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...is anybody holding the bag yet?

Richard Daughty
the angriest guy in economics
The Mogambo Guru
Posted February 9, 2004

Last week was pretty weird everywhere I looked. The Fed was not called upon to issue any credit, and they only dabbled in monetizing existing Treasury debt, the usual $202 million or so, which is literally turning government debt into money by printing up the money to buy the debt, and then throwing the debt into the shredder. Which is such a blatant fraud that I am embarrassed by the ineptitude of the media who, although they like to run their mouths about everything, cannot recognize a blatant fraud when it is happening right in front of their eyes. Uh-oh! It looks like I am ranting! Sorry.

But the big action was in the banks, as almost all line-items changed pretty dramatically. I was especially enthralled by the revelation that they sucked up, like a huge, demented vacuum cleaner, a huge $20 billion wad of government and agency debt. The Treasury Department itself only issued another $6 billion in new debt last week, taking us, once again, to another new record, although I have been reporting this "new record" thing for so long that I am beginning to sound like a broken record broken record broken record. To see what is wrong with this picture, I quote a pertinent section from the Reality Check newsletter of Gary North, "The banks have buried themselves in government debt certificates. They have bought government bonds. They have bought what economist Franz Pick called 'certificates of guaranteed confiscation.' Eventually, the debt will be repudiated. There is a universal long-run law of all government debt: creditors eventually get skinned."

And, as far as the Treasury acting like profligate children goes, it is not their most egregious effort by a long shot. And speaking of egregious efforts, as I write this the national debt has bumped up to $7.043 trillion, which is up another $29 billion, and the week is just getting started.

In a related vein, the IMF, given that they are as brain-dead as our own Fed, which is understandable since the Fed is the biggest of the creditors of the IMF, decided to give Argentina some more loans. I left off the exclamation point there, although normally that would rate at least one exclamation point. But I am cleverly setting you up for the punch line, to show you that the Mogambo has a humorous side, which I call the Mirthful Mogambo, with which to offset his dangerously angry and trigger-happy side. The IMF gave them more money even though Argentina is pretty honest and blunt about saying that they are in pretty bad shape, and they are going to keep defaulting on loan payments! I put that last exclamation point in there to indicate the fact that this is the punch line, and now you should laugh heartily-- Ho ho ho! --and say, wiping the tears of laughter from your eyes, "No! Really? No! What is the joke, oh Mighty Mogambo?"

The joke, and you are going to love this for all its cosmic ramifications, is that it is no joke. That is what really, really happened.

Now, anybody who knows me immediately deduces, correctly, that all of this is just too, too spooky for me, and I am grinding my teeth so hard that the friction is sending out a radio signal that is jamming radios and government communications for blocks around. I know this from looking outside my window and watching the government's Super Secret Agents spying on me as they try to talk to each other on their cell phones over the loud static I am producing, and I sneer at them "Chumps! This is one of those 'unintended consequences' from your reign of terror against me, the Magnificent Mogambo!" And, to give the government agent credit, he was fast on his feet when he replied, "Huh? Look, Mister, I'm just here to read the water meter! Honest!"

Well, I think that is what he said, but my Super Duper Central Computer System was activating a Perimeter Defense, Repel Boarders-type action, and what with all those machine guns cocking, and shells being loaded, and sirens blaring, it was pretty loud, and the super-powerful Klieg lights were illuminating the Fire Control Zone with a blistering glare and neighborhood kids were falling to their knees crying "My eyes! My eyes!" and he was in a hurry to leave. But he was one of them, all right. Trust me on that one.

Jerry R. Olson on Goldseek.com wrote one of those little essays that make you stroke your chin, and then have a stroke. In this case, the article is entitled "Historical Roman and American Parallels - The Die is Cast." Mr. Olson is pretty convincing when he compares Congress with the Roman Senate of 2,000 years ago, and one is hard-pressed to discern which is the most idiotic and self-serving. And he is no less convincing when he writes, "When the Clinton and Bush Administrations along with the compliant Fed Chairman, Greenspan undertook to combat every downturn in the economy with ever increasing injections of fiat money and credit, surely 'the die was cast'. Just as with Caesar, there can be no turning back in the new economy based on fiat money expansion in ever increasing amounts. Any change in course now will result in a severe contraction and lead ultimately to crashes in the markets, business failures, and to a worldwide depression."

In short, the economy is now so distorted, malignant and bizarre that it is impossible for it to operate with any semblance of sanity or normalcy, and trying to get it operating thusly will cause the whole machinery to seize up-- urk! --like my heart when I contemplate the consequences of yet another of the fiscal and monetary insanities being hatched.

"So what?" you say. I'll tell you what. No, better yet, I'll let Mr. Olson tell you, since you never listen to me when I say it. "Throughout history an unlimited expansion of fiat money and debt has always resulted in the collapse of the currency." And if you don't realize the significance of that, try and recall anybody ever saying, "We can have prosperity once we destroy the value of our money!"

