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Another night in the Bunker of Fear

Richard Daughty
...the angriest guy in economics
The Mogambo Guru
February 10, 2005

- It has been a quiet couple of weeks, what with the G-7 (plus China) and the federal budget all swirling in the air, and nobody is making any waves with their weird stupidities. But one of the interesting developments (I was going to use the word "weird", but then I thought to myself, "Man! Everything is weird nowadays, so one more damn little weird thing is NOT all that weird!") is that total reserves in the banks have suddenly gone up, and are at the highest level since the early 90's, which in turn were the lowest levels for about a zillion years. These reserves are supposed to provide the cushion needed in case all of us paranoid lunatics got our knickers in a knot, twist or wad (I've heard all three, so it makes me wonder, "What do those British girls do that has such diverse effects on their knickers?") and went storming down to the bank to withdraw all of our deposits in a panic, run home, and bury the money in the backyard as some hysterical over-reaction to something that the government did, is doing, or will do soon. So these reserves are supposed to keep enough money on hand to meet that theoretical sudden demand for cash, although in my case, I have so little money in the bank that they could pay me off with the few coins that fall onto the floor, although that still doesn't give them the right to hustle me out of the lobby, yelling "And never come back, you horrible, smelly man!"

But what are the real chances of a bank run happening? Nowadays, banks probably can't fail, because the Fed system can give them all the money they need to do anything they want, including paying off a few low-IQ Neanderthal depositors like me. So there is almost no chance of you losing your money due to a bank insolvency anymore.

Hell, the entire liability of the banks is only about $4 trillion, which the Fed and the Treasury could easily produce in an afternoon, with plenty of time to run down to the bar and get really drunk in case the damn Mogambo calls up and starts that screaming thing about how all that new money is going to cause price inflation, and how it is inflation that is going to eat us alive, and that there is a big Mogambo lesson (BML) inherent in the French Revolution, which was caused by the ruinous inflation that was caused by this selfsame monetary idiocy, and the French people were chopping off the damn heads of their butthead bankers and government minions, and that maybe, just maybe, the damn Federal Reserve ought to think about THAT the next time they are printing up all this excess money and credit to desperately try and buy their way out of the problems that they have caused by printing up the excess money and credit in the first damn place!

But we are not anywhere near the historical average on bank reserves, and maybe we don't really need them when you have a fiat currency in a banking system that is this corrupt. They can just print as much money as they want. So don't get too excited and start thinking that this shows some renewed prudent banking behavior (The Mogambo puts back his head and laughs that scornful laugh of bitter contempt and disrespect (SLOBCAD), which sounds sort of like "Hahahaha, jerks!"), as the total reserves in the banks have been going down and staying down for most of Greenspan's term as chairman of the Fed, even as deposits and liabilities have soared. They have simply stopped going down. But they are still absurdly low. In fact, reserves would have to almost quadruple from here just to be back to the low end of the "normal" range, figured as a percentage of deposits.

I assume that this is all window dressing for the benefit of the G-7, who are our creditors, like when I pick up the old pizza boxes and fried-chicken bones up off the floor before the social worker comes by, and I take all those empty liquorbottles and put them in the neighbor's garbage can so it looks like HE is the loudmouth lush who is screaming in a drunken fury all night long about Federal Reserve policy.

But since some things never change, I am able to report that the Treasury Department is still sinking us into oceans of debt via a surprisingly linear program, which works out to an almost constant $50 billion of new debt per month. The chart of the growth of Total Fed Credit goes up in an almost straight line since June of 2002. It is the most amazing thing I have ever seen. Of course, there are many of you out there who are so adept at math that you can easily multiply $50 billion a month times twelve months to give us an annual estimate of new debt, and when you do, all us math-challenged idiots out here stagger to our feet and applaud. So, I, as one of those math-challenged idiots, get up and walk over to where one of these savants is sitting, and I peek over his shoulder and look at his answer sheet. This is how I know that this comes to $600 billion a year, which is a long, long, LONG way from the asinine lies and distortions otherwise known as The Bush Budgets.

For instance, I keep hearing about how last year's budget deficit was "only" $412 billion or thereabouts. Ha! I got BIG freaking news for you, pal! The lying bastards known as the Vicious Federal Government That Is Out To Get The Poor Old Mogambo (VFHTIOTGTPOM) took us farther into debt by more than $600 billion last year, which is an error in the original claim of only a $412 billion deficit of almost 50%. Not even close! What liars! And I don't care how you dress up that pig budget with your off-budget items, and your on-budget items, and your trust fund items, and your "black budget" items that are so secret that nobody is even allowed to know where the money is going, although I am sure that none of it is flowing to ME, dammit. But the whole thing sums up to just how much more debt you ended up with. And that sum is, as I said, more than $600 billion last year.

