Here Comes the Story of the Hurricane

Something strange is afoot…and no, it’s not just the Mogambo wandering around the streets with a sandwich board that reads "The End is Near." It seems that public sentiment regarding the state of our economy is beginning to sway…

Recently, something happened that really weirded me out. My wife gets home from a business trip and hands me a copy of USA Today. Naturally, I figure that they have discovered my awful secret, and I am being exposed for the lying and deceitful fraud that I am – and now all is lost and my life is completely ruined.

But to my immense relief, it was not about me at all! Instead, on the front page, the headline read, "As Social Security surges, and Medicare takes off, the deficit will soar. The Result: ‘Fiscal Hurricane.’ " The byline showed that it was written by a guy named Richard Wolff. Although both of our names are Richard, we are entirely different people, although I secretly wish my name was Wolff, only I’d spell it with one ‘F’. So, I would be Richard Wolf, mild-mannered reporter for The Mogambo News, and then when people want to know why I am grabbing them by their nasty little throats in my anger about their irritating, aggravating stupidity, I can say, "Hell, my name is Wolf! What in the hell did your stupid client think was going to happen, you ugly moron?"

Anyway, my wife (who prefers that I refer to her as my "lovely wife", and not "plaintiff") always gets a free copy of USA Today wherever she stays on one of her "business trips."After all this time, she considers herself somewhat attuned with USA Today and the type of stuff they write about on their front page, and so, she says that she was very surprised to see this kind of article on the front page.

Now, dramatically, the scene changes. Suddenly, I am in this big merry-go-round with the postal carrier, who has a "package" for me. Naturally suspicious of packages, I take cover behind the hedge and make her open it, and that is when I find out that it is just a copy of the Sacramento Bee newspaper! With a sigh of relief, I find also included was a note from Roger of the Rocklin Coin shop, with a cheery: "Finally, front page for the first time…FISCAL TRAIN WRECK." I know what you are thinking; you are thinking: "What? No exclamation points?" And you would be right! Roger must have known that I was going to take points off for not concluding with exclamation points, as the subject matter and sentence construction certainly called for it! And look! Notice how I am using them to great effect right now!

But he, like everybody else, knows that I am easily bribed and have no shame, so he cleverly covers his bases and closed his note with: "Have a silver eagle on me!!" Which, included two, count ’em, two, exclamation points! He also enclosed a shiny new silver dollar, too, which I kept and have on my desk right now, which I like very much because it is nice and shiny and bright.

Fiscal Train Wreck: Nothing Worth Owning but Gold

But what a coincidence about this "fiscal hurricane" thing, huh? Beyond these two people delivering hard copy, lots of other people are sending it to me, too, in my e-mail! They want to make sure I saw it. I would have had to have been freaking blind not to see it, because it seemed to be everywhere on the Internet. This is the kind of effect that this unusual front page of USA Today has. And this is how public sentiment is subtly altered, leading to that dramatic moment in the future when you wake up in the middle of the night, drenched in sweat, because you suddenly realize that something has changed.

Or maybe it has something to do with, according to an alert reader, physics. "In chemistry," he says, "there is a term called the eutectic point. This is where a compound can no long remain in its current state due to environment surrounding it. Be it gas, liquid, or solid, it must change due to temperature, pressure, gravity, etc." Relating this to gold, he says, "The converging lines only indicate that the conditions which influence the gold price have reached a point where something has happened and the price must change." So, being the dimwitted guy that I am, I meekly ask, "So does this mean I should buy gold?" His thunderous reply? "There isn’t anything else worth owning, but gold!"

But we were not talking about gold, but about this watershed USA Today event. So, what was in this amazing article? Well, not much. The same old stuff about how we are freaking doomed. Everybody ignores the poor old Mogambo, ranting like he does, but they will listen to a guy named David Walker, just because he is the comptroller general of the United States. He said, without even a hint of hyperbole, "We face a demographic tsunami," that, "will never recede." Mr. Wolff, taking my ideas and twisting them around until they finally make sense, paraphrases Mr. Walker as saying that the United States is like, "Rome before the fall of the empire."

Fiscal Train Wreck: Gloom and Doom

Mr. Walker goes on to say, "Our financial condition is ‘worse than advertised.’ " He calmly explains that we face huge deficits in our budget, balance of payments, savings – and "leadership." Man! I heard that! Our leadership is so brain dead that they are leading us down the rocky road to ruination and really rough riding, which is today’s gratuitous installment of a Mogambo Pointless And Stupid Alliteration (MPASA).