I also discovered an article entitled "Real Rates and Gold 6" by a guy from an outfit named Zeal Research, named Adam Hamilton. Adam Hamilton. Nice name, eh? His name sounds like one of the Founding Fathers, and he sounds like them, too, although he is a CPA, and most of the real Founding Fathers were not, as far as I know. But anyway, Mr. Hamilton, being a CPA, is one of those guys who looks at the numbers and is not instantly confused, like me, and he is also one of those guys who looks at history, and, in a blistering show of productivity, combines them both and looks at historical numbers. And, having done so, he is, as am I, aghast.

The crux of his recent screed is negative interest rates. This is the concept that if you are loaning money at 4%, and inflation is 10%, then you are losing your purchasing power at the rate of, roughly, 6%. Thus the term "negative interest rates." And most people do not make a point of loaning a gob of purchasing power to be repaid in less purchasing power, and, parenthetically, nobody will loan me any money, even thought I promise I would try and pay them back a little every week, if I could.

But the Fed is artificially manipulating short-term interest rates so low that they are actually driven below the official rate of inflation. Or, as Mr. Hamilton puts it, and here you can see that I have literally plagiarized his exact words in my quest for productivity, "In negative-real-rate environments, a central bank artificially manipulates short-term interest rates so low that they are actually driven below the official rate of inflation. This means that savers and investors actually lose real purchasing power by lending and investing their capital." Later on, he tells you one reason why this is so bad: "Over time, these negative real returns decimate the savers and investors in the capital markets." And if you have ever been decimated, you have some idea of the horror of that.

You would think that negative interest rates would not be very popular, and Mr. Hamilton agrees by saying, "Negative real rates are relatively rare in financial history, as they represent an inherently unstable and artificial state." This leads people to try and go somewhere with the money that is NOT unstable and artificial. And one of those places is, and you knew I was going to say this, gold. And since we are speaking of gold, let me remind you that if you are not buying gold, then you are indeed an idiot.

And what else can history teach us, or at least what can Mr. Hamilton teach us, who has been reading history, and is thus taught? "In a desperate gamble to try and re-ignite a failed stock-market bubble, Alan Greenspan and his Fed are remaking a terrible mistake that has only led to pain and misery throughout history. US real rates have been bludgeoned relentlessly lower since 2000, and the bitter fruits of officially plundering savers to subsidize debtors are slowly becoming apparent." Didja catch that part about "pain and misery?" And the pain and misery that he is referring to aren't even here yet. They are only "becoming apparent."

Marc Faber is one of those guys whom people should pay attention to, and I do, as should you, as he has this unnerving ability to see things extraordinarily clearly, and in my own defense I would probably be able to see things just as clearly if I wasn't hiding my head under the bedcovers and refusing to come out because I am such a gutless little coward. He proves this, by which I mean his being able to see things clearly and not that I am a gutless coward, in a recent essay of his, entitled "Flight to Garbage," which is a pretty witty way of summing it all up. He writes, "In fact, 2003 will enter the financial history books as the year in which all asset classes - including equities in developed as well as emerging markets, government as well as any kind of corporate bonds, industrial commodities, precious metals, real estate, and art - increased in value."

Well, to be fair, although he used the term "value," nothing actually increased in intrinsic value as far as I am concerned, because assigning value to something involves individual judgement about "worth." And then when people hear we are talking about "worth," then that inevitably brings up how worthless I am as a human being, and I get so tired of hearing that over and over, day after day. But I gotta admit that all those things he mentions certainly increased in price. But if that is how you measure value, then, okay, they all increased in value according to Mr. Faber, and increased in price according to me.

And isn't the popular definition of inflation, and I am asking you instead of actually looking it up in the dictionary, something about how prices go, umm, up? And so how come this blistering inflation in prices was not enough to get the Fed to increase interest rates? How come the year-after-year double-digit increases in house prices, or stock prices, or the prices of oil, or commodities, or the rapidly rising prices of anything, is not enough to get the Fed to try and cool down the white-hot asset sector? The answer is obvious, once you remember that this Fed is the most inept, corrupt, ridiculously pompous and smugly arrogant bunch of clueless weenies in US history. They are worried about deflation, which is now defined as when something, even things that are already so grossly overpriced, goes down in price. Like stocks. And bonds. And houses. You know: Everything that that is currently waaayyyyy overpriced.

And why do they want to prevent this deflation in preposterously overpriced things? Wouldn't the US consumer, namely you and me, be better off if things were cheaper? Wouldn't it be a big benefit to us pathetic bozos out here in the real world when our paltry incomes buy a bigger basket of things on payday? Without waiting for your answer, I answer my own question and say, "Yes, it certainly would be a benefit!" But Greenspan does not WANT us to be better off. Why? Because the whole US economy is now totally dependent on things NOT going down in price. In fact, the whole US economy is now dependent on overpriced things being more and more and MORE overpriced! Namely, stocks, bonds and real estate. Weird, huh?

