Financial Mouse Trap

The Daily Reckoning PRESENTS: As our government spends more and more ridiculously huge amounts of U.S. dollars – we become increasingly dependant on that kind of spending to keep our economy moving. The Mighty Mogambo explains…


If you are wondering why I am drooling and babbling incoherently, one reason could be that that I am pretty sloshed by this time. And, I am “in my cups,” because Total Fed Credit went down by four billion dollars. Not overly remarkable in itself, but the growth of TFC, from which springs the excessive creation of money and debt that has been killing America for over 40 years, looks like it really has stopped accelerating! Wow! But only time will tell.

As I pour myself another drink of tequila anesthesia, I note with disgust that required reserves in the banks dropped to a miniscule $40 billion, which is within a hair’s breadth of revisiting the historic lows set in 2001. I almost yawn with the ennui of it all, as this is just more of the typical, and despicable, Federal Reserve crapola.

Then, suddenly, the glass dropped from my hand when my bleary, bloodshot eyes caught the headline “Yuan Gains Most Since Peg Ends as China Allows It to Track Asia,” which is the headline of a Bloomberg news article published August 16, 2006. It says, “The central bank on Aug. 9 said it would allow more ‘flexibility’ in the new system, which allows the yuan to float with reference to currencies of leading trading partners.” Subsequently, “China permitted the biggest gain in the yuan since ending a peg to the dollar in July last year, a day after allowing the largest decline, suggesting the central bank is easing controls over the exchange rate.”

In light of the fact that the yuan has only appreciated (so I understand it) about 1.5% in the last year or so since the yuan-dollar peg was ostensibly removed, a sudden, significant move in the dollar-yuan exchange rate has now occurred. How significant? “The yuan rose as much as 0.24 percent against the dollar today, as 13 of 15 leading Asian currencies climbed,” the article says. The dollar fell the equivalent of another 16% of its total to-date decline, in one day! One day!

Then it really starts to get bizarre and surreal when we read about the new U.S. Treasury Secretary, Henry Paulson, saying, “a rising yuan would benefit both (America) and China.” Hahaha! How things have changed! Up until just this moment, the “official” government policy and mind-numbing mantra has been: “A strong dollar is in the best interests of the United States.”

But now, suddenly, a weaker dollar is in the “best interests” of the United States? Hahaha! And people are not buying gold in panic when they hear such things coming out of the mouth of our secretary of the U.S. Treasury? Maybe they will when they see what is coming out of the mouth of The Mogambo, which is the fabled Mogambo Vomit Of Fear (MVOF), which (in case you were wondering) is like ordinary puke, except with less of an alcohol-tinged after-taste. Some blood, though.

But it gets, thankfully, uproariously funny, as from the same Bloomberg article we hear about how a stronger yuan “would help China slow an economy that grew 11.3 percent in the second quarter from a year earlier, and threatens to ignite inflation.” Hahaha! I’m busting a gut here! Hahahaha!

I thought all you had to do to be an economist in America was learn to spell ‘economist’ and memorize a few buzz-words, and so that is how I became the Famous Mogambo Economist (FME) that I am today. So, you can see how my Tiny Mogambo Brain (TMB) would be confused by all of this.

Let me see if I can get this straight: Because the yuan gains in strength, imports into China will be cheaper, and thus imported energy will be cheaper, imported commodities will be cheaper, and this, somehow, is going to slow the booming Chinese economy. This is an economy where there is an unimaginable pent-up demand, where wages are rising at 10% a year, that also uses a fiat currency, that also allows low fractional-reserves via commands from a central bank, and has, in train, massive, massive, massive infrastructure plans for the next few decades? Hahaha! Stop! Please stop! Hahahaha! I’m laughing so hard here that I think I made a little poopie in my pants! Hahaha! How embarrassing!

But my levity is soon dissipated, perhaps because there is a really foul smell around here all of a sudden, or perhaps because the latest reading on inflation, as measured by the consumer price index from the BLS, came in at 4.1%…4.1% inflation! And trust me when I say that it takes a lot more tranquilizers and anti-depressants than you think it will take before you stop screaming in your sleep about how inflation may well be, as they say, a “silent tax,” but all I can hear is the loud munch, munch, munch of invisible monsters eating my financial legs off.

