 I never
get the twenty bucks, dammit
Richard Daughty
...the angriest guy in economics
The Mogambo
Guru
Archives
January 20, 2005
- Marshall
Auerback, one of the big dogs at the PrudentBear.com website,
handily explodes the conceited stupidity that The Mogambo knows
what he is talking about when, oops! Sorry! On re-reading the
piece, he did NOT expose The Mogambo for the pretentious little
twerp that he really is. What Mr. Auerback REALLY did is to explode
the overarching stupidity that constantly lowering interest rates
will always produce economic growth. This is important because
this idiotic idea is the bedrock from which all of modern central
bank theory springs. He writes, "It is generally assumed
that increases in credit stimulate aggregate demand. In the short
run that is always true. But in the long run it need not be true.
The expansion of credit is an increase in debt. When debt levels
are low, a credit expansion which increases debt does not leave
a legacy which later suffocates demand, since the resulting still
low level of debt is not yet a problem. But when debt levels
are very high, the increases in debt created by credit expansion
soon act as a burden on demand. It follows from the above that,
as the level of debt relative to income rises, it should take
larger expansions of credit to achieve any given percentage increase
in demand, since the now high, and climbing, debt burden acts
as a countervailing force to depress demand." As is proved
by stopping by my house on almost any day, as I try and explain
to my wife that what we really NEED around here is another mortar
emplacement down at the end of the backyard, and she explains
that we owe so much on the OTHER mortar emplacements that we
simply can't afford another one.
But as long as the credit keeps
expanding, which you can measure by total debt, then that means
that people are still borrowing and spending money, and as it
winds through the system there will be money flowing into everything,
and that includes the stock market and the bond market and the
housing market. So far so good.
In a related note, Total Fed
Credit, which is the ultimate measure of "money out of thin
air," went down by a whopping, and surprising, $11 billion
last week. I am not sure what this means, but it is unusual,
after all these years and years of the damnable Federal Reserve
creating more and more money and credit, day and night. But if
it continues long enough, then the money supply will start contracting.
And while I am again not sure exactly what THAT means, either,
the steel-trap mind of The Mogambo (STMOTM) notices that there
are no economic theories that start out with "To get economic
growth, first you need a shrinking money supply." Hahahaha!
That new lack of borrowing
is why the chance of Congress authorizing the use of Social Security
contributions to be invested in private accounts is almost sure
to pass. And if it does NOT pass, then I will have this really
surprised look on my face and people will say "Is something
wrong with The Mogambo? I mean, look at his face!" and somebody
else will say "Yes, by golly! It DOES look like something
is ailing him. I wonder what we can do to help him?" and
I tell them that giving me twenty bucks would go a long way towards
making me feel better. But then they just stare at me and get
all huffy and make some rude comment, and I never get the twenty
bucks, which shows you just how deep their compassion runs, the
little bastards.
But the subject was not my
problems with things surprising me, and how I never get the twenty
bucks, dammit. No, the subject was that if you really want to
see the beginning of the Great Bear Market Which Signaled The
End Of The World, then pay attention to how much debt is being
created, because if credit is going up, then that means, as I
never seem to tire of saying, that people are borrowing and spending.
But when it starts going down, then people are not spending,
and economic and financial things will start going down, too.
In the meantime, perhaps we
can take some solace from Bob Wood of Kaizen Managed Assets,
who explained to me over lunch that everyone apparently believes
that the whole "economics thing" is apparently of divine
origin, and is so complex that our puny human minds cannot comprehend
it, and so economics must be taken on faith, particularly faith
in the Federal Reserve. It is, we decided, sort of an Intelligent-Design,
Neo-Keynesian, Supply-Side Economics, and thus we expect that
all books of economics will, in the future, have affixed to their
covers a sticker that reads "Intelligent-Design Neo-Keynesian
Supply-Side Economics is a fact, and not a theory" thus
effectively proving it.
