Money Down the Rat Hole

The Mogambo is in full lock-down mode at his bunker – complete with a camouflage Speedo. Why is he so frantic? The lack of growth in Total Fed Credit has a lot to do with it…

Total Fed Credit has gone to zero for over a month now. This is, for me, the ultimate in bad news.

The lack of growth in Fed Credit is bad news because, as Peter Zihlmann of P. Zihlmann Investments explains, "The present expansion is the longest running expansion on record. It has surpassed all other economic expansions before it. The driving force behind it is the rapid growth of the money supply and the explosion of credit that has accompanied it." Many people are saying that the money supply is anemic, too, but that is not exactly true. In fact, M3 has accelerated over the last month above its trend for the last few years, although the monetary base has pretty much leveled off.

But if there really is no rapid growth in the money supply, and there is no explosion in new credit, then the longest-running expansion in history must be just that; history.

Gary Lammert, who is a practitioner of fractal analysis, writes that even when there is money and credit being pumped out, there is nothing to guarantee that the money will be spent on anything useful. "But without the growing money supply flowing into investments for the production of real and useful items that can be sold in a competitive manner to the global markets, the generated economic activity may be malinvested into cul de sacs of domestic services, speculative financial assets, and purely domestic production items such as housing construction."

The Next Economic Stimulus: So Far in Debt They Can’t Take Any More

So the money may be thrown down some rat hole or another, such as stocks or bonds or houses.

"Every great economic cycle," he goes on to say, "has a recognizable -usually in retrospective- apogee inflection point or day where markets peak and begin their primary descent. While the primary cause of this inflection point in major economic cycles is a decelerating rate of growth money supply (prior to an actual contracting money supply), the inciting composite elements of that decelerating money supply are a combination of fundamental evolving feedback conditions occurring in the real economy at the consumer level. At the consumer level – ongoing wages, consumer debt load, forward consumption status, and projected job status dependent on near term production needs – all factor into the deceleration of borrowing and hence money supply."

In short, sometimes people are already so far in debt that they don’t want to take on any more damn debt and then have to listen to their wives or husbands whining and complaining that they can’t afford to eat as it is, and borrowing MORE damn money to buy ANOTHER damn machinegun is crazy. Some people have called this the "puke point."

And if that wasn’t enough, in the last week, foreigners have suddenly stopped buying our debt through their accounts at the Fed. And the banks have suddenly divested themselves of $74 billion in government debt. In one week! One! And the banks got rid of another $11.5 billion in "other securities," to boot!

The only bright spot, if you want to call it that, is that mortgage activity in the banks took a big jump, as usual, meaning that the only thing that is selling well is the ultimate in humongously-expensive, time-consuming, non-productive things, namely houses.

The Next Economic Stimulus: Not Normal Times

Now, left to its own devices, the economy would, under normal circumstances, drift into a little recession, the excesses would be cleaned out, and the stupid businesses (the only kind that will hire me) would all go under, and the mismanaged businesses would all go under, freeing up resources of all kinds, and the busted people who acted like idiots would all be swearing that if they ever, EVER, get their hands on another dime, they will never, never, EVER act so stupid with it again as long as they lived. And, for awhile, people will try and save some money and make do without things they want, and savings would grow, and pent-up demand would grow, and then one day, for reasons that nobody can actually enumerate, things get a little better, and then they get a little more better, and then better and better and better, and after awhile the economy is perking again, only slightly different, since there are no stupid businesses or mismanaged business stinking up the joint.

But these are not normal times. The cover of Barron’s this week, with the headline, "When Will He Stop?" should convince you of that. The illustration is of Alan Greenspan pumping up a balloon with a bicycle pump. The balloon, emblazoned with "4%", is leaking air. The article, inside, by Randall W. Forsyth, who is one of the Assistant Managing Editors of Barron’s, wrote the cover story. He entitled it, "Leaky Balloon" with the subhead, "Greenspan’s end game." The story itself is nothing, as the whole purpose of that particular newspaper is to get people to buy stocks, and it would irritate advertisers to even suggest that everything was not wonderful, or even hint that today is not the perfect time to buy stocks, and lots of them. So it is not surprising that it does not even mention the cause of our problems; an out-of-control Federal Reserve and the resultant enormous levels of staggering, stultifying, smothering debt in every freaking corner of the world. So how insightful can it be?

