Mister, Can You Loan Me A Buck?

The Daily Reckoning PRESENTS: Spending money, borrowing money, investing money and loaning money…that’s what makes the economy go ’round. So what happens when none of the above is occurring? The Masked Economist sends his answer from deep in the Mogambo Bunker of Ultimate Defense…


I am having a hard time believing that the Federal Reserve is not expanding Total Fed Credit. In fact, it went down last week by $4 billion. Even currency in circulation is down. For a bunch of guys who are so hell-bent on flooding the world with money and destroying the United States with inflation, the Federal Reserve is suddenly doing a very poor job of it!

It’s almost as if they woke up one morning and had the sudden revelation: “My God! The Mogambo was right! We are a bunch of idiots, and our stupid New-Age, warmed-over, half-Keynesian-half-stupid monetary policy, combined with an asinine fascist/socialist/communist political hodgepodge, means we are really doomed!” And then they all jumped up and ran to work, and immediately started acting like competent grownups for a change. They immediately stopped that suicidal excessive creation of money and credit, which eventually drives up prices so high that people can’t afford to loan me twenty lousy bucks.

The real reason, I suspect, is much more prosaic; people have started stopping (as strange as that sounds) and borrowing money, as suggested by a report on CNNMoney.com. The report states, “Americans are among the world’s most cash-strapped people, according to the latest semi-annual survey from AC Nielsen. Nearly a quarter (22 percent) of Americans have no money left once they’ve paid for their essential living expenses and spent their discretionary dollars. That puts the United States at the top of a list of 42 countries for saving futility.”

I am going to gloss over the part where they seem to be saying how we ignorant wastrels out here have paid for “essential living expenses” and have also spent our “discretionary dollars,” too! So, is the survey merely finding out who just got tired of spending money before it was all gone?

I just don’t know.

Anyway, this goes along with the facts that about a quarter of the people have no health insurance because they can’t afford it, and a quarter of homeowners have no homeowner’s insurance because they can’t afford it. It also mentions that about a quarter of the drivers on the road have no automobile insurance because they cannot afford it, and 100% of the people I personally know cannot loan me any more money because they, so they claim, “can’t afford it.”

But life is not all bad, I am supposed to surmise, as CNNMoney go on to say, “Some good news for Americans – the results were an improvement from six months earlier, when 28 percent of those surveyed had nothing left at the end of the month.” Well, it may be good news for “some” Americans, but it is bad for America, as this means that at the end of the month there is a lot of money left over that was not spent on goods and services. The change may be due, Nielsen suggests, to “an attitude change – 42 percent of Americans (up from 33 percent) now list debt repayment as their first priority for spare cash.”

If my voice seems muffled at this point, it is because I am speaking to you via the cheap speakerphone in the Mogambo Bunker Of Ultimate Defense (MBOUD), and I am locked in here shaking in fear, because this lack of spending is bad news for the economy. Spending is what makes an economy! An economy requires that people have to be out spending money, making money, borrowing money, investing money, and loaning money, all of which it takes to make an economy go. And suddenly, we are “None Of The Above.”

Well, at this point I need a heavy medication regimen to control my fear, and am typing this with my nose because my hands are clenched in useless fists, as I am so freaked out, and so, without further ado, we’ll return to this very scary CNN report as they say, “Americans are saving more cash by curtailing some of their discretionary spending. Nielsen reports that 66 percent of those surveyed said they have cut down on take-away meals; 61 percent have turned down the thermostat to save on gas and electricity; 61 percent have cut back on home entertainment; 54 percent on new clothes; and 47 percent do less driving.” Yikes! Yikes! Yikes, yikes, yikes!

So, if your fabulous, high-paying job is overseeing some vast global empire having anything to do with drive-through restaurants, gigawatt utilities, catering services, fabrics and/or petroleum, then your business is in a slump. And you are in a slump because of all us over-stretched, over-indebted, over-leveraged people out here have been forced to “cut down” on buying your goods and services. And then one morning, you get to work and you learn that the board of directors has decided to make cuts in staff. One of the cuts is either you or The Mogambo, and then one Friday, when I am taking another of my famous three-day weekends that my stupid boss is always yammering about, I’m fired! For no reason! This is how recessions really hurt!

And now, what’s even worse, houses in some areas are suddenly not selling, or inventories of homes for sale is rising to historic records, or mortgage applications and originations are falling or something, and the global bubble in housing also seems to be cooling dramatically.

But this is all about economic collapse and blah, blah, blah, while it is price inflation that really concerns me. And along this line of thought, comes Doug Noland and his famous Bubble Watch column at PrudentBear.com, where he writes, “The CRB index closed at another all-time high. This week saw copper, platinum and zinc all trade at new record highs. For the week, the CRB index added 0.5%, increasing y-t-d gains to 4.6%. The Goldman Sachs Commodities index declined 1.2% this week, with a y-t-d gain of 4.0%.”