And sure enough, I look down, and there are hostile creditors and enormous, ravenous governments eating my right leg off. My zombie wife and family are eating my left leg off, and all of them are eerily intoning, in their dull, monotone voices, “More! I must have more money because prices are high! Give me more money!” All I can think about is how in the world I am going to play golf without any legs, and how I’ll have to buy all new, custom-made shorter clubs. I’ll bet those babies are going to cost a fortune! That means I’ll soon be tapping into the last of the money remaining in the children’s college funds, and I am thinking to myself, “These people are so low and base that they would pick on a poor crippled man who doesn’t have any legs? Screw ’em!”

And then, I wake up bathed in a cold sweat. I think it is all a dream. But when I walk out to the kitchen, the family immediately starts whining that they need more money because prices are so high. And can they have some money? And how come we don’t have any money? And when are we going to get some money? And why don’t I get a real job like other husbands and fathers and make some more money?

So, I patiently and kindly explain, as I always do, “Shut up, you greedy little punks! I make the same money I made 20 years ago! But somehow it’s my fault that the Federal Reserve provided the financing for insane amounts of government spending, and so it’s my fault that all this monetary madness of mountains of money and debt ballooned into price inflation, as it always freaking does?”

Oh, I know by the blank, confused looks on their faces that they will not listen to the Big Stupid Mogambo (BSM), no matter how loudly I yell or how many frozen waffles I throw at them. Or you either. But perhaps you, and they, will listen to Dallas Federal Reserve Bank president Richard Fisher, who has neither a loud voice, nor a supply of frozen-waffles-as-missiles handy, but is reported by Reuters to have said that inflation “is a sinister force that has the capacity to charm and romance the heck out of you, but in the end wreaks only havoc.” Atlanta Fed President Jack Guynn says that inflation is “poisonous.” Exactly so!

Perhaps this is what prompted reader Rebecca I., probably in an oblique reference to my many rat-like qualities, to pen the perfect analogy to Mr. Fisher when she writes, “I equate fiat currency like a mouse trap. The easy credit and instant gratification it gives you is the bait. The bar that is sprung when the bait is taken is called inflation. As we munch on the bait, the spring has been sprung and we ignorantly wait for the bar to fall.”

Predictably, I am quickly screaming about inflation and how it is going to kill all of us rats, and how it is all the fault of the Federal Reserve, who allowed Congress to spend money and go into unfathomable debt to get more money to spend, like irresponsible, half-witted children.

Like, for example, the people of Massachusetts in general, and Boston in particular, who have turned their state into one composed almost entirely of government employees and government spending, who send the same kind of idiotic ethic to Congress in the forms of the repellent Ted Kennedy and the equally loathsome John Kerry.

Specifically, Boston went massively into debt to build a huge, whopping tunnel and transportation infrastructure project that not only plumbs new depths in the definition of “shoddy, substandard and dangerous” (in that falling concrete is already killing people), but that came in 500% over budget! The thing, projected to cost less than a whopping $3 billion, ended up costing almost $15 billion, thanks to their infamous pandemic Leftist stupidity leavened by trashy, low-life corruption. Hahahaha!

And now, they will learn the ugly truth about the downside of sudden deluges of government spending. The ugly fact is that the economy of the whole region was malignantly distorted at the instant the first dollar of the project was spent, and it got grossly more so as more horrifically, humongously huge amounts of money were spent, year after year.

Whether they realize it or not (and they probably don’t, as they seem to be really stupid), their economy is now totally dependent on somebody continuing to spend that kind of gigantic money. Hahaha! Chumps! But now, not only is there is no more tidal wave of money flowing through those now-customary channels, but there is no new wave of money to even replace it! And this does not even count the perpetual, budget-busting new costs of hugely more maintenance and repairs on the new structures, nor the millions (or billions) it will take to correct the poor workmanship. So, what kind of economy prospers when billions of dollars a year in annual spending disappears from the economy, which is also now paying down a backbreaking debt, and is now also saddled with huge, new on-going costs? Welcome to the world of fiat money and Leftist “build it and they will come” stupidity, Massachusetts!

But this is not about how Boston is going to go bankrupt, or how Kennedy and Kerry will predictably attach a rider to some Congressional legislation to funnel all of our money to Massachusetts to bail them out, or even about how if we really want to help America we would throw Massachusetts out of the country, but about fiat money and how the Federal Reserve creating the money to buy all the government debt, including the debt to build this foul Boston Boondoggle, will always produce price inflation and a distorted, moribund economy.