This is eerily in line with the thoughts of Bill Buckler, who writes the Privateer newsletter, and I am glad to see that I am thinking more and more like normal people. He writes, "The United States is expected to borrow $US 670 Billion this year, according to estimates made by the Organization for Economic Cooperation and Development (OECD). That much wanted money is simply not to be found, even searching for it right around the world. That amount of money exceeds the rest of the world's net financial savings by about 20-25 percent."

Hahahaha! We are borrowing more than the entire world saves! We are financing our grubby, gluttonous consumerist lifestyles by borrowing more than every bit of savings stashed away by everyone on the entire globe! Hahahaha! Yeah, sure! THIS is a situation that will surely last a long, long time! Hahahaha!

But it is not just me that finds this incredulous. In fact, the wags over at DailyReckoning.com even use the word "credulous" when they opine that "America's consumer economy, too, will be bankrupt and discredited. Economic historians will marvel at how so many people who had taken Econ 101 could have been so naïve, so credulous and so stupid. How could they believe that they could live off foreigners for so long? How did they think they could prosper without savings? Why did they think they could live beyond their means forever? Perhaps they will look back at George W. Bush's State of the Union Address, and gape at how a nation that couldn't save a dime thought it could save the entire world."

Which brings us to Consumer Installment Debt, which rose $3.1 billion in December to $2.104 trillion, on top of the $2 billion increase in November, even though the government originally said that there was an $8.7 billion DROP in consumer debt in November, which, again, which only shows what a bunch of liars and incompetent nincompoops the government workers are.

- Rumor has it that 99N, the mysterious trader who always comes roaring into the futures market and buys whole carloads of SP500 futures whenever there is a risk of the market going down in any substantial way, is back at it full time. The paranoid fruitcakes among us (and leap to my feet and with a loud, irritating voice proudly announce, "I am Mogambo, their king!"), believe that this is the Fed itself intervening in the market to keep it up. And if I was as desperate and scared as they are, then I am not sure that I wouldn't do the same thing, assuming that I was a cowardly, gutless, retarded corrupt little weasel, which, of course, I am.

Their skills may be sorely tested, as the shape of the graph of the earnings of the SP500 has an unmistakable aroma (similar to the smell of the Mogambo feet (MF), only without the rancid undertone) of rolling over. Oops! And if earning are not going up, then the chances of the stock market going up strongly from here are, if you are the kind of person who rounds things off, zero. Maybe not in the very short run, where all kinds of magical, miraculous, things are possible to infinitely-capitalized entities like 99N, but in the longer run, where titanic forces always overwhelm such manipulations.

And it isn't just me who sees these things, and Chad Hudson at Prudent Bear.com, went over the earnings that are coming out, and that is probably why he titled his essay "Higher Interest Rates and Slower Earnings Growth". He summed up with "It is doubtful that the economy will be able to continue to expand without inflation pressure or margin compression. This will happen at the same time as earnings growth slows and should have a negative impact on earnings multiples."

- Mark O'Byrn, in a column entitled "Commodities & Precious Metal Markets Weekly Analysis", makes note of the fact that "India is very much the largest importer of gold in the world and it is estimated that they will import some 880 tonnes of gold bullion this year alone. To put 880 tonnes of demand into perspective, one must realise that total mine production, the largest element of supply, is only some 3 times larger." Now, if you are as baffled by British spellings as I am, and you are as irritated as I am that our American women are fascinated with men like this O'Byrn who have charming foreign accents, and they are also fascinated with men who have nice cars, and men who have jobs, and men who bathe regularly and brush their teeth and do all of that "grooming" stuff that is so boring and time-consuming, then you were so discombobulated that you missed the actual meat of the thing. So, I will put it in terms that even a moron like me can understand: "India alone will import a third of all the gold mined this year."

He also quotes Mr. Fan Gang, the Director of the National Economic Research Centre in Beijing, who says, "In our opinion the US dollar can no longer be seen as a stable currency since it constantly depreciates and therefore is a permanent source of problems." Now, I don't know to whom he is referring when he say "OUR opinion", but I am afraid that it shows that the Chinese are not as stupid as we think they are. Or at least these two Chinese guys aren't, and so we can only hope and pray that all of the REST of the Chinese people are gullible chumps like us Americans, and that they WILL see our stupid fiat money as NOT constantly depreciating, and that our stupid fiat dollars are NOT a constant source of problems, and that they are so dimwitted that they will want to get more and more dollars.

But I am afraid that Mr. O'Byrn figures that there are more than just these two Chinese guys who are smart, and that this is "ominous for the dollar's long term survival as the petrodollar and global reserve currency." No kidding? You mean that foreigners are NOT the boneheaded morons that we think they are? Oops!

