A Vicious Circle

The Daily Reckoning PRESENTS: The U.S. economy is a myriad of contradictions and confusions – one, in particular, being that consumer spending is keeping the economy afloat. Hmm…the Mogambo can’t help but wonder – where is the consumer getting the money to begin with? Read on…


The alarms started ringing the instant that the figures for Total Fed Credit hit the airwaves, and in that same instant I was scurrying like a frightened rat-in-a-trap. In my panic, I must have turned on one too many self-defense systems in the Mogambo Bunker Of Mortal Dread (MBOMD), and the newly installed Mogambo Intruder Pacification System (MIPS) did its job. And while the exact details of who shot the living hell out of who’s stupid boat are still in contentious debate, I know exactly who threatened to (and I quote), “Come in there and kick some Nutcase Mogambo Butt (NMB)!”, thus constituting a legal case of assault, albeit flimsy, of my own.

In all the hubbub, I forgot about checking Total Fed Credit to see what set off the alarms in the first place, and also in that selfsame hubbub I forgot all about donning, as I usually do, an adult disposable diaper in case it is bad news, economically speaking.

Well, Total Fed Credit was up $7.6 billion, foreign central banks stashed another $11.8 billion at the Fed, the Treasury printed up another $2.4 billion in actual cash, repo activity in the banks last Thursday alone was a staggering $32 billion, and the nation’s current-account deficit went through the $880 billion per year mark. Gahhh!

With big numbers like these impacting my fragile nervous system, the rest is history.

I know, I know; I should feel sorry for the dumb, ignorant bastards who are doomed because their money is doomed because the Federal Reserve is creating so much money and so much credit that we are cruising to a huge inflationary bonfire and the destruction of the American economy, and they don’t have any gold to protect themselves and blah blah blah.

Then I remember that they are the same dolts who consistently elected and re-elected collectivist bozos to erect a suffocating, huge, expensive system of governments that not only looked the other way, but encouraged the Federal Reserve to create all that money because everyone wanted inflation in stocks, bonds, the size of government, and (later in the cycle) houses! There was just too much money to be made!

And now we have price inflation in everything, painfully manifested in a dollar that is losing its buying power, just like the Austrian Business Cycle Theory so elegantly, and so confidently, predicts. After this short mental exercise, I naturally deduce “To hell with them AND their stupid boats! And the stupid trailer they had it on, too!”

And it is not just us, either, as the stupid idea of constantly increasing government size, spending and number of people being given money is becoming apparent to the British, as the blaring headline of the Daily Express, “Highest Taxes In History”, so dramatically attests. The article notes that things are getting much worse, as “When a crippling barrage of more than 100 stealth taxes is added, workers are paying almost half their earnings” in taxes.

I will note, with an appropriate dose of Snarling Mogambo Outrage (SMO), that paying roughly 50% of income is exactly the proportion of income that Americans pay in total taxes, too, when you include income taxes, Social Security taxes, surtaxes, sales taxes, property taxes, excise taxes, government fees, etc.

And why is all of this happening? Well, in a recent essay, Dr. Kurt Richebächer quotes Jean-Baptiste Say from his 1803 “A Treatise on Political Economy.” “The encouragement of mere consumption is no benefit to commerce because the difficulty lies in supplying the means, not in stimulating the desire for consumption; and production alone furnishes those means. Thus, it is the aim of good government to stimulate production, of bad government to encourage consumption.”

Well, I got some bad news for Mr. Say, and it is a good thing that he is dead because he would probably croak from a brain explosion if he knew that not only do today’s bad governments encourage consumption, but they are also actually the country’s largest consumer!

And, to compound their folly, they actually give out money to people so that they, too, can consume, or the government provides the services to be consumed, or (as in the case of health care) the government requires that people with insurance and/or wealth pay higher prices for healthcare to cover the bills of those who don’t (or won’t) pay. This is, for one thing, communism gone freaking insane.

But Americans can handle some degree of insanity, just like my parents, who kept me shackled and locked in the basement all those years and referred to me as Mogambo, Spawn Of Satan (MSOS), but led otherwise perfectly normal lives.

The bad part is 1) one day I am going to get big enough to bust out of this stinking basement to seek my unholy revenge, and 2) that all this money the governments are spending has to come either from taxes, or from borrowing.

The economic ugliness of raising the money via raising taxes is obvious and legendary. But the problems of raising the money by borrowing are not so obvious, which is too bad, because they are worse, as it only postpones the repayment (either in higher taxes or higher inflation).

And, even more egregiously, since there are no savings to be borrowed, all this money that the government needs to borrow and spend is created by the Federal Reserve, which increases the money supply, which causes prices to go even higher, which is what always causes the destruction of economies, and is behind the government’s current need for more money! It’s a vicious cycle!

