A New Era of Profligacy

Mogambo on Monday returns! Below, our favorite Guru reviles the ever-growing and still-too-often-unrecognized licentiousness of our monetary administrators…

We have entered a new era, my grasshopper. A glorious era of prosperity and plenty – funded by as many free dollars as the U.S. Treasury can manage to pawn off on any poor schmuck deluded enough to take them.

Yet the International Monetary Fund, and I will refrain from calling them a bunch of low-IQ commies only because I have said it so many times before, does not seem to grasp this verity. Instead, they have waded into the financial state of the U.S., and, of course, have bad advice to generously dole out to us. Apparently they figure that we are too stupid to notice the parlous effects of their advice to other countries all these years, and that we will sit still for them lecturing to us, the guys who are the primary funding source of the IMF.

Anyway, it only goes to show that the IMF losers are seriously behind the times, as they are still wailing about how high government borrowing needs will "crowd out" private borrowing and drive interest rates up and blah blah blah. This logical argument had some validity back in the olden days when the U.S. dollar was gold, or backed by gold, or had some relationship to gold, and so therefore the money supply was more or less fixed. So, therefore, higher borrowing by government meant that there was, ipso facto, less money available to be borrowed by everyone else.

Lowering Interest Rates: What Firm Hand?

Those days are long gone, and Ben Bernanke and his printing press can merely print up as many dollars as anybody wants. Therefore, there can never again be such a phenomenon as the dreaded "crowding out effect."

The Wall Street Journal is no big fan of the IMF either, although their economic acumen is highly suspect, as when they write in the January 9 editorial "The IMF Votes Dean" that "As long as the Federal Reserve maintains a firm hand on the monetary tiller and a watch on the dollar’s value…then the earnings from U.S. growth and investment should be more than able to repay any accumulating debt." Huh? What in the hell is THAT supposed to mean?

For one thing, right off the bat, the Fed does NOT have a "firm hand on the monetary tiller," and are instead are recklessly producing money and credit at breakneck speed to keep all the bubbles from popping. Secondly, they are obviously NOT keeping "a watch on the dollar’s value," either, as hardly a day goes by that the dollar is not worth less and less.

And even if the Fed WAS doing both of these things, what have they got to do with "earnings from U.S. growth and investment" that are supposed to produce some glut of money to "repay any accumulating debt?" One does not necessarily follow another.

This particular idiocy is an extension of the New Age fallacy that all that matters is interest rates, interest rates, interest rates, and the logical extension that if interest rates are low enough then economic vigor always follows, as night follows day, and as insults predictably follow my pathetic attempts to be clever. The WSJ may believe it, and the Fed may believe it, and the economic twits at Princeton may believe it, and all the economists in the USA that you can gather together into a gaggle may believe it, and if you are familiar with geese and geese-related terms you will no doubt notice that "gaggle" refers to geese, which are renowned for their group herding behavior, and I use this goose-related metaphor to characterize the stupefying uniformity, and even more stupefyingly wrongness, of the laughable opinions of economists in the USA, but economic growth and economic health does NOT automatically flow from lower interest rates.

Lowering Interest Rates: No Beneficial Effect

Although one would think that at least once in the last fourteen years, maybe out of sheer boredom or something, that somebody at the WSJ, or someone at the Fed, or maybe one pinhead graduate students at Princeton, or any thousands of so-called economists wandering aimlessly around the halls and offices of America, dazed and drooling on themselves in contemplation of the basic fact that they have no idea what they are talking about as evidenced by their egregious performance, would have noticed that Japan has exposed that lie, as they have keep interest rates at almost zero the whole time, and without any apparent beneficial effect.

And here in the good old USA, interest rates have been pounded down and down and down for year after year after year, to levels seen only a few times in the last century and always then in response to emergency situations, to little effect, except to 1) make debt levels monstrously bigger to prevent 2) the debt bubble from imploding until some later date. Ugh.

