The World's Final Consumer

It seems as though America isn’t living up to its reputation as the "ultimate consumer," which will send a major ripple through the world economy, and basically spells big trouble America. The Mogambo sheds a little light on the topic…

In case you are looking at the economic universe and see what appears to be a huge freaking storm waaayyyy out there on the horizon, that is the sight of the biggest decline in Consumer Installment Credit since 1990, as we bozo Americans apparently paid off $3 billion in credit-card debt last month, instead of going farther and farther into debt like we have been doing every month for freaking decades now.

It’s a piddly little bit, to be sure, compared to the total credit card debt of $2.13 freaking trillion, which works out to some diddly little teensy fraction of one lousy percent of the total debt owed. So $3 billion bucks, at this level, could be just a rounding error.

Being a real thick-headed doofus, you should realize that I cannot possibly comprehend what all this means, but I DO know, deep down in the dark, dismal depths of the heart of The Mogambo (DDITDDDOTHOTM) that for a nation whose only reason for economic existence is to consume in an orgy of raw gluttony, things are not looking particularly rosy in that regard. If they were, as I said, rosy, then Total Consumer Credit would have gone up. But it did not. In the mind of The Mogambo (MOTM) I hear the Horsemen of the Apocalypse, as this portends big changes. Big, important changes. Big, important and ugly changes.

If America, standing proud as the world’s Ultimate Final Consumer, is not buying, then this means that nobody is buying stuff, because we buy all the stuff! And this means that all those producers, a lot of them foreigners, all the way up and down the line, ain’t a-gonna be making sales. This lack of sales will cause some businesses to suffer a fall in revenue. Which means a fall in profits. Which means that the shareholders are out for blood. Which means management will spring into action to deflect blame from themselves. And since the axe of retribution must fall around here, some sacrificial scapegoat has to be identified and fired. You can almost see the light bulbs appearing above their heads as they suddenly realize that The Mogambo is nearly at the end of the new-hire probationary period.

Consumer Installment Credit: The Mogambo Turns the Tables

Earning every dime of their obscenely-bloated paychecks, they make another of their many brilliant-but-exhausting executive decisions, and it’s, once again, pink-slip time for Mogambo (PSTFTM). But they do not realize that the wily Mogambo has again turned the tables on them all! Hahaha! He has demonstrated his extraordinary forecasting powers by not only a) anticipating this moment, but has also been b) stealing office supplies and people’s lunches for weeks in shrewd preparation! Hahahaha! I’ll make a fortune in Post-it Notes alone!

But I actually feel sorry for them as they celebrate and laugh it up at their "Goodbye and Good Riddance, Mogambo!" party, with their damn cake and balloons, since none of them owns gold. A few of them wear silver crucifixes around their necks because they think it will magically keep me away. But I know for a fact that they do not accumulate precious metals (or commodities of any kind) as investments! I have spent my short time employed here ignoring my work to attend to the more important matter of constantly calling them on the inter-office phone, and sending them emails, to tell them, over and over and over again, about how the Federal Reserve is destroying our money, and how they are encouraging everyone and everything to plunge into a bottomless ocean of debt, which they do by creating so much money and credit and lowering interest rates to entice you to borrow, and how our many, many, many layers of government are destroying our country by creating so damned much government, and by creating so many more people and businesses who are totally dependent on government spending. So it is not like they do not KNOW about why they should own gold and silver! They know damned good and well why they should! But they don’t! They just don’t.

And not only do they NOT buy precious metals against the guaranteed continued debasement of dollars, but they make fun of me, and mock me, and say hurtful things, like, "Hey, gold boy! I see gold is down two dollars! Let me tell you how much I made in my Google stock!" And, "What idiot hired you?"

If you take a look at all the people that are screaming at us Americans to grow up and act responsibly, you soon see that it is A-list of the whole world. Off the top of my head I remember some pointed criticism from the Bank for International Settlements, the World Bank, the European Central Bank, the International Monetary Fund, and then most countries, and The Mogambo, to name but a few. All of us are officially on record as demanding that Congress immediately address our glaring and totally irresponsible monetary and fiscal idiocies. I will point out, because the news media censors your news, that I am the only one who has actually formulated a workable plan, a wonderful plan, a Terrific Freaking Mogambo Plan (TFMP), which is to put me in charge of the Federal Reserve, give me awesome, god-like powers to hire, fire, and push buttons at will, and to have the IRS and police attack anybody who disagrees with me, sort of, you know, like Bill Clinton’s administration.

