Funding the Bacchanalian Excess

The world of modern economics is a gluttonous feast. The problem is that today’s feasters are gorging themselves at the government trough and electing politicians to continue feeding them, regardless of the cost. The Mogambo Guru expounds…

I could see that the audience of reporters and passersby was getting nervous, as I had just finished going through the explanation of how the Federal Reserve creates inflation in the money supply by creating too much money and credit, which causes inflation in things as all of this money enters the economy, and then eventually the inflations in stocks, bonds, houses and the size of government becomes so great that further infusions of money must increase in proportion to the increase in the aforementioned prices of the stocks, bonds, houses and size of government if they are to maintain a static percentage growth, and some of all that increasing avalanche of money starts getting into bidding wars for commodities, increasing the prices of commodities.

But they just weren’t getting it. Even that cute little cub reporter from the Daily Planet wasn’t getting it. In my imagination, I had hoped that she would immediately see the horror of what I was telling them; thus leaping, whilst sobbing and trembling, into my Manly Mogambo Arms (MMA), she would say, "Oh, save me from the horrors of such inflation in prices that comes from inflation in the money supply, Mighty Magnificent Mogambo (MMM)! And by the way, your Manly Mogambo Arms (MMA) get me hot! Take me! I’m yours!"

But they all just sat there with these stupid expressions on their faces. "Like food and gasoline getting so highly priced that you can’t buy them, you freaking morons!" I exclaimed helpfully.

Then they all started yammering about how prices are so high and how the government ought to do something and blah blah blah.

So I asked, "Do any of you morons know what will happen if the government slows down its spending? Chaos! The government is so huge, and so many people now depend upon it for everything, that the government cannot stop spending! And so the Fed cannot stop creating excess money and credit, because there is nowhere else from which the government can get that much money! Inflation will turn to rioting in the streets!"

Well, they all thought that I was crazy, and that raising taxes on the rich and adding a few more government programs would solve everything.

With a weary sigh of resignation, I showed them an interesting article in Archeology magazine that refers to the Roman writer Seneca describing the feasting excesses of Rome, who asks, "We have all heard about the decadence of the ancient Romans, but how much of this is true?"

It turns out that researchers "are confirming the classical author’s accounts of the Roman taste for luxury. Banquets were extravagant feasts where patrons competed to outdo and outspend each other".

So, intrigued about the possibility of this kind of thing becoming a fad again (Oh, boy! Oh, boy!) and maybe somebody we know will host one of these Bacchanalian excesses involving un-dreamt of depravity and gluttony and invite us, we naturally want to know, "How much would one of these Roman feasts cost today?"

The answer is "$10,000 for a party of 15 revelers."

I know what you are thinking. You are thinking, "Is that all? At a lousy $667 per reveler? It almost costs that much to fill the gas tank on my damned car! Hahahaha!"

Well, that’s not exactly true, I admit, but $667 per day times 365 days a year is $243,455 a year, which used to be a lot, but these days, thanks to the rampant inflation of the last few decades, it is not all that much anymore, and half of all government workers probably make that much when you add in the full value of their overly-generous benefit packages!

And even half of that, or $334 a day, is $121,727 a year, which, if taxed as income, would yield net-of-tax about what the full Social Security, Medicare, Medicaid and welfare packages now deliver per recipient! Free food, free medical care, free housing, and literally given cash to spend!

But this is not about how little it costs to stage a Roman feast, but about what happens when people are used to getting free gluttony, and then suddenly they are not. Perhaps a clue can be found when the Roman author Seneca "wrote that his friend, the food writer Apicius, drank poison and committed suicide rather than give up the gluttonous lifestyle he could no longer afford."

The bad news is that today’s feasters, gorging themselves at the government trough, are not going to commit suicide. They are going to riot, and elect politicians to continue the feast, regardless of the cost. Regardless of the cost! Hahaha! We’re freaking doomed!

Until next time,

The Mogambo Guru
for The Daily Reckoning
June 30, 2008

The Mogambo Sez: Gold, silver and oil. That is all that one can say when asked about investing in such a crazy world: gold, silver and oil.

And note how even the words are soothing; gold, silver and oil. Ahhh! I feel better already! Get some, and you will, too!

Gold, silver and oil! Ahhhhhhhh!

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.

What not to do with your money now…

It has been the worst June in 77 years, says Bloomberg. In June of 1930, the Dow lost 18%. So far, it is down 9.4% this month. Since this is the last day of the month, we presume that is where it will stay.

The rest of the news is not much better. Oil closed over $140 a barrel on Friday. OPEC’s president says it could go to $170 by the end of the year.

And the New York Times says the number of people who can’t pay their mortgages continues to grow. There were 2.6 million of them six months ago. Now, the figure has risen to 3 million.