- Ted Butler, everybody's favorite guy who exposes the corruption and manipulation in the silver market because none of us has the guts to do so, says that he has been taking a look at the Commitment Of Traders report in silver, and that "My personal take on the COTs is still that the bottom is effectively in, and we are at an ultra-low risk buy point. If I am wrong and we do take out the January lows by a decent margin, it will only come with heavy tech fund new short selling. This can only make the market structure even stronger, as there is no way the tech funds would then not be required to buy back their shorts at a loss. This is a time to be aggressively invested." So if there was ever a time when you wanted to go long silver, this would seem to be the time and place!

David Morgan, of silver-Investor.com, does not directly comment on this COT thing, although he probably would if you asked him to, although it may be instructive to note that he would not loan me his car even though I asked him to, but his optimistic view of silver is also unmistakable. "The silver Trap," he says "is composed of 1) Too little silver in the world, 2) Too much demand for silver from China and other countries, 3) Dollar inflation. Put it in an equation and it looks like this: 1+2+3 = SPE", where SPE is an acronym for silver Price Explosion.

- Reuters reports that "Half of all U.S. bankruptcies are caused by soaring medical bills and most people sent into debt by illness are middle-class workers with health insurance."

But as terrifying as that is busting our individual chops, it is Medicaid and Medicare that are going to bust our collective chops. One out of six people in this country is how many people get free health care from Medicaid, according to an article in the Wall Street Journal by Sarah Lueck, entitled "Surging Costs for Medicaid Ravage State, Federal Budgets." In effect, the lesson is that when the government requires the provision of free health care, the explosion in demand makes prices go up, although apparently this is never mentioned in any of the economics books that anybody in government has ever read. And it is not just Medicaid, which is for the poor and disabled, but also in the giant Medicare program, where we play for the big numbers! And right now, even as we speak, the Congress is teeming with little Democrat rodents, their tiny little brains all tingly, and all anxious to prove that they have these big, bleeding their hearts by expanding both Medicare and Medicaid to include giving even MORE benefits to even MORE people! The programs are bankrupt, thanks to their infernal meddling and largess, and are expanding at horrifyingly exponential rates, which means that they are going to eat us alive as it is, and yet the halfwits known as Democrats want to keep expanding them both! Hahahahaha! Morons!

Dr. Steffie Woolhandler, who is a Harvard associate professor (and physician) who is referred to as a tireless advocate for universal health coverage, said the study concerning the horrifying number of people who are pushed into bankruptcy because of the price of health services "supported demands for health reform." Well, duh! Then she goes on to say, revealing her for the brain-dead robot that she is, "Covering the uninsured isn't enough. We must also upgrade and guarantee continuous coverage for those who have insurance". Hahahaha! When asked about how the high medical costs are forcing people into bankruptcy, she evades answering the direct question, and merely responds by saying we need to cover more people with free insurance and to force the insurers to pay more!

I almost break my neck getting to the phone so that I could call up this Woolhandler chump! As I am dialing, my finger a superhuman blur as I bip boop beep the number, a whirlwind of questions race through my mind, mostly revolving around just who in the hell is going to pay the enormous cost for all of this "upgrading" and this "guarantee of continuous coverage" in our nation's health care system? But since she is a Harvard professor, she is not required to show any smarts or offer solutions, and all she is required to do to earn her a membership as a Whining Democrat Collectivist is to complain that not enough free stuff has been given away to as many people as she thinks needs it. This is the same kind of lackluster mental acuity found at another ridiculous sewer of Harvard, the economics department, which, together, makes Harvard one of bulwark pillars of the Ridiculous Leftist Lunacy (RLL) that befouls America and makes things stink so bad.

Nelson Hultberg, who is FMNN Alternative Political Policy Analyst and Executive Director of Americans for a Free Republic, is as dyspeptic as I am about all of this, although we are probably talking about two completely different things. He writes. "Collectivism with its regimented dream for mankind now had its Trojan Horse effectively established throughout all the important nations of the world. Marx's dictum that capitalism would fall, through corruption of the language and the money, was proving to be horrifyingly prophetic."

Notice the way I twisted his words around to suit myself? Actually, he was talking about central banking, but once I get started ragging on Leftist commie bastards I can't stop myself. Anyway, about the central banking setup, he writes "The central banking systems of the world are in their death throes. In the next two decades, there will take place a total discrediting of these monstrous blights on the economic stability and prosperity of our civilization." I am surprised that it will take twenty more years, as they are already totally discredited in my mind!

But he explodes one of the misconceptions about fractional banking. He writes, "Contrary to popular opinion among hard money thinkers, the evils of the system were not brought about by the policy of 'fractional reserve banking' per se, but by the intervention of government authorities to convey special legal privileges to bankers that violated the basic laws of fraud." Hahahaha! Well put!

