The Great Variety of Poor Rich People:Magambo Guru

By: Richard Daughty, The Mogambo Guru - The Daily Reckoning

-- Posted Thursday, 14 August 2008 | Source: GoldSeek.com

If you'd like a sample of the kind of "hedonic" qualifying idiocy running rampant in economics these days, The Economist magazine reviewed a paper by Christian Broda and John Romalis at the University of Chicago. These two guys say that the inequality between the rich and the poor is not as bad as it looks. This was such a surprising development that I and all my pals rooting around in the dumpsters behind the grocery store stopped to listen! We are not poor!

First off, we bums found out that we are not as bad off as we think we are because "around two-thirds of the increase in the standard inequality gauge is offset by the poor's lower inflation rate", which we get by consuming mostly non-durable imported items like food, clothing, and footwear that were falling in price!

The rich, who consume more services, comparatively suffer because they mostly consume domestic services, which are NOT imported, and so have prices that are going up with the inflation in the money supply!

I suddenly felt so bad for the rich that Lefty and I made a promise that the next time we come across an apple that isn't too mushy, we will give it to a rich guy as our way of helping them out!

And if that was not enough, these university egghead guys actually go on to say that the poor are actually thriving, as "the range of goods consumed by poor households increased by far more than for rich households. The benefit of this extra variety is not captured in income or inflation, but it can be quantified."

At this promise of quantification of the benefits of diversity of available imported goods as impacts inflation, I said, "Shut up you guys! This is going to be good!" As I stretched out on a pile of rotting cabbage in preparation for this exciting bit of news, I was actually all tingly at the thought of seeing how the inequality between the rich and the poor can be shown to be offset by sheer variety of goods in the marketplace!

It wasn't long in coming, and sure enough, before I could even get comfortable, the very next sentence was "If that gain is expressed as an addition to real income, the remaining increase in inequality vanishes."

Hahahaha! This is too much! The poor are as rich as the rich!

And lest you think that I am exaggerating the effects of inflation because that is just the kind of Hysterical Reactionary Loudmouth (HRL) I really am, this is one time I am not, as inflation in imported prices is still inflation in imported prices, and for those who are encouraged by the recent reports of seemingly positive GDP growth of 1.9%, Randall Forsyth in his Current Yield column in Barron's reminds us that GDP accounting means that "Soaring prices of imports, including petroleum, lowers the GDP deflator" because "imports count as a negative." Hahaha!
Inflation went down because imports went up in price!

In effect, he says, the government is applying "truly Orwellian logic: higher import prices mean lower inflation and therefore higher growth"! Hahaha!

This is so bizarre that even he can barely control his laughter, and says, "You can't make this stuff up."

Perhaps this is why I am so miserable these days, sitting here in the Mogambo Powerful Bunker Of Doom (MPBOD), uselessly looking at my desk covered in charts, reams of erstwhile useful analysis and miscellaneous "past due" notices from various creditors, knowing that it is all crap.

Even Chris Powell, of the Gold Anti-Trust Action Committee, agrees with me and says, in a pithy phrase that should congeal your blood at the tragic implications,

"There are no markets anymore only interventions."

Ed Steer of Casey Research tells me that we are not alone, and presents a commentary by Peter Degraaf and posted at Bill Murphy's lemetropolecafe.com, who "doesn't mind admitting that (technical analysis) is pretty useless in the face of this kind of intervention."

What kind of intervention? How about foreign central banks suddenly plowing a staggering $28 billion into buying U.S. debt last week, and stuffing the enormous haul of government and agency debt into their accounts at the Fed itself, taking their total ownership of government and agency debt to $2.4 trillion! At a lousy 5% interest, this is $120 billion in cash that we are shipping out of the country per year to these guys, just in interest payments!

And why are these foreigners doing this? James Turk at goldmoney.com explains "When central banks intervene in the currency markets, they exchange their currency for dollars. Central banks then use the dollars they acquire to buy US government debt instruments so that they can earn interest on their money. The debt instruments central banks acquire are held in custody for them at the Federal Reserve, which reports this amount weekly."

This would, then, explain why the dollar shot up last week, out of nowhere, for no reason that I can think of other than that all the alternative currencies suck even worse! Hahaha! What a world!

