"If Not You Then... Plan C"
Richard Daughty, The Mogambo Guru - The Daily Reckoning
"...the concentration of wealth is why the tax code has been altered to give the poorer people money, via the tax return; the poor have so little spending power, and there are so many more poor people. And as the rich are the only ones with any money that the government can borrow, that is who is loaning money to the government. And then the government taxes everybody to give the wealthy lenders their money back, plus the extra money to pay the interest. This is one big way how the wealth becomes more and more concentrated in the hands of the rich..."
The Mogambo Guru
St. Petersburg, FL -
The foreign holders of American debt increased their holdings at the Fed by another $2.3 billion last week, And the Treasury printed up another $4.5 billion actual currency, which I assume they are giving to Iraqis and Afghanis. All I am sure of is that they aren't giving any to me, the bastards. My mood is very dark.
The reason is simplicity itself; when one knows what the future will hold, as I and the other Austrian economists do, it is one thing to laugh and make jokes at the impending calamity and the laughable ineptitude of governmental forces, and university eggheads that caused it. Nowadays, my eyes exhibit a blank, glassy stare and my vocabulary is reduced to incoherent mumbling and raw obscenities, because everything is fine when you say the words, but it is quite another thing to make jokes when you see the rising stress on those you love.
And it is all very, very depressing. And I am seeing it all around me. And I'm willing to bet that you are seeing it all around you, too, because all the people around me are seeing it all around them, and those people around them report to the people around me that the people around them are seeing it all around them, too. So you see how this thing builds. And the bad news is that it will just keep getting worse and worse until it all collapses, as it must, as it always has. And so I assume that my mood will keep getting worse and worse until it collapses, too, or until I scarf down an entire bag of Coffee and Cream Oreos, and then, as Rosanne Barr said, "When you come down out of that sugar-coma, it will be a whole new week!"
But there is an upside! Whereas I suddenly do not have any income, at least I have a couch under whose cushions I am sure lurks at least two, maybe three bucks in change that has fallen from various pockets!
But almost all others who suddenly do not have any income do not have such a magical couch. And as the days go by there will be more and more people with reduced or eliminated incomes, and fewer and fewer magical couches.
Philip Spicer, that handsome and debonair hotshot at the Central Fund of Canada, sent along an article that appeared in the National Post concerning pension accounting. "The financial economist's key charge against the actuaries is this: Their models for long-run pension performance assume, wrongly, that over the long run investments in the stock market will rise fast enough to overcome essentially underfunded pension structures. Inevitably, when the actuarial model breaks down, the pension plans engage in a variety of techniques to try to cover over the shortfalls. This is known as smoothing, allowing pension managers to conceal losses and give the impression of long-term health."
So what bunch of scared witless weenies is NOT concealing losses and giving the impression of long-term health, huh? Welcome to the real world, dude! And I shall leave it to you, as a self-discovery exercise, to punctuate the phrase "scared witless weenies." Personally, the one that really puts some oomph it is for me is, "Scared? Witless weenies!" by which I snottily infer that we are scared because of witless weenies who are killing us all with their weenieositude.
Nonetheless, as regards the original point, assuming that I even HAD a point to start with, bad news and economic calamity are being kept from view. In that regard, Russ Baker wrote a very interesting little essay posted on MSN Slate entitled, "Bush's Data Dump. The administration is hiding bad economic news. Here's how."
And he goes on to name quite a few frauds and cover-ups of government globules of weenieositude, and reveals not only "how," but "how much." And when you get a gander at the size of the numbers that we are talking about, you realize immediately that the homework assignment, the one where you had to punctuate the phrase "scared witless weenies," is now revealed to be more correctly written as "scared-witless weenies," to signify that a bunch of weenies, who may or may not be congenitally witless, are now de facto witless as a function of their being so scared.