A really clued-in dude named Steve Sjuggerud wrote a nifty article about this very subject on the Daily Reckoning website, which he entitled "No Place to Hide," and I figured that he was referring to my secret cubbyhole here under the stairs, so naturally I am suddenly overcome with fresh paranoia, which was a nice change of pace, as the old paranoia about alien beings from a distant galaxy controlling my thoughts was getting stale. But it turns out he was not, so I gathered up my teddy bear and the boxes of ammo and went back under the stairs and quietly shut the door, gobbling nitroglycerine pills like candy in the warm darkness while stapling another layer of aluminum foil on the walls and ceiling to block those invisible thought-control waves.

What Mr. Sjuggerud was actually referring to was a dearth of places to put money where there was a good possibility of making some profit, instead of having a good probability of losing your shirt and ending up in the gutter begging money to buy stale bread or another shirt. He writes, "Today we have substantially the worst prospects for long-term global investment returns of my 35-year career when all asset classes are considered, particularly for U.S.-centric investors." Dan Ferris at the Daily Reckoning site has also taken a hard look at the entire menu of stocks for sale, and he writes, "My little screening exercise suggests that there's almost nothing left to buy in the U.S. markets. Or any other markets, for that matter." This is because things are all so overpriced, and this should not come as a surprise to you if you had been paying the least bit of attention to me, and don't feel bad if you have not, since nobody else does, either. And when things are overpriced, there is usually not a good chance that they will get MORE overpriced, which is where your profit should come in.

But how and why did they all increase in price? Because the Fed increased the amount of dollars in the system, and the Congress borrowed and spent those dollars. And so the system was flooded with more dollars, but the amount of goods and services did not increase. Ergo-- and don't you just love it when I use the word "ergo?" --the value of each dollar went down.

And don't worry if you do not understand this concept right away. The Federal Reserve has never understood it either, and they think they are smarter than all of us put together. They are not. In fact they are much more stupid than we are, QED. They just think that they are smarter.

And, continuing our little story, Goldilocks said, "Why Grandmother, what big teeth you have!" and the big, bad wolf said... oops. Sorry. Wrong story. Anyway, that flood of dollars sped hither and yon through the economy, and ended up in somebody's pockets, who spent the dollars on imports, which flooded foreign economies with dollars. But those foreign exporters did not want dollars, but instead they want their own currency, because their wives want to spend money, and the places where they shop do not want to go through the hassle of converting US dollars into their own currencies. So the exporters were prone to dumping those dollars to get their own currencies with which to fill up the pocketbooks of their wives, and then the banks ended up with all those damn dollars. But the banks do not want the dollars either. So then the foreign central banks printed up some big wads of their own currencies, and bought up the US dollars from the banks, who do not want, as we have seen, dollars. And then the boss of the central bank comes to work one day and wants to know who in the hell has been piling up all these damn dollars in the lobby and making such a big mess, and issues an order to get them out of here and get this damn placed cleaned up! So all those dollars, those lovely mountains of dollars, that in the aggregate add up to more than a half a trillion dollars a year, were used to buy US debt.

Which the US government spent, continuing the cycle. And they went into people buying things, like stocks, and bonds, and houses, and imports. And prices went up. And then, the next year, they went up some more. And then, the next year, they went up some more. And then the next year, they, but this is getting real boring, so to save time, we will hop into Professor Peabody's Time Machine and fast forward a decade or so, and when we step out of that time transporter we notice that I am still intoning, "And then the next year, they went up some more." Then we are all happy that we are back in the present, and have finally stopped that "and then next year" crap. And sure enough, there is Steve Sjuggerud saying "Today we have substantially the worst prospects for long-term global investment returns of my 35-year career when all asset classes are considered, particularly for U.S.-centric investors," which gives me an eerie feeling of deja-vu, but is quickly explained by the fact that I just cut-and-pasted his original quote, but that doesn't change the facts.

And it is a truism that the mechanism of inflation is that the beneficiaries of excess creation of money and credit will be those guys who are first to get in line for it, and who buy the things that will soon go up in price. And it is another truism that after this initial bunch of winners will come another bunch, who will get in the parade and do the same thing, and prices will go up some more. And it is another truism that more and more people will take notice of the profits being made, and then they will get into the swing of things, too, and then, finally, at the end of the parade, are the guys who think that they can arrive late at the party, and they will be buying those assets that are so high in price that there is nobody left to take the bag from them, and so they will be left holding the bag.

