-->National Debt Stupidity Jackpot

The Daily Reckoning

Grand Canyon, Arizona

Monday, August 09, 2004

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*** Dream on, America...

*** Ouch! Stocks plummet...oil soars...investors get
stung...

*** Gold at $400 - very nearly...the Grand Canyon at
dawn...dumb beasts get squished...and more!

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We are trying not to keep up with the financial news. For
the first few weeks of our trip it was easy; there was no
financial news.

But now the news is intruding on our vacation. Last week,
the Dow retreated down to 9,815. It was an orderly retreat.
As in all previous declines of the last 4 years, there was
no panic.

Investors are far too calm and collected. They have made
nothing from stocks in the last 6 years. Yet, they continue
to believe that stocks - and real estate - will make them
rich. Without working. And since they think neither stocks
nor real estate will ever go down - in the long-run - they
see no risk. Buying a house or a stock is thought to be a
safe investment...sooner or later it is bound to go up,
they reason.

We are traveling around the U.S. trying to gauge the temper
of the place. What we find is a decent people caught up in
an indecent conceit - an unshakeable belief in American
Exceptionalism. Things that would be wrong - or imbecilic -
in any other race are regarded as perfectly normal when
applied to Americans. A pre-emptive attack, for example.
Were any other people to try it, it would be unforgivable.
But in America, it is public policy. If foreigners tried to
get rich by buying each others' houses, it would be
regarded as a silly fantasy. But Americans see no reason
why they can't do it. Nor do they find anything unbecoming
about living beyond their means, year after year, and
counting on savers in poor countries to make up the
difference. Yet, they'd think it was preposterous for
anyone else to try it.

Last week, the Dow dropped, gold rose, and the dollar fell.
Employment numbers came in weaker than expected...and
retailers seem to be in trouble. Sooner or later, the
consumer has to run out of money. A reasonable people
wouldn't wait to the last minute. They'd panic out of
expensive financial assets and pay down debt now. But
investors believe that bad things only happen to other
people. They think America is an exception and that
Americans will be spared the misery that befalls other
peoples.

"Things are getting better all the time, and if they're
not, we'll fix it," wrote Michael A. Ledeen, a leading
proponent of American Exceptionalism. Somehow, investors
expect someone to 'fix it' so that stocks never go down and
debt never needs to be repaid.

Dream on.

More news, from Eric in New York...

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Eric Fry in Manhattan:

- A crazed wasp stung your New York editor yesterday. It
hurt...but the lumpeninvestoriat suffered far greater pain
last week from the sting of soaring oil prices and the
hornet's nest of plummeting stock prices.

- As crude oil jumped to one record high after another, the
stock market ratcheted lower and lower. Ouch!

- By week's end, 324 points had vanished from the Dow,
dropping the blue chip index below 10,000 to 9,815. The
Standard & Poor's 500 slumped 3.4% to 1,063. The Nasdaq
tumbled nearly 6% to 1776, more than doubling its losses
for the year to date. Investors tried to salve the pain of
disappearing Dow points by applying generous amounts of
gold - like a kind of financial Benedryl - to their wounded
portfolios.

- The sting of capital loss, like that of a crazed wasp, is
usually avoidable...assuming one does not get too close to
either stocks or hymenoptera. But investors who insist on
frolicking amidst richly priced stocks are certain to get
stung from time to time.

- Unfortunately, the bottom of the July-August sell-off
does not yet appear to be at hand. Stocks are still too
richly priced and investors are still too complacent."The
signals that usually indicate a washed-out market shows
them mixed at the moment," observes Barron's Michael
Santoli,"even if they're heading in the right direction."

- Investors are certainly less optimistic than they were a
few months ago, but they do not yet exhibit the sort of
near-suicidal depression that often precedes a significant
rally. To the contrary, the VIX and VXN options volatility
indexes are both registering relatively high levels of
investor complacency amidst the market's recent decline.
Absent are the signs of sheer terror that would indicate an
imminent rally.

- Even so, fear is slowly coming back into fashion. As
stocks fell last week, investors flocked into the gold
market, driving the price of the precious metal up $8.90 to
$399.80 an ounce. And why not? As Tom Dyson observed in our
weekend edition,"oil's straight-up rally should take a
breather at some point...but that point never seems to
arrive." It certainly didn't arrive last week.

- Nymex WTI touched a fresh life-time high of $44.70 on
Friday, before closing the day almost $1.50 up for the week
at $44.23. And while gold rallied sharply, the dollar
plummeted against all major world currencies. The euro
gained more than two cents against the greenback from last
Monday to $1.226.

- The dollar's weakness - let alone oil's strength - is
probably not a bullish sign for stocks.

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Back to Bill Bonner at the Grand Canyon...