And for good reason, too! Because when I got a good look at the actual numbers, all in one place, then I, too, am scared witless. But since I have always been a weenie and pretty witless as befits my peculiar personality, and am now also scared, then I realize, to my profound dismay and disappointment, that the scared witless weenies that I disrespectfully alluded to, with enormous Super-Sized portions of loathing and disrespect, is, alas, and this makes me feel really bad and I wish I did not have to say it, and you cannot fail to notice how I am dragging this out to keep from getting to the end and finding out who this mysterious scared witless weenie is, and if you could read my mind you would realize that I am desperately praying that a huge meteorite will crash through the roof and kill me before I have to finally say it, and it looks like that is not going to happen, c'mon c'mon c'mon, damn, so, okay, you probably figured it out already anyhow, me.
Yes, hear me world! My name is Mogambo and I am a scared witless weenie! I cry out in my pain! And I cry out for a federal subsidy to compensate me for my pain, which I will state for the record, and as many forms in duplicate as necessary, as being chronic, and acute, and sharp, and dull, and 24 hours per day, every day, and I suffer, suffer, suffer, and- ouch! -there it is again!
But at least I own gold, so I know that I will not suffer overmuch, no matter what happens. Especially when compared to, oh, by the way, how much gold do YOU own? Oh, that little, huh? Okay, then I figure I will not suffer as much as you, as damn near anything is better than starving to death in the damn freezing gutter.
And since it will be too, too tacky to laugh at your pitiful condition in the future when all this misery is happening to you, I will make the hyperspace jump into "I told you so!" mode and scorn you now. Drawing myself to my full commanding height, and affecting a stern tone of voice that is calculated to turn butter to stone, I slowly extend my arm in your direction, and fixing your gaze with an outstretched Finger of Doom, all gnarly and bony and pointing into the depths of your broken heart, I thunder, "Hahahahaha! I'm laughing at you, you poor, pathetic dumb jackass!
You thought that everybody is going to be so nice, and so honest, and they will always work for your best interests, and so you never had know anything, so you never learned anything at all, and you gave them all your money! Hahahaha! You thought that if you loved everybody, then everybody would love you back! Hahahaha! You actually thought that a country could finally make a success of a fiat currency, whereas it has ruined every other country that dared to do such a thing! Hahahaha! And you thought that these nice, wonderful, intelligent government people would give you a comfy, lush retirement through the financial alchemy of spending money to grow the size of government to humongous, cancerous proportions and by the wizardry of accumulating impossibly-much debt in the Social Security trust funds and Congressional deficit spending! Hahahaha! And you thought that the Federal Reserve was something other than what it is; all the banks being under the tight control of the government, which means that the government has complete control over your money and every aspect of your economy! And when you realize how well THAT particular idea has worked out in human history, then freezing to death in the damn gutter is better than you deserve, you stupid ignorant jackass! Hahahaha!"
There was a quote printed on the screen of the TV about the student financial aid programs, and a caller had written in and said something to the effect that "More money than you can imagine is being lost in misappropriation, poor planing and poor administration."
But the crucial point is that the money IS being spent on something. If you cut back on misappropriation, poor planning and poor administration, then you cut the income of the misappropriators, the planners and the administrators, so that you can provide more income to students.
As far as the macro income effect would be, it is a zero-sum game. All it takes is for the those selfsame incumbents in charge to cut their own incomes so that a bigger bunch of raggedy, ungrateful, whining kids can have an enlarged income with the money. Hahaha!
Yeah, I'm sure THAT'S going to happen!
Gary North has a good handle on why government programs fail, and this is why the tuition giveaways are being pared back. He writes, "It backfires for the same reason the other conservative programs backfire whenever inaugurated: it calls on the State to limit the State."
What was that phrase I used a minute ago? "Yeah, I'm sure THAT'S going to happen!"
If you have ever read Ravi Batra's stuff, especially "The Great Depression of 1990," you remember it. He makes a lot of interesting points and brings up a lot of interesting things, but I want to give you a quote from the foreword by Lester Thurow, then one of the brainy profs at MIT. He says that Batra believes that "Depression is seen as a product of systematic tendencies for the distribution of wealth to become concentrated among a few. When this happens, demand eventually sags relative to supply and long cyclical downturns commence." A little glib perhaps, but when a few people have lots of money and wealth and lots or people have neither, things tend to happen. Bad things. The kinds of bad things that happen when people do not have enough money to get along from day to day.
