You Pay, We Provide

Who’s to blame for the Great Bubble Economy? The Mighty Mogambo takes on Nobel prize-winner Joseph Stiglitz, below…

"No one – not the president, the secretary of the treasury, or the chairman of the Federal Reserve – can be blamed for this irrational exuberance; but they can be blamed for not dealing with the consequences, and in some cases, for feeding the frenzy. After a faint effort to let the air out of the bubble, the Fed simply added to the hype."

– Joseph Stiglitz in "The Roaring Nineties: Seeds of Destruction", published October 2

Joseph Stiglitz, in an excerpt from his new tome carried in The Guardian, examines the bubbles fostered in the U.S. during the 90’s from his lofty viewpoint as part of "we in the Clinton administration." His blatherings are part educational, part anti-educational, part nonsensical, part historical, and mostly self-exculpatory.

Earth to Mr. Stiglitz! Yes, the President, the Secretary of the Treasury, and especially the Fed Chairman CAN be blamed for the bubble mania, and I, the Mighty Mogambo, blame them with every fiber of my being, and with every decibel of my loud and irritating voice, and I point my long and bony finger at them and say "Shame! Shame!" Their every action was in reckless pursuit of expanding and exploiting the bubble economy via growing government meddling.

And also highly blameworthy, of course, is Joseph Stiglitz himself, who, armed with his precious Nobel Prize in economics, supposedly knew better and should have said something and done something, but chose to go along to get along. And now, I note with disdain, even though it looks like I am having some horrible gastric distress, but I am not, and that is just the way that my look of disdain appears to the casual observer, that he is defending his lack of responsibility.

Don’t believe me? Well, just listen to this load of crap, and you instantly know that when the Mogambo uses a phrase like "get a load of this crap" that I am really going to lay into this Stiglitz character in a another pointlessly vicious and senseless personal attack of some sort:

"We made some good long-run investments – both in the private sector and in the public, but too much of our investment went into wasteful private expenditures. By contrast, too little of our investment went to address vital public needs, in education, in infrastructure, in basic research."

Joseph Stiglitz: Vital Things Stem from Government?

Get that part of about how private investments are wasteful, and how vital things, vital NEEDS he says, stem from government? Do you suddenly have, as I do, that foul taste of bile in your mouth?

He goes on to explain how he and his fellow-traveler commie buddies were so wonderful: "We had principles. As the administration came into office, most of us knew what we were against. We were against Reagan conservatism, we knew there needed to be a larger and different role for government, that we needed to be more concerned for the poor and for providing education and social protection for all, and we needed to protect the environment."

Once again, we have another Loathsome Leftist bleating about how only he and his precious leftist political buddies are concerned with the poor, and how things need protecting, and how they are so nurturing and wonderful and all, and thus intimating that all others, meaning you and me, are horrid ogres who delight in being evil. As if we are supposed to clasp our hands together, gaze adoringly up at their shining faces and gleefully exclaim "How wonderful! Our heroes! Our saviors! Knights in shining armor!"

But you would think that a guy with a Nobel Prize in economics would know that the government intervening in the economy always HURTS the poor, mostly by making prices rise! Ergo, Mr. Stiglitz and his loathsome friends are, their laughable and shrill protestations to the contrary, the embodiment of evil, as concerns increasing the pitiful travails of the poor.

The poor are considered poor because they haven’t got enough money to afford to buy the things they need, and then here comes this Stiglitz and his buddies propounding expansionist credit-fueled policies to make sure that prices rise even farther out of range, making the poor even worse off! Jeez! I’m glad I didn’t get a Nobel Prize, because then I would be ashamed that I won the prize because of the lackluster quality of previous winners as exemplified by the Stiglitz fella, and I already have plenty of things to be ashamed about without adding to my own misery.

Joseph Stiglitz: Larger, Different, and Better

But note carefully how he wants a larger and different role for government! But, and I extrapolate, just larger and different? No! Larger and different and better! No! Larger and different and better and more expensive! No! Larger and different and better and more expensive and much more powerful! No! Larger and different and better and more expensive and much more powerful so that it can crush anybody who dares to stand in the way of its providing for the poor, providing education, providing social protection for all, and protecting the environment through, ummm, providing! "We are the government, you pay, and we provide!"

If you don’t think this is a fair characterization, then get another load of some more of this Stiglitz crap, "The central lesson that emerges from this story of boom and bust – that there needs to be a balance between the role of government and the markets. When countries got that balance wrong, veering either toward too much or too little government, disaster awaited."