- George Ure or UrbanSurvival has taken a look at the new $2.57 trillion federal budget in terms of a $11.728 trillion economy. He figures that "Before we make the obvious calculation, what percent of $11.728 trillion is $2.57 trillion, we need to reduce the $11.728 trillion by removing the $2.57 trillion. That's because the GDP figure includes all kinds of activity on behalf of government - in other words government which doesn't make anything other than 'governance' swells the GDP from its 'closer-to-reality' $9.158-trillion. When viewed in this light, government spending takes a whopping 28% of the Gross Domestic Product - and that's before we deduct the other costs of government. These costs, which are not collected centrally, include state and city governments, not to mention counties."

And when you add it all up you will find that The Mogambo was right: the governments of the United States ARE the damned economy, and in terms of sheer spending, governments, in one way or another, account for over half of all spending in the country.

- Richard Ebeling, president of Fee.org and who is the FMNN Economic Freedom Strategist, writes that "Restrained by neither gold nor the limits of taxation, governments around the world went into an orgy of deficit spending and money creation that led some to refer to a good part of the twentieth century as the 'age of inflation' ."

Dr. Lawrence Parks, Executive Director of Foundation for the Advancement of Monetary Education (FAME) is thinking along those same lines when he writes, "Because there is no longer any market-based self-correcting mechanism, i.e., what in the sciences is called a 'negative feedback loop,' on increasing financial leverage, our monetary system will absolutely blow up. That is, there is no longer any market mechanism to constrain the ever-increasing amount of money that our banking system is creating out of nothing. We will approach the time when the 'dollar' may lose most, or all, of its purchasing power." Notice that he did NOT say "lose SOME of its purchasing power" or "lose a LITTLE of its purchasing power" or "lose a LOT of its purchasing power."

He has an interesting solution. "With this in mind, it is proposed that legislation be enacted to distribute to all holders of U.S. Social Security cards, at no cost, on a per capita basis, the gold being held by the U.S. Treasury (approximately 260 million ounces)." Since all the world's central bankers and their prancing, preening pimps (mainstream "economists) all agree that gold is, to quote Keynes, a "barbarous relic" then they shouldn't have any trouble with that! Think of all the money they would save by not having to store it and guard it!

- If you want an example of how teachers in America, and the whole educational system which they infest like a plague, are both worthless pieces of crud (WPOC), get a load of what their students are saying in an article in USA Today entitled "U.S. Students Say Press Freedoms Go Too Far" by Greg Toppo. "One in three U.S. high school students say the press ought to be more restricted, and even more say the government should approve newspaper stories before readers see them, according to a survey being released today." Hahahaha! They never even heard of the First Amendment! And they have no idea why it is in the Constitution to start with! Idiots! These children are the ignorant blockheads that are supposed to be so intelligent and educated that they will wax prosperous enough to support us in our old age? Hahahahaha! Now you have ANOTHER reason to own gold!

To be fair, just over half of them have the right idea, as the article goes on to explain that "The survey of 112,003 students finds that 36% believe newspapers should get 'government approval' of stories before publishing; 51% say they should be able to publish freely; 13% have no opinion." A half of them got it right, so at least that is something we can cling to in our fear.

And the reason that this should concern you is also asked by Bill Bonner over at the Daily Reckoning site, who asks, "Why are incomes falling? Again, we look at the essentials. Labor rates in the U.S. are 10 to 100 times higher than in China. We have no chance in competing on the world market on price. We must compete on quality and innovation. But that requires massive, long-term investment in technology, machinery and training, which requires huge amounts of savings and a very disciplined, far-sighted approach." Not to mention a workforce that is not a clueless bunch of Big Government-educated robots who can neither read nor write.

But this is par for the course, as, according to Stateline.org, "Four hundred employers surveyed estimated that at least 39 percent of recent high school graduates lack basic skills to hold down a job." Well, we just learned that half of them lack the basic skills to comprehend the Constitution, so this is not surprising that they don't have the skills necessary to hold down a job. For example, according to the scores on the National Assessment of Educational Progress (NAEP), which is the federal testing program to quantitatively find out just how stupid these kids are, "only 17 percent of graduating seniors are considered proficient in mathematics and just 36 percent in reading." Hahahaha! Not only are they ignorant, they can't even read so that they could learn something!

- I watched the President's State of the Union address, and I gotta tell you that I am aghast. I spent the night in the Fortified Mogambo Bunker Of Fear (FMBOF), because he seemed to be issuing a threat to everybody that was not sufficiently democratic to suit him personally, which is, as far as I can tell, everybody. Obviously, Saudi Arabia got the message, as the price of crude oil immediately went obediently down.

