Paying More to Get Less

Total Fed credit fell a good amount – which can only mean one thing: in a country that thrives off of people borrowing themselves into debt, "free money" is suddenly not looking so tempting to the citizens of Squanderville. The Mogambo explains…

I remember that I was still trying to shake a killer hangover when I read that Total Fed Credit abruptly fell by $7.4 billion last week, taking the total back down to $792 billion. The next thing I knew, I was in the emergency room and doctors were trying to re-start my heart while trying to restrain my wife, who is screaming, "Let him die! He wants to die with dignity!"

But it wasn’t my heart causing the initial distress. It was my brain, which interpreted this fall in Total Fed Credit as meaning one of two things; either the Fed is finally trying to curtail the decades-long explosion of money and credit, or there are not as many people wanting to borrow money, and so they don’t need to expand money and credit to accommodate them. Either way, this is what we in the Mogambo Economics Biz (MEB) officially call The Big Freaking Bell Going Clang Clang Clang (TBFBGCCC).

Ours is a country that does nothing but spend every dime it makes, and which continuously borrows more money. Historically, this is a recipe for disaster. Nobody wants to hear this, especially my family, who think that money grows on trees, and I keep telling them that money does not go to all the hassle of growing on trees, which involves fertilizing and pruning and weeding and applying pesticides and picking, and then some drunken, stoned-out illegal alien migrant worker falls out of a tree and sues the hell out of you, and then they find out how you have been stealing them blind and selling them substandard food at premium prices, and you don’t have a prayer in court and you know it. Brrrrr. Gives me the chills just to think about it!

The Fall of Federal Reserve Credit: Making Life Miserable for Many

But this is not about how Mogambo International Exploitative Enterprises (MIEE) is screwing over the poor wretches, just as the government and the Fed are screwing the poor by destroying the purchasing power of the little bit of money they get per month. It’s just that MIEE, as a prototypical capitalist-pig company with no scruples or ethics in my mindless quest to secure profits, demeans the people directly, and they suffer because they get less. The government does it indirectly, making them get less by destroying the purchasing power of their money. But my whole case rests on the fact that, in the end, we both make life miserable for lots and lots of people because they must pay more and get less.

And the only reason that we have anything going for us at all is because we spend every dime, which makes and economy go, to indulge in an orgasmic orgy of glorious, greedy, gluttonous over-consumption, and simultaneously grow the size, the grasp, and the bankrupting expense of a huge, suffocating, inter-locking structure of governments that has, to use a phrase used in the Declaration of Independence "erected a large multitude of new offices, and sent hither swarms of officers to harass our people, and eat out their substance." By which they mean, in Mogambo-ese, "The government sucking you dry through your wallet to give total strangers money and services for the rest of their lives."

The joke goes, "I spent my entire million-dollar inheritance. Most of it I spent on women, fast cars, booze and drugs. The rest I spent foolishly." In our case, the rest we spent foolishly to party party party (PPP).

Recognizing that this sudden slowdown in the growth of money and credit would mean the total collapse of the United States, you will, I hope, forgive me for jumping up, running in panic, pushing my wife and children out of my way as I run, as fast as I could, to try and lock myself inside the heavily-fortified Mogambo bunker (HFMB), which would, theoretically, protect me from the hordes of scared, angry and desperate people whose lives are being destroyed as the economy is being destroyed, including my family, who were already scared and angry about being related to me in the first place because I seemingly will never die.

The fall of Federal Reserve Credit: Rising Inventories

And this slowdown may be showing up in the way that inventories are sort of building. I would assume that inventories are increasing because people are not buying as much, which would explain why they are not borrowing as much, although the producers and retailers are still stocking as much. Trying to be as philosophical as I can (and you can tell I am being philosophical by the way I wipe the drool off of my chin and try to act dignified for a change), this had to happen sooner or later, as every schoolchild knows that you cannot continually go farther and farther into debt forever. I, personally, learned this valuable Mogambo lesson (VML) rather early in life, and I remember it like it was yesterday, when I went to my dad and asked to have another advance on my allowance, and how he laughed, and with acid in his voice asked, "Do you think you can perpetually bring forward future consumption into today?" Maybe it was HOW he said it, but I never forgot the lesson about over-consumption via debt, and I hope you don’t either.

But this is not about my cruel life of pain and anguish that I mostly brought on myself for acting like such a jerk all the time, but about money and the spending thereof and how rising prices are no fun. Like gasoline prices. And with gasoline rising dangerously in price, people do not have as much money to spend on the rest of the silly crap that we love to indulge in, making things worse.