The big question (BQ) is: is anybody holding the bag yet? Yes. Lots of them. In fact, the whole American economy is now composed of people holding bags. Big bags (BB). Big, BIG bags (BBB). And the Other Big Question (OBQ) is: Is there another bunch of people who are willing to pay money to take the bag? Ahhhh. That's the REAL question (RQ)!

And the way to entice people into buying something that is ludicrously overpriced is to, and here we see the beauty of Modern Fiscal Policy, give everybody their money back! Yes! That's right! And how do we do that? Through the Tax Credit section of the 1040! The government will pay you back if you spend your money the Government Approved Way (GAW)!

The Federal Reserve had one of their famous little meetings to discuss monetary policy and play with their crayons and trade whatever anti-psychotics that they are currently taking and which are obviously not working, and talk about what they are going to do with interest rates. In the fullness of time, which I figure is about a nanosecond, they decided that they liked things just the way that they are, and that they are not going to change anything. But what spooked the market was that they forgot to add that they were going to be clueless boneheads for the rest of eternity, and are no longer going to force interest rates to preposterously low levels "for a considerable period." Now they are merely "patient" in allowing rates to rise to more normal levels, but are still holding rates at ridiculously low levels.

Apparently there are a lot of people who are not aware that "a considerable period" is a long time at first, but as things go along we eventually reach the end of that period, and the "considerable period" starts to resemble "a shorter and shorter period." And then one day we start getting to the end of that period, and then it becomes "pretty soon now," and then one day it gets to the point where it is "now" and then, soon after, it is "Game over, Player One." An analogy would be to tell your misbehaving child that when daddy gets home he is going to get a spanking, but daddy is currently out of town. So it will be a "considerable period" before dad's dreaded drubbing takes place. Then the next day, daddy is still out of town, so it is still a "considerable period." Then one day, daddy is on an airplane on his way home, and now it is not "a considerable period," and the child is told to "be patient." But one day, he will be here.

Well, having to change one's perception of when the axe will fall from some distant "considerable period" to being asked to 'be patient" is being viewed as some horrible calamity. And then it is only a matter of time before you start hearing things about how the Fed is now on a tight money stance and blah blah blah, and then I guess Milton Friedman and that gang is going to get on their little soapboxes and whine about how awful things are if the Fed does not keep flooding the world with liquidity.

In refuting that idiocy, Frank Shostak, and that is a name you ought to take note of because he is one of the really bright guys running around the Mises Institute, once famously said, and I quote, "Note that, contrary to popular thinking, depressions are not caused by tight monetary policies, but are rather the result of previous loose monetary policies." This is because the loose money policy encourages people to borrow money and bid up the prices of things like stocks and bonds and houses, as they and their village-idiot government turn a bright and glorious economy into a misshapen, malignant Frankenstein monster. And then one day, and you probably recognize that I am talking about how we are in the "tight money" phase that gets modern American economists, aka morons, all upset, as people stop and say "What? You expect me to borrow money at these high rates to buy overpriced stocks and bonds and houses? What? Do you think I am nuts?" And so, without a Greater Fool to sell to, the asset falls in price. The Fed's dreaded deflation. And that sets off the inevitable calamity.

We have had a long, long period, and I will use the term "a considerable period" in a gratifying example of "getting with the program," of extraordinarily loose monetary policy. Now it is going to be tighter one day soon when the Fed is tired of "being patient." So you tell me: what happens then?

The Senate, that conclave of corrupt clowns, passed a bill to allow companies to put less money into their pension plans. This is accomplished by using higher interest rates of corporate bonds, instead of the rate paid of Treasury bonds, to calculate future returns to the fund. This wonderful expedient that brings to mind a "Dilbert" cartoon, where the our hapless hero is explaining, "We doubled our projected income by modifying our assumptions." The Wall Street Journal perfectly characterized this as a "bailout." Thomas G. Donlan, in his essay in this week's Barron's entitled "The Old Switcheroo," opines that "Congress says it's strengthening private pensions by taking money away from them."

This new contribution method will, according to the Associated Press, "result in smaller payments to pension funds over the short run," and that it "gives some financial breathing space to companies that might otherwise go bankrupt, lay off workers, freeze their pension plans or renege on the promised benefits." So let me see if I have this straight: By screwing the workers out of some of their retirement benefits, the companies will not go bankrupt, because they get to keep the money. Which would, admittedly, screw the employees out of retirement benefits. So here we have, again, another identified cohort of people who are targeted to be screwed out of something to make up for the jackass Congress and the jackass Federal Reserve making a mess of things. How special.

Like General Motors, I assume, which has 25 retirees for every ten workers, as if there is any way in the world that one worker, up to his ears in mortgage payments, credit card debt, taxes and disobedient children who think I am made out of money or something, can provide a retirement to 2.5 other people. It is obvious that the one worker cannot even provide for his own living expenses anymore, much less his own retirement, and much, much less the retirement of 2.5 other people who don't even say "thank you." And of course there is a long, long list of sorry companies who are borderline insolvent, and a longer, longer list of people whose golden years are riding on this wheeze working out. Hahahaha!

