The Sunny Optimism of Youth

Mogambo on Monday! In today’s episode, our hero works his way into a frenzy over the op- ed pages of the Wall Street Journal. [Warning for children: there may be violent scenes involving Russian-made automatic weapons in the following drama.]

"Economists expect the economy to grow a healthy 4.4% next year."

– The Wall Street Journal

Let’s do the math.

A 4.4% growth in the economy at the same time that the government is running a 4.9% (as a percentage of GDP) budget deficit is NOT healthy by any stretch of the imagination. And believe me when I say that. My imagination is so huge (right off the bat, the audience shouts out "How huge, Mogambo?") that I can imagine women actually spitting on me, kicking me in the groin, and spraying Mace in my eyes, are really just flirting with me in the cute way that they do…(at least as is alleged in official court documents).

I don’t know who these people are that are being called "economists," but I say that anybody who thinks that the economy will grow "a healthy" 4.4% is a world-class idiot. As a world-class idiot myself, I am in a position to know.

These "economists," I assume, are the same lackluster dimwits as the "they" in this follow-up sentence: "They also expect inflation excluding food and energy to rise half a percentage point, to 1.8%." This proves two things at once, showing a huge increase in productivity, because most of us can only prove one thing at once. One is that inflation, which is already higher than 1.8%, cannot "rise" to 1.8%, by mathematical imperative. And the other follows naturally, namely that American economists are obviously numerically illiterate.

Inflation Creation: Holding Interest Rates Down

"Remember Inflation?" asks John Lipsky, chief economist for JP Morgan, on the op-ed page of the same edition of the WSJ. "The Fed is going to wait longer than investors currently anticipate before raising rates. But once inflation risks begin to rise, the Fed will act quickly to withdraw the existing stimulus." Hahaha! Every single indicator of inflation is rising, and HAS been rising, and yet the Fed is still holding interest rates to absurd lows!

As I write, the Reuters CRB Index, an indicator that tracks 17 different commodities, from live cattle to crude oil, has risen 11 percent this year. Gold is $407 an ounce, up 17 percent over the past year. Copper is up 39 percent, oil 31 percent, and natural gas prices are 51 percent higher than at the end of October. In addition, the dollar has dropped to record after record low against the euro and has fallen to its lowest in more than a decade versus the British pound. "The fall of the dollar," adds Bloomberg, "helps boosts the price of gold and other dollar-priced commodities on international markets and also makes imported goods more costly."

So…what kind of jerk does this Lipsky character think I am that I would believe that the Fed would act with any haste, at ANY level of inflation, when they are already proving that they have absolutely no interest in inflation, OR its deleterious effects, whatsoever, and in fact, and this is the important point, they are doing everything they can to create MORE inflation?

At that I abruptly stop laughing.

"Central bankers became convinced that maintaining low and stable inflation produces the best possible outcomes," Mr. Lipsky writes. Huh? I mean, what planet am I on? Is this still early twenty-first century Earth or not? If so, then the damnable Fed is on record, Greenspan is on record, Bernanke is on record, and I assume that even the mailroom clerks at the Fed are on record as saying that they WANT higher inflation! They are screaming loud and clear that they do NOT want, as Mr. Lipsky says, "low and stable inflation!" That is the whole freaking point of their monetary insanity!

Inflation Creation: Goodbye, Cruel World

And yet, here is this Lipsky fella telling me the exact opposite? The mind reels, and I stagger and collapse into a chair, clutching my chest and gasping for air! I sense the world fading to black, as black as my mood, and as I mouth the words "Goodbye, cruel world!" I suddenly remember, and am cheered, that I don’t have any money under management at JP Morgan.

While us bozos out here in the real world still live in our fantasy world, where rising prices are evidence of inflation, the Fed says "no". They figure that productivity, output per hour of labor, is rising, offsetting the rise in raw materials. "While the supply of some commodities may be temporarily scarce, raising their price," writes Lipsky, "the supply – and price – of workers is not. That enables companies to absorb the commodity price increases without passing price increases on to consumers."