And, if you want to know the specific aftermath of such monetary idiocy, then let me quote Bill Bonner at, who says, “Booms beget busts, and riches beget rags.” Later, he gets less blunt and more, characteristically, transcendentally philosophical when he says that for “every yin there really is a yang, a fit for every start.”
Until next week,

The Mogambo Guru
for The Daily Reckoning
August 26, 2006

Mogambo sez: Some things never change, and one of them is the Boring Advice Of The Mogambo (BAOTM): buy some gold, some oil, and lots and lots of silver, and you will make a lot of money, or don’t and you won’t. It doesn’t get simpler than that!

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 housing market is in a funk,” the Wall Street Journal writes. “Can the stock market be far behind?”

According to Bloomberg, new homes purchases, 15 percent of the market, dropped 4.3 percent while sales of lived-in homes dropped to the lowest in more than two years.

The National Association of Home Builders’ builder confidence index, which leads the stock market by 12 months, fell to a 15-year low in August.

And Angelo Mozilo, the CEO of Countrywide, a leading mortgage lender warns, “I’ve never seen a soft-landing in 53 years, so we have a ways to go before this levels out.”

How much of a way? You get an idea from a look at the books of one prominent lending institution – Washington Mutual: At the end of 2003, 1% of its option ARMS were negatively amortized (payments not covering interest charges, so the shortfall is added to principal). In 2004, that figure was 21%. In 2005, 47%. By loan value, it was actually 55%.

And, Washington Mutual isn’t alone. Hundreds of lenders are in the same position. They don’t have to keep the borrowers aware that their debt is soaring, since Neg Am loans do not have strict disclosure rules. And they can even book the loans as earnings.

Shades of junk-bond mania. Remember that, dear reader? Just like the lumpen homeowners today, the takeover kings of the 1980s could use the company they planned to raid as collateral for the loan they used to raid it with. When the companies started folding, the junk kings went belly up…or did the perp walk ala Michael Milkin.

So far, of course, the housing fraudsters have managed to stay clear of the plank. Mortgage giant Fannie Mae paid a record $400 million fine this past May, but managed to squeak out of criminal prosecution over prettifying its earnings. Ditto for Freddie Mac, which had its own accounting scandal in 2003.

And the rest of the perps today happen to be thousands of middle-class homeowners who still think the Fed will dive in and give them a get-out-of-jail-free card at the last minute. But our friend, Steve Sjuggerud, thinks they shouldn’t bet on it. Recalling the aftermath of the 80s, Steve says real estate is just about to get much worse:

“It’s looking like 1990 all over again…1990 was the last time homes were unaffordable. The confidence of homebuilders was at a record low (and about to go lower). And the U.S. economy was starting to cool.

“Home prices fell hard. Nationwide, new home prices fell from around $200,000 in 1990 to around $175,000 by 1992 (in inflation-adjusted terms).

“By 1993, home prices were affordable once again. Homebuyers slowly crept back into the market. Prices crept higher, and they didn’t surpass the 1990 highs for over a decade (in inflation-adjusted terms).

“Over a dozen years have passed since new home prices bottomed back then…enough time for people to forget real estate is not always a sure thing. Just ask the Japanese how bad it can get…they just lived through 16 straight years of falling home prices.”

Sixteen years of falling home prices….

But from where ever came the idea that housing would always rise? Whence the delusion that prices always move up and up…and still further up? Looking back over the last century we find that the cost of a house…or of renting…has actually fallen.

Contrary to the lumpen mythology of ever-burgeoning home prices buoyed up by a sea of credit, the reality is that over time housing has at best stayed stock still…or fallen. Although average consumer prices in America have indeed risen 20 times since the beginning of the 20th century, which comes to a mean of about 3% a year, the prices of a number of consumer goods – and that’s all a house is, dear reader – have actually fallen. Yes, fallen.

The Economist explains why this is s

“Over time, general inflation tends to mask changes in individual prices. Strip out the general rise, and variations are clearer. Thus the cost of a hotel room has risen since 1900 by around 300% in real terms; a telephone call is 99.9% cheaper.

“First, goods or services that have benefited from large productivity gains, thanks to technological improvements and mass production, have seen large price falls in real terms. Telephone calls are the most striking example. But electricity, bicycles, cars, even eggs (thanks to battery hens) also have fallen. In 1900 a car, then hand-made, cost over $1,000. Henry Ford’s original Model-T, introduced in 1908, cost $850, but by 1924 only $265: he was using an assembly line, and, in virtuous circle, was also selling far more cars. Over the century, the real price of a car fell by 50%.”