But there is more to King George Bush than creating a New Holy War. I was amused that he has all kinds of plans, Big Plans, Big Expensive Plans, to reform Social Security because it is almost bankrupt. And why is it bankrupt? Two reasons: first, and I like to begin with the first thing, the money that people have been putting into Social Security has been devalued to, using the precise Spanish term, el squat-o. So these retiring sad-sack people, year after year, all their lives, have put a few thousand dollars into the Social Security System, which was a nice chunk of change back them, and now they need to get back tens of thousands of dollars to merely equal the purchasing power of that original money.

The second reason, of course, is that there is no money IN the Social Security Trust Fund, as the commie-bastards in Congress have taken the money, replaced the money with IOUs, and then spent the money! And the only reason that it is not bankrupt right this freaking second is that people, Ponzi-like, have to keep putting one-seventh of their gross incomes into the damn thing or face a prison term!

And if you think that this a healthy thing, then tonight, when you are asleep, I'll come sneaking into your house and take all the money out of your wallet and replace it with my personal Mogambo IOU (PMIOU). And don't worry about it being good, because it is! When you need to redeem it, I will again sneak into your house, take your money out of your wallet, replace it with another PMIOU, and take the money out of your kids' piggy banks and replace THAT with yet another PMIOU, and then go around to the front door, ring the bell ("ding-dong!") and hand you a nice stack of money! Won't that be nice? Well, you SHOULD be, because you seem to be so happy with the current system, which is exactly like the same thing! Hahahaha!

The Congressional morons all kept struggling to their feet to applaud the idea of "strengthening" Social Security, although none of them seemed remotely aware that they are the direct cause of the crisis in Social Security, as I imagined that people all over the country watching it all rose to their feet to also applaud, although none of THEM seemed remotely aware that the crisis in Social Security was their fault, as they keep electing these collectivist morons to Congress, year after year.

It reminded me of Marshall Auerback's comment about the travails of the European Union, "It comes around as regularly as the Super Bowl: Germany violates a provision of the Stability and Growth Pact, the other nations cry foul, and to assuage hard feelings the Germans respond by calling for 'reform' in order to forestall the embarrassment of being punished by a creature of their own creation."

- Jim McTeague of Barron's newspaper says in his D.C. Currents column "Polls gauging the public's perceptions about Social Security and retirement income prove conclusively what stock and bond salesmen always have known: Americans are soft in the head, especially when it comes to money."

A case in point is provided by one of my readers named Bud, who is retired in Stuart Florida, and who is 75 years old. He is grumpy because he had to go back to work, at his age, delivering pizzas. His desperate situation is caused by, as if you had to be told, inflation: In short, he needs money because prices have risen and his income has not. He writes that he has personal experience with inflation, as he remembers that the price of a new Ford was $900 in 1946. In 2005, a new Ford costs $25,000.

Being cold sober (was the light in here always this damn bright?), it is easy to see that the price of a new car has increased a lot. And even if I was drunk I would be able to recognize that the price of a new car has gone up a lot. And even if I was so sloshed that I was merely moments from passing out, dying from alcohol poisoning, I would be able to EASILY mentally calculate that the difference between $900 and $25,000 is a lot of money, involving a lot of zeros, which is a Mogambo vital clue (MVC) to determining if something is large and/or expensive, and when combined under field conditions involving alcoholic beverage consumption, it also involves a lot of staggering about, slurred swear words, and probably getting into a fight with somebody who is a lot smaller than me, and a lot older than me, or a lot younger than me, but definitely smaller and weaker. So the body of anecdotal evidence is pretty conclusive that the rise from $900 to $25,000 constitutes a lot of inflation.

I see that the pretty girl in the front row is holding up her hand. I look at her and smile, and I say "Yes, my little strudel, what would you like to know?" She says "Exactly HOW much?" I smile with my best Hollywood face, my voice like buttery velvet, and I lean forward and leer at her like the little pervert that I am, and I say, "For you, I am free! Free, my darling! Take me away with you, and I shall ravish you and drive you to heights of passion hitherto unknown, and maybe order out for pizza, too!" Well, I expected her to blush and giggle, both reveling in the attention and being embarrassed by it, and then sweetly clarify that she was actually asking about how much inflation it was, and then I'd apologize profusely, and then we'd share a laugh, and then we'd go out for coffee, and then out for a drink, where I would try and get her really drunk. But instead she starts gagging and saying, "Ewww. Icky! Ewwww!" which is Earthling female talk for "Just the thought of you touching me makes my skin crawl, and the smell of your foul breath makes me want to puke!"

You can tell by the way that my breath has become fast and shallow, my face has become ashen with fear and my heart is beating like, oh, about a zillion beats per minute, that I am going to attempt one of the rare Mogambo Mathematical Moments (MMM). And sure enough, I deftly key into a calculator the appropriate data, and after a few abortive tries I stand up and ask the class if there is anybody here who can figure out this damned %##@ math problem, and then one of the smart little punks hands me a piece of paper with the answer written on it, and then I announce that a measly 5.8% inflation causes the price of a new Ford to increase from $900 to $25,000 in 59 years! 5.8%!

