The Other Federal Budget

Heed the words of the Mighty Mogambo! $843 billion is "a gigantically, unimaginably huge freaking wad of money" for U.S. citizens to have to pay for federal regulatory compliance. Result: stagflation.

Now, I know that YOU, fabulously up-to-date on all this stuff, probably know of a report called "The Impact of Regulatory Costs on Small Firms," by W. Mark Crain and Thomas D. Hopkins, prepared for the Small Business Administration, October 2001. In fact, I’m sure you know it by heart, and are probably sick and tired of hearing about it. But, I am sorry to say, this is the first time I ever heard of it. (I’ve probably been spending too much time tuning in to the music of the cosmos or something, because you know how we gurus are, all the time meditating and attaining transcendent enlightenment. Ommmmmm.)

But according to Ashlea Ebeling, writing in a Forbes.com article entitled "The Other Federal Budget," "a widely cited study says that Americans actually spent $843 billion to comply with federal regulations in 2000," citing the aforementioned report.

"Huh?" I thought when I read the $843 billion figure. It’s not that we peons out here did not already know that the costs of the regulatory burden were significant. We did. But $843 billion is a lot of money. Better known as "a lot of money," or perhaps it should now be known as "a gigantically, unimaginably huge freaking wad of money."

Of course, the World Bank has also issued a report that details how regulation by government is a killer of economies. And the economist Hernando de Soto has written a whole book on the subject, identifying all the money being wrapped up in regulatory compliance the world over as "dead capital."

So, in light of the massive evidence, it is amazing that government continues to pile on regulations to kill the economy.

Stagflation: Ten Thousand Commandments

In a report called "Ten Thousand Commandments: An Annual Snapshot of the Federal Regulatory State," Wayne Crews, the director of technology policy at the Cato Institute, argues with unstoppable, iron logic, striding like a Colossus across the intellectual landscape because there is no way to argue the opposite, that "regulation is like an off-budget, hidden tax….State and local governments, businesses and consumers have to pay – even though it doesn’t appear in the federal budget."

Well, I got some good news and some bad news for Mr. Crews.

The good news is that is that neither the state, nor the local governments, nor businesses have to permanently pay the hidden tax. They get all that money back. The bad news is that the consumers always pay the full cost of everything, eventually, as the state government, and the local government, and the businesses always get their money back, and more, through taxes and higher prices. Always higher prices. The August CPI, for example, is up 2.2% from a year ago. This follows the rise of 2.1% in June and the 2.1% in July.

The goal of Fed policy "ought to" be zero inflation. But now, looking nervously up at the gauge on the wall, I note with alarm that the needle has climbed, and is now quivering at 70% of red-line, which is 3% price inflation.

Dark, moody music fills the soundtrack, and the camera comes in for a close up, where the twitching of my eyebrows and barely perceptible tics of my handsome leading-man face betray my rising nervousness, as evidenced by the little beads of sweat that suddenly glisten on my manly brow. So we are in the ‘yellow zone,’ which is entirely appropriate, because the color so perfectly matches that wide streak up my back, as concerns inflation. Price inflation, even after the intense and fraudulent massaging of the raw data to subtract quality improvement and the other hedonic devices, is running at two-thirds of red-line!

Stagflation: "Heed the Words of Mogambo!"

You can tell by the way that the rest of the audience is moaning and groaning that they are less than overjoyed to see me raising my hand in the air, saying, "Excuse me please! I’d like to be recognized to speak!"

But, rising to my feet, I refuse to acknowledge the fact that everyone on the dais and everyone in the audience are all yelling and pleading with me to shut up and sit down. Undaunted, my voice rises to a commanding pitch that causes even rabid dogs to cower in the corner, and delivered in that hypnotically sing-song way that top evangelists have, I remind everyone to heed the words of Mogambo: "Friends and neighbors, heed the words of Mogambo! Heed, heed, heed the words of the Mighty Mogambo! The Mogambo speaks, and says thus: The regulatory burden is ultimately income to some of our citizens, but like slugging back one shot of good liquor makes all women pretty, makes me witty and eases the horror of actually interacting with any of you morons in person, chugging down an entire bottle of liquor will kill you. Therefore, beyond an absolute minimum, regulatory burden is completely contrary to the Darwinian imperative that you do not go around inventing ways of harming yourself."

