A Mogambo, A Machinegun and a Boom

As Halloween is right around the corner, it seems fitting that there are some seriously frightening things happening in the economic world. The Mogambo Guru explains…

I am, as hard as that is to believe, getting freaked out more and more. The Federal Reserve didn’t increase total credit by much, but they did continue accelerating down the Road To Economic Hell (RTEH) by buying, outright, $2.4 billion of debt last week.

In short, the government borrows by issuing debt, and the Federal Reserve creates the money to buy the debt! Bingo! This not only creates more money and credit, the thing that got us to this point, but funds the activities of the government! Gaaahhhh!

The bigger news in this filthy area of the economic world, for me, is that foreign holdings of U.S. debt deposited at the Fed went up by a whopping $7.6 billion last week. Whew!

Inflation Is a Killer: A Lot Higher Than Two Percent

The biggest, scariest thing of all was that nominal incomes dropped. And when you adjust nominal incomes by the reduction in buying power from all the inflation around here, then it is no wonder that inflation-adjusted incomes dropped so much, too. But I wail like a wounded banshee (ooOOooOOoo!) when I realize that the government’s piddly little chain-weighted, hedonically adjusted statistical adjustment to incomes for inflation is around two percent. At that, I laugh this Big Booming Mogambo Laugh (BBML)! Hahahaha!

I am here to tell you, with the courage found only in a guy fully clad in body armor and sporting a machinegun in one hand and a flamethrower in the other, inflation is a lot higher than two or three percent…horribly higher. It is like somewhere in the range of six to nine percent, at least. And so when you adjust incomes for the real rate of interest, then the drop in real, inflation-adjusted incomes is getting to be pretty significant!

I am finally not screaming and angry and scared and hysterical over what is happening in the world of inflation, central banks and governments; namely getting bigger and meaner and more insane with every tick of the clock. This cannot, and will not, end well. Tick tock.

Well, let me put it a non-clock oriented way: Booms have never worked out in all of history, except at the beginning, where it has worked every time. You always get a boom when you stimulate, stimulate, stimulate the economy, year after year. The endings never worked out well, because inflation in prices always results from inflation in money and credit. And here we are again, standing up to our ears in debt at another ending of a period in which monetary and fiscal sins were indulged in, the boom happened, and now we are again standing by the side of the road on the way out of town with the company payroll under arm, one step ahead of auditors and creditors, inflation rising up to devour everything. My only consolation is that at least I got out with a few bucks, and my kids are old enough to beg, so they will be fine.

But it is inflation that is the killer. For example, in my little hometown Leftist rag of a newspaper, the St. Petersburg Times, we have been getting stories of how the rise in gasoline prices is squeezing people, and how they are coping…mostly by cutting back.

Inflation Is a Killer: The Price of Inflation

And what do I mean by “cutting back”? Well, consider alert reader Charlie R, who writes, “Yesterday I was at a local Ford dealership. Sales were very, very slow. Across the street is a Chevy dealer. Six months ago they had 16 salesmen, today only eight, and are about to let more go. A muffler and tire shop laid off half of its employees. A furniture store is about to close the doors.”

Here, listening (well, reading) this, is exact place where The Mogambo weeps, and the Mighty Heart Of The Mogambo (MHOTM) breaks, because this is the price of inflation. Driving the car, at work, in your sleep, wondering, wondering, wondering how in the hell you are going to pay all of this money, when you ain’t got no money, and you ain’t a-gonna get no mo’ money, neither!

Somebody, I forget who, noted that the latest University of Michigan consumer sentiment also produced a stock market crash signal, in that it had a one-month fall that was the biggest drop in fifteen years or something.

What does one do? Well, The Mogambo starts borrowing money like crazy. And when that (predictably) doesn’t work anymore, I work double shifts at the stop light, wearing my sign that says, “Homeless. Crazy. Pleaze help! Help me! Give me money or I will take down your license plate number, track you down, and you will be sorry!” And I don’t want to hear from any of you about how this is extortion and the poor woman hasn’t had a good night’s sleep ever since she looked in her rear view mirror and saw me writing her tag number down, because this is not about who is extorting who, or who threatened who, or who did what to somebody’s ugly yard ornaments.

