-->The Daily Reckoning

London, England

Monday, 19 January 2004

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

*** Three kinds of economists... and America's terrible
twins...

*** Without the tax cuts... Gold down... dollar up...

*** The trouble with money... and more!

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

"There are three kinds of economists," said Sir Eddie
George in the Times of London."Those who count and those
who can't."

Mr. Greenspan's British counterpart showed us which group
he belonged to. Today, we now wonder about America's
economists.

"The Fed has arguably offset the bursting of one bubble by
inflating another..."

The Economist magazine referred to the way housing has been
puffed up by lower interest rates. As rates went down,
Americans found that they were able to buy bigger and
better houses - for the same monthly payment. Housing
prices rose... leaving people freer to refinance their
existing houses and 'take out equity.' The money was then
used to buy stocks or consumer items. Either way, the
results are misleading enough to make Americans regard Alan
Greenspan as though he might be a hero and George W. Bush
as though he might be a two-term president.

"The longer a bubble is left to inflate," continues the
Economist,"the more it encourages the build-up of other
imbalances, such as excessive debt. When these imbalances
unwind, there is a risk of a long period of sluggish
growth. Mr. Greenspan's fans claim that America has escaped
a prolonged downturn. That may prove to be so, but it is
too early to be sure, simply because the imbalances created
by the bubble, such as low saving and record borrowing,
have yet to be unwound. Instead, the economy has been kept
going by a further bout of consumer borrowing and by
massive government borrowing, pushing the total budget
deficit to 5% of GDP. Such indebtedness is unsustainable.
At some stage households must save more and spend less, as
must the government. At the very least, America's debt
overhang leaves its economy more vulnerable to its next
downturn."

You recall a recent IMF report that suggests the next
downturn could pose"significant risks," not only to the
U.S. but to the rest of the world as well. Net financial
obligations to the rest of the world could soon be equal to
40% of the total U.S. economy, the IMF concluded,"an
unprecedented level of external debt for a large industrial
country."

Other developed nations - Japan, Germany, France - have
large government deficits. Japan's deficit is even larger
than ours. Some nations have current account and/or trade
deficits, too. But only we have the proud twin towers of
debt, deficit and duplicity - Alan Greenspan and George W.
Bush. Working together, they have given us a government
deficit reaching up to almost 5% of GDP and a trade deficit
of about the same size.

"Without those tax cuts I do not believe the downturn would
have been one of the shortest and shallowest in U.S.
history," says John B. Taylor, undersecretary of the
Treasury.

Good thinking, John. And let's not forget the interest rate
cuts, either. Without such quick and decisive action by the
feds, the U.S. might have had a real correction, instead of
a phony one. People might have stopped spending, paid down
their debts... and begun saving again. They might have lost
their jobs and regretted having gone so deeply into debt.
Stocks might have fallen to levels where they were a good
buy again. By this time in the cycle, people might actually
have some money to spend, and we might be looking ahead to
a real recovery, instead of a prolonged, phony after-
bubble.

And without such prompt and reckless action by the feds,
Greenspan and Bush might be sweating a disgrace they did
not merit... rather than a respect they do not deserve.

And here's Addison with the latest news:

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

Addison Wiggin, three stories above the Paradis café...

-"Something very strange is going on," wrote our friend
Gary North last week."It has been going on since August.
The U.S. money supply is shrinking."

- Strange indeed. Here at the DR HQ, we've made several
references to the shrinking money supply, but only in
passing. Why? Mostly because, like focusing on one eye in a
Picasso portrait, it's only one of many features that seems
to be out of place. And, given the government's current
recovery-at-any-cost economic plan, we find ourselves
recoiling from the whole economic picture in mock horror.
We prefer, instead, the more predictable environs offered
by the Paradis café.

- The Paradis, you may recall, is where your editors repair
to dabble in various viticultural pursuits. Our experiments
at the café meet with remarkably foreseeable outcomes. But
by the time we stumble back upstairs to the office, our
ability to foresee the future gets... how shall we say?... a
little fuzzy.

