The World Economy Calls in Sick
Paris, France
Monday, January 12, 2009
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*** The economy is in the worst shape since WWII...you can’t cure a bubble in five or six months – try five or six years...
*** Losing the world’s consumers...the Fed’s new super drug: “quantitative easing”...
*** Things went downhill quickly in Ireland...the Bonner family is getting into the spirit of the Worldwide Financial Meltdown...and more!
It’s Monday morning. The world economy is calling in sick.
A Bloomberg report confirms last week’s news: the U.S. economy lost more jobs last year than at any time since the end of WWII. The jobless rate is now at a 16-year high.
The Dow fell 143 points on Friday. Oil stayed at $40. Gold didn’t budge much from $855. And the dollar rose – to $1.34 to the euro.
“Economists see longest recession since WWII,” is a headline at Reuters . Economists are always the last to know what is going on. If they see a long recession coming, maybe the recession is already over? But, no...this time, we think even the economists have it right.
“This is worse than the S&L crisis,” said our old friend Jim Rogers a year ago. “This is the first time – this is the worst credit bubble we've ever had in American history. No – never in American history have people been able to buy a house with no money down, never. That's never happened anytime in the world. So, we have the worst credit bubble. It's going to take a long time to work its way out. You don't cure a bubble in five or six months... It takes five or six years.”
The world economy is clearly ailing. But what’s really wrong with it?
In 1945, the war economy was suddenly out of business. Orders for tanks, guns, and C-rations stopped coming. The economy felt a little ill. Economists feared the United States would sink back into a ’30s-style depression. And investors sold off stocks in anticipation.
Instead, the soldiers came home and got married. Women gave up their jobs building airplanes and began to build families. Then, the new families started spending the money they had saved up during the war years. In came the orders for refrigerators, houses, and automobiles...and the illness passed!
Once again, the economy is feeling like it has a touch of the flu. And once again, the cause can be traced to a change in the weather. After so many years of living beyond their means, Americans are reluctantly beginning to live beneath their means. Instead of spending every nickel they earn, plus a few they didn’t, they’re finally beginning to save. Not that they want to; but they have to. The easy credit is gone.
And so the orders for new cars, new granite-topped kitchen counters, and new televisions have stopped coming in.
But now there are no soldiers coming home – or not enough to make much of a difference. And there are no women giving up their jobs at the aircraft factories to start new families. And no kindling to light a fire under a new consumer spending boom – people have soggy debt, not savings.
This is not just a problem for the United States; it’s a problem for much of the world. Americans were the world’s consumers. They could be counted on to spend money – even when they didn’t have any money to spend. They bought the gadgets made by the Chinese, the wine made the Chileans, and the automobiles made by the Japanese. They were the chumps of last resort for the entire planet. Now that American consumers are coming to their senses, the whole world economy is feeling a little ill.
Left to their own devices, people would adapt. Chinese factories would gradually switch from making gee-gaws for people in Minnesota to making things for people in the middle kingdom. Displaced Japanese autoworkers could open noodle stands. One way or another, things work out...the malady would pass.
But the quacks threaten to make it much worse.
Of course, they’re delivering the standard elixirs – in massive doses.
As to the ‘fiscal stimulus,’ the president elect says he will change the TARP program so that it corrupts more taxpayers – rather than just a few big ones on Wall Street. He says he aims to create 4.1 million new jobs. Already, according to the Congressional Budget Office, the U.S. deficit for 2009 is expected to come in at $1.18 trillion – BEFORE Obama’s new stimulus program is added in.
As to ‘monetary stimulus,’ there’s nothing left to cut in the Fed’s key lending rate. If they want to ease rates further, they’re going to have to pay borrowers to take the money.
But the new super drug at the Fed is its policy of “quantitative easing.” What is ‘quantitative easing,’ you may want to know? It describes the Fed’s latest ploy, in which it buys toxic assets from banks. The banks thus increase their reserves. If they were to maintain the same loan-to-reserve ratio, they would have to lend out more money. But when the Fed buys assets from the banks, it does not borrow the money; it creates it ‘out of thin air.’ In other words, between ‘quantitative easing’ and ‘printing money’ there is not enough space to wedge a subway ticket.
So far, this new treatment has produced no signs of recovery. But don’t worry; the quacks won’t give up. They’ll give larger and larger doses – until the patient dies.
*** Our old friend Jim Davidson, founder of the National Taxpayers Union, sends this note:
“Obama has confirmed he will take rapid action to cut taxes for 95% of Americans. At first blush, cutting taxes for 95% sounds like a grand idea. However, look closer. The top 5% of income earners already pay 60% of all income tax, up from the top 36.64% in 1980. The corollary to Obama’s tax reduction, which will go mainly to people who don’t pay income taxes, is that a large increase is scheduled for the high earners.
