bankruptcy. Bankruptcies have risen in each of the last three years."

– But that’s okay…under the prevailing recovery scenario, consumers only have to drive themselves deeper in debt until their credit cards begin spawning hundreds of thousands of jobs a month. They’ve done it with relative ease since 1947 – why not this time, too?

– Of course, a thoughtful investor might look at this trend and think, "Hmmmmnnn…that’s a trend that can’t go on forever." Then, he might make plans to get his money as far away from the fictitious rebound as possible. Last year’s spending season, for example, proved to be a big disappointment for retailers. A more daring investor might try to trade options on the retailers over the holidays or into the new year. But beware. "Bear markets are more violent than bull markets," writes our new friend Dennis Gartman, by way of John Mauldin’s weekly e-mail "and so also are their retracements."

– The markets barely moved on Friday…traders were sleepy, and volume was light. In Europe, however, news that European manufacturing was up for the third straight month hit the benchmark red wine indicator hard. The dollar closed at an all-time low against the eur $1.20. Though we pontificate and forecast it, your rouge-elixir-quaffing editors at the DR HQ still find it a shock each time the greenback finds its way to a new low.


Bill Bonner in, er, Paris…

*** "I have a cousin who lives in Pennsylvania," continued the taxi driver. "She tells me how nice it is in America. Anybody can get a job in America, she says. Here, it’s a different story. They practically make against the law to hire someone."

*** We conclude little from this morning’s taxi ride than that Popular Economics is in a bull market, if not a bubble. When taxi drivers start recommending stocks, you know it is time to sell. But what do you sell when taxi drivers recommend macro-economic strategies?

Everything, is our answer – stocks, bonds, real estate …and especially the dollar. Asset values depend on investors’ misplaced confidence in economics. They don’t seem to realize that economics – as currently practiced – is only one part science, one part experience and 10 parts flim-flam.

But if we sell everything, what do we do with the money? But gold, is our answer. Gold is an antidote to humbug economics. It makes no predictions. It makes no recommendations. It offers no analysis, no prescriptions, and no excuses. It is the asset-of-last-resort – to which investors turn when they realize that their leading economists are frauds.

*** We asked our friend and gold expert Paul van Eeden what he thought of buying Durban Deep:

"I don’t like it. If the U.S. Dollar gold price increases, there is no reason to believe that the South African Rand gold price will increase as well. Durban Deep’s assets are marginal and, in my opinion, the stock is grossly overpriced even for a leveraged play on gold. Durban’s assets give you much less leverage to upside in the gold price than, say, Harmony, which is a better company. Durban is also almost always on the verge of bankruptcy and management is not of the same caliber as other South African gold companies that I would rather own if I was going to invest in the country.

"It may sound like Durban could be a contrarian play on higher gold prices but I don’t believe it is. Sometimes buying a poorly managed company with below-average assets and a weak balance sheet is just not worth the risk."