A Free Lunch on Easy Street

Americans are living way beyond their means…and the Mogambo wonders how much longer it can last. He knows that borrowing and spending one’s way to prosperity never works out…but try telling that to everyone in Consumerland.

So, do you every wonder what the Chinese are going to do with all those dollars they are accumulating? Did you ever wonder if maybe they wake up in the morning and think to themselves, "Hong choi hin gong?" which, of course, means, "I wonder how much value those damn American dollars lost last night?" Well, wonder no more! They have decided to buy things with them before they turn into just worthless paper, which will probably be a lot sooner than anyone thinks. If you don’t believe me (and if you DO believe me then there is something very wrong with you, so you deserve whatever bad happens to you) let’s just see what some other fine folks have to say (and for the record, these are people who think as YOU do, namely that the Mogambo is a loudmouth jerk, so at least you have something in common!) For instance, over at the Christian Science Monitor, there is an article, China’s Risky Scramble for Oil, by David R. Francis that starts off noting that, "The average American consumes 25 barrels of oil a year. In China, the average is about 1.3 barrels per year; in India, less than one."

We’re gluttons. I know that you think it looks bad to criticize us Americans as gluttons when I have just stuffed an entire donut, dripping with delicious icing, into my mouth at once, and now my cheeks are puffed out and I look like some kind of deranged squirrel, and when I talk, I sound like, "Mmfph gmgg thmmnqnn!" But there is a reason for that; by eating the donuts as an integral, audio-visual aid and, as such, is a necessary part of the class lecture, they are a tax deduction! And the fact that I originally borrowed the money to buy the donuts means that, net net net, I am MAKING money by eating donuts! Man! Why didn’t I think of this earlier? This is the best plan I ever had!

But, sadly, my brilliant Mogambo tax windfall bonanza (BMTWB) is not going to have much of an impact on my lifestyle, because I consume a lot fewer donuts than I do barrels of oil. And it is going to get worse, too, as Mr. Francis goes on to say, "So as the 2.4 billion Chinese and Indians move to improve their living standards, they’re going to want more oil – likely more than can be produced. That perceived shortage is setting off an intensifying scramble to tie up oil reserves around the world. So far, China has been the most aggressive player. But the competition is just getting going."

Economic Gluttony: How Strong Is the Competition?

How strong is the competition? Well, I know that everybody in the whole world is out to get me, personally, and so I assume that the selfsame whole world would all like to take oil and donuts right out of my mouth, the greedy bastards. Not much help, I admit, but it gives you a certain "perspective" on things. So, in desperation we turn to Mr. Francis again, and in reply he writes, "The challenge is huge. For China and India to reach just one-quarter of the level of U.S. oil consumption, world output would have to rise by 44 percent. To get to half the U.S. level, world production would need to nearly double."

I love this kind of thing! I grab you by the front of your shirt with my grubby little fist, and haul you in close to my face so that I can look deep, deep, deep into your eyes, and I say, "World oil output is maxed out, and refining capacity is maxed out, too, and so just where in the hell is all of this additional output going to come from? Hahahaha!" Then, I say that if there is one thing that I am pretty sure is true, and it is that when demand exceeds supply, the only way to equilibrate the two forces is for the price to go up. And although I have never actually shown a profit in my life, (or even been near one, as far as I can tell), mostly because I am an incompetent loser whose entire inventory of managerial skills ranges from "bad" to "nonexistent", I have HEARD and READ about profits, and as I understand it, you would make a profit if prices go up.

I just happen to have a copy of The Mogambo Unabridged Dictionary (TMUD) nearby, so it is child’s play to look up "competition." There are, of course, many alternate definitions. But we are interested in the one definition categorized under "Competition, resource, international, long-term, price action; phases of. Page 4744." So we go to page 4744 and we read that, in this case, it is defined as, "A period of time when prices start heading up, leading to a time when prices are still heading up, which leads to a time period where prices have seemingly always headed up, culminating in a period when prices continued to go up but that, suddenly, stop going up. Over the long-term, even at relatively low levels of inflation, prices will rise enough to make your freaking eyes pop out of your head".

As a result, "The growing demand for oil is leading to a growing global conflict," warns Amos Nur, who is a geophysicist at Stanford University. And if you don’t think so, too, then ask the people of Iraq if they have noticed any conflict with foreigners.

But it is not only oil! Oh, no! As Jim Willie reports, that the Chinese are making bids to, for starters, acquire Noranda Copper, gobble up vast tracts of undeveloped land in Alberta’s energy fields, buy up Australia and Brazil to secure large supplies of minerals, and buy the American energy firm Unocal. Mr. Willie says, "The captured booty will be mineral and energy properties, which will elevate the tone of the commodity bull market and eventually trigger a bidding war on mining and energy stocks in the coming years. Political fallout is certain. Tensions will heighten".

