If It Feels Good, Then Do It -- Economic Commentary by The Mogambo Guru

"...John Snow believes that 'There is virtue in fiscal responsibility, but there are times when a higher deficit should be allowed.' Let me expand on Mr. Snow's new program of variable virtues. Monogamy is a virtue, but there are times when adultery should be allowed. Practicing safe sex is a virtue, but that there are times when dangerous, unprotected sex should be allowed. There is virtue in not shooting high-powered handguns at noisome neighbors, but there are times when blowing a few of them away should be allowed...There are virtues, and there are times to be virtuous, and, according to Mr. Snow, there are times when it is appropriate to act un-virtuous, and to act like mindless, greedy idiots. And the only way to tell the difference between the two, apparently, is to determine whether or not you are in the mood to be virtuous or not. In the popular vernacular, if it feels good, then do it!..."

St. Petersburg, Florida -- - The Treasury has now indebted us by another $600 billion in the last twelve months, more than $2,000 for every man, woman and child in the country. The Fed, being in total control of the banking system, can only make money cheap and available for borrowing. But the Treasury IS a borrower, and is borrowing scads of Fed-cheapened money for us and our children and our grandchildren to repay, and the Fed is making that money, as I said, cheap and available for borrowing. I am hereby defining the word "scads" to mean "Amounts so large that they defy comprehension and make your eyes bug out when you see it written down in front of you." And the fact that "scads" sounds like "scabs" is just a happy coincidence, since the Fed's actions are bleeding you dry and you are being covered with invisible scabs from the wounds. And since scabs have never been a popular beauty or health accessory, nobody wants them, and this is exactly the reason why the banking system was supposed to be independent from the government. Supposed to be. Used to be. Should be. But ain't.

And, since all the central banks of the world are in on the rigged game, the amounts of our debt held by foreigners in custody of the Fed naturally increased by another $4.2 billion, as those central banks are at war against their citizens, too, in the name of providing spendthrift Americans with more cheap pocket money. How special.

And speaking of every man, woman and child in the country, the amount of interest that the government is sending to foreign holders of our government debt already comes to more than $1,000 per year per capita. If you ever want to know where your tax dollars are going, this is part of it, and the part that will get bigger and bigger and bigger.

- Ian Campbell, UPI Chief Economics Correspondent, wrote an interesting little article entitled "Greenspans new new paradigm." Yes, he used "new" two times. He writes, "The danger, to our mind, is that Greenspan's 'solid advance' is not solid at all. It is all based on flooding the markets with liquidity, forcing down mortgage rates to indecently low levels, cutting rates on savings deposits to almost nothing, encouraging the creation of more and more debt -- while friend George racks up the government debt -- and encouraging spending based on extracting equity from an asset, housing, whose price is inflating recklessly and which, subsequently, like the equity market, is likely to fall."

Did he say "likely to fall"? Likely? Houses are in an obvious bubble, and they have been in an obvious bubble for years, and yet Mr. Campbell figures that the chances of real estate prices falling is only "likely"?

I'm not so sure. It seems that I read that the average house in L.A. is being occupied by 2.5 families, so the price per family is less than half the sales price. So obviously, as long as you can keep crowding more and more families into a house, then the price per family goes down, even though the price of the house goes up!

And besides, all it takes for houses to assume a perpetual rise in prices is for the damnable dimwits in Congress to provide a deduction for interest AND principal! Tax-free houses!

- Concerning inflation, the CPI, reports Bloomberg, was up. "Food prices, which account for about a fifth of the index, rose 0.4 percent in June. Last month's rise was led by higher prices for fruits and vegetables, beef and chicken." So everything except candy bars and pork chops, I guess. Yummy! And this is the exact moment when I decided that I LIKED this new inflation stuff! Cheap candy bars and pork chops makes me wonder if I had died and gone to heaven!

An interesting tidbit is that "Almost 60 percent of the CPI covers prices consumers pay for services, ranging from medical visits to airline fares and movie tickets. Service prices rose 0.1 percent last month and are up 3.3 percent over the last year."