To which I say, hahahahaha! You crack me up! Hahahaha!

I am already laughing like a hyena, when I spy, right there below Lipsky’s effluence, on the same page, another piece of ridiculous fluff, this time by Joshua B. Bolten, who is the director the Office of Management and Budget, which is apparently an office of government wonks that employs mental defectives as another affirmative action-type thing. His asinine screed is entitled, "We Can Cut the Deficit in Half."

First off, Mr. Bolten traces the "roots of today’s deficits" to the economic slowdown as Bush took office, three freaking years ago. Next, he implies that deficits are not as important as Bush’s policies, namely national security. Wow! Talk about your government-speak! Fiscal rectitude is not as important as policy!

Mr. Bolten is clearly a government spin-meister. Of course, deficits don’t matter as long as they pay for something nifty and wonderful. We are doofuses for sure, if we can’t see that. Mr. Bolten goes on to explain how three-quarters of the deficits are directly related to the post 9/11 "enhanced homeland security and the global war on terror" as if, somehow this justifies immense budget deficits. As if this bottomless pit of spending madness will somehow metamorphose into healthy economic growth…or something.

Inflation Creation: Restraint?

Then Bolten, and notice that I have dropped the "Mr." because I am obviously working myself into one of my foul moods and I am this far away (let the record show that I am holding up my thumb and forefinger, and that they are almost touching each other) from calling him a lowlife insect, probably something that crawls around in sewers, then says that the budget deficit is "entirely manageable, if we continue the president’s strong pro-growth economic policies and sound fiscal restraint."

The audience spontaneously laughs at my exaggerated double- take, my head snapping around comically and my hair standing straight up into the air – fweep! – as I perfectly portray a man who cannot believe what he just heard.

"Restraint"?!?

This is the same guy who has run up the national debt by $1.3 trillion dollars in three short years! This is the same guy who is running a budget deficit of 4.9% of GDP! This is the same guy who has not vetoed a single spending bill in the entire three years of his administration! "Not one?" you ask in that darling and delightful way that melts my heart. "Not one lousy veto of any spending bill?" Nope!

And this is, and you would laugh if you saw me because I am comically rubbing my bloodshot eyes in stunned disbelief at what I am hearing, what the author calls "fiscal restraint?"

Huh? Did he say "fiscal restraint?" Did he really say "fiscal restraint?" And right around in here someplace is where court-appointed experts figure that I was overcome with emotion, and, compelled by forces that I could neither comprehend nor control, was propelled to action. I grab a fully loaded AK-47 that just, you know, happened to be leaning against the desk, and jump up on that selfsame desk and scream at the top of my lungs, "Did he say fiscal freaking RESTRAINT? I can’t believe my ears! But I thought he said that the President of the United States is showing fiscal freaking restraint! RESTRAINT? You want restraint? I’ll show you a little dang-blang restraint!" I proceed to throw that rifle into full-automatic mode and, holding it down low against my hip like John Wayne storming a machine- gun nest on some God-forsaken Pacific island in WWII, proceed to empty an entire banana clip of full-metal jacketed mayhem, shooting out all the lights in the place, plaster exploding off the walls and ceiling, framed pictures shattering in a hail of glass splinters, passersby and process servers ducking for cover, a cascade of smoking empty shell casings beating a tattoo of tinkling sounds as they hit the floor.

Well, at last, the fusillade of gunfire is finished, and the silence that follows is punctuated only by the ringing in my ears and the sound of approaching sirens, and I sink to the floor, spent and exhausted, too weary to even reach for another full clip of ammo. But it isn’t really needed, as I am sure that you get my point, which is to demonstrate "restraint."

