The Cab-Driving Economist
The Daily Reckoning
Ouzilly, France
Resistance...denial...debt.
We Americans are a people in revolt against fate. Wealth and power are
migrating from West to East...our empire is peaking out...our dollar is doomed -
if only we could take it more gracefully. Instead, politicians, central bankers
and ordinary consumers want to dispute it, as if they could stop the tides of
history, like Xerxes’ troops doing battle with the waves.
Just listen to the mindless rants coming from Congress: The Arabs want to
take over our ports; the Chinese are taking over our oil companies! What do they
think this is...a free country? Last year, 96 American companies were bought by
firms from emerging markets. Those transactions were worth about $14 billion and
were hardly noticed. But when a big offer makes the headlines, you can count on
resistance, indignation, and dissembling.
Who do these Chinese think they are? How dare they try to stabilize their
economy by tying their currency to that of their largest trading partner? Don’t
they know they’re supposed to let their paper money rise so ours can fall?
Meanwhile, the Financial Times reports on “How China is Winning the Resources
and the Loyalties of Africa.” China needs resources; Africa has a lot of them.
So far, they seem to be going after them honestly - with smiles and cash, both
of which they have in abundance.
Back in the homeland, consumers spend more than they earn, borrowing the
shortfall from Asia. And why not? They deny that there is any problem at all. If
there is a problem, they’re sure it can be solved with more debt. Have real
hourly wages gone down? They don’t seem to have noticed. Don’t they already owe
a lot of money to a lot of people? It doesn’t seem to bother them. And, isn’t
most of the growth since 2001 simply a by-product of a booming housing market?
It never seems to occur to them that there is anything wrong with it.
Investors, too, deny that there is a problem. They buy stocks at an average
of 20 times earnings - with a dividend yield below 2%. How do they expect to
make any money? And over in the bond market, at current yields, after taxes and
inflation, an investor is practically guaranteed to lose money. How could he
miss it? The math is so simple: a 4.5% yield...less inflation of 4% (being
optimistic about it)...leaves only half a percentage point to pay taxes. There
is no way that will work.
But, Americans have been told that they have the world’s most dynamic and
flexible economy, and they believe it.
What they really have is a mature, shopworn economy struggling to appear
young. What can it do but dye its hair, pin back its face, and lie?
Around the world, people are beginning to notice the signs. While no maturing
economy can avoid some sag, bulges and lines, it is the resistance, denial and
debt that produce the real problems.
The Russian newspaper, Pravda, reports:
“The United States is heading to financial crisis at top speed. That is
correct, America will default on its foreign debt sooner or later if the actual
trends remain unchanged. Consequently, the whole dollar-based world (including
savings in U.S. currency) may crumble. The picture looks pretty grim this time
around. Several factors will have an extremely detrimental effect on the dollar,
according to U.S. Secretary of the Treasury John Snow who forwarded a letter
full of ominous predictions to 21 members of U.S. Congress. The letter was made
public after the markets had been closed for Christmas and New Year's holidays –
a rather appropriate precautionary move in terms of the international foreign
exchange market, which is extremely sensitive to any sound produced by U.S.
bureaucrats.
“Besides, the U.S. Federal Reserve is going to stop publishing the so-called
‘M 3 aggregate’ reports i.e. data on increase rates in money supply. Given the
New Year's predictions by John Snow, the Fed's intentions look pretty
suspicious. In other words, the international community will have no tool for
measuring a real value of the dollar...
“The Fed is going to pull the plug on the data in March this year. Several
events should occur in different countries more or less at the same time and
thus damage credibility of the U.S. securities. Risk-averse investors get rid of
speculative securities e.g. the dollar securities under the circumstances.
“All in all, the situation is quite alarming though it looks like a play
being staged on purpose.”
What purpose?
Peter Schiff: “The Feb distracts the audience with short-term rate hikes,
while behind its back it monetizes long-term government bonds. It creates the
illusion of its being an inflation fighter, while in reality it is an inflation
creator. No wonder it wants to further cover its tracks by no longer reporting
M3!
“My guess is that the Fed’s goal is to keep long-term interest rates low long
enough to allow millions of homeowners to refinance their adjustable rate
mortgages into 40 or 50 year fixed-rate loans, and to create enough inflation to
cause nominal incomes to rise sufficiently in order to enable homeowners to make
higher debt payments and prevent nominal home prices from collapsing.”
[Ed. Note: Right now, the number of homes on the market in the United States
is 528,000 - the largest supply of homes in nine years! What happened to all the
buyers? “The growth in inventories and the slower pace of sales and price
appreciation are factors suggesting the booming housing market of the past four
years is losing steam as mortgage rates rise and affordability falls,” says
MarketWatch. Hmmm – it might be a good idea to have a plan in place to protect
yourself when the bottom falls out of the housing market – sending ripples
throughout the economy:
A Gut-Punch to Every Homeowner
http://www1.youreletters.com/t/339476/1466280/783270/0/
More news from our currency counselor...
