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May 17, 2007

Trapped in a Government Spending Spree
by The Mogambo Guru

"I deftly add the $3.7 trillion in spending by the federal government plus the $1.3 trillion by the state governments, and after a few tries I triumphantly announce that we are looking at a cool $5 trillion or more per year! Wow!"

My excuse is that I was driven insane by the incessant noise from the sensitive Mogambo Economic Seismograph System (MESS), the recording pens noisily clicking and clacking, all the time clicking and clacking, clicking and clacking as they bang back and forth, erratically scrawling and scratching a frantic graph of financial desperation and doom across that rolling strip of graph paper.

That said, I admit that cleaning a bunch of loaded and cocked weapons is not the smartest thing I've ever done, but (in my own defense) probably the most optimal in terms of preparedness, which is so important that the pithy phrase "Be prepared" is the motto of the Boy Scouts.

But these are desperate times, prepared or not. For example, right before an accidental burst of bullets exploded the Total Fed Credit Seismograph into a spray of tiny plastic shards and miscellaneous bits of wire, I was suddenly alarmed that TFC had slumped by a surprising $13.4 billion last week, which is a big, BIG drop, which startled me and resulted in the, you know, unexpected ear-splitting gunfire.

This drop in TFC means that if more new credit was NOT being created by the Federal Reserve, then no new loans were being made by the banks based on an expansion of available credit, which meant that no new money was being created.

I secretly hope that nobody asks me why. Is it because nobody wants to borrow? Or is it because nobody wants to lend? Or are they all lying? All of the above? Something else entirely? I don't know why. It just isn't. I just keep seeing my life flash before my eyes and I don't know why that is, either.

There are only two things I really know for certain. One is that not using the safety on guns because they are "useless, time-wasting exercises that diminish preparedness" works better in theory than in real life, and the other is that this TFC thing is very spooky and ominous. Why? Because the bizarre new economic system of America (and essentially the whole world these days) requires always more, continually more, exponentially more, money. More, more, more!

And if not? Doom! Jim Willie CB of the Hat Trick Letter says essentially the same thing when he writes, "One should be aware that as long as enormous unprecedented monetary inflation flows from bank and credit sources, the stock market has a very low change of any serious decline whatsoever. Beware only if the flow is halted!"

Besides the satisfying-yet-dubious benefits of an inflationary economic boom created by new money and credit, creating more money is now a requirement for the Crazy New Economic Paradigm (CNEP), as the federal government itself needs it!

The federal government alone is spending (including the budget and voluminous supplemental appropriations) about $3.7 trillion this year, which is by itself a whopping 30% of GDP.

Now, add in all the money that the states spend. How much is that? Well, according to nasbo.org, "Total state spending in fiscal 2005 was over $1.2 trillion, including both operating and capital expenditures." That was two years ago, and so it must total somewhere above $1.3 trillion by now, wouldn't you think?

Always eager to show off my impressive skills with calculators, I deftly add the $3.7 trillion in spending by the federal government plus the $1.3 trillion by the state governments, and after a few tries I triumphantly announce that we are looking at a cool $5 trillion or more per year! Wow!

And let's not forget municipal spending! And county spending! Property taxes and miscellaneous taxes and fees levied by all kinds of school boards, utilities and myriad agencies!

Since I can't find a total of county and municipality spending on the Internet, I rely on the fabulous robustness of the patent-applied-for Mogambo Research Methodology (MRM), wherein I am permitted to produce facts and figures from thin air whenever I want. Thus, I add, oh, say, a trillion dollars a year in county and municipal spending.

Hitting the "total" button on the calculator, it is revealed that total spending by all the governments and agencies of the United States is - AT LEAST! - $6 trillion a year!

I am staggered backwards and fall on my Fat Mogambo Butt (FMB) when I realize with horror that since annual Gross Domestic Product of the USA is about $12 trillion, total government spending is fully half of GDP! Half! Half of the entire yearly output of goods and services of the whole freaking country equals total government spending! The government IS the economy!!!!