Hahahaha! You think that you are going to get real, inflation-adjusted returns from the stock market to equal that rate of inflation? Hahahahaha! What a chump! Hell, your $900 investment is already down in terms of purchasing power, and you haven't made a dime of real, inflation-adjusted gains yet! Hahahaha! Brilliant investing there, dork!

And even if you did make enough in capital gains and dividend income to offset the inflation (which is actually deflation in your buying power), you still haven't paid the damn taxes on the gain! So now it is time for you to get out YOUR calculators, and you tell ME how much you have make on your $900 investment to turn it into $25,000 in fifty-nine years, net of inflation, net of taxes, net of fees, costs and charges, net of commissions, net of "inactivity fees" , net net net.

I figure that if you make a profit of about ten percent a year, ought to be enough to just break even! And if you think that you are such a hot shot investment genius that you can do that consistently over 59 freaking years in a row, then hahahahaha!

Thus is it with all of your investments; your gains will be eaten up by inflation, cause by horrid Federal Reserve which has created all this money which caused all this inflation by destroying the purchasing power of your money. Just ask Bud. If he put $900 into his retirement savings in 1946 so that he could have a new car when he got to be 75, he might actually get a new car. But his investment would not do so well that he could also afford to afford the insurance, much less the gas to put in it!

And to extend this to your other retirement plans, such as your 401(k) or your IRA or your company plan, you will get, at most, a week's worth of income when you retire only if you save a week's worth of income now. It's one-for-one. There will no compounding of your investment through some magical multiplying effect (MME), and you will not end up with some huge pile of money with which to retire in comfort and style. Life is not that way, and the stock market is not that way, either.

- The jobs number is always presented as "the economy created more jobs." The truth is that the government provided the money, somebody borrowed the money with the idea that somehow he could make a profit, and then the borrowed money provided the jobs. So not only was the money supply expanded by somebody going farther into debt, but the jobs are created out of that same debt.

Manufacturing, it should be noted, dropped 25,000 jobs in January. And the reason that I keep hammering away at this, flogging a dead horse over and over, is that there is no such thing as an economy based on services, because if you COULD make an economy out of services, then everyone would do it. And nobody does it. Although we Americans, alone in the history of the world, are trying. And failing.

I also note that the government has added about 200,000 jobs in the last year.

- An article on Bloomberg entitled "Argentine January Inflation Jumped to Two-Year High" makes note of the fact that "Argentina's consumer prices rose at their fastest pace in more than two years in January as a government-ordered wage increase and tax breaks led consumers to boost spending." This inflation in prices is what happens when you have, as they have had, a "government-ordered wage increase." These higher wages make costs go up for businesses, which makes businesses raise prices, which is inflation, which eats up the wage increases of the workers, which negates the entire wage increase. At the end of the day, the only two things that are changed are that prices are higher and more people are miserable.

But the Argentine government is not worried, although they are idiots. They say "The central bank targets inflation of between 5 percent and 8 percent this year". At 6.5%, which is certainly between 5 and 8 percent inflation, prices will double in 12 short years! Hahaha! Double! Idiots! The article goes on to say "Da Fonseca, who forecasts inflation will quicken to 7.3 percent this year, said central bankers may be hesitant to cut money supply to hold down consumer prices because that would spark a rally in the currency that could hurt the country's export-led expansion." I am stunned to speechlessness by the complete lunacy of such a philosophy, as inflation at 7.3 percent makes prices double in only ten years.

- George Ure at UrbanSurvival has taken a look at the new employment report, and writes that "the civilian workforce declined in January. From 148.203 million to 147.949 million. What happened to 254,000 people in this month's report?" The answer, among many explanations, is that they are "discouraged", probably at the piddly amount of money that they can make from some dead-end job is not enough to live on, and there is much more money to be made in, for example, selling drugs to each other, stealing cars and getting on some government programs where they give you money and stuff.

- "Power By Any Other Name" is an essay by DW McKenzie on the Mises.com site. "While some still see the Republican Party as the party of smaller government, it is hard to know why. Perhaps no one else did more to create this impression than Ronald Reagan. In his inaugural address Reagan declared that 'Government is not the solution to our problem, government is the problem.' While President Reagan's actions fell far short of is rhetoric, one might excuse Reagan by noting that the Democrat-controlled House frustrated many of his efforts. This excuse obviously does not apply to the current Republican administration."

To prove the point, Mr. McKenzie goes on to note "President Bush delivered more big government regulations and spending in his first four years than President Clinton did in his eight years in office. The first State of the Union speech of his second terms promises to deliver more of what we saw in his first term." Now you know why my hands are shaking so much that I can hardly get a handful of tranquilizers into my mouth.

