The Daily Reckoning - The Fed's Free Lunch Program (Mogambo Guru)

verfasst von Firmian, 30.09.2003, 03:06

-->The Fed's Free Lunch Program

The Daily Reckoning

Paris, France

Monday, 29 September 2003

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*** GDP numbers revised... deeper into the land of fantasy
growth...

*** Dow dips last week... poverty increases... incomes
fall... but consumers spend, spend, spend...

*** The lumps... our book... Amazon.com - great company! And
more...

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It takes 70% of the entire world's savings just to keep
Americans in the same place. Never before in history has so
much money and credit been brought to bear on such a
misbegotten project.

Just scroll down the headlines. The first to catch your eye
might be:

"Second quarter GDP revised up..." According to the new
numbers, GDP rose at a 3.3% rate during the 3-month period.
Of course, dear reader, we know the numbers lie.

Housing prices - the biggest single consumer expense item -
are going up nearly 10% per year. But government
statisticians put the rate of inflation at only 0.4%.

What a marvelous, imaginary little world they describe!

Homeowners get to extract the inflationary 'equity' from
their homes and spend it. If they buy a computer, every
dollar they spend gets magnified 600% by a statistical
legerdemain known as a 'quality enhancement.'

All this fictional spending makes it look as though there
were a boom. And inflation? The number crunchers seem not
to notice that the whole hopeless boom can be traced to
inflation in the housing market. But no one complains when
his house goes up in price. Instead, he happily enjoys the
phony boom - until he loses his job.

Here are the headlines that tell the important story:

"California median home price hits new high."

"Spending strong."

But...

"US income fell, poverty rose in 2002..." (Addison
elaborates below... )

"134,000 Lost Jobs in August Mass Layoff."

"Second-quarter after-tax profits fall 5%."

Consumers are still spending... thanks to rising house
prices, low prices and EZ credit. But business profits are
falling. Naturally, companies are laying off workers.

How can people with lower incomes and fewer jobs continue
to borrow most of the world's available savings? Good
question. And two more: why do the lenders keep
lending... and when will they stop?

We wait to find out.

Over to you, Addison:

-------------

Addison Wiggin, on the other side of the desk...

-"Despite the effects of the economic slowdown and
recession," Republican shill from New Jersey, Jim Saxton,
told the Washington post over the weekend,"terrorist
attacks, and wars, the comprehensive measure of the
household income has not plunged." Excellent... great news.
Household income has not plunged!

- Median U.S. household incomes dropped for the third year
in a row, according to a report filed by the U.S. Census
Bureau on Friday. Nearly 1.7 million people in the U.S.
fell into 'poverty'... some 2.7 million jobs in the
manufacturing sector were lost. The report sent politicians
and spin-doctors of all stripes, flavors and stages of
decay to the chalkboard."How can we get [our guy] on the
right side of these numbers?" Tom Daschle said
this... Saxton said that. Who really cares?... Really!?

- The idea that the economy is producing rising incomes has
been a fraud for several decades. As we point out (on pages
206 through roughly page 209) of Financial Reckoning Day,
during the 1980s and 1990s median family income stagnated.
For men, it fell... and the average family had to punch the
time clock for an increasing amount of time each week just
to keep food on the table. In 1979, for example, a man took
home $677 a week on average. In 2000, at the height of the
'boom' 21 years later, he earned $33 a week less.

-"Without savings," we quote liberally from ourselves,
"there can be no real capital investment - because there is
nothing to invest. Instead there is only make-believe
investment paid for with credit. Without real capital
investment in profit-making new machinery, new plants and
equipment people do not have high-valued added new jobs.
Wages cannot increase, for companies are not really
producing more and better goods and services. People are
forced to work longer hours and go into debt, while their
stock and real estate investments rise in value. This gives
the illusion of financial progress."

- Once everyone thinks they're getting rich... in a self-
reinforcing vicious cycle... they're encouraged to take on
more and more debt, spend and consume, until the whole
economy gets distorted. As if on cue, a CNNMoney article
this morning confirms the severity of the problem - at
least for your cranky and cynical editors."Nationwide
household liabilities," says the article, citing
Economy.com,"have grown 24% since the start of the
recession, which is 10 percentage points more than during
the last recession in 1991."