Now let’s get up, whining and complaining about having to get up, and walk over to the Economist magazine and take a gander at what they show prices are doing, according to their “The Economist Commodity Price Index.” Hmmm! I see that, in the dollar index, over the past 12 months, we have “all items” up 21.6%! Food up 13.5%! “All industrials” up 30.7%! Non-food agriculturals are up 18.6% and metals are up 36.5%! Oil is up 33.0%! Gold, precious, lovely, value-protecting, wealth-conserving gold is up 31.5%!

And inflation is everywhere, too! The Yen Index of “all items” has inflation at 34%, the Euro Index is up 28% and the Sterling Index is up 27%!

My God! If this ain’t price inflation, then what is it? And if we are not, as The Mogambo says, freaking doomed, then what is going to happen? What else could possibly happen? Things will magically get better? Hahaha! Let the Hollow Scornful Laugh Of The Mogambo (HSLOTM) ring in your ears!


The Mogambo Guru
for The Daily Reckoning
February 6, 2006

P.S. If, in the face of all of this, you are not buying gold, silver, palladium, oil and commodities of any kind, then you deserve what is going to happen to you! There’s still time…check out how you can make money hand over fist- by just dedicating four minutes a week on natural resources.

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, and a vocational exercise to heap disrespect on those who desperately deserve it.

We returned from the United States this morning feeling low. Maybe it was just the effect of so much traveling. It could the delayed effect of attending a memorial for a dear friend. Perhaps it was our drive down to the family farm…or the result of the book we were reading on the plane.

We had not seen the family farm in Maryland in a few years. As we drove to it, we wondered again about this extraordinary period of prosperity in the United States. By the gross numbers, Americans added more to their wealth in the last 20 years than in any equivalent period in history. But something seems wrong. What kind of wealth is this, we wondered? All we could see on our drive was a wealth of opportunities to spend money badly. The countryside is being junked up with strip malls and highways.

You can barely throw a beer can out the window without hitting a collection of Chicken Fil’s, WaWas, and Mr. Noodle’s…not to mention muffler shops and car dealers. There are more cars and more roads to drive on, but there doesn’t seem to be anywhere worth driving. And driving down the road itself is depressing. We remember as a child that our grandparents would get in the car on Sunday afternoon to “go for a drive.” It was fun just to drive around and take in the sights. We can hardly imagine doing that now.

On paper, people are a lot richer than they were 20 or 50 years ago, but it doesn’t seem as though the money has done them much good. Maybe our memory is giving out, but we don’t ever remember the area looking so shabby, so crowded, or so disagreeable.

When we finally got to the farm, we were disappointed to find that even our own place seemed to have fallen into the same junky disrepair as the rest of the neighborhood. The fences are broken. Trees have fallen down and lay on the ground like unburied soldiers. Shutters bang in the wind. We worked for 10 years building it up; now, it seems like a lot of time and effort for nothing.

But maybe that was only our mood and who really knows what causes moods or what our moods cause?

That we have moods, no one denies. They react to the world around us, and then cause us to change the way we think and act.

And they affect entire nations. Of course, we see this in the markets. Sometimes people are buoyant and upbeat about the future. Other times, people are downcast and gloomy.

Sometimes a dollar’s worth of earnings can be sold for $20. Other times, investors will turn up their noses even at a $10 price.

Sometimes moods sink – even deeper than stock prices – deep into the heart and soul of a people. Our reading on the flight was a book we found in an airport kiosk. It was a “social history” of the Soviet Army in World War II. Rarely has any group of people been so roughly handled as the Soviet soldiers in the ’30s and ’40s. If a soldier escaped being slaughtered by the enemy, it was only to be annihilated by his own government. Sometimes he managed to get lucky and get shot or he died from sheer incompetence…with neither proper gear…nor proper food…sans sleep…and sanitation.

And yet, why did these millions of armed men still not turn on their tormentors? Ah, that’s where mood – the zeitgeist – of the country plays its part. The people of the Soviet Union were, for the most part anyway, believers. They believed in the Soviet ideology, in rational materialism, and in Stalin himself. That is to say, they believed in things most people today regard as delusions. Even those who survived Stalin’s mass murders often still say his name with reverence…as if he were a national saint.

“You know what, I think the mood in the U.S. has changed a lot in the last decade,” said a friend at breakfast. “I remember when I went to West Point, we were taught to respect the enemy. He was a worthy opponent. If captured, he should be treated as well as you could treat him. In World War II, that’s what we did. That’s probably part of the reason so many Germans surrendered to us at the close of the war. They wouldn’t surrender to the Russians, because they knew they would be killed. And it’s probably why we had a relatively easy time reconstructing our enemies after the war.