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Chuck Butler, reporting from the EverBank currency trading desk in St. Louis:
“Gold sure had a nice rebound on Friday - up over $10 per ounce! It gave back
some of those gains in the Asian session overnight, and has really come under
some selling pressure in London, after the price of oil slipped again. In case
you missed class the day I tied these two together, here goes: High-priced oil
will result in higher inflation, and gold is used as a hedge versus higher
inflation. It's just something to watch for.”
For the rest of this story, and for more market insights, see today’s issue
of
The Daily Pfennig
http://dailyreckoning.com/Writers/Butler/Articles/022706.html
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Bill Bonner, back in Ouzilly with more views...
*** We’re always pleased to hear about those who have taken our advice to
contact their Congressman about the state of our economy. One DR reader writes:
“I wrote my Congressman, Frank Wolf, urging him to read Empire of Debt - and
to stop the insane spending spree of the U.S. government. Mr. Wolf wrote back
(or maybe a staffer) a signed letter boasting of his vote for a 38 billion
dollar cutback in government spending which was passed by the House 216 to 214.
“This just confirmed my fear that the ‘Empire’ is burning to rubble!”
*** Meanwhile, we continue to get form letters from Congress. This one came
in on Friday:
“Mr. Addison Wiggin
Agora Financial
808 St. Paul Street
Baltimore, Maryland 21202
“Dear Mr. Wiggin:
“Thank you for Empire of Debt: The Rise of an Epic Financial Crisis. You were
very thoughtful to include me in the distribution of this work.
“With appreciation, I am
“Sincerely yours,
“Hillary Rodham Clinton”
Heh. Heh. Heh.
*** “Since the days of the Great Khan,” writes Lew Rockwell of the Mises
Institute in a review of Empire of Debt, “and the barbaric clarity of his claim
that the gods had given him the earth and everyone and everything in it, empires
have resorted to rosier delusions, if no less fatal to victims - and sometimes
citizens - than the Khan model. From the Romans to the Fourth Crusade (and their
Venetian and French aggressors) to Genghis Khan to the Spaniards and Napoleon
and the British, Bonner and Wiggin teach us the lessons of empire, with
learning, wisdom, and irony.”
Mr. Rockwell’s review will appear in next week’s American Conservative. But
here you can get a sneak peek:
Something Has Gone Very Wrong
http://www.dailyreckoning.com/Media/LewRockwellReview.html
*** Addison was apparently seen nationwide yesterday morning on CBS Sunday
Morning prattling on about debt and delusion. CBSNews.com forwarded these
outtakes from the interview filmed in our offices in Baltimore:
Outtakes from the 14 West Mt. Vernon interview
http://www.dailyreckoning.com/AgoraMtVernon.html
*** “It’s a problem everywhere in the Western world,” commented the mayor of
our little town in rural France last night, speaking about one of our Big Es.
“We have a factory in town that produces furniture. It employs 275 people, which
is a lot of people for a small town. So, when something goes wrong, I have to
get involved. The company was bought about five years ago by an Italian group.
They make a lot of money in the furniture business, but where they’re making
money is the top end of the market, where the margins are high enough to permit
a company to pay our wage levels.
“I mean, wages aren’t high here compared to Paris or London, but they’re very
high compared to Poland or Indonesia. And this factory here in town produces
down-market furniture. It’s the sort of stuff that you buy in the big discount
stores, but the big discount stores buy in huge quantities and at very good
prices. And more and more, they don’t buy from Europe. They buy from Asia, or
Eastern Europe and sell in Western Europe. So, I don’t see how this factory is
going to stay in business. And if it doesn’t stay in business, I don’t know what
these 275 people are going to do. It’s all very well to say they can be trained
for the New Economy, but what New Economy? There’s no New Economy here.
“And these people are not the kind of people that are likely to start up new
websites or work their way into the information technology business. By the time
they figure out information technology, there will be about 300 million people
in Asia already ahead of them. They just don’t have any particular advantage
that I can see over workers in India or China who work for only one-tenth as
much. And since they have no advantage now, and since people in Asia are making
such rapid progress, I don’t see how they will ever have an advantage. So, I
don’t see how they can ever expect to earn more money – speaking about it in a
purely theoretical way - than the Asians do.
“You know, this area has been losing population since the 1960s. I think it’s
going to continue losing ground.”
*** We spent the weekend in Paris. It was freezing cold, windy, with
occasional snowflakes passing along horizontally.
