Lie and Keep Lying

There have been six major economic recoveries in the postwar period. They all had vigorous income and employment growth in common. But what about the most recent recovery? Let the Mogambo explain…

The One Big Thing (OBT) that I am constantly screaming about, and screaming about, and screaming about, is inflation. I scream about inflation until I am hoarse from screaming in fear about it, and my throat is so sore that I am now reduced to writing apocalyptic warnings on large placards and standing by the side of the road, maniacally waving them at people who are stopped at the traffic light.

Even my dog has started whimpering and frantically scratching at the door to be let out every time he hears the word "inflation."

Mr. Ure, of UrbanSurvival.com, notes that crude goods prices are up 22.4% year over year, and that intermediate goods are up 8.1% year over year. This is inflation writ large. But somehow, finished goods are showing no inflation! How can that possibly be?

Well, with so much competition engendered by a Federal Reserve banking system that gave loans to anybody who wanted to start or expand a business, firms that raise prices make fewer sales, so the firms have to eat the higher costs. He says, "What it means is that prices paid for crude and intermediate goods that are used to make finished goods have continued to increase, while the pricing power for finished goods has only kept pace with inflation – if that. It squeezed profits generally, and that leads to layoffs."

And if I may add my usual snide remark, companies that are laying people off are not famously known for simultaneously raising wages, except to the weird computer models and the hundreds of weird little low-IQ "economists" at the Federal Reserve.

But wages are not rising as fast as prices, which means that people buy less with their static paychecks, which means that factories sell less, which means that factories produce less, which means they don’t need as many workers, which means that there is a glut of labor, which means that wages are not increasing, due to a lack of demand for labor, which gets us back to the beginning, where we learned that the Mogambo is screaming, screaming, screaming that wages are not rising as fast as prices.

Mass Layoffs: Not Uniquely American

Mr. Ure goes on to say, "As anyone can see, the mass layoffs in July were up significantly, and we have to wonder what the August report will look like. The mass layoff picture clouding up again is not a uniquely American problem, either. We note, for example, that in Germany, Volkswagen is saying that up to 30,000 jobs are at risk if workers don’t accept wage freezes and benefit reductions."

"Wage freezes and benefit reductions" is another way of saying, "Your stinking little paycheck ain’t a-gonna buy as much stuff from now on, my darling little herrenworkers and frauworkerettes, and you might as well get used to having a lower standard of living." I’m not even going to mention the fact that every year from now, your standard of living will get lower and lower and lower until finally, you can’t take it anymore and you scream, "The Mogambo was right! They are out to get us!" and you reflexively grab flaming torches and pitchforks and rise up in an angry, rebellious mob bent on blood revenge."

Kurt Richebächer, who is everybody’s favorite Austrian economist-type dude, probably because he is a really nice guy and is not, like me, a foulmouthed gun-wielding gold bug raving lunatic bastard always on the verge of going berserk in a blazing rage of homicidal fury, is also up to speed on this inflation and wage thing and says, "Looking for clues in history, we have pored over the data of past economic recoveries from recession in the United States. Altogether, America experienced six upturns during the postwar period."

So, let’s see here; That’s about 60 years, and there have been six upturns. Quickly reading ahead so it looks like I have a thoughtful, cogent comment, I innocently ask, "Mr. Richebächer, what did those six upturns have in common?" Playing right into my hands, he says, "They had many features in common, both in speed and pattern. Most striking among them was their extraordinary vigor in employment and income growth. Manifestly, all the recoveries were job and income driven."

Makes sense to me! If you make more money, you get to spend more. If you spend more, factories will produce more. If factories produce more, they must hire more labor, which bids up the price of labor, which means you make more money, which means you get to spend more. Man, I love this economics stuff!

Mass layoffs: Make More, Spend More, Produce More

I suddenly find myself dancing gleefully around, chanting, "Make more! Spend more! Whee! Produce more! Make more! Spend more! Whee!" I am up on his coffee table dancing my little Mogambo heart out in happy celebration when out of the corner of my eye I notice that Mr. Richebächer is calmly cautioning me to take notice of the fact that income growth is flat at best, and maybe even declining when viewed another way, and perhaps even plummeting like a stone when viewed through the Prism of the Way the Mogambo Views the Whole World and Everybody in It (TPOTWTMVTWWAEII), which is to see treachery, betrayal and impending catastrophic doom in everything.