Sixty percent of the CPI is categorized as services? Wrong-o, I figure. I buy food every week, but I can go a long, long time between uncomfortable and inconvenient airplane rides, painful and expensive medical interventions and watching rich Hollywood stars pretending to be normal people. But even assuming that 60% of the CPI is services, then even that is up 3.3% in the last year! My God! This is past the level of price inflation that used to make German central bankers gag on their bratwurst! How much real, in-your-face inflation does it take before the Fed snaps out of its stupid reverie about hypothesized deflation being some problem?

One other little factoid was interesting, namely "Unemployment reached 6.4 percent last month, the highest since April 1994, and factories used 74.3 percent of their capacity in May, the least since June 1983." The world-wide glut of overbuilt capacity, one of the horrific manifestations of the bubble engendered by the Greenspan Fed idiocies, is not being used, and is retarding the recovery. The reason is that the scrapping of the over-capacity, Schumpeter's "creative destruction," would result in that excess capacity being deflated to its real value, namely zero, and the resources being put to use to make things that people want. Paradoxically, this is the one thing that Greenspan is trying to stop, and it is the one thing that is necessary for a real recovery. In other words, Greenspan does not want a recovery if something has to go down in value to achieve it. This helps to underscore how out of touch Greenspan is with the basics of Economics 101.

- John Snow decided to weigh in on the Euro problem of government budget deficits that exceed the 3% of GDP limit. According to an article by Christopher Rhoads, Mr. Snow believes that "There is virtue in fiscal responsibility, but there are times when a higher deficit should be allowed."

Of course he is going to say that, as we Americans are the biggest bunch of deficit-spending jackasses on the face of the planet. This probably includes the mole-people who live underground, too, but I am not sure, but we are the biggest of the beings that live on the surface of the planet. Oh, you haven't heard about the mole-people? Oops! Forget I said anything.

Well, to be sure, the Japanese are worse from a strict percentage viewpoint, but there is some discussion in my mind, all those voices yammering yammering yammering in my head all the time, as to whether or not Japanese people are capable of independent thought, since they have been living without complaint for over a decade with their government treating them like grubby, half-witted slaves who enjoy having their money taken from them. But when it comes to sheer number of currency units, we take a back seat to nobody, and nobody else even comes close.

But since I always like to get with the program at the earliest opportunity so that I can be thought of as a team player, let me expand on Mr. Snow's new program of variable virtues. Monogamy is a virtue, but there are times when adultery should be allowed. Practicing safe sex is a virtue, but that there are times when dangerous, unprotected sex should be allowed. There is virtue in obeying the speed limit, but that there are times when reckless speeding should be allowed. There is virtue in not shooting high-powered handguns at noisome neighbors, but there are times when blowing a few of them away should be allowed. There is virtue in paying for what you want, but there are times when stealing should be allowed. There is virtue in loving your spouse and children, but there are times when beating them to a bloody pulp should be allowed.

Extrapolating to the federal level, there is virtue in paying your taxes, but there are times when blatant lying and cheating should be allowed. There is virtue in not polluting, but there are times, like when cleaning out the garage, when dumping old pesticides, paint and used motor oil into the rivers should be allowed.

So there we have it. There are virtues, and there are times to be virtuous, and, according to Mr. Snow, there are times when it is appropriate to act un-virtuous, and to act like mindless, greedy idiots. And the only way to tell the difference between the two, apparently, is to determine whether or not you are in the mood to be virtuous or not. In the popular vernacular, if it feels good, then do it!

- Greenspan, in his testimony before the Senate, an elected body of laughable blowhards, which I will state for the record was not as clueless or insipid as usual, says that savings and investment must balance! Huh? Since when and for what? The whole freaking point of his whole freaking tenure is that savings are completely unnecessary, and that the only thing that is necessary is that the Fed and the Congress be allowed to do any damn thing that they want, any time they want, and that the other central banks of the world be forced into playing the same games to bail us out of the, let me see, how to phrase this, problems caused by virtue or lack of it.

