Attention to Deficits Disorder

Some people go through life with blinders on, happily oblivious to the state of the economy; they never give the trade deficit or inflation more than a fleeting thought. Sadly, The Mogambo is not fortunate enough to have the luxury of ignorance…

A lot of things scare me nowadays, and the two biggest things I fear are 1) that my wife wants to go on the Jerry Springer show to tell me something, and 2) that the U.S. Treasury issued $49 billion in new debt, which they did, in ten lousy days. Annualized, this rate of issuance runs to $1.78 trillion, which is, by strange coincidence, the exact amount of money it would take to buy enough tranquilizers to make me NOT scared of this, or hearing Jerry Springer say to me, "Come on out, Mogambo, and hear what your wife wants to tell you, you worthless little bastard!"

Foreign banks only plopped $1.6 billion into their custody holdings at the Fed. This may have something to do with how they want to "diversify" their holding of foreign reserves, as many of them have hinted in the last few weeks. This means that they do not want to hold more dollars, but what else is there? The world is awash in the things, they are accumulating more of them at the rate of $660 billion a year in trade deficits, and there are more dollars and dollar-denominated assets sloshing around the globe than practically all the other currencies combined! They want to diversify? Into what? And how?

But when you take a look at the chart of the dollar, one is hard-pressed to come up with a bullish case, and that means that the value of the dollar will continue to go down, which means that oil will continue to go up, which means that oil equities are going to go up, and that means that (if you believe in cost-push inflation) that the price of everything is going to go up because the cost of energy has gone up, and that means that gold should go up, and silver should go up, and uranium should go up as one country after another looks at their predicted energy consumption and discovers that only nuclear power has the necessary most-bang-for-the-buck to even try and pull it off.

The Dollar and Bulls: Bad News for the Bulls

For the bulls, the bad news is that Total Fed Credit, that original source of magical money-from-thin-air, is down by $7.2 billion this week. The amount of credit being created by the Fed is surprisingly muted here lately. If this keeps up, you can kiss the stock market and capital gains goodbye, as an economy as bizarre, as large, as expensive, as government-centered, and as malignant as this one cannot exist without more and more money being created all the time, and at ever-greater rates. So this change in credit-creation is so potentially important that you might want to make a note of this in your diaries, "Dear Diary, Today The Mogambo says to keep an eye on Total Fed Credit, and if it does not start shooting to the moon soon, then we can all kiss our butts goodbye. P.S. I saw David in the hallway at school today. He is so cute!!!!! I hope he asks me to the prom!!!!!"

Perhaps this "cute David" thing is what alarms Jim Shepherd, of the Shepherd Investment Strategist. Or maybe it is the strange goings-on with Fed Credit. I don’t know. But something sure has him spooked, as he has a new flier out that says, simply, "Huge Crash Near." I could not have said it better!

This is a bad time of year for me, as my infrequent big bills all hit at once, and when combined with the monthly bills, hits me like a sledgehammer between the eyes, Well, auto insurance; up. Health insurance; up. Monthly bills; up. Food; up. To the sharp-eyed detectives among us, after a while you recognize a pattern. And for those of us who are not so gifted as to be able to recognize patterns, here is the answer. The pattern is that things are going up in price.

And, in fact, they have been going up in price for quite awhile now. Years, in fact. And every time you pay the higher prices, you vaguely recognize that things are a little more expensive these days. But you chuckle knowingly to yourself – heh heh – and accept that "a little the inflation is one of those things that you can’t do anything about." And month after month, prices keep going up some more. More and more. Always more and more! And then one day, perhaps a day like today, and in fact a day that was EXACTLY like today, because it WAS today, I went over the tipping point, and all the years and years of prices hitting five, ten, fifteen percent per year increases has finally, one day, produced a number on a bill that is so large that instead of writing the check, I rush to the window, fling it open, and shout, "I’m mad as hell and I’m not going to take it anymore!"

And then everybody realizes that I stole that line from the Howard Beale character in the movie "Network" and that proves that everyone was right, and I AM incapable of demonstrating originality or any real creativity, and thus I am actually handicapped by more than just looking funny and smelling bad. I’m creativity impaired, too!