They say that consumer spending is what is keeping us afloat, which doesn’t explain where the consumer got the money in the first place. In truth, government spending is now so huge that the money (earned or borrowed) came, originally, from the government deficit-spending the money that the Federal Reserve created just for the purpose, year after year, until the debt thus created now totals $8.6 trillion (roughly, a stack of $1,000 bills 540 miles high), which merely means that the government borrowed, and spent, and owes one enormously humongous load of money. The consumer merely ended up with it, just in time to be credited with keeping the economy afloat by spending it.

To show you what I mean, the government budgeted $2.6 trillion, and they spent another $600 billion on top of that, to the tune of $3.2 trillion in cash outlays last year! The GDP of the United States is only $13 trillion, for crying out loud! And the actual, real-life deficit last fiscal year, as reported by the Treasury itself, was $4.6 trillion! 35% of GDP! In one year!

Until next week,

The Mogambo Guru
for The Daily Reckoning
January 2, 2007

“Wasn’t he the one they used to say couldn’t chew gum and walk at the same time?” asked a French friend.

The markets were closed yesterday for New Year’s Day. Today, many will be closed in honor of Gerald Ford, who is to be laid to rest after a state funeral.

Gerald Ford seemed like a good egg, as presidents go. And yes, there were a lot of jokes about him. He stumbled coming down stairs occasionally. He had gone to Yale and had been a star football player, which led Richard Nixon to remark that he thought Ford must have played too often without his helmet on.

But Ford was no dope. In his Inauguration in 1974 he said:

“I must say to you that the state of the Union is not good: Millions of Americans are out of work. Recession and inflation are eroding the money of millions more. Prices are too high, and sales are too slow. This year’s Federal deficit will be about $30 billion; next year’s probably $45 billion. The national debt will rise to over $500 billion. Our plant capacity and productivity are not increasing fast enough. We depend on others for essential energy.”

You have to give the man credit. In this brief paragraph, he identified the two of the key things that would eventually undermine the empire. The early ’70s were a critical turning point. Until then, the average man in America had made steady financial progress. The dollar had real value; foreign governments could trade their surplus dollars for gold. The U.S. government tended to balance its books. And until then, the nation could count on its own oil wells for the energy it needed.

The two world wars of the 20th century were won largely because America had cheap, good oil…and the losers didn’t. Germany had to bend its military strategy in Russia in order to try to secure the oil fields of the Ukraine. As a result, its drive to Moscow stalled. Japan’s war effort was doomed too when the island nation ran out of oil. Its ships could offer no effective resistance to the U.S. fleet, because they had no fuel.

It is of no concern to us whether our gasoline comes from Texas or from Venezuela. In our private lives, we are as happy to add to the profits of Gazprom as of Exxon. But if you want to play the role of a butt-kicking empire in the modern world, you need two things: money and energy. Ford noted that the United States was running out of both.

President Ford sounded the alarm over a $30 billion budget deficit and a $500 billion national debt. The numbers sound almost quaint to us today…like a $15,000 mortgage or a wood stove. It reminds us of an earlier era…before there we ever heard of derivatives…before the financial operators took over Greenwich, CT…before the celebrities forgot to put on their underwear.

Ah yes, dear reader, we are becoming sentimental. It happens this time of year…after the holidays. Yesterday, we sat in our office, alone…thinking about the years gone by…sniff, sniff…

We remembered those days…yes, 30 years ago…when you could buy a gallon of gasoline for less than 50 cents and smoke a cigarette without risking a jail term. We remember, we bought an English sports car – an MGA – for only $200. And we sold a house for $23,000! Those were the days…when we were young and foolish. Now, alas, we are old and foolish.

If only hair were as steadfast as foolishness! Through the years, our hair has deserted us…but our foolishness hangs around like a loyal sidekick.

Meanwhile, circumstances change. In one era, we are young and restless. Thirty years later, we are careful and reflective. In one era, stocks are cheap and credit is dear. In another, even household pets can get mortgages…while stocks have never been more expensive. In one era, a nation is on top of the world…30 years later; it is slipping and sliding, desperate to hold onto its position.

Of course, there were plenty of jackasses back in the ’60s and ’70s too. In ’74, the United States was trying to figure out how to withdraw from another absurd military adventure – in Vietnam. The Vietnam War, like the war in Iraq, had proved good for military contractors and artificial limb makers, but bad for the nation. Scarcely a year after Gerald Ford moved into the White House, the last American troops were coming home. This report from the North Country Times:

“His were the last American boots to leave the ground that day, the last pair of military feet to scramble aboard the last American helicopter out of Saigon on April 30, 1975.