***"The interesting thing about the Grand Canyon, is that
it cuts through a huge section of sedimentary rock that has
been otherwise relatively undisturbed for millions of
years."

Elizabeth had gotten us up at the crack of dawn so she
could begin improving us before it got too hot. We were
descending the trail at Bright Angel with a group of surly
teenagers - our own.

"Why did you have to get us up so early," asked Jules."And
why do we have to hike all the way down this trail? We
already saw a big canyon. And we already hiked up and down.
We've already seen these rocks. We don't need to see any
more."

Jules had made what seemed like a reasonable argument to
the rest of the family. At least to those under the age of
40. The previous day, we had driven to the Canyon de Chelly
and walked down the trail to the bottom to see some Anasazi
ruins built into the rock wall. We had picnicked on a log
in the cottonwoods along the dry river bed, and then
marched back up to the rim. The whole promenade had taken
only a couple of hours - agreeable hours. We had learned
our lesson at the Chaco Canyon; we took plenty of water.

The Canyon de Chelly is a beautiful and enchanting spot. It
is an oasis, hidden in the wilderness. You can imagine how
it might have been for the ancient Pueblo and Navajo tribes
who lived there. With a little imagination, you can see it
as a kind of Shangri-La of the high prairie, where a few
hundred people might have lived a secluded, peaceful and
graceful life for many generations.

Maybe that is what happened and maybe it isn't. The old
Pueblo people farmed the land and built impressive stone
cities in the canyon. But by the time Lt. Simpson came
along with the cavalry and sketched the place in 1846, they
were long gone. Something had gone wrong. Something always
does.

While the Canyon de Chelly is beautiful and romantic, the
Grand Canyon is majestic and spectacular. Both are giant
drainage ditches, but they have more differences than
similarities.

"At the Conyon de Chelly we saw huge sandstone formations,"
Elizabeth continued."All of this area - in fact, most of
the west of the U.S. - was alternately under the water...or
was a dry desert. During the dry times, sand dunes piled up
and then were pressed down by millions of years of
additional sediment...and by water. That is how sandstone
is formed. The area was flooded several times...it was all
flat for a very long time...and covered with water. Then,
it rose up out of the water. There were volcanic eruptions
as well as upswelling formations that were not volcanic. In
the Canyon de Chelly, what we were mostly looking at were
huge blocks of sandstone. Here in the Grand Canyon, we see
many different layers of sediment laid down over millions
and millions of years. And see how straight it is? That's
because this area was undisturbed by the kind of upheavals
you see in the mountains. You can read the record of the
place pretty clearly. You see the layers that have marine
fossils in them - from the times when the area was under
water...and other times when it was dry. Look over
there...you can clearly see the different strata."

Elizabeth had picked up a book,"The Roadside Geologist,"
and had become an amateur expert in a few hours.

"Look, Mom, we've seen enough rocks already. We don't want
to hike up and down this trail all day long just to see
more of them. Besides, it said in the lodge that it was
dangerous to try to go too far."

Jules' first argument fell upon deaf ears. His mother
thought getting up at dawn to look at rocks would improve
him; there was no stopping her. But his last argument -
that it was dangerous - improved her hearing.

Walking down was easy. Like war, debt and love affairs,
getting into a canyon is fun. It is getting out that is
painful.

People of all shapes and sizes made their way along the
trail. Some strode lightly. Others were already sweating at
8AM and didn't look like they would ever make it out alive.

Occasionally a train of mules would come along, carrying
passengers on their backs. We got out of the way and felt
sorry for the poor beasts. One had a red-haired woman on
his back who looked like twice the burden of the others.
The mule foamed at the mouth a bit. We thought he might go
mad at any minute and jump off the cliff.

After about two miles down, the children had had enough.
The sun was rising in the sky. It was getting hot. A moment
of decision had come; either we continue for another couple
of hours, spend the heat of mid-day in the shade somewhere
and face a very long, hard hike back up. Or, we turn back
now.

We could have gone on. But hiking out of the canyon is like
climbing stairs for hours without stopping. Temperatures
reach 115 degrees in the summer. Every year, people die
from heat, exertion and falls. We decided to turn
back...hike back to the rim...and then walk along the rim
to Hopi Point to watch the sunset.

"Well Jules, have you ever seen anything like that," we
asked the 16-year-old after the sky had turned red and the
canyon had turned purple.

"No," said the boy."But can we go to dinner now...?"

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The Daily Reckoning PRESENTS: We, as a nation, could soon
be paying $78 billion dollars a year in additional interest
costs. And the children will be using dried up doggy-doo
and rat bones for toys...


NATIONAL DEBT STUPIDITY JACKPOT
by The Mogambo Guru

If you have just gotten here from Mars, then you may not be
aware that inflation is the one thing I fear more than,
umm, my wife finding out about you-know-what, and if you
knew what was best for you, you would be very afraid of
inflation too.