- But, keeping up with the Joneses can get rather
expensive. The average consumer household in the U.S.,
according CNNMoney, carries $8940 in overall credit-card
debt, holds 16.7 cards and owes $1363 per card. Likewise,
the average homeowner owes $90,000 on his home by way of
mortgages and an additional $30,000 in equity loans. The
average vehicle loan is now in excess of $20,000. (Don't
even get us started on college loans.) As we've pointed out
on occasion in these pages, personal debt as a percentage
of GDP has risen steadily since 1982 - to more than 70%
mid-2002.

- But for politicians, reports that suggest a high-
consumption, low-saving economy is unsustainable in
practice, like the Census Bureau report issued Friday, are
simply annoying disturbances that need to be explained
away... or used to blame the incumbent, sitting duck. Well,
at least we're used to it, huh? It is, after all, the eve
of an election year. Who really cares? Really?!?

- Like politics, the lumps barely noticed... on Friday, the
Dow closed down slightly... -30 to 9313. The Nasdaq fared
slightly better... -25 to 1792... and S&P slightly better
still... -6 at 996.

-------------

Bill Bonner, back in Paris...

*** The real investment risk comes from not knowing what
you are doing, says Warren Buffett.

Insiders have been dumping stocks at a record rate. The
smart money is using the rally to get out of its most
woebegone investments. The outsiders have been buying them
up.

"Bull market 2003: The worse the company, the better the
stock," notes Floyd Norris in the NY Times. Just as the
smart money shucks its mistakes, the dumb money takes them
up with such enthusiasm the insiders are probably wondering
if they should have held on.

Rarely does the lumpeninvestoriat know what it is doing.
But today, it seems especially accident-prone, racing into
the stock market at particularly dangerous moment. The
floor is slimy with high prices. Profits are falling from
the ceiling. And the whole structure is so full of gaseous
credit it could blow up at any time.

*** Oh là là... Our book is selling well - hitting the best-
seller lists of the New York Times, bn.com, and the Wall
Street Journal. Of course, it is a new release... still not
available in bookstores; sales are sure to decline after
people get a chance to read it. (In the interest of honesty
in advertising, we warn readers that it is a book of moral
philosophy that is being offered in the investment
section.)

Addison reports that on-line sales are so strong that
bn.com ran out of copies. So, Addison directed buyers to
our old friend - that Big River of No Returns bookseller,
Amazon.com. We have frequently made fun of AMZN, pointing
out that the company was an imbecilic investment... and that
Jeff Bezos seemed to have no clue what he was
doing... besides separating investors from their money.
Well, now that Amazon is selling OUR book, we have been
forced to reconsider: Great company. Great stock. Love that
Bezos fellow.

But what's this? On Friday, the link that was supposed to
direct buyers to Amazon where they could buy the book,
didn't work! How do you like that!? Error? Or sabotage?
What are we to think?

Financial Reckoning Day - 30% off! (With any luck this one
works) Go to:

http://www.amazon.com/exec/obidos/ASIN/0471449733/dailyreckonin-20

*** The only person we know who has actually read the book
is your editor's mother.

"I read every word," she reported this weekend."I thought
it was excellent. Very well written. I just hope you don't
get sued."

"By whom?"

"By all those people who you call morons and imbeciles.
They may be imbeciles. But they have smart lawyers."

---------------------

The Daily Reckoning PRESENTS: Mogambo on Monday! Your
weekly lesson in Mogambo-nomics...


THE FED'S FREE LUNCH PROGRAM
By the Mogambo Guru

By now, you must be aware that the FOMC has met and decided
to leave interest rates at once-in-a-lifetime lows. And all
you hear is how this is supposed to be such hot stuff.
Money is cheaply available for investing and hiring and
purchasing and all of that wonderful economics-stuff. And
when I say cheap, I mean CHEAP! Short rates are actually
less than the rate of inflation, giving you real rates that
are actually negative! Wow!

Offering money at rates that are less than the rate of
inflation actually translates into an offer for a free
lunch. But, as the savvy dude or dudette that you are, you
smile knowingly to yourself, because you realize that there
is no such thing as a free lunch. In this case, the people
paying for the lunch of lusciously low interest rates are
the people who are being forced to loan money at these
rates. That is, loan money at rates that are less than
inflation, forcing them to lose buying power for the
privilege of loaning strange people their money!