And the result is that the national debt has now officially soared over $7 gazillion, I mean trillion, but when you are talking about money in mountains that big it really makes no difference whether it is gazillions or trillions, as numbers that big are too huge to be comprehensible, and when you think about them you get dizzy, and then you get a headache, and pretty soon you’re real grouchy, and then your conversational skills subset is reduced to snarling "What in the hell are YOU looking at, scumbag?" But either way, seven gazillion or seven trillion, it is a lot of money, roughly comparable to what it would take in plastic surgery and personality transplants to make me appear to be almost human, and then paying somebody to be nice to me so that I could get used to how that feels.

To help us out, foreign central banks, of course, continue to underwrite the profligacy of we Americans, or us Americans, I’m not sure which, and they salted away at the Fed another $6 billion in the latest week, roughly twenty billion in the last month. And those are, lest we forget, dollars. Lots and lots of dollars.

As I say, my grasshopper, welcome to the "new era"…of stupendous, mind-boggling dollar profligacy.


The Mogambo Guru
for the Daily Reckoning
January 9, 2004

P.S. Foreign nationals, as compared to their central banks, must be a little more on the ball, as up until recently the dollar has been selling off like hotcakes, and it has been doing so for quite a while now, which obviously means foreign nationals are not interested in owning dollars or things that dollars can buy. Those foreign guys are such sneaky little copycats, and that is why we sneer in contempt and disrespect for all foreigners and their strange ideas and odd habits and bizarre customs and incomprehensible laws and the funny way they dress and their stupid little accents when they comically try and speak English. And as for getting out of dollars and dollar assets, I again snort in contempt at them, both collectively and individually, as we genius Americans have been waaayyyyy ahead of them in that regard, because we don’t care about the dollar either, and are only interested in shiny baubles and fattening foods and things that make us feel good, and that is why we are up to our fat ears in them, and why we happily give them every dollar we can get our hands on in exchange for amusing doodads, and that also explains why the aforementioned foreigners are up to their ears in dollars, as that is what we use to pay for the shiny baubles. And now who are the big chumps? They are! I laugh at those snotty foreign devils – Hahahaha! – who all smell funny, who actually live in foreign countries, and talk in some strange foreign language or another that I can’t understand a word they say, and they often wear funny hats, too.

Editor’s note: 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. If you’re inclined to read more, you’ll find the whole Mogambo here:

Borrowing to Stand Still

"There are three kinds of economists," said Sir Eddie George in the Times of London. "Those who count and those who can’t."

Mr. Greenspan’s British counterpart showed us which group he belonged to. Today, we now wonder about America’s economists.

"The Fed has arguably offset the bursting of one bubble by inflating another…"

The Economist magazine referred to the way housing has been puffed up by lower interest rates. As rates went down, Americans found that they were able to buy bigger and better houses – for the same monthly payment. Housing prices rose…leaving people freer to refinance their existing houses and ‘take out equity.’ The money was then used to buy stocks or consumer items. Either way, the results are misleading enough to make Americans regard Alan Greenspan as though he might be a hero and George W. Bush as though he might be a two-term president.

"The longer a bubble is left to inflate," continues the Economist, "the more it encourages the build-up of other imbalances, such as excessive debt. When these imbalances unwind, there is a risk of a long period of sluggish growth. Mr. Greenspan’s fans claim that America has escaped a prolonged downturn. That may prove to be so, but it is too early to be sure, simply because the imbalances created by the bubble, such as low saving and record borrowing, have yet to be unwound. Instead, the economy has been kept going by a further bout of consumer borrowing and by massive government borrowing, pushing the total budget deficit to 5% of GDP. Such indebtedness is unsustainable. At some stage households must save more and spend less, as must the government. At the very least, America’s debt overhang leaves its economy more vulnerable to its next downturn."

You recall a recent IMF report that suggests the next downturn could pose "significant risks," not only to the U.S. but to the rest of the world as well. Net financial obligations to the rest of the world could soon be equal to 40% of the total U.S. economy, the IMF concluded, "an unprecedented level of external debt for a large industrial country."

Other developed nations – Japan, Germany, France – have large government deficits. Japan’s deficit is even larger than ours. Some nations have current account and/or trade deficits, too. But only we have the proud twin towers of debt, deficit and duplicity – Alan Greenspan and George W. Bush. Working together, they have given us a government deficit reaching up to almost 5% of GDP and a trade deficit of about the same size.

