Weirdness Abounds

Two men have just won the Noble Prize in economics for having proved theories that the Mogambo Guru has known as truth for years. Will the winners come forward to share their prize with the Mogambo?

The Federal Reserve, tired of waiting for us idiot Americans to drive down to the bank in our almost-new SUV to borrow more money to buy new SUVs so that the money supply can expand, is moving into Buying Outright Mode to accomplish the same thing. This is, of course, the second ultimate monetary fraud, the first ultimate monetary fraud being that you would accept an IOU from the Mogambo ("Money down the rat hole!").

And when you look at the category known as "U.S. Government Securities Bought Outright," it is up another $2 billion. The way it works is that, and you gotta admire the utter simplicity of it, the banks buy Treasury debt from the government, and the government spends the money. Then, later, when they think nobody is looking, the Fed sneaks around and creates some money out of thin air, and uses that new money to buy the debt from the banks and then run that debt through the shredder. And since that gives the banks their money back, the banks use that new money to go out and buy up more Treasury debt, so that the government can spend some more money! It’s like a miracle!

The Treasury was likewise emboldened that nobody has raised so much as a peep that they have exceeded the borrowing limit as set by Congress, and so they went out and sold another big stinking pile of American government debt, taking us to $4.420 trillion in total, which is up healthily over the statutory maximum of $4.384 trillion. But let me go over my MasterCard limit by a lousy 10 bucks and all hell breaks loose around here like I got into a fistfight with Mrs. Kravitz again or something!

Weird things are abounding. The biggest surprise to me is that there are a lot of idiots in the world who are not under court-ordered supervision who are buying bonds at the exact same time as interest rates are rising! Basic economic theory, the stuff you learned on the very first day of Economics 101, says that rising interest rates make bond prices go down. And if you own bonds, then you lose money, capital gain-wise. But yet, here these morons are, bidding up bonds, and thus saddling themselves with lower yields for extended periods and potential losses!

Alan Greenspan: Idiotic Monetary Policy

The big news is that the new winners of the Nobel Prize in economics, Edward Prescott and Finn Kyland, won the coveted prize by essentially saying that Alan Greenspan, and the idiotic course of monetary policy they are rabidly pursuing, is wrong! I love this stuff! Ergo, they also win the Mogambo Prize (no money or fame, but I take them on a ride around the neighborhood, while we play the radio real loud and honk at pretty girls), in that they, to quote The Wall Street Journal, say that their theory shows, "Government policymakers invited long-term trouble" when they ran around like idiots to address short-run problems by throwing money and credit around by the profligate boatload, when, by doing so, they operate at the expense of ignoring the prudent long term goals of, I assume, low inflation and stable money supply.

In particular, again quoting the WSJ, "Most central bankers around the world typically espoused a commitment to contain inflation, but in practice central bankers would shift policy to tolerate a little more inflation in the short run as a trade-off for stronger economic growth and rising employment." In other words, the Mogambo was right, and Alan Greenspan and the other horrid little central banking nitwits are morons! But am I, and my contribution, even mentioned anywhere? No!

These two guys also deserve some credit for putting, what is hoped, the last nails in the coffin of the whole stupid Keynesian economic theory, where the government comes roaring in and tries to desperately correct its nearly fatal fiscal and monetary mistakes with the added mistake of more rampant deficit spending.

But the lesson about inflation is not entirely learned, as in the same Oct. 12 issue of the WSJ, where we read an article by a guy named David Henderson, who is a "research fellow with the Hoover Institution and an economics professor." Anyway, he wrote an essay entitled "A Nobel Tiger in the Tail," wherein he characterizes Alan Greenspan as an "inflation hawk"! I rub my eyes in disbelief, as he goes on to write "In the last 17 years, U.S. inflation has averaged only 3%." Only 3%! Only! Three! Percent! My stomach churns in outrage; my teeth grind themselves into powder, and my trigger finger spasms reflexively. I regain control of myself with my usual Mighty Mogambo Real He-Man Effort (MMRH-ME). Snagging my calculator off the desk and furiously punching buttons in my fury, hour after hour, until somebody mercifully takes it away from me and uses it to figure out that that three percent inflation for three years is a 9.3% increase in prices.

Alan Greenspan: Not Tame, Not Low

Remember, you pay prices with AFTER-tax money. Therefore, with a 28% tax rate, do you really think that over the next three years that you are going to get an increase in your before-tax income of 13%? You had better, because this is the amount of increase that you need to merely keep up with 3% inflation! If you do NOT think you are going to get a cumulative 13% raise in the next three years, then you will suffer a fall in your standard of living. NOW do you think that 3% inflation is "tame"? Do you think 3% inflation is "low"? Huh? Do you?

I am too paralyzed with rage to continue, and anyway, passersby are stuffing rags into my mouth to try and muffle my screaming, and so we will turn to someone who DOES comprehend economics, and by this I mean, of course, Mark Rostenko, of the Sovereign Strategist. He says, "The writing’s on the wall, folks." So I look over at the wall, and sure enough somebody has written, "The Mogambo is a big fat idiot!" But this is not what he is referring to, as he immediately proceeds to say he was referring to a figurative wall, in that, "Long-term interest rates are falling. Retail sales are slumping. The consumer isn’t making more money and the government is only making up job numbers. Are we in for another round of recession? Before you answer, consider that oil shocks = recessions."