And that is why he is punishing people who are stupid enough to save money by reducing their interest-earning income to zero! His whole policy is that savings are easily supplanted by the Fed creating money out of thin air, and that there is no reason whatsoever for anybody to ever save any money, ever, and in fact our whole personal-service and retail-oriented economy is now based on the presumption that everybody will spend every dime they can get their grubby little hands on! And when that is gone, to arrange to borrow more, and then spend that! And now, in front of the Senate, he is saying the exact opposite? The mind reels!

- The June 12 issue of the Economist magazine had a nice pithy quote about how Asians are amassing monumental dollar reserves. "By buying Treasury and government-agency debt, central banks have financed America's current-account deficit, and pushed down bond yield and mortgage rates, allowing America's consumer spending and borrowing binge to continue for longer. This has enabled households to postpone their post-bubble belt-tightening. But because consumer debt and the current-account deficit have swelled further, it means that the eventual adjustment, when it comes, will be more painful."

Note that there was nothing in there about "if," or "maybe," or "perhaps." I make this point to emphasize that there WILL be a price to pay, and because we have acted so stupid for so long, it will have a huge price tag.

- Ron Paul, one of the very few people elected to Congress that is cognizant of economics, says "We know those who lead us -- both in the administration and in Congress -- show no appetite to challenge the tax or monetary systems that do so much damage to our economy. There's no resistance to spending, either domestic or foreign. Debt is not seen as a problem. The supply-siders won on this issue, and now many conservatives readily endorse deficit spending.

"Spending, borrowing and printing money cannot be the road to prosperity. It hasn't worked in Japan, and it isn't working here either. As a matter of fact, it's never worked anytime throughout history. A point is always reached where government planning, spending and inflation run out of steam. Instead of these old tools reviving an economy, as they do in the early stages of economic interventionism, they eventually become the problem."

And, to add my two cents, we have reached the point where "eventually" is now. He notes that there are too, too many people who "... ignore the fact that endless borrowing to finance endless demands cannot be sustained."

Well, this is the part where Mr. Paul and I part company. I say, and with the hysterical ranting that is a powerful symptom of something that is very wrong with me, that there is never a time when the government cannot borrow and spend newly printed fiat money. That is the whole point of having a fiat currency! They can keep doing it indefinitely, even past the point where it costs more than a thousand dollars to print a thousand-dollar bill, since a dollar would be worth so little. And that is precisely the problem. Because they are the government, it makes sense to keep printing thousand-dollar bills even past the point where it costs more than a thousand dollars to print one. There is nothing to stop them.

And this may be our temporary salvation, "temporary" meaning "Until the Presidential elections in November 2004, because that is the point of all of this." For example, a deficit of another lousy $280 billion, which is pretty much chump change here lately, sent out to every man woman and child in the country would put a thousand dollars of ready money right into the hands of the people. Family of four? Here is your check for four grand! And if you can manage to tax the windfall, and keep the payments off-budget, then the budget deficit would be reduced, too! Magical! And if you think that this is too preposterous for the government to consider, then you are not paying attention to how the government is operating these days.

- Martin Weiss, of the Safe Money Report, says, "Adjust corporate earnings for all this gimmickry ... and S&P 500 corporate earnings could be as much as 41 percent less than the profits being reported to investors. If you assume actual earnings are as much as 41% lower -- as this new study shows -- then the average S&P 500 stock is now trading at an absolutely insane 56 times earnings! The average S&P 500 stock is now trading at 33 times earnings -- more overvalued than when the index hit its record high of 1552.87 on March 24, 2000."

In short, people who are buying stocks actually DO believe that there is some fabulous recovery that is going to happen real soon, and that stock prices have no relationship to value anymore.

- Founder's America responds to Greenspan's bizarre notion that the idea of manufacturing anything is so old-school. "Today, America is so dependent on China for the manufacture of some tools and mechanical parts that any war effort would be impossible to stage against China if she became belligerent and threatened us. We don't make many tools anymore, which capacity is the necessary underpinning for any continuing defense against military aggression. As America ships its manufacturing base overseas, it becomes weak. Whether making wrenches or computer chips or clothing, keeping America's manufacturing base for making vital goods is basic to our survival."