Aside from the stock and bond markets, Mr. Degraaf says that even "Gold closed just above the $850 support line during a washout caused by the performance of a US dollar that defies belief. Without any improvement in fundamentals, the dollar rose 132 points today. The largest gain in
years! Despite a banking crisis, low interest rates, huge deficits, money supply running in double digits, housing sector in shambles, the US dollar has now risen 8 out of the last 9 days. Someone please convince me that this is not rigged. Meanwhile at $855.00 the gold price is back at $323.00 expressed in 1980 dollars!"

And it is not just gold acting weird and grossly under-priced, but silver, too, as Mr. Steer notes that

"Ted Butler also mentioned yesterday that silverby any measurementis the most oversold it's ever been in its history."

In history!

My mind screams, "It's the time to buy!" And I would, too, but I went to the kids' piggy banks this morning and there is nothing in them except useless scraps of paper that say "IOU $5. Love, Dad."

They are not going to be happy when I explain to them that we are both victims, as I have no money either, just like them, and similarly because the Social Security Trust Fund is holding my "money" in the form of IOUs, whereas at least I said "love" at the end, which is a hell of a
lot more than the spendthrift, bankrupting government ever did for me! The bastards!

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.

Editor's Note: 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.

Visit The Daily Reckoning's website.

More eavesdropping on the great investors

From today's Daily Reckoning ..

(oh, doesn't reality just BITE!!)

(psst! .. the definition of a "good school"

is that it is so far away, the 'rents don't have to visit)

The Dow rose 177 points yesterday, amid a flurry of gloomy headlines.

“New homes sales fall by record amount,” says the Associated Press , referring to the 26% drop in 2007.

In Florida, housing is in a ‘death grip,’ adds the Dallas Morning News .

And the whole U.S. economy “faces the guillotine,” is how Newsweek sums up the situation.

The big battle, as always, is between greed and fear. Greed pushes up prices. Fear drags them down.

As of yesterday, fear was winning.

“Fear stalks the markets,” says the Economist .

Yes, dear reader, fear – the force of deflation – is getting the headline coverage. Recession, say the papers, is either coming...or it is already here.

As we pointed out yesterday , when Mr. Market turns to fear...it is hard for Mr. Market Manipulator to stop him. Frightened investors have knocked down stocks – wiping out more than a trillion dollars worth of implied wealth. Frightened homeowners have sold off houses – taking nearly $2 trillion off the implied value of the U.S. housing stock. The subprime crisis is said to be taking out another half a trillion. A trillion here...a trillion there...

What can the forces of inflation do against these huge attacks? Mr. Politician has come forward with a plan to pump $150 billion back into the U.S. economy. Mr. Central Bank manager has cut rates by 75 basis points...and threatens to cut more.

But the problem, as the Financial Times so elegantly put it, is that the “credit orgy” is over. The liquor ran out. The music stopped. And someone called the cops. Bush and Bernanke show up with a few more bottles of booze, but the guests are already putting on their coats and fumbling for their car keys.

If we’re right, one of two things will follow:

If Mr. Market has his way, fear will dominate the market...and stocks will fall while gold stagnates.

If Mr. Market Manipulator prevails, greed will return...but not necessarily where he wants it. Stocks will stagnate while gold soars .

Most likely, each will have his victories and his defeats as the fortunes of this war shift back and forth.

We got a hint of which way things were going yesterday. The Dow rose, but the real action was in gold, which shot up $16, to a new record of $927. Analysts mentioned that the power went off in South Africa, putting the gold mines out of commission. But a healthy boom wouldn’t care...and investors wouldn’t have cared a few years ago. A healthy boom produces rising stock prices...leaving gold behind. This is no healthy boom at all. It is a fraudulent boom and investors know it, shifting their speculations from stocks to gold.

Thus begins a new stage in the bull market in gold . Do you remember when we were able to buy gold around $300 an ounce – 7 years ago? It rose hesitantly, often giving back gains. People wondered if gold had not been made completely obsolete by sophisticated financial instruments. We at The Daily Reckoning know better. With the decline of the dollar (and indeed the worthlessness of all paper currency) gold is one thing that will always have value .