Henry was there for another “rallye.” Edward was there for the birthday party
of his friend, Matthieu, whose mother died recently, and Jules was coming back
for a two-week vacation from his American college.
As we get older, the family logistics seem to get more and more complicated.
Everyone has a separate program. Somehow, all of them have to be coordinated. In
yesterday’s case, we had to collect Henry from one place, Edward from another,
and Jules from the airport - all in time to catch a train down to the country.
But on Sunday morning, Elizabeth and your editor had a little time to
themselves. We crossed the street and found a nice patisserie near Notre Dame.
Then, we went to church at St. Nicholas on rue Monge. There are a lot of
churches in Paris; few of them operate at capacity. This one was an exception;
it was hard to find a seat. We soon discovered why.
St. Nicholas church is run by schismatics who broke away from the Church of
Rome in 1977. The priest explained why in his sermon:
“Light and darkness. There are some people who spend their whole lives in
darkness, because they have no choice. There are others who have access to the
light, but who choose to live in darkness. The first are
unlucky...unfortunate...and it is our duty to bring the light to these people.
But the second are sinners. They have the light...they have seen the light, but
they turn away from it. They live in darkness despite the light that God offers
them.
“We have left the guidance of Rome because the church leaders decided to live
in darkness. Today, we pray that they may turn to the light again, so that we
may return to them. But until they do, we will continue to teach and celebrate
and live in the great tradition of our Catholic faith. We may be martyred, but
we will not be apostate.”
The mass - conducted in Latin - was very long, with much kneeling and
rising...chanting and ceremony. The first hour passed quickly enough, but by the
second hour, our legs grew restless and we began to feel the stirring of our
Episcopalian roots. We wondered what the nature of the schism really was. We
wondered how one group of Catholics could claim a source of wisdom superior to
another group. And we didn’t much care for the idea of going to Hell for eating
red meat this Wednesday - not that we had any intention of having a steak (why
take chances?). We just didn’t appreciate the threat.
Finally, we got everyone together and got on the train at Montparnasse for
the trip down to the country. Unfortunately, Sunday was a big travel day. We
couldn’t get tickets for the train we wanted; we’d have to wait in Poitiers for
two hours to catch the next train. When we got to the station in Poitiers, there
was our gardener, Damien, who had driven up to meet us.
“Damien, you’re a real saint. It is very nice of you to interrupt your Sunday
afternoon to come and get us,” we thanked him. “It’s an hour drive down to the
house. Besides, it’s snowing.”
“Oh, it’s nothing. I used to be a truck driver. I drove trucks for 14 years,”
Damien replied, “I kind of miss it.”
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The Daily Reckoning PRESENTS: There are certain unorthodox economic
indicators – like when servers at restaurants start coming home with less money
in their pockets at the end of a shift, or when a movie theater is surprisingly
empty on a rainy Friday night. The Mogambo examines these signs with a growing
sense of fear...
THE CAB-DRIVING ECONOMIST
by The Mogambo Guru
I don't remember the sound of wolves howling in the distance, but it was a
darkly inauspicious start to the beginning of the Bernanke reign of monetary
terror and pain, as Total Fed Credit at the Federal Reserve shot up by $6.7
billion last week, which is a handy measure of the amount of excess money and
credit being created - poof - out of thin air by the monstrous Federal Reserve.
But that pales in comparison to the biggest and most unbelievable fraud,
which is not that I pretend that I am a decent, caring human being, but that the
total debt of the United States is now at $8.248 trillion, or $8,248 billion, or
$8,248,000 million. Let’s just say this is enough to make instant millionaires
out of 2.8% of the population of the country! We owe, as a taxpaying nation,
enough money to create instant millionaires out of almost 1 in 30 people in the
country! My eyes bug out of my head and my stomach churns at the very thought of
such monetary, financial, economic and social malfeasance, and I think to
myself, "Do I have enough frozen pizzas and ammunition to sustain me during the
economic upheaval that is coming?"
Now you want to know, "What upheaval?" Well, on the WorldNewsTrust.org site
we read, "The Laboratoire européen d’Anticipation Politique Europe 2020
(LEAP/E2020) now estimates to over 80% the probability that the week of March
20-26, 2006, will be the beginning of the most significant political crisis the
world has known since the Fall of the Iron Curtain in 1989, together with an
economic and financial crisis of a scope comparable with that of 1929." I
re-read, and re-read, and re-read that part about it being "comparable" to 1929,
which is the year that the stock market crashed and ushered in the Great
Depression. But there is, so these guys say, only an 80% chance of that, which
is the exact odds my wife figured of our marriage lasting less than a week.