Batra posits that societies go through four stages. The last one, the one just before the big collapse, is "the acquisitive age," and this is when the whole society is engaged in getting money and making money and spending money, and that single-minded acquiring of wealth is predominantly what matters to the society. Does that remind you of any society you know?
Anyway, without making a big to-do about the four groups and their cycles, I am going to just sum up what Batra says happens at the end of the acquisitor stage, which we are bringing to a close. "As wealth becomes concentrated, the living standard of the other three classes progressively declines, until there comes a time when society degenerates into two groups - the haves and the have-nots...The resultant crime, poverty and malaise eventually invite the revolt of the masses."
Some other cheery things that will happen are not only increased crime, as we have already stated, but also more "drug and alcohol addiction, family breakdown, high rate of divorce, child abuse, increasing poverty for the poor and middle class, greater disparity in income and wealth, and massive economic hemorrhage brought about by enormous trade and budget deficits." He also figures that prostitution and gambling would increase. And remember, he was writing this in 1987. It is only now that his profound prescience is, seemingly, being made monstrously manifest, which is a sentence with two, count 'em two, alliterations. Two for the price of one!
This concentration of wealth is why the tax code has been altered to give the poorer people money, via the tax return; the poor have so little spending power, and there are so many more poor people. And as the rich are the only ones with any money that the government can borrow, that is who is loaning money to the government. And then the government taxes everybody to give the wealthy lenders their money back, plus the extra money to pay the interest. This is one big way how the wealth becomes more and more concentrated in the hands of the rich.
He also remarks that "the Fed can leash the money supply in the short run, but not in the long run. In other words, man can control his destiny at a point in time, but ultimately has to operate within certain bounds set by larger forces- forces which cannot be defied forever." Which fits precisely with the observation that Greenspan produced the boom of the 90's, but now, although he has cut interest rates to lows that haven't been seen for fifty years, nothing happened this time. In fact, things are getting worse. And now interest rates started climbing even as the Fed was cutting rates for the 13th time in a row! All for nothing! The Fed can't give away money for the first time in history!
I pretty much agree with most all of this, and have climbed on many a soapbox to propound essentially the same thing over and over again. And I just did it again, too.
There is, so the new seems to say, a lot of people who are calling on the Chinese to de-peg the yuan from the dollar.
Since everything we do is always proclaimed as "being in the best interests of the United States," I imagine that when the Chinese de-peg the yuan it will be "in the best interests of China." All we gotta do is figure out what the best interests of China are. Simple, eh?
And if China had a lot of financial assets denominated in US dollars, then if they DID de-peg, they would lose money on the new exchange rate. And ditto any other foreign holder of assets , when they see a potential looming drop in the dollar that will affect everybody that holds US financial assets.
Imagine their fear, and if you sniff the wind you can almost detect a little smell of fear wafting in on the breezes, if their losses may be compounded by a deflation in asset prices, too! Yow! The ramifications are enormous!
Stephen Roach of Morgan Stanley, writing on this pressure on the Chinese to devalue the yuan, has noticed that scapegoating, which always arises when there is some distress, is on the rise. "I fear there's a deeper meaning to the pressures now being put on China: Unwilling to accept responsibility for their own shortcomings, the wealthy economies of the industrial world are making China a scapegoat for their weak recoveries."
His take is that the other economies of the world are voluntarily outsourcing their production in China to take advantage of the cheap Chinese labor and lack of regulatory rigidities that have evolved in the longer-industrialized countries, and for the advantage of being able to produce stuff cheaply, and thereby make a profit. In other words, for their own selfish gains. But now these selfsame industrialized countries are whining about the downside of the bargain that they made, since there is a price to be paid at home when you shift employment out of your own country.
The argument for higher stock prices is that because the Fed is extremely accommodative, the Congress is spending money like the proverbial drunken sailor and is literally sending out actual money to people, both domestic and foreign, that there HAS to be a bull market, because all of that money has to go someplace. And so that is why everybody is buying stocks and bonds and houses, since those are the only places where so much money can go.
It is a compelling argument. But there has to be a resultant price-inflation, among all the other unforeseen consequences, from all this monetary expansion, and that is the compelling reason NOT to do these monetary and fiscal remedies.