If you’re worried about a bear market, buy some put options, said the experts. If you’re worried about depreciation of the dollar, buy euros. If you want protection against defaults, buy some swaps.

The experts could not imagine that a day would come when we’d be worried about the whole dollar-based financial structure ...about the ability of the biggest banks to survive...and the capacity of the biggest Wall Street firms to make good on their obligations.

But here we are...and gold is rising. And now it goes up by $10...$15...$20 in a single day. And now people are starting to read about it in the papers. And people are starting to wonder how high the price will go...and where they can buy Krugerrands.

Yesterday, Peter Munk, CEO of the world’s largest gold miner, Barrick Gold, told the worthies at Davos that the bull market in gold had a ways to go. He said the price would go into the “$2,000 bracket” before it was over. We couldn’t agree more .

*** “The real story is the decline of America,” said David Fuller yesterday at lunch. David has been writing his Fuller Money , a careful analysis of global money trends, for as long as we can remember.

The rest of the world is in pretty good shape, economically, says David, adding that if he had to make one “buy-it and forget-it” investment for the next 10 years he’d buy stocks in India .

India (Asia generally) and much of the rest of the world have expanding economies, rising incomes, and plenty of room for growth, he says. The problems, on the other hand, are mostly concentrated in the United States.

Martin Hutchinson adds this:

“The US is currently in the position of General Motors in about 1970, splendid in its possession of a majority share of the US automobile market, and apparently invulnerable to competitive threat, yet in reality burdened with impossible welfare programs that a foolish management had negotiated during the good years. For General Motors, the future after 1970 was one of steadily slipping market share, from 60% of the US market to about 25%, of a steadily aging workforce, and of a retiree health benefit obligation that if valued appropriately is today worth far more than the value of the company itself. Had GM not undertaken its excessive pension and healthcare obligations, it would have had more capital to compete effectively, would have been less likely to lose oodles of money in every downturn, and might still retain primacy in the world automobile market today, albeit by a lesser margin than in 1970.

“For the US, the position is the same. Its workforce will be older than its competitors’ and entitled to benefits that absorb an increasing share of the national income as its relative earnings decline.”

We probably all had the same thought. Yesterday, if you were to buy a 30-year Treasury bond you would have gotten a 4.28% yield. That yield is only a few basis points from the current U.S. consumer price inflation level, as announced by the government’s own number torturers. Assuming the number is more-or-less honest, and assuming things don’t change, this means that a person who buys a long Treasury bond gives up money now for the right to receive zero return over the next 30 years. Of course, things do change. But the changes that are most likely are those that make this investment even worse. The inflation rate is likely to go up. At 10% inflation, the investor loses 5.72% per year. If the dollar falls against other major currencies, he is out even more.

The only way the bet on long bonds could work out for investors would be if the United States were to sink into such a fear-driven recession that inflation and interest rates fell substantially. Nominal prices could actually go down, for example, as they did in Japan. Real yields could rise...for a while.

But the United States of America controls the value of the currency in which the United States of America’s debts and obligations are calibrated. Even before a slump has begun, the Fed has panicked...and Washington has rushed to get the checks in the mail. A serious downturn would produce even more desperate attempts to bring prices up and the dollar down. It is the only way the feds can service their enormous debts and obligations. One way or another, they will find a way to keep inflation rates high...and sooner or later, certainly sometime with the next 30 years...they are almost sure to lose control altogether. Holders of long U.S. treasury bonds will continue receiving their coupon payments. Perhaps they will be able to buy a cup of coffee with them.

*** Colleague Horacio Pozzo in Argentina thinks investors may have gone too far in driving down prices on financial stocks. In the United States, he notes that you can buy Bank of America at prices 26% below its high...giving it a P/E of only 11. The bank has been recapitalized with $12 billion in bonds. He thinks the worst is behind it.

Citigroup, too, looks like a buy to Horacio. Its price has been cut in half and now trades at only a fraction above book value.

We were more convinced by Horacio’s pick in his own Argentina. The United States already has plenty of credit – too much of it. We can easily imagine that these U.S. financial firms will lose ground for years – like GM. We don’t see much growth...but plenty of room on the downside.

