Nothing is more dangerous than good luck... The US finances half its expenses with borrowed money... How can consumers increase spending and saving at the same time? The Mogambo on the ups and downs of money supply...and more!
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Ruined by Good Luck
by Bill Bonner
London, England
Not much action in the markets on Friday. The Dow was off 34 points. Oil slipped to $69. Bonds rose a bit. Gold and the dollar remained pretty much where they were.
The thought we kept having this weekend was an old one: that nothing is more dangerous than good luck.
As Bret Harte said, "The only sure thing about luck is that it will change." And it certainly has a way of kicking you in the derriere.
If you're lucky enough to win the lottery, you should watch your back. Almost all lottery winners are broke within a year or two. Many are broker than they were before they won the lottery. Because their good luck causes them to miscalculate.
There was a story about one lottery winner in the press here in London last week. He had won millions of pounds. Feeling lucky, he invested in a number of enterprises suggested by friends, relatives and total strangers - all failed. He married a much younger woman - who later left him (taking with her the house he bought for her). He invested on the advice of analysts and advisors - who naturally turned out to be idiots. And he lent money to people who, naturally, couldn't pay it back. He was in the news because he had been arrested for attacking one of his old friends while trying to collect a debt (he needed the money to pay his rent!)
Evelyn Adams won the New Jersey lottery twice - in 1985 and 1986. Talk about luck! She won $5.4 million in total. But don't go looking for Evelyn in a Beverly Hills or Palm Beach mansion. She lives in a trailer.
"Everybody wanted my money. Everybody had their hand out," she says.
Or take the case of William "Bud" Post. He won $16.2 million in the Pennsylvania lottery in 1988. Think he's fixed for life?
"I wish it never happened. It was totally a nightmare," says Post.
Within a year he was $1 million in debt and had to declare bankruptcy. Now, he is said to live on food stamps.
Niall Ferguson explains, in his book, The Ascent of Money, that it was good luck that ruined the Spanish economy of the 16th century. Indeed, we passed along the same basic facts here in the pages of these daily reckonings. Ferdinand and Isabella kicked the last of the moors out of Spain in the same year they sent Christopher Columbus across the ocean blue. Getting rid of the Muslims was a net loss to the Spanish; the moors took with them money...and more important...valuable commercial skills. But when the conquistadors arrived in the new world, they hit the jackpot.
One mountain, Mt. Potosi, yielded 45,000 tons of pure silver between 1556 and 1783. 'Valer un potosi' is a saying that is still used in Spanish to describe something that is worth a fortune. Even before the mining began, the Spaniards had helped themselves to billions worth of Aztec and Inca gold. Gold and silver were real money back then. The precious metals entered the Spanish economy and quickly inflated the money supply...first in Spain and then throughout Europe. The cost of living in England, for which there are some price records, went up 700% during the "price revolution" between the 1540s and the 1640s.
The "free" money coming from the colonies financed about 40% of the Spanish government's budget. But even with ships still bringing more and more gold and silver to Spanish ports, the crown still ran short of money. In 1557 it defaulted. And again in 1560, 1575, 1596, 1607, 1627, 1647, 1652 and 1662.
The US government now finances half its expenses with borrowed money. This is similar to the Spanish financing system, in that much of the money comes from outside the economy itself. But the difference is that the United States still has to settle up on its financing. Spanish gold was real money. It didn't have to be paid back. It was "monetized" from the very moment it arrived.
US financing is more subtle, and more complicated. But it is made possible by an extraordinary luck. The United States has the world's reserve currency...and the largest, most liquid economy. People put their money in US Treasuries because they are sure the money will be there for them when they need it. And they are used to a world of disinflation; interest rates and inflation rates have been falling for the last 25 years. And, inasmuch as the world economy is now in a deflationary correction, the risk of inflation seems very, very remote. So, for the time being, the United States seems to be able to borrow almost unlimited amounts of money at very low interest rates.
More on this below. In the meantime, check out our intrepid correspondent and resident precious metals expert, Byron King's special report. You don't need any luck to win with the investment Byron details in the report. See it here.
Now we turn to The 5 Min. Forecast for the news:
"The world's rank and file of millionaires are in for quite a shakeup," writes Ian in today's issue of The 5.