That is one opinion, and Greenspan has another. Let's mosey over to the bookshelf and look for some other examples of any nation that thought that it could make a vibrant, healthy economy by doing each other's nails and printing money. Hmmm. Damn! Nothing there! Maybe Greenspan is wrong about that, eh?

- The business cycle committee at the National Bureau of Economic Research has concluded that the recession that began in March 2001 ended in November 2001. Hahahah! This is almost too funny!

- Jim Tesluk, a thoughtful reader, sent me an advertisement for a restaurant in Tokyo named Cafe Mogambo! Their motto is, "Because it is a jungle out there!"

- Jim Sinclair's MineSet website had this pithy quote about the rampant fraud, lying and deceit that is, hmmm, I already used the word "rampant," so I shall use the word "pandemic" as a synonym. "The only hope is a deceitful equity rally based on legally-sanctioned, government-financed, ESF-executed, manipulative equity forces to paint a rosy picture over an economic body of pure rust and rot. Lower interest rates have done nothing, so manipulation is the only tool the Treasury and Federal Reserve have to resuscitate the global economy."

- Dan Denning, of Strategic Investment, is seemingly getting a little panicky, too. He writes, "We are about to enter the age of hyperinflation. We have now entered the era of 'extreme' central banking, where bankers must turn everything they can into cash to promote inflation. This is how the end begins, with more and more desperate measures to pay off the debt with new money. The only problem is that each new unit of currency decreases the values of all the others in existence. Prices rise. Inflation is born. Thus is the fate of all managed currencies."

And what of the COUNTRIES that had one of these managed currencies, like us? Oh, yeah, now I remember. They all suffered and collapsed, or are in the process of collapsing.

- Christopher Lingle, Taipei Times, writes that "Higher prices have caused property tax bills to rise, making them the second largest expense for homeowners after their mortgage payments. Last year, Americans made interest payments of US$265 billion on their homes while paying US$205 billion in property taxes."

And what are these local governments using all that money for? Giving themselves overly-generous pay and benefits packages, and retirement plans that are so generous that they are not even offered to anybody in the private sector, and having a wonderful time driving around in their new vehicles. Of course, some of the money is used to pay for shiny gimcracks, like playgrounds and government buildings.

- Lightning struck here last Friday and it fried two computers, one TV, one phone system, a VCR, the air conditioner, miscellaneous wiring and, probably, a lot of things that we haven't discovered yet but will find out about once we are relying on them working. I note, for your amusement, that every one of these things were plugged into surge suppression devices, none of which worked.

- John Mauldin, quoting Richard Russell, "This nation operates on the 'fractional reserve system,' and if deflation hits and consumers halt their buying and borrowing, the money supply begins to shrink and the whole system starts to work in reverse. I might add that this is not a normal economy. The US economy is up to its ears in debt, with a commonly accepted figure being that there's roughly $38 trillion in debt built into the US economy. If deflation hits, this tower of debt could become a financial nightmare. It could take on a domino effect and one layer after the next would be crushed by the need for financing, financing that becomes almost impossible to obtain in a deflationary environment."

To John and Richard, I say that if gigantic debt loads were a problem, then surely Alan Greenspan would have at least mentioned it, wouldn't you think? But he hasn't, he doesn't and probably never will, since the theory is that debt loads are not important, and that only interest rates are important. Nothing but interest rates.

So obviously you two guys are as stupid as me, because I personally think that gigantic debt loads are a problem, every economist who ever lived thought they were a problem, and the only guys in all of history who thought they were not a problem are Alan Greenspan and his fellow-traveler American economists.

- Steve Saville of Speculative-Investor.com and reprinted on the 321 gold.com site, writes, "The problems facing the US today cannot be mitigated in any way, shape or form by higher money-supply growth because inadequate dollar supply is not part of the problem. In fact, the current predicament is partly the result of excessive dollar supply and actions taken to increase the money-supply growth rate can only make things worse."

He goes on to say, "We don't think there's any question that US$ prices are going to rise as a result of the on-going substantial growth in US$ supply. The only question we actually need concern ourselves with is: Which prices are going to rise?" Two of his big picks for those things that seem destined to rise are gold and commodities.