But the article does contain a helpful suggestion as to where the next stimulus is going to be. He quotes Independent Strategy, a London-based consultancy, as saying "there is a paucity of corporate spending the U.S. and the rest of the developed world."

If this is true, and even if it is not true, then you can count on Congress to pass some more tax incentives to encourage businesses to spend. And since mere deductions, which only means that the business does not have to pay tax on the money they spent, are insufficient, look for tax credits, where the business gets actual cash from the government! Spend a buck, get some, if not all, of your money back! Talk about an economic stimulus!

Perhaps this explains an article in the Washington Post, entitled "The Road to Riches Is Called K Street," informs us that the number of registered lobbyists in Washington, D.C. has, since 2000, more than doubled. The fees they charge their clients have doubled.

Why this sudden lobbying activity? The Post explains: "The lobbying boom has been caused by three factors, experts say: rapid growth in government, Republican control of both the White House and Congress, and wide acceptance among corporations that they need to hire professional lobbyists to secure their share of federal benefits."

The Next Economic Stimulus: Pro-Business, but Pro-Government

Patrick J. Griffin, who is identified as "President Bill Clinton’s top lobbyist," says that the clients of lobbyists, "see that they can win things, that there’s something to be gained." It’s this next part that caused me to spew beer out of my nose. "Washington has become a profit center." Like this is news or something! Hahahaha!

But it IS news, because of the sudden sheer size of the money involved, as the article then went on to chronicle how the Republicans have sold out, becoming as loathsome as the Democrats, only better dressed, when they write, "The Republicans in charge aren’t just pro-business, they are also pro-government. Federal outlays increased nearly 30 percent from 2000 to 2004, to $2.29 trillion. And despite the budget deficit, federal spending is set to increase again this year, especially in programs that are prime lobbying targets, such as defense, homeland security, and medical coverage." In short, things to kill people, things to spy on people, and socialized medicine. Terrific. Just freaking terrific.

Having said that, this is where I always make my big mistake, as I always underestimate the lengths to which government will go, and the depths to which they will sink, to desperately try and ameliorate the damage that they continuously do. So I, foolishly trying in vain to learn from my mistakes, now say that you should look for more tax rebates, something on the order of a thousand bucks to everybody! Look for tax credits for buying cars and houses! Look for taxpayer money being spent to pay poor people’s down payments on houses! Look for elimination of capital gains on investments! Look for spending on energy development of all kinds! Drilling for oil! Solar! Wind power! Hydrogen power! Nuclear power! Biomass! Natural gas! Anything, Jack, anything!

And this is entirely possible, because when you have a fiat currency, there is no end to what a government can do to literally put money into people’s pockets. It is limited only to the extent of the human imagination, greed and fear.


The Mogambo Guru
for The Daily Reckoning

July 04, 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.

Everyone in America is on vacation today. But here at the summer headquarters of The Daily Reckoning we keep our lonely vigil on the world’s markets and its vanities – even on national holidays.

As to the former, there is not much to report. The New York Stock Exchange, as well as other American markets, are closed today. As to the latter, vanities, there is never any let-up; when it comes to pretensions, bosh and claptrap it is 24-hour trading, seven days a week, weekends and holidays included.

In Congress, for example, the peoples’ representatives have asserted a right to take a close look at China’s bid for Unocal. Free trade is all very well – as long as it comes out in your favor. Even Congress is noticing that it doesn’t. The House of Representatives is also threatening to impose a 27% across-the-board tariff on Chinese-made goods, if the Chinese don’t revalue their yuan.

The two ideas are at odds with one another. If the yuan is revalued, it gives China even more purchasing power for U.S. assets.

But the whole thing has politicians perplexed. The occasion calls for lies. This is no problem in itself; they’ve devoted their entire careers to telling lies. The problem is that they don’t know which lies to tell. They can tell voters that the United States has the greatest, most dynamic economy in the world. But that exposes them to the obvious question: What do we have to worry about? So what if the Chinese buy U.S. companies, in other words; they buy them because they’re the world’s greatest, of course. Or, they can tell voters the opposite lie – that we need to protect U.S. resources and American jobs. But that raises its own unpleasant questions: What is going wrong with the U.S. economy that we cannot compete on the world market? And, isn’t it Chinese protectionism that we were complaining about in the first place; how can we rail against the Chinese for protecting their own markets while we simultaneously tell the world that ours needs protection, too?

No American politician is going to admit the truth: that Americans work harder than any other group on the planet – but they get less from it.