But South of the Rio Plata, the picture is upside down. North is where the sun shines. South is where the snow flies. And credit has plenty of room to expand. Nobody has much credit in Argentina. The ratio of private credit to GDP is only 12.5%...(compared to over 150% in the U.S.)...and it’s growing at 42% per year. There is not much room on the downside...and clear skies overhead.

The banking sector in Argentina has none of the threats and problems of its U.S. peers, but banking stocks have taken a beating anyway. As a result, you can now buy Banco Macro at a P/E just above 11...and its deposits are growing at 23% annually. You can read Horacio, in Spanish of course, at Moneyweekes.com.

*** Our Sunday lunch with the boys was intended to focus on education. Where was Henry going to college? Would Edward like to go to boarding school next year?

Pater Familias laid his cards on the table even before the entrée was served.

“Look, I’m almost 60. I’ve had children around the house for the last 30 years. And for at least a quarter century, my life has been tied to the school schedule; I’m ready for a change.”

“Oh...so you want me to go to boarding school, so you can do whatever you want?” Edward saw the point immediately.

“Well, yes...”

“Wait, it’s not just that,” Elizabeth entered the conversation. “We’re not sure you’re going to be able to get back into the French school in London. It would be nice to have an alternative.”

“A Plan B,” said your editor...who suspects that all Plan A’s are doomed to failure.

“Not only that,” the voice of reason returned. “I went to boarding school when I was about your age. I loved it. And I think you’re the sort of person who might like it too. The English boarding schools are very focused on sports and outdoor team-building activities. Those are the sorts of things you like. Most likely, you’ll go to the French school, but we should look at these boarding schools to see if you like them...and just in case the French school doesn’t work out.”

“But I don’t want to go to boarding school,” Edward replied. “You didn’t make any of the others go to boarding school. Why should I have to go? It’s not fair.”

“No, we’re not going to force you to go to boarding school. But you might want to go.”

“I don’t want to...”

“How do you know you don’t want to? You haven’t tried them.”

“Well, I don’t want to try...”

“Well, you might try anyway. You know, you don’t have the best grades. If you want to get into a good college, you’ll have to make yourself interesting by doing something different.”

“Maybe he should go to St. Georges in Buenos Aires,” suggested Papa. “That’s different...an English speaking boarding school in Argentina. They can’t get too many applications from there.”

“That might be over-doing it,” Momma replied. “If it’s too strange or too far off they’ll think he was a discipline problem that we wanted to get rid of.”

“Well, I wouldn’t worry about getting into a good school anyway...it doesn’t make any difference.”

“Oh no...here we go again. And you know it’s not true. People from the best universities get the best jobs.”

“Maybe...but they don’t really learn anything. Edward would be better off learning on the job. Look at this subprime crisis. Who created the crisis? It was smart guys who came out of Ivy League schools and worked in sophisticated financial firms all Wall Street. They were the ones who packaged subprime debt...who did the math and the analyses that told them this stuff wouldn’t go bad in a million years...and who also worked at the rating agencies who gave it AAA ratings...and they’re the ones who work for Citigroup and for Societe Generale. All so well educated...and so smart that they couldn’t think straight. You’re better off not getting that kind of education.”

“Maybe...but then you’d never have gotten a job at Citigroup and you wouldn’t have an expensive house on Long Island.”

Until tomorrow,

Bill Bonner
The Daily Reckoning

Bill Bonner: 2007 year in review

Well, the final day of 2007 is upon us. And what a year it’s been...oh yes...an interesting year to say the least.

2007 was an eye-opening year for many...finally seeing the truth behind the housing market...the precarious state of the dollar...and the underlying strength of gold and other commodities.

Here at The Daily Reckoning we’ve covered each of these topics...and more. And today and tomorrow, we will be taking a trip down memory lane. So without further ado, we give you:

2007: The Year in Review – Part I

01/04/07 – The World’s Push for Power
by Chris Mayer “The North American power grid is the largest in the world. Chris Mayer explains that investment in the power grid will top $100 billion by 2015 - but that’s nothing compared to what other countries are going to spend...”

01/31/07 – The Rising Liquidity Wave
by Puru Saxena “During the past year, the ongoing monetary inflation, credit growth and expanding liquidity environment drove up prices in various markets. Apart from rising interest rates and unrest in the Middle East, we did not get any major negative developments on the economic front, which also helped the global markets. Puru Saxena looks forward to the year ahead to see what we can expect from the various asset classes...”