But, I guess, perhaps there is a hidden alchemy that is known only by the priests of the Fed. With the appropriate mumbo-jumbo, this is the magical way that they can ordain that inflationary pressures of all that delicious free money, produced out of the proverbial thin air, can be held to stocks, and bonds, and houses, and taxes, and growth in government, collectibles, and doodads, and gee-gaws, and gimcracks, and I'll have one of those shiny whiz-bangs there, and maybe a couple of those blue whirligigs, and everything else in this whole damn country that depends on constantly-rising prices. If they can do that, then maybe OK. But not food. Or wages. Or energy. Or health care. Or college tuition. Or anything else that can be remotely called inflationary, or that anybody needs to consume. Because if those inflationary pressures do start leaking into commodities and cost-of-living things, then you get right back to the reason why there are laws, lots and lots of freaking laws, and lots and lots people screeching about the laws and basic Economics 101; you ruin your economy, and your country, and you financially destroy everybody IN the country with inflation very soon.
And the latest readings on price inflation can be found in the new higher producer price index and the JOC-ECRI Industrial Price index. Oh, there is lots of massaging of data to show that some things went down, and if you re-define core inflation to include only those things that went down in price then it is child's play to show that price inflation went down and blah blah blah. But prices, defined as those things that you pay by taking money out of your wallet and giving it to strangers, didn't do any such a thing, so don't believe them.
These are not deflationary numbers. As Doug Noland remarked, "It strikes me as notably non-deflationary that the average auto loan is approaching $28,000 and the average new home these days is going for about $243,000."
The number of people receiving unemployment benefits is the highest number in twenty years, and the job losses are mounting with each monthly report. Of course, all of these things remind me of the movie "Predator" where Arnold Schwarzenegger and his small band of heavily-armed hotshots battle a murderous inter-galactic alien who is hunting them for sport, and is wearing a special suit that makes him invisible.
In our case, the murderer is not an alien from another galaxy, but is inflation itself. And it is not wearing a special suit, but is instead being made invisible by the government's statistical lying. And, in a weird twist, the government itself is actually working day and night to make the murderous monster more deadly, more inevitable, and more invisible.
Everything works with a lag. My wife bonks me on the head with a baseball bat, and, with a lag, I will get a big bump on my head, and then later a bill from the ambulance company, with an added expense for their irritation at having to argue with my wife that they are required by law to take me to the hospital because I am unconscious and bleeding heavily and her screaming and grabbing at them, saying that they are crazy and that is the way I always look and that they should just leave me on the lawn where they found me because that is what I wanted. Always the lags.
Even eating works with a lag. Eating a Snickers candy bar is eaten with a lag. You have to take it to the parking lot, spend a lot of time trying to get that damn steel-reinforced Mylar wrapper off of it, and you fumble around like some sissy-boy who hasn't even strong enough to open a stupid candy bar, and then you start getting more and more desperate and angry, and you start tearing at it with your teeth, and then, finally, after setting all the other packages down on the damn ground so that you can get a good grip on the damn thing, and then you finally get it open, and finally you get to eat the damn candy bar. That's a tasty example of how everything works with a lag, so never say that my examples are always dry and tasteless.
So when you are reading how everybody that had a job is now without a job, and how sales are down, and blah blah blah, all of these things are working with a lag that will show up as being even more unsavory one of these days in the future.
And it is this lag feature that is a big part of modern fiscal policy; whatever filthy, stinking mess is passed by Congress today will not show up in the economy until it is too late to do George Bush any good on election day in 2004. That is why all the emphasis is on sending checks to people; it keeps them spending until the lag is over, when, hopefully, a recovery will get steaming along. It won't. But that is the hope.
Bill Fleckenstein reports of an interview given by Sir John Templeton. " The stock market is broken, and it will take some time, maybe years, to repair it." When Mr. Templeton says the market is broken, I must assume that he knows what he is talking about, since he has invested his whole long life to it and started a lot of big mutual funds.
And just looking at the damn thing, I gotta think he is exactly right.
"Long-term Treasury yields are significantly overvalued at current yields and the market is displaying the characteristic aspects of a bubble," says The Bank Credit Analyst.