The Dollar and Bulls: Rage and Outrage

Then if you ask them if they knew about the Federal Reserve creating more and more money and credit, and how the government is going more and more into debt, and how this is going to create an inflationary firestorm that will more than decimate the world’s wealth, they admit, "No, we did not know that" and so I shout, "Ha! That proves you are imbeciles!" Which was, apparently, the wrong thing to say because somebody called security and things got, for me, real ugly, and real fast. So this proves that their reaction to inflation was anger. Anger and uniformed security personnel. Well, their whole reaction to inflation was anger and uniformed security personnel and pepper spray.

But pepper spray making my eyes water and forcing me to gasp for breath does not change the fact that the universal reaction to inflation is rage AND outrage, which both contain the word "rage," so right off the bat you get a good idea of the tenor the situation. You watch, helpless, as prices rise faster than your after-tax, after-benefits, after-deductions, net net net take-home wages, that pitiful little bit that is left after everybody has had their chance to chew the guts out of your paycheck, like ravenous vultures. This brings up your homework assignment for tonight. I want you to perform a spreadsheet analysis that assumes that your income is slashed by five percent. You must now make cuts in discretionary spending to balance your budget. Detail these cuts in spending to achieve a balanced budget under the new paradigm of lower purchasing power.

Then, for the next year, take another five percent loss of income. Again detail the cuts to achieve a balanced budget. Then the third year, take another five percent loss of income. Detail those spending cuts, too. And the fourth and the fifth and the sixth year do the same thing. And then you’ll notice, which I call The Mogambo Moment Of Enlightenment (TMMOE), that the price of inflation is measured in the aggregate price of happiness lost. And the sheer tonnage of lost happiness accumulates, year after year, as prices rise year after year, and it adds up and up, and pretty soon you realize that life ain’t fun anymore, and all your money goes to pay for necessities, and they, as I said, ain’t fun.

From Reuters we read, "The United States posted a record $113.94 billion budget deficit in February, above most Wall Street forecasts, as higher government receipts were not enough to cover a spending increase. The government took in $100.87 billion in February, nearly $9 billion more than a year ago, but outlays rose more than $26 billion, causing the budget gap to stretch."

When Alan Greenspan took office in 1987, the national debt stood at $2.3 trillion. Now it is over $7.4 trillion. John Myers, formerly of Outstanding Investments, never says it in so many words, but that is a LOT of money. But he does allow, "Currently Uncle Sam is carrying around a debt of $7.4 trillion. It is almost impossible to really understand just how big $7,400 billion is. But to put it into some perspective consider the following about America’s federal debt: It is twice the value of all the oil beneath the sands of Sandi Arabia. It is larger than the combined GDP of Germany, France, England and Canada. It is 15 times more than the value of all the gold that has ever been mined since the dawn of mankind."

This is all thanks for Alan Greenspan and the Federal Reserve. Bill Fleckenstein calls Alan Greenspan, "The most incompetent and irresponsible Fed chairman in the history of the world." I say the same thing, only with more obscenities and at a higher volume.


The Mogambo Guru
for The Daily Reckoning
March 21, 2005

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.

"What’s good for GM is good for America," people used to say. Now, they hope there’s no connection.

Nothing seems especially good for General Motors lately. Making cars and selling them at zero percent financing in order to pay retirees’ health care costs is not a particularly good business.

Last week, people began to notice.

Three bits of bad news hit the press last week – all on March 16th. An announcement from GM made investors realize the nation’s biggest company may no longer be a going concern. The U.S. current account deficit hit a new record. And the price of oil hit a record high.

Stephen Roach thought these three bits of bad news might mark March 16th as a "tipping point" for the U.S. economy. If zero percent financing by an auto company isn’t such good business, maybe zero percent financing for an entire nation is not such a good idea either. General Motors provides more than $8,000 worth of incentives to get one of its big SUVs into someone else’s hands. The Fed provides zero percent financing too – for the whole economy. In real terms, the Fed’s key lending rate is about zero (netted against changes in CPI.) Both financing schemes increase consumption. It’s a consumer economy, say the policymakers. "We’re stimulating consumption!"

But consumption is not America’s problem. The nation is good at consumption. People consume with their eyes shut. We’re the best consumers in the entire world. When it comes to buying things we don’t need with money we don’t have – no other race comes close.

America’s problem is that it is too good at consumption. We consume so much there is nothing left over. The savings rate has dropped to 1.5%. (It was over 8% when Ronald Reagan won the White House.) Without savings, people need financing – which is why zero percent rates are so attractive – in order to continue to live beyond their means.

