Worthless Money, Worthless Economy

Frequent readers of The Mogambo Guru will note his distinct Mogambo Laugh Of The Damned (MLOTD), and how it is usually followed by the words "We’re freaking doomed!" Well, this week, he comes across something so terrible, he can’t even muster a chuckle, let alone an MLOTD.

There comes that "Kodak moment" (elsewhere referred to as that "Wile E. Coyote moment" when he has run off the cliff and is surprised to see himself momentarily suspended in mid-air) when burgeoning governments and the dysfunctional economies that grow up around them have grown and evolved into their final, grotesque, bloated maximum by constantly expanding their spending via debt and taxes to the maximum, and then one day they suddenly cannot do that silly crap anymore.

I know that the audience is dying to ask, "Why not, oh Wonderful Mogambo Master (WMM), when it is you who counsels that with a fiat currency, it will always be possible to finance infinite amounts of spending?"

I look at them with pity, as the answer is simplicity itself; they literally run out of money because money is being lost so fast! Unfortunately, I can’t say anything, as my guts are churning so badly at the prospect of universal bankruptcy that it is all I can do NOT to puke my guts out in fear, which I prevent only with Heroic Mogambo Control (HMC) so that I will not get a lot of angry people demanding their money back, which they paid for this stupid seminar, as I already lost most of it in a crap game with the kitchen staff before we even got started. Oops! Damn!

So I say nothing, but smile hopefully enigmatically and point them to Bloomberg.com, where they can read for themselves the horrible news that "Wall Street’s mortgage losses have grown so large that some firms may pay little or no taxes for years, widening New York City and state deficits and challenging their ability to provide services, Mayor Michael Bloomberg said." Gaaaaahhhh!

The one industry that makes most of the money, the financial services industry, will pay no taxes! And even worse, "Some companies are seeking refunds from the city on taxes they prepaid, saying losses have cut their tax liability to zero."

So not only are they not going to pay any taxes, but they want the city to send them some money back! They can do this because they already paid too much, as, "The banks pay tax on 110% of earnings in advance as a ‘safe harbor,’ protecting against penalties for underpayment."

The mayor dryly admitted, "I think it will be a number of years before Wall Street starts paying taxes again" because "They will carry forward all of those losses" and not pay any tax for a long, long time.

And, as if you need something else to worry about, ditto federal tax revenues going down because massive losses will result in zero tax due. No wonder Obama is proposing all these higher tax rates!

And if you think it won’t happen, then I laugh in scorn at your misplaced optimism, because it is already happening! The federal budget deficit tripled in July to a record $102 billion, taking government spending up by a massive 27% from this time last year, which is bad enough, but then everything is made Much, Much Worse (MMW) by the stunning news that revenue was down 6%! Gaahhhh!

After $150 billion borrowed, put into stimulus checks, sent and spent, tax revenue was still down 6%? Staggering! The economy is so bloated, indebted and dysfunctional that $150 billion of additional raw spending produces 6% less taxable income? Hahaha! We are so freaking doomed!

And it is not just here, either, as Peter Schiff of Euro Pacific Capital reports that we Americans are "defaulting on hundreds of billions of dollars of existing loans underwritten by lenders around the world."

This may have something to do with the Wilshire Trust Universe Comparison Service reporting that, according to Bloomberg.com, "The return for all institutional investment portfolios turned negative for the 12 months ended June 30", and "the median contraction for master trusts, which includes pension plans, foundations and endowments, was 4.49% during the year."

And you still think that you can fund a retirement by investing all your money into the stock market? Hahaha!

And this does not even take into account, according to Agora Financial’s 5-Minute Forecast, that the Federal Reserve opening the bank to any and all borrowers resulted in the eye-popping news that the "Fed’s TAFs and TSLFs have now dedicated over $1.6 trillion to quelling the credit crunch"! $1.6 trillion dollars! My God! We are freaking doomed!

Perhaps Junior Mogambo Ranger (JMR) Len M. sums it up best when he says, "Honest government, honest money. Dishonest government, dishonest money. Worthless government, worthless money."

The worst part is that this is also true: worthless money, worthless economy. I wish I could find a laugh in there, but I can’t. Plenty to weep about, though! And plenty of time to repent at leisure, too!

Unless you have gold, silver and oil, of course, but don’t get me started on their virtues or how obnoxious I will be when I am rich, rich, rich from owning them and how far, far, far away the kids will be in some boarding school, and how much fun, fun, fun life can be again, as I never tire of thinking about it and I have far, far, far too much work to do.

Thanks.

Until next time,

The Mogambo Guru
for The Daily Reckoning
August 25, 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.

The whole United States seems to be following in the direction of Merced, California – epicenter of the housing quake.

Poor Merced; The New York Times calls it a disaster. Housing prices have been cut in half. Three out of four of the houses listed for sale are foreclosures. If a seller isn’t willing to cut his price to the level of a foreclosed house, he can forget about selling it, say real estate agents.

How did this Golden State get itself into such a jamb?

The Times reports:

"…hardly anyone in Merced planned very far ahead.

"Not the city, which enthusiastically approved the creation of dozens of new neighborhoods without pausing to wonder if it could absorb the growth. Certainly not the developers. They built 4,397 new homes in those neighborhoods, some costing half a million dollars, without asking who in a city of only 80,000 could afford to buy them all.

"Obviously not the speculators turned landlords, who thought that they could get San Francisco rents in a working-class agricultural city ranked by the American Lung Association as having some of the worst air in the nation.