- There is a plan afoot to
let American corporations who have substantial assets sitting
in foreign countries bring the money "home to America"
by allowing them to repatriate those monies by paying a special,
one-time, ultra-low tax rate. This is supposed to be some wonderful
news. But it will not be such hot news for those countries that
are currently harboring those monies when they see it flow out
of their countries, and out of their assets, and out of their
markets, and out of the control of their governments.
- As a little change of pace,
let's take a little trip to Technical Analysis Country, and visit
Chris DeHaemer, courtesy of the DailyReckoning.com site. Suppose
that you want to make a little short-term money by predicting
market action. How do you do that? Easy! As Mr. DeHaemer explains,
look at volatility, as revealed by the VIX. "Simply put,
when volatility spikes during bearish action, buy. That flood
of panicked sellers is a contrarian indication that the market
has bottomed. When volatility continues to drop during a time
of high bullish action, sell." See? Nothing to it!
- Edmund M. McCarthy, the President
and CEO of Financial Risk Management Advisors Company, is one
of those guys who goes around looking at things in financial
reports, while The Mogambo goes around peeking through the windows
of Madame Lulu's Cavalcade of Girls, Girls, Girls, and he writes
"Looking at a 10Q of a quite revered bank recently, we saw
an 100% expansion in that footnote to credit quality entitled
'Over 90 days past due but not non-performing.' The dollar amount
would be significant to most analyses. There was no further explanation.
We will be paying particular attention to this area going forward
as it was an early warning sign in previous cyclical changes."
Part of the problem may be
explained by Rosalind Wells, who is the chief economist for the
National Retail Federation, who notes that consumer spending
appears to be dropping precipitously. Ms. Wells says, in an article
in my local paper, the St. Petersburg Times, entitled "Stores
Facing Closed Wallets," that "Consumer spending is
about to downshift. This may be a tough year because the consumer
may be tapped out." While not forecasting the imminent destruction
of the globe and flesh-eating zombies rising from the grave,
like the stupid Mogambo who is always either in a panic or close
to one, she says that consumer spending will probably settle
down to a 3.5% gain this year, down from 6.7% in 2004. I love
this next part in the article: "Virtually all of the gain
would be consumed by inflation. Her downbeat assessment brought
general agreement from other experts and industry leaders"
at some convention that they were all attending, a convention
to which The Mogambo was not invited, probably due to a mere
oversight or as part of a coordinated plan to destroy me, I'm
not sure which, but I'll bet you know what I suspect.
Now this 6.7% increase in retail
sales for 2004 is very interesting to me, because according to
the AFP, consumers spent a hell of a lot of money last year.
"Total sales of 4.06 trillion dollars in 2004 were up 8.0
percent from 2003, the biggest annual increase since 1999,"
they say. This is the first time in history that the consumers
of one country spent more than four trillion dollars in one freaking
year, roughly 12% of the GDP of the entire world.
And all of THAT may help explain
why Consumer Installment Credit contracted by $9 billion in November,
which was a big surprise to everyone, including The Mogambo,
who is usually only surprise that armed and armored agents of
the government haven't hauled me off by this time, hopefully
to give me the therapy I so desperately need.
- According to XFN, "China
is beginning to have an impact on US technology industries formerly
thought to have been insulated from low-wage overseas competition,
according to a report prepared by a US Congress-mandated commission.
China's exports of electronics, computers, and communications
equipmentare growing much faster than its exports of low-value,
labor-intensive items." Hey! I know what you are thinking!
This isn't fair! As I understood it, the deal was that those
Chinese guys would remain content with their peasant status,
work like slaves for pennies a day in horrible working conditions,
and then we Americans, for our part, would sit around in our
air-conditioned offices, waiting until the boss isn't looking,
then go online to go shopping to buy those cheap Chinese products,
and download entertaining pornography to pass the time while
we wait for delivery! And use money borrowed from the Chinese
to pay for it all! Isn't that the way you understood the arrangement?
Me, too! This proves that you can't trust the damned Chinese!