This is where the Natural Instincts of the Mogambo (NIOTM) are made manifest, as I hear that (and follow my logic closely here) all previous recoveries had "extraordinary vigor in employment and income growth," but our current "recovery" has neither of them.

I fixate on the part that says all recoveries have extraordinary vigor in employment and income growth. I stop dancing. I sit down. I stand up. I look around. I notice that we do NOT have extraordinary vigor in employment and income growth. I ask with a plaintive cry in my voice, "Hey, Mr. Richebächer! Do you see any extraordinary vigor in employment and income growth?" He says nothing, but shakes his head sadly, which I assume means, "No."

Mass Layoffs: A Lack of Vigor

This means that, ummm, it means that, ummm, well, I admit that I have lost my train of thought. But it seems to me that there was something significant about the fact that all previous recoveries had extraordinary vigor in employment and income growth, and the fact that we currently have neither extraordinary vigor in employment nor income growth seems like it should mean something significant. I can’t exactly put my finger on what it means, but maybe you, with your giant, computer-like brain and your fancy-schmancy education can make something out of it and then explain it to me.

But since the significance of those two things escapes the Perpetually Confused Mind of the Mogambo (PCMOTM), it seems obvious that I could not possibly come up with a remedy. But it would be foolish to discount the government not coming up with a plan!

If wages are not rising as fast as prices, then (and I hope you love this as much as I do) let’s do something about prices! And since we cannot actually lower prices, then the next best thing is to do what government does best: lie and keep lying!

UrbanSurvival notes that the government has already employed "creative lowering of the measured inflation rates through hedonic pricing and other devices." And not content to show how much smarter they are than that idiot Mogambo, they even give the reason why the government is doing that. "Always keep in mind: One less percentage point in inflation equals one percentage point higher in productivity growth. In other words, GDP growth is grossly overstated."

Lie and keep lying!

Regards,

The Mogambo Guru,
for The Daily Reckoning
September 20, 2004

*** The Mogambo Sez: There is a theory going around that the dollar may soon, paradoxically, strengthen because there is such a universal consensus that the dollar must fall in value. In short, the market does the opposite of what everybody thinks, and since everybody thinks that dollar should fall, it will rise.

The reason that people think that is should fall is that there is no fundamental reason for the dollar NOT to fall, as it is being actively devalued by the Federal Reserve every day of the week.

If it does rise, the price of gold will probably fall. If it does, then try and contain your joy at what will probably be the last time that you will ever get to buy gold that cheap. If this does come to pass, I assume that, because you are a smart person, you will back up the truck and load up with the gift of cheap gold, as the long-term course of the dollar is inexorably down and the course of precious metals is, as a result, equally inexorably up.

And you don’t have to listen to me, and only a real idiot would listen to anything I had to say. But you would be well advised to listen to Marc Faber, who also suggests the accumulation of gold, "as it is the only sound money," and that "Gold should be accumulated continuously." But he agrees with me, even though I am sure that the very thought of agreeing with me about anything puts a bad taste in his mouth, that there is also a lot to be said for the bull market in commodities, and he especially likes the profit potential of "corn and coffee, and especially sugar and orange juice." Me too.

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 the better to heap disrespect on those who desperately deserve it.

Do you want to make a lot of money in real estate, dear reader? Well, it is easy enough.

Speculate! Leverage! Play the angles!

"Here’s what ordinary people are doing," explained a friend yesterday. "They have a house that they bought 10 years ago outside Boston or Washington. They paid $200,000 for it. But now it’s worth $500,000 or $800,000…or God knows how much. So they "take out" 200 grand in "equity" and use it to buy a place in Florida.

"Florida might be passé to you globe trotters, but there are still millions and millions of baby boomers in America who dream about retiring to Florida in a couple years.

"We see it all around us. People buy these places before they’re built…and then, after they’re built, they never move in. They hold for a couple of years and then resell. And then the new buyer never moves in, either. You go into some of these places and there’s hardly anyone there. It’s kind of eerie.

"The buyers might be thinking that they’re going to move down after they retire. Or they intended to flip the place from the very beginning. In the meantime, they only use it for a few weeks a year. That’s it.

"But look at what’s happened. These people might not be earning any more money than they were 10 years ago. Ten years ago, they could make ends meet with a $200,000 house. Now, they’ve got a half-a-million-dollar house in the Northeast AND another half-a-million-dollar place in Florida. That’s a big, big lifestyle improvement. And of course, it’s only possible because interest rates are so low and real estate prices are so high. We saw prices go up 30% in a 12-month period in our area of Florida, while the stock market went nowhere. You don’t have to be a genius to figure out why people are buying and leaving them empty."