This is the Greenspan method in all its glory. In the strict Greenspan method, screwing people who have savings accounts, by lowering their interest income to the point of ridiculousness, will enable stressed borrowers and other deadbeats to not default on their debts, if they can borrow more money cheaply, and this is somehow going to benefit the small saver in the long run, although nobody actually says how this is possible. This retirement plan is the same thing: Screwing people out of their retirements so that the companies can keep the money, to keep them from defaulting on their pension obligations, which would screw the people out of their retirements. And the retirees will benefit, although, again, nobody actually says how this is possible.

There is no doubt that more and more retirement plans are going to be dumped into the laps of the government bailout fund, known as the Pension Benefit Guaranty Corporation, because the whole thing is ludicrously insane to start with.

For all the criticism of Alan Greenspan that I have dished out in the last ten years or so, he does occasionally rise up and show some smarts. Paul O'Neill, the erstwhile Treasury Secretary in the book, "The Price of Loyalty," reports that Greenspan has noticed that capitalism in America is dead. No kidding!

He was talking about how companies are fudging this and changing that and ignoring these other things over here, all to generate a balance sheet and an income statement that they figure will 1) please investors, who will bid up their stock, and 2) positively affect their generous stock options.

If Mr. O'Neill had quoted me, the book would have reported that I said we are a nation of communist prostitutes now. And if it was a recent quote, it would be that we are a nation of FAT communist prostitutes, and an especially low-IQ bunch at that. The electorate is selling their votes to the candidate who promises to pay them for their votes, by giving them more and more government benefits, all at the expense of everybody else.

As evidence of this, I warily turn my back on you to put a transparency on the overhead projector, and the screen is filled with the latest statistics on Personal Income. The annual total Personal Income is $9.336 trillion. Transfer Payments, which is government literally giving people free money, is $1.4 trillion. While Alan Greenspan may wax indignant that "capitalism is dead," perhaps he is relieved to know that the communism of Big Government is alive and well, and apparently thriving.

Speaking of communism and Big Government and the yahoos who support such idiocy, a person named E.J Dionne, Jr., who is a syndicated columnist for the Washington Post, wrote an article entitled "An election-year jab at the Patriot state." The thrust of the article is whining about how Massachusetts is being criticized for being a bunch of commie Leftist losers. Let me get this straight: They re-elect Ted Kennedy, the biggest blowhard commie rat infesting Congress, time after time after time, and then they want to know why nobody values their stupid opinion? Hahahaha!

But then E.J. hits me right in the stomach---ooof! --by remarking about the Bush administration is proposing a budget that is so grossly insane that it makes Democrat excesses seem insignificant in comparison. Touche. In a similar vein, apparently I am not the only one outraged at Bush and his outrageous spending proclivities, although I am being described as "an angry fiscal conservative," which doesn't even scratch the surface, if you want to know the truth, and I am more correctly described as livid with fury (LWF).

Judging by the actions of President Bush, and you can tell by the way that I am beginning to grind my teeth and steam comes out of my ears whenever I say his name that I am getting as testy about Republicans as I am about Democrats, he and Congress, a marriage made in hell if there ever was one, are ramping up spending, and ramping up borrowing, and jamming money into every crevice and orifice of the economy, and as a guy who has had things crammed into orifices by healthcare professionals, trust me when I say it is not a pretty picture, and all in a valiant attempt to keep this bloated, malignant, stinking Big Government economy from erupting into flames and killing us all before the election this November. If Mr. Bush was conversant with economics, or any of the morons on his Council of Economic Advisors were conversant with economics, and this includes N. Gregory Mankiw, whose named his dog Keynes, for crying out loud, who is the head honcho of that Council, who is also from Harvard, and who is, by definition, also from Massachusetts, and don't get me started on that Massachusetts thing again, he would immediately announce that he is NOT running for President, because he is going to be blamed for what is going to happen. And things will happen, and it will be bad things (BT), and then for the next fifty years the Republicans are going to be blamed.

In today's episode of "Strange but True," I saw some doofus on CNBC, and you are going to love this one, who opined that since the Fed Funds rate is 1%, then that means that people can borrow money at 1% and buy bonds paying 4%, and thus make a profit on that carry trade! This weenie actually believes that somebody in the USA can borrow money at the 1% Fed Funds rate! Hahahaha! He doesn't even know what the Fed Funds rate is, and yet he thinks he can have an opinion about the investment wonders of T-bonds! I didn't catch the guy's name, and had no opportunity to do so, as my trigger finger involuntarily twitched in my moment of incensed outrage at listening to such, and pardon my French, crap, and the TV has gone to Appliance Heaven, dispatched in a hail of every expensive bullets. Oops. It looks like my mother was right when she said "Don't play with that machine gun in the house! You could put somebody's eye out with it! Or hurt the TV set!"