No, this is about inflation in prices that comes after you have inflation in the supply of money and credit because the Federal Reserve acted like halfwits and morons. Without an increase in wages, people can’t afford to buy as much stuff!

Regards,

The Mogambo Guru
for The Daily Reckoning

October 10, 2005

Mogambo Sez: President Bush has opened the Strategic Petroleum Reserve in response to high gasoline prices, and thus temporarily driven down the price of oil. But nothing has fundamentally changed, except to get worse. So, Mogambo Tip O’ The Day (MTOTD) is to buy oil and oil stocks, as not only is demand still outpacing supply, but Bush has to refill the SPR pretty soon, adding to demand. Ergo, oil prices will shoot back up.

And the gold lease rates on gold have started back down, which usually means that the people that manipulate the price of gold are trying to manufacture a lower gold price. In practice, this means that you can soon buy gold on the cheap. Do so, or suffer the consequences of having your spouse and family laugh at you and say hurtful things like, “Hell, even an idiot like The Mogambo knew to buy gold!”

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.

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

The War on Terror now costs $7 billion per month. Rebuilding New Orleans costs about $16 billion per month. A billion here, a billion there…pretty soon you’re talking about real money…which is just what the empire does not have. It only has make-believe money – credit, offered by the kindness of strangers in strange places.

What we think we are witnessing, dear reader, is this: a great empire is rolling over. That empire got its start with steam engines and mechanized looms. It managed to parley its ‘early mover’ advantage from industrialization into an imperial asset. It could produce more weapons and more machines – and the oil to run them – than any of its competitors.

But the great Anglo-Saxon empire rests on commerce more than outright conquest. Until the mid 1970s, it paid the costs of imperial order with the profits from its factories.

Those profits have now disappeared.

Over the weekend, another little milestone was passed – the $23 billion giant auto-parts supplier, Delphi, went broke. An MSNBC report explains:

“As the auto industry has gone global, U.S. automakers – saddled with high-cost labor contracts negotiated in more prosperous times – now find themselves pitted against leaner overseas rivals.

“Delphi’s bankruptcy filing, which became more likely as the Oct. 17 deadline loomed, nonetheless sent shockwaves through the industry. The company’s management has said operations won’t be affected. And the complicated three-way talks between Delphi, the United Auto Workers and General Motors will continue. At stake is billions of dollars owed Delphi’s work force, including wages, benefits and pension payments – some of which GM agreed to take on when it spun off Delphi to fend for itself.

Of course, Delphi’s 185,000 will be the ones holding the short end of the stick in this situation. They can expect major wage cuts and an elimination of a “jobs bank” that gives full pay to 4,000 laid-off workers.

The report continues, “Delphi’s retirees face similar cuts if the company follows the lead of steel companies and airlines that have successfully used the bankruptcy courts to offload their pension obligations to the federal Pension Benefit Guaranty Corporation, an agency set up in 1974 that is funded by contributions from premiums paid by companies. Once the agency takes over a pension plan, workers receive only part of their benefits.

“The PBGC itself is on a rocky financial footing, in part because of chronic under-funding of older, so-called ‘defined benefit’ pension plans in favor of pay-as-you-go 401(k) retirement savings plans, which don’t leave employers with long-term obligations to pay retirees.

“As of the start of this year, the PBGC was under funded by some $23 billion. A report last month by the General Accountability Office estimated that gap will swell to $87 billion over the next decade. If the PBGC continues to shoulder the cost of more failed pension plans dumped by ailing companies, those liabilities could hit $119 billion in 15 years and $142 billion within two decades, the GAO report said.”

With no longer a commercial advantage to sustain the empire, the whole apparatus of world domination now rests on debt. America now borrows from (still communist) China to keep its bourgeoisie living in luxury and fantasy.

As the kids say in their text messages: LOL.

Readers less hip than your editor may require a translation. LOL originated as “laugh out loud,” Henry explains. Now its used to mean ‘ha ha’ or ‘wow’ or almost anything.

So you see, dear reader, you do learn something from The Daily Reckoning, after all.