Both Europe and North America are faced with the same challenge – competition from the East. Low wage countries in Eastern Europe and Asia are dragging down wages in the West. Europe struggles to preserve its standards of living with high rates of capital formation, high wages, high unemployment, expensive social services, and rigid controls. Europe’s roads were clogged this past weekend – as were those of America. But in Europe, the roads were clogged with people leaving for weeks, not days. The entire period – from the 1st of July to the 31st of August – is one long vacation season. It is hard to get anything done in Europe – so many people are away on holidays. Families reunite. Resorts fill up. The quality of life remains relatively high, even as many people work short hours.

In America, people work harder and longer to try to meet the Asian challenge. Most of the income gains realized by American households since 1971 have come from more hours of work – not from increases in per hour compensation. But people also came to believe a lie – that the key to prosperity was to spend money, rather than earn it. Consumption rose faster than earnings – made possible mostly by increases in property prices.

The extra consumption – incited, aided, and abetted by the Federal Reserve – gave Asian competitors a big boost; Americans bought more than ever, far more, in fact, than they could afford. It left huge profits in Asia…which are now coming back to the United States in the form of bids for U.S. corporations and resources.

Who wants to tell Americans on Independence Day that it is their own damned fault? Or, that the tide of economic history has turned against them? Or, that their system of imperial finance works against them, not for them? Or, that they might want to learn to speak Chinese?

Many firecrackers will go off today…but not that one.

More news, if there is any…


In case you missed it, Dan Denning has bet Addison Wiggin that his new book, The Bull Hunter, will surpass Thomas Friedman’s book on the Amazon best-seller list… or he will wear a green sarong to this year’s Agora Financial Wealth Symposium (August 10-14 in Vancouver, BC).

If The Bull Hunter doesn’t bump Friedman out of the running by Friday, July 15, 2005 – you’ll get a chance to see Dan don a sarong….

Of course, we know how much you’d love to see Dan shed a little leg… but dashing past that blowhard Friedman is a worthier cause, don’t you think? The clock is ticking…


Bill Bonner, with more views….

*** How can you take advantage of this latest development – this bid by the Chinese for one of America’s oldest and greatest oil companies?

"We don’t know how this bid will make out," said Mike Anderson, MoneyWeek’s North American editor, "but there’s one place that is almost a sure winner: Canada."

Here’s the story. An energy pact has already been signed between Canada and China, intended to develop Canada’s oil sands in Alberta province. "In a few years," says Anderson, "2 million barrels of oil a day is expected to flow from the tars sands in Canada’s Rocky Mountains to a seaport in British Columbia. There the oil will be loaded on to tankers.

"Will the ships sail south to the U.S., or east to China? Regardless, the winner is Canada."

Canada is number two in the world in terms of proven oil reserves. Officially, there are supposed to be about 180 billion barrels of the stuff in the Athabasca oil sands. Trouble is, it takes money to squeeze it out of the sand – about $20 a barrel. When oil was selling for $14, nobody wanted to invest the billions it would take to produce oil. But at $60 a barrel, investors are lining up – behind China’s PetroChina and Sinopec.

"Canada’s oil sands are hot," Mike continues. The region is as big as Florida. Its sandy soil contains bitumen, a form or super-heavy oil. In order to get the oil out, you need energy – preferably natural gas. Mike suggests Canadian Natural Resources, Canada’s second largest natural gas producer, as a safe way to play the oil sands venture.

You could invest in China directly. But the risk is huge. You never know exactly what is in China’s corporate numbers. It is often hard to know even the basic information – such as who is actually in charge and for whom they are working. Better to stick with Canada, says Mike.

Another possibility he mentions is Teekay Shipping. Whether the oil goes south to the U.S. or east to China, it has to go in ships.

*** We had forgotten what it was like being around small children. Five very little nieces and nephews have come for the summer. We had dinner with them for the first time last night. Seated on our left was our little niece, Eliza, 7.

"Would you like some ham, Eliza?"

"No, I don’t like ham."

"Would like a tomato?"

"No, I don’t like tomatoes."

"How about some string beans…they’ve come right from the garden. And Jean-Francois cooked them up…they’re delicious. I promise."

"No, I don’t like string beans."

"All right, well, what do you like?"



"Eliza, would you take these plates into the kitchen?"


"What do you mean, no? Aren’t you a good little girl?"

"No…I’m a difficult child."

The Daily Reckoning