- Reader Brad T. did a research paper in college on the subject of the ancient Roman economy, and writes that "Rome had to pass a law prohibiting the population (especially in Italy) from voluntarily selling themselves into slavery in order to avoid the crushing tax burdens of being a citizen. You hoped to find a kind master and/or sold yourself to a relative. Imagine a situation so dire that the horrifying life of a slave held more promise than being able to pay your taxes."

- Chuck Butler, president of Everbank and the writer of the Daily Pfennig column at Daily Reckoning, writes "The Non-ISM data was very bearish to me when I looked at it, and can't for the life of me figure out who was asleep at the wheel when this data was printed, because the markets missed this altogether! Here's some highlights or low-lights however you want to look at it. First of all, the Non-ISM index came in at 59.2 in Jan, below the 61.5 expected and the 63.9 Dec printing. But that's not all! My trader friend at RBC sent me this note: 'there was a huge drop in unfilled orders from 56.5 to 48.0 - reflecting the first contraction in 21 months.' "

He also gives a snippet from Jim Rogers, who "tells us in his new book, Hot Ccommodities, that commodities are in a bull market that will not peak out until 2015-17. BUT, he also says that stocks are an opposite pattern and therefore should be in a BEAR market until 2015-17." Sounds right to me!

- Bob Bronson of Bronson Capital Markets Research writes that "The false new-high breakout and bull trap is confirmed, notwithstanding the incipient fractional-retracement rally." It has something to do with the 4-year Kitchin Cycle, which is one of the shorter cycles, which is not important in itself. What IS important is that the imminent resumption of the bear market in stocks is, as he says, confirmed.

- If you want to hear something ridiculous, get a load of this: People who, for reasons that nobody can explain, have a reputation for having smarts, say that the devaluation of the dollar is a GOOD thing, because that means our exports will be cheaper to foreigners, and they will buy our exports, but that exports will become more expensive, and so we will buy less imports, and the balance of trade will adjust, and everything will be wonderful as soon as that happens and blah blah blah. The Mogambo laughs, which is unfortunate since he was just taking a drink of Coke and now he has snorted some out of his nose and those carbonation bubbles are stinging the sensitive Mogambo mucous membranes (SMMM) in his nose, and now he is snorting and sneezing and cursing and laughing all at the same time, and it is not a pretty sight.

Ignoring the snot and soda stains (SASS) on his shirt, the brave Mogambo goes on to ask "And just where are these foreigners going to get the money to buy all of our exports if we are not buying their exports anymore?"

- Everyone is screaming "Euros! Euros!" and how the euro is some magical antidote to the poison of owning US dollars. Well, I am here to tell you that the euro ain't no prize, either. And there are a bunch of other currencies that are rising, although under normal global economic conditions, they would be falling, if they had a strong dollar to fall against. They will soon all be falling against gold, so they have that to look forward to.

The only constant is that they are all losing absolute purchasing power, as almost all countries in the world have positive consumer inflation rates of one degree or another, some of them relatively low, and some of them terrifyingly, heartbreakingly high. And it is not just inflation that is crushing them, as Germany just announced that their official unemployment rate is now 12.1%! And since it is the government reporting on itself, this figure is almost certainly too optimistic. As the Elliott Wave people put it, "A record five million Germans are out of work. Last time the job situation was this dire was right after World War I."

Which means, with mathematical certainty, that gold must go up in price. And as the feature of gold as a store of value starts to encroach on the dimwitted mental disabilities of the American population, some of them will look at the problem with their usual blank look of incomprehension, and then, and nobody can explain how, the primitive beast in them may sudden realize the value of gold. But I doubt it. Some people are too stupid to learn, and I am afraid that Americans fit that bill, as evidenced from the bizarre economic things that they believe and in the idiots that they elect.

In fact, remember the scene at the beginning of Arthur C. Clark's "2001: A Space Odyssey"? All these monkeys hobbling around, screeching and blaming all their troubles on The Mogambo, even though I would not even be born for another 10,000 years, which only proves that the plot to hurt me has been around a lot longer than anyone realizes. Then, one morning, everybody awoke to find this big black monolith in the middle of the living room. When one of the monkeys touched it, bingo bongo, mental capacity is increased in the ones that touch it, and there is this weird droning music in the background, and you don't know if the sound is coming from the monolith, because maybe it was a big loudspeaker for some alien home entertainment system or something. We just don't know, and don't ask Mr. Clark because he doesn't know either. Well, anyway, suddenly half of the monkeys were making tools and inventing derivative financing structures, while the other half was making weapons and trying to trying to live off a system whereby everybody prospered by taxing each other. All very modern.