Of course, I think that this is as profound as all get-out, of course, and I search for a way to provide a boffo ending. But the best I can come up with is that chestnut, my old boilerplate speech that I carry around on a 3X5 card, the old "Now you are going to die speech," which is as hoary as Martin Luther King’s "I have a dream" speech: "And now you are all going to die! Hahahaha!" I scream, "You have economically killed yourselves, and now you are going to die! And you have economically killed your children, and you have economically killed your grandchildren! And grandchildren! Hahahaha! You have murdered all the seeds of your own loins! Your names shall forever be as the name of serpents, and you will be forever vilified, condemned as vile, a Biblical seven times over, for your sin of (insert economic sin here)."

Of course, I inserted "increased regulatory burden" there at the end, since that is what we were talking about, and I wanted to kind of tie it all up.

Stagflation: Malevolent Stagflation

James Cook at Investment Rarities is one of those guys who has taken a look at things and is justifiably alarmed about, and here I reproduce his exact list, the lack of savings, inflation, over-consumption, debt, deficits, the trade deficit, asset inflation and speculation. And then, I add one of my own: the aforementioned "increased regulatory burden". The difference between Mr. Cook and me is that I take a look at these things and see death and destruction descending on us, which I can only try and forestall by clutching my ratty blue flannel security blanket to my chest and screaming in hysterical fear for extended periods of time, while he remains curiously calm and still in possession of his faculties.

"We don’t know the future or the precise timing of the things we warn about," Cook writes. "But, at the very least, it seems certain that, in the near term, a malevolent form of stagflation is inevitable with much worse to follow."

Now, for those of you who are not familiar with the term "stagflation," it is a word that combines stagnant, as in "a foul smell emanated from the fetid, feculent swamp of stinking, stagnant water," and inflation, which means that prices of things are rising, as in "a foul smell emanated from the swamp of prices that rose above your knees, and then above your hips, and then above your chest, and then above your neck, and then above your head, and you suddenly found yourself drowning in higher prices."

You see, today we are on a fiat currency, and there is nothing to stop the government from merely printing up all the dollars it needs! Print them up and just hand them out! Of course, all that extra money suddenly coursing through the veins of the economy is going to cause the general price level to rise to hyper-inflationary rates, but who the hell cares anymore? Certainly not John Snow. Certainly not the Fed. Certainly not the President. Certainly not the rest of the government. Certainly not the lackluster university-trained economists that like to demonstrate their profound ignorance of economics. Certainly not the blowhard stock touts on TV.

So why should YOU care?

As a nice lesson in why you should care, the recent Zimbabwe experiment in this area has now so devalued their currency that toilet paper, per sheet, or per square, or whatever you call each little piece of toilet paper, is now more valuable than the money it takes to buy it! In practical terms, toilet paper costs over a thousand Zimbabwe dollars per roll, and so it is cheaper to wipe your funky behind with Zimbabwe ten-dollar bills than it is to use a thousand Zimbabwe dollars to buy actual toilet paper!

And now, for your optional essay question, how much is a Zimbabwe 401(k) retirement plan worth?

Regards,

The Mobambo Guru, for The Daily Reckoning

October 13, 2003

P.S. And, parenthetically, if you want to be richer in the future, you had better be moving into gold, too, because the un-holy monetary and fiscal insanity that got us to where we are today is getting exponentially worse with every passing moment in time. And with each new passing of each moment in time, when very bad things are growing exponentially, this is where the smart guys got out of Pompeii when the volcano starting rumbling, and they got a good price for their house, too, unlike the guys who ignored the rumbling, and whose real estate holdings are, even to this day, centuries and centuries later, still worthless, as they are still encased in mountains of rock-like volcanic ash.

