Hollywood Economics

The basic elements of economics can prove too difficult for some to understand… realizing this, and thinking how unfair it would be for anyone to miss out in the joy that is the story of the U.S economy, The Mogambo Guru explains it in way that we can all grasp…

"Everything that could go wrong did go wrong, yet the U.S. economy sailed right on through," writes Caroline Baum on Bloomberg.com.

"If you consider the litany of negatives buffeting the economy since the bursting of the stock market bubble in 2000 and the 2001 recession, it’s something of a miracle that it managed to grow 2.3 percent in 2002, 4.4 percent in 2003 and 3.9 percent in 2004 (all on a fourth-quarter over fourth-quarter basis)."

She does admit, "The economy expanded in 2001 as well, albeit at a miniscule 0.2 percent rate."

Zero Percent Inflation: Prices Jump 10%; Sales Rise 7.8%. Not Good.

Yep, and I’ll tell you how it is done, only in Hollywood style. The scene is set in the swanky offices of your typical CEO, or Chairman of the Board, or majority stockholder, all of them ruthless tyrants whose names strikes horror in the hearts of the proletariat trash who toil under my brutal command, night and day, while I am living it up by seriously under-funding their stupid little pensions that I am trying to dump on the government, so they will end up with something, so what in the hell are they bellyaching about?

Suppose I sold a hundred widgets last year at ten bucks a pop. So total GDP = $1,000. This year, I sell 98 widgets at $11 each. GDP = $1,078, which is an increase of $78! The freaking economy is soaring by 7.8 percent! The economy is white hot! Yow! Buy stocks, any stocks, but especially shares of Mogambo Enterprises if the SEC hasn’t shut them down already.

In normal times, that is to say, during the entire freaking course of human history up until the last fifty years or so when people really started losing their minds, probably due to something in the water, but when prices go up by 10 percent and sales go up by only 7.8 percent, you were typically in big freaking trouble. And then you started drinking heavily, which made everything worse. And especially so, ESPECIALLY SO, when total production was actually reduced by 2% to start with! I mean, it’s head for the hills time! And now you gotta finally make that decision whether to take your family with you, or abandon them to the wolves like they deserve, the ungrateful little leeches, and now that I think about it they were nothing but a millstone around my neck in the best of times, which weren’t such hot times to start with, and even those relatively wonderful days are gone, and now it’s every man for himself, so get outta my freaking way, I’m coming through!

Zero Percent Inflation: Adjusting For Quality

But nowadays things are different. Thanks to Michael Boskin and the Federal Reserve, those pesky questions about the ten percent inflation, and how this is supposed to be such a bad thing, can be easily explained away! Ain’t science wonderful?

It goes (pause for dramatic effect) like this: The government official looks at you like you are some kind of lowlife dimwit and who needs to be spoken to gently, or maybe we’ll cry or something, and he says, "You forgot to adjust for quality, stupid asker of stupid questions! I know that’s you on the end of this phone, Mogambo, you stinking lowlife dimwit! But for the last damn time, last year the damn things caused three deaths." Then he holds up three fingers to make sure that I somehow grasp, with my obviously limited intellect, the whole concept of the number "three" and then I say, "I’m on the end of the phone, you moron! I can’t see you holding up three fingers!" And then he gets really huffy like only a dimwitted career government worker can get.

Through clenched teeth he goes on to say, "And this year only caused one person to bite the big one, and too bad it isn’t you, Mogambo, and why don’t you be the one to die, you horrible little man? So anyway, the whole point is that widgets are getting safer! Don’t you get it? So you are getting more widget for your money!" And so I say, "Huh? I was happy with the OLD widget, as I never had one where I drank a lot of beer or took medications that made me drowsy or took shots of straight liquor, mostly tequila, when I was consuming, operating or building a widget, and even then only under the supervision of an adult or a boss who hates my guts as much as I hate him, and I caution you to never try this at home, as I AM a professional at this widget thing."

But, somehow, the basic widget did NOT go up in price, see, and you merely paid extra for the extra quality! Therefore, and my brain is already reeling from the paradox, there was no inflation in price! Even though the price went up! And the explanation for this seeming impossibility is that you only paid more for the extra quality, sort of like paying $600 more for a car with a better stereo! But if you bring up the point that this is a really stupid thing to say because I never listen to the radio anyway; I am always too busy yelling at the other drivers on the road and criticizing their stupid lack of driving skills, and if I had the radio on, then I couldn’t hear their stupid replies (although I can always see their rude hand gestures, sometimes from the kids!), so a damn $600 dollar radio means nothing to me. But then they always say, "What about the passengers? Wouldn’t they like to listen to something soothing instead of your stupid screaming all the time?" and I say, "Screw them!"

But this is not about some damn radio, and why the car costs so much, which we wouldn’t even be looking at if the wife hadn’t decided that she is suddenly too classy and "uptown" to hitchhike anymore. No, this is about how, through the magic of mathematical wizardry and sheer nerve, then they can prove – ya gotta love it! – that inflation was now, magically, zero! Zero percent inflation! Nirvana! Utopia! Economic perfection! Then (and this is the best part because the media, and the stock shills, and the bond shills, and the real estate shills all really eat this stuff up), and after you adjust GDP for inflation, you still had growth in GDP!

Of course, I gotta come home and listen to the wife moaning about the high cost of widgets, and then I politely tell her, "You forgot to adjust for quality, you stupid woman! After you adjust for quality, they are NOT higher in price! Don’t you know any of this stuff, ya old bag?"


