The Pension Plan Cookie Thief

Economic thievery is rampant…appearing everywhere you turn. So why is it that when the Mighty Mogambo tries his hand at such burglary he can never get away with it?

To show you that the level of disgusting corruption at the end of long booms created by an excess of money and credit extends beyond the obvious slimeballs at Fannie Mae, Freddie Mac, Congress, the Federal Reserve, the banks, and damned near everywhere else you look, a headline in last Monday’s Wall Street Journal adds to the total tonnage of crud with the page-one headline "Companies Tap Pension Plans To Fund Executive Benefits", which let companies use the pension plans of the regular employees to "pay for executives’ supplemental benefits and compensation."

Now, I will note for the record that every time I try that crap with the employee pension plan or the petty cash account at work, everybody starts running around screaming about what a thieving, lying, despicable crook I am, and then everybody else starts adding to the accusatory din by saying how I’m probably the one who stole the cookies out of their stupid sack lunches, too, which weren’t all that good (and kind of stale, too), so I don’t know what all the fuss is about.

But everybody wants something for free, and since I look and act like a real Earthling human, don’t I bleed, too? So who is the real victim here, you hateful bastards?

But the desire for free stuff is pandemic, and Frosty Woodbridge at talks about this very point when he says that "Our U.S. Senate along with Obama and McCain protect the interests of 20 million illegal aliens that take jobs from American citizens! Has either man stepped up to stop 400,000 annual illegal alien anchor babies and their mothers from sucking out of the U.S. taxpayer’s pocket? Even while 86 hospitals in California and Arizona are bankrupted out of existence because of millions of illegals using services for free?"

See? Everybody wants something for free! And the governments (federal, state and local) are there to give it to them and charging me for it!

Well, Peter Chamberlin, author of The Planned Collapse Of America, doesn’t mention me specifically as the patsy who pays the taxes and the inflation in prices that comes because the damnable Federal Reserve creates so much money and credit so that the damned government can borrow it because the government can’t get any more from me (as the archetypical American tax-paying worker, only more lazy and undependable) to spend on their little friends.

And by "everybody else", I mean the connected insiders, as Mr. Chamberlin writes, "our economy [is] based on parasitic capitalism, where the small elite sits atop the heap of men and gorges on their lifeblood." He says that this "is destroying the social fabric of America" and that it "is based on a stacked deck, where the top elites always reap the profits that are made to rise to the top through the corporate profits-based system".

To add Presidential gravitas to the whole thing, had the perfect quote from Ronald Reagan, which is that "government is not the solution to our problem…government is the problem. It is no coincidence that our present troubles parallel and are proportionate to the intervention and intrusion in our lives that result from unnecessary and excessive growth of government."

And we are going to pay a hell of a price, and as Junior Mogambo Ranger (JMR) Skip G. reminds us, "Jay Leno says on the air quite frequently, ‘You have the government you deserve.’", which I amend to say, "And will yield a result similar to what the old Soviet Union got when they tried that Same Silly Crap (SSC)!!!!", which I punctuate with four exclamation points to indicate just how sure I am about that, because that is the way economics works and what history has consistently shown.

And all of this getting busted out and ruined makes us little guys angry, in my case because I am too broke to afford drinking myself into oblivion. And it gets even worse when I read the essay at by Charles Hugh Smith, who titled his essay as, "Yes, There Will Be Armageddon: Government Goes Bankrupt", wherein he writes, "One financial Armageddon is entirely, easily predictable: the bankruptcy of government in the U.S.A., at every level: Federal, State, County and City. The prediction follows from very simple mathematics: entitlements which grow at 8% a year cannot be supported by an economy which grows at 3% or less."

In case you are wondering, I say that the money supply expanding recklessly, so that the government can borrow and spend and cause more and more debt, means that inflation in prices will lead to a catastrophic implosion of the economy, just because that is what always happens.

And what is the antidote? 4,000 years of history answers loud and clear, "Buy gold!" To which I will add "And silver! And oil!"

After the expected applause dies down in appreciation of getting such good advice, I will say, "And speaking of buying things, who wants to buy me a drink?" Apparently, people in line at the supermarket don’t like good advice or they don’t like to buy me a damned drink. Or both. And then they wonder why I hate them so much!

But at this point, nobody wonders why I love gold, silver and oil so much. And you should, too.

Until next time,

The Mogambo Guru
for The Daily Reckoning
August 11, 2008

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.

We are on vacation.