- For example, as we noticed last week, the Christmas
season - following the biggest burst of stimulus ever
applied to an economy - produced almost no new jobs. Our
friend John Mauldin, digging through last week's Dallas Fed
report, noticed the average wage for temporary labor was
$13.50, down a buck fifty from a year ago. And there were
actually 72,000 fewer temp workers during the retail season
than December 2002. Stephen Roach pointed out that 84% of
the total non-farm increase in employment from August to
November is traceable to one of four hiring segments:
temporary staffing, health, education and everyone's
favorite sector, government.

- These numbers look pretty clear. At least to your
enfeebled editors, the recovery appears to missing more
than a few teeth. (Unless, of course, they've been painted
on some other part of the canvas and we haven't identified
them as such yet. Many readers suspect self-employment is
giving the recovery its real bite.)

- Yet the massive infusion of government stimuli is not
only tickling the stock market's fancy... it's also getting
the financial media all hot and bothered. On Wall Street
last week, the lumps reveled in a twisted sort of
schadenfreude of their own. With some of its largest
components releasing better-than-expected earnings reports,
the Dow came to a fitful rest Friday a little over
10,600... up 147 for the week.

- The Nasdaq tacked on 54 points over the week to close at
2,140. The S&P added 8 points on Friday to 1,140.

- And"mysteriously," Eric Fry, our man on the scene in New
York reported over the weekend,"until [last] week, the
surge in foreign buying of U.S. securities had not boosted
the dollar's value one bit. In fact, the dollar had been
suffering a widely publicized swoon." No longer. The
greenback finally caught a little bit of the fever raging
on the corner of Wall and Broad. On Friday, the U.S. dollar
pushed the euro back to $1.238, marking its fourth rise in
as many days. It closed the week up almost 4% from its
record low of $1.286/euro on Monday.

- Even Gold, whom the gold bugs were convinced had wrangled
its way free of the stock/gold inverse ratio, recoiled in
fear all week long, losing nearly $20 over the five trading
sessions to $407 an ounce.

- But against this backdrop, the recovery's molars may be
beginning to decay. In fact,"while no one is using the
terminology, we may be witnessing a bank run," writes North
of the"strange" fact that the money supply is falling.
"This is not a panic-driven bank run, like something out of
the Great Depression. This is a steady bank run that is
motivated by something other than fear."

-"The Fed decided to stimulate the economy in 2001 by
pumping in new money," North observes."Lo and behold, this
policy is now backfiring. It has produced such low rates of
investment return for savers that they are pulling currency
out of the banks. This has created an anomaly: a fall in
the money supply, or at least a fall in the various money
supply statistics. What amazes me is that there is so
little discussion today in the financial press about the
existence of this anomaly, let alone its implications for
financial markets.

-"The recent rise in gold's price is not taking place as
an inflation hedge," North concludes."It is taking place
parallel to the decline of the dollar against the euro.
There is something more fundamental going on here than
traditional inflation hedging. There is a move against the
dollar that is not based on fear of inflation. I think we
are seeing the beginning of a shift away from the dollar as
the world's primary reserve currency. What has prevailed
since 1940 is beginning to change."

- We, of course, having made one too many trips downstairs,
are still having trouble making out the face. But despite
all the high praise, the smile emerging onto the canvas
still looks a lot less like the Mona Lisa... and more like
Quasimodo on a mean bender.

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

Bill Bonner, back in London...

*** Gold fell again; it's down to $407... less than taxi
fare from our latest remorse price. With a little luck it
will fall below $400 and we'll buy more.

*** Meanwhile, the dollar rose. And curiously, bond yields
are falling. Don't give up on deflation, dear reader. What
to make of it? Is a Japan-style deflation still in our
future? Maybe.

***"JP Morgan and Bank One are merging in a $60 billion
deal to create the largest credit card issuer," writes
colleague Dan Ferris."I can't believe the DR wouldn't have
something to say about that. I mean, who on earth wouldn't
want to be the largest credit card issuer in the U.S.? It'd
be like owning a bar next door to Alcoholics Anonymous
headquarters. How could you go wrong betting on that deal
to win?

"Then again, where's the growth potential? Who's left that
doesn't have a credit card? Who that has a credit card
doesn't have it charged up to the limit?

"Those questions are why I'm betting on Portfolio Recovery
Associates, the company that buys charged-off credit card
debt for two cents and collects 7 cents. About 85% of their
employees come to work every day and generate cash."