Serious Mogambo Scholars (SMS) immediately took note of the extremely rare use of the quadruple exclamation point and were, of course, alarmed. Even those who are completely new to the subtleties of punctuation or the Mysterious Ways Of The Mogambo (MWOTM) instinctively know that it means something bad. Another important clue can be gleaned by the fact that I am snarling in outrage and screaming "We're freaking doomed!"

Now, there are those of you who question The Mogambo's facts and figures, and shrilly note that some of this spending is double counted, and maybe even triple counted. I admit it. I never disputed that federal money is given to the state governments and state agencies, contractors, late-night escort services, pizza delivery services and lots and lots of assorted parasites of one kind or another, and who in turn give a bunch of money to county governments, city governments, agencies, contractors, late-night escort services, pizza delivery services and lots and lots of assorted parasites of one kind or another.

So to this and all other criticism, I can only say with the legendary and charming Mogambo politesse, "Who the hell cares what you think, punk?"

Doug Noland has wisely decided not to get into the middle of this sudden little flare up, but I note with a sense of satisfaction that his Credit Bubble Bulletin obliquely refers to this same avalanche of spending by noting that "On the spending side, total y-t-d federal expenditures are up 3.2%. By largest category, Social Security spending is running 5.7% ahead, National Defense 6.0%, Income Security 4.3%, Medicare 17.4%, Health 7.0%, and Interest 5.2%."

He also reports that other very, very weird things are afoot, as "From the New York Fed's weekly Primary Dealer Transaction Report, we see that Primary Dealer 'repo' positions (in Treasuries, agency, and MBS) are up an astounding $533bn y-t-d, or 45% annualized, to $3.981 TN." Like I said…weird.

And all this frenetic activity is showing up in the stock market, as bizarre new records of over-valuation are being hit day after day, so much so that the particular economic seismograph dedicated to observing "Bizarro, Outlying Events" is going bananas, too, which reminds me of one of the classic and fabled "blow-off" tops that appear so many times right before cataclysmic collapses.

It's all too, too much for me. I am exhausted and scared, and thinking of looking for a real job with real work that involves no thinking about economics, or reading about economics, or writing about economics. Then I sigh. My problem is, according to a T-shirt I saw, as "Regrettably, all the good jobs start before I get up in the morning."

Knowing that I am not going to change, and that nobody would hire me even if I could, I reluctantly go back to economics. Well, right off the bat I notice that the Fed bought ("bought outright" as they list it), $2.6 billion in U.S. government securities last week.

It ain't all that much, I admit, but this is (according to me and my loud mouth where I constantly accuse every government of stupidity, corruption and tyranny) the ultimate fraud; the Federal Reserve (created by Congress and given the power to create money) creates the money to buy more government bonds so that the Congress can spend more money, which makes prices go up, which is NOT "maintaining the value of the currency", which is what the Federal Reserve is supposed to do! That's their damned job!

And the bad news is that all this new money is created by a new offsetting debt, and Puru Saxena of Money Matters casually remarks, with a graph from The Grandfather Report to back it up, that another new record has been set, as "the U.S. is the largest debtor nation the world has ever seen, its debt to GDP ratio is over 400%."

I seem to remember that at the height of 1929, it was in the 260% range. But Mr. Saxena says that it is even worse than that, as the U.S. "has a negative personal savings rate, its currency is overvalued and its society is heavily dependent on consuming cheap, imported goods", which is somewhat of a relief, as I originally thought he was going to say "heavily dependent on consuming cheap liquor in ratty little bars."

Even so, part of that "cheap, imported goods" he is talking about sure ain't oil, as Barron's listed the U.S. merchandise trade deficit as having jumped to $70.2 billion in March, which was up a whopping 10.4% from February!