Mogambo Sez: Judd W. Patton, PhD, a professor of economics, enumerated the "Seven Economic Laws," and the fifth law is "Law of the Quantity of Money: there is no economic benefit from increasing the quantity of money. Prices and costs adjust to the available supply. More money means higher prices and less money means lower prices."

Today, and all the yesterdays for the last decade or so, the money supply of the USA and the world is boosted to levels only dreamt of in the nightmares of real economists. Now you don’t have to wait in suspense to find out if you will really spend the rest of your life slowly starving for goods and services. You will.

Richard Daughty is general partner and C.O.O. 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.

The Mogambo Guru is quoted frequently in Barron’s, The Daily Reckoning, and other fine publications.

Investors are still buying the most expensive stocks since the great bubble popped in March 2000. S&P stocks are selling at 30 times earnings. Nasdaq 100 stocks are at 8 times SALES.

They are also still lending to the world’s biggest debtor – the U.S. government – at interest rates that haven’t been seen since the Eisenhower administration. Foreigners are still extending E-Z credit terms to Americans never before so burdened by debt. And foreign and domestic investors continue to buy U.S.-dollar assets at record prices…at a time when the dollar is falling.

Today’s question: are they naïve…or just stupid?

We ask the question humbly; we are the ones who’ve missed the echo-bubble in stocks and the bubble in housing. We might have bought a cool house in a hot market such as Minnesota or a hot stock in cool New York…think how much richer we’d be. So, we have no reason to feel superior; we’re just curious.

There is practically no way an investor who pays 8 times sales for a stock can hope to get his money back – except by selling to an even greater fool. That is what leaves us out…we cannot imagine any greater fool than ourselves. And yet, there they are…rushing in where angels fear to tread.

They must either be delusional, or have great faith – in the dollar…Wall Street…the U.S. government…the American model. There again, we are left out. For, while we have a residual faith in the free market – and in the good sense of our fellow man – what we find in America today is a market that is so jived and corrupted by political tinkers that the poor common man is lost; he cannot find his bearings, for almost every number is a chimera and every headline is an invitation to insolvency.

"U.S. Economy Recovers…" Stocks rise again…" Houses up 25% in San Diego…" No danger of housing decline says Freddie Mac CEO…" Click here for fast loan approval…" How can he resist?

So he keeps digging his hole.

In 1957, total private and public debt in America came to $25,000 per person. Today, calculated in the same inflation-adjusted dollars, it has gone up to $115,000. Real, after-tax incomes, meanwhile, have barely budged for the last 30 years. And, after the necessary expenses – health care, housing and taxes – are deducted, the average household actually has less money to spend today than it did in the ’70s.

James K. Galbraith of the Levy Economics Institute explains.

"The American model…supposedly includes deregulation, privatization, the free setting of prices and, especially, wages, in productive markets, without interference from unions or concern for the shape of the resulting distribution. The principles favor free international trade, reduction to the minimum of public subsidies, public transfer of payments, including pension, and public enterprise. And they favor the application of ‘sound fiscal and monetary policies’ with the former dedicated to budget balance and the latter exclusively to price stability. The image of the U.S. upon which these nostrums are based has little foundation in reality…

"The peculiarity of effective demand in the U.S. during the 1990s was that much of it was generated or encouraged by acts of public policy….Thus…when households cut back on spending to bring their outlays into line with their (declining) incomes, a prolonged period of stagnation, if not recession, is unavoidable…"

Here’s more news from Addison…

————-

Addison Wiggin, writing from Paris…

– Stock market bulls raged ahead for most of the week, last week. The Dow gained 102 points to 9,675 and the Nasdaq added about 2% to 1,915. The lumpeninvestoriat appear to be fully prepared to buy "the bull is back" theory hook, line and lead anchor.