But it isn’t just the Chinese, either! Man, it just keeps getting worse and worse! He goes on, like driving a stake into my heart, to report about how "A newly coalesced group has formed. Greater Asia has banded together to form the Shanghai Cooperative Group in order to create what could become a more powerful commodity supply organization than OPEC itself. China, India, Russia, and the former Soviet Moslem Republics form the nucleus."

Economic Gluttony: No Free Lunch

So what does this all mean? I have my own ideas, most of which revolve around me eating an entire pepperoni and sausage pizza, but perhaps Mr. Willie can come up with something better. And sure enough, he does! "My conclusion," he says, "calls for an amplification of current trends in a declining U.S. dollar and rising commodity prices, with the added risk of the U.S.A. locked out of markets." You mean that China and India and Russia and the former Soviet Moslem Republics that he talks about might want to hurt us? Why? Didn’t we spend most of the last century kicking all their nasty little butts and humiliating them? Wasn’t that enough already? They want ANOTHER little taste of American competition?

This is very alarming to me, mostly because I am the easily excitable type, but also because we Americans are living waaaAAAAaaayyyy beyond our means, and have been for a long, long time. And that means that OUR standards of living are going to have to come down. And they are! When the prices we pay for things go up faster than our incomes (with which we pay for those things), our standard of living is falling! So, welcome to the future, chumps! There ain’t a damn thing anybody can do about it, because believe me when I tell you that every dirtbag government that ever lived, and every economist that ever lived, have ALL sought the Holy Grail of somehow magically managing things to produce a Utopian "prosperity without earning" and "getting rich by amassing un-payable debts."

So far, and wait a moment as I tally up the final score, we have all failed miserably in our quests for A Free Lunch On Easy Street (FLOES). Not one of us even came close. The lesson seems to be that a country and everyone in it cannot continually borrow and spend their way to prosperity, no matter how much we want to, or how cool that would be, or how many Congressional buttheads say that they can. But you can borrow and spend yourself into bankruptcy and ruination. And you WILL, too, if you ever try that stupidity.

The end-result of inflation is always heartbreaking. And that is why all intelligent people have strenuously tried to avoid inflation, until the suicidal idiocy known as the Greenspan Fed took over in 1987.


The Mogambo Guru
for The Daily Reckoning

January 31, 2005 — Paris, France

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.

The Mogambo Guru is quoted frequently in Barron’s, The Daily Reckoning and other fine publications.

Hyperbole is under priced.

At least, it is when people become delusionally comfortable. As long as everything is going well, the "end of the world" gets no respect. People will pay nothing to protect themselves from it; they think it will never happen.

"In the end, the Davos crowd drew its greatest comfort from the passage of time – that an unbalanced world survived yet another year without a disruptive outcome in financial markets."

The sentence comes from Stephen Roach, chief economist for Morgan Stanley, reporting on the mood from the World Series of Humbug in Davos, Switzerland. Even the most celebrated economists in the world couldn’t resist the temptation of complacency. If nothing bad has happened so far – it will never happen.

And thus, day-by-day, more straws are laid upon the American consumer’s back. And day-by-day, the world’s movers, shakers, economists, investors and kibitzers grow more convinced that there is no limit to the bales that the poor schmuck can take.

Last year, the dollar fell. This was supposed to lighten the load. Americans were supposed to buy less from overseas (because it had become more expensive) and U.S. firms were supposed to sell more to overseas consumers (because they were more competitive.) Instead, the gap between what Americans imported and what they exported grew larger!

The world economy became more unbalanced than it was before. And now the U.S. consumer carries more debt weight around then ever before – about $10 trillion worth. And while his burden grows, his strength diminishes. We reported the shocking news last week that real wages in America actually fell last year. Today’s news brings elaboration, from Reuters: Nominal wages rose 2.5% last year, begins the report. But inflation rose 3.3%, resulting in a loss of purchasing power of 0.8%. At the low-end of the income scale, however, the damage was more severe. People earning less than $21,000 saw paychecks down by 1.7% – not to mention inflation. How is this poor fellow going to pay back his loans?

And here comes the hyperbolic guess: he isn’t. Instead, he’s going to go broke. He is only making ends meet now by taking out loans on his house, if he has one. When the extraordinary increases in house prices stop, more than 10 million houses will become insolvent.

This week, the Fed meets again. Most likely, it will continue its pattern of rate increases – putting up the key rate to 2.5%. With inflation over 3%, this means that the Fed is lending money for less than its loss in purchasing power. The difference is free money, since it costs nothing to get it. Shrewd investors are taking advantage of the Fed’s offer by borrowing short and lending long. The 30-day yield is more than two points higher. This too, seems like free money – since there is no danger that the U.S. government will default.