And it is with this in mind, and remember that I am talking
about inflation and not you-know-what, that I blurt this
out: there is not one indicator of inflation that is under
3%! And the latest whack to the head comes from the Gross
Domestic Product Deflator, which just went to 3.2%. This
time last year it was at 1.1%. So inflation has tripled in
one year! Tripled!

If the government's own lying Pollyanna press releases
admit to a rate above 3%, then the true level must be
waaaayyy higher.

Reflecting the inflation rate, oil has now powered up to
over $44 a barrel on its way to heights that used to seem
impossible. This is because the demand for oil is rising.

But the price of oil is also rising because the dollar is
falling in purchasing power. This is the direct result of
the Bush administration and Congress colluding to
effectuate a mind-blowing spending spree of such colossal
size and scope that the history books of the future will
point to us and curse our names, because we are the brain-
dead people who elected these raving bozos to office.

The Bush Administration and Congress epitomize the most
profligate bunch of economic illiterates that ever
disgraced themselves, by admitting that they do not listen
to the advice of the Mogambo. Instead of heeding my wise
counsel, they perversely decide to do the exact opposite,
and they mindlessly continue to borrow and print money at
insane levels!

To illustrate the point, what do crazy, economically
illiterate people do with money? Answer: they do something
crazy with it. If you will dim the lights, I will now
present a little slide show...

This first slide is a graph of national debt. Notice how
total national debt continues to climb at its eerie linear
rate, namely $52 billion per month. Look at that number
again. That's right; look at it - look at the number $52
billion! A month! Make sure the number is burned into your
brain, because years from now your grandchildren are going
to be sitting in the dirt playing with rat bones and dried
doggy-doo, the only kind of toys you can afford to give
them, and they will be asking you,"How much money were you
guys spending, anyway, that has caused us to suffer such
misery?"

To put it in perspective, it's $372 in extra debt, PER
MONTH, for everybody who has a job in this whole country,
INCLUDING government workers! And next month it is going to
be ANOTHER $372! And then another and another and another!
Month after month, year after year, the government is
putting you farther and farther into debt. And this does
not even include the debt that you voluntarily take on, so
that you can have those matching Jet Skis.

In the last, short 25 months, we bozo Americans have
accumulated, in spooky straight-line fashion, another $1.3
trillion in new federal debt. Even if all of this money was
loaned out at a lousy 2%, then the interest expense alone,
which is one of those federal budget line items, is rising
by $26 billion a year! At 3%, it's another $39 billion! At
4%, $52 billion! At 6%, which is closer to where short-term
rates should be given the current inflation rate, we will
be paying $78 billion a year in extra interest costs on the
debt! That's $557 for everybody who has a job in America!

Where does this money go? Who is going to end up with $26
billion a year?

It's obvious...to the guys who had money to start with, and
who loaned it to the government! And who are these guys?
Well, it ain't the poor, who don't have any money to lend,
and it ain't the Mogambo, who was trying to borrow money
from the poor, and we all know how well that worked out.
So, once again, the rich get richer and the poor get
poorer.

And how did the poor get poorer? Well, the Bush people just
put a nice big tariff on imported shrimp, and now the price
of shrimp is going to go up. So the poor are going to pay
for this by suffering a decline in their standard of
living, which translates into their not being able to
afford to eat shrimp anymore.

Everybody else will pay the old fashioned way - digging
deeper into their wallets to pay higher prices for the more
expensive shrimp cocktail. And then there will be the added
costs of shrimp smuggling, and a huge government law
enforcement bureaucracy to combat the scourge of shrimp
smuggling, and the building of new prisons to house all
these convicted shrimp smugglers, and the halfway houses
needed to ease the smugglers back into useful employment
once they have paid their debt to society.

But despite the shrimp smugglers, things are actually a lot
better than they should be. We are talking about gigantic
bets, involving humongous amounts of debt, the sheer size
of which is literally beyond comprehension, that span
international borders and time zones around the globe, all
linked to a currency that is being inflated at frightening
rates by a country that has a massive trade deficit and
budget deficit, and is held together by artificially low
interest rates that are rising in response to inflation in
prices.

I'm surprised it holds together at all! And I am sure, very
sure, that very soon it won't.


Regards,

The Mogambo Guru
for The Daily Reckoning


*** The Mogambo Sez: The surprising fact is that gold is
not gaining in price around the world as inflation heats up
around the world. This is such a good deal that I am
surprised that so few are taking advantage of it, and that
is why gold is not rising faster.

But for Americans, not buying gold shows a lack of
education. Instead, Americans buying stocks and bonds
instead - in an environment of massive deficits, a falling
dollar and rising interest rates - shows a suicidal
stupidity.