"Yes, and there’s something else going on, too," began another friend. "Have you sent a kid to college recently? I’m the bad guy on our block now, because I had to call the cops twice last Saturday. I live in a college town, and some guy bought a house for his son, who’s a student at the university. The kid must have brought in his friends…there must be about 10 guys living there…and they have a party every weekend.

"But look at the math on that. The house probably cost about $300,000. And they’ve been rising at about 10% per year – at least. So he’s making $30,000 a year – that’s enough to pay his son’s college expenses. Not to mention that the kid has a place to live. In fact, as far as dad’s concerned, the kid’s probably gone to college at a profit.

"But there’s more to it. Because if you have a house in the state, you can get in-state tuition, which is lower…and here’s the other thing, they usually exclude the value of real estate when they figure out how much financial aid a student should get. Which kind of makes sense; they don’t expect you to have to sell the family house in order to put your kids through school.

"So what people are doing is putting their money in real estate – with a big mortgage. The value of the real estate doesn’t count…but the mortgage payments do. For the purpose of getting financial aid – you look terrible…you can barely make your payments. But you’re cutting expenses, because your kid is living in your own house…and getting his friends to pay to live there too…he’s collecting financial aid because your finances look terrible…and the $300,000 house – which you probably put no more than $30,000 down on – is going up 10% per year."

And now the news, from our man on Wall Street, Eric Fry:

_________________________________________

Eric Fry, from the financial Garden of Eden…

– Whatever happened to the "Land of Plenty?"

– We Americans still have plenty of things that we could do without, of course, like overpriced stocks, bad sitcoms and personal injury lawyers. But we seem to be running low on the things we need to keep the world’s biggest economy firing on all eight of its gas-guzzling cylinders.

– Crude oil soared almost $3 a barrel last week to finish at $45.59. Maybe we don’t have as much of the stuff as most folks believed one year ago, when oil was changing hands for only $29 a barrel. We also don’t seem to have as much gasoline or heating oil or natural gas as we thought we had. Week by week, the prices of most fossil fuels rise, while the aboveground stockpiles fall. A number of other commodities are becoming scarcer as well.

– So where did all the "plenty" go?

– Before addressing the question, a brief historical aside…

– As we all learned in grade school, the Pilgrims gathered in the autumn of 1621 to celebrate the first bountiful harvest in a land of plenty. The prior winter had been unrelentingly harsh – and fatal – to the new settlers. Half the colonists died. But as we also all learned in grade school, the survivors were hard working and tenacious and – thanks to a little help from Squanto – were able to gain sufficient agricultural expertise to survive in the new land.

– "The only problem with the tale, unfortunately, is that it’s not true," writes syndicated columnist Geoff Metcalf. "Oh, the part about the Indians graciously showing the new settlers how to raise beans and corn is right enough. But in a November 1985 article in ‘The Free Market’ monthly publication of the Ludwig von Mises Institute, author and historian Richard J. Marbury pointed out: ‘This official story is…a fairy tale, a whitewashed and sanitized collection of half-truths which divert attention away from Thanksgiving’s real meaning.’"

– The "real meaning," according to Marbury, was less a triumph of tenaciousness and faith than a triumph of laissez-faire capitalism. "The harvest of 1621 was not bountiful," Marbury points out, "nor were the colonists hardworking or tenacious. 1621 was a famine year, and many of the colonists were lazy thieves."

– In his "History of Plymouth Plantation," the governor of the colony, William Bradford, reported that the colonists went hungry for years because they refused to work in the fields, preferring instead to steal. Bradford recalled for posterity that the colony was riddled with "corruption and discontent." The crops were small because "much was stolen both by night and day, before it became scarce eatable."

– Then, Mr. Marbury points out, "something changed." By harvest time 1623, Gov. Bradford was reporting that "Instead of famine, now God gave them plenty, and the face of things was changed, to the rejoicing of the hearts of many, for which they blessed God." Thereafter, the first governor wrote, "Any general want or famine hath not been amongst them since to this day." By 1624, so much food was produced that the colonists actually began exporting corn.

– "What on earth had happened?

– "After the poor harvest of 1622, writes Bradford, "They began to think how they might raise as much corn as they could, and obtain a better crop." And what solution was decided upon? It turned out to be simple enough. In 1623 Gov. Bradford simply "gave each household a parcel of land and told them they could keep what they produced, or trade it away as they saw fit."