02/01/07 – Corporate America to the Rescue?
by Dr. Kurt Richebächer “The Good Doctor is back - and still wondering why our friends at the Fed seem to think that the U.S. economy is ‘sound’ - even though all the signs seem to be saying otherwise. Read on...”

02/27/07 – A Bad Hand for Bernanke
by Adrian Ash “It’s clear Bernanke’s been dealt a bad hand by the Maestro. But will the gold market fold, raise, or call his bluff...? Our U.K correspondent, Adrian Ash, explores...”

03/09/07 – Alphas, Betas, Scamps and Scalawags
by Bill Bonner “As the subprime industry continues its steady decline into the bowels of bankruptcy, we can’t help but wonder what these lenders were thinking. Bill Bonner explores this industry’s business model, and finds out that sometimes, thinking isn’t necessary - just showing up to work is enough. Read on...”

03/28/07 – “It’s the End of the World As We Know It”
by Doug Casey “Anyone paying even a little attention right now can’t help but notice the stunning array of problems that are menacing the global economy and threatening traditional investments. Doug Casey explains how you can profit from the unfolding crisis...”

04/17/07 – Oil Booms and Busts
by Byron King “Over the past 25 years, the ‘growth’ in oil reserves estimated to be in existing oil fields has actually exceeded the additions to reserves from new discoveries. The implication is that the existing oil fields of the world are as important, and maybe even more important, than the prospective new discoveries out in wildcat country. Byron King explores...”

04/19/07 – Standby Commodities
by Kevin Kerr “There are certain commodities that are staples of trading...beef...sugar...soybeans, etc. Kevin Kerr asserts that all investors should know these sectors and be very comfortable with them. Read on...”

05/12/07 – Where’s the Boom?
by Kate “Short Fuse” Incontrera “Using the mighty force of Fed-speak, Helicopter Ben and Ol’ Bubbles helped to push the Dow back up. They should really think about using their awesome powers to fight crime.”

05/29/07 – Alas, The Demise of the Dollar
by Addison Wiggin “The greenback is in a sorry state of affairs, down against most major European currencies. This weak dollar trend looks like it is nowhere near wrapping up, and below, Addison Wiggin details how a declining value of the dollar has far-reaching effects. Read on...”

06/02/07 – Is Ethanol Running Out of Gas?
by Kevin Kerr “The corn-based ethanol craze is probably not being shown the door, but may be getting handed its hat. Kevin Kerr explores...”

06/12/07 – Fighting the Last War
by Chris Mayer “You have probably heard the expression about generals always fighting the last war. Investors, too, tend to invest by looking in the rear-view mirror. In both cases, the consequences are costly. Chris Mayer explains...”

07/06/07 – Bear’s Market Blues
by Bill Bonner “With the housing market in free fall, it is sometimes difficult to decipher exactly where everything began to go wrong. This week, Bill Bonner sifts through CDO’s, MBS’s, and falling asset prices to explain what is really happening. Read on...”

07/10/07 – Gone, But Not Forgotten
by Mark Skousen “Hans Sennholz, who passed away two weeks ago, was a died-in-the-wool doomsayer, a charismatic speaker, and an influential player in the financial freedom movement. Mark Skousen, who was a close friend of Dr. Sennholz’s, gives us a snapshot of his life, below...”

08/09/07 – The Jekyll and Hyde Global Economy
by Bill Bonner “The symmetry of the system is simple: the East makes; the West takes. The East saves; the West spends. The East lends; the West borrows. The boom in the East is real; in the West it is a fraud.”

08/20/07 – The Currency Cavalry Rides Again
by Bill Bonner “On Friday, the Bernanke Fed looked a lot like the old Greenspan Fed...riding out to rescue speculators like the cavalry to the aid of desperate pioneers. The trumpet sounded...the rifles fired...and the savages were beaten back.

09/13/07 – The Effects of the Summer Market Shock
by Bill Bonner “Pity the poor American householder. Just a few months ago he had people lining up to lend him money. Now they’re on the phone wanting it back! He had gotten used to refinancing. But now refinancing is tough...and more expensive.”