“A hint of the magnitude of the coming burden was offered by The Washington Post on January 2, when it published its assessment of the cost of the bailout as already announced.
“According to [the] Post , if equally apportioned over the 139 million tax returns filed last year, the toll of the bailout would be $61,871 per taxpayer. But taxes are manifestly not apportioned equally. Even before Obama's tax hikes take effect, 60% of the tax burden falls on 5% of earners – roughly speaking, those who earn $250,000 or more annually.
“If you are one of them, your share of the bailout cost will be about $750,000. Pencil that into your balance sheet.”
*** A dear reader writes:
“I hear people telling me that things are heading up again, that the market reached the bottom in December, blah blah blah. Consider:
“My wife and I were in an excellent seafood restaurant on route 1 in Saugus – an extremely heavily traveled commercial strip north of Boston – back in mid-November. We were there from 12:45 to 2:00. There was one couple there when we arrived, and two more came whilst we were there.
“Traveling over the Mystic River Bridge into Boston, the parking lot below the bridge where imported cars are parked before being shipped to dealers was full to overflowing. A news item along about that time reported that they were trying to find more parking for the cars that were still en route.
“In a mall store a day or so after New Years Day I remarked to the clerk how dead it seemed. He said it was worse the day before when the store (Radio Shack) did only about $1,500. On a slow day he rarely did less than $5,000.”
*** A friend reports that it is worse in Ireland:
“It’s unbelievable how fast that country has gone downhill. We had a house there that we sold in 2006. Now, the people who bought it from us are trying to resell it at a quarter of the price they paid us. Even at that price, there are no buyers.”
*** “WWFM is what we call it in the family,” Elizabeth explained at a dinner party. “The Worldwide Financial Meltdown. Bill just goes on and on about it. He keeps hounding us all to cut expenses. So this year, we’re trying to cut back ...turning out the lights...and staying at home.”
Yes, dear reader, the Bonner family is getting in the spirit of the WWFM. And it is amazing how much you can save, when you put your back into it.
“Elizabeth, can you sew up this hole in my sweater,” we asked on the weekend.
“Just give it to Katya [the cleaning lady]...she’ll sew it up for you.”
“But she charges us 10 euros an hour.”
“Well, it’s cheaper than buying a new sweater.”
We also found a guitar on the street. Someone had just thrown it away. We took it home and put on new strings. It’s not much to look at and it sounds funny; but it works.
And on Saturday, the heating system developed a leak.
“No, don’t call the plumber; Edward and I will fix it ourselves.”
“Uh oh...”
The connection between male and female is always a bit tricky. In the plumbing world no less than the rest of the world. Our union was uncooperative. But an economist armed with a wrench is a formidable foe. We banged the joint and then cursed it. And when the battle was over there was water all over the floor but the leak was fixed.
“There...see, we fixed it!” we announced in triumph.
“I don’t know if you really saved any money. The water probably leaked down to the apartment below us...they’ll probably have to fix the ceiling. And we’ll have to pay for it.”
Until tomorrow,
Bill Bonner
The Daily Reckoning
The Daily Reckoning PRESENTS: With so much money going toward “relieving troubled assets,” it seems only appropriate that the Mogambo would use this irresponsible money creation as a precedent to create his own TARP...using other employees’ pension funds. Unfortunately, the bitter outcome of his wheelings and dealings doesn’t look to be any more positive than that of the Federal Reserve. Read on...
THE TROUBLED ASSET PENSION FUND
by The Mogambo Guru
Junior Mogambo Ranger (JMR) Phil S. was apparently as aghast as I was, so he sent the AP news item that “The Treasury Department opened the door...to using a Citigroup-style rescue package to help other troubled financial institutions”, which referred to the scam of the government “backing billions in risky assets and providing a fresh capital infusion.”
This is all, apparently, part of the new Targeted Investment Program, which is government-speak for “new giveaway program that will end up costing the nation whole multiples of actual dollars expended when measured in the sheer tonnage of misery and suffering, or its equivalent; inflation/loss of buying power that all that new money and credit will create, which is not to mention the further cancerous distortion of the economic fabric by the government being an even bigger piece of the economy, especially now that the total amount of government (local, state and federal) spending is already over half of freaking GDP to start with!”
Of course, the Treasury anticipated that I would make a stink about this new giveaway program, and they are emphatic that this is not a “giveaway”, and that it was a “participation” in getting grubby, incompetent hands on free money, the lucky recipients being “weighed on a case-by-case basis.”
