We may or may not have real growth, dear reader, but we are certainly paying a hefty price for it…
I can’t let the 7% rise in GDP, annualized, pass without comment. To wit; how much is 7% of GDP in dollars and cents? Well, the usual figure for GDP is ten trillion dollars. So 7% growth in GDP is, by mathematical imperative, a $700 billion dollar growth in GDP. The economy, in other words, grew by $700 billion. Sounds kind of impressive. But, and you knew there was going to be a "but," the federal government has borrowed and spent $600 billion in the last year, and doofus Americans increased personal debt, mostly mortgage refinancing, to borrow and spend at least another $800 billion in the year. And when you add in mortgage refinancing, then the amount borrowed and spent easily surpasses a trillion dollars.
And let’s not forget all the corporate debt that has been floated, so that corporations could borrow and spend. And the states and municipalities also borrowed and spent a load of cash, too. And out of all this borrowing and spending, which totals almost certainly near $3 trillion, the damn GDP only expanded by $700 billion? You spend four bucks to get one buck of growth? GDP grew at about a lousy fourth – a fourth! – of all the money that has been borrowed and spent? So why in hell am I supposed to get all worked up about a lousy 7%? Jeez!
What was missed by most people is, of course, the predicted inflation, as the price index for personal consumption rose at a 2.4% rate, which is up dramatically from 0.8% in the second quarter. As the WSJ put it, "In addition to the climb in…consumer prices, other familiar signposts, such as rising commodity prices and a depreciating dollar seem to indicate brewing inflation."
Hyperinflation: A Whole Different Ball game
I cannot keep my eyeballs from rolling back in their sockets whenever I hear that inflation is low. But apparently I am the only guy in the whole freaking country that is watching the prices of insurances, cable TV bills, telephone bills, commodities, houses, taxes, fees, and damn near everything else I consume going up at double-digit rates. So for YOU maybe this is some wonderful world of low inflation, but for me it is a whole different ball game.
And I note with a certain shudder that I am reading more and more references to economics-forecasting people starting to predict HYPER inflation. Not ordinary inflation. But the real thing, the big thing, the old Reichmark thing, where it took a wheelbarrow of money to buy a loaf of bread and caused the absolute collapse of the German currency. It is not inconceivable to me. Perhaps it isn’t on its way yet, but it will be soon enough.
In the meantime, debt continues to explode. Hans Sennholz, the god-father of the Austrian school of economics here in the USA, writes, "In just five years, total financial as well as non-financial American debt has surged by 51 percent or $10.9 trillion to more than $32 trillion, three times the annual Gross National Product. During the last quarter alone American households added $397.6 billion in mortgage debt and another $40 billion in credit card debt."
And all this at the same time as Saturday morning as I drove to the store, and happened to hear two stock market jackasses talking about their theory of why the economy showed such growth in the last quarter. They were all a-tingle about the tax cuts and the rebates, and how things are just peachy. I didn’t catch the names of those two doofuses, but that is not important, because they are all that way.
Hyperinflation: Morons Borrowing Money
And in case you are wondering, the gigantic increase in GDP was the result of morons, like you and me, but not you and me, and not nearly as good looking as us, well, you anyway, borrowing money that they cannot pay back to buy things they cannot afford and should not be buying. It is just that simple.
And now that these ugly morons have spent the money, the other doofuses in charge of businesses all decided that the one-off increase in sales is some permanent thing, and so they borrowed to ramp up production to meet the anticipated demand! How in the hell we got to be the number-one superpower in the world is beyond me, unless the rest of the world has more idiocy per capita, or IPC, than we do. Which is truly horrifying in itself.
There is one capita in particular upon which I am sorely tempted to lay all the blame for everything. It belongs to a certain gentleman who is willing to make every economic mistake in the book if he thinks it will make the economy go. He is, of course, none other than Mr. Ben Bernanke of the Fed – otherwise known as Printing Press Ben.
I have been busy coming up with yet more "unconventional methods" for Ben. Just to help him out a little. So, if you are willing to accept horrific results down the road, then I have a solution to the big debt problem today.