But the next day, Friday, the Wall Street Journal had an op-ed piece by Brian S. Weebury, entitled "Keeping the Bush Boom Alive." In it, he owns up to the horrific state of the economic world, and says, "Nonetheless, beneath the surface problems are brewing. Government spending is soaring, business regulation is on the rise, and protectionism is gathering some momentum. At the same time, excessively accommodative monetary policy threatens an increase in inflation." Later he reprises that with "Big government and easy money is the perfect recipe for inflation."

And he has some suggestions on how to make this all work out, as if there is anything anyone can do to make it all work out, and I am charmed by his brave self-confidence, and the Mogambo smiles to himself, as if to say, "Ahh, little grasshopper! The sunny optimism of youth! To hear you is to make me remember my own youth, and I smile."

Sincerely,

The Mogambo Guru
for The Daily Reckoning

December 22, 2003

— Mogambo Sez: We are getting to the end of the portfolio fraud season, where the accounts are totaled up, losers are sold and the winners accumulated, and blame and losses are shifted to somebody else, and things are done and mistakes are made, and all of the other slimy things that occur whenever huge amounts of money are involved, because if there are huge amounts of money involved, then the government is not far away, and that is the path to utter ruin, QED.

But soon it will be the new year and a new game, and it will get worse and worse in every material respect, day after day, until some unforeseen event causes the whole thing to just, one day out of the blue, go "bang!" And that, and I am talking about at that exact moment, when you fully comprehend, in a flash of incandescent, total enlightenment, the real value of gold.

And soon after that you will have another epiphany, in which you will comprehend the great value of cannons, and guns, and bows and arrows, and knives, and pitchforks, and machetes, and axes, and slingshots, and clubs, and sharp sticks with which to fend off the mobs of suddenly impoverished people who ALSO have suddenly comprehended the real value of gold, and they don’t have any, and in fact they don’t have anything anymore, except debts and creditors hounding them day and night, and then after a while you get tired of answering the phone and trying to explain to one collection agency after another that if I had any money then I would certainly be happy to send it to them, but as it turns out I don’t have any money and so why don’t they just stop calling, but they never do, and then I finally just stop answering the phone, and turn off the lights and cower in the corner behind the sofa and use some throw pillows to cover my ears to try and muffle the sound of the phone as it rings and rings and rings and rings…

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.

A scam pretending to be a mountebank.

That is the problem with the ‘recovery,’ dear reader. You cannot simply pull off its fake beard and show the world what it really is. Because beneath the beard is a mask…and under that is a false moustache.

Unemployment is said to be declining…stocks are said to be going up…the economy is said to be growing at a near- record pace.

If you don’t look too hard, it could pass for a ‘recovery.’

But yank off the beard and the unemployment numbers appear pathetic for this stage of a real recovery…and the jobs that are being created are "restaurant hiring" – low-wage, low-value-added service jobs.

Stocks are going up, but if you adjust prices for the fall in the dollar, Americans have gotten no richer.

And the economy? Take out government deficits, military spending, tax cuts, hedonic adjusts and other one-time flukes and frauds…then adjust the number for the fall in the dollars….and the economy is not growing at all.

But that is only the scam. Even if all these numbers were true, the ‘recovery’ would still be a mountebank – for the pace of it only measures the rate at which Americans ruin themselves. Already deep in debt, with a national savings rate near zero, Americans can only increase their spending by borrowing and spending more! Yet, that is what the Fed and the Bush administration are banking on…and what is applauded on Wall Street and CNBC. Everyone is counting on the American consumer to continue being the world’s patsy- of-last-resort…buying what he doesn’t really need with money he doesn’t really have, impoverishing himself and his nation.

As recently as the mid-80s, about the time that Alan Greenspan took over at the Fed, America’s accounts with the rest of the world were even. Now, we’re $3 trillion in the hole…and going deeper in the hole at the rate of $500 billion per year. Our dollar is falling…and soon will no longer be the world’s reserve currency. And our ability to earn money – by making and selling things – is being exported overseas!