But while a Ford may have got better over the last hundred years, we doubt that the average suburban plasterboard look-alike has. In fact, we doubt that any of the million-dollar eyesores that have mushroomed over the landscape in the last decade are even going to be standing in a hundred years. Without increases in quality or productivity to sustain growth, the only thing that could keep housing costs afloat would be high labor costs and high demand, which explain why services like medical care, hotel accommodation and domestic help have all soared in the past 10 years.

But we know that soaring house prices have not been driven by fattening wages or real demand. No, globalization has made sure that labor is squeezed by foreign competition. Domestic wages are down. In turn, real demand is low…unless it is artificially primed with credit, which is exactly what has happened for the last 10 years.

But we know that the age of easy credit is coming to an end…bankruptcies are piling up, the consumer is running out of wind, and now, where can housing prices go but down?

Indeed, the 10-year Niagara of credit hasn’t even lifted all boats evenly around the country. In the North and Northeast, in cities like Detroit and Pittsburgh, housing is still cheap and getting cheaper in many areas, as jobs disappear. We wager that as oil prices rise and heating costs become more burdensome, houses in the North will get cheaper yet.

And in the bubble-ridden cities of the East and West Coasts, comes a time when even the densest householder digs in his heels and turns down the chance to enslave himself to an overpriced shack. He looks past San Francisco…and sees Phoenix. Or past Miami…and sees Charlotte. Or casts his eyes to Texas. Or, he decides to rent and wait for prices to come down even more.

And when he does, the crutches get kicked out form under it and the housing market lands on its fanny…hard.

More news from our currency counselor…

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

“At this point, I can’t see the Fed going back to the rate-hike table, at least for the next meeting. And that should weigh heavily on the dollar.”

For the rest of this story, and for more market insights, see today’s issue of The Daily Pfennig


More views…

*** “Venezuela’s Hugo Chavez and China’s Hu Jintao agreed to an oil field development deal, which will solidify the energy ties between the Latin American exporter and the oil-thirsty Asian power,” reports Outstanding Investments’ co-editor, Kevin Kerr. “This move does not bode well for the United States. Some analysts are saying that the deal won’t threaten Venezuela’s crude exports to the United States in the near term – nonsense. How could it not?

“The deal was signed last week in Beijing as part of a very publicized trip for Chavez to China. Chavez also proposed to raise Venezuela’s oil exports to China to a million barrels a day over the next 10 years, from the current level of 150,000 barrels.

“Hu and Chavez inked the deal for China National Petroleum Corp. (parent of Hong Kong-listed PetroChina). Clearly, the deal sent a shot over the bow of the Bush administration and, in essence, the deals between China and Venezuela have more political than economic value.

“Why? Well, proximity. It doesn’t make a lot of sense to move oil from Venezuela to China when the United States is so much closer. In addition, the sour crude (which means there is a higher sulfur content) is difficult to process. U.S. Gulf Coast refineries have already invested in the refineries to process heavy sour crude. Chinese refineries are simply not equipped to handle this type of oil, at least not at this point.

“Venezuela is very important to the United States; don’t forget, it’s the world’s fifth largest oil exporter, selling about a third of its crude to the United States. That’s about 15% of total U.S. oil imports.”

***Addison continues the “Ponzi Finance” discussion he had with Dr. Richebächer in Cannes…

For centuries, rising profits, a rising economy, and rising productivity have always lead to rising wages…not so this time. Why?

It’s only possible in a world where the macro picture has disappeared or is being ignored completely. Cutting wages may be good for one or a few firms. But it cannot be good for an entire economy. Economists call it the fallacy of composition.

What about globalization? Cheap products are supposed to be good for the economy. But they also destroy wage increases. “Free Trade” in the sense of wage market arbitrage is not possible. Trade with China, for example, is a disaster on a macro level. The exchange rate is artificial and absurd. And comes at the destruction of the wage level in developed economies.

So why do they do it? Without China, a) the United States would have a much higher inflation rate than they do today. And b) they would have less capacity for “easy money.”

[Wall Street can only have one thought at a time…]

Taking advantage of lower wage markets is classical “Ricardian” economics. But without “free markets” and free-floating exchange rates, the exact opposite is happening. China is trading up to higher paying skilled jobs. While the industrial economies trade down.

Consumers have to make up for declining wages with increased borrowing. And this is exactly what is happening. Consumers are tapped out. When borrowing stops (as it has to) the consumer will have not impetus for further optimism. In such a system of ‘Ponzi Finance’, the only questions are how quickly will asset prices fall. And: how deep will the recession be?

More to come…

The Daily Reckoning