09/22/07 – Brokedown Greenback
by Kate “Short Fuse” Incontrera “Wow, the dollar has certainly taken a beating this past week following the Fed’s rate cut. It has fallen to a 15-year low in the world dollar index, hitting the weakest level ever against the euro at just under $1.40.”

10/02/07 – Like Fed Head Like Son
by Bill Bonner “The results, announced two weeks ago, made it clear that Bernanke is heir to Alan Greenspan, not Paul Volcker. That is, the Bank of Ben Bernanke will not fight inflation...instead, it will battle deflation to the bitter end.”

10/20/07 – An All Season Hedge
by Addison Wiggin “The lesson not yet learned has everything to do with the reasons why the gold standard was so important. We have given control of economic forces over to government tinkering.”

11/15/07 – It’s All About the Euros
by Kate “Short Fuse” Incontrera “The dollar is quickly becoming the red-headed stepchild of the currency world. First, supermodel Gisele came out saying she didn’t want to be paid in dollars for her latest campaign. Then, rap superstar Jay-Z released a video in which he was doing something very odd - flashing money around.”

11/19/07 – More Than “Sheets” Hitting the Fan
by The Mogambo Guru “People want to know why things in the financial markets are so damned weird, and I answer that there are many reasons, all of them concerned with greed. And it may also have something to do with ‘making hay while the sun shines’.”

12/13/07 – So What’s Gold Worth?
by Ed Bugos “Writing from Vancouver, British Columbia, Strategic Investment contributor Ed Bugos estimates the value of gold adjusted for the exploding supply of dollars. He also provides a trader’s perspective on the likelihood of a gold correction. Read on...”

12/19/07 – A Recession Worth Having
by Bill Bonner “Yes, dear reader...a recession is probably on the way...And it will probably be a real recession this time, not just a phony recession such as we had in 2001. This time the consumer will actually have to cut back on his spending.”

Happy New Year from all of us here at The Daily Reckoning !

Short Fuse
The Daily Reckoning

Thought PROVOKING Bill Bonner essay of the Daily Reckoning ... Hmmmmmmm

My caveat here: Dr. Michael Hudson's essay on the subprime crisis to come (and the ramifications) was published in MAY 2006, in mainstream Harper's magazine). You can find it right on this blog by putting in a search on the box to your upper left.

“Radioactive Paper” is how Forbes describes it.

Forbes referred to various forms of securitized debt, of which subprime CDOs have probably gotten the most media attention.

You’ll remember how we got to into this mess, dear reader. The whole thing was chronicled in these Daily Reckoning pages. Thanks to a mixture of good luck and bad management, the United States was able to heat up the entire world economy. But now, it’s in hot water itself. Americans are up to their necks in boiling debt while Wall Street has its vaults stuffed with the kind of debt that sets off Geiger counters.

The warnings began earlier in the year. But it was only this summer that the indicators flashed a “Meltdown ” signal. Since then, the papers have been announcing one calamity after another. We’re going to skip the details and go right to the big picture...

The big picture is this:

• The United States has a consumer economy...70% of GDP is consumer spending
  
• 20% of the entire world’s spending is done by Americans
  
• Americans counted on house price increases...not only for current spending but for future spending; they expected to retire on them
  
• Now that house prices aren’t rising...something has to give

A pause: Here’s Money Magazine’s Myth #13 about retirement from their recent “Retire Rich” issue:

“Treating your house as the ultimate retirement insurance is an easy trap to fall into. Even with the housing market in the doldrums, the five-year real estate bull market has likely left you feeling house-rich. According to a 2004 study by the National Economic Bureau, upper-income boomers ages 51 to 56 have a third of their net worth invested in their principal residence.

“As recently as May, a survey of affluent boomers by financial adviser Bell Investments Advisors found that nearly 70% were relying on their homes as a retirement asset. Question is, will the strategy work? The answer is, not that well.

“Why? Because it’s hard to eat out on your home equity. You have to live somewhere. To turn your equity into cash, you can sell and then rent, move to a cheaper area or downsize. Most retirees prefer to stay put. Yes, you can do what a small but growing number of retirees are doing: Get a reverse mortgage, which is a loan against the value of your house that you don’t have to pay back. (When you die or move out, the loan is paid off by the sale of the house, which means you may not be able to pass the home on to your children.)