As alluded to earlier, the new 2005 budget proposed by the Bush people is out, and it totals to a hefty $2.4 trillion dollars, and it includes a $521 billion deficit. This budget is up 3.5% over last year, which had a pretty sizable increase over inflation. The website CapitalUpdates.com ran the headline, "Bush's Budget Blunder," with the subhead "Comically Projects 13.2% increase in Revenues to $2.04 Trillion." Martin Weiss, of Safe Money Reports, figures that when you add in the un-funded War on Terrorism, or whatever it is being called these days, and then include the off-budget stuff, then you are looking at a real deficit of about a trillion dollars in deficits. In one year. A trillion dollars. In one year. A trillion dollars. In one year. A trillion dollars. You mental health professionals out there will instantly recognize that my brain has seized up at the revelation, but for me, the universe has shrunk to "A trillion. In one year."

Mark Rostenko, the guy who writes the Sovereign Strategist and is one of the guys who really has a firm grip on economic reality as it exists, while I can't even get a good grip on a five iron, writes "While the CRB Index of commodities surged to new 15-year highs, Alan Greenspan took advantage of new-year optimism to remind us that the risk of inflation is quite low. While the dollar plunged, Fed governor Bernanke belabored the point that the 'risk of a dollar crisis is quite low.'" So here we have two of the big shots at the Federal Reserve telling us that they are so smart, and we are so stupid, that only they can see the truth, and that we bozos out here are wrong to rely on our own eyes or the lessons of the entire corpus of economic history.

He goes on to remind us that "Alan Greenspan's tenure at the Fed has resulted in an absolutely unprecedented 45% increase in the global supply of dollars." And while he may be too polite to say it, I am not, and in my crass rudeness, which is "the Way of the Mogambo," I will remind you that under Alan Greenspan's tenure the amount of goods and services has not increased by a comparable 45%, and jobs have actually shrunk. Therefore, you have more dollars per good and service, and that is inflation. Massive inflation. Pure and simple.

But how can we have a growing GDP if all that has grown is the supply of dollars? Mr. Rostenko explains: "It's called the wealth effect to differentiate it from real wealth. Wealth is what happens when you work, save, invest and build net worth. The wealth-effect is what happens when you have little, borrow more, spend still more and feel the 'effect' of someone else's (your banker's) wealth. Temporarily." Note the use of the word "temporarily," and you will feel your heart skip a beat, because you know exactly what he is talking about.

Also notice that Mr. Rostenko has correctly differentiated between saving and investing. This handy tidbit of terminology has apparently escaped the notice of the average American boob, who think that buying overpriced stocks constitutes "savings." It does not. "Savings" is what you do when you salt away a few bucks, and with the knowledge that when you go back next week, or next month, or next year, those bucks are going to be there. Think "money in a coffee can buried in the back yard."

"Investing" is when you put a few bucks into an asset, with the knowledge that when you go back next week, or next month, or next year, there may be nothing left at all. Think "Enron." That is the crucial difference between saving and investing.

"Americans are living the effects of wealth without actually creating any. The consumer is overstretched in debt, the nation is drowning in debt and the employment picture is not improving to any significant degree. We may be in recovery, but we're not in a sustainable recovery."

Now I can tell by the polygraph and biometrtic readouts that John Ashcroft has surreptitiously wired into your chest while you were sleeping, as allowed under the Patriot Act, that you are starting to get real nervous. You should be.

I got an interesting letter in the mail from Carol Freinkel, who is a loyal reader of the MoGu, and as such deserves no respect whatsoever because there is obviously something very wrong with her, although deserving of infinitely more respect than the jackass who writes the MoGu, which is, as far as I can tell, me. After shaking out all the anthrax spores from the envelope, I sat down to read her letter, my wife by my side to explain the big words to me. She had many interesting and insightful things to say, so much so, in fact, that my lips got tired before I finished reading it all, and she ought to write her own book if she is so damned clever, and I am obviously not going to take a lot of time to report what she said, because you would immediately want to know why a complete jerk like me was writing the MoGu when she could do a much better job without even breaking into a sweat. But she has coined a clever new term, "international terroiffs" which she defines as "terrorists masquerading as politicians seeking to impose new tariffs," which is about as witty and profound as you can get. Hahaha! I love it!

And I gotta tell you, that I hesitated to put this in this MoGu, because if international terrorists really wanted to destroy the United States, they would give up ramming airplanes into buildings, and put their considerable efforts into convincing the cretins in Congress to impose a lot of tariffs, as that is guaranteed to ruin this country. And so I hope that they are not reading this, and if you are a terrorist, then forget I even said anything.