- Gary North asked an interesting question, "About 80% of the world's savings was spent last year investing in the US. How much more will the rest of the world buy?" Even though this is obviously a rhetorical question, I can tell you the answer; the rest of the world had better have an appetite for all of it, or we are going to be in big trouble. He goes on to ask, "Why should American investors expect the rest of the world's investors continue to invest 80% of their savings in dollar-denominated assets when the greatest economic growth is in Asia?" The answer to this one is much more straight forward; the reason debt holders buy one class of debt over another is because one of them has an interest rate differential that is higher.

And now that the debt has been deflating, to use the current buzz-word, the long bond is back where it was at the beginning of the year. Therefore, almost everybody who has been buying all that avalanche of newly-issued American debt has lost money on the gamble. It makes you wonder how enthusiastic they are going to be in the future.

- Kurt Richebächer, one of the biggest of the big de facto Austrian-type economic hotshots of this world, was poking around in the statistics of how we spend our money, and he found something that surprised him. "We learned that the American consumer's heavy borrowing is largely financing expenditures on essentials."

Now, while this may be surprising to Kurt, if I may be permitted to lapse into the familiar, but I am stunned like I have been shot with a stun gun. It is one thing to borrow money to buy a SUV, but it is quite another to borrow money to put food and medicines in your mouth. But when all your money is being used to buy a house you cannot afford, to put into speculative investments and retirement plans that will soon be sinking in value, higher government taxes and fees, larger and more expensive cars on extended payment plans, and all of the rest of the crapola that has come to define America's system of values, something has got to give sooner or later. Ugh.

--- Mogambo Sez: I keep looking over my shoulder for a monster to creep up behind me, until I suddenly realize that it is right there in front of me; rising interest rates and a falling dollar.

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.

It already is the problem.

Richard W.

Well he's right about the spending not bringing prosperity part - but he's completely ignorant about government debt. First, that is not the people's debt...(he assigns at least 2,000 to every person)...that is the amount of money the government OWES to the people. I like having the government in debt to us. Secondly, he complains about foreign investors buying our bonds. GOOD. THAT IS A GOOD THING. IF they buy bonds, they SHOULD get interest payments. I'm glad they are lending us money for our operations against terrorists and the like. I'd rather take on some debt and at the same time kill terrorists than let my family get blown up in the process.

In other words, Greenspan does not want a recovery if something has to go down in value to achieve it. This helps to underscore how out of touch Greenspan is with the basics of Economics 101.

No, but Greenspan is perfectly in touch with the basics of Politics 101: If the value of anything, anywhere goes down (particularly housing), his legacy goes with it. The medicine needed would be unpalatable even to honorable men - to shameless self-promoters like Greenspan and the US Senate, it is utterly toxic.

I note, for your amusement, that every one of these things were plugged into surge suppression devices, none of which worked.

Because they were crap made in China and had burned out varistors (or maybe never had any protection to begin with). Symptomatic. We are selling our future for a bunch of cheap crap. There are better surge suppressors made in USA: they work, they don't increase our debt and their additional cost ripples back through our economy.

Mainstream economists are under the delusion that free trade has improved the world's financial markets, creating both greater transparency and enhanced liquidity.

And so it would have, had the money being 'invested' been sound. Instead, liberalization has compounded the folly of the Fed's 'policy', whatever it is. If that policy isn't 'We'll print any amount necessary', will someone please tell me what it is!

The implosion of a debt-based economy is not a pretty sight. Think Weimar circa 1923. :^0

I like having the government in debt to us.

Since they (government) control the currency and can inflate away the value of the dollars they pay to Americans, I'd say your assessment has to be one of the dumbest things I've heard.

Richard W.

"- Martin Weiss, of the Safe Money Report, says, "Adjust corporate earnings for all this gimmickry ... and S&P 500 corporate earnings could be as much as 41 percent less than the profits being reported to investors. If you assume actual earnings are as much as 41% lower -- as this new study shows -- then the average S&P 500 stock is now trading at an absolutely insane 56 times earnings! The average S&P 500 stock is now trading at 33 times earnings -- more overvalued than when the index hit its record high of 1552.87 on March 24, 2000."

