Zombie Economy Feeds on New Money and Credit

By The Mogambo Guru

03/26/09 Tampa Bay, Florida I thought that I had a pretty good handle on how much “stimulus” money Congress and the Fed have spent so far, ranging, as it does, in the zillions of dollars… So I was taken aback when Addison Wiggin of Agora Financial wrote, “$7.2 trillion is a lot of money. That’s what D.C. has poured into ‘our’ bailout so far.” Wow!

Trying to keep from peeing my pants in horror, I think to myself, “Hell yeah, that’s a lot of money… Because it is roughly half of everything this country makes in a year! Half of American GDP!” which, unfortunately, ended in “P”, which sounds like “pee”, which was just enough of a subliminal suggestion that… Well, never mind.

But if creating that much money is not enough to scare the piss out of you, too, then consider it just a Mogambo Warm-Up Test (MWUT) to see if your heart is strong enough to take the news behind the New York Post headline “The Fed’s Futile Move” – an article by Dick Morris and Eileen McGann, who report, “the money supply has already expanded by 271 percent in the past five months”! Gaaahhhh! That comes out to a money supply expanding by 650% in a year!

I immediately see that I made a mistake in worrying about YOUR heart, when I just noticed that my own has taken the news very badly, and as I am laying here on the floor, wondering if the newspaper reporter will report whether I am “laying” or “lying” on the floor where I have been killed by the news of the complete suicidal stupidity of Congress and the Federal Reserve, when it occurs to me as I was either laying or lying on the floor that the thing that makes it all so surreal, and which proves that everyone involved in this whole Federal Reserve/Congressional irresponsibility is both insane AND stupid, is that the whole ridiculous idea behind all of this “stimulus” money is the laughable belief that all of this excessive new money and insane amounts of deficit-spending can be removed once the economy “recovers”! Hahaha!

After nervously laughing at such idiocy to hopefully forestall puking up blood in terror, or at least screaming in sheer outrage, my lips curl into a snarling sneer, and with a voice dripping with venomous contempt, I ask, “Recover from what, morons? Hell, the wildly distorted economy has been a walking zombie for decades, animated only by the constant infusions of new money and credit from the Federal Reserve to finance more and more deficit-spending of government, so that the entire economy gradually evolved into a cancerous, warped, mal-invested, misshapen, bloated, disgusting socialist/collectivist monstrosity, built upon the insane economic pillars of government spending for constantly-increasing entitlements, trading financial assets to each other, providing health services to each other, and building huge houses and lots of Starbucks coffee shops! Hahaha!”

In case anybody asked (which they didn’t) I would have ended with, “Everything else that we used, we imported! We stuck ourselves with a trade deficit that regularly exceeded $800 billion a year” which means that $800 billion a year left this country and became the wealth of somebody in some foreign country, who appears to not be very happy to get those $800 billion dollars because he is saying disparaging things about them, which sounds like, “Wong cho wo hubba bubba go down crapper?” which means, “What in the hell am I supposed to do with all these American dollars that get more worthless every damned day because the stupid American Federal Reserve is creating insanely more of them every damned day and the stupid American government is insanely deficit-spending more of them every day, too?”

I admit that eavesdropping on foreigners whining about the dollar is pretty far from my original complaint, which was that all of this stimulus money will never, ever be withdrawn from the economy because that would mean that the money supply would go down, which is the definition of deflation, and this deflation is what has the Fed and the Congress in such a frightened panic that they are deliberately creating inflation and risking hyperinflation with their unbelievably massive explosions of new fiat money and government spending, which are guaranteed to destroy us a dozen times over, just to make sure that deflation, and the attendant drop in inflated asset prices, doesn’t happen! Hahaha! We’re freaking doomed!

And yet (notice the way my eyes comically roll around in my head) I am supposed to believe that maybe one day, perhaps after a decade of the government deficit-spending another $40 trillion or so, they will allow deflation to happen and let all the prices of assets collapse then? Hahaha!