We are soothingly told that the majority of the trade deficit was due to the rise in the price of oil (as if that makes it all okay), but nobody mentioned that the trade deficit was actually made worse by the fall in the buying power of the dollar! I mean, foreigners have to increase their prices just to achieve a standstill in terms of purchasing power, thanks to the dollar's fall!

So I am at the grocery store and I am giving the checkout clerk a hard time about some of the prices of groceries of various kinds, mostly fast-rising milk, but her attitude was one of disdain and unconcern, as she proudly told me that she has a fresh college degree in the exciting field of Criminology in her pocket, and this gig of minimum wage brain-dead employment and living at home is merely temporary.

So why is she working at a cash register, for minimum wage, living at home, when she has a bachelor's degree in Criminology? "Because", she explained "the state and all the municipalities have frozen all positions, and nobody is hiring."

Oops! We are at a tipping point, as tax collections falter even as the government's giveaway programs are wildly and widely entrenched, at a zenith in terms of enrollees and cost, and now being called upon to dispense even more giveaway money as the pain of increased prices drives more and more people into the loving arms of the nanny-state government.

And after all that, there is no money left to hire people to fill job positions! Welcome to just one tiny part of the living hell of price inflation that always comes from monetary inflation!

An apparent sudden lack of spending power is perhaps reflected by Reuters.com, which had the news that a Commerce Department report "showed widespread declines in April sales" by U.S. retailers, which "fell 0.2 percent to a seasonally adjusted $372.03 billion last month, hurt by a one-two punch of soaring gasoline prices and a slumping housing market."

But the situation may be one of "spending more, but getting less" as from Anthony Cherniawski of The Practical Investor we learn that "the Federal Reserve released the March figures for consumer credit. It is not a pretty picture."

He writes, "While nonrevolving credit (automobiles, boats, student loans, etc.) increased by 5.2%, revolving credit (credit cards) increased by a whopping 9.2% in the month of March. The Federal Reserve reports this as a 'good thing,' because until now this has supported the so-called consumer economy. But has it?"

Uh-oh! Did he ask me a question? Instantly, in a panic, my mind is a jumble of thoughts, mostly of the "What in the hell was he even talking about?" variety. Perhaps my beady, rat-like eyes nervously darting from side-to-side betrayed me as the cornered little rat that I am, so he gives me a little hint. "Until recently," he says, "consumption has grown alongside the debt."

The room is silent. I am so confused that I just look right at him and think to myself, "What in the hell are you talking about? Isn't it almost lunchtime? Can I go to the bathroom?"

After what seemed an eternity, Mr. Cherniawski went on tormenting me, and with a tone of exasperation in his voice, offered, "Now, however, we have higher consumer debt and lower consumption." Again he paused, waiting for me to, I guess, come to some conclusion or something, but I am sooOOoo lost by this time that I just sit there like a big, dumb jerk.

So he finally gives up, answers his own question, and I slump back into my chair in relief. He says, "One inescapable conclusion is that the consequences of the negative savings rate since 2006, the consumers' willingness to take on more debt and the loss of jobs in the past year have put our economy into a death spiral of increasing debt and declining consumption."

I paid particular attention to the phrase "death spiral." So should you. Its significance will become clear as time goes on.

An unseen hand slips a piece of paper under my door, and then I hear footsteps hurrying off. Curious, I walk over and pick up the paper, and see that it is a Bloomberg.com news item about the Labor Department reporting, "Prices paid to factories, farmers and other producers rose 0.7 percent after a 1.0 percent gain in March." No wonder they hurried away, as I feel those old feelings welling up inside me, wanting to lash out in anger, and all I need is a target!

Even worse, as Bloomberg writes, "Today's report showed food prices rose 0.4 percent in April, after the previous month's 1.4 percent increase."

Beads of sweat broke out on my forehead as I realized that more of the same is on the way, as "Costs of intermediate goods, those used in earlier stages of production, rose 0.9 percent last month, after rising 1 percent the prior month."