The proof of this is demonstrated by the fact that people are going to the movies less, and all kinds of businesses that depended on the flow of all this frivolous discretionary spending are finding that sales are down dramatically. This is another Mogambo Sign That Things Are Not As Good As They Say (MSTTANAGATS) that highly-trained market technicians use to chart the markets.

For you who believe that "the trend is your friend", I will note that the Fed has had this mindless expansion of credit going gangbusters since 1997. So, all this sudden and surprising absence of growth in money and credit is, in a word, ominous. But you probably already gathered that from the spooky soundtrack, which is all low, wailing horns in ugly disharmonies that sound like banshees wailing. Or, if you are deaf, then you can also figure it out from the graph of Total Fed Credit, which has being growing like a huge, malignant cancer since 1997, pausing only in early 2000, whereupon the stock market fell like a stone, which put the Fed back in credit-expansion mode ever since. Until the last couple of months. Listen to the soundtrack, which is telling all that you need to know. OooooOOOooooo!

You’re going to love the way I end this! Slowly fade in from black, see? An indistinct, fuzzy form appears out of the gloom. What could it be? Soon, it looks like a – what is that? A hand? Yes, it’s a hand holding something. As the lighting continues to come up, we see that it is indeed a hand, a hand holding a revolver, and it is pointing right (pause) at (pause) you. Slowly, the thumb reaches up and cocks the gun, and you can hear it going "click click click" as the hammer is drawn back. Then the clicking stops. The thumb returns to its place on the butt of the gun. The forefinger moves to the trigger. And as the camera pans in closer and closer and closer, we plainly see that the finger is beginning to flatten as it begins to pull on the trigger. Of the gun. That is pointed right (pause) between (pause) your (pause) eyes.

One of the reasons that I use this gun metaphor is that the latest reports shows that inflation is running at 0.5% for July, and when you multiply that by twelve months in a year, you come up with (and you can check me on this) 6%. Inflation, even after all the massaging and tweaking by the government to make things look good, is running at 6%! This is terrible, terrible, terrible news! It was within living memory that Nixon (as I recall) seized dictatorial power and imposed wage and price controls on the entire economy because inflation was at an intolerable 4%! So this 6% thing is terrible, terrible, terrible news! And it demonstrates, one more time, the utter, utter failure of the Federal Reserve.


The Mogambo Guru
for The Daily Reckoning

August 22, 2005

The Mogambo Sez: Repeat after me: Oil. Gold. Silver. Ommmm. This is the sound of cosmic salvation. Ommmmm.

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 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.

Yesterday started out nicely enough. We looked out our bedroom window at 6 am; the field behind the house was on fire.
France is dry. A water emergency has been declared in many departments, including this one. Watering the lawn is against the law. Helicopters fly over looking for the green lawns of scofflaws, or so they say.

The fields are so dry that a dropped cigarette can set off a wildfire. We got word from Normandy the other day that a haystack was ablaze:

A message on the telephone:

"Hi, this is Jean-Baptiste. One of the piles of hay next to the main barn is smoking. Should I call the fire department?"

By the time we got the message, whatever was going to happen had happened, so we didn’t worry about it. But we were on the alert.

We return to the scene in our back yard, below. In the meantime, we talk money…

We are in a late fin de bubble period, we believe…similar to the spell in 1999, when the world’s stock markets were so dry and so hot they threatened to go up in flames at any moment. We watched. We waited. For a long time, nothing happened. People sent us letters telling us that we were just sourpusses who were jealous because we’d missed the tech stock boom. Then, of course, tech stocks blew up beginning in January-March of 2000. But before the fire got completely out of hand, Alan Greenspan showed up on the scene with the biggest hose the world has ever seen. Never before has so much liquidity been pumped into the world’s economy. After a few months, the whole planet was dripping with it.

The effect of all the wet stuff was to send up another whole crop of bad investments – creating more tinder for an even bigger fire. Now, it is the real estate speculators who send us notes. They are still confident and self-satisfied; they think they’ve gotten away with something. And now it is not just the stock market that is in a bubble, but the entire economy.

At the center of this new bubble are the homebuilders. It looked as though they couldn’t build new houses fast enough to satisfy the demand. Their stocks soared. When this bubble finally ends, the homebuilders’ stocks should be toast. They’ve already headed down – could the fin of the bubble be at hand?

Well, we don’t know. We’ve been expecting it for a long time. Readers may think we expect it permanently. And maybe it will never come at all, for all we know. Still, we are keeping a special "We told you so!" ready, just in case…

More news, from our currency counselor:


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

"It all depends on what you believe the actual rate of inflation is. Big Al tells us there are no worries regarding inflation…if he really believes that, then interest rates shouldn’t go much higher than 4%…"


Bill Bonner, with more views:

*** "You do not make money in the market by looking in the same place as everyone else," boomed a voice at the Agora Wealth Symposium.

