Surviving on Candy Bars

The cover of the most recent issue of The Economist shows a dollar bill being consumed by some caterpillar, with the caption “The Disappearing Dollar.” This “disappearing dollar” is big-time important, because it directly affects how much imported things cost, and since we import almost all the things that we consume, it directly affects how much things cost, period. For confirmation of that cryptic statement, ask Bill Ridley, of Online Investors News, who writes, “For the savvy investor who can read the writing on the wall, this also means that the asset based inflation we have seen with gold, copper, oil, and other resources will continue to go up, regardless of upward pressure on interest rates or the slumping dollar. The devaluation of the dollar will not make these commodities worth less.” That is obviously true. It just makes them cost more.

Speaking of money, last week Total Federal credit shot up another $5.6 billion, the Treasury printed up another $4 billion in actual cash, foreign central banks bought up another $5.8 billion of U.S. debt, as everybody tries desperately to keep this embarrassing economic monstrosity from collapsing under its own ponderous weight.

Government people came out from behind the curtain and pronounced that GDP came in at 3.9% growth. And maybe it did. I have no idea. But the consumer confidence numbers went down as the consuming public’s buying power went down, which makes sense to me. With much less buying power (thanks to a weakening dollar) and anecdotal reports of sluggish sales, I have a difficult time reconciling that with how the government says that the economy was up by 3.9%. People paid more, but they got less. The GDP numbers are all supposed to be adjusted for inflation, but I really, really, really, really have a hard time imagining that we had nominal growth of over 7%, that would adjust back down to 3.9% after backing out inflation of at least 3.2%.

The Disappearing Dollar: Gimme-Gimme-Gimme

If you want to see MY consumer confidence go down, all you gotta tell me is that something that I want to buy costs more money, and while the previous price was more than I could afford to pay, I was willing to stretch the point so that I can have everything I want now-now-now, because that is just the sort of childish, gimme-gimme-gimme attitude that is so characteristic of Americans in general and The Mogambo in particular. And it fits a whole lot of other people around the world, too, who are all up to their eyeballs in debt so that they could have things then-then-then and who are getting calls from bill collectors now-now-now who also want their money now-now-now and I keep telling them that the check is in the mail-mail-mail, and anyway, that guy moved, and me no speakee English so I am saying goodbye now (click).

Personal income went up by 0.6% and spending went up 0.7%. Stephen Roach of Morgan Stanley has looked at the numbers and says “I found the report appalling. What caught my eye was a further reduction in the already sharply depressed personal saving rate – down to 0.2% in October from 0.3% in September.”

Savings hitting a new low of 0.2% is a statistic that I cleverly demonstrate by using this pile of 500 yummy cheeseburgers to illustrate your total income for the year. Your entire savings would be represented (I hold up one cheeseburger) by one cheeseburger. That is the amount of money that you are saving? How big do you think one cheeseburger can grow? Wake up, dude! And look! The Mogambo, representing the government, is taking a big old bite out of that cheeseburger! And now The Mogambo (what a talent!) is representing the financial service industry, which is also taking these little bites out of your one lousy cheesburger!

The Disappearing Dollar: $1.50/Week

Drew Matus, who is an economist at Lehman Brothers, writes, “The savings rate fell to 0.2 percent. That means for a person earning $40,000 per year, they are saving $80. Put another way, that person is saving a little over $1.50 per week.”

Reader Arlo S., obviously thinking along the same lines as these guys, writes, “What he didn’t say is that if the whole household only makes $40,000 per year, then the average family of 3.2 persons only saves just under 47 cents per week per person. These people are planning to survive on about a half of candy bar per week.” Upset that this Arlo S. character makes a better point than me, I notice that he did not say anything about the effect of inflation on the price of this hypothetical candy bar! I leap from my chair to thrust myself unbidden into the conversation and maybe get a little glory for myself. Out of the corner of his eye he sees me coming, he suddenly realizes his mistake, and in capital letters writes, “IF IT STAYS AT TODAYS PRICES.”

I am naturally upset that he has stolen my thunder, and I am left mulling over even worse news, such as that sent by Geoffrey W., who sent an article entitled, Real Wages Falling, Maryland Professor Says, from CBSMarketWatch.com. The article starts out with a quote from Peter Morici, business professor at the University of Maryland. “With average hourly wages up just 0.1 percent in November, take-home pay for most U.S. workers is falling behind the rising costs of energy and health care. American workers can expect their paychecks to buy less and less each month,” he said, while painting a grim picture for job growth in the near term. “Economic growth is already likely to slow in the first and second quarters of 2005, and further interest rate increases will further chill growth and jobs creation, without having significant effects on inflation.” This is stagflation writ large, in case anyone asks you.

Peter Schiff of EuroPac.net put it rather cleverly when he wrote; “The first rule of holes is that when you find yourself in one, quit digging. Not so for Americans, who simply buy larger imported shovels.” Hahahaha!

Regards,

The Mogambo Guru
Rancho Santa Ana, Nicaragua
December 13, 2004

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Nothing much happened last week – except the price of gold corrected, as the technical analysts predicted.

We don’t have any particular opinion on where gold is headed this week. We hold the yellow metal because we see trouble ahead. When trouble comes, the quantity of money you have is sometimes less important than the quality of it. You could have had a billion dollars in German marks in the early ’20s…but by the last year of the Coolidge administration, it wouldn’t have bought you a cup of coffee.