To make sure that I am not misunderstood, let me state, for the record, and notice by the way I am rising to my feet and have this serious look on my stupid face that I am getting ready to say something that I think is profound, that I truly DO believe that the Fed and the overwhelming majority of economists in this country are boneheads. They actually believe their own idiocies, which I can immediately prove by citing one of the core beliefs of their whole complicated, mechanistic paradigm: "If interest rates fall, this will produce an increase in investment." This is not true. It has never been true. It MAY increase investment, and it usually does. But it does NOT always produce an increase in investment, and it certainly is NOT the basis of a mathematical proof, all gears and levers, with which to guide monetary policy.

Steve Puetz, who writes the Steve Puetz Letter, provides a little buttressing of my point, although I am sure that it would pain him considerably to be thought of as agreeing with anything I ever said, when he writes, "Federal Reserve policy has almost always been geared toward the borrower, never the saver. Whenever the Fed wants to jump-start the economy, it lowers interest rates to encourage more borrowing."

And then the rest of their ridiculous theory all follows from that one overarching stupidity. And that is why we are in the shape we are in. And that is why Alan Greenspan will go down in history as one of the biggest chumps of history, and why the term "American economist" will reverberate throughout the rest of time and space as a euphemism for "moron," sort of how The Mogambo means "loudmouth jerk" in our own age.

And speaking of Steve Puetz, his opinion is that "Once the ongoing rally is finished, one of the greatest crashes of all-time should begin," and he has twenty reasons why this should be so, and I think he thinks that it will happen soon, as in "a matter of weeks," although I am looking out of the window and everything looks okay so far. But I am far from mollified by the view.

Doug Noland writes in his latest newsletter that the money supply, as indicated by the M's, are in decline, as are the cash balances of damn near everybody, as they continue to pour every dime they have into the stock market.

"But," he continues, "we must not allow the stagnation and/or decline of key traditional money supply components to draw our attention away from the continued major expansion of Credit, along with an attendant huge expansion of financial sector liabilities (predominately not elements of the money aggregates)." He then goes on to produce a short list of how every dirtbag agency and corporation and government in the country, and several foreign ones, too, are issuing shares and bonds at an alarming rate.

"It is also worth noting the extraordinary expansion in 'Miscellaneous' and 'Other' assets and liabilities. Moreover, it appears ­ especially in the case of agency securities ­ that households were increasingly using liquid balances to acquire marketable securities directly, rather than holding money fund or bank deposits."

And in conclusion, which he cleverly introduces by saying "In conclusion," he sums it up by saying, "The third quarter 'Flow of Funds' confirms that we remain in the midst of an unprecedented ­ truly historic - financial sector expansion and security issuance boom."

In a roughly similar vein, Richard Russell, and if you do not know who Richard Russell is then you have no business reading this stuff, says, and as a warning I urge you to buckle your safety belt to keep from catapulting out of your chair, "Going over past history, say going back a hundred years, total US debt averaged around 130% of GDP. But today US debt is around 300% of GDP -- its highest level in history. No country has ever carried debt amounting to 300% of its GDP before. Furthermore, the amazing fact is that our debt burden is actually growing faster than our GDP. In an effort to handle this debt burden, credit creation has been accelerating. Credit creation recently has been growing at an annualized rate of around $3.3 trillion."

See? Now aren't you glad I told you to buckle up? Now, do like I do, and put these cardiac resuscitation paddles on your chest and push the "start button," and in a few minutes you'll be as good as new.

The Daily Reckoning site reports that, according to a report by the Bureau of Labor Statistics released last week, the average salary a U.S. worker can expect to make has dropped from $44,570 to $35,410 since 2001. Fabulous. People are making less money. I can't WAIT to hear how the government weenies put a positive spin on THAT!

Then they quote Greg Weldon, who adds this depressing statistic: disposable income, which is the part of your income that you use to buy Oreo cookies and cheap cigars, collapsed in the 4th quarter from $160 billion to a miniscule $1.7 billion. The DR folks were kind enough to do the math, and they report, "That's a 99% drop." I will leave it to the Fed, and Alan Greenspan to show you how a 99% drop in Oreo consumption will also be good for the economy.

Bill Buckler, who writes the newsletter The Privateer, has produced one of those little epigrams that is so cleverly distilled, and thus short enough to tattoo on your arm, so that you can refer to it as you need to, "When Currencies Fall, Prices Rise Eventually." The mechanism is simple enough, and it involves the reluctance of foreigners to accept the same number of dollars for their goods, when it means that they will receive less of their own currency units once they are exchanged. So they raise prices, so that they WILL receive the same number of local currency units as a result of the sale of their goods. Then the higher prices of imports allows domestic producers to raise their prices. The next thing you know, you are looking at that tattoo on your hand, and you realize that Mr. Buckler was right: "When currencies fall, prices rise, eventually."