If only consumption could make you rich! The problem is consumption doesn’t make you rich; it makes you poorer.

But who knows? Who cares? Who wants to hear it? Don’t waste your time telling your neighbor that consuming won’t make him rich. You might as well tell him that his wife is fat; he’s probably already noticed and won’t appreciate the observation in any case.

Besides, property prices are still rising. "Home prices soar," says the latest headline from San Francisco. Who’s going to believe he is getting poorer when his house is rising at 20% per year? And when you get so much money without working for it, it’s hardly surprising that the money is spent. Easy come; easy go. Americans "flock to luxury," says a Reuters article.

Meanwhile, GM can’t make cars at a profit. Whatever America still makes, it doesn’t make enough. The trade deficit continues to widen. All the blabber about how dynamic and flexible our economy is…how the world wants our brands and our money…the foreigners have no choice but to lend to us…our economy is growing so fast…and we’ll all get rich by buying each others’ houses…is just noise. Distracting. Annoying. Brain deadening.

Several Asian central banks have already said that they’ve had enough. They said they were going to lighten up on dollars. Others must be thinking about it.

Perhaps the "tipping point" was reached last week. Perhaps not.

More news, from our currency counselor:


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

"Asian central banks aren’t stupid. They do not want wild swings in the value of their assets. They will look to a gradual decline of the dollar and move slowly to diversify out of their dollar holdings into other currencies, mainly the euro."


Bill Bonner, with more views:

*** "So, the stock is a down a bunch today because, shock of shocks, General Motor’s business is crumbling exactly," writes our old friend Rick Ackerman, "…only the voodoo magic of creative financing can make GM appear viable as a going concern over the long run.

"We should all be mystified by the fact that a company offering zero percent financing to so many buyers is supposedly making all of its profits from consumer loans. But that’s another story for another day, one that I’m sure will be written. For now, though, even with the massive shrinkage of the firm’s capitalization today, we need to recognize that GM shares are not going to zero in a month, or a week, or a year, or even in five years. To paraphrase Adam Smith: There’s a lot of ruin in a nation’s biggest manufacturer. How much ruin lies just ahead for GM’s stock? My best-case target for the next five to seven months is 17.13, a hidden pivot."

*** Our roving reporter, Greg Grillot, just off the plane from Delray…

"Last week, The Daily Reckoning sent me packing on down to balmy South Florida, to attend the 7th Annual Investment University conference.

"I saw Dan Denning speak of the nascent, emerging markets like Vietnam, Malaysia, and Singapore. I listened to Porter Stansberry detail his secret ‘No-Risk Investment’ strategy and I watched Dr. Steve Sjuggerud make presentations on some of his favorite real assets like timberland and gold coins. Finally, Dan Ferris spoke about buying the world’s most undervalued real estate for meager dollars on the acre.

"I could have ducked out right then to gawk at the bikini-clad valkyries on Delray Beach, but Alex Green hadn’t spoken about dynamic asset allocation yet…"

*** Yesterday was Palm Sunday. The church in our little town in Normandy was open for the first time this year. It is a much more elegant building than the church we are used to in Poitou. It is built of a white stone, with columns and arches along the sides and the pews down the middle.

"If Jesus had wanted to do so, he could have called down an army of angels," said the presiding priest, "to rescue him. Instead, he suffered on the cross…for us. So that we might be cleansed of our sins. So that we might join him in everlasting life."

"I think I would have called down the army of angels as soon as they got out the hammer and nails," said Henry, after the mass.

"Yes, but then Jesus would not have been crucified," his mother explained.

"We would have learned nothing from his example. We would not have been saved by his blood."

"But what was the point," the 14-year old continued. "If he wanted us to be Christians, surely an army of angels would have made the point. People would have been convinced right away that he was the Son of God. They would have listened very carefully to everything he said. And he could have taught for a lot longer. "

"It’s not that simple. That would have astonished people. But it would have astonished them like magic or supernatural powers astonish them. I don’t think that’s what God wants. He doesn’t want people to obey because they are impressed by the supernatural or afraid of the power of God. That would have been something from the Old Testament. Christ taught something different. You do not become a Christian because you’re afraid that if you do something wrong an angel with a big sword will come after you. Christianity is not based on fear. It is based on love. You do the Christian thing because you believe in the power of Christ’s love…even if you can’t see it or can’t explain it. "

"I think the army of angels would have been more effective…"

The Daily Reckoning