"Here's some takeaways from our latest read: 'The 2009 World Wealth Report,' by Merrill Lynch and Capgemini.
"First, the number of global millionaires fell at a record rate in 2008, led by North Americans. The credit crisis wiped out 15% of the world's millionaire population, now at just 8.6 million high net worth individuals (HNWI) as Merrill puts it. The total worth of the world's wealthy fell about $7 trillion last year, to $32.8 trillion.
"North America was the greatest victim of 2008, shedding 600,000 millionaires and roughly $2.8 trillion in HNWI wealth. Of course, it's still at the top...but for how long? Check out this chart:
"We should hedge this chart a bit: First, it's from Merrill Lynch...need we say more? It uses some rosy projections for global economic and market recovery for the next few years. Expecting the coffers of HNWI to grow at an annualized rate of 8.1% over the next four years is the same kind of Ivy League MBA thinking that caused Merrill's collapse and subsequent fire sale to Bank of America.
"That being said, we wouldn't be surprised if its forecast comes true. Simple ratios alone make an Asian takeover seem inevitable: One out of every 195 North Americans is a millionaire. Only about one in 1,700 Asians can say the same."
Look for Ian at this year's Agora Financial Investment Symposium in Vancouver, British Columbia. The conference is rapidly approaching...and this year marks the 10th anniversary of The Daily Reckoning. So, this July, the Symposium will be focused around a "Decade of Reckoning"...four days that will help you to gain greater insight into the investment ideas and profit opportunities of the next decade.
This event is sure to sell-out...secure your spot now. Click here for all the info:
The Agora Financial Investment Symposium: July 21-24
And back to Bill, with more thoughts:
Though the fear of inflation is minimal right now, government's deficit spending on this scale is bound to result in higher consumer price levels sometime. How long will it be before this good luck ends up kicking us in the derriere? How? We don't know, but look at this chart that appeared in The Wall Street Journal. The United States has found its Mt. Potosi.
The US money supply growth was fairly constant for the last 45 years. Then, under pressure from the stimulus/bailout programs, it exploded. Art Laffer says it is meaningless to compare it to anything in our history; nothing like this has ever happened before. He argues that inflation this time could be much worse than the inflation of the '70s, when the prime rate hit 21.5%. This is a new era!
"More Americans see sunny skies ahead," says a headline in USA Today. Elsewhere, Bloomberg reports that consumer spending is rising.
The Wall Street Journal, however, reports that savings rates are going up.
How can consumers increase spending and saving at the same time? We don't know. But the statistics are so jiggled and jived we have little faith in them.
The Richebächer Letter's Rob Parenteau is scratching his head at this contradiction in trends. "Oddly," he writes to his subscribers, "along with flat consumer spending, the gross personal saving rate has surged to nearly 7%, yet the unemployment rate has kept climbing. How is that combination possible? Specifically, where is the household sector getting the income growth to both increase saving and stabilize spending levels when job cuts remain alarmingly high?"
"If households try to hike their gross saving rate and the business sector does not increase its investment, then simple junior high algebra tells us that nominal incomes, especially profit incomes, will decline," continues Rob.
"The only way to avoid this outcome is for the trade deficit to improve or fiscal deficit spending to increase. The trade deficit has come a long way, but it is starting to stall again as consumer spending stabilizes and the pace of inventory reduction slows. The existing fiscal stimulus will have to do the trick until the household saving rate stabilizes and residential and nonresidential investment gets some traction."
In any case, be wary of statistics - they are furnished by government. And government has its own axes to grind and its own heads to cut off. For example, inflation numbers tend to be held down - in order to avoid costly adjustments to social security benefits. Unemployment statistics, too, tend to be understated. If joblessness was reported in the same way it was during the '30s, the figures would be much higher. More on this in an upcoming Daily Reckoning.
Until tomorrow,
Bill Bonner
The Daily Reckoning
P.S. For more insights from Rob Parenteau, check out his latest report for the newly-revamped Richebächer Letter. Get it here.
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| The Daily Reckoning PRESENTS: Bracing himself - as he usually does - before reading the latest inflation data, the Mogambo makes a few startling discoveries about the US money supply. And in true Mogambo fashion, he relays this information with his two trusty tools: the acronym and the exclamation point. Read on to find out what he discovered...