A few startled conference attendees scanned the room, and the disembodied voice said it again…and again…and again. Some people looked around the room, but most missed the point – and continued to stare at the podium.

The purpose of Carl Wayneberg’s little exercise was simple – to be a successful investor, you need to learn to think outside the box. He was giving the quintessential contrarian advice that we stress so often in these daily reckonings: Go against the grain. There is money to be made in places of the market where no one else is looking. Trade on the trends before they turn into headlines.

*** We urged you in the weekend edition of the DR to write in response to Kevin Kerr’s mishap with Homeland Security – and you didn’t let us down. We’ve received at least 75 emails so far, and we plan on printing a few everyday, so keep ’em coming!

One reader writes: "Mr. Kerr alludes to the idea that the Homeland Security Department is a means to help people sleep better at night. No one I know puts that much faith in governmental powers. The Homeland Security Department is not a sham; it’s an expensive and dangerous folly."

"I don’t know about you, but I find it extremely interesting that the government becomes the Gestapo at legal ‘checkpoints’ throughout the country, where no terrorist in his right mind would cross," writes another fuming reader.

"Yet at the same time, the same government gives drivers licenses, free health care and other benefits, and pardons (thanks Mr. Bush) to truly illegal immigrants already in this country. Further, they show painfully little interest in protecting the Mexican and Canadian borders where real terrorists can slip through without a problem.

"To me, since this is such blatantly irrational behavior that it all adds up to some sort of government agenda that we are not privy to. Perhaps they’re thinking that after they devalue our dollar down to the value of the peso, it’ll be good to have millions of illegals here to work for those low wages."

And one more, for good measure:

"I live in Minneapolis, Minnesota, am a senior citizen, 65+, and have a friend who’s REALLY a senior citizen, she’s over 80. In 2003, while waiting to board a plane, she was pulled out of the lineup, taken into a room and strip-searched! When she asked why, they told her a computer had selected her as a security threat.

"Somehow this Homeland Security action doesn’t make ME feel any safer."

*** The fire we saw out our window proved benign. At 4 am, our gardener had come to cook a pig. By 6 am he had the pig on a spit roasting over the open fire and a glass of wine in his hand.

"Do you always begin drinking so early?" we asked.

"Early? I got up at three to start this operation. I’m ready for a little refreshment."

Damien had enlisted the help of another neighbor, Roger. The two of them were spreading olive oil on the pig as it turned. The oil, along with the pig’s own fat, dropped into the fire and sizzled.

"Mmm…this is going to be good," said Damien.

This little episode has nothing much to do with investing. Nor nothing much to do with anything else. What we found interesting about it was that so many people were ready to spend an entire day preparing food and then eating it. By the end of the day, they were no further along than they had been when the day began. They had made no progress – they were not a penny richer.

"Let’s have some breakfast," said Damien. The bakery in town wasn’t open yet, but Damien had gone around to the back. "They’ll give you whatever you want. They don’t open the doors until 7am, but they usually have baked the first loaves by 6."

So we sat down on a tressle table next to the roasting pig. Damien had brought rillette – a pate-like spread made from a pig’s innards – and cheese. Your editor made coffee.

"People don’t know how to do this anymore," said Roger. "Everybody’s too busy."

"What do you mean?" we asked

"I mean, cook a pig like this. It takes all day. And you have to set it up the day before…and get the pig ready…and then get up early to get the fire lit. People don’t want to be bothered. They go to the supermarket and buy a ready-cooked ham."

"But it’s not at all the same thing," Damien added. "Have some more wine."

The morning was cold. It is still August, but already the sun seems low in the sky. At 7am it was still not visible. Brown leaves lay curled up on the ground, Damien sat at the table wearing a winter coat and a sweater. Roger, an older man, in his 70s, didn’t seem to notice the cold. He wore a cotton shirt. His face was bright red from standing close to the fire, tending the pig.

The two men took turns basting the pig. Occasionally, they would add oak logs to the fire. Mostly, they stood together and watched the pig turn on its electric spit.

For six hours the pig turned, roasted, and sizzled. Neighbors began arriving about noon. By 1 pm there was a crowd of about 25 people. Roger began carving. He sliced off thick, juicy cuts and placed them on a large serving platter. We came with our plates to load them up.

The meal was simple: string beans, potatoes and pig. And many bottles of red wine. It was not so different from a meal you would get in an ordinary French restaurant in the country. But…

"No, it’s not the same thing," said Roger.

The Daily Reckoning