Didja get that last stupid part about how he actually invents history out of thin air, and says it is dangerous to have a government that is too small? Huh? Did you ever, EVER, hear anybody other than a screaming, flaming communist, or socialist, or fascist, or Democrat, ever complain that government was too small? Is there a country right now, anywhere on the face of the planet, that is suffering because their government is too small? Was there EVER a country anywhere on the face of the planet that suffered because their government is too small? And exactly when WAS there a time and place, in all of history, in all of time and space, across the length and breadth of whole galaxies, and this includes those teensy-weensy little planetoids way out there on the edges of the universe where you can’t even get a good burrito, who, and I quote, "got that balance wrong" and suffered an economic disaster because their government was too small? When, where, how and who, Mr. Stiglitz?

Since Mr. Stiglitz is not here in person to respond to my rhetorical questions or my ridiculously vicious ad hominem attacks, I will fill in the blanks and announce that the answer is, in nice round numbers, none and never. But every country, in all of time and space, and that includes those nasty little planetoids I already referred to above, that got a government that grew too big ALWAYS suffered eventual economic collapse of said country and planetoid. But nobody ever suffered because their governments were too small and inexpensive. Sometimes because their armies were too small and/or lightly armed, but never because their government was too small.

Joseph Stiglitz: Increasing Homelessness

In my humble opinion as the humble and opinionated Mogambo, I offer as an example of their intellectual insufficiency that the Loathsome Left is always apoplectic about the problem of homelessness. And why are people homeless? They are homeless because they cannot afford a place to live. And yet the LL, which is, if you have been paying attention, merely an acronym for the Loathsome Left, sits there with these dumb, perplexed looks on their faces as the housing bubble prices the cost of housing even MORE outside of the pocketbooks of the poor, which increases homelessness!

How about lack of health insurance, which describes a sixth of Americans? The Congress, Stiglitz’ big wonderful fount of goodness and compassion, mandated essentially unlimited free medical care for the old (Medicare), the poor (Medicaid), their children and whole hosts of others. Then they required that hospitals provide free care to anybody who shows up at the door, including illegal aliens.

So government mandated a gigantic demand in health care. And who is left to pay all the costs? The people who buy health insurance. But now the cost is so high, thanks to years and years of prices rising by double-digit rates, that fewer people can buy insurance, and then one day they have to make the choice of either eating or buying health insurance, so they have to join the ranks of the un- insured, but still get medical care simply by showing up at the hospital, driving up the premium costs by double-digit rates for the still-insured, until, one day, they too have to make the choice between eating and health insurance, and then they drop their coverage and become un-insured, but still need medical care, which the Congress requires that they get, thus driving up the premiums by double-digit rates for the few people who still have insurance, until one day those people…

And now these self-same Congressional weenies are trying to pass a prescription drug benefit, which means MORE costs will be passed on to the people who have health insurance, which drives up the premiums by double-digit rates, which means that more people will be forced to make the choice between buying food or health insurance, and then they will drop their coverage, and then…

If you haven’t noticed yet, the cycle never ends. That’s because people like Mr. Stigliz make sure that the government is never ever satisfied with where it is, it must be always growing bigger, always spending faster, always reaching farther, always grabbing for more, more MORE power until we’re landed in one of those Big Brother scenarios that I’m sure you don’t want the Mighty Mogambo to go off on just now.

Anyway, like I said, you can be very sure the government IS to blame.


The Mogambo Guru
for the Daily Reckoning

October 06, 2003

P.S. Now, I guess, Stiglitz figures that because he has got some doofus "Me and my big-government buddies are so wonderful" article run in a British newspaper – and don’t get me started on the laughable idiocies of the British, which is an insular little island and so I guess it was only a matter of time before the inevitable inbreeding started to be made manifest – we are supposed to conveniently forget and forgive the results of the policies that the lying, corrupt Clinton administration pursued with his blessing. And all of the other horrors inflicted on us by other loathsome, leftist governments. It is enough to, as the saying goes, gag a maggot.

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.

The big news at the end of last week was the employment numbers. In September, 57,000 jobs were added to the U.S. economy. The unemployment rate is still over 6%, but if you believe the numbers, at least this was a step in the right direction.

And it was all that was needed to convince economists and stock market investors that they have been right all along – recovery is on its way. The poor legionnaires are sure they see an oasis ahead. So, they bid up the Dow 84 points on Friday…and knocked down the euro and gold.

"The dollar will be all right," they said to themselves, as they sent gold prices down $13.70 – bringing an ounce of gold to $370 (Dec. contracts).