– "In historian Marbury’s words, Gov. Bradford "abolished socialism" in the colony, "replacing it with a free market, and that was the end of famines."

– All well and good; But the end of famines also marked the beginning of American consumerism…after all, if "just enough" was worthy of a Thanksgiving celebration, wouldn’t "more than enough" be even better? For nearly four centuries – and counting – we Americans have been consuming the bounty of our marvelous land of plenty.

– But there is little bounty left to consume. So we are importing record quantities of crude oil, natural gas and gasoline…not to mention record quantities of stainless steel, specialty coffee and bottled water – the staples of the modern American kitchen.

– Make no mistake; America is still the land of plenty – it boasts plenty of SUVs, for example, plenty of millionaire athletes and plenty of "cash-out" mortgages. What’s more, year after year we produce bountiful crops of anorexic female models, aggrieved special interest groups and antiseptic presidential candidates. Unfortunately, we do not always produce enough of the things we need every day.

– Last week, a group of Agora editors convened in Baltimore to discuss investment ideas (yes, we actually do hold such meetings). As we shared ideas with one another, we discovered that many of our specific investment recommendations derived in some way from America’s growing dependency on imports.

– One editor recommended an oil refiner, while mentioning America’s growing dependence on imported gasoline. Another editor recommended a cement company, while mentioning America’s growing dependence on imported cement.

– No one mentioned America’s growing dependence on imported capital, the most precious import of all. The country that used to be the world’s biggest creditor has become the world’s biggest debtor…and that’s not a good thing.

– A nation that relies upon foreigners, both for its natural resources and for the wherewithal to purchase these natural resources, is a nation that is likely to witness a great big bull market in commodities…at least when priced in its domestic currency.

– And don’t overlook the foreigners themselves. They are the most important element in this brave new world. So we’re sending Addison to China with a group of readers. They’re going to meet some important figures in the business world and sniff out some of the large factories and important financial installations. For more information, please contact Barbara Perriello (info@agoratravel.com).

————–

Meanwhile…Bill Bonner, back in Germany…

*** Germany is in a slump, everybody says. The economy is growing…but very slowly. Still, the place looks prosperous.

Outside the Petersberg Hotel, a large, luxurious automobile pulled up.

"What is that?" asked a friend.

The car was substantial. It had smooth lines, like a Rolls Royce, but with a modern, sculptured look. On the hood and the trunk were logos that we had never seen before.

"That’s a Maybach…it’s the new top-of-the-line model from Mercedes. It’s a great car, but it’s not cheap. This one is about $500,000."

*** "Right now, Bush has got a comfortable lead," said Chris Ruddy, proprietor of NewsMax.com, over dinner on Saturday. "But the race will probably tighten as it gets closer to the election."

We wondered why the race might tighten; it seemed more likely to us that it might fall apart. The more people get to know the candidates, the more they might turn away in disgust.

The only open question is which one is more reprehensible.

George W. Bush, it is alleged, dodged the draft during the Vietnam War and then failed to fulfill his obligations to the National Guard. That is mostly to his credit. The Vietnam War was a stupid disaster; anyone who was able to get through it with neither blood on his hands – nor on his shroud – was ahead of the game.

But 40 years later, when a new generation of young men’s lives are at stake, Bush volunteered the whole nation to undertake a mission as expensive, as foolhardy and maybe more dangerous than Vietnam. Liberals cannot vote for him, because he talks like a "conservative" warmonger. Real conservatives cannot vote for him, because he has taken up the most activist expansion of government since Roosevelt.

But who can they vote for?

John Kerry, on the other hand, reported for duty 40 years ago and tells us so every chance he gets. But as evidence of his wartime service comes to light, it appears his reason for going to war was more political than strategic, more practicable than honorable, more idiotic than patriotic. In other words, it looks as though the man had elections in mind, rather than military service.

Aiming for the White House, the young Kerry apparently hit a Vietnamese teenager in the back. What kind of man would do such a thing? We don’t know. But we have a naïve and trusting faith here at The Daily Reckoning. We believe people get what is coming to them. It is not for us to decide, of course. But though Kerry may or may not spend four years in the Oval Office, an eternity in hell seems more appropriate.

When the votes are tallied in November, one of those not counted will be ours.

We have no dog in this fight. Other Americans are likely to come to the same conclusion.