Well, Mr. Rostenko’s views gets me immediately back to those two new Nobel Prize winners Prescott and Kyland (which, now that I think about it, is, by rights, MY prize and MY money, and not only do I get neither, but they act like they never heard of me, and then they hang up on me when I call them up and demand my cut, and then I have to call them back, and they say, "We no speakee English," and laugh at me, and then they hang up again), who say that supply-side shocks, like "a surge in the price of oil," could have a big impact on economics, mainly by "causing a recession or a boom." See how all of this fits so neatly together?

Regards,

The Mogambo Guru
for The Daily Reckoning
October 18, 2004

More interesting that what is happening is what is not.

Now we’re seeing projections of U.S. net current account deficits reaching over 6%…but the dollar is not collapsing.

The recovery is said to be proceeding as planned…but bonds are not falling.

"Inflation pressures" are building…but the price of gold only grudgingly rises – it was at $420 last time we looked.

Consumers keep spending…but GM makes less than nothing on its cars.

GM reported a profit of 78 cents a share for the third quarter. But not a dime came from making cars and trucks. Instead, the automaker lost on every screw, bolt and rivet. It made up the losses by financing cars and houses.

"What’s good for business is good for America," said Calvin Coolidge. Then what’s bad for business is probably bad for America too. Both America and General Motors have largely ceased making things at a profit. Instead, both live on "finance." The nice thing about "finance" is that you can do it in an air-conditioned office wearing a suit. No sweat. Mothers are proud to say their sons have gone into "finance." There’s something almost honorable about it.

If, on the other hand, their boy had gone to work in a GM assembly plant, they’d be a little embarrassed to say so. There’s no glory in manufacturing anymore. And no money, either.

But what do people in "finance" actually do? They sit in front of a computer screen all day…and occasionally talk to clients…or co-workers. Beyond that, we really don’t know. We suppose the idea is to borrow money at one rate and lend it out at a higher rate. Like merchants who buy at wholesale for resale at retail, the person in "finance" must have the same problems as everyone else. He has overhead, inventory and customers. He must protect his margins…and make sure he doesn’t make the financier’s classic mistake: misjudging his risk.

Yet that is exactly what we expect…and what we revel in. It is almost why we get up in the morning and what we look forward to. It is also inevitable.

As more and more people make more and more money in "finance," naturally, the trade attracts more and more people. The financiers compete to attract borrowers. The subprime borrower, who was judged too bad a credit risk at the beginning of the cycle, suddenly becomes a worthy customer and is lent money at rates scarcely higher than those of best customers.

The longer the finance craze goes on, the more it seems eternal. Risk is forgotten. "Risk premiums" disappear. Marginal borrowers are sent more credit cards. They could barely get a lease on a slum apartment a few years ago; now they can buy almost any house in town, with no money down. A few years ago, they had to shop for a car from Cowboy Bob’s Pre-Owned Cars and BBQ Pit and pay 15% interest on a 10-year-old bomb. Now they can go into any showroom in town and drive away in a brand new car – and pay no interest at all!

The huge credit bubble should implode. But it’s not happening either. At least not yet.

Still, word came last week that Standard & Poor’s downgraded GM debt to just above junk status.

Now for more news from Tom Dyson, on the East Coast…

———————

Tom Dyson, reporting from bustling downtown Baltimore…

"The options market is one big poker game, says Jeff Yass, an options-pro. "The basic concept that applies to both poker and option trading is that the primary object is not winning the most hands, but rather maximizing your gains."
———————

Bill Bonner, back in Paris…

*** General Motors makes cars out of habit. It went into finance out of necessity, perhaps. America is "deindustrializing," say the pundits. No harm in that. We’ll be a society that thinks, rather than sweats.

One thing that GM has to think about is how it is going to make good on all its promises to retirees now that it can’t make money in the car business. Capitalism is supposed to be a system in which the capitalists make money by exploiting the workers. But GM, as near as we can tell, has it backwards. It is selling bonds to investors in order to pay health and retirement benefits for GM workers. It now more resembles the U.S. government than a profit-making business.

*** Dr. Copper shocked the world last week. It had risen to a 15-year high on the 8th of October. Five days later, it fell the most it had ever fallen in 14 years.

*** "Well, who will it be?"

No matter where he goes, the American confronts the same question. Europeans are overwhelmingly against Bush. They know little about John Kerry, except that he is not Bush, which makes him extremely popular. At dinner parties, weddings and funerals – people all want to hear that Bush will soon be gone from the White House.

"The polls say it is a close race," we reply. But that is not good enough.

"How could Americans re-elect such a man…etc., etc.,"
the conversation continues.

We have no answer. We do not know how Americans could re-elect Bush. On the other hand, we don’t know how they could elect Kerry either.