– And why shouldn’t they? "On Oct. 10, 2002, the Dow hit a 6-year low of 7,197," Eric Fry pointed out in the Weekend Edition of the Daily Reckoning, "but then the blue chips stopped falling…and started rising. They have been rising ever since. The Dow has jumped a hefty 34% over the last 12 months, while the Nasdaq has soared an astounding 72%." Impressive, no doubt.

– Impressive…aside from the fact that, as previously mentioned in these pages, in the wake of the collapsing credit/stock market bubble in Japan, the Nikkei rallied 15 times, more than 15% each time, between 1980 and today. On 4 occasions it rose more than 30%. And twice more than 50%.

– We must ignore, too, that as the Economist points out, the broad money supply grew by 8% in 2002. And that the dollar lost 2% of its value v. the euro last week. And that core PPI numbers are beginning to reveal…what’s this…inflation?!?

– We must especially ignore the Barron’s report indicating that the S&P 500 is still trading at 30 times trailing earnings. (This fact alone is bound to lead to some nasty surprises as "earnings season" kicks off next week, with some 110 of the S&P’s top firms reporting earnings.)

– If the lumpen faltered in their ignorance, they might wake up and recognize the signs of an economy suffering from a credit-binge collapse. On Friday, Morgan Stanley’s Stephen Roach sighted one of these tell-tale features: scapegoating. "Tough economic times always produce scapegoats," writes Roach. "Politicians and policy makers are invariably quick to point the finger elsewhere rather than face up to their own failings. Such is the human condition."

– "The bubble model always involves a ‘displacement’" we quote Strategic Investment contributor Marc Faber, from the third chapter of our book, "which leads to extraordinary profit opportunities, overtrading, over-borrowing, speculative excess, swindles and catchpenny schemes, followed by a crisis during which fraud on a massive scale comes to light, then by the closing act during which the outraged public calls for the culprits to be taken to account…"

– "America’s jobless recovery," agrees Roach, "is a case in point. The U.S. body politic is now taking dead aim at China – making it the poster child for the latest outbreak of scapegoatism."

– But, here, according to Roach, is the key: "As always, those pointing the finger usually have the most to hide. That’s precisely the case today. As I see it, the real problem is made in America. Washington is engaged in the most reckless fiscal policies since the ‘guns and butter’ blunders of the late 1960s."

– Roach’s argument: "Saving must always equal investment. This isn’t some wild-eyed theory – it’s just the way that any economy must always balance its books. If a country is lacking in domestically generated saving – precisely the case in the United States today, with its rock-bottom 0.7% net national saving rate in the first half of 2003 – it is faced with two stark choices: It can either rebuild domestic saving by suppressing aggregate demand or borrow surplus saving from abroad.

– "Inasmuch as suppressing aggregate demand is not exactly politically palatable, America has opted to finesse its accounting identity by borrowing from abroad. Such a choice, of course, is not without consequences. In order to attract the foreign capital, the U.S. must run massive current-account and trade deficits. In case you haven’t noticed, that’s exactly what’s happened – America’s current-account deficit stood at a record 5.1% of GDP in the first half of 2003, and the trade deficit made up about 90% of that imbalance.

– "In other words, for a saving-short U.S. economy, the macro accounting identity virtually guarantees a massive trade deficit. In my view, Washington is going down the same dangerous road it did in the late 1960s – building on the economic hubris of a failed boom and attempting to provide both guns and butter to a clamoring electorate. Back then, it was Vietnam and the Great Society. Today, it is Iraq and the war on terrorism, together with tax reform."

– The occupation of Iraq presents itself like a pair of cement chaussures around the ankles of the Bush administration. You’ll recall that one of the stated goals of the neocons, after the search for WMD lost its justificatory appeal, was to liberate the Iraqi people and give them the opportunity to express the divine right of all humans: that of practicing democratic consumer capitalism (i.e. to charge enormous sums on credit cards and buy things they don’t need with money they don’t have). The BBC now reports that this conversion is going to be a tough row to hoe. "Iraq’s economy declines by half," reads the headline.