But let’s get back to money…

“Even if you are right,” you might object. “Let’s say the Anglo-Saxon empire really is peaking out. Isn’t that just too ‘big picture’ to be useful? What point is there to such an insight?”

The answer is: we don’t know. But we have long ago given up the habit of trying to guess about tomorrow’s stock prices. Even going out a year or two, we still have a very spotty forecasting record.

And yet, we think we can see broad patterns in history – like the ocean currents, long and slow, viewed from outer space – that inevitably and ineluctably float the trash in a certain direction. America was a very good bet in 1900. Is it a good bet now? We don’t know. All the promise that the country held a hundred years ago now appears to be fully realized and fully…or even over-fully…priced.

But wait, you protest. Isn’t it exactly the same country…with same people…with the same constitution…the same commercial energy…the same can-do spirit?

It is certainly the same in form…but perhaps not in substance. Today’s big corporations are rarely run by risk-taking entrepreneurs. Instead, they’re in the hands of professional functionaries, pension funds, and fund managers.

A glimpse of one of these men appeared in the weekend paper. Mario Gabelli, a regular at Barron’s Roundtable, and his family has been accused of “looting the assets of the company, breaching [their] fiduciary duties to the shareholders and oppressing its minority shareholders.” Family members allegedly took out hundreds of millions of dollars in salary and ‘management’ fees.

Mario stands accused by one of his largest investors. Can you imagine what small mom and pop lumpeninvestors get? Is it any wonder that America’s mommas no longer want their sons to grow up and be cowboy entrepreneurs? Instead, they help them to be financiers, and managers and lawyers, oh my.

America has grown old and decadent, along with its leading corporations. The voters still vote. But who really cares what they vote for? The empire has a life of its own…a destiny to be fulfilled…a banana peel to slip on. The people vote, but it is the custodians, the managers and politicians who run the great empire who get the loot.

More news, from our currency counselor…

————–

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

“Gold has reached a 17-year high, its highest level since 1988 overnight with the overall weakening of the dollar. That pushes gold’s return this year to 9.1%…”

————–

Bill Bonner, with more views:

*** Over the weekend, your editor got carried away and made an offer on a piece of land he saw in Argentina.

“A man’s got to know his limitations,” he began, explaining his motives to his wife. “I do not enjoy investing money. And I’m no good at it. I’m better off with real estate. At least it doesn’t go away.”

“But a ranch in Argentina?” came the reasonable reply.

Your editor could only shrug.

“I liked it.”

*** And so are the great questions reduced to a few words of vain aesthetics. He could offer all the reasonable explanations and justifications he wanted – yes, China’s appetite for beef is increasing…yes, Argentina’s economy is on the upswing…yes, this would provide a good diversification…and yes, where else can you buy land for $4 an acre – but in the end, he had to admit: he just liked it.

Your editor buys property in a way similar to the way Warren Buffett buys stocks. His ideal holding period is forever. He asks himself: If I could sell it…and the price fell in half…would I regret the purchase? If the answer is ‘no’-he realizes two things. First, that it is okay to make the purchase. Second, that he is a happy fool.

And here, dear reader, we offer not just financial advice…but helpful life advice to our male readers: Be lucky. And marry a woman who is a good sport.

*** By the way, if you are interested in Argentina land, our agents in Buenos Aires, Paul and Maria Reynolds, will be in Ft. Lauderdale for that Paul and Maria Reynolds will be in Ft. Lauderdale for the

*** Errata, erratum… We are fond of semi-colons, but his time we were betrayed by one.

Our friend Lila writes to tell us that a punctuation error changed the views she was trying to express completely.

Here, we set the record straight:

We wrote:

“It is all based on a huge and unnatural pretension; we think she is trying to tell us that policymakers understand and control the global economy; that carefully considered action produces anticipated reaction; and that the entire world can be modeled, manipulated, and browbeaten.”

We meant: “It is all based on a huge and unnatural pretension, we think she is trying to tell us, that policymakers understand and control the global economy; that carefully considered action produces anticipated reaction; and that the entire world can be modeled, manipulated, and browbeaten.”