Consumer Installment Credit: The Question

So the question is, "Will Alan Greenspan continue down this rocky, ruinous road of ruthless, relentless monetary accommodation, in spite of unanimous world opinion, and in spite of interest rates being too low, for too long, already?"

In case you are a cub reporter for a great metropolitan newspaper, and you were thinking to yourself, "Yikes! I have a deadline coming! Hmm! I wonder what The Mogambo would say about Greenspan raising interest rates?" I say, and this is a direct quote, "Yes." See, if he acquiesced to the demands of these slippery foreigners, who all speak with those strange, foreign languages so nobody ever knows what in the hell they are saying anyway, it would help cover his nasty little butt when the whole thing falls apart, as it will, as it must. Then, he could look into the camera and, with this wide-eyed look of innocence all over his stupid face, say, "But I was doing what they all told me to do! And I did it in the spirit of international cooperation between the relevant monetary authorities! So it is all THEIR fault!"

On the other hand, if he ignores all the critics, and keeps on trying to expand credit via lower interest rates, then, when the whole thing finally falls apart as it must, he will go down in history as not only stupid, but stubbornly so. All of the other countries in the world would then strut around crowing, "We told them to stop! But they did not! Stupid Americans!" and then they will laugh at us, and you notice that even when they laugh, they even laugh with a foreign accent, that will make us even MORE angry because it is all so true, and now the guys we used to laugh at ("Ha ha! Dumb foreigners!") are laughing at us ("Ha ha! Dumb Americans!") and I, for one, don’t like it one little bit.

But speaking of the Federal Reserve, for the last month and a half the Fed was not creating much new credit at all. But I knew that the Federal Reserve could not resist intervening in the markets for much longer. Finally, last week, the long string of week-after-week stasis in Total Fed Credit, which is the glorious, magical fount from which springs the fabled "money from thin air" in the banking system, has been broken, and is now increasing again, theoretically feeding the insatiable maw of America, the Ravenous Monster From Hell That Gobbles Things, Especially Imported Consumer Items And Real Estate.

But, and leave it to The Mogambo to find a dark lining in the silver cloud, incomes are not going up, which is a real bummer, because it takes money to pay money. If debt goes up, but income doesn’t go up, too, then you are paying more but getting less, sort of like being married, ha ha. And I don’t know how things work in YOUR neck of the woods, but around these parts, this usually means that things are not going as planned, and it was profits that were planned. And it is the thought of increasing profits that make stock prices go up.

Regards,

The Mogambo Guru
for The Daily Reckoning

July 18, 2005

The Mogambo Sez: If you were Spiderman, then your Spidey-senses would be tingling from the danger that is everywhere, and that would get to be a real hassle after awhile. Be thankful you are human, grasshopper, and you can buy gold and silver, and you can rest easy at night without your senses tingling and keeping you awake, tossing and turning, and the next day and you have to walk around in a daze, all grouchy and sleepy. And tingling.

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.

Dude, where’s my home equity?

A housing market does not have to crash to cause problems. That’s the difference between a bubble in the housing market and one in stocks. Stock market bubbles are financial phenomena. Housing bubbles – at least, those in the Anglo-Saxon countries – are economic phenomena. What’s the difference? In the first, when the bubble comes to an end, the people who get hurt are investors who should have known better. Who cares about them? Typically, somebody blows his brains out and blames it on falling stock prices. But the rest of the world goes about its business.

But when a housing bubble ends, the whole economy suffers, because ordinary working stiffs have come to rely on increases in house prices just to pay the bills. When the "equity" stops coming, they have to cut back. Soon, the economy is in a slump.

Housing prices took off in the Netherlands between ’97 and 2000. Thereafter, they did not crash; they just stopped rising so fast.
The Dutch economy had become "hostage to the housing market," say analysts. When housing cooled off, so did the economy, which has been in a slump for the last five years.

"People don’t feel that they are automatically getting richer any more," ABN AMRO economist Charles Kalshoven said.

"House prices tend to stimulate consumer spending so much that just removing that stimulus tends to lead to a sharp deceleration of consumption," Fortis economist Nick Kounis added. "For the housing market to start being a drag on consumer spending, you just need it to stop providing a boost."

People stop taking out equity when there is no equity to take out. Last year, homeowners took out more in phony equity than they got from pay increases. Without the $700 billion of extra spending, the U.S. economy would have been in a slump, too.