All Congress has to do is do two ridiculous things. The first one is to order the Treasury to print up $10 trillion in cash and simply buy up all the Treasury debt. It’s a simple as that. At the end of the day, we will have no sovereign debt. Zero! Zip! And we will have about $3 trillion left over after doing it! And we can use the money to fully fund Social Security! And Medicare! And Medicaid! And full prescription-drug benefits for everybody!
And for the private debt in this country, simply let everybody declare a special bankruptcy, which I suggest they call Jubilee Bankruptcy, and pass a new tax law that says you can claim a juicy Tax Credit for every dime that went bad because the guy you loaned it to went bankrupt in the big Jubilee! And then Congress can just print more money to send everybody their tax refund checks! Suddenly, no more consumer debt! We have wiped all of the slates clean, and are ready to start again!
I mean, if you are going to have a fiat currency, then how come we aren’t enjoying the fruits of it? If not, then what is the point of even HAVING a fiat currency if you are not busy having fun with it, by destroying it by printing up too much of it? As Richard Benson of Bensons’ Economic Trends says, "A few months’ growth can be purchased if the authorities are willing to pay any price." The 7% rise in GDP does not come at any price – it comes at an astronomical price. And we, that is, you and me, are paying very, very dearly for it.
The Mogambo Guru
For the Daily Reckoning
November 10, 2003
—Mogambo Sez: The recent pullback in gold is another buying opportunity, as the government continues printing money and thus debasing it. This is one of the Iron Laws of Economics in action.
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.
We’re still waiting for the crack of doom.
We think we hear a creak now and then…or the occasional twig snapping. But the real crack of doom seemed farther away than ever on Friday as the unemployment statistics were released. According to the latest revisions, 286,000 people were added to payrolls during the 3rd quarter, with another 126,000 finding jobs in October.
Real jobs, we recall writing, would convince us that the recovery was for real. Are these real jobs…or just a statistical mirage? Or, is the appearance of jobs just a fluke? Even dead economists bounce a bit when dropped from a high enough point; do jobs bounce up too?
The job news was enough to convince most people.
"Bonds Sink as Jobs Data Herald Sea Change," announced Reuters. All of a sudden, the winds shifted, and the sails filled with the warm air of inflation. The doldrums of deflation was yesterday’s weather forecast. Now, there is clear sailing.
"Greenspan Hints at End to Low Rates," began a New York Times item. "How long will Fed hold out?" was the question posed by TheStreet.com.
England and Australia have already turned their ships 180 degrees; both nations recently raised rates. And now bonds are tumbling in the U.S. in anticipation.
But we will maintain our lonely vigil…with our ears cocked towards deflation, listening for the crack of doom. Will it ever come? We don’t know. But we bet that the risk of it is mis-priced.
People say, "stocks will most likely go up." Why? "Because that’s what they usually do," referring to studies showing stocks up in 3 of 4 years over the last hundred years.
Of course, they ignore the effects of inflation; in real terms, stocks go down or nowhere about as often as they go up. And there’s no guarantee that stocks must do in the next 100 years what they did in the last 100.
But even if it were true that stocks usually go up, it still doesn’t make buying stocks now a good bet. In order to figure that out, you have to multiply the odds of a stock market decline times the gravity of it. Stocks are already near epic highs. They may climb further, but where does that take you? Not much higher, is our guess…and only to an even riskier level. So, even if stocks do go up, investors don’t gain much.
If stocks fall, on the other hand, investors are in big trouble. At no time since 1999 have investors bought so many stocks on margin. Consumers, too, have greatly increased their debts, even throughout the slump period. Practically everyone in the nation now needs rising asset prices – stocks and real estate – in order to remain solvent.
Buffett, Templeton, Soros, Rogers – and corporate insiders – don’t like the odds. But the lumpeninvestoriat, the hoi- polloi of the investment world, seem to love them; they keep buying. We do not know what will happen, but it looks as though the lumpeninvestoriat is making a bad bet. If they are right, they gain little. If they are wrong, they lose big.
And now, here’s Addison with more news:
– "The fact that an opinion has been widely held," wrote über-thinker Bertrand Russell early in the 20th Century, "is no evidence whatever that it is not utterly absurd."
