Twilight Zone Buying Power

By: The Mogambo Guru | Tue, Nov 20, 2007
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"It's a frightening Twilight Zone moment when you realize that you started with $500,000 in buying power, and you ended up with, after waiting five long years, with only $439,700 in buying power!"

There must be a slowdown in buying going on, as John Stepek at MoneyWeek.com reports that, "wholesale inventories rose 0.8% in September, far more than the 0.2% that analysts had been expecting", and that the "Institute for Supply Management's survey for October suggested that customer inventory levels were at their highest since January 2001, which was two months before the US's last recession begun."

"Hmmmm!", I think to myself, suddenly realizing that a drop-off in consumer spending, resulting in a drop-off in middlemen buying inventory, would be a good predictor of recessions!

But before I could develop this idea, Mr. Stepek quotes David Rosenberg at Merrill Lynch (NYSE:MER) as saying the same thing; that with consumer consumption slowing and retail businesses responding by ordering fewer goods because inventories are rising, fourth-quarter GDP could come in "perilously close to flat, or even negative."

And if you think that this subprime, inflationary, recessionary mess is bad for us ordinary weenies out here in the real world, imagine the effect on tax revenues for all the spendthrift governments out there as a result of all those sales that didn't take place, and all those fees that were not paid, and all those fortunes that were not made, and thus all those taxes that were not collected.

And the thing that makes it all worse, so Very, Very Much, Much Worse (VVMMW) is that not only were grubby fortunes not being made nor taxes being paid, but these are losses, and all these losses will be netted against whatever pitiful little gains people managed to make! If any! And deducted against ordinary income if not!

And for years and years to come, the government will receive less tax revenue, as all of today's losses will be netted out against future gains or income until they are completely deducted by taxpayers!

For the American federal government, this is the Ultimate Triple Whammy (UTW); not only are taxes not being collected now, or will future profits be taxed, but it comes at the same time as the rising social burden of taking care of the victims of inflation means a "need" for higher government spending!

And at a time when the federal government alone is already deficit-spending $500 billion a year, and the states are selling bonds for a few hundred billions of spending-dollars a year! Hahaha! We're so screwed!

And it will get worse and worse, as is implied from the title "Is $100 Oil Cheap?", which is a question asked by Chris Gilpin of the Casey Research Speculator ;newsletter. My immediately response is, of course, "No! Now let me ask YOU one! What in the hell makes you ask a question like that? You trying to start something with me? You want a piece of The Mogambo? You want to maybe go a couple of rounds with me? Is that what you want?"

Mr. Gilpin apparently took some offense from my gratuitously sarcastic attitude, and disdainfully says, "Your average economist will tell you that once you correct for inflation, crude prices reached their actual peak in 1980 during the energy crisis spurred by the Iran-Iraq war."

For that, I thank Mr. Gilpin for verifying that I am not your "average" economist, as I haughtily admit that I could not have told you that at all, as the details are all news to me, but it seems about right.

Mr. Gilpin unmasks me when he suddenly realizes that I am just another ill-informed blowhard, and I have to be spoon-fed the data. So he says that from April to July in 1980, "a barrel of oil sold for US$39.50. Using the government consumer price index (CPI) numbers, that record-high price per barrel is estimated at between US$90 - US$102 in today's dollars."

Well, Casey Research's chief economist, Bud Conrad, has (like me) some reservations about using the government's Consumer Price Index for anything other than as toilet paper because that index of inflation which has been openly distorted and bastardized by the satanic Alan Greenspan and the detestable Michael Boskin.

Using a rate of inflation calculated the old-fashioned way, as by John Williams at his shadowstats.com site, instead of the lying, distorted way that Greenspan and Boskin created to do it, Mr. Conrad has confirmed with his own calculations that real, in-your-face, pay-me-now, price-rising inflation is actually running at or above 10%.

Using this inflation data, he has thus calculated "the oil price history using the 1980 CPI method. It turns out that 1980 barrel of $39.50 crude is the equivalent of over $200 per barrel in today's anemic dollars." Yikes! Oil would have to rise to $200 a barrel just to reach the old high price in inflation-adjusted dollars! Yikes! $200 per barrel, thanks to a falling currency!

And since I am always on the lookout for ways to illustrate how inflation causes the loss of buying power of dollars, it is fortunate for me that MoneyandMarkets.com happened to come along and writes, "Suppose you put $500,000 into a money market account earning 4% a year back on November 7, 2002. Compounded daily, you'd have $610,694.69 as of yesterday."

Immediately I know that he and I travel in totally different circles, as all my hoodlum friends and me TOGETHER couldn't come up with $500,000 to put into some stinking money market fund. So I was getting ready to say "Bah!" and leave, when he says, "But wait! Over that same five years, the dollar has lost another 28% of its purchasing power. So, what one dollar bought in 2002, will only buy $0.72 worth of goods and services today."

At that, I start sensing something sinister and important here, but I know that I am too stupid to understand exactly what, so I will keep my mouth shut and my hand inching towards the pistol I have under my jacket, just in case. This "freezing like an armed deer in the headlights" tactic turned out to be very fortuitous, as he was somehow persuaded to go on to explain "So that $610,694.69 in savings that you accumulated and thought you protected so wisely in a money market fund? Well it will only purchase $439,700 worth of goods and services - 28% less than you thought!"

It's a frightening Twilight Zone moment when you realize that you started with $500,000 in buying power, and you ended up with, after waiting five long years, with only $439,700 in buying power! That's $60,300 LESS than what you started with!

And that is before you pay the capital gains/income taxes on the phantom "gains" on that additional $110, 694.69 in account value, turning your total real loss in buying power into a bigger, much bigger net loss! Hahahaha! Ugh.

Mogambo sez: Everyone has lost their minds in their desperation to keep the markets up until at least December 31, so that taxes are fixed in amount, bonuses are paid, money is made, and end-of-year account statements do not tell a shocking tale of horrifying loss and financial terror to trusting investors.

Money and corruption will be coming out of every pore of the body economic, and hopefully driving the prices of stocks, bonds and houses up, which pleases them, but driving gold, silver and oil down, which pleases us, because then we can buy more and more and more and more at cheaper and cheaper and cheaper prices, which is the essential first half of the immortal phrase, "Buy low and sell high."

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The Mogambo Guru

Author: The Mogambo Guru

Richard Daughty, the angriest guy in economics
The Mogambo Guru

The Mogambo Guru

Richard Daughty (Mogambo Guru) is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the writer/publisher of the Mogambo Guru economic newsletter, an avocational exercise to better heap disrespect on those who desperately deserve it. The Mogambo Guru is quoted frequently in Barron's, The Daily Reckoning, and other fine publications.

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