The $200 million house of bread
By The Mogambo Guru
I got a Big Mogambo Laugh (BML) out of the cover of Barron's this week, which
proclaimed "How Taxpayers Can Profit On The Bailout", with the subhead "The
$700 billion rescue plan could do more than stabilize markets and ease the
credit crunch. It may turn a tidy profit, too." Hahahaha! "Tidy profit"!
Hahaha!
Instantly, I am on the phone to Barron's, and the snooty little receptionist
asks what she can do to "help" me. So I naturally tell her "I want to speak to
the top dog in charge of Barron's, because your stupid newspaper is full of
idiots! Your latest issue has a cover that says that a $700 billion bailout may
mean that taxpayers may 'turn a tidy profit', which proves that they have no
idea what in the hell is the difference between nominal gains and
inflation-adjusted gains! The place is full of morons, and I want to
tell the halfwit publisher to get his or her stupid butt in gear! That's what I
want!"
So she politely says, "One moment, please", and she puts me on hold. As I wait,
I figure I should prepare for my blistering attack, and I decide that I need an
example that even a Barron's dork can understand. I wonder what $700 billion is
worth in loaves of bread at $2 per loaf of bread, and I calculate that the
bailout is equivalent to 350 billion loaves.
Instantly, at the mention of bread, my mind flashed to the twin facts that 1)
It will be lunchtime in a few hours, and 2) Junior Mogambo Ranger (JMR) Steve F
noted that "the monetary base expanded by 7.65%!! In 2 weeks!!!" which I have
quoted here verbatim to show his appropriate use of exclamation points to
indicate particularly ominous emphasis, in this case, along the lines of,
"We're freaking doomed, and there is the culprit standing right there,
preparing to kill us all with a machete!!!!"
Astute JMRs will note the repeated use of the rare "quadruple exclamation
point" punctuation and tremble at the implications.
Apparently, JMR Steve understood the situation, as he continued, "If I compound
a 7.65% increase in two weeks 26 times, I get a 680% increase in one year!!!!"
That's 15.3% inflation in the money supply per month, without compounding!!!!
Again, note again the terrifying quadruple exclamation point punctuations!
Gaaahhh! We seem to be screwed! Help! Help!
I realized that were really ARE, all kidding aside, screwed when he calculated
that if this 680% inflation in the money supply increases uniformly and
continues into the future as it must, "once the new money works its way into
the economy and if prices rise at that rate", then "In a year, a yuppie latte
will cost $27. In two years, a plate of two yummy tacos and beans will cost
$300. In three years, a half-gallon of milk will cost $782. In four years, a
tank of gas for a compact car will cost $106,720."
I realize that I have been on "hold" a long time, and so the Barron's honcho
will soon be on the phone and wanting me to tell him where he and his ignorant
staff went so terribly awry in not noticing the difference between nominal
gains versus inflation-adjusted gains. In final preparation, I quickly
calculated the price of bread four years into the future after suffering a
15.3% monthly inflation, and found that, in four years, a loaf of bread that
costs $2 today will then cost $1,857.11!
This brings us back to the Barron's cover, where "taxpayers may turn a tidy
profit" on the bailout by acquiring worthless assets. If a tank of gas costs
$106,720 and a loaf of bread costs $1,857.11, then what are all those old
$250,000 mortgages worth? A lot! The $250,000 house would have to be worth more
than $232 million to stay even with the gains in gasoline and bread, for crying
out loud!
So, the Fed could buy a mortgage for a house worth 250,000 dollars (and also
worth 125,000 loaves of bread), and then after the inflation of all that money
percolates into prices, if the Fed later sells the houses for $500,000, they
would indeed show a 100% "gain" on the sale, but it would be worth only 269
loaves of bread! Hahaha!
That means that a house today would be worth $538 at $2 per loaf. Hahaha!
And the government might make back the entire inflation-adjusted gain if they
can get someone to pay $232 million for a fixer-upper, and apparently proving
Barron's right that taxpayers "may turn a tidy profit" on paper by issuing
massive amounts of money to buy up assets that nobody wants at any price ...
But let's get real!
Scholars of prose comedy will, of course, instantly realize, "Hey! The phrase
'let's get real' is not only a rude and snide comment, but is also a sly
reference to 'real' as in 'inflation-adjusted'. How clever! Somebody should
give this guy an award of some kind, or maybe have everybody send him 20 bucks!
Or more!"
On the other hand, those who are not so adept to the subtleties of comedic
literature instantly realize, "Hey! This guy is an idiot! Why am I reading this
Stupid Mogambo Crap (SMC) anyway?"
Well, in response, I don't know why people read my SMC, and I don't want to
know because I figure that there must be something seriously wrong with them if
they do, mostly because I write it and there are LOTS of things that are
seriously wrong with me, but the point is that there is No Freaking Way (NFW)
that the taxpayer will show a real, inflation-adjusted profit from this bailout
crap, and I would have told those Barron's people, too, if anyone had ever
picked up the phone. But after five hours of being on "hold", I hung up in
disgust.
I could have used the time to buy some more gold. Now I am, obviously, doubly
upset!
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.)
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