– The prevailing wisdom in the financial media right now suggests that an American consumer Hell-bent on destroying his personal balance sheet can spend the world back to economic health. And the "widely held opinion" as of Monday morning Paris time – it’s working!
– Let’s take a step back and see what the recovery scenario looks like: Tax cuts, rebates, cheap credit…the government puts money in the hands of big spenders in whatever way, shape or form they will take it. (Pay no mind to the fact we have escalating foreign conflicts to fund.) Slap-happy consumers then turn around and dispense the cash with ease. Producers of goods and services need help siphoning off their share of the free and easy money – so they take on a few new-hires to help schlep goods from the backroom to the floor. In this way October saw the creation of 126,000 new jobs in the U.S.. – Hurray! Fed Governor Ben Bernanke tempered initial enthusiasm for the job numbers last Thursday by reminding we economic heathens that 150,000 to 200,000 schleppers per month will have to be added to nation’s payrolls for the remainder of the calendar year – and well into the next – before the recovery is deemed ‘real.’ But hey, at least we’re moving in the right direction, huh?
– We carpet weavers here at The Daily Reckoning are aware that all things man creates are flawed, so we are constantly on the lookout for them. Of course, this morning, we spot an easy one. The government can’t control what Joe ‘Almighty’ Sixpack will spend his rebate checks on…nor his tax cut…nor his home equity loan money. If he wants to stock up on DVDs, an extra night out on the town (because he deserves it!) a new, new car…so be it!
– These transactions, of course, are all tabulated in the rising 7.2% GDP growth figures. But what happens next quarter? Where will the next round of spending come from? Despite the fact that 126,000 thousand jobs were created, and more hours were worked, average income rose only one penny to $15.46 an hour. And many of the schleppers are on temporary contracts because employers are afraid of what we here at the Daily Reckoning are always prepared to accept: government statistics are hogwash! So we ask again, where does the money come from?
– More tax cuts? Not without significant reciprocal spending cuts. A reader recently pointed out to us that the debt clock is back up in Times Square…and ticking away at $19,000 a minute! With escalating foreign conflicts to fund, there isn’t a political backbone in Washington ready to defy the spending trend.
– Further rate cuts? The minutes from the FOMC meeting last week indicated the Fed spent a considerable amount of time reviewing their pledge to keep rates low "for a considerable amount of time." With central banks in England and Australia already throwing in the towel, the courageous fight against slowing inflation is beginning to look a little daft.
– In fact, we have word from our colleagues in the London office that despite rates being at a 48-year low in England, the personal bankruptcy rate hit record highs in September. "With increasing numbers of households unable to cope with their debt even when interest rates are so low," Vicky Redwood, a British economist, told Yahoo! News, "the danger is that households have not given enough thought to the possibility of a rise in interest rates when taking on debt."
– We’ve commented on the U.S. personal bankruptcy rate ad nauseum in these pages. Ever riskier consumers gobbling up credit card offers and buying cars at 0% down…is an unintended consequence of a central bank manning the levers of the economy. In England and Australia, the policy wonks have decided that enough is enough…and have raised rates to try to slow the rate of borrowing. One wonders how far behind Greenspan and Bernanke really are…and just how costly it will be when the market gets wind they truly have changed their definition of "a considerable amount of time." So we ask again, where is the money for the next wave of ‘GDP growth’ going to come from?
– Another not-so-unintended recipient of Fed meddling is our old pal Mr. Market. The Dow has risen 32% since March and the Nasdaq screamed ahead 56% – while bean counters at S&P firms have been secretly adding up fewer and fewer beans. Last week, Mr. Market received the ‘great’ economic numbers with little fanfare. As Eric mentioned over the weekend, the Dow closed just 9 points higher for the week at 9810…while the Nasdaq inched up 2% to 1971.
– Still, John Q. Consumer continues to do his part – or so it would seem. The widely held opinion that the almighty consumer can spend his way to riches…and take the global economy along for the ride…is alive and well. At least in America.
Back in Baltimore…
*** It all seems so normal. Our travels this week took us to New Orleans…then to Baltimore, and, this weekend, to Toronto and Nova Scotia. Everywhere we went, people walk upon two legs – just as they always did. They go about their business. The bars – at least in airports – are full.