And so is the rest of France. The little church was crowed yesterday, mostly with Parisians and their children. It was also the 50th wedding anniversary for a friend…a retired army colonel and his wife. But the occasion was marked by more sadness than joy. Only three weeks ago, one of their sons was killed in a traffic accident. We felt so sorry for him; we didn’t know what to say. We wished he could worry about the stock market…or the monetary system…or the war in South Ossetia – but it was all no more than the buzzing of a fly compared to the loss of a child. We were meant to celebrate their golden wedding anniversary, but who could offer more than empty words?

"Oui, mon vieux…yes, my poor old fellow," was all we could say. We hugged him and said nothing more.

Yes, we are on vacation…but this is The Daily Reckoning, after all. And there are always things to be reckoned with. Some important. Some trivial. Some sacred. Some profane.

But come 1PM, the lunch bell is going to sound and stand up from our computer and not touch it again until tomorrow. Then, after lunch, we’ll round up our crew of involuntary workers – three boys – and get to work. We have about 125 shutters in need of scraping and painting.

"Hey Dad, why do we have to do this? I mean, other people take a real vacation…I just spent the week with Paul and his family. They were really on vacation… and we just work."

Henry also did some calculations: "Besides, if you add up all the expense of maintaining this place, it would probably be cheaper for us to take a vacation somewhere else…somewhere where somebody else paints the shutters…"

You’ll find our reply below…but first, we have the trivial world of finance to deal with.

Not that we have much to say about it. Yesterday, the Dow rose 302 points. The price of oil fell $5, to $115. After so many weeks of stormy, bearish, depressing news…it was time for a little blue sky and sunlight.

Stock markets all over the world are on the rise. Even financial stocks…and automakers…and airlines – all seem to be recovering.

One major exception – China. The Shanghai index fell more than 4% on Friday…and is still falling this morning.

But outside Shanghai, the word on the street is that "the worst is over." They liken this to the ’70s, noting that after inflation peaked out, stocks rose strongly, and gold collapsed. In fact, the period – 1982-2000 – was probably the most agreeable financial period in most peoples’ lives. The Dow rose 11 times, while gold fell to less than a third of its peak. Interest rates went down in fits and starts over the entire period, not reaching a bottom until 2003. What could be better? Assets rose in price…while the cost of borrowing fell. This was the era of globablization, free trade agreements, cheap shipping costs, the entry of China and other nations into the world market system, Wal-Mart, technology and just-in-time inventory – all of these things helped to lower the cost of many manufactured goods. What a great time to be an investor!

But Daily Reckoners are warned: the stock market didn’t take off until stocks had been beaten down to very low prices – with P/E ratios of 5 to 8 (currently, they’re 14-18). Bonds didn’t take off until yields had peaked out over 15% (currently the 10-year note yields 3.95%). Which is another way of saying…the cost of borrowing didn’t go down until it had become almost impossible to borrow. And inflation rates didn’t retreat until they had hit 14% annually.

The moral of this story is simple enough. You have to fall down before you can pick yourself up.

Another big story in the financial press this morning has the dollar as its hero. The greenback rose three full pennies against the euro on Friday. It now stands at $1.50 per euro. Yes, the dollar is coming back too – or so you might think.

As to the dollar/euro exchange rate, we have no prediction to make. It’s like a spelling Bee where both contestants are dyslexics. Neither the euro’s masters nor Ben Benanke can spell "sound money." The European central bank lends at twice the rate of interest of the Fed. But the Europeans are expanding their money supply faster.

Compared to dollars and euros, gold is a Webster’s Unabridged Dictionary. Every word is spelled perfectly. Our guess is that both dollars and euros will lose ground against gold. Here too, many commentators think the top in gold has come and gone. It’s down nearly 15% from its near-term peak. But again, it appears to us – and maybe to us alone – that the ’70s-style trends have yet to run their course. Stocks still have to be crushed. Inflation still has to reach higher than an official rate of only 5%. Yields have to reach higher than 4%.

And the monetary system rigged-up by the Nixon Administration in ’71 still has to fall into ruin.

*** "Oil rises on troubles in Georgia…"

The headline is a sign of our time. Today, the world believes in money. In economics. In material progress. Everything else takes second, third, or fourth place. It is easier to see small changes in the price of oil than big changes in the way you look at the world. You can tell when the world changes; but when you change it goes unnoticed.

If this were August 1914, instead of August 2008, the headlines might read:

"French Bonds Fall on Invasion of Belgium." Or, if this were August of 1939, the headline might read: "Oil prices jump on threatened German invasion of Poland."

Or how would the modern press report the big event of 2000 years ago? "Miracle worker’s earnings cut short by untimely crucifixion…"

But in years zero, ’14 and ’39, money was not the main issue. People believed in politics, nationalism, racism, religion…and reported the news otherwise.