The combination of ’30s-style asset deflation and ’70s-style consumer price inflation has spooked investors everywhere.

"Falling prices grip stock markets around the world," reports the Financial Times.

Where can you turn for relief, the paper asks? "Nowhere," is the answer it gives.

Nowhere?

All the world’s stock markets have taken losses, most of them bigger losses than those on Wall Street. Property prices, too, are headed down in most places. So, don’t bother to diversify. It barely matters where you look – asset prices are sinking.

"Diversification no longer works," writes Tony Jackson in the Financial Times. Mr. Jackson says rising inflation rates are playing hell with all sorts of investments. Bonds, equities, real estate – anything that produces a fairly steady stream of income – is vulnerable, because the money you receive, whether as dividends, rent or interest, becomes less and less valuable. Result: big drop in assets prices.

So, how do you protect yourself? You already know the answer, dear reader. But let’s look at the possibilities to make sure we haven’t missed something.

Let’s begin with real estate. Over the long run, property usually stays even with inflation. But the trouble now is that this bout with inflation begins when property prices are already high…and coming down. Real estate prices are adjusting downward after a record bull market. Inflation just makes the correction worse, since wherever prices end up in nominal terms, they’ll be even lower in real terms.

The same could be said of stocks, but with slightly less conviction. U.S. stocks fell heavily last week. But they’re still down less than 15% from their all-time high. You could even argue that they’re cheap; that is, if you take current super-low bond yields into account. But as inflation rates go up, so do bond yields – normally. Then, stocks go down with bond prices. Why? Because when bond prices go down, yields go up, making bonds more attractive than stocks.

Of course, not all stocks will do badly. If we are replaying the ’70s, we’ll find that oil stocks provide a return above inflation. Gold stocks too could produce spectacular rates of return for a few years. But most stocks will probably go down.

Bonds are always vulnerable to inflation. Remember the ‘bond vigilantes’? These were the guys who dumped bonds as soon as they caught a whiff of higher inflation in the air. These fellows went to sleep during the Reagan Era. Paul Volcker had inflation under control; bonds were in a long-term bull market; the vigilantes had nothing to do. Once in the land of nod, they stayed asleep for the next 20 years. Only recently have they begun to stretch and yawn.

But real yields are still so low; the vigilantes still have not completely wiped the sleep from their eyes. In the United States, for example, the real yield on a 10-year T-Note is MINUS 2%. And last week, the yield on the 10-year T-note fell below 4%. We don’t know what to make of it. But as inflation increases, that yield is going to rise – meaning, the value of bonds will go down.

No, dear reader, bonds are no country for old men, at least not for old men with money. Not when inflation is going up.

How about treasury bonds linked to inflation, or TIPS as they are called? Nope. Don’t even think about it. For one thing, when the bond market goes down, inflation-adjusted bonds go down too. Because there are two parts to the value of these bonds – there’s the regular part, which acts like any other bond, and there’s the inflation-adjusted part, designed to offset the loss from inflation. The inflation-adjustment only offsets inflation, not the loss from the bond market.

And even the inflation-adjustment is no sure thing. The people who decide how much inflation compensation you get are the same people who have to pay you for it. It is a bit like letting the undertakers decide when you are ready to die; the conflict of interest may be good for their business, but it might be bad for you. What is good from the government’s point of view is a low official inflation number. Billions and billions of dollars depend on the CPI calculation- everything from tax rate adjustments, Social Security payments, to monetary and fiscal policies. In a better world, perhaps we would have honest inflation numbers. But in a better world, we wouldn’t need them.

*** Stocks are out. Bonds are out. Real estate is out.

Commodities? That’s where the money has been made lately. Commodities have just had their best 6 months in 35 years. But our guess is that many are in bubble mode and will continue to rise as the U.S. Fed pumps more liquidity into the system. But betting on commodities is not a one-way wager. Tony Jackson tells us that in the 1970s, commodity prices, adjusted for inflation, were flat in the United States and down in the United Kingdom. Besides, remember that high prices cure high prices. As commodity inflation bubbles over to retail price inflation, consumers cut back. Demand falls. The economy slows. Commodity prices drop.

It may be true that commodity prices will continue to rise for a few years more. It may even be true that real commodity prices will be higher 10 years from now than they are today. But at today’s prices, looking for safety in the commodities market is like protecting your son from bicycle mishaps by buying him a motorcycle. You’re simply trading a slow risk for a fast one.

How about emerging markets? Same problem. They’re risky anyway. Inflation doesn’t make them safer. It just makes alternatives to them less safe too.

So, what does that leave? Nowhere? Nah… the FT is wrong. There’s no such place as "nowhere."

More about where your money should be…tomorrow…

Until then,

Bill Bonner
The Daily Reckoning