Sums it all up. At this pace, I can see many stocks trading at 100 to 200 times earnings again by this time next year. Hmmmm, isn't that what happened in 99 before all hell broke loose? I guess it's time to sharpen the pencils up and look for some killer shorts when the market tops out again during this bear rally next summer. Or some great real estate deals as the repos' slam the market next year....

First, that is not the people's debt...(he assigns at least 2,000 to every person)...that is the amount of money the government OWES to the people.

First, that is the "people's debt." Where does government financing predominantly come from except from the populace?

Second, that is the amount of money government OWES individual investors in treasury instruments, unless it nullifies debt through inflation. Even that spreads the debt over the entire populace.

Sure they can inflate away the value. But I would rather have it this way than the government using a surplus to buy into the private sector. Anyway, obviously the government doesn't have an inflation agenda, seeing how the dollar has actually increased in value over the past 5 years until recently.

Not to mention that it is virtually impossible for this u.s. government to have an inflation agenda, as the different parts of government are so separated from each other that would create huge conflict and it would simply not happen.

"Sure, it doesn't bother me simply because those foreign investors are all individual units acting in their best interests...it isn't like they would all collaborate and try and screw us by cashing in their bonds all at once."

Keep on believing everything the Disney Investment Corporation, er Federal Reserve tells you. They will bail if they see that they will lose a fortune. Everyone said they wouldn't bail on Argentina also. Take a quick history lesson on those economies that everyone claims "couldn't fail". You'll find history full of suckers who believe like you do.

seeing how the dollar has actually increased in value over the past 5 years until recently.

Sorry to burst your bubble, but the dollar has been on a steady decline. When you hear talk of a stong dollar, that's against other currencies. We have never not had inflation except back in the great depression. You get out much?

Richard W.

Recently it has declined, yes, which is why I said, "until recently." But if you look at the value of the dollar...not relative to other currencies, but its overall value, it increased substantially from 1997 to 2002.

>We have never not had inflation except back in the great >depression

First, lets get the definition of inflation correct. The definition of inflation is the decline in the value of a currency, not the overall rise in prices. See, the CPI (consumer price index) can still rise while the overall VALUE of the currency is actually increasing, because when you have inflation or deflation, not all commodities and items are hit at once. It is a cascade effect, with gold, oil, and other commodities affected first, followed by other goods. So, you can have no inflation from years 1-5...have inflation in year 6...no inflation in years 7-9, but have the inflation from year 6 show up in the CPI in year 10.

Sort of like Japan. They have been suffering from an economic deflation (slow rise in the value of the currency)since the mid to late 80s. However, the CPI didn't show this until the mid 90s!!

So, in summary...if the CPI rises for 5 years, it does not necessarily reflect any change in currency value for those 5 years...

There is no inflation agenda. The problem is that we have really smart people thinking they can determine how much money is needed in the marketplace...unfortunately that is impossible for mankind to do. There is only one way to do it.

The only way investors would bail is if it was clear that our government would not be able to make interest payments on those bonds. We are not even close to that sort of default, as the interest payments on those bonds make up a tiny fraction of the overall U.S. GDP. Now, i'm not saying we won't ever have an economic disaster here...which could be very likely if socialists somehow gain control of our government en masse, or we have some sort of lunatic take over monetary policy...but the economic disaster would be the CAUSE of those foreign investors leaving the U.S., not the EFFECT. Those investors bailing on Argentina did not cause that disaster....they tried to bail because the disaster already happened.

And, if a disaster DOES happen, at least the foreign investors are screwed, and not Americans. Not our concern. LOL

let me say another thing to "y'all." you know the foriegn money that comes in to buy our bonds and invest in our companies? That is the rest of our supposed "trade deficit." When we buy foriegn products, where do these people put their money? They buy our stuff and send us their money, of course!! Because, ultimately, you can only import as much as you export. It's pretty simple

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