Borrowing is a doubtful
bargain By The Mogambo Guru
A reader of Agora Financial's 5-Minute
Forecast wrote, "You spend a lot of time talking
about the loss of purchasing power of the dollar -
and rightly so. Therefore, I fail to see the
problem with anyone spending dollars as quickly as
possible and incurring debt. That dollar spent
today will be worth less, if not worthless,
tomorrow, and the dollar repaid will be of lower
value than the dollar borrowed. Can't have the
argument both ways."
I was hoping that
someone would ask me to field that question, as I
was really chomping at the bit at the sight of a
potential target for a test-drive of Random
Mogambo Attack Mode (RMAM), where I take strange,
unnatural delight in punishing stupidity by being
rude, sarcastic, insulting, arrogant,
argumentative and truly hateful, as is implied by
the words "Attack Mode".
And my reply
would have been a real bargain, too, as it was
a
"two-fer"; not only would I have
rebutted the argument, but I would have also been
entertaining in a horrifying, embarrassing way,
for no extra charge! Free!
For those who
wish to hear my entire reply, I have handily
expurgated the screaming obscenities, malicious
lies, various libels, incoherent words and
phrases, personal attacks and random death
threats, and now the entire 50-page essay is
boiled down to just the paragraph, "If you can
guarantee that you will have an income that will
rise faster than inflation, interest and taxes for
the rest of your future life as your debt rises
for the rest of your future life, then you are
right; borrow as much as you want and party down,
dude! You will, indeed, be paying back with
cheaper dollars, handing yourself a bargain in the
process, which is no problem for you because you
are so smart and important that your employer will
no doubt be happy - happy! - to pay you more and
more wages and benefits at a rate that is actually
higher than inflation in prices and taxes, for all
the rest of your life! Lucky you!
"But if
you are like the rest of us miserable creeps out
here who are living hand-to-mouth and are one
lousy 'written reprimand in our employee file'
away from being fired and probably sued for sexual
harassment or that whole embezzling thing, then
no; borrowing for the sake of getting more of a
bargain on some consumer item is really, really,
really stupid."
And I say this because a
study by the University of Central Florida found
that, as reported by the St Petersburg Times, "56%
of low-income respondents said they could not pay
their bills if they missed one month's pay", which
is not very remarkable since these are low-income
people. But the startling part is that "38% of
middle-income respondents" also said that they
could not pay their bills if they missed one
month's income, and that "24% of upper-income
respondents made that same claim"!
And
what percentage of each class felt like they were
so far in debt that "they will never be able to
get out"? Oops! Low income: 25%. Middle income:
14%. Upper income: 10%!
And they are not
going to get any help from their houses going up
in value, as Martin Weiss of moneyandmarkets.com
reports that, "The S&P/Schiller Home Price
Index plunged 9.1% in December. Worse, the median
price of new homes sold has tanked 15.1% from
January of last year, the biggest drop in any
month since at least 1964, when they first began
tracking this measure."
And so it is
obvious that the reason nobody has any money is
because they have no more money or credit after
paying higher prices for everything else, as you
can surmise from Ambrose Evans-Pritchard at
Telegraph.uk.co, who reports that "40% of the
world economy has an inflation problem", which he
proves by reporting inflation of consumer prices
in China (7%), Vietnam (15%), Russia (12%),
Bulgaria (12%) Romania (8%) Estonia (11%), The
Emirates (12%), Qatar (14%), and India (5%).
And where did all of this inflation in
prices come from that is making people hungry and
angry? Mr Evans-Pritchard is right on the money
when he says, "I totally agree with those who
blame the debt crisis on the irresponsible
policies of the Fed and fellow central banks from
2003 to 2006, and indeed for [the] better part of
fifteen years. They stoked this bubble by
artificially holding rates too low (by government
fiat). The money leaked into asset prices, just as
it [did] in the US in [the] 1920s, and in Japan in
the 1980s. (Two other low inflation eras).
"In effect", he says, "central banks
rigged the price of credit. In doing so they
caused massive 'inter-temporal misallocations', to
use the posh term of the BIS [Bank for
International Settlements]. Or put another way,
they stole prosperity from the future."
You can imagine the powerful cinematic
effect when he added, with just the perfect touch
of ominous undertones, and augmented by my adding
a soundtrack of people screaming while being torn
apart by ravenous wolves, "The future has now
arrived." Ugh.
The Mogambo Sez: "There is
a darkness descending upon us." Well, that was my
first thought, and with which I was pleased in a
strange, pretentious little literati way, but upon
reflection, now I change that to, "The thread
holding the sword of Damocles suspended above our
economic heads is unraveling", which suits the
situation perfectly, but unfortunately doesn't
lead me to a clever segue to how you should buy
gold and silver bullion, and oil stocks to save
your financial butt, but which is, once you think
about it, so obvious I don't even have to mention
it to someone as smart as you!
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.
Republished with permission from
The Daily
Reckoning .
Copyright 2008, The Daily
Reckoning.
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
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