Mr. Magoo PanicsNo doubt about it: the Fed is in heavy panic mode. Having renamed BushLeaguer as Bushocio, it's only fair that Alan the Magician gets similar treatment. My last essay was, how should we put it, somewhat critical of Alan the Magician and his economic Central banking skills. However, Mr. V of GOLD-EAGLE.com administered the coup de grace to Alan by using a picture that makes our widely esteemed, and equally widely incompetent in my humble opinion, Alan GreenSpan look like the cartoon character Mr. Magoo. A picture is worth a thousand words and in this case my entire essay. So I salute my esteemed editor Mr. V for using a picture that shows Alan the Magician in his true state.
For those foreign readers who have absolutely no idea what I'm talking about, a few words of explanation. Among my many and varied skills is a passionate love of the classic cartoons of my youth. The good news is I really do act my age. The bad news is my true age is permanently stuck at around ten years old. Like Peter Pan, I've never felt any particular need to grow up, although I make enough concessions to this lunatic adult world to get by. Just enough though, and no more. Anyway, Mr. Magoo is an American cartoon character of the 1960's who is nearly blind. Being nearly blind, he has many humorous adventures as he navigates thorough life causing mayhem and chaos. The character was voiced by Jim Backus, who played the millionaire Mr. Howel in the American sitcom classic "Gilligan's Island."
It was probably his chaos causing abilities which made Mr. V first compare Alan the Magician to Mr. Magoo. I'm sure Alan, like Mr. Magoo, means well. It's just Alan, like Mr. Magoo, is both blind and incompetent. The results in the cartoon are frequently hysterical. The results in real life, real economic life, are less funny. Let's face it: our economic Mr. Magoo GreenSpan doesn't have a clue about the current state of the American economy. It seems Mr. Magoo can't see the true data for all the statistics he looks at. And I'm afraid the apathetic American populace will pay the price for his extreme myopia.
The first sign of Federal Reserve panic is the Monty Pythonish statement of one of the Fed governors. I believe his name is McTeer or something. This Fed governor gave a speech where he is quoted as telling the American people to "go out and buy a Sports Utility Vehicle(SUV). If this isn't the clearest sign of either mental breakdown or a deep sense of panic, I don't know what is. Since the Federal Reserve Bank is neither federal or a bank, I guess I shouldn't be surprised at this kind of lunatic statement. However, if this is what passes for reasoned economic analysis at the Fed, we are indeed doomed economically. Perhaps they sit around in their meetings and try and decide which types the American people should buy? Hopefully not the ones with Firestone tires. The government has now raised the official SUV road-kill to 174 people killed by exploding tires. It certainly makes one trust the government and its ability to micro manage the ten trillion dollar American economy doesn't it?
I think the Fed governor was expressing the second deepest fear of the Fed. Mr. Magoo and his cronies are deeply fearful the American people will stop buying stuff. They are good enough economists to understand the often stated cliché‚ about consumer spending being two/thirds of the total economy. The rough numbers would be about 6.6 trillion, interesting number isn't it? What exactly would a consumer spending slowdown do to the American economy? In a word, devastate it. First, the context is an American populace deeply in debt. The debt context is vital to understanding our unfolding economic disaster. It's plain to anyone, especially my brilliant readers at GOLD-EAGLE.com, massive levels of debt are smothering all economic sectors in America. I've emphasized that in several other essays, so I won't belabor the point. It's a fact as far as I'm concerned. The Fed realizes this and is deeply concerned at the implications of a psychological change in the people's mindset. Assuming the people are heavily in debt; assuming the psychological attitudes begins to have measurable effects, the Fed is extremely nervous about the potential results. With very good reason I might add.
Given people are in debt, what evidence is the popular economic psychology is changing? Plenty. The recent consumer confidence numbers merely reflect the deepening economic pessimism spreading throughout the land. The economy slowed radically in the last three months of 2000. There were massive layoffs in the month of January. I believe almost 275,000 jobs were cut in December and January. The NASDAQ has been gutted. Our fictional Ma and Pa Kettle are getting nervous. Our Mr. Magoo Central bankers are too, although for different reasons.
In the real economic world, as opposed to the Beltway fantasy one, people are hunkering down. The Fed senses the public mood has changed. They got that right. What they didn't get right is thinking cutting interest rates will have any effect on people's economic psychology. I can't blame them for trying. What the Fed is doing is like handing out an aspirin to a soldier with a gunshot wound. In a word, dulling the pain while the patient dies.
So, what exactly is the Fed afraid of? They're afraid people will actually stop buying stuff. If people's incomes aren't growing, if their stock holdings are tanking, if they've diteched their home equity into nothingness and their credit cards are maxed; then, what's left? Old fashioned American prudence is what. Unfortunately for the Federal Reserve cabal, economic prudence is the death-knell of the American economy. Here's why. The current savings rate is negative .08%. Each 1% of consumer savings equals $90 in lost consumer spending. Assuming the consumer saving rate goes to 3.3%, we're looking at, as Mr. Tice puts it, the elimination of two Wal Marts worth of economic activity. Can anyone say depression? A savings rate of 7 to 10% would be needed to seriously reduce consumer indebtedness. Let's see here. $6.6 Trillion worth of total consumer spending: whoops, let's knock of the $600 billion and see what happens. For instance, anyone want to do the numbers on a 10% drop in consumer spending? Is it reasonable to assume the American consumer, worried about losing his home, his job and his car would cut back buying stuff? I think so. The Fed also thinks so. I'd look for interest rates to continue dropping. It's too bad the Fed hasn't figured out the impact this will have on the dollar. By the time they do, it will be too late. A gutted American economy and a dollar collapse: LOOKS LIKE A GOOD ATMOSPHERE FOR PRECIOUS METALS!
I'll leave it to the reader to accept or reject the above economic analysis. I think it's right on target, but we'll know real soon now. I'd also say Mr. Magoo is aware of the above analysis. If consumers merely not buying stuff is the Fed's second fear, then what is their first? Simple. Mr. Magoo is afraid- urinate in your pants and leave a puddle on the floor-afraid of upside/down. If enough people stop buying stuff, unemployment will soar. If unemployment soars, then people will go bankrupt and begin defaulting on all the stuff they bought on credit. Upside/down refers to the situation highlighted by the 1984 oil price collapse in Texas. Many people owed more on their houses than they were worth; many people simply walked away and defaulted. It took Texas, and to some extent California, many years to recover. Just because people bought stuff on credit, doesn't mean they will pay it off. I believe this is Mr. Magoo and his Fed cronies deepest fear, their darkest nightmare when the word Recession is used. Mr. Magoo clearly understands the stakes to the global financial system if the American consumer stops buying stuff. Mr. Magoo clearly understands what will happen if America goes upside/down. It's just that Mr. Magoo doesn't know what to do about it. But then, I guess that's why he's Mr. Magoo.
11 February 2001