And there will be a price to pay, of course, as there is
always a price to pay. Because, as you have heard over and
over and over, and in fact you just heard it again from me
in the preceding sentence, there is no such thing as a free
lunch. Even though the Fed makes it look like there is.

And the people who are being forced to loan out their money
at these historic lows are going to get their money back
one day, you can bet on that. They are already making plans
about how they are going to get that money back. Perhaps
something (cue ominous music) unconventional.

The term 'unconventional' apparently comes from Ben
Bernanke, who is now an appointed, fully-fledged Federal
Reserve weenie, against my advice. Although, to be fair, my
literal advice was to get everybody to gather together and
go down to the Fed and use pointed sticks to run everybody
out of there, and make them disperse into the woods, and
then burn the building, and everything in it, to the
ground, and then scatter the ashes.

But Bernanke says that he will be happy to achieve monetary
policy objectives by unconventional means, and nobody gets
all shook up, except me. So I figure that we bedeviled
savers out here ought to emulate Bernanke and his Fed, and
commit 'unconventional' acts of our own. We have got to get
our money back here! We are suffering deflation in our
discretionary spending account! We demand the same rights
as the Federal Reserve! We demand the right to commit
unconventional acts and get away with them!

As for me, I have noted that food expense is one of those
big-ticket items, and I have thus made a management
decision to achieve gains in that area. Unwilling to reduce
my consumption of Oreo cookies, although my wife spying on
me already makes it difficult to sneak a few of those tasty
chocolate morsels, I must make gains with other,
unconventional methods. One will certainly be to walk
around the grocery store until I see a full shopping basket
that has a lot of good stuff in it. When the person isn't
looking, I shove a few bags of Oreos into it, and then it
is a simple matter to follow them home from the grocery
store and park down the street a ways.

Then they will have to make many trips carrying the grocery
bags into the house, and there will be times when the car,
which is still filled with bagged groceries, will be
unguarded! Then I will run out take a few bags, and leave a
five-dollar bill as payment! Now I realize that five bucks
is not enough to pay for three full bags of groceries, but
these are unconventional methods! I paid five bucks for the
damn groceries, and now the person I bought them from is
whining!

"Hey!" I say."The Fed, without your permission, takes your
valuable dollars away and hands you cheaper ones, so it is
the same damn thing! And this Greenspan guy you think is
some (and here is where I use a real nasal, whining,
sarcastic tone of voice) hotshot hero, (back to normal
voice) but you are throwing Chinese Ninja Death Stars at
me, even though we are doing the same damn, dangity blang,
jam blagged ding-dong thing! I'm not stealing your food!
I'm giving you money for your groceries! So gimme a break!
I'm just using standard unconventional methods!"

Another of my brilliant unconventional plans is a classic
Plan B, which is to sneak over to my neighbor's house with
a long extension cord and tap into his electric power, and
then I can run my whole house on free electricity!

Of course, I will dutifully go over to him at the beginning
of each month and give him, oh, let's say, ummm, ten bucks
cash. Now, I realize, and you realize, that my electrical
power usage is much, much higher than that, especially
considering my latest scientific research attempts to use
extremely high-voltage magnetic fluxes to turn lead into
gold, highly secret scientific experiments that have all
been, I am sorry to report, utter failures so far.

But, and this is a big plus, I have that sunny optimism
that flows naturally from being crazy and stupid, and I
have plenty of both of those! So expect good news any day
now!

You want unconventional methods? Buster, I can give them to
you in spades!

One of the nagging questions about the Fed's free lunch
recovery scenario, is, oddly enough, the same nagging
question that my wife has. Namely,"Where is the money
going to come from?" To her, I readily list my personal
sources of where this money is going to come from, namely
maybe we'll win the lottery or maybe a long-lost relative
will leave me some money in his will, or maybe we will find
an oil well in the back yard. To hear my wife tell it, it
is all crazy talk, and she has some mindless, simplistic
idea that there is one easy answer to all questions, one
pithy Philosopher's Stone that will solve all the riddles,
and that Easy Answer is for me to, you know, go out and get
a real job."Oh, sure, if you want to take the EASY way
out. But you don't really want people to say that we are so
lazy that we always take the easy way out, do you dear?
Really?"