No, no, my darling Junior Mogambo Rangers (JMRs); all that money, and yet still more money from other countries and other sources, will be with us for the rest of our lives, and the inflation in the money supply will show up as higher and higher inflation in consumer prices, which is what will cause rioting when the people realize that they are bankrupted and starving to death because they did not buy gold, silver and oil when their own stupid government started acting irresponsibly, which is, I am sure you will agree, bad news.

The good news is two-fold in that that 1). I will be a shining exemplar of the fat, piggish, conceited, self-absorbed, obnoxiously gluttonous rich guy whose gold, silver and oil have obviously served him well enough to indulge every gutter-level salacious appetite, no matter how revolting, and 2). It will be a lesson everyone else will, hopefully, not forget the next time their government acts like a moron.

Whee! This investing stuff is easy!

Caution: Zombie Economy Ahead

Caution: Zombie Economy Ahead

By Rich Lowry

Computer hackers managed to hijack a digital road sign in Austin, Texas, the other day and change its message to "Zombies Ahead."

It was a whimsical warning for that stretch of Texas road, but could have served as a deadly earnest statement about the U.S. economy. "Zombie banks" was the term for Japanese financial institutions propped up by government in the 1990s despite their basic insolvency after a real-estate bubble. These unprofitable banks, in a financial revenge of the living dead, cast a decade-long pall over Japan.

At the time, American officials like Pres. Barack Obama's economic guru Larry Summers urged the Japanese to give up on failed institutions. Instead, Japan pumped 12 percent of its gross domestic product into saving the banks and got a "lost decade" of economic stagnation in return. Economic analysts across the board agree that the Japanese example must not be repeated, even as our lawmakers stumble into repeating it.

Members of the House Financial Services Committee flogged eight banking chief executive officers the other day, apparently without considering that some of them were already dead men walking. The CEOs were grilled about their lending practices and bonuses, when they should have been asked, "Why does your company still exist?" The head of Citigroup, Vikram Pandit, noted he's getting paid $1 a year, which might be $1 too much given the state of his all-but-bankrupt firm.

The awful truth is that the financial system has at least another $1 trillion hole in it. Either the U.S. government has to continue to try to patch it over with massive--and perhaps ever-escalating--injections of money à lá the Japanese in the 1990s, or it has to take the painful, risky step of letting some of the big, irreparably wounded financial players go down.

Neither choice is appealing, which is why Treasury Secretary Timothy Geithner trotted out his muddle-through, we'll-get-back-to-you-on-details rescue plan. Obama shows no appetite for grasping the nettle of a problem much more difficult technically and politically than asking Congress to shovel billions of dollars at its favorite priorities in a stimulus bill. In his first prime-time press conference, Obama dodged when asked if it would take another trillion dollars to rescue the financial sector--because a simple "yes" would be just too starkly truthful.

As it stands now, the U.S. government is keeping alive banks that would otherwise go bust at the same time it is hectoring them about lending more money--in other words, Japan redux. "Many banks continued to extend credit to insolvent borrowers, gambling that these firms would recover or that the government would bail them out," writes University of Chicago economist Anil K. Kashyap of Japan in the 1990s. "The Japanese government also encouraged banks to increase their lending to small- and medium-sized firms to ease the credit crunch after 1998." The resulting misallocation of capital smothered growth.

Tokyo short-circuited the natural churning of the capitalist system that is the only way to clear out failed companies and unproductive uses of capital. If the U.S. government keeps alive Chrysler and General Motors or Citigroup and Bank of America when they are no longer viable--and have rendered themselves such through poor business choices and foolish risk-taking--it will create a zombie economy without the capacity for self-renewal.

The financial system, of course, is fragile. We have learned that the uncontrolled collapse of an institution like Lehman Brothers is dangerous. Bankrupt banks that are truly "too big to fail" need to be taken over by the government, broken up until they are small enough to fail and sold off, with government eating their toxic assets for now. This kind of semi-nationalization can clear the decks for new, healthy banks that won't be long-term wards of the government or long-term drags on growth.

During the stimulus debate, Obama often cited Japan's cautionary example. But Japan tried a big stimulus, too, even as it left in place its zombie banks. Will Obama heed his own admonitions?