"And, sadly, not the local folk who moved up and took on more debt than they could afford. They believed – because who was telling them differently? – that the good times would be endless…

"The belief that this dream could be achieved with no risk, no worry and no money down was at the center of the American romance with real estate in the early years of this decade, and not just in Merced.

"How long will the economy have to pay the price for that illusion? The experience of Merced, which rose higher and fell faster than nearly anywhere else, suggests that recovery from the national real estate debacle will be painful and protracted."

A painful and protracted debacle would actually be a good thing for the nation. Americans would learn a valuable lesson about money – that if you want to get richer you’ve got to have more income than expenses; there’s no other reliable way. The pain would convince them to avoid goofy speculations and excessive spending. The protraction would give them time to pay off the mistakes of the past, save money, and re-jig their lives.

"I feel sorry for these people," said an American house guest over the weekend. "They drive these big pick-up trucks…and have jobs that barely pay the minimum wage…I don’t see how they get along. And there are millions of them…"

"You can criticize the American economy for a number of reasons," responded a French economist. "But it has done a marvelous thing. It absorbed millions of immigrants – often with no skills, often who didn’t even speak English. The U.S. population went from about 250 million people just a few decades ago to around 300 million now. We saw what happened to Germany when it was unified. The cost of bringing the East Germans into the modern economy was very high…and it depressed the German economy for a decade. But the U.S. economy was able to provide jobs for millions of immigrants – many of them illegal – and still grow. No other economy could have done such a thing…"

Yes, that was the great achievement of the U.S. economy. It took in the tired, the poor, the huddled masses of newcomers and put them to work. These marginal workers – slaving away at minimum wage jobs – pushed down the general level of incomes, so that the average hourly employee saw no wage gains for the last 40 years. And today, thanks also the strength of the euro, the typical employee in America today earns less than the typical Frenchman or the typical German.

But what did all these new workers in the United States do? They swept floors, stocked shelves and changed bedpans. More than that – they helped build the scaffold for the whole consumption economy. They ricked up boxes at Wal-Mart – where people can buy jumbo quantities of things they don’t need at Everyday Low Prices. They greased the grills at Appleby’s, where the hardworking, two-income families could get fat on credit cards. They cleaned pools and trimmed hedges…parked cars…replaced roofs…and lugged granite countertops all across the country.

But not only did the U.S. economy give him work; it also gave him credit. He could spend money he hadn’t earned yet – and use it to buy a house in Merced, California. And now he’s stuck with it.

*** Buy the dips in gold…sell the rallies in stocks. Gold seems to have bottomed around $800. So far this year, gold has lost less than 3%. But stocks are down 14%.

*** "Detroit pushes for $50 billion bailout," says a headline from the LA Times.

Meanwhile, Fannie Mae shares dropped to $5 on Friday. Freddie Mac, her partner in crime, slipped to $2.61. How much will it cost to save the two desperadoes, asks a New York Times article. Between the two, they have $5 trillion in mortgage commitments.

Both the housing industry and the auto industry are in trouble. Both look to the government for a bailout…or clandestine nationalization. One way or another, losses will be transferred from the people who earned them…to the lumpen citizen. That’s the beauty of modern American capitalism. For many years, the insiders got the profits…the outsiders (the public) can now take the losses.

*** Willem Buiter, formerly of the Bank of England rattled the assembly of central bankers over the weekend. He said the Fed was over-eager to bailout Wall Street. Some took offense. Others took his side.

But what is the Fed for, if not to protect the big financial institutions? It was set up by the big banks, for the big banks, and of the big banks. Is it any wonder it watches over its own?

Like any other cartel, it tries to make things easy for itself – by keeping out competition, maintain a monopoly position, and fixing prices. Currently, the Fed lends to preferred institutions at 2%. These big banks then lend at twice, thrice, or quadruple the rate. Good work if you can get it.

*** And a note from Short Fuse:

"Thanks so much to all of our DR readers who attended Thursday night’s screening of I.O.U.S.A. and subsequent discussion panel with Warren Buffett, Pete Peterson, David Walker, William Niskanen, chairman of the CATO Institute; and Bill Novelli, CEO of AARP.

"The premier in Omaha was at capacity – close to 2,000 people filled the auditorium where the film was shown. It was unbelievable. We heard reports from friends, family and readers all around the country that the turnout in their theaters was pretty impressive as well.

"The movie has been received pretty well by critics to Roger Ebert gave I.O.U.S.A. three and-a-half stars, and wrote his review as a letter to his grandchildren.

"All in all, the entire crew of the film is quite pleased at how things are going for I.O.U.S.A. thus far – but we aren’t done yet! The movie is in theaters for the rest of the week, so if you haven’t made it out to see it yet, you still have a chance."

*** The big party is over…the end of summer is coming fast. This morning, a group of workers is taking down the tent. Our houseguests are packing up and leaving…in groups of two, three, or five. The flowers are wilted. Cigarette butts litter the back porch. The candles are burned out. The house feels like a prizefighter after a boxing match – bruised, but relieved.

The cook is taking the day off to recover. One daughter left for London yesterday. A mother-in-law, nieces, and a brother-in-law got into a car this morning; Elizabeth is driving them to the train station in Poitiers. A son leaves tomorrow. More to come…of no particular interest…and for no particular reason…

Until tomorrow,

Bill Bonner
The Daily Reckoning