“But I have a friend with a son at West Point now. What I hear is that they regard the enemy as though he were inferior…and no longer deserves either respect or the courtesies of the Geneva Conventions. Of course, that could be just his opinion. I don’t know…but I can’t imagine that we would have put burlap bags over the head of our prisoners in World War II, or had WACs stripping them down and kicking them in their private parts.”

How much has the mood of America changed in these last 20 years? In what direction? We know the average American will pay nearly three times as much for the same dollar of earnings. Why does he think it so much more valuable? What else has changed?

We don’t know.

More news from our currency counselor:


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

“Well, the Jobs Jamboree failed to produce the 250,000 new jobs that were forecasted, with the total coming in at 193,000, but the media and talking heads were all about the fall in the overall unemployment rate.”

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

————–Bill Bonner, back in London with more views…


*** The war in Iraq costs $150 million a day, according to a recent USA Today report. Afghanistan adds another $27 million.

Meanwhile, fears over Iran sent the oil price up last week. And then came Venezuelan President Chavez, with a helpful remark. He said he’d shut down U.S. oil installations in the country and sell his oil to China and India, if America got on his nerves.

And these tensions over Iran’s nuclear ambitions didn’t only affect oil prices…gold, the “safe-haven metal” traded near 25-year highs today.

“It might even be a calm before the storm. I think we’re going to see some further tests higher this week,” said James Moore, analyst at TheBullionDesk.com.

“The market is going to remain a bullish trend and we will continue on towards the $600 (an ounce) level, probably over the course of the year,” he said.

[Ed. Note: Diversifying your portfolio with the “safe haven metal” is one of the smartest choices you can make as an investor. But many people avoid gold investments because they aren’t sure what steps they need to take to get started. Luckily, our friends at EverBank have an easy and sensible way to do so – the Five-Year MarketSafe Gold Bullion CD – open to DR readers until February 14, 2006.

*** “The debt is exploding and the president isn’t facing up to it,” said Sen. Kent Conrad of North Dakota, the top Democrat on the Senate Budget Committee.

Dubya may not be facing it, but well-respected bond guru, Bill Gross, certainly is.

At a financial conference at UCLA last week, Gross “expressed concern that the game might be up – that foreign investors would decide that U.S. bonds and other securities weren’t worth the money, leaving the American economy suddenly desperate for capital,” notes the LA Times.

“In any case, the extent of foreign investor control over the U.S. economy’s fortunes is a cold reality,” Gross said.

Savings rates are at a 72-year low. Of course, back in the ’30s people had lost their jobs. They couldn’t save; instead they had to draw down savings simply in order to eat and pay the rent. Now, we just heard that employment is near a record high. So, now people don’t save for another reason – because they think they no longer need savings.

There will always be jobs, ATM machines, and home equity lines, right? What a strange public mood! It’s almost delusional. People cannot imagine that times could ever get so bad that they would need to draw on their own savings. There will always be someone ready to lend them money, won’t there? What they don’t consider is where the money will come from. If Americans no longer save, who will have savings to lend?

Well, that must be why God made foreigners.

*** Due to soaring deficits, the Bush administration will be forced to ask Congress to raise the national debt limit, which is now at $8.2 trillion…and counting. (To keep up-to-date, we have included a real-time debt clock on the DR home page – just go to https://dailyreckoning.com and scroll to the bottom.)

But never fear – Bush has made a pledge to cut the U.S. deficit in half by the end of his term in 2009…and how exactly does he plan to do that? After reading a bit about his new proposed budget, to start October 1 of this year, your guess is as good as ours, dear reader.

In his budget proposal, Bush is asking Congress for $120 billion to pay for the wars in Iraq and Afghanistan, on top of five percent increases in the Pentagon and Homeland Security budgets.

With these increases, to meet his goal of cutting the colossal deficit in half in the next three years, the budget plan calls for $36 billion in Medicare cuts over five years, as well as putting “the squeeze on the one-sixth of the budget that funds the nonsecurity operations of government – everything from running the national parks to buying paper clips,” CNN.com reports.

*** At the memorial service for our friend Thom, we got together as many surviving members of the old ‘Ouzilly Band’ as we could. Even at its best, the Ouzilly band was pathetic. Without Thom in the lead, it was worse. Still, it was a time for music, laughter and tears; that’s what Thom would have wanted. A performance of the Ouzilly Band accomplished all three. When people heard us play, they laughed, unless they were real music lovers…in which case, they cried.

The Daily Reckoning