They are obviously not interested in my matrimonial problems, and blithely
continue, "This last week of March 2006 will be the turning-point of a number of
critical developments, resulting in an acceleration of all the factors leading
to a major crisis, disregarding any American or Israeli military intervention
against Iran. In case such an intervention is conducted, the probability of a
major crisis to start rises up to 100%."
Of course, I could not let it pass without a snide and sneering comment that
the Treasury Department of the United States has now, illegally, put us $64
billion dollars further in debt, in just a couple of weeks, than is authorized
by law! As aghast as that makes me, I can only imagine, with horror, what
foreign creditors make of this terrifying development, now that the damned U.S.
Treasury Department has proved to the world that laws mean nothing to it, or to
the executive branch, or to the legislative branch. So far, they’ve all sat
there watching...and doing nothing.
Addison Wiggin at The Daily Reckoning thinks about that for a minute, and
innocently asks, "But you have to ask yourself, how much faith would you put in
an I.O.U. from a friend who has sinking job prospects, soaring credit card
bills, a double mortgage, a chronic gambling problem and - it turns out - a bad
habit of lying about how much money he has in the first place?" I thought he was
talking about The Mogambo there for a minute, especially about that "sinking job
prospects" thing.
So, I asked, "What do you mean about 'sinking job prospects', Addison?" He
answered, "If you use the real statistics to calculate unemployment, the way we
used to calculate it back in 1980, the real unemployment rate is a much more
devastating 12.5%." Yow!
The good news, they say (but they are wrong), is that consumer spending went
up, even if nobody is working, by 2.3% in January. How to explain it? Well, it
could be that consumers are still spending those gift cards they received for
Christmas? I suppose. Or, they may be out spending money because they are
getting raises and bonuses I haven't heard about...and never hear about, because
every time I go in and ask for a raise, they say, "What? Are you still working
here?" And then, I scram, hoping to leave well enough alone. It's worked out
very well all these years, except for, you know, the raise thing.
Or, it could be that that consumers are spending by cutting back on other
things. For instance, Tom Dyson, writing for DailyWealth.com, reports that taxi
drivers, by dint of their conversing with so many passengers in their cabs, have
a good idea of what is really happening. One driver told Mr. Dyson that he
thinks "The economy is bad at the moment." Mr. Dyson sums up the cabby's
assessment as: "Business is hard. No one goes out anymore."
The driver also has friends in the restaurant business, and “They are
struggling to make ends meet. It used to be easy, but nobody’s spending
anymore.”
Then again, it may be (and I think it is) that consumer spending went up not
because consumers are actually buying more stuff, but that the stuff they are
buying merely costs more, which it does. Remember, the report says only that
consumers spent more, not that they bought more stuff!
Of course, being officially diagnosed with Mogambo Fear And Paranoia Syndrome
(MFAPS) means I see inflation and treachery everywhere. For you non-medical
professionals, MFAPS is the heartbreaking condition where you fear inflation as
the greatest threat to mankind, because it is. Furthermore, you see enemies
everywhere, mostly on the political Left, as that group of grinning morons
actually believe spending more money, and having a bigger government, and having
more of the population dependent upon government spending and government support
will (insert drum-roll) solve problems, which is absurd.
Since we are talking about inflation, let’s move to some bad news on the
inflation front: the producer price index rose 0.3 percent in January, and I am
reminded that the PPI rose 0.6 percent in December, too. PPI is supposed to
measure the prices paid to those who actually produce something, like factories,
refiners and farmers, who then sell the value-added product to other
intermediaries, one after another, until it gets to the final consumer, which is
me. The consumer has to pay a price high enough so that a lot of middlemen can
make a profit, even as they, too, battle the dark forces of higher prices and
higher taxes.
The core producer price index, which happily excludes food and energy prices,
rose 0.4 percent in January. I gulp and open my eyes real wide in this cute and
comical little way that I have, which I call the Mogambo Cute And Comical Little
Way That I Have (MCACLWTIH), when I am getting ready to plotz from fear right
here on the spot and probably soil my pants.
Bloomberg News, apparently thinking that I am real funny, replies with its
own attempt at dry, weird humor, and they write, "The report may raise concern
that businesses will pass rising raw materials costs on to consumers." Hahahaha!
What did they say? Hahahaha! Can you name any cost that is not passed along to
the consumer? Hahaha! This is too rich! How in the world can a business stay in
business unless they can pass along all the costs?
Regards,
The Mogambo Guru for The Daily Reckoning
Mogambo sez: Keep buying silver, gold and oil. One day you will be very, very
glad you did, or very, very sorry you didn't.
Editor's Note: 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, and a vocational 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. If you're inclined to read more, you'll find the whole
Mogambo here:
The Inflation Show
http://dailyreckoning.com/Writers/Mogambo/DREssays/MG02206.html
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