Most people cringe at the thought of recession, but a recession in America would be an improvement. As it is, the national economy is like a man with a serious mental problem. He needs to straighten out. But Dr. Greenspan and the other quacks in charge of the economic policy encourage his delusions with soothing words and easy money. Now, every day that goes by, the poor man is in worse shape. His debt increases; his wealth decreases. His ability to function declines.

Say Fed governors: "See, I told you we could prevent a slump!"

America’s GDP is positive – despite the fact that people get poorer. Inflation is not a problem – despite $60 oil and housing costs rising at 10% per year. Housing prices are "solid" say economists, despite the fact that few people can afford to pay them. Americans are getting wealthier, they add, despite the fact that people don’t really earn more money.

And in the financial markets, rarely have we seen so many people so sure that nothing can go wrong. No one is buying puts. Inflation-adjusted Treasuries earn almost as much as those without the protection. Mortgage lenders hand out money to bad credit risks with no apparent concern about getting it back. Not since 1914 has the average man been so confident…and never before has he been so confident with so little reason to be.

In 1914, Americans had the confidence of youth – the United States had become the world’s biggest economy in 1910; it was still growing fast and on its way to becoming the worlds only superpower…and its only true empire. Now, the empire seems to have peaked out. America is on the losing end of the imperial trade – it pays the costs of maintaining open, globalized markets. But it loses money every day. Still, Americans have not quite caught on. As long as housing prices are rising, they figure they are on top of the world. They are still confident, but it is the confidence of an old fellow who has lost his grip and his wits.

More news, from our currency counselor…

————–

Chris Gaffney, reporting from the EverBank trading desk in St. Louis:

"We have put out the For Sale sign on U.S. debt and have done everything to attract foreign buyers, even enabling them to buy at better prices than U.S. consumers. But what will happen when they no longer want or need to purchase this debt?"

————–

Bill Bonner, with more opinions….

*** On the heels of Hurricane Dennis, comes Hurricane Emily, which shut down most of the offshore wells in the Gulf of Mexico’s most productive oilfields and two major ports that export crude.

Even worse, with fierce winds, Emily killed the pilot and co-pilot of a helicopter that was attempting to evacuate an oil platform in the Gulf of Mexico.

Mexico is the world’s ninth-largest crude exporter, and the state oil monopoly, Petroleos Mexicanos (Pemex) has shut down almost all production from the Campeche Sound, which accounts nearly 80 percent of Mexico’s total crude output.

Sam Tilley, an analyst with Sucden brokerage, says, "The market is now waiting to assess the impact of the storm and how long production will be shut-in for. The shut-in is likely to slow U.S. import levels and erode relatively robust inventory levels."

*** "Real estate investment clubs are thriving," says a headline in the N.Y. TIMES. People are learning about zero-percent financing, no-money-down, minimum payment plans and other mysteries. We suggest that members take a moment to learn about the source and inspiration for their latest pre-occupation. Our guess is that they will not figure it out until the current up swing is exhausted. Then, they will take up bridge. Or canasta.

*** Europeans take long vacations; Americans do not. The former feel superior because they believe they have a higher quality of life. The latter fee superior because they think work is a virtue in itself. They credit their growing economy and their wealth largely to their willingness to work long hours.

Americans under-price leisure, in our opinion. They have gotten caught in a trap. They spend more – believing that gadgets, gizmos, new autos and larger houses improve their standards of living. Where do they get the money? They have to work longer hours – or borrow it. Either way, they have to work longer hours to keep the cash flowing…and need more gadgets and gizmos to make the extra work seem worth it.

We sat out on the lawn last night and wondered whether it was worth it at all. The gadgets give a kind of instant pleasure. But instant pleasure is all people have time for. When you have no time, you have to spend money; you cannot grow your own vegetables, or wash your own car, or clean your own house, or fly "stand by" on your vacation, or even sit around and wonder about it all – you’re too busy spending money.

If a man earns $25 per hour, you may say that an hour of leisure costs him $25. But taking out the costs of taxes, transportation and so forth, it probably only "costs" him about $15. Is an hour of leisure worth $15 to him? The poor man can’t even ask the question – he has to work to pay the bills. He knows the price of the un-worked hour. What he doesn’t know is its value.

Europeans, meanwhile, have decided to "consume" more leisure. They spend less and save more, too. It may not be the most dynamic economic model. But it seems in much less danger of falling apart.