And so they rush onward, deeper into the desert…further from any hope of relief…lured by the mirage of recovery.

But wait, aren’t more jobs proof that the economy really is recovering? Despite all our macro-economic mumbo-jumbo, isn’t the fact that businessmen are hiring again hard evidence that things really are improving? Haven’t investors been smart to buy into this rally…and shouldn’t they continue to buy, not that new jobs are being created?

Ah…so many questions…Certainly, if employment really is increasing, it is a good sign. But we’re suspicious of all the numbers coming from Washington. They get crunched and beaten up so badly, they’ll confess to anything the government puts before them. Also, we remind you, dear reader, that a single beer bottle doesn’t make a brewery.

We also remind you that American jobs are more and more dependent on the entire global economic situation. The Dollar Standard system gave us what looked like a gold mine; we could buy all we wanted from overseas without ever having to settle up in hard currency. We only had to print more dollars. This allowed us to spend more than we could afford, and it permitted the foreigners to make more goods, build more factories and hire more workers. It all felt so wonderful for so long…but while Americans thought they had discovered a gold mine, the Dollar Standard system has turned out to be a hole in the ground for the U.S. economy…and nothing but the shaft for its workers. Super- easy credit has had the effect of moving jobs from high- cost areas, such as the U.S., to low-cost areas, especially China. And that trend can’t stop without a major – almost certainly painful – adjustment. Implication: until the dollar falls, jobs, profits and growth are going to be scarce in the U.S..

That is why we liked Friday’s news. Instead of going directly to $400…gold is returning to more modest levels. Instead of going directly to $1.50…the euro is taking a breather, too.

We have a buying opportunity, dear reader. Let’s take advantage of it.

But here is more news from Eric:


Eric Fry in New York City…

– Employment growth is resuming…(sort of)…stocks are reasonably priced…(based on February 2000 valuation levels)…and gold is no longer a prudent portfolio allocation…(unless you worry about things like weekly attacks on GIs in Iraq and $1 trillion twin deficits here at home).

– So, all is right with the world, which is why the Nasdaq Composite soared nearly 5% last week and the S&P 500 jumped more than 3%. As investors rushed in to buy stocks again, they found little use for any of the other assets that had been cluttering up their portfolios. They dumped their bonds, dollars, gold, gold stocks and anything else that doesn’t trade under a four-letter Nasdaq symbol.

– Helping to fuel the stock market rally was the news early Friday morning that the economy added 57,000 jobs. Your New York editor was as happy as the next bearish stock market commentator to learn that the economy added jobs last month. Even so, he found it a little troubling that the Department of Labor added 57,000 jobs in September, while subtracting 145,000 jobs from the prior 12 months. In other words, the Labor Department revised away 145,000 jobs that it had previously reported as existing, while adding 57,000 new jobs…which may or may not be revised away in subsequent reports.

– Net-net, the economy has LOST 88,000 jobs in the last year…and that’s not a good reason to buy overpriced stocks. But nothing seems to dampen enthusiasm for stocks…especially richly valued stocks. Indeed, the Nasdaq Composite’s glittering performance last week typifies the stocks market’s year-old rally: the shares of financially challenged companies are greatly outperforming their financially stable peers.

– "As the current bull market nears its first birthday, its defining characteristic is the great performance of otherwise poor stocks," notes the New York Times’ Floyd Norris. "A money manager with the foresight a year ago to buy only companies of dubious financial standing would now be a star. Consider the Standard & Poor’s stock ratings, based on 10-year records of earnings and dividends. So far this year, stocks with a rating of A have risen about half as much has stocks rated B. And stocks rated C – a category that indicates shaky financial condition but excludes companies that have defaulted on their obligations – have done twice as well as the B companies.

– "Perhaps the market’s message," Norris concludes, "is not that the economy is coming back, but only that the speculators have done so."

– Norris’ assessment seems to be right on target. Consider that the Internet HOLDRS (HHH), an exchange-traded fund containing a dozen Internet stocks jumped 7% last week, and has more than doubled over the last year. Brazen speculation is back in fashion…No doubt about it.

– Meanwhile, there is no joy in Goldville. Gold and gold stocks both fell sharply last week, as the yellow metal tumbled nearly $14 on Friday alone. Was Friday’s steep selloff a long-overdue "correction" of the gold market’s bullish trend, or was it the "fingerprint" of nefarious government manipulation…or both? We do not suspect an organized manipulation of the gold market…although we are too cynical to rule it out completely. More likely, the gold market simply tumbled under the weight of accumulated bullish expectations. But whatever the exact cause or causes, the gold price plunged like a lost miner down an abandoned mine shaft.