Who would suspect that there was anything seriously wrong?
And yet, a reader who manages a hedge fund sends this warning:
"In the first quarter of 2003, total credit growth ran at a $2.362 trillion annual rate. The rate of increase in total debt was 7.4%. The correlating percentage increase in nominal GDP was 3.82%. At first blush, this seems bad but perhaps not insurmountable. Until you realize that total debt is three times larger than GDP to begin with, so a rate of growth twice as fast as GDP means the absolute debt is growing six times as fast as GDP!
"It is interesting to note that the estimated market value of all real estate plus the total equity market capitalization of all American corporations has fallen to the lowest percentage of all outstanding domestic debt in the 50-year statistical record. Each dollar of debt now has only 72 cents of collateral behind it!"
*** West Virginia By-the-Sea.
A waitress in Shelburne, Nova Scotia, wouldn’t stop talking. She told us that she had recently been fired because she had gotten sick…and complained to the local labor police. She also explained that her son’s 4-wheeler had been wrecked by a neighbor, so she went to the police again.
"You seem to spend a lot of time with the police," we noted.
When she brought the Fresh Sea-food Platter, we felt like calling the police ourselves, for it had been a long time since anything on the plate had had any contact with the sea.
But we have a weak spot for lost causes, underdogs, third world countries and out-of-season resorts. Nova Scotia was perfect. For it was here in Shelburne that a group of American loyalists retreated after losing the American war for independence. And here, in November, it seems so wind- swept, cold, and desolate that you wonder if it could ever be in-season.
The food at the Loyalist Inn was not fresh, but it was familiar. It was West Virginia cuisine, where quantity is far more important than quality. After a hearty meal, served with a bottle of Pepsi, we got in our car and drove down the coast to a tiny island. Along the route, we took in the sights. As in West Virginia, the scenery is stunning. But many of the houses are eyesores. They are too small; a lot of domestic impedimenta gets left outside – cars, machines, refrigerators. The place is not as woefully trashy as West Virginia, but it has the same cheap look to it…and a style that might be called "maritime dilapidation" as opposed to the degenerate hillbilly look.
The houses are made of wood. But there seems to be some perverse gene that makes people want to turn to wood substitutes, even in a place such as Nova Scotia, where real wood is everywhere…and cheap. The older, more dignified houses are clad in wood siding or wood shingles. The newer ones are dressed in aluminum siding, asphalt shingles, vinyl, plastic or some other hideous amalgam. We noticed no improvement in design, either. Instead, the Victorian, Greek Revival or Italianate houses of the last century have been superceded by simple bungalows of no particular distinction, other than the aluminum siding and junk in the yard.
Saturday evening, we took the cable ferry at LaHave and made our way up to Lunenburg. The roads were empty. Even the animals must have gone south for the winter; there was no road kill. We found Lunenburg charming and attractive, with many fine, old houses. But the place was almost completely deserted, as if it were anticipating a tidal wave. We dined at a waterfront bar, the only one in town that looked open, taking a place near the window so we could see it coming.
"Would you like to try our Nova Scotia wine?" asked the waitress.
"Nova Scotia wine? You mean, you can grow wine grapes this far north? "
Well, it looked like wine. And it tasted a little like wine, too. We ordered another glass or two and worried if we’d be able to get on and off the ferry without running into something.
We spent the night at a friend’s house. By 8pm it might have been the middle of the night and a bitter wind blew. But there, in the eastern sky, was a full moon, shining on the black sea.
What was it worth, we wondered? That view…that moon…that night? There was no price on it…it must be worthless. Any dunderhead on the south shore could see it for nothing. All he had to do was to turn off his television and stumble out his front door. How many bothered? It was a view so cheap, you couldn’t give it away.
A quarter of an hour later, we looked out again. This time, the moon was only half full…and we remembered that there was to be an eclipse of the moon. We watched as the earth’s shadow charged into the moon….It was as if a terrible battle had taken place, because the moon turned red, as if stained by blood….and then the dark earth retreated. The moon remained. Full, glorious, resplendent and victorious.