Laughable "Loans" To Prevent the Bust

With both the U.S. government and U.S. consumers in debt up to their ears, you would think that "loaning" money to anyone would be impossible. Well, you’d be wrong…sort of. This week, the Mogambo maintains his ever-vigilant Laugh Of The Damned (LOTD) at this new batch of stupidity…and is delighted that those debt-addled ears are still slightly above water.

When I woke up, it was morning, which meant that the economic world did not blow apart during the night, abruptly waking me up by setting off loud alarms in the Mogambo Big Battle Bunker (MBBB), rudely alerting me to another outbreak of serious financial trouble from the economic cataclysm ("bust") that I figure is right around the corner, now that the decades of irresponsible over-creation of excess money and credit by Alan Greenspan and his misbegotten Federal Reserve ("the boom"), and the rest of the central banks of the world, are wreaking their inevitable damage.

Which is not to mention the inevitable wars that usually break out about this time in the economic cycle, either, which is another damned thing to be paranoid and worried about – as if worrying that my wife, children and creditors are trying to drive me to suicide with their incessant demands for more money, more money, always more money is not enough to worry about.

But perhaps I am just in shock, or becoming jaded, because while Total Fed Credit went down by a massive $19.3 billion dollars last week, I am strangely not shaken or afraid, as it seems so insignificant nowadays, especially compared to the $142 billion increase of the previous week, which, despite my deadened sensibilities, still merits an exclamation point!

Then, just as I was congratulating myself on how "cool" I am and how maybe I am finally growing up, I was again instantly childishly hysterical when I read at that "The U.S. government is prepared to lend more than $7.4 trillion on behalf of American taxpayers, or half the value of everything produced in the nation last year, to rescue the financial system since the credit markets seized up 15 months ago."

My brain went into convulsions, as the average increase in Federal Reserve credit was a measly $10 billion per month during the Greenspan years that created the bubble, and even Bloomberg notes that Fed lending is now "1,900 times the weekly average for the three years before the crisis." Yikes! We’re freaking doomed!

Laying there on the floor clutching at my heart and waiting for the emergency squad to get here, I was laughing and choking up blood at the irony of American taxpayers "loaning" $7.4 trillion dollars – half of GDP – when the problem is that American taxpayers are already up to their ears in debt and can’t make the payments as it is; and American corporations are up to their ears in debt, and all the federal, state and local governments are up to their ears in debt, which is actually good news because with their ears still above the congealed mess, they can hear me laughing at them, mocking them, and saying, "Welcome to the hell you rightfully deserve, you halfwit lowlife morons! Hahahaha!"

So, I have some bad news for the U.S. government; the taxpayers are not prepared to loan anything to anybody! Hell, total debt-to-GDP is over 350% already, maybe 450%, which is, either way, the highest, by far, of anything I’ve seen in U.S. history, including the height of the Roaring Twenties boom that preceded the Great Depression!

Well, Bloomberg is not interested in the Mogambo Rude Mocking Laugh (MRML) and they do not ask things like, "Tell us why you are so dismal, disdainful and derisive, oh, Fabulous Mogambo Person (FMP) upon whose full, sensitive lips is bloody froth and scornful laughter that chills our spines!"

Perhaps it is because nobody cares about me, or perhaps because $7.4 trillion is already just another big freaking number that defies comprehension, but Bloomberg continues, "The unprecedented pledge of funds includes $2.8 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg." Yikes!

But this, as horrifying as it is, is typical government crap, and if you want a good example of the kind of governments we have, reports that "New York Mayor Michael Bloomberg said his administration wouldn’t send $400 property-tax rebate checks due this month to owners of apartments and houses because the slowing economy threatens to worsen a widening budget gap." Hahaha!

I wipe the tears of laughter from my eyes and ask, "Seeing the way the government steals the buying power of the currency, the confiscation of taxes, and now seeing what appears to be outright theft, you STILL say I’m wrong about gold? Hahaha!"

Whee! This investing stuff is easy!

Until next time,

The Mogambo Guru
for The Daily Reckoning
December 01, 2008

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.

O! Bama! Where is thy bounce? Maybe it is here…

‘Black Friday’ turned out to be less dark than people feared. Sales rose 3% over the year before. This was a ‘weak start’ to the holiday shopping season, reported the New York Times. But to us, it was surprisingly strong.

In fact, many shoppers were so eager to part with money they would kill you if you got in their way. We’re not exaggerating. This report from the New York Times tells what happened at a Wal-Mart:

"Suddenly, witnesses and the police said, the doors shattered, and the shrieking mob surged through in a blind rush for holiday bargains. One worker, Jdimytai Damour, 34, was thrown back onto the black linoleum tiles and trampled in the stampede that streamed over and around him. Others who had stood alongside Mr. Damour trying to hold the doors were also hurled back and run over, witnesses said.

"Some workers who saw what was happening fought their way through the surge to get to Mr. Damour, but he had been fatally injured, the police said. Emergency workers tried to revive Mr. Damour, a temporary worker hired for the holiday season, at the scene, but he was pronounced dead an hour later at Franklin Hospital Medical Center in Valley Stream."

Of course, when you’re fighting a major war there are bound to be some casualties…and some collateral damage. As we keep saying, the latest fashion trend is being led by the frugalistas. But some people are slow to catch on…such as the mob in Valley Stream, NY. At least Mr. Damour died in the line of duty…serving his country as it desperately tries to avoid coming to its senses.