Well, it was the same gloom-and-doom stuff that I have been screaming about for years and years. I’ve been fearfully explaining to mental health professionals why we are freaking doomed, how they ought to let me go, and then we could all go out and buy a lot of gold and make a whole huge pot-load of profit when the dollar implodes. But the article does not even mention The Mogambo one damned time. Instead, we read about some guy named Douglas Holtz-Eakin, who is the director of the U.S. Congressional Budget Office, and he admits to being "terrified" about the budget deficit in coming decades. Then comes Maya MacGuineas, president of the Committee for a Responsible Federal Budget, who sees a future of, "unfunded promises, trade imbalances, too few workers and too many retirees." She figures that the stock market will fall, assets will be lost and we will all suffer a lower standard of living. She mercifully stops short of predicting the ensuing rioting of the desperate people, and the wailing and bellyaching for government help, and cries of, "gimme, gimme, gimme!"

Now you may be wondering what she means when she refers to a "lower standard of living." Well, for us old-timers, Stuart Butler, of the conservative Heritage Foundation, projects that the government has to "renegotiate" the Medicare, Social Security and Medicaid programs, which means smaller checks for everybody. This certainly falls under the heading of: "lower standard of living!" This may sound like nothing to you, but let me tell you that once the multiplier takes over, it is going to be a sizable whack to the head of the economy, which is, in German, probably something like: grosse kopfschlag uppensiden ekonomie gewhacken oof!


The Mogambo Guru
for The Daily Reckoning

November 28, 2005

****Mogambo sez: If you needed any more reasons to buy gold, let me quote Gary North of the Reality Check newsletter for another on, "I think a squeeze is coming that will affect the entire banking system," he writes. "The madness of bankers has become unprecedented." So keep on buying gold, silver and oil – as much as you can carry.

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, and a vocational 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.

P.S. In case you were wondering, the "fiscal hurricane" phrase came from Isabel Sawhill of the Brookings Institution, who was also the first director of the U.S. Congressional Budget Office in 1974. She compares, "The growing gulf between what the government spends and takes in, to a ‘Category 6 fiscal hurricane.’

Gold is only $4 short of $500 and the Dow is not far below 11,000.

No one seems either jubilant or alarmed. Instead, a sort of stupid numbness has settled over investors. All the news, no matter what it is, reassures them.

This attitude of reckless complacency must be a product of the Great Moderation. The Fed has proven that it can control the business cycle, says Fortune. Over the past 20 years, crises have come and crises have gone. Each crisis deftly managed by the Fed and none disturbed the underlying tranquility of the world’s financial system…or shook investors’ faith in the people who run it.

Of course, the confidence is not limited to investors. Ordinary householders are now leveraging themselves as if they were Jesse Livermores; they are sure that nothing bad will happen.

"Holiday shopping +22% over weekend," reports the FT. So far this holiday season, people are spending nearly a quarter more than they did last. What is remarkable about this is that it seems so out of place next to the other news items in the paper. Elsewhere, we discover that household earnings are falling for the second year in a row (not news to us) and that average hourly wages are no higher in 2005 than they were in 1973 (again, not news to us).

How can people who earn less spend more? Of course, that is merely a rhetorical question; we already know the answer. They do it by going further into debt. They are confident to a fault – unflappable, immoveable, almost as if they were dead. While obvious, the fact of it bothers almost no one – your editors excepted. The rest of the world believes, as Fortune put it: "It is the sheer free-market vibrancy of the U.S. economy that will probably be its greatest strength in the decades to come."

But it is our sad lot in life to remind readers that things do go wrong from time to time, free market vibrancy or not.

If the last 10 years have been a period of "Great Moderation," the 10 years of the late ’60s and early ’70s must have been a time of "Great Extremism."

There was a, "Stampede out of paper money," reported Roger Eglin in The Observer, on the March 17, 1968. "Spurred on by greed, fear, hysteria and ignorance, European civilization’s seams were creaking…The French threw their urbanity out of the window and punched and fought like animals to get gold. Men in Throgmorton Street and around the City (London’s equivalent to Wall Street) were desperately worried…"

They had good reason to be worried; the world’s financial system seemed to be breaking down. Merchants were reluctant to take dollars; international exchanges were blocked.Travelers were stranded without cash.