Inflation is everywhere! I can't even afford to write my stupid Congresspersons ("Dear Morons, You let the Federal Reserve destroy our money by creating so much of it!") as first-class postage is going from 39 cents to 41 cents, which is an increase of 5.1%. In case you were wondering, other classes of mail will have newly altered rates, too, and the average rate is going up 7.6%.

This comes on top of (if you remember) the increase in postal rates that took effect in January of 2006, with first-class postage going from 37 cents to 39 cents, a 5.4% increase.

An interesting note to the ugly news was that there is a new restriction on the Post Office, as future rate increases in postage cannot exceed inflation, as determined by the Consumer Price Index! Hahaha! That'll teach them!

The Post Office is quoted as saying that this would be "extremely challenging" to them, as "Significant portions of our costs - such as fuel and employee retirement and health benefits - routinely exceed the consumer price index."

Hahaha! You, too? Hahaha! Relax, letter-carriers of America; your own government says that you are wrong, and that prices are not going up! You're all just a big bunch of stupid poopie-heads about inflation, just like The Mogambo! Hahaha!

If you want to measure inflation, then perhaps the Post Office should read, "Dow Jones Plus 13000 - No Big Deal", an essay at gold-eagle.com by independent analyst Mark J. Lundeen. In it he wrestles with the problems of measuring inflation, and writes, "as an investor I must come up with a rate of inflation that is real world and easily determined, or risk losing purchasing power, over time, due to inflation's erosion on the dollar."

Looking at alternatives, he compares the rise in various costs, expenses and indexes to the rise in the Dow Jones Industrial Average since 2000, and concludes that the annual increase of his property tax can be accurately used "as the yearly inflation benchmark to determine if I am making an inflation proof return on my capital."

Even better, "the calculation is very easy as we only have to do it once a year and our county officials will make sure we have all the information we need"! How handy! Thanks, Mark!

And how much did his property tax increase from 2000 to 2007? About 6.7 times as much as the Dow increased!

Now that the housing market is in obvious distress, perhaps you would be interested in knowing exactly who is going to eat those mortgages going bust. In his book Financial Armageddon, Michael Panzner reveals that the Bank for International Settlements (BIS) figures, "more than half of all U.S. residential mortgages were incorporated into mortgage-backed securities in 2006."

A mortgage-backed security, in case you were wondering, is when a bank bundles up a lot of mortgages altogether into a unit, slices and dices the bunch into various pieces, or "tranches" which vary according to what the piece yields, pays or promises, and the pieces are then sold to various buyers, who buy them for various reasons.

The very, very interesting part is that "the yield of each tranche would vary, with the overall average working out to less than what the underlying mortgagees were paying." Hahahaha! So, as stupid as the banks were to make these risky-but-low-yield loans, the average of the "investors" who bought the mortgage-backed securities from them is even more stupid, as he got, on average, a still-risky-but-even-lower-yielding "investment"! Hahaha!

And, even worse, the last tranche was the "equity tranche", which apparently doesn't get any payments at all, but that "Anything left over after making good on loan losses would go to the equity tranche holders!" Hahaha!

A voice calls out from the back of the audience, asking "Hey! Stupid Mogambo Jerk (SMJ)! If all the pieces and tranches of the mortgage-backed security add up to less than the whole thing, where did the money go? Did you steal it, you Filthy, Stinking Crook (FSC)?"

I was, of course, livid at the insult. I could plainly see my rude and insulting adversary smirking at me from the back of the room, and I quickly realized that striding back there, grabbing that little snot by his geeky little neck and repeatedly slapping his nasty little face was the only Appropriate Mogambo Response (AMR).

So I say to Mr. Panzner, "Take over for me, will ya?" and I start striding downstage to get my hands on my little nemesis. But I was stopped mid-stride when Mr. Panzner provided my alibi when he explained that the difference went not to the slimy Mogambo, but "to cover the fees of those involved in the securitization and later sale to investors, as well as any legal and administrative costs."