– No one, of course, suggested the conversion was going to be easy. And no one ever suggested the Iraqi economy would turn around in a year, let alone five…or even a decade. But having committed the troops, Washington is likely to have to foot the bill, too. "Later this month," the BBC article continues, "governments and international agencies meet in Madrid to discuss [the estimated $55 billion needed to rebuild the Iraqi over the next four years]. Early indications had suggested that few governments other than the United States will make substantial pledges." This is, of course, in addition to the funds requested (and required) to keep the "peace"…

– "Alas," Roach sums up, "there’s a major difference between today and the late 1960s: Back then, the U.S. had an ample reservoir of net private saving – close to 10% of GNP. Today, net private saving is running at less than half that rate." (The ‘gambo Guru, in his rather eccentric way, adds an additional painful twist to story below…)

– So, given the macro-trend…what should we make of the ready willingness of Johnny Six Pack to follow the bull back into the stock market? "To justify current valuations," writes Mark Rostenko of the Sovereign Strategist, offering to take a whiff at the answer, "earnings valuations will have to come in ‘surprisingly good.’ I don’t know what’s going to happen, but I do know that I don’t like putting my money on a market that needs a miracle to justify itself."

– Amen to that.

————-

Meanwhile, Mr. Bonner, back in London…

*** How reliable are the employment numbers? Not very. The Houston Chronicle reports that the Texas Workforce Commission said the state lost just 600 jobs between March ’02 and March ’03. This happy news was later rebutted by the sad truth, coming from business tax returns. The real loss was more than 66,000 jobs.

*** According to the Economist, the broad money supply in America grew by about 8% in 2002. Well, how about this…the price of a house, nationwide, rose by about the same about – or 7%.

In some areas, of course, house prices are going through the roof. In these hot markets, people are realizing that they can leverage their gains. Not only do they buy their houses with little money down…then, they ‘take out’ the equity to buy a second home! Since 2000, the number of 2nd houses bought with ‘equity’ from a first house has risen 60%.

Let’s see…if you buy a $300,000 house with 5% down, and it goes up by 10%, you’ve made a profit of 200%. So, you take that $30,000 ‘equity’ and you use it as a 5% down payment on a $600,000 beach house. If both go up only 10% the following year, you’ll make 500% on your original $15,000 investment. Getting rich probably never seemed so agreeable. With just $15,000 in savings, you get to enjoy the sand and sun, while you add nearly $90,000 to your wealth – effortlessly – each year.

How many people are doing this, we wonder? What will they do when property prices turn down?

*** We had lunch on Sunday with an ambassador from Venezuela, a charming and cultured man with a sense of humor. While His Excellency described his recipe for choucroute, another guest described conditions at home:

"It’s a catastrophe…the currency used to trade at 4 to the dollar. Now, on the black market, it’s more than 3,000 to the dollar. But everything is taking place on the black market, because [President] Chavez has imposed so many controls – including exchange controls – you have to go onto the black market to get anything done.

"You know, Venezuela was a paradise…a paradise. But it’s being ruined. This guy Chavez is very popular with the people…but he’s trying to destroy the middle classes. This is very obvious. He’s a close friend of Fidel Castro. They have lunch together once a week. And now we have 30,000 Cuban troops in Venezuela. He gave them all citizenship and passports….so they are totally loyal to Chavez. It’s a dangerous situation. And his side has all the guns.

"I only wish that President Bush would stop ignoring us. We’re a major oil country, too. Why doesn’t Bush send troops? Chavez is worse than Saddam…and a much bigger threat to the U.S….I only hope that once the Iraq situation settles down, Bush will send his army to Venezuela to straighten things out."