And if you have been keeping up with the value of the dollar, then you know that our currency, our beloved dollar, is falling. And here is where you take another look at that tattoo on your arm, and then you look at the price tags on things, and then you look at that tattoo again, and then you look at the price tags again, and pretty soon you will realize that prices are rising, and that will be rising some more the next time you look up from staring at that tattoo. And all you have to do is figure out when "eventually" is. For me, it is when the wife comes home and says "My God! Do you realize how much money I had to spend on groceries today?" Which is, I am loath to report, this morning.

Peter Spina of GoldSeek.com commented on the abrupt downdraft in gold last Thursday after the Fed indicated that they might allow interest rates to rise. The specter of higher rates sent the goldbugs scrambling to sell, resulting in the deepest downdraft since 1997. Mr. Spina has the same attitude that I do, and that is that this is a golden opportunity, and notice how I cleverly used the phrase "golden opportunity" as a pun that, I am sorry to report, is nether very clever nor original, but I did the best I could, to buy more gold at these cheaper prices. It will almost certainly be your last chance to buy gold at less than $400 per ounce.

And not just for us American dimwits, either! Marshall Auerback of the Prudent Bear website, is looking at how the Europeans have decided to ignore the Growth and Stability Pact, and now anybody who want to run massive budget deficits can. And that means they are going to print more money, and get into the currency devaluation game, just like us! And so the Europeans will soon see a rise in the price of gold in euro terms, which has been absent so far.

This is not lost on, of all people, the Russians, and Mr. Spina reports that they are one of those rare central banks using their growing foreign reserve horde to buy "historically cheap" gold. I remember when we used to look on Russians as mouth-breathing cretins, and now I am starting to see who the new mouth-breathing cretins are.

James Grant, who has the same name as Grant's Interest Rate Observer, which is more than just a happy coincidence, quotes a guy named Mr. Monrad, who is now 73 and has spent almost all of this life in the bond market and runs a big junk-bond portfolio, and who was asked by Mr. Grant, "Hey, old-timer dude! What is you opinion of the junk-bond market?" "Well," says Mr. Monrad, "this thing scares me."

Well, me too! Again quoting Grant, "Yields are low. Ditto, the quality of new junk issues. Inflows into junk-bond funds are strong. And complacency levels about credit risk are high." And, "Investors are oblivious to the dangers. The junk market is as blind to risk today as it was in 1999. In this setting, the word ' junk' is not pejorative. It is descriptive. There is no yield to speak of in 'high yield'--you're not being paid for the risk you take."

Investors are, as investors do, plowing mindlessly into anything that can provide a return that is above the real negative-rates (nominal rates adjusted for inflation). To paraphrase Mr. Grant's pithy aphorism, "In this setting the word 'investor' is not only pejorative, it is not remotely descriptive."

To illustrate the idiocy of people buying these junk bonds, Mr. Grant writes, "The average yield for a speculative-grade debenture with a ten-year maturity is less than 6.5%." He then quotes a guy named Marko Budgyk, which looks like a typo but isn't, who is the managing director of Helix Investment Partners, and who says that "63% of the junk market trades above call (the price at which the issuer can, at its option, redeem an outstanding bond), and 80% of the market trades above par. Corporate credit isn't just overvalued. It has reached bubble-like levels."

Alan Abelson, the witty commentator for Barron's, showed a chart provided by Asha Bangalore of Northern Trust, which showed that a remarkably high inventory of unsold houses exists. In fact, although the chart only goes back to 1993, the number of unsold houses is the highest it has been since then. High inventories, and yet prices are high and rising?

Not content with that, Mr. Abelson has also been to the grocery store lately, and although he did not mention bumping into my wife while he was there, as a result he is pretty adamant that inflation is NOT dead, and in fact is quite healthy. And when I say inflation is "healthy," you can be sure that I mean that, very soon, your financial situation will not be. Ugh.

---Mogambo Sez: I wish I wasn't so lazy, and then I would take the time to go back through precious issues of the MoGu and identify the guy who said that buying gold was an investment that was obvious, riskless, and a bunch of other swell things, all of which added up to suggesting, in the strongest of terms, that you ought to take a break from downloading pornography off the Internet, and go out and buy gold. I shall merely paraphrase, and look deep into my eyes to discern my utter seriousness, when I say to quit trying to download pornography off the Internet and go out and buy gold right now. If not sooner. You'll thank me later when the investment will pay off in spades, and you can hire somebody else, who did NOT look deep into my twinkling blue eyes and who did NOT buy gold as per my suggestion, to do the downloading for you, and then project it onto the giant plasma screen TV on the wall of your lovely beachside villa.

Richard Daughty
written on February 3, 2004

Copyright ©2004 Richard Daughty. All Rights Reserved.

Real Rates and Gold 6 by Adam Hamilton

321gold Inc