*** And from associate Karim Rahemtulla comes this note:

"Research In Motion is the Canadian company that
manufactures the handheld Blackberry communications device.
The Blackberry is the top wireless communications PDA. Very
popular and more secure than a Palm Pilot. The company has
been growing like gangbusters. Here's the interesting part:

Revenues - 2004 - 800 million
Earnings - 2004 - 90 cents per share - 80 million shares
outstanding
Share price - $81 (90 times forward earnings)
Stock moved up 50% in one day - 12/23/2003 when they
released their sales/earnings forecast

And the kicker...

"Yesterday they sold 10.5 million shares at 78.50 per
share, raising $800 million plus. They raised more money
with a 10 million share offering than their annual revenue
forecast. What a market!"

*** The trouble with money is that it robs you of the
pleasure of not having any. We recall how much fun we had
'making do.' We once bought a house in a Baltimore slum for
only $27,500. We did almost all the work ourselves... often
recycling materials from a recovery yard in order to keep
costs down. And furnishing? How proud we were when we found
an old rocking chair on the street corner. All it took was
a little glue and paint - and good as new.

And when we had a plumbing or electrical problem - heck, we
could fix it ourselves.

Every saving was a triumph... making-do was a pleasure... and
every job done by ourselves was a great satisfaction.

But now, we're the ones throwing out the old rockers and
used windows. And even talk of economy... or that 'we'll do
it ourselves' attitude... brings shrieks of alarm from the
whole family.

"Just call a plumber," says Elizabeth.

"Don't try to fix the ceiling yourself. Get it done right
by a professional."

"Oh Daddy, please don't get another second-hand car. It's
just someone else's junk..."

But pater familias tightwadus has not entirely given up.
Recently your editor proposed that the whole family take
next summer off and go to Nova Scotia where they would all
work together to build a cottage.

"You must be kidding," came the reply from all.

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

The Daily Reckoning PRESENTS: Mogambo on Monday returns!
Below, our favorite Guru reviles the ever-growing and
still-too-often-unrecognized licentiousness of our monetary
administrators...


A NEW ERA OF PROFLIGACY
by the Mogambo Guru

We have entered a new era, my grasshopper. A glorious era
of prosperity and plenty - funded by as many free dollars
as the U.S. Treasury can manage to pawn off on any poor
schmuck deluded enough to take them.

Yet the International Monetary Fund, and I will refrain
from calling them a bunch of low-IQ commies only because I
have said it so many times before, does not seem to grasp
this verity. Instead, they have waded into the financial
state of the U.S., and, of course, have bad advice to
generously dole out to us. Apparently they figure that we
are too stupid to notice the parlous effects of their
advice to other countries all these years, and that we will
sit still for them lecturing to us, the guys who are the
primary funding source of the IMF.

Anyway, it only goes to show that the IMF losers are
seriously behind the times, as they are still wailing about
how high government borrowing needs will"crowd out"
private borrowing and drive interest rates up and blah blah
blah. This logical argument had some validity back in the
olden days when the U.S. dollar was gold, or backed by
gold, or had some relationship to gold, and so therefore
the money supply was more or less fixed. So, therefore,
higher borrowing by government meant that there was, ipso
facto, less money available to be borrowed by everyone
else.

Those days are long gone, and Ben Bernanke and his printing
press can merely print up as many dollars as anybody wants.
Therefore, there can never again be such a phenomenon as
the dreaded"crowding out effect."

The Wall Street Journal is no big fan of the IMF either,
although their economic acumen is highly suspect, as when
they write in the January 9 editorial"The IMF Votes Dean"
that"As long as the Federal Reserve maintains a firm hand
on the monetary tiller and a watch on the dollar's
value... then the earnings from U.S. growth and investment
should be more than able to repay any accumulating debt."
Huh? What in the hell is THAT supposed to mean?

For one thing, right off the bat, the Fed does NOT have a
"firm hand on the monetary tiller," and are instead are
recklessly producing money and credit at breakneck speed to
keep all the bubbles from popping. Secondly, they are
obviously NOT keeping"a watch on the dollar's value,"
either, as hardly a day goes by that the dollar is not
worth less and less.