The Ups and Downs of Money Supply Growth
by The Mogambo Guru
Tampa Bay, Florida
I usually have to get "prepared" to visit John Williams at his famous shadowstats.com site so that I am "feeling no pain," and this time I was happy I was, as his headline was "Inflation, Money Supply, GDP, Unemployment and the Dollar - Alternate Data Series".
As for inflation, his calculation of the Consumer Price Index "reflects the CPI as if it were calculated using the methodologies in place in 1980," which I note is back when inflation was a measurement of the change in prices of things that you buy, and not, as it is now after the villainous Alan Greenspan and Michael Boskin came up with their ludicrous "hedonic" measurements of inflation with which to disguise it.
Anyway, Mr. Williams' honorable and time-honored methodology shows inflation in prices running about 6%, a horrendous rate, which is a big shock to those who have just swallowed the government's estimate of CPI as being a negative 1.3% over the last year!
Mr. Williams' estimate of the M3 money supply (the broadest definition of 'money') shows that it is growing at about 6%, which, although startling to those of us who are seemingly predisposed to getting hysterical about such monetary idiocy because it causes inflation in consumer prices and which is the Worst Thing That Can Happen (WTTCH), is actually down from the boiling 17% growth in M3 money supply at the beginning of 2008!
Wow! What a deceleration! This certainly has something to do with his calculation that year-over-year change in GDP is down by a whopping 5%.
Even worse, M1, which is the narrowest definition of money since it is essentially defined as "cash", has exploded to an outrageous 16% growth since the beginning of 2009!
| "...the really bad news is that measuring unemployment the correct way shows that it has now shot past the 20% mark! One out of five unemployed! This is Great Depression stuff!" | |
This is plenty bad news if you are afraid of inflation in consumer prices, which is different from being afraid of the CIA tapping into your computer and discovering all that pornographic filth and hate mail (e.g. "Dear Federal Reserve, I always hated you morons for creating so much money and credit that it caused roaring bubbles in the stock market, the bond market, the housing market and the size of government, and now your outrageous excesses to stupidly supply the financing to let the federal government try and buy its way out of a well-deserved bankruptcy will soon cause roaring inflation in consumer prices as the value of the dollar tanks, and my stupid relatives are getting laid off and are coming over here asking me to loan them some money, and I reply, 'Why don't you sell some of the gold and silver I have been screaming at you to buy all these years? It's way up in price!' and they admit, 'We didn't buy any' and then I say, 'Then why would I loan money to someone who is so stupid that I hate everything about you, including hating that stupid look on your stupid face' and then they say to me, 'We always thought you were kidding when you said you hated us' and then I say to them, 'Now you know, you moron!' all of which has caused a lot more tension at home, as you can imagine, which is the last thing I need right now").
And as bad as that is, the really bad news is that measuring unemployment the correct way shows that it has now shot past the 20% mark! One out of five unemployed! This is Great Depression stuff! Yikes!
All of which brings me to one of the stories that you don't hear about when discussing the Great Depression, which is that the people who did not own gold or shares of gold miners all wanted to own them, and would have, too, if their paper assets had not taken all their money away!
"Which is kind of like right now!" I thought to myself after getting the news after I had finished the scheduled Perimeter Security Check outside of the Mogambo Bailout Bunker (MBB), whereupon I was settling down to read an essay by Gary Gibson, managing editor of Whiskey and Gunpowder, who had done a little research and found that the Federal Reserve just reported that "US household wealth dropped $11.1 TRILLION since 2008 - $5.1 trillion of that in the last three months alone." Yikes!
I assume that he has not mastered the use of the exclamation point, which would have made his sentence end, more appropriately, "the last three months alone!!!!"
And lest I be remiss in giving to you Earthlings another heaping helping of Secrets Of The Cosmos (SOTC), which is my mission here on your miserable planet, way out here in the middle of what we sophisticated interstellar travelers call "No Freaking Where", here it is: Buy gold when your government is acting irresponsibly, which is, admittedly, most of the time, which should make you Squeal With Glee (SWG), "Whee! This investing stuff is easy!"
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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