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Great Depression Online Archive Issue:

The Lumberjack Slam Indicator

Great Depression Online
Long Beach, CA
June 30, 2009

Inside This Issue You Will Discover…

*** Pure Unadulterated Hogwash
*** The Mechanic and the Storeowner
*** The Lumberjack Slam Indicator
*** And More

Pure Unadulterated Hogwash

We have to hand it to our fellows.  While man’s collective behavior is typically reduced to that of animals and idiots – soccer riots and running up the price of beanie babies – every now and then we all come together, hold hands, and do something of unified intelligence.

What is it exactly we’re talking about?

Saving money.

That’s right.  The Commerce Department reported last Friday that American’s are saving more money now than anytime since 1993…the personal savings rate in May was 6.9 percent.

“That’s a vast improvement from what had been an official U.S. savings rate near zero for much of the time from 2005 through early 2008,” reported the Los Angeles Times.

“The rate was just 0.4 percent in 2007.”

~~~~~~The Buffett System~~~~~~

Let’s face it, there are literally hundreds of thousands of people out there trying to invest just like Warren Buffett and only a very rare few are actually getting Buffett results.  Of course, it’s no wonder why so many people want to invest like Buffett.  After all, Warren Buffett is, unequivocally, the greatest stock market investor of all time.  And now you can invest just like him.  “Invest Just Like Warren Buffett”

~~~~~~~~~~~~~~~~~~~~~~~~~

Still, you can always count on economists to disparage sensible and prudent behavior.  One economist, and a notable moron, Walter “Bucky” Hellwig of Morgan Asset Management, explained, “The consumer is hoarding cash and that’s an economic headwind.”

Whenever an economist tells you spending lots of money brings wealth to the world…first check to see you still have hold of your wallet, then run for the hills.  For the true cornerstone for building wealth is saving more money than you spend.  The idea that it could be otherwise is pure unadulterated hogwash.

We’ve even heard that saving money is somehow unpatriotic.  Typically for such nonsense, the term ‘hoarding’ is replaced for ‘saving.’  But hoarding money is precisely what everyone with half a brain should be doing at a time like this…particularly since unemployment is still increasing.

If you lost your job right now, finding another won’t be easy.  Should that happen, you’ll be glad you squirreled away some extra nuts for the winter rather than having listened to some economist who told you spending money would bring prosperity.

The Mechanic and the Storeowner

The velocity of money is what economists who ridicule saving money point to as the critical determinant for economic growth.  In this respect, velocity of money is the average frequency a unit of money is spent in a specific period of time.

For example, a mechanic buys $40 of maintenance supplies and detergents from a storeowner in the morning.  Midday the storeowner spends $50 to have his car tuned up by the mechanic.  That evening the mechanic picks up a $10 case of Budweiser from the storeowner.

Thus $100 changed hands over the day, even though there was only $50 of actual money.  The reason it was possible for the $100 to change hands is because each dollar was spent twice…the velocity of money was 2 per day.  For the day, based on these transactions, the storeowner and the mechanic each contributed $50 in gross revenue to the economy.

But what happens if the storeowner takes the proceeds from the initial $40 sale and stuffs the money in his mattress…and the mechanic, not having earned $50 in tune up services, passes on the beer? 

In this example, just $40 in gross revenue would be contributed to the economy’s GDP.  But is the world a less prosperous place in the second example than the first?

In terms of GDP growth it appears to be.  Still, we’re not convinced…

For what if the economy has zero savings and the mechanic uses credit to make the initial $40 purchase?

In this case the economy would get an initial boost to GDP, but the acquired debt would serve as a future drag on economic growth…a portion of the mechanics future income would go towards servicing the debt.

Here’s the point.  Consumer spending makes up 70 percent of the economy in the United States.  But over the last economic boom, consumer spending was based largely on credit rather than savings. 

Hence, when 70 percent of the economy is based on consumer spending, and consumer spending is based on credit rather than savings, then GDP stops being a measurement of economic growth, and becomes a measurement of the rate at which consumers are going into debt.

So contrary to what an economist may tell you, spending lots of money doesn’t bring prosperity to the world.

The Lumberjack Slam Indicator

Nonetheless, how will you know when the consumer’s getting ready to go on the next spending binge?

One novel indicator is the Lumberjack Slam.

For those who’ve never heard of the Lumberjack Slam…it’s is a feast of pancakes, ham, bacon, sausage, eggs, and hash browns served at Denny’s.

“When the economy gets better, people will start buying the Lumberjack breakfast again and more appetizer samplers,” said Denny’s CEO Nelson Marchioli.

If we had our druthers, we’d prefer there not to be another bull market in Lumberjack Slams.  During the last one, the population became so abnormally large it seemed every flight we were on there was a portly chap next to us sitting in his seat and half of ours.

Perhaps the economic contraction will also contract waistlines, and folks will be less eager to wolf down pancakes, ham, bacon, sausage, eggs, and hash browns all at once.

Sincerely,

M.N. Gordon
Great Depression Online

P.S.  Did you know that $1,000 invested with Warren Buffett when he started in 1956 would be worth more than 30.6 million today?  Discover The Quick, Easy, And Automatic Way To Invest Just Like Warren Buffett.  “Invest Just Like Warren Buffett”

 

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