And even if the Fed WAS doing both of these things, what
have they got to do with"earnings from U.S. growth and
investment" that are supposed to produce some glut of money
to"repay any accumulating debt?" One does not necessarily
follow another.

This particular idiocy is an extension of the New Age
fallacy that all that matters is interest rates, interest
rates, interest rates, and the logical extension that if
interest rates are low enough then economic vigor always
follows, as night follows day, and as insults predictably
follow my pathetic attempts to be clever. The WSJ may
believe it, and the Fed may believe it, and the economic
twits at Princeton may believe it, and all the economists
in the USA that you can gather together into a gaggle may
believe it, and if you are familiar with geese and geese-
related terms you will no doubt notice that"gaggle" refers
to geese, which are renowned for their group herding
behavior, and I use this goose-related metaphor to
characterize the stupefying uniformity, and even more
stupefyingly wrongness, of the laughable opinions of
economists in the USA, but economic growth and economic
health does NOT automatically flow from lower interest
rates.

Although one would think that at least once in the last
fourteen years, maybe out of sheer boredom or something,
that somebody at the WSJ, or someone at the Fed, or maybe
one pinhead graduate students at Princeton, or any
thousands of so-called economists wandering aimlessly
around the halls and offices of America, dazed and drooling
on themselves in contemplation of the basic fact that they
have no idea what they are talking about as evidenced by
their egregious performance, would have noticed that Japan
has exposed that lie, as they have keep interest rates at
almost zero the whole time, and without any apparent
beneficial effect.

And here in the good old USA, interest rates have been
pounded down and down and down for year after year after
year, to levels seen only a few times in the last century
and always then in response to emergency situations, to
little effect, except to 1) make debt levels monstrously
bigger to prevent 2) the debt bubble from imploding until
some later date. Ugh.

And the result is that the national debt has now officially
soared over $7 gazillion, I mean trillion, but when you are
talking about money in mountains that big it really makes
no difference whether it is gazillions or trillions, as
numbers that big are too huge to be comprehensible, and
when you think about them you get dizzy, and then you get a
headache, and pretty soon you're real grouchy, and then
your conversational skills subset is reduced to snarling
"What in the hell are YOU looking at, scumbag?" But either
way, seven gazillion or seven trillion, it is a lot of
money, roughly comparable to what it would take in plastic
surgery and personality transplants to make me appear to be
almost human, and then paying somebody to be nice to me so
that I could get used to how that feels.

To help us out, foreign central banks, of course, continue
to underwrite the profligacy of we Americans, or us
Americans, I'm not sure which, and they salted away at the
Fed another $6 billion in the latest week, roughly twenty
billion in the last month. And those are, lest we forget,
dollars. Lots and lots of dollars.

As I say, my grasshopper, welcome to the"new era"... of
stupendous, mind-boggling dollar profligacy.


Regards,

The Mogambo Guru
for the Daily Reckoning

P.S. Foreign nationals, as compared to their central banks,
must be a little more on the ball, as up until recently the
dollar has been selling off like hotcakes, and it has been
doing so for quite a while now, which obviously means
foreign nationals are not interested in owning dollars or
things that dollars can buy. Those foreign guys are such
sneaky little copycats, and that is why we sneer in
contempt and disrespect for all foreigners and their
strange ideas and odd habits and bizarre customs and
incomprehensible laws and the funny way they dress and
their stupid little accents when they comically try and
speak English. And as for getting out of dollars and dollar
assets, I again snort in contempt at them, both
collectively and individually, as we genius Americans have
been waaayyyyy ahead of them in that regard, because we
don't care about the dollar either, and are only interested
in shiny baubles and fattening foods and things that make
us feel good, and that is why we are up to our fat ears in
them, and why we happily give them every dollar we can get
our hands on in exchange for amusing doodads, and that also
explains why the aforementioned foreigners are up to their
ears in dollars, as that is what we use to pay for the
shiny baubles. And now who are the big chumps? They are! I
laugh at those snotty foreign devils - Hahahaha! - who all
smell funny, who actually live in foreign countries, and
talk in some strange foreign language or another that I
can't understand a word they say, and they often wear funny
hats, too.