– And now, what should we make of the gold market? The phrase ‘bloodied but unbowed’ comes to mind. The intellectual argument for owning gold remains as persuasive as ever. The dollar is no less an accident-waiting-to-happen than it was a week ago…which means that gold is no less worthy a hedge against dollar weakness than it was a week ago.

– Inevitably, gold will take another run at $400 an ounce, but the exact timing of this run may be very inconvenient, especially for leveraged speculators. However, we remain confident that patient, unleveraged owners of gold and gold shares will enjoy their reward sometime before Alan Greenspan departs from the Federal Reserve.


Bill Bonner, back in Granada:

*** In Palm Beach, there were two favorite subjects for discussion over the weekend. One concerned one of Palm Beach’s most well-known property owners, Rush Limbaugh. But the one that interested us was the discussion of property itself.

"Do you realize that houses around here have doubled in the last three years?" explained a friend. Even in not-so-good areas, they’ve doubled in the last 5 years. It’s amazing."

Our friend was not merely enjoying the show, he was taking advantage of it.

"Yes, it’s a bubble market. But if you look hard enough, you can find good values. We know it’s not going to go up like this forever. And a lot of people are probably going to get hurt. But if you choose low-end properties where the rental income can cover your expenses…how are you going to get hurt?

"I’ll tell you how you’re going to get hurt," began another friend. "You’ll get hurt when all these prices come down and your renters lose their jobs. Rents will come down and you won’t be able to cover your mortgage and upkeep. And when that happens, your mortgage interest rate will probably go up too, unless you have a fixed rate."

"Well, we’re getting a rate fixed for 5 years…"

"Yeah, well, 5 years from now you’ll probably wish you had gotten a fixed forever."

"Yeah, but by then we’ll have sold the property and made a profit."

"You’re just caught up in the bubble. You think you’re being safe. You think you understand that prices could go down. But emotionally, you’re not really prepared for it. You think that prices will go up…because they always seem to go up. But that is always the way it looks in a bubble. Prices always seem to go up when you’re standing on top of a bubble. Then, later, after it pops…they always seem to go down."

"No, I’m not caught up in a bubble mentality."

"Oh yes you are…" I "Oh, no I’m not…I’m being very conservative…"

"Yeah…and you’re going to go broke along with everyone else…"

*** And here’s another interesting update from our correspondent in South Africa. We follow the Zimbabwe story because we think it may offer a glimpse into the future:

"The Zimbabwean powers that be have decided to lighten the plight of their countrymen by issuing Z$1,000 notes.

"Only problem is the new banknote is still not enough to buy a standard loaf of bread, which costs more than Z$1,000, or a liter of petrol, which costs Z$1,980.

"But with this new note, Zimbabweans can at least afford a roll of toilet paper, which costs exactly Z$1,000. However, this still does not change the fact that it’s still cheaper to convert your Z$1,000 into Z$10 notes and wipe your bum on 72 of them, ensuring you get change.

"But despite this worthless state of their currency, the Zimbabwean government released the new Z$1,000 banknotes on Wednesday, hard on the heels of last week’s issue of ‘redesigned’ Z$500 notes.

"The government has reportedly pumped Z$2.5 billion into the banking system and has said it will continue to introduce the same amount every day until December to improve money supply.

"Why would the government want to free up the cash flow to the extent of Z$2.5 billion a day? Well, the central bank governors (with their economic master’s certificates as evidence of their wisdom in these matters) believe it will stem a cash crisis which has developed from hyperinflation of 426.6%.

"But many advisers to government apparently believe the crisis is being fuelled by government’s inability to print enough bank notes! There is Z$220 billion cash in the banking system, but at least Z$400 billion is needed for sufficient money supply, a reporter from Harare says in South Africa’s Business Day.

"Higher-denomination banknotes like Z$20,000 or even Z$50,000 have been recommended to reduce printing costs and to ensure people carry less notes on them, comes the news.

"However, the authorities are apparently not too keen for this as it would make them look stupid, for political reasons. Who would have thought?

"Meanwhile, according to statistics published in Business Day, fuel prices in Zimbabwe rose 60% on Wednesday but petrol shortages are set to remain. The price of regular octane petrol went up to Z$1,980 a liter, with the official exchange rate Z$824 to the US dollar and a black market exchange rate of more than Z$5,000 to the greenback."

The Daily Reckoning