For a little levity to lighten the mood, Bob van A. likens the new inflation statistics, calculated out to three decimal places, as akin to "measuring something with a micrometer and cutting it to length with an axe!" Hahaha!

And speaking of inflation, which is all I seem to do anymore, the Bureau of Labor Statistics at the Department of Labor reports, "The Consumer price Index for All Urban Consumers (CPI-U) increased 0.6 percent in April." George Ure of UrbanSurvival.com remarks that "the 2.6% number is a backward look - the compound annual rate of the most recent 3-months is 5.7% - a more reliable indicator of what's happening now."

Bloomberg.com looks even farther into the fetid, stinking, lying bowels of the report and reports that "Today's report showed energy prices rose 2.4 percent after jumping 5.9 percent in March. Gasoline prices jumped 4.7 percent. Food prices, which account for about a fifth of the CPI, rose 0.4 percent after a 0.3 percent increase in March."

And it is not just here that inflation is roaring, as the Federal Reserve is not the only bunch of arrogant, ignorant halfwits creating too much money and credit (monetary inflation) which shows up later as price inflation. To justify that outrageous and highly inflammatory statement, I merely point to the same Bloomberg.com report that in the U.K., "Consumer prices rose 2.8 percent from a year earlier after increasing 3.1 percent in March, the most since 1997."

And lest you think that this is just a one-off aberration, they went on to report "U.K. inflation exceeded the Bank of England's 2 percent target for a 12th month in April." An entire year!

As to food prices going up so much so fast, the Edmonton Journal reports, "Merrill Lynch has even coined a new term to capture the phenomenon of food prices forcing up consumer prices more broadly: 'agflation.'" This is akin to the word "stagflation", which was a term used in the '70s to describe an economy that is stagnant, but in which prices are inflating, which is supposed to be impossible according to the idiotic economic theories and equation-laden models that the Federal Reserve is still using to this day, having learned nothing, and who apparently never will.

Everyone looked shocked at my gratuitous-yet-vicious assault on the intelligence of the Federal Reserve and the overwhelming majority of "economists with degrees" in this country, and the reporters from the Edmonton Journal almost break their necks getting back to the point, which was inflation in the prices of food. As evidence, they nervously cite the statistics that "Corn prices are at 10-year highs, pushing up the cost of feed for livestock and therefore meat as well. Wheat and dairy prices are also up across the board. In China, inflation was three per cent in April, just off a two-year high, driven by food-price inflation of 7.1 per cent." And milk is at the highest price ever, too.

And they say it will get worse, too, as "U.S. food prices, normally in line with broader price levels, are expected to outpace the general inflation rate by as much as two per cent for the next two years."

It's ironic that the rise in food prices is theorized to last for two years, as they say the problem is likewise two-fold, as "Hot, dry weather in many parts of the world augurs poorly for this year's harvest", and "there are also shifting demand and supply patterns, which could amount to structural change."

If you have read this far, you have read the whole, long, dreary Mogambo Guru newsletter. And after that ordeal, I hate to harangue you with the obvious point that rudimentary economics clearly dictates that supply going down while demand is going up always equilibrates at a higher price. Always. It's just a matter of either "now" or "soon."

And with the dollar going down, too, then the price of food should be all the higher than a supply-demand dynamic would indicate. As will oil. And soon, so will everything that you need. It's too, too ugly to think about. Ugh.

**** Mogambo sez: I am astonished that gold and silver are not leaping in price to heady new highs, and grateful that they are not. So should you be, as it allows you to get rid of some more overvalued dollars by exchanging them for gold and silver while they are still cheap. One day it will not be so!

P.S. To get The Daily Reckoning sent directly to your inbox, sign up for our free email newsletter, or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.

Richard Daughty, the angriest guy in economics
The Mogambo Guru

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.

Copyright © 2005-2008 Richard Daughty

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