Most of human striving, scratching, and grasping is really only intended to make a man feel superior to this fellows. When he succeeds, at least he can honestly pound his chest and howl. But he is a pathetic sight when feels himself superior and pounds his chest…all the while he is actually slipping behind.

Over to Eric for more news:

Eric Fry, writing from Manhattan…

– A "credible and imminent" threat of terrorism in New York City spooked the stock market Friday morning. Around noontime, ABC News reported U.S. intelligence had received information that New York City could be the target of a terrorist attack, possibly by a female suicide bomber. Share prices dropped immediately, but recouped most of their losses later in the day after the Department of Homeland Security said it could not confirm the threat.

– Despite the specter of imminent, life-threatening terrorism, your New York editor bravely strode down Park Avenue yesterday afternoon to buy a double espresso at the 23rd Street Starbucks. He passed many females en route, any one of whom could have been a suicide bomber. He maintained an acute vigilance while standing in line at Starbucks, closely eyeing each and every female in sight, solely for the purpose of national security, you understand.

– Happily, the bomb threat proved to be a dud and New York City enjoyed another terror-free day. But a credible and imminent threat remains…down on Wall Street. From our vantage point, the pricey stock market poses a credible and imminent threat of capital destruction. At any moment, the stock market might catch a financial trip wire – like a dollar crisis, for example – that would rip apart investor confidence and blow a few thousand points off of the Dow Jones Industrial Average.

– But maybe we shouldn’t worry about such risks. After all, if we live in fear, the terrorists (and short sellers) win. So let’s look on the bright side. All week long, one government agency after another issued reports showing renewed economic vitality: Inflation is tame, factories are humming, leading economic indicators are pointing skyward, houses are selling like ‘Nelly’ CDs and yes, the stock market is surging higher.

– So ideal is the world we inhabit that the Dow Jones Industrial Average established a new 19-month high four days in a row last week. The blue-chip index gained 2.4% for the week to 10,278. But the rallying Dow provided no boost to the struggling dollar, which shed another 1% of its value against the euro to $1.237. Meanwhile, the gold price dropped for the first week in four, slipping 20 cents to $409.90 an ounce.

– We can find much to like about this economy of ours, as long as we don’t examine it too closely. Initial jobless claims are trending downward…and that’s a good thing. But the quality of the employment growth leaves something to be desired.

– "It is important to examine the quality of the jobs gained relative to those lost," the Economic Policy Institute observes. "Over the course of the recovery (from November 2001 to November 2003), 1.3 million jobs in manufacturing have been lost, 272,000 jobs in information services, and 93,000 jobs in professional/technical services, all sectors that pay above-average wages. At the same time, jobs have been added in administrative services and accommodations/food services, two lower-wage sectors."

– In other words, compared to the job market of the latter 1990s, many of the new jobs added in this recovery pay relatively low wages. "Over the past two years," the EPI continues, "expanding industries paid $14.65 per hour, while contracting industries paid $16.92…In percentage terms, expanding industries now pay 13% less than contracting ones; in the 1998 to 2000 period, growth industries paid 12% more…This dynamic, in tandem with the fact that wages are rising more slowly within specific industries right now, has the potential to significantly slow the growth of living standards for working families."

– Not to worry, says Paul Kasriel, Director of Economic Research at Northern Trust. "2004 promises to be a year in which the global economy grows at its fastest pace since 2000. Not only is global growth likely to be strong, but widespread as well. Why the optimism for 2004? For starters, the largest economy in the world, the U.S. economy, is forecast to grow in excess of 4% in 2004 – its fastest growth since 1999. A combination of very aggressive monetary and fiscal policies finally appears to be getting some traction."

– In other words, the Fed’s low interest rate policy, combined with Treasury’s dollar-annihilation policy will enable the American consumer to continue spending money he doesn’t have on things he doesn’t need. A kind of statistically pleasing economic growth will result.