"Without those tax cuts I do not believe the downturn would have been one of the shortest and shallowest in U.S. history," says John B. Taylor, undersecretary of the Treasury.

Good thinking, John. And let’s not forget the interest rate cuts, either. Without such quick and decisive action by the feds, the U.S. might have had a real correction, instead of a phony one. People might have stopped spending, paid down their debts…and begun saving again. They might have lost their jobs and regretted having gone so deeply into debt. Stocks might have fallen to levels where they were a good buy again. By this time in the cycle, people might actually have some money to spend, and we might be looking ahead to a real recovery, instead of a prolonged, phony after-bubble.

And without such prompt and reckless action by the feds, Greenspan and Bush might be sweating a disgrace they did not merit…rather than a respect they do not deserve.

And here’s Addison with the latest news:


Addison Wiggin, three stories above the Paradis café…

– "Something very strange is going on," wrote our friend Gary North last week. "It has been going on since August. The U.S. money supply is shrinking."

– Strange indeed. Here at the DR HQ, we’ve made several references to the shrinking money supply, but only in passing. Why? Mostly because, like focusing on one eye in a Picasso portrait, it’s only one of many features that seems to be out of place. And, given the government’s current recovery-at-any-cost economic plan, we find ourselves recoiling from the whole economic picture in mock horror. We prefer, instead, the more predictable environs offered by the Paradis café.

– The Paradis, you may recall, is where your editors repair to dabble in various viticultural pursuits. Our experiments at the café meet with remarkably foreseeable outcomes. But by the time we stumble back upstairs to the office, our ability to foresee the future gets…how shall we say?…a little fuzzy.

– For example, as we noticed last week, the Christmas season – following the biggest burst of stimulus ever applied to an economy – produced almost no new jobs. Our friend John Mauldin, digging through last week’s Dallas Fed report, noticed the average wage for temporary labor was $13.50, down a buck fifty from a year ago. And there were actually 72,000 fewer temp workers during the retail season than December 2002. Stephen Roach pointed out that 84% of the total non-farm increase in employment from August to November is traceable to one of four hiring segments: temporary staffing, health, education and everyone’s favorite sector, government.

– These numbers look pretty clear. At least to your enfeebled editors, the recovery appears to missing more than a few teeth. (Unless, of course, they’ve been painted on some other part of the canvas and we haven’t identified them as such yet. Many readers suspect self-employment is giving the recovery its real bite.)

– Yet the massive infusion of government stimuli is not only tickling the stock market’s fancy…it’s also getting the financial media all hot and bothered. On Wall Street last week, the lumps reveled in a twisted sort of schadenfreude of their own. With some of its largest components releasing better-than-expected earnings reports, the Dow came to a fitful rest Friday a little over 10,600…up 147 for the week.

– The Nasdaq tacked on 54 points over the week to close at 2,140. The S&P added 8 points on Friday to 1,140.

– And "mysteriously," Eric Fry, our man on the scene in New York reported over the weekend, "until [last] week, the surge in foreign buying of U.S. securities had not boosted the dollar’s value one bit. In fact, the dollar had been suffering a widely publicized swoon." No longer. The greenback finally caught a little bit of the fever raging on the corner of Wall and Broad. On Friday, the U.S. dollar pushed the euro back to $1.238, marking its fourth rise in as many days. It closed the week up almost 4% from its record low of $1.286/euro on Monday.

– Even Gold, whom the gold bugs were convinced had wrangled its way free of the stock/gold inverse ratio, recoiled in fear all week long, losing nearly $20 over the five trading sessions to $407 an ounce.

– But against this backdrop, the recovery’s molars may be beginning to decay. In fact, "while no one is using the terminology, we may be witnessing a bank run," writes North of the "strange" fact that the money supply is falling. "This is not a panic-driven bank run, like something out of the Great Depression. This is a steady bank run that is motivated by something other than fear."