"Even having the money with you can still bring problems," Eglin explained. "People are getting frightened by the sight of foreign currency. The Hilton hotels in Rotterdam and Amsterdam are not changing foreign currency for guests, although they will take it for bills…’People are no longer prepared to hold money,’" Eglin quoted a broker, "It’s an expensive process holding gold, but it’s a better short-term holding."

"No one wants to tough paper – especially anyone else’s – unless he is forced to do so.The confidence that props up the international money system is being eroded. Once this starts it could spread like wildfire."

He was referring to non-Americans. Holding gold in the United States was still against the law.

"The mighty dollar," Eglin continued, "once the lingua franca of world money, has caught the plague. Dutch bank managers for 10 days have been telling their clients to get out of dollars and into guilders or marks. One London merchant bank ditched its dollars for marks earlier last week…Panic is even creeping in. Last week a London hotel would not take payment from a party of Americans in dollars or Swiss francs…"

The years of the Eisenhower administration were calm. Readers will wonder what happened to cause such a landslide in confidence. Was not America on top of the world in the Johnson Administration, just as it is in the time of Bush? Had we no central bank with a genius at its head? Did not the U.S. economy vibrate then…as now?

Again, we only ask the questions because we like the sound of them.

Then, as now, the United States was increasing spending at a breathtaking rate. The war du jour back then was in the jungle, not the desert, but the landscape of domestic spending was almost exactly the same as it is today. If anything, the dollar should have been stronger then, than it is now. At least in the 1960s, voters, householders, and legislators still felt they should pay their bills. Lyndon Johnson proposed a 10% tax increase to try to bridge the gap between outflow and income. It was rejected by Wilbur Mills, head of the House Ways and Means Committee. He wanted guns and butter, too, but he knew the taxpayers wouldn’t want to pay for them.

And so, the matter was thrown onto the international financial markets. Especially in Europe, people still recalled how quickly things could get out of control. In Germany, in the 1920s, the price for a beer rose before it had been drunk. Inflation set off a "flucht in die sachwerte" – a rush into material things – that was remembered even in the ’60s.

The favorite material thing in such times is gold. Pressure on the gold price forced the Nixon Administration to drop the last vestige of gold backing for the dollar in 1971.Over the next nine years, the price of the yellow metal rose 2,000 percent, and mortgage rates hit 18 percent.

Eventually, markets settled down. And now, after such a long stretch of "moderation," extremism is underestimated, under-appreciated, and under-priced. But does this mean that modern Americans will never flap again? Again, another rhetorical question.

More news from our currency counselor…


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

"The point I’m trying to make here is that RBC and HSBC, tried to start the wave and it stopped. Now they’ve picked up Morgan Stanley, and we’ll see how far the wave can go on."


Bill Bonner, back in London with more thoughts…

*** We have been wondering whether to jump on gold now, before it goes over $500, or to stick with the discipline of buying on weakness. Our current target price is $450, which is far below the current market price of $496. Still, gold will most likely correct soon. It is far above its 200-day moving average: $440.

*** What is it about gold? Does it have some mystical quality? Is gold the key to prosperity?

Well, ‘no’ to both questions. It is just another element. But over many thousands of years, by trial and error, gold has been discovered to be very useful as a means of exchange, and a store of value. No law makes it so. No opinion on the issue matters. You might as well wonder why people wear wool clothes, why men and women pair up, or why people eat turkeys for Thanksgiving. There is no law that says you have to do so. But whatever your purpose, some things work better than others.

People are always experimenting with other forms of money. Governments prefer money they can control, naturally. They particularly like the paper money, because it is so accommodating. Since the invention of the printing press, they can produce as much of it as they want.

But just because a politician says a piece of paper is valuable, doesn’t make it so. Here at The Daily Reckoning, when we hear a politician say something, we’re inclined to believe that the opposite is true. We have seen no successful government program in America since World War II. Why would the government’s new money be any better?

Does gold make you prosperous? Of course not. It only measures past prosperity. If you have gold, but do not produce a positive cash flow, you grow poorer all the time. Gold is just a handy way of making sure that what you’ve earned does not disappear suddenly and completely.

The Daily Reckoning