It was here that I initially stopped reading and went off on a loud rant about corruption and stupidity in Congress and the sheer, colossal, towering stupidity of the weird economic theories of the Federal Reserve! And with the fawning endorsement by the overwhelming majority of the nation’s universities and professors, who teach that stupid crap, which is the same staggeringly stupid econometric theories that have gotten us into this mess!
It all became surreal when Madoff – the guy who amassed, so they say, $50 billion worth of losses in a huge Ponzi scheme – was called to testify about it by Congress! Hahahaha!
I can tell you everything you want to know about it; The Federal Reserve created the excess money and credit so that huge amounts of money would be borrowed and spent by the government, which contributed not only a lot of economic activity, tax revenues, and inflation, but which also caused a problem by winding up as a profit in somebody’s pocket, who then has to decide “Where to put all of this damned money?”
Predictably, I spent most of the morning firing off flaming emails to Congress and The Federal Reserve (“Dear halfwit scumbags, You are disastrously wrong and I hate you for destroying us! Signed, Disgruntled in Florida”).
Now I am sorry that I used up all of that time, as the part that I can really use came later in the article, where the “Treasury said it would consider, among other things, whether the ‘destabilization’ of a financial institution could threaten the viability of creditors and others. It also would weigh the extent to which the institution faced a loss of confidence because of the troubled assets it held.” Wow!
At this I yelled, as did Archimedes, “Eureka!” The answer to my troubles at work was right here!
I hastily scrapped all the other “it ain’t my fault” defenses on which I had worked in a feverish attempt to keep from getting fired like I deserved, and now, using this fabulous new TIP scheme to my advantage, I immediately declared my little department to be a bank, and plowed all of the employee pension fund money into it as shareholders of the bank.
Next, I simply – and cleverly – transferred all my department’s losses to the bank as “troubled assets” of the bank, throwing my MasterCard balance in there for good measure so that I can subsequently claim at my trial that this illegal commingling of funds showed it was all obviously a big, tragic misunderstanding, over which I had no control, and therefore I am not guilty of anything, the preponderance of evidence to the contrary notwithstanding.
But my anticipated legal troubles aside, with an entire pension fund invested in a bank that has assets of negative value, at a stroke I have demonstrated a desperate need of money (lots and lots of money!) to prevent “destabilization” of a financial institution which “could threaten the viability of creditors and others.”
It also would weigh in the Heavyweight Class when considering “the extent to which the institution faced a loss of confidence because of the troubled assets it held.”
Now, thanks to my genius, we just sit back and wait for all that lovely money to come pouring in from the Federal Reserve! It’s brilliant!
Alternately, a news item by the Wall Street Journal gave me a backup idea in an embarrassment of riches. The article said, “Cerberus Capital Management suspended withdrawal requests from investors, joining a parade of hedge and private-equity funds that have halted redemptions.”
The actual plan at Cerberus Partners was “to pay 20% of year-end withdrawals in cash and suspend the remaining withdrawals for investors for up to one year.”
Well, this applies to me perfectly, as I would like to have a lot of money without working for it when I can confiscate it from somebody and pay them back at twenty cents on the dollar!
So I ask one of my employees, “Hey! How would you like it if your pension fund returned 20 percent this coming year?” And naturally the guy says, “Sure, I would like that juicy return, but what does that have to do with your rummaging through my lunchbox and stealing pencils from my desk?”
Quickly I say, “Nothing, moron!” and I hustle back to my office to implement Phase 2 of my plan; transfer the money in the employee pension fund into the Mogambo Hedge Fund (MHF), where I can then get my grubby hands on all that lovely, lovely money.
Phase 3 is where I ignore letters, telephone calls, faxes, emails, telegrams, subpoenas, hysterical bankrupted investors banging at the door, and anything concerning the Mogambo Hedge Fund (MHF) until, backed into a corner by the police and their SWAT team goon squads, I send out a letter saying that the MHF will immediately give the employees 20 cents on the dollar, but then the now-world-famous Mogambo Hedge Fund (MHF) is suspending all further payments!
My legal defense is that the employee got what that employee said he wanted; a 20% return on his money! And I got what I wanted; a lot of money without working for it!
So, whee! Innovative financial engineering is so profitable!
For everyone else, of course, they will have to be content to buy gold, silver and oil to capitalize on the stupidity of the Federal Reserve and Congress creating more money and credit, debasing the dollar bit by bit, and everything getting weirder and weirder!
Until next time,
The Mogambo Guru
for The Daily Reckoning
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 – an avocational 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. Click here to visit the Mogambo archive page .
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