It’s war, remember. The feds are spending more on this war than on WWII. They’re ‘pulling out all the stops.’ They’re ‘throwing caution to the wind.’ They’re ‘riding hell for leather’ to rescue the U.S. economy. Getting in their way is dangerous. For investors and store managers.

Investors should check their shorts. A major rally could be very costly. Stocks could easily bounce back half way to where they began. That would put the Dow at about 11,000. If that happens – and it could – don’t forget to sell.

It says in this morning’s International Herald Tribune that the feds are "going for broke" to avoid a "financial collapse." Yes, exactly…that is where they are going.

Bloomberg came up with its count of how much the war against nature is costing: $7.4 trillion…with $2.8 trillion already committed. We reported a figure over $8 trillion yesterday. By the end of this week, it will probably be $10 trillion.

Anyway you look at it, it’s a big number. It has to be. According to the theory given to us by Keynes, the government has to make up for the spending private citizens are no longer doing. Americans used to ‘take out’ as much as $200 billion per quarter from their home equity. Now, they have nothing to take out. So, that’s $800 billion per year that needs to be replaced right there. And, instead of taking out, they have to put back in…that’s what a ‘balance sheet recession’ is all about. They have to pay off debt and build up savings. Our own guess is that that figure – the amount that used to be spent, but must now be used to repair finances – will rise to about 10% of GDP – or about $1.4 trillion per year. In other words, the feds will have to spend an extra $2.2 trillion per year.

For comparison and reference, the Times is reporting a $1 trillion figure. And economists argue that $750 billion of federal spending would achieve the equivalent of $1 trillion in additional output, thanks to the ‘multiplier effect.’

But today’s Times’ editorial goes on to say something uncharacteristically smart: "fighting today’s crises the government is teeing up the next one. To finance the bailouts, the Treasury is borrowing money and the Fed is printing it. That bodes ill for a heavily indebted nation, presaging higher interest rates and higher prices – perhaps sharply higher."

Let us remind you of Tainter’s simple explanation for why things fall apart. Problems bring solutions. Solutions bring more problems. And each solution has a cost. Eventually, the weight of all the solutions crushes the system.

But we’re not going to worry about that now. We’ve got a bounce on our hands…finally! The Obama Bounce is here!

Or, at least that is how it looked to us at the end of last week. The shoppers were out…and the Dow had a winning streak last week. It rose again on Friday 102 points. Oil remained unchanged at $54. The euro/dollar exchange rate is staying put too at about $1.27 per euro. And gold rose $8.

*** "It doesn’t affect us…" said Edward, 15. "Except that you don’t let me call for a pizza anymore. I have to go pick it up myself."

The two of us – Edward and his father – have been living the bachelor life. Elizabeth returned to the United States for her mother’s 80th birthday. The other children are dispersed all over the world. Your author’s mother – who lives with us part of the year – went back to the United States with Elizabeth. That left just the two of us, uh huh…uh huh…

Fortunately, Paris is full of restaurants and other distractions. We had dinner with friends along the canal St. Martin…the restaurants and bars were full. Then on Saturday, we were turned away from one restaurant; it was ‘complet,’ said the waiter.

But wherever we went, whomever we spoke to, the subject was the same – the worldwide financial meltdown.

"Crisis that touches everyone," says the International Herald Tribune.

Au contraire, the crisis doesn’t seem to have touched anyone in Paris. At least, not much. In Zurich, too, there were few signs of a downturn. Christmas decorations have gone up. Shoppers have come out. Life goes on as usual.

Except for a few banks and pension funds, Europe never got caught up in the credit bubble the way the Anglo-Saxon countries did. Housing prices rose strongly, but were never based on mortgage debt or speculation. Generally, people kept their heads. Europeans never quite got in the party mood…and now have no hangovers.

Over in the English-speaking world, though, it was madness on the way up…and it is madness on the way down. Which is great fun for economists…but a little nauseating to the poor guy who’s just along for the ride.

And now everyone is caught in the gloom of the après-bubble world.

In the United States, auto dealers were the pillars of the local community. They provided convertibles for the high school football games. They led the fund drives for widows and orphans. They supported the local restaurants and bars with bonhomie and dollars.

Now, the auto dealers are in trouble. Not that they aren’t still ready to help the Fair Queen; it’s just that they don’t have any money. Sales have flattened. The salesmen put their feet up on the desk and snooze, confident of being undisturbed. While the crowds trample clerks at Wal-Mart, people selling big ticket items – consumer durables – are as lonely as a hermit. It’s one thing to lay down 10 bucks for a geegaw from China. But a $10,000 or $20,000 commitment demands reflection. And few people who stop to think about it are going to spend money – not with a major recession settling in.

How bad will it get? Of course, no one knows. At the present rate of walking backward, the U.S. economy will retrace 4% of GDP in 12 months. Nouriel Roubini says he expects the slump to take 10% off America’s GDP before it is over.

The recession of the early ’90s took only 1.3% off US economic output. The Great Depression, on the other hand, was a 25% setback (if we recall correctly).

How much will people be ‘touched’ by the slump? Again, we don’t know. What can you do? Prepare for the worst. Hope for the best. Watch out for hordes of shoppers. And beware the bigger bust the bailout brings.

(More about that as our Daily Reckoning continues…tomorrow… Note that we’re on our way to South Africa today…then on to Mumbai. If you don’t hear from us, it is not that we have forgotten you. Either we have been unable to get an Internet connection…or we are being held hostage by terrorists…)

Until tomorrow (hopefully),

Bill Bonner
The Daily Reckoning