Chinese economic growth has
been averaging 9.7% a year from 1990 to 2003. Partly as a result,
the People's Bank of China said that China's foreign exchange
reserves rose 51% last year to $610 billion, a new record. (But
as John Mauldin reports, suddenly, the overwhelming bulk of that
increase in reserves was NOT in dollars!) And China's M2 money
supply growth expanded 14.6 percent from a year earlier. M2 in
China is now up to 25.3 trillion yuan, which apparently works
out to $3.06 trillion, which is, for comparison, roughly equal
to half of our M2 money supply. So, like the budding little capitalist
swine that they are, and we are, and we all are, the nefarious
Chinese now want to invest in producing high-value items, taking
the bread out of our mouths! As one of the bright dudes at the
Daily Reckoning website notes, also looking at the trade deficit,
"Over the last 12 months, exports of 'high tech products'
actually FELL 21%." How much longer before they start producing
some nuclear weapons, like us? And then they can strut around
the world, randomly kicking butt, like us! And won't that be
nice?
But life is not all eggs rolls
and Geisha girls who are all giggly and happy until they find
out I have no money, and the inflationary impact of such unrestrained
money/ credit/ production excesses is showing up as higher and
higher consumer prices, which is why the Chinese are trying to
cool off their economy, even though the official Chinese consumer
price inflation is only 2.8%. On the other hand, America's official
inflation rate is higher at 3.5%, and instead of trying to cool
the economy in the face of such high inflation, the Bush idiots
are trying to stoke inflation even higher! And then people wonder
why The Mogambo has locked himself in the Mogambo Fortress Of
Solitude (MFOS) and is writing terse, incomprehensible letters
to George W. Bush (e.g. "Dear Butthead President: Arrrggghhhh!
Signed, Angry in Florida (AIF)").
And speaking of China, one
of the most Profound Moments In History According To The Mogambo
(PMIHATTM) is that Mises.org reports that the Taiwanese have
published, in Chinese, a reprint of Murray Rothbard's famous
book "What
Has Government Done to Our Money?" This miraculous little
book (62 pages), which is actually more of a booklet, contains
all you need to know about money, credit and economies, and the
disastrous results of fiat currencies, fractional banking, government
deficits and all the rest of the stuff that keeps The Mogambo
screaming long into the night until the police come and make
me shut the hell up by putting handcuffs on my wrists and tape
over my mouth, which tastes like crap, in case you were wondering,
and then the rest of the night all I can muster is muffled cries
of rage ("Mmmffhhh mmmummfffmmmm!").
And now that the book is translated
into Chinese, that singular effort will doom us if they take
it to heart and base their money on gold.
Our only hope is that the politicians of China are as corrupt
and stupid as our own, and opt to go with a profligate central
bank creating and un-backed paper currency in a banking system
rife with fractional banking excesses, too.
- Let's not count the Russians
out! Agent 007 ("The name is Bond. James Bond") has
had his share of run-ins with those guys, now their central bank
reports that their foreign currency and gold
reserves rose to a record of $124.6 billion. Note that they are
including gold in their report, which we do not,
and they are accumulating gold, which
we do not, either, mostly because our government and central
bank figure that Americans are too stupid to know the significance
of that. The only good news is that Rothbard's book has not been
translated into Russian, as far as I know, although the fact
that they are accumulating gold shows
that it probably has. Now we have the Russians AND the Chinese
to worry about! Fabulous. Just freaking fabulous.
People often ask, "Mogambo,
how come you never amounted to anything and are, according to
recent data, actually a big failure in everything?" Well,
to be fair, they usually only ask me that question one time,
and then forever after they carry bad memories and/or actual
scars to remind them not to ask me THAT damn question again!
But they are wrong when they
say I have failed at everything, because you can ask anybody
who works at the supermarket about monetary policy and they ALL
know all about how the dollar is being destroyed by the Federal
Reserve, and how they are literally creating this tsunami of
credit and money, which is going to rise up destroy our money
by lowering its buying power to, rounding off to three decimal
places, squat. And if you have never actually tried to exist
on money that has buying power that registers in the "squat"
range, then gather up some attractive pebbles from the roadside
and try and use those "pretty rocks" as money when
you go to the store. If you try that silly crap around here,
as soon as you use the phrase "pretty rocks" the manager
will probably run off, tearing out his hair and screaming, "Noooooo!!