What happens, Roach explains, is that the buying of long-dated Treasuries compresses yields and drives investors to reach for higher returns from riskier investments. Junk bonds have become very popular with sophisticated investors. Real estate speculation has become popular with less sophisticated ones.

But as time goes on, and nothing bad happens, the risk seems to disappear. The world economy still rests on the shaky shoulders of the U.S. consumer. Even as his knees quake and back quivers, investors worldwide are convinced that the American consumer has become "too big to fail." The Fed may raise rates a quarter point. But it will not raise rates enough to upset consumers.

And there you have the remarkable scene, dear reader; that is our world economy, circa 2005. Nothing can be done to topple the U.S. consumer. Nothing can be done to slow his borrowing and spending. Nor can anything be done to lighten his load. Instead, day by day, more debt is added on…while investors imagine that, if he hasn’t buckled yet, he never will! And day by day, hyperbole – the over-the-top quibbles and kvetches you read here in the Daily Reckoning – get less and less respect.

More news, from our currency counselor:


Chris Gaffney, reporting from the EverBank trading desk in St. Louis…

"In typical fashion, Chinese officials did an about face on the possibility of currency revaluation…Chinese Vice Premier Huang Ju and deputy central bank governor Li Ruogu said they want a ‘stable’ exchange rate."

Bill Bonner, back in Paris…

*** Our remarks, above, will come as old news to the long-time Daily Reckoning sufferer. We mention it merely to remind us where we are. A mariner, crossing a great ocean, will wake up each day and look out. And each day, the sea will look much like the day before. After a while, he will begin to think that there is nothing but sea…that the ocean goes on forever. And every day that passes he will be tempted to think that there is no longer any need to watch for reefs. Still, he must keep his eye on the stars…and on his bearings. Or, the day will come when he will run aground.

*** "I don’t know where that leaves you Americans," continued a French friend at dinner. "At the upper end, you can’t compete with Europe in quality…design…or technology. Germans make better cars. The Swiss make better precision tools. The Italians make better shoes. I’m exaggerating a bit, just to make my point. But in Europe, we have maintained much higher levels of investment – which means our products are generally of higher quality and better design. And at the lower end, you can’t compete with Asia on price. You could lower the dollar 50%….and you’d still be nowhere near Asian cost levels. Labor is much, much cheaper. Taxes and regulations are lower. Forget the low end. So, where does that leave you? I don’t know. A few high tech gadgets, I guess, like the iPod…weapons…food…"

*** OPEC and the redheaded stepchild…

Venezuela brushed off the OPEC meeting this weekend. Apparently they were too busy making trade agreements with the Chinese! Kevin Kerr, energy market expert and editor of Resource Trader Alert, tells the real story…

"It’s a really big deal…and may even herald the beginning of the end for OPEC," says Kevin. "Venezuela is the red-headed step child of OPEC, mainly due to religion and geography. At the same time, China has been aggressively seeking to secure supplies of raw materials. Oil producers have been cutting deals behind OPECs’s back for years, but with China now offering all these goodies, it’s a trend which can only intensify."

"That’s not all. Remember, there is little love lost between the Bush administration and Hugo Chavez. By snubbing OPEC and doing business directly with China, Venezuela is also indicating it won’t just bend over backwards for the U.S.A."

Like NATO before it, OPEC is just another relic of the war between East and West. Venezuela has no sympathy for the Arab plight, they just want more money for their oil.

*** A reader in India wonders:

"I had a doubt regarding one of the facts that you have stated in your newsletter. I could not understand which mess you are referring to when you talk about millions of deaths that can be attributed to Mahatma Gandhi. I am a citizen of India and would be quite interested in why you feel Gandhi caused millions of people to die and how such a event is attributable to him.

"The paragraph attached is for your reference:

"All the greatest world improvers have been mass murderers. Alexander, Caesar, Tamerlane, Genghis Khan, Hitler, Stalin, Mao…Even the peaceable improvers, such as Mahatma Gandhi and perhaps Wilson, so upset the order of things…that millions died in the mess they left behind. "

"Otherwise, I find your newsletter highly entertaining and informative. The style of writing of the Mogambo Guru is extremely well received in my circles. I wish there were more people who wrote like him. Perhaps he can start a class, the Mogambo School of People Who Make Acronyms Out Of Sentences (MSOPWMAOS)."

We respond:

In 1947, the year before Gandhi was assassinated, approximately one million people died in fighting on the subcontinent. Gandhi and other world-improvers had put India in play, politically.

The Daily Reckoning