"Buying Treasurys at current yields is a bit like playing chicken with the Fed," continues the Analyst. "The Fed is trying to encourage investors to buy long-term Treasurys at yields below 3.5%. Yet, the Fed is explicitly targeting a stronger economy and increased inflation, two events that will ensure Treasurys purchased at current yields become a losing proposition."
In other words, any doofus stupid enough to buy long-term government debt at the same time that the government is actively working to get a roaring price inflation cooking is gambling, pure and simple, and deserves to be wiped out. And that is exactly what will happen to most of them.
The only two questions that remain, as always, are to what extent that the Congress and the Fed will go to bail out yet another moral hazard that they created. And the other is exactly how are they going to stick me with the bill. And if not me, then, Plan B, you. And then if not you, then, Plan C, everybody.
Greenspan spent last Tuesday testifying in front of the House, and of course he was all upbeat about how his sharp eyes can detect all these wonderful signs that some golden era of prosperity and productivity-produced paradise is imminent. He has been saying these things for three years, and for three years the ugliness of reality has proved him to be a clueless liar. Tuesday was no different.
The funniest thing for me was when he responded to the question whether or not manufacturing is important. He responded that markets make value, and it is inconsequential whether an economy makes tangible things out of raw materials or the economy makes services that people want to buy. True enough, I guess. The only rub is that we cannot export government regulations and personal services, and we will always import oil and widgets. In the final analysis, Greenspan has no idea how economies actually work.
The best part was when Bernard Sanders, one of the few Independent Party members of Congress, accused Greenspan as being completely out of touch with the economy. In fact, he got positively angry about the egregious performance of the Fed chairman.
He also wanted Greenspan to comment on the fact that the people who save money, and are dependent on the interest that those savings generate, are getting hammered, thanks to the damn Fed having to resort to extreme measures to try and desperately correct the egregious mistakes he has been making and making and making. Greenspan's reply was pure business as usual: the elderly and the poor ought to be grateful that businesses can borrow cheaply! So, in short, the elderly and the poor are a bunch of whining crybabies, and they should be happy- happy I tells ya! -to sacrifice their lives so that interest rates can be held low so that CEO's can continue making the big bucks, and people can buy big houses that they cannot afford, and that people can extract more and more equity from their appreciated houses with which to spend. At the end of the day, he seems to say, the low interest rates that preclude the elderly from affording to buy things IS allowing other people to go farther into debt so that THEY can buy things.
To hell with that, says Bernie, and I say hooray for Bernie!
And, like an icing on the cake, he was followed up by Ron Paul, one of the few people in Congress who is has a good grip on the correct ideas about money and the Constitution.
Around these parts gasoline is higher by about a dime per gallon. The last time that prices got this high there was all kinds of hand-wringing and screaming in fear. But now, nothing. I assume that out where you live that the cost of gas remains low, and that my little locality is getting hit with cost rises, and we are getting hit because I am here and everybody is out to get me, and that is why there is nothing in the popular press about higher fuel prices. Ugh.
Mogambo Sez: It just keeps getting weirder and weirder. The two parts I like best were both on the 'International page of the WSJ. The first is Chirac, the French President, saying, "This is not about modifying the Stability Pact," referring to the 1997 accord where the Euro members all swore that they would never, ever, not in a jillion years, let budget deficits exceed 3% of GDP, since that is the road to ruin. Now they all are doing it, or wanting to do it. He explains, "It has to do with getting the representatives of the euro-zone countries to examine together the terms for a temporary softening." So, you see how a "temporary softening" is NOT the same as "modifying" the Pact.
The other is the recession in South Korea. See if you can hear tongues clucking when you read, "Two years ago, the government, in an effort to spur economic growth in the face of weak exports, encouraged domestic consumers to borrow and spend. Credit-card debt ballooned and defaults began to rise. Now, households are reining in spending to get personal finances back in order."
And now Gary North reports that newsletter businesses are reeling under the drop in subscriptions, as households rein in spending to get personal finances back in order, to borrow a phrase.
The Mogambo Guru Lives!
Richard Daughty,
for The Daily Reckoning
www.dailyreckoning.com
17 July 2003
Richard Daughty is general partner and C.O.O. for Smith Consultant Group, serving the financial and medical communities, and the writer/publisher 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.
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