Not the damned Mogambo and his damned 'pretty rocks' and his
damned loud monetary policy lectures! Death, where is thy sting?"
But Hans Sennholz takes the
calm, philosophical approach, as he demonstrates with his essay
"The
Dollar's Questionable Future." He writes, "If the
love of money is the root of all evil, the depreciation of money
must be the mainspring of all shams and frauds. It works silently
and covertly, impoverishes many while it enriches a few, and
thereby inflicts great harm on social cooperation and international
relations."
And what do you get when you,
as he says, inflict "great harm on social cooperation and
international relations"? You get strikes and riots, something
like the recent outbreak in Moscow when they tried to trim a
little off their bankrupting welfare payments, and countries
like the USA operating as terrorist nations that routinely invade
other countries and kills whole swaths of people. Oops! But then
again, nobody ever said that the downside of a fiat currency
was pretty.
- The U.S. trade deficit reached
$60.3 billion in November. Peter
Schiff, of Euro Pacific Capital, makes the telling statement
that "The reality is that a falling dollar, by itself, only
exacerbates the trade deficit, by increasing the cost of imports."
How much, you ask? Before I could shrug my shoulders and admit
I had no idea because I am just a big, brainless idiot with a
big, fat mouth, Mr. Schiff saves me from that embarrassment by
interrupting to say, "Including energy, import prices rose
6.9% for the year." And yet I cannot pick up a newspaper
or listen to some clueless market tout on TV telling me how there
is no inflation in prices! Hahahahaha!
And it gets worse than that,
because if the dollar continues falling in value, then imports
will continue to go up in price! Bummer!
And don't be mollified by the
teensy-weensy. 0.7% drop in producer prices last month. The index
still posted a 4.1% gain on the year. And why do producer prices
matter? Because there is a lag between higher wholesale prices
and rising consumer prices down the road, since somebody has
to eventually pay the higher producer prices. And if you are
at all familiar with how business actually works, let me tell
you. Somebody owns a company, and they hire a manager to run
it so that the owners can make a profit without actually working.
The profit comes between the cost of inputs (producer prices)
and the price they get for selling the firm's output (goods and
services). And when that profit goes down because producer prices
are up and the manager did not find a way to increase prices,
then the owners come into the manager's office and the next thing
you know (insert video footage of Donald Trump looking into the
camera and saying "You're fired!") two beefy guys from
Security have me under the arms and I am being hustled towards
the door and tossed into the cold street, and all the pretty
secretaries are looking out the window at me, including the adorable
Teresa, with whom I had thought we had shared the bond that unites
two tortured souls, but who is also standing there yelling "Get
lost, ya big weirdo! " and laughing at me, which is a sting
that really hurts the most.
Continuing on, Ron
Peebles of the PrudentBear.com site writes that The Mogambo
is right on the money (although he doesn't actually mention me
by name, but he did crinkle up his nose as if he had smelled
something bad, which is practically the same thing) about this
inflation thing when he says, "For the record, prices for
intermediate goods, excluding food and energy, were up 8.3% in
2004, with crude goods soaring 20.1%."
Then he went on to talk about
other, more prosaic things, such as housing prices. Chugging
another shot of cheap tequila to help us forget for a moment
that we are buying each other's houses for what is elsewhere
known as "a king's ransom," he says, "Oh sure,
having your house increase in value is a great thing if you're
planning to sell in California to buy in North Dakota. But if
you're going to stick around long enough to get some use of those
granite countertops, the penalty for such pleasure is higher
property taxes. According to CNN, state and local property tax
collections in Q4 spiked 9% year-over-year." So high-priced
houses mean high-priced taxes. It just doesn't get worse than
that!
- Alfred
Tella of the Washington Times has taken a look a the Fed
minutes and notes that "Some members worried that low interest
rates 'might be contributing to excessive risk-taking in financial
markets.' " No kidding! Hahahaha! That is the whole point
of it, isn't it? Everybody is running around taking on more risk
to hopefully (please please please!) get higher returns, right?