– At the same time, the Chinese yuan money supply is now growing in excess of 20% a year – a phenomenon that is stimulating the Chinese economy. To a lesser extent, other Asian central banks are doing the same thing as the PBOC. It all adds up to a booming global economy, resting on the shaky foundation of a soaring global money supply.

– Is economic recovery really this easy? Can the world’s central banks "manufacture" prosperity, merely by keeping the printing presses running during the graveyard shift? Are pigment and parchment the keys to global prosperity? We, as usual, are dubious.

– "What could go wrong?" Kasriel wonders. "The biggest risk to this optimistic global economic scenario would be a run on the dollar. If this were to occur, it would result in spikes in U.S. inflation and interest rates…But this is more likely to occur in 2005. So, sit back and enjoy 2004, which is shaping up to be the best year for the global economy since 2000."

– Yes…enjoy…but don’t forget to salt away a bit of gold from time to time.

Bill Bonner, back in Ouzilly…

*** Oracle pleased investors with its announcement that sales had risen 8%. Many of the sales were made overseas…and adjusted back into dollars, the increase was only 1%…but investors seemed not to notice. Nor did they seem to mind the accompanying announcement that Oracle was letting 1,364 employees in the U.S. go. It will, meanwhile, add 1,334 employees overseas.

We did not check, but we wouldn’t be surprised if many of these new employees were hired in India, which seems to be picking up more and more jobs in the software/service sector.

*** A recent issue of India Today comes with the cover headline: "Champion of the World." In the race of global economic competition, India says it is the lead position…and pulling away.

The numbers are suspect, but India has one of the highest GDP growth rates in the world. While China hogs the headlines, India is where English-speaking outsourcers look first when they are trying to cut costs. The country is a bureaucratic mess, as everyone knows. But it is growing fast…with a labor pool that is nearly as big as China’s and growing at a faster rate. In terms of mouths to feed and hands to employ, India is expected to surpass China in less than 2 decades.

India is a relatively free country. China is relatively unfree. From the little we can tell, India’s growth is chaotic, but real. China’s growth, by contrast, has developed into a bubble…based largely upon lending to customers (Americans) who cannot really afford to buy. China’s bubble is destined to blow up…like all bubbles…and lead to God-knows-what kind of problems – social, political and economic. India’s growth – while less visible and understandable to the outside world – may actually be more durable.

*** It is the Christmas holiday season. We have brought the whole family to the country for a week of conviviality.

Our oldest son, Will, has come from Florida, bringing his fiancée. Our daughter, Sophia, has returned from her college in West Virginia. Our mother has come back from her visit to Virginia. And the rest of the family has come down from Paris.

Our friend, Michel, has taken a keen interest in India. He is convinced that China is a giant fraud and compares it, unfavorably, to India at every opportunity. He has also become a fan of Bollywood – India’s huge film industry – and is fascinated by all that it produces.

Last night, the family settled down to watch one of Michel’s favorites – Gadar – a movie in some subcontinent language, with subtitles in some form of English. At first, we all laughed at the odd translations, stylized acting and strange song and dance scenes. But gradually the film engaged us and then finally captivated us.

"It was ridiculous," said film critic, Maria, "but we liked it anyway."

The theme is a love story, which takes place at the time of the partition of India and Pakistan in 1947. Despite what appears to us as an undeveloped or even naïvely simpleminded view of courtship, the film’s presentation of politics is remarkably sophisticated and cynical. There is not a single politician, military man, or bureaucrat in the film who is not a moron or a scoundrel. And every scene of collective action is a horror of mob violence. The most ‘political’ character in the movie is a lunatic who has lost his mind and talks incessantly of liberation from the British and the glories of the new India. He is, alas, a Pakistani, mortal enemies of all Indians!

The film’s hero, an Indian, almost single-handedly defeats the entire Pakistani army, wielding a pump that he has pulled out of the ground.