The point is that I advised Arthur C. Clark at the time to change the scene to a monolith of gold, and then when the monkeys touched it, they were, again, transformed by the experience in some mysterious and strange way, and the monkeys organized their economy around using gold as money, see, and then with the stability of money values, the economy grows and soon all the monkeys are walking upright. Oh, don't bother asking him about it, because he will just deny he ever met me or even heard of me, which is probably true, because when I call him up, somebody says "We have Caller ID, you Mogambo idiot! Now go away, ya freaking weirdo!" and the mail I send him comes back marked "Return to sender. Address unknown. No such person. No such soul" which he stole from the Elvis Presley song, the little plagiarizing bastard, which only proves that this Arthur C. Clark is such a low-life that he not only stole from me, but from Elvis, too, who is dead! Stealing from the dead! Although I am sure he did not call it "estate tax" like the government, which is also so low that they will steal from the dead.

The point is that real things are going to get more and more expensive here pretty damn soon. And when that starts happening, it means that gold will do what it traditionally does what it does best, namely, saving your sweet butt from the fires of inflation hell, (insert maniacal laughter with screams of pain and hopelessness in the background).

- Also in Barron's this week is an excellent editorial by Thomas G. Donlan, who is the editorial page editor, entitled "The Union and The Dollar" with the sub-head "Pride goeth before a fall". At first I though he was describing marriage, as it is a union of two humanoid people to produce a money-gobbling monster, and suddenly your dollars have all gone into drapes over your windows instead of an old army blanket stapled over the opening, and there are several windows that have no defensive armaments at all any more! And right where the command center used to be, there is some dorky "entertainment center" where the Thought Police, as department of Homeland Security, are beaming their thought-controls rays into my house and into my brain. But he was not referring to my marital difficulties. . He was, instead referring to inflation, and reminding us that the value of the U.S. dollar peaked about the time that Bush came into office. "Deflation never happened," he writes, "but there should be no debate about inflation. It has already happened. There are already too many dollars."

He explains that the excess production of money and credit has not seriously shown up in prices because the Chinese and the Japanese and the European Union and lots of other countries have been desperately soaking up dollars, removing them from the system, so that their currencies do not get stronger, because a strong currency would make their exports more expensive, although if they did NOT try and weaken their currencies, then their imports would become cheaper, and the citizens of that country would have a nice boost in their standard of living.

But one day, and probably when we least expect it, those dollars are going to emerge like some giant monster, and will probably attack Tokyo, as there is something about that poor damn city that seems to attract large, angry monsters, and if you are thinking "Godzilla", you are right, although that is just ONE of the many, many monsters, many of which could shoot fire out of their mouths, that have bedeviled poor Tokyo over the last 50 years.

Anyway, getting back to the point, he reminds you that "Unless we act quickly to slow the creation of dollars, they will eventually come home to bedevil the price of bread, meat, cars, and the rest of the CPI market basket."

And you won't have The Mogambo to get in your face and tell you of the horrors of inflation, as Mr. Donlan adroitly does that for me. He writes, "If you are under 45 or so, you may not know what inflation can do to your investments. Believe us, or believe your parents, you don't want to find out." And although he did not say it, you also do not want to find out about what happens to lots and lots of other things besides your investments when the inflation monster comes striding down the street, and it is spitting fire out of its mouth, and laser beams are coming out of its eyes, and it is crushing cars, and you are standing in your front yard yelling at it, "Tokyo is that way, you idiot! Get out of here!"

Well, it won't be just us Americans, as the new issue of The Economist magazine just got here, and for the first time ever (as far as I remember) every stinking country listed in their tables in the back section ALL now have inflation bedeviling their populations. It used to be that there were a few countries that were experiencing a slight deflation. Now, every single country in the world is not suffering from price inflation. Congratulations, butthead governments of the world! You have now inflicted the pain of inflation on, literally, every damn person in the entire world.

And inflation is right here, too, as reported by Reuters, which notes that U.S. inflation pressures rose in January, according to The Economic Cycle Research Institute, which said that the rate of inflation, as measured by their Future Inflation Gauge, rose 4.5 percent to a reading of 120.0 in January. This, in turn, was from an upwardly revised 118.7 in December.

As a reminder to you to have nightmares tonight when you go to bed, the index of future inflation registered 3.4 percent inflation in December, which was itself revised up. Ugh.

***** The Mogambo Sez: The latest swoon in gold is another gift. gold lease rates have dropped again, as the lenders dropped rates so that borrowers, which are effectively net short, could lease the gold and could flood the market with it, pushing the prices down and thus saving their short position. These kinds of things can work in the short run, but they cannot last in the long run for some reason, as none ever has. That is why when it IS working in the short run, like now, they are handing us a gift in the long run.

Buy and hold gold. You'll soon be glad you did!

Feb 8, 2005
Richard Daughty
email: scgcjs@gte.net

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.

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