And now that the Fed is provably intent, in their desperation,
on permanently lowering the cost of borrowed money to less than
the rate of inflation, they figure that people are NOT going
to be taking on more risk? I was right; the Federal Reserve IS
a bunch of idiots!
- Richard Russell, of the Dow
Letter, wryly notes that the idea (Mogambo says "Not just
an idea, but a Really, Really Stupid (RRSI) idea!") underlying
the Bush scheme of putting part of your Social Security money
in stocks is that they figure that "the long-term rise in
stocks will make up for any possible inflation, and SS would
then be a boon instead of a boondoggle." Hahahaha! This
proves that Bush is an idiot, because if he was NOT an idiot,
then he would have died on the spot for saying something so ridiculous!
For one thing, we are not having, nor are we going to have, "possible
inflation." It is beyond "possible." Price inflation,
and ruinous inflation at that, is a dead-bang certainty. And
if you care to examine the evidence, financial assets do not
usually prosper for long when inflation is roaring.
To further bury that idea,
Mr. Russell reports that Stanley Hogue, a defense industry analyst
and MIT graduate, put money into SS over his 45 year career,
and then decided to go back and check his own records to answer
the burning question "Would he have done better investing
his money than the bureaucrats at SS?" Mr. Russell notes
his method: "He recorded all the payroll taxes, tracked
down the return the SS Trust Fund earned for each of the 45 years,
and then compared result with what he would have received had
been able to invest the same amount of payroll tax money over
the same period of time in the D-J Industrials (including dividends)."
So what was the result? "To his surprise, the SS investment
won out: $261,372 vs. $255,499, a difference in favor of SS of
$5873." He didn't mention the tax bite, I notice, but perhaps
it was implied.
And this all assumes that private
pensions will always be a good deal. Not so! For example, Paul
Krugman comments on an article in the magazine American Prospect,
which illustrates the dismal failure of the British experiment
in privatizing pensions. Britain's Pensions Commission warns
that at least 75 percent, which is a big chunk of the population,
of those with private investment accounts will not have enough
savings to provide "adequate pensions." Of course,
those are just the stupid British, who can't be very smart, or
else Tony Blair would not be Prime Minister.
- The LeMetropoleCafe.com site
attempts to answer the perennial question, "What in the
hell is going on in the gold market?"
They reply "The motives of The gold
Cartel are as plain as day: The gold
Cartel and US financial market power structure know the dollar
must fall. However, they are concerned a dollar rout could cause
some sort of financial market instability or panic. To prevent
such an occurrence, they are following Paul Volker's insight
and what he had to say regarding the rise in the gold price in 1980: '...Joint intervention
in gold sales to prevent a steep rise in the
price of gold, however, was not undertaken. That
was a mistake.' "
Note that Mr. Volker was only
referring to a STEEP rise in price, which took gold
to $850 the ounce. Regardless of what the gold
Cartel and Mr. Volker want, the price of gold
will rise, thanks to the dollar's problems.
- Warren Pollock, of The Macroeconomic
Newsletter, is as pessimistic as I when he writes, "We are
right on top of multiple inflection points. Will it be a dollar
rout with a rising stock market, or a dollar rise with a stock
market crash? My answer to this question is that we will experience
both! We are going to have a declining-grinding stock market
and a stealthy devaluation of the dollar." Ugh.
**** The Mogambo Sez: To start the new year, I am responding
to all those who have written and complained that the MoGu is
too long, and by the simple expedient of shortening it. You got
what you wanted. You are welcome. Now send me twenty bucks, you
cheap bastards, because that is what I want. It's a win-win situation!
Jan 18, 2005
Richard Daughty
email: scgcjs@gte.net
Archives
The
Daily Reckoning
Richard Daughty
is general partner and C.O.O. for Smith Consultant Group, serving
the financial and medical communities, and the writer/publisher
of the Mogambo Guru economic newsletter, an avocational exercise
the better 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.
321gold Inc
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