“But these loans give you much less than the value of your house. For homeowners ages 62 to 69, lenders will typically let you borrow just 49% of your home equity, says Wharton finance professor Nicholas Souleles.

“The best way to look at your house is as a place to live, not a retirement account. So in the years leading up to retirement, don’t over-invest in it with the idea that you can get that money out later. Keep your mortgage and other housing expenses to no more than 28% of your income, and don’t prepay your mortgage instead of saving for retirement.”

Back to our discussion:

All this has been obvious to us for a long time. Still, until this summer, nothing gave. Consumer spending continued to rise!

But now, the latest news is that consumers are finally slacking off. Auto sales are plummeting, for example.

Of course, the first thing to go was spending on houses itself. The builders got nailed. And then, the people who financed the builders...and who lent mortgage money to borrowers who couldn’t pay it back. But nobody seemed to care...until the ‘radioactive paper’ – derivatives based on mortgage debt – started to melt down. All of a sudden, a ‘Credit Crunch ’ was in the headlines...and Wall Street was on the phone to central bankers.

At first, hardly anyone knew what a credit crunch was. People thought it was a new breakfast cereal. The newspapers had a problem with the story from the get-go. They didn’t know whether it should run in the finance section...or the Police Blotter. Subprime lending could have been a crime story...or a financial accident; they didn’t know .

Then, the banks began to announce losses...and the numbers grew. A hundred billion here...a hundred billion there...pretty soon, we were talking about real money.

The latest estimate comes from Goldman Sachs. Goldman says total losses from subprime lending will hit $400 billion. But the golden boys go on to say that the losses to the economy will rise to $2 trillion.

Ah, yes, dear reader. That is how a credit crunch works. When credit is expanding, a relatively small amount of money is leveraged into a big amount of money. A borrower might use $100 million deposit, for example, to anchor a loan for $1 billion. But when credit contracts, leverage works in the opposite direction. A hundred million of capital disappears...and the $1 billion of loans are withdrawn. Altogether, Goldman expects $2 trillion in cash and credit to evaporate.

This is bad news for the U.S. consumer...and for the people who sell him things. Already, there is “alarm at rising U.S. car loan defaults,” says the Financial Times . And gasoline in the United States rose 13 cents in the last 2 weeks.

And, remember...the consumer has to eat! Food prices have been going up five times faster than the reported CPI.

Give them enough time and even economists can put two and two together. Now, more and more of them are predicting a recession. And everyone has his eyes on the holiday sales figures.

But...and here is a fairly big but...a Texas-sized but, in fact: so far, the stock market has edged down...but it has not crashed. Our ‘Crash Alert’ flag is still flying. And we’ve had some exciting 300+ point declines. Just yesterday, the Dow went down more than 200 points. But no crash.

You’d think investors would want to get out. You’d think they’d at least want to watch what happened from the sidelines for a few weeks. But so far, we’ve seen only a steady retreat...no panic. No crash. No collapse.

The old market hands are wondering...what does the market see? How come it doesn’t correct in a major way? Do investors really think that the declining dollar will save them...? Are they expecting another big rate cut from the Fed (Bloomberg says another 3/4 point is coming...)? Do they think it will all blow over...instead of blowing up?

More tomorrow...and the day after...and the day after...

Here, we stroll...perambulating and cogitating...with reflections that bounce back on one another.

The subject is contrarianism. We know it works in the investing world. “Buy when blood is running in the streets,” was how Jacob Rothschild put it.

But if it works in investing, how about the rest of life?

“You are either a contrarian...or you are a victim,”

says our old friend Rick Rule. Crowd followers are the victims of the financial markets. Last week, we saw how ordinary soldiers are the victims of wars. Today, we walk a little further down this hall of mirrors...hoping to see something new.

We watched a little television while we were in Ireland. A group of grown Englishmen caught our eye. They were jumping up and down like children...whooping and clapping... What were they so happy about? Their team had won. They had won. They were winners. They stood taller. They were prouder. There was real joy in Mudville.