But I will admit, after long stretches of relentless
grilling, that these are not truly viable sources of money
on which to base our family economy, much less an entire
national economic recovery.

According to the reports, I am not the only one asking this
question. People are having such a hard time paying off
their current debt load that they are going bankrupt in
rising, and record-setting, numbers. The number of
mortgages in arrears is also high and rising.

So where are we proletariat boobs out here going to get the
money to buy all the stuff? Huh? Answer me that one
freaking question, and I can tell you what the future will
bring.

And since we can't seem to come up with anything, we all
agree that we will NOT be buying any stuff. And thus we
must also agree that this is only natural, since borrowing
money for the purpose of current consumption merely moves
the Modigliani life-cycle stream of purchases forward to
the present.

Stepping to the blackboard, I say in a voice that is far
too loud and with my patent-pending, irritating nasal
whine,"Here we are at the Present, P and we are proceeding
through time to" (and I make a great big arrow leading all
the way to the other end of the blackboard}"the future, F.
And this implies, by mathematical imperative," (and here I
write 2, subtract 2, equals zero, to show the mathematical
imperative that I had just alluded to)"that there be LESS
consumption, C, in the future, F, because you, Y, consumed,
C, that future stuff, or FS, today, N. The future, F,
being, of course, where this Big Economic Recovery Thing,
or BERT, is supposed to take place, or TP. Which is, and I
define 'is' to mean exactly what even Clinton knows it
means, today, T, or P sub zero, or N, depending on which
one I was using before I lost track of where I was, but
anyway this is where the past, P sub minus N, and the
future, F, meet."

By this time the blackboard is filled with N's and P's and
T's and all kinds of letters, and scribbled arrows linking
them together in some psychedelic, madness-induced web of
interconnections.

My voice rising in excitement and anticipation, I
simultaneously beat and grind that poor little piece of
chalk into the very surface of the blackboard with strength
born of anger and betrayal, and, my voice rising to a
fevered pitch, I continue:"And it is here, at the present,
which is P, or N, or whatever in the dang-blanged hell you
want to call it, THIS, and I mean right freaking HERE, is
where all the crap happens!"

"It never happens in the past," I continue, absolutely
convinced I've lost everyone in the class, but pushing
ahead nonetheless,"P sub T minus 1. Ooohhh noooo! That
would be too damn convenient! And your whole world doesn't
collapse around your ears in the future, F, either, ohhh
noooo! It always happens right freaking now, RFN, in the
present, which we angrily denote with that dagjabbity,
blangity blang P, P, P, P!"

And then I draw a lot of arrows coming in from every angle
to converge on the present, P. And then I hastily draw a B-
52 bomber flying above it all, and have it dropping bombs
on that cursed letter P, too, and make very realistic
explosion noises as the bombs explode.

"Kapow! Boom!"

And I draw lots of squiggly lines to illustrate bombs
exploding and destroying everything. And then I draw a few
bolts of lightning striking it, with the appropriate sound
effect, and then I just viciously smash the poor little
piece of chalk into it over and over, over and over, until
the air is filled with a cloud of atomized chalk dust.

"But we just showed that Americans borrowed heavily, BH, to
bring future more-consumption, FMC, into the present, P,
which exported present less-consumption. PLC, into the
future, F, which is now the present, P, whereas it was once
the future, F, but now it is already the past, N sub T
minus one. So what we have, canceling terms, collecting
variables, is that current consumption, C, has been
exported to the past, JQR, and less consumption, PMV, has
been imported from the past, XCB, into the present, zippity
doo dah, and that is why the future, FMXJRB, is, is, the,
is..."

My voice trails of, and I collapse to my knees, head sunk
to my chest in weary resignation, exhausted and spent by my
valiant efforts. Confused and depleted, I am ready to just
assume that the United States will win the lottery.


Regards,

The Mogambo Guru,
for The Daily Reckoning

Mogambo Sez: The market will probably hold up until the end
of the month as the end-of-quarter window dressing takes
place, and as loser money managers sell their losers and
buy the stocks that were winners.

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gesamter Thread:

• The Daily Reckoning - The Fed's Free Lunch Program (Mogambo Guru) - Firmian, 30.09.2003, 03:06