– "The Fed decided to stimulate the economy in 2001 by pumping in new money," North observes. "Lo and behold, this policy is now backfiring. It has produced such low rates of investment return for savers that they are pulling currency out of the banks. This has created an anomaly: a fall in the money supply, or at least a fall in the various money supply statistics. What amazes me is that there is so little discussion today in the financial press about the existence of this anomaly, let alone its implications for financial markets.

– "The recent rise in gold’s price is not taking place as an inflation hedge," North concludes. "It is taking place parallel to the decline of the dollar against the euro. There is something more fundamental going on here than traditional inflation hedging. There is a move against the dollar that is not based on fear of inflation. I think we are seeing the beginning of a shift away from the dollar as the world’s primary reserve currency. What has prevailed since 1940 is beginning to change."

– We, of course, having made one too many trips downstairs, are still having trouble making out the face. But despite all the high praise, the smile emerging onto the canvas still looks a lot less like the Mona Lisa…and more like Quasimodo on a mean bender.

[Editor’s note: You can see Dr. North’s complete article on the Daily Reckoning website: A Slow Motion Bank Run?]


Bill Bonner, back in London…

*** Gold fell again; it’s down to $407…less than taxi fare from our latest remorse price. With a little luck it will fall below $400 and we’ll buy more.

*** Meanwhile, the dollar rose. And curiously, bond yields are falling. Don’t give up on deflation, dear reader. What to make of it? Is a Japan-style deflation still in our future? Maybe.

*** "JP Morgan and Bank One are merging in a $60 billion deal to create the largest credit card issuer," writes colleague Dan Ferris. "I can’t believe the DR wouldn’t have something to say about that. I mean, who on earth wouldn’t want to be the largest credit card issuer in the U.S.? It’d be like owning a bar next door to Alcoholics Anonymous headquarters. How could you go wrong betting on that deal to win?

"Then again, where’s the growth potential? Who’s left that doesn’t have a credit card? Who that has a credit card doesn’t have it charged up to the limit?

"Those questions are why I’m betting on Portfolio Recovery Associates, the company that buys charged-off credit card debt for two cents and collects 7 cents. About 85% of their employees come to work every day and generate cash."

[To learn more, see: Extreme Value]

*** And from associate Karim Rahemtulla comes this note:

"Research In Motion is the Canadian company that manufactures the handheld Blackberry communications device. The Blackberry is the top wireless communications PDA. Very popular and more secure than a Palm Pilot. The company has been growing like gangbusters. Here’s the interesting part:

Revenues – 2004 – 800 million

Earnings – 2004 – 90 cents per share – 80 million shares outstanding

Share price – $81 (90 times forward earnings)

Stock moved up 50% in one day – 12/23/2003 when they released their sales/earnings forecast

And the kicker…

"Yesterday they sold 10.5 million shares at 78.50 per share, raising $800 million plus. They raised more money with a 10 million share offering than their annual revenue forecast. What a market!"

[Ed note: Karim Rahemtulla is the executive director of the Supper Club, a venture capital club founded by Bill Bonner. For complete details and a special invitation to the club’s next meeting in Puerto Vallarta, please e-mail Vickie Beard: vbeard@agora-inc.com]

*** The trouble with money is that it robs you of the pleasure of not having any. We recall how much fun we had ‘making do.’ We once bought a house in a Baltimore slum for only $27,500. We did almost all the work ourselves…often recycling materials from a recovery yard in order to keep costs down. And furnishing? How proud we were when we found an old rocking chair on the street corner. All it took was a little glue and paint – and good as new.

And when we had a plumbing or electrical problem – heck, we could fix it ourselves.

Every saving was a triumph…making-do was a pleasure…and every job done by ourselves was a great satisfaction.

But now, we’re the ones throwing out the old rockers and used windows. And even talk of economy…or that ‘we’ll do it ourselves’ attitude…brings shrieks of alarm from the whole family.

"Just call a plumber," says Elizabeth.

"Don’t try to fix the ceiling yourself. Get it done right by a professional."

"Oh Daddy, please don’t get another second-hand car. It’s just someone else’s junk…"

But pater familias tightwadus has not entirely given up. Recently your editor proposed that the whole family take next summer off and go to Nova Scotia where they would all work together to build a cottage.

"You must be kidding," came the reply from all.

The Daily Reckoning