The Mogambo Guru
for The Daily Reckoning
March 14, 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.

The big number came on the last day of last week – $58.3 billion. It sat on the weekend news like a bum at a wedding. Where did he come from? Where was he going? No one wanted to ask questions; he might be a member of the other family!

58 billion is a lot of money. In fact, it is a record. It is the difference between what Americans sold to foreigners in the month of January and what they bought from them. It is a negative number. On a chart of the nation’s accounts, it would be in red. Or in brackets. Or preceded by a minus sign.

If it were divided between the nation’s families, it would come to about $600 for each one. This represents only a single month’s trade deficit, so we should multiply it by 12 to the get the measure of damage on an annual basis, giving us $7,200 per family per year. That is roughly the amount of money the average family spends each year that it doesn’t have. It is such a big number, compared to the average family’s income that we wonder if we’ve done the arithmetic correctly. On a macro-economic scale, calculates Warren Buffet, the nation spends 5% more each day than it earns. But these numbers suggest that at the average, lumpen-household level, the amount is probably closer to 10%!

In the old days of the gold standard, the nation on the plus side of this exchange would pile up its excess foreign currency and take it to the other nation’s central bank. Gold was the common reference and an uncommon restraint. It was real money. If a nation ran out of gold, it ran out of money. It could no longer borrow. It could no longer run trade deficits, because when the foreign currencies were presented to it, it would have no means of settling up. It would have to declare bankruptcy, which happened from time to time.

But it has been 34 years since the United States settled its overseas obligations in gold. Since then, it has found it far easier to offer U.S. dollar-denominated Treasury bonds. Remarkably, the foreigners accepted them… as if they were as good as gold. More remarkably, for most of that time they were not only as good as gold – they were better. Gold fell in price for two decades following Ronald Reagan’s first presidential election. Overseas central bankers took the Treasury bonds and felt grateful, even lucky, to have them.

America was just too lucky. It could spend without really paying. It could borrow without ever really paying back. It could dig itself into such a deep hole of debt, it may never get out.

Yet, that long, lucky trend is coming to an end. Gold rises. The dollar falls. Bond yields rise too. Now, the foreigners are losing money on their Treasuries and looking at alternatives. Just in the last couple of weeks, the Koreans and the Japanese said they would lighten up on dollars. Other central banks are sure to be considering it. Private citizens, Warren Buffett and Bill Gates have already done it. Daily Reckoning readers should think about it, too.

More news, from our currency counselor…


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

"Foreign net security purchases data is measured vs. the deficit to see if we are attracting enough financing for our deficit! We’re a little behind on this data, but still it is a lot like me…it carries a lot of weight!


Bill Bonner, with more opinions:

*** The U.S. money supply is growing even faster than the trade deficit. Sixteen billion was added to M3 the week ending Feb. 28. Wal-Mart sales are increasing. Forbes says the people on its super-rich list are richer than ever.

*** The Financial Times reports that bankruptcy specialists are adding staff. They are on "bubblewatch," said one analyst quoted by the paper. Over the past eight months, $100 billion of debt-financed deals were done in the United States and the United Kingdom. Many of these deals will run into trouble. Debt restructuring will be the next growth sector in the financial community.

*** A note from Steve Sjuggerud:

"A penny now costs two cents to produce! It cost the U.S. government 3.8 cents to produce a nickel and 0.98 cents to produce a penny, according to the U.S. Mint’s last annual report, dated September 30, 2003. We haven’t heard from the Mint since then, but metals prices have nearly doubled. By my quick math, as of this morning’s metal prices, it would cost 1.7 cents to produce a penny and 7.2 cents to produce a nickel today. Am I the only one who’s ever run these numbers?

"The government needs raw metal to produce the coins. Anyone want to go in with me and set up a metal recycling business outside the mint? We buy freshly minted pennies and nickels for 1 cent and 5 cents respectively, melt them down, and then sell the metal back to the mint for 1.7 cents and 7 cents. It’s the perfect business…

"Don’t we wish – what’s more likely is the government will take the profits for itself. It will have to change the metal content of the coins. Older, worn coins will be turned in (if we’re not forced to turn in our old coins), and the government will melt them and make the profit for itself. Argh! You do own gold coins by now, right?"

*** "I didn’t know anything," is Bernie Ebbers’ defense. "Besides, I’m incompetent and had no business at the head of Worldcom."

We have no reason to doubt him. We guessed he didn’t know what he was doing even when Worldcom was flying high. But, then, we have a keener appreciation for ignorance and incompetence than most people. We see it almost everywhere we look. Sooner or later, it undermines all the world improvers, who never know what they are doing. And even in private business, it is widely underestimated.

More evidence comes in the weekend paper. There, Kurt Eichenwald chronicles the farce at Enron. Apparently, none of its executives understood what was going on.

Enron executive Jeff McMahon: "We don’t have any method for tracking our cash? That’s impossible. We’re a Fortune 50 company. We have to tracking our cash!"

Enron executive Ray Bowen: "Come on guys. I mean, how can we manage our finances if we don’t track our cash?"

Enron executive Tim Despain: "Ray, I’ve never… nobody’s ever asked us before to focus on it."

Enron was broke.

How could people be so stupid? We have developed a principle to help explain it: As you go from the immediate, small, private events of our personal lives to the large, abstract, mass events of public institutions, ignorance increases by the square of the distance… and the cube of the scale.