The men didn’t look like winners. They looked like losers. They were out-of-shape...poorly dressed in tee-shirts and jeans...with stupid expressions on their faces. And yet, as if by a miracle akin to transubstantiation, they were made winners... What had they done? Nothing. What merit or skill had they revealed? None. And yet, they felt like winners, simply because the home team had scored more points than its opponents. They were fans caught up in sports...emotionally and intellectually. Far more mental energy goes into second-guessing coaches at sporting events than went into the Brandenburg Concertos or War and Peace .

“You know,” said Elizabeth, “you risk becoming so alienated you can’t take part in these things...and you can’t enjoy them. You risk putting yourself so far away from everyone else that you are like a man with his nose against a pane of glass...like Frankenstein’s monster...looking in at the human race. It will be very lonely...

“You might also think of Rhett Butler in Gone with the Wind . Now, there was a real contrarian. He knew the war was a lost cause. He urged his fellow southerners not to go to war in the first place. Then, instead of joining up himself, he profited from the war...he was a blockade runner, remember? But even he couldn’t stay out of it for long. Near the end, when the Great Cause was almost lost, he joined the Confederate Army. He didn’t have to. He knew it was hopeless. But he did it.

“It is all very well to be a contrarian...but we are human too. And humans operate on instinct...what’s more, many of those instincts are noble and good. You don’t want to put yourself at too great a distance from those instincts...or you will cease being human at all.”

A Greek philosopher – we can’t remember which one – argued that the greatest curse a man can suffer is to be married to a smart woman. She will laugh at his pretensions and find the flaws in his arguments. No, what a man needs is a good woman...he said, one who makes cookies and looks adoringly at her husband, as she would at a cocker spaniel.

But the Greeks were wrong about a lot of things. A smart wife is a man’s greatest protection from his own absurd logic and his own preposterous vanity. She will point out that he is a fool...and he will see that she is right.

Contrarianism, as a philosophy, only takes us so far. (We are not contrarians...long term Daily Reckoning sufferers will remember. We are Essentialists . Distill the transaction down to its bare essentials, we say. Then, find the rule that governs it. More on that when we have nothing better to do...)

Getting back to our subject...modern wars, often, are like sporting events. There is a logic to them. But we are often as bamboozled by own logic as we are misled by our instincts. Take the American Revolution, for example.

The history books tell us that it was a war of liberation. ‘No taxation without representation,’ was the War Party’s cry. And yet, an Englishman lays out the facts:

"One of the great ironies of the American Revolution,”

writes Martin Hutchinson,

“is that the colonists, who rebelled against British-imposed taxes lower than those of the mother country, were in reality living in the lowest tax polity in the history of civilized mankind. Needless to say, once the United States had achieved independence, the taxation on its people was never as low again, even though for the country’s first century and a half most U.S. governments pursued admirably frugal policies.”

The Founding Fathers were driven by their own instincts and deceived by their own logic. It happens to the best of us.

More to come...

Bill Bonner
The Daily Reckoning

From today's Daily Reckoning

Money Supply Rates

Best analysis I've seen to date of the coming inflation

NIGHTMARE!!!

Take a look at the annual money-supply growth rates around the world –

US +12%
Euro zone +13%
Britain +14%
China +20%
Russia +51%
India +23%
S. Africa +22%
Brazil +12%

Now, you don’t have to be a NASA-scientist to figure out that as the quantity of money increases, each unit of money will continue to lose its value or purchasing power against assets whose supply cannot be increased at the same pace. This confiscation of purchasing power has bullish implications for precious metals.

Today, several highly-intelligent economists and analysts are anxiously waiting for “The Crash” which will wipe out the value of the Dow Jones by 50-60%, cut the value of gold by half, cause an economic depression and create a vicious bear-market in asset prices. In my humble opinion, these people are going to be disappointed because “The Crash” will be stealth and will take place via plummeting currencies rather than an outright collapse in nominal asset-prices. Those who are forecasting a significant decline in US asset prices need to look no further than Zimbabwe where stocks have been making record-highs, albeit in a collapsing currency! So, given a choice between an outright deflationary bust and an inflationary bail-out, I can assure you that every establishment will opt for the latter outcome. In fact, central banks will continue to print money until the world runs out of trees.

Editor’s Note: Puru Saxena publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets. Money Matters is available by subscription from www.purusaxena.com

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