“And as the mechanical bird finally headed out of war-ravaged Vietnam, John Valdez looked down at the place he had just left, the U.S. embassy at Saigon. Some people were looting the building. Others just sat, talking. A few raised their heads to watch the American military fly away.”

Sic transit gloria belli.

But for all the foolishness of the Vietnam War, the war in Iraq surpasses it in grand style. The Iraq War is far more expensive…it stirs up new enemies, rather than wrestling with old ones…and it comes at a time when the empire is no longer in control of its finances or its energy. The United States now imports vast quantities of oil…the revenues from which flow to enemies and potential enemies – Russia, Venezuela, or one of the Bedouin kingdoms. And it must also import the money to pay for the war! The cost is $8 billion per month. Let’s see, that’s $96 billion a year. Whoa…that’s only a fraction of the $750 billion current account deficit. And it’s only a fraction of the estimated 2007 federal deficit of $400 billion. In other words, the foreigners lend us money for the war – and a lot more!

Man, oh man…we were so much better off when Gerald Ford was in the White House! Then, at least we could have a moronic war without having to beg the money for it from strangers.

More news…


Chris Mayer, reporting from Gaithersburg, Maryland:

“The world’s dollar-holders are in the process of revolting against the dollar’s reserve currency status. So far this ‘quiet revolution’ has caused very little blood-letting…but things might get a little bloodier.”

For the rest of this story, see the latest issue of The Rude Awakening.


And more thoughts…

*** The family has dispersed. Maria went back to London for New Year’s Eve. Jules went to Paris to spend the night with his friends. Sophia is teaching people how to ski in West Virginia. Our oldest son is in Florida, where he is preparing to move to Buenos Aires. That leaves only the two youngest boys with us. A family of four is perfectly normal…but we are used to much larger groups. And even our old friends from Paris – three of them – packed up and left yesterday.

Yesterday, your author spent the day in his office…listening to Frank Sinatra and Dean Martin singing Christmas music…and growing nostalgic. The first of January must be the loneliest day of the year. Gone is the merriment of Christmas and New Year’s Eve. What is left – at least out here in the French countryside – is a tranquility so intense it almost hard to breathe.

At a certain age, a man sees more road behind him than in front of him. He wonders why he has taken the direction he took…and begins to see where it leads. What can he do differently? Is it too late to change course? What would be the point? He poses himself questions, but has no answers. He cannot go backward; he must advance. But towards what?

He cannot tell. But he must move forward. The first of January will turn into the second before he knows it…then will come the rest of them…all the days and months and years, leading like highway signs to the end of the road. He must resolve to do something with them. He must make resolutions…so he can carry himself along. Otherwise, he will be carried along by time. Yes, the end may the same, but at least the journey will be more satisfying if his own two hands are on the steering wheel. At least, that is what he tells himself.

And so he resolves…

First, he will be kind and courteous to everyone regardless of race, religion, politics or family affiliation. Yes, it is that last category that is the tough one. It is easy to be gracious to the Maronite Christians and the Australian aborigines, but it is hard to be polite sometimes to the people you eat breakfast with. But this year, yes, he will do better. He will always be in a good mood, even when going through airport security lines or spending on the new kitchen. And if he isn’t in a good mood, he will keep it to himself.

Second, he will organize his financial affairs. He has been meaning to do this for years. But he has been so busy figuring out the world’s financial system, he has had no time to tend to his own. But this year will be different. He will get a stiff drink and open up his own books. Then, he will put them in order…with a proper budget, a proper investment portfolio, accounts payable, accounts receivable, and accounts lost and found…even a Last Will & Testament! He will clean things up – selling off investments and properties that don’t really contribute to his future well-being. And he will make a plan for his retirement financing! He doesn’t want to think about any of it right now…but he promises himself he will get on it as soon as he has a spare minute.

Third, he will finish that project he started last year. He can’t quite remember what the project was or why he didn’t do it in 2006, but he imagines that it is still waiting for him. Heck, 2007 will be soon enough. And then it will be finished.

Fourth, he will always remember that he is as big a fool as anyone in public life. He will still laugh out loud at presidential addresses and stockbrokers’ cold calls. But he will try to remember that politicians and Wall Street promoters are God’s creatures too…and deserve the respect of all His works, even lamebrains and hedge fund managers.

And yes, this will be the year that he tends to his health…with that program of diet and exercise that he meant to start five years ago. More exercise! This year he will take the time. No doubt about it. No backsliding. No excuses. He will make time available and he will do it. And won’t he be proud of himself next year at this time – with a body that would make Schwarzenegger weep.

Let’s see, he has 24 hours in every day…364 days left in the year ahead. He has plenty of time. So, no more time to waste writing to Dear Readers…he has to get on the ball…get with it…get on the move…

…and let Dear Readers get on with their lives in 2007, too.

The Daily Reckoning