Mr. Magoo's New Scheme

December 8, 2001

You have to give Mr. Magoo credit for persistence, if not ethics or brains. Here is a man who is convinced that low interest rates will save the economy-period. He has now undertaken a bold, dangerous and ultimately futile last ditch effort to do just that. In case GOLD-EAGLE.COM readers haven't noticed, the 30 year bond has been eliminated by the munchins at the Federal Reserve. The significance of this little noticed action, besides reflecting hysteria at the Fed, is it impacts 30 year mortgage interest rates. Despite Mr. Magoo's best efforts at interest rate reduction he utterly failed in his stated goal of cutting interest rates for consumers and reviving the economy. After 10 rate cuts, credit card, consumer, mortgage and other long term rates didn't budge during most of 2001. What the Federal Reserve has done is pad bank profits, beef up bank bankruptcy reserves and little else. For instance, as of 10-29-01 Wells Fargo Bank, fifth largest in the USA, is running $500 million in profits per quarter. The reason is their credit card rates ranged from 19.25% to 11.7% for most of 2001, despite Mr. Magoo. The profit spread from getting money at 2 to 4% and leasing it out at 11% to 19% is one reason bank profits have soared this year.

Mr. Magoo realized his rate cuts weren't being passed on by the banks to the consumers and therefore eliminated the 30-year bond to bring down mortgage rates and other consumer rates. Mr. Magoo and his Federal Reserve munchins believe that economic salvation will be found in mortgage rates below 6%. The goal is to get 30 year mortgage rates down to 3 to 5%. It's somewhat distressing for me to realize just how corrupt, incompetent and out of touch with basic, fundamental American economic reality our Federal Reserve leaders are. The auto boom of October and November, along with the surge in home refinancing are not going to save the economy Mr. Magoo. Honestly, you people are not only fools but damn fools. At least GOLD-EAGLE.COM readers now have a clear understanding of our leaders final, desperate effort to save the American economy. The plan is to get Americans to use what little equity they have left in their homes to finance a consumption splurge. I'm not kidding; this is what the best and brightest economists have come up with.

Obviously, the current economic reality can't be bothered with by our Federal Reserve munchins. Having failed with 10 rate cuts in one year, they now shoot the wad by restructuring, manipulating is a better word, the entire interest market. They are doing this to lure the last remaining asset the middle class has: inflated home values. With 3 and 6 month bond returns under 2%, and true yields even lower, Mr. Magoo is forcing money into the equity markets. Mr. Magoo is like an aging buffalo hunter reduced to chasing down the last few stragglers from the long dead herds. Pathetic and lame don't even begin to describe this feeble attempt by the yahoos at the Federal Reserve. Understand this analysis and you will see why 2002 will be a very nasty economic year for the United States and the world.

It's plain to any reasonable person the current economic situation is not good, either in the United States or the world. The USA is officially in recession. Industrial production and sales of manufactured goods have been in decline since September 2000. Employment began collapsing in March of 2001 and personal income has stagnated for October and November 2001. The Enron debacle is only the latest and largest, 62 Billion stock loss, corporate collapse. Job losses are stunning in their numbers, 415,000 in October alone. Manufacturing has lost one million jobs since March 2000, officially at least. The total number of Americans receiving unemployment benefits is 3.83 million-the highest number since Valentines week 1983. Consumer confidence has dropped for the last five months. New housing starts declined in October to the lowest point of the year, 1.55 million units. The data just goes on and on. The real economy, versus Mr. Magoo's fantasy one, is in free fall.

Japan's economy is expected to fall nearly 1% from March 2001 to March 2002. Argentina is rationing cash to $250 a week and has a full fledged banking crisis. Commodity prices in particular and prices in general are falling in a deflationary spiral. October showed a stunning 1.6% decline in prices, the largest in 50 years. Both the Manufacturing and Service index are below 50, well below fifty, for the month of October 2001. Remember all those car sales in October and November? It seems the cars sold were current inventory and no money was made by the car companies. In fact, Ford is estimated to cut 20% of its white collars workers starting in January 2002. What are the chances of Ford building a lot of cars in the next six months? Not very good in my humble opinion. The cars they would have built have already been sold in October and November. The point is things are bad now and will get much worse next year. The fact the stock market and media are in denial is to be expected. It's also expected that the Fed is trying to prime the pump with still more interest rate cuts. Mr. Magoo is a one note kind of guy.

It's a mark of their desperation that Mr. Magoo is trying to sell the idea that lower energy prices, home refinancing and credit card consumption binges will save the economy. Our political leaders are reduced to borrowing 42 billion in August for a tax rebate; 38 billion in January for a Social Security rate reduction as a "stimulus" program. A ten trillion dollar economy absorbs these sums like a kind of economic black hole. Face it guys, it's ridiculous. Do the math. Personal income stagnated in both October and November; yet, consumption went up 2.9%. How can that happen unless people are spending their refinanced home money? Mr. Magoo will fail since home real estate values will collapse, just like commercial real estate, the job market etc. etc. etc. Mr. Magoo will be remembered as the man who not only deceived the American people into losing their retirement 401k plans, but also as the guy who lured them into borrowing against the inflated value of their homes. Our noble Mr. Magoo did this and it is on this he will be cursed down through history. Get ready. Mr. Magoo assumes the job losses aren't real. Mr. Magoo assumes the rising mortgage default rate, approaching 5%, isn't real. He assumes that the soon to be thousands of houses dumped onto the foreclosure market won't impact home prices. He assumes that the rising credit card default rate won't impact the economy. He assumes corporate defaults like Enron are not the first lapping of a coming tidal wave. Well, Mr. Magoo, you know what they say: assume means ass of you and me. If the tail fits Mr. Magoo, I'll be quite happy to pin it on you.

Gold is still being mined and refined at the rate of almost 2,600 tonnes per year.