“Dangerous times for the dollar,” begins a letter from our old friend, Martin Spring. “There is nothing new about a collapsing dollar. In euro terms, the greenback plunged twice as fast at the end of 2000 as it has in recent weeks. It lost nearly twice as much in value in early 2002 as it has over the past quarter.”

What has frightened the markets about the current bout of dollar weakness is that it’s feared that this one could develop into a full-blown global crisis, clobbering economic growth and disrupting investment markets.

To finance its foreign trade deficit, the United States depends on “the kindness of strangers” – it needs to continue attracting more than $2.5 billion of foreign capital every working day, or some 80% of the world’s surplus savings.

But the strangers are beginning to grow uncomfortable about investing in a nation showing increasing signs of financial irresponsibility, with consumers going ever deeper into debt and the politicians in Washington on a spending spree.

Private capital inflows from abroad remain surprisingly strong – foreign investor purchases of long-term U.S. securities, mainly corporate bonds, were a net $158 billion in the third quarter. But it appears that U.S investments are starting to lose their appeal. For three years now, foreign investors have been reducing their direct stakes in American enterprises and taking their capital out of the country.

Still, no sign of alarm in America. “IPOs rise like a phoenix from the rubble,” begins a story in USA Today. We thought the headline was a little ambitious. More than a few readers are likely to wonder when Phoenix was ever in ruins. “Maybe an earthquake hit it,” they are likely to say to themselves.

“An avalanche of initial public offerings are scheduled to start trading this week,” continues the paper. If those two metaphors were not enough, the paper quotes an analyst, who offers two more: Investment banks “want to close the book on 2004 on an upbeat note,” he says.

Meanwhile, over in the right hand column, USA Today takes up what it believes is a serious examination of the dollar question. Here, the paper moves from puerile metaphor to wistful mirage:

“Many of the factors now affecting the dollar, including the big U.S. budget and trade deficits, must be tackled by Congress, the White House and foreign economies, not the Fed. But the Fed could be called in to stabilize the economy if the dollar were to go into a sudden nosedive.

“Fed policies can indirectly affect the dollar. While the Fed is expected to continue raising rates in 2005, other central banks are keeping rates steady. That could make the United States a more attractive place to invest and buoy the dollar.”

Let’s see, even if Congress could “tackle” the deficits, how could it bring them down? There are only two ways: Cut spending or raise taxes. Neither would likely make the United States an attractive place to invest – at least not in the short run.

And how might the Fed “stabilize” the economy in the event of a dollar crash? It can either lower short rates…or raise them. Typically, you would expect the Fed to raise rates to support the dollar. But that is less likely to stabilize the economy than to destroy it.

More news, from our friends at The Rude Awakening:

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Eric Fry, reporting from Wall Street…

“‘The U.S. has been able to trade off the dollar’s status as the world’s major reserve currency for a long time, rightly suspecting that foreigners would tolerate the U.S. getting more deeply into debt than they would another country.'”

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Bill Bonner, back in Nicaragua…

*** Here at the Daily Reckoning, we feel as if we’re on the verge of something big. Tectonic, even. What, for example, would happen if the dollar ceased being the reserve currency of the world…overnight?

Jonathan Kolber, editor of Vantage Point Investment Advisory, one of our more, shall we say, “visionary” publications, believes that we’re on the verge of a similar tectonic shift in science.

“We are at one of those unique moments in history,” writes Kolber, “when everything old is swept away ‘as in the twinkling of an eye’.”

The cause: Advanced rates of computation. “This transformation is happening now, and it’s just beginning. It’s going to affect every area of life. You cannot ignore it.” (We’ll hear a more from Kolber in tomorrow’s Daily Reckoning guest essay. But if you can’t wait, click here for a sneak preview…

One Russian scientist escaped the KGB to seek the “American Dream.” Every patent he brought with him has been successfully brought to market. Now, he’s now working on the board of a company that is developing technologies to sniff out nuclear terror threats…and more.

*** A flash update from London…again, from Martin Spring:

The latest political soap opera in Britain involves the fall-out of a love affair between Home Secretary (internal affairs minister) David Blunkett and a married woman. What politicians get up to in bed is a private, not a political, matter, says Prime Minister Tony Blair. However, this principle doesn’t apply to many other kinds of private conduct. The Government has just forced through a law banning the innocent pastime of fox hunting and plans to ban smoking in pubs serving hot food.

“We are nightly offended with disgusting adverts on television in the Government’s anti-smoking hysteria,” writes my adviser on these matters.

“You will now get fined for smoking almost anywhere, for chewing gum, for wearing an anorak with a hood, for smacking your infant (five years’ ‘porridge,’), for trying to sell your house without an ‘information pack’ (cost £600), for chasing a fox with a dog, for possessing a handgun unless you are a policeman or villain (neither of which are to be trusted with them), for owning a horse without a passport (so that we don’t poison ourselves when we eat old Dobbin – a £5,000 fine or three months in the slammer), for using a mobile phone in your car, even if stationary, for snogging if one or both of you is under 16 (but not if of the same sex). It will be an offence to smoke in a public toilet (but not to commit buggery, providing it’s behind a closed door), and to set off a firework after 11pm.”

My friend, who no longer lives in the UK, asks: “Apart from all that, how are things in the gulag?”

*** “This is completely crazy,” began a friend, describing the property market in Delray Beach. “People are buying condominiums that aren’t near the beach for $750,000. These things are built in areas that used to be ‘the wrong side of the tracks.’ Now, they’re suddenly not only acceptable, but actually fashionable.”