Today, it is money that counts.

The price of oil fell heavily last week. It ended Friday at $115. But this morning, it is rising – on news of a political struggle in South Ossetia. And if this continues, we wouldn’t count on the price of oil to stay ‘low’ for long. The only good news is that when energy is under the gun, the soaring oil price itself opens you up to all kinds of soaring investments.

The region is between Russia and Georgia, on the Black Sea. Ossetians, whoever they are, have been there since the days when the ancient Greeks set up colonies around the Black Sea. In the 1930s, the Pontic Greeks were still there – until Stalin deported them to Kazakhstan. The Ossetians, too, disappeared into the maul of the Soviet Union. They were forgotten for most of the 20th century. Then, when the Soviet Union disbanded – there they were. But who then had the right to tell the Ossetians what to do? The Russians? Or the Georgians? The Russians expressed themselves on the issue over the weekend. According to one report, 2,000 people have died in the fighting.

U.S. Vice President, Dick Cheney, had Georgia on his mind over the weekend. He reportedly said that this violence "must not go unanswered." What sort of response he had in mind, we don’t know. But inasmuch as the United States and Russia are the world’s two most heavily armed nuclear powers, there may be more at stake than the price of oil.

*** "If you added up the cost of maintaining this place, it’s probably a lot more than a nice vacation," Henry argued. "We had to replace the roof a few years ago. We have Damien, [the gardener] who keeps an eye on the place. We had to have the plumber come and fix the furnace. You put a new door on the kitchen. It must cost a lot of money. We could have gone to spend a month in a nice hotel on the Cote d’Azur, for example."

Henry had just come back from a week spent with friends. They didn’t paint shutters, or fix stone walls, or weed the garden. Instead, they went sailing…and to movies…and restaurants.

"Oh…and I was surprised by how much people hate Parisians," said Henry. "They think Parisians are rich and snobby. And they’re right. You know Paul’s father would see someone with Paris license tags, doing something stupid, and he’d roll down the window and yell out – ‘Go back to Paris…’ or something like that."

"But wait…Paul’s family is from Paris…they are Parisians…"

"Yes, but his father got local license tags. So when he’s on vacation, he pretends to be from the area and yells at the Parisians…

"But we had a good time sailing…it was nice to take a real vacation. Not like around here. We never get a vacation here, because there’s always so much work to do just to keep the place from falling down. Really, Dad, I don’t see the point…."

Henry is right, at least insofar as the money is concerned. When you add in all the costs of maintaining a summer house – or, at least this summer house – it is far more than the cost of a real vacation. In addition to all the costs Henry mentioned, there’s the cost of heat. Even though we’re rarely here in the winter, we still have to heat the place or it will soon be ruined by mildew. And here in Europe, it costs a fortune to heat a large, old, un-insulated house through the winter. Then, there are taxes…insurance…and the inevitable repairs.

What we’re discovered here in France is the same thing that Americans all across the nation are discovering – houses are ways to spend money, not to make it.

"Well, why do you keep it?" Henry wanted to know.

"Sentimental reasons, Henry. This isn’t an investment. And it’s not just a vacation spot. This is our home. We’ve spent the last 13 years fixing it up. We’ve restored it. We’ve planted trees and gardens. And you children have grown up here.

"Besides, our lives are otherwise rather nomadic. I work in London. Your mother and Edward live in Paris. You children are spread out all over the world. You’re going to be in Virginia next year. Maria is out in Los Angeles. We need a place to call home…a place to keep our sacred family documents…."

"You mean, a place to keep grandma’s recipe for bread pudding and Maryland beaten biscuits?"

"Yes…and your monkey outfit from when you were in the school pageant… We need a permanent family stronghold…a family seat…a place where the whole family could gather every summer."

"Well, why didn’t we just stay at the family farm in Maryland?"

"Because my business took us to Europe…and because the whole area changed so much…with all those shopping malls and housing developments…it didn’t seem like home anymore. We had to retreat…"

"Well, I don’t mind that…I like this place. I just don’t like having to work all the time we’re here."

"But that’s just part of the charm of it. Imagine if we had gotten a condo at the beach at Ocean City? We’d go crazy. We’d just sit around and read all the time. Here…we get to do a little stonemasonry in the morning and paint the shutters in the afternoon…"

"When I grow up, I’m going to get a place at the beach…and spend the summer there. You’re going to have to paint the shutters by yourself."

Until tomorrow,

Bill Bonner
The Daily Reckoning