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It's always the damned banks!

Richard Daughty
...the angriest guy in economics
The Mogambo Guru
March 1, 2006

- I am really getting freaked out here, as this whole economics thing keeps getting weirder and weirder, and more and more out of control. For example, the amount of money flowing through the bank repo market is staggering, and it is becoming common to see over $12 billion a day, every day, in repurchase agreements! Per day!

On the positive side, Total Fed Credit is pretty much at a standstill, so that source of the curse of fiat money is, thankfully, neutral. But on the other side of the coin, foreigners continue to soak up tons and tons of our debt, which they will probably spell "tonnes and tonnes of debt of the world's biggest idiots who think that they can make an economy out of borrowing and spending money for imported consumer items and having their governments borrow more and more money to spend more and more money on more and more people!", and last week the official holdings of these foreigners at the Federal Reserve exploded by another $16 billion. In one week! I don't know if this is a new weekly record or not, and I don't care, because if I did care, then I would have to do actual work to answer the question, but you know how I feel about work, and if you don't, then ask me to do some and see what happens. The only thing that matters is that it is a lot of money, and the humongous sum total of American government they have stashed at the Fed IS a new record, $1.572 trillion!

Not to be outdone, the banks themselves gorged and gobbled up $17 billion in government debt last week, too! Wow! See what I mean about things getting weird? For a moment there, I thought my throat was tightening in fear, suffocating me, but it was only my wife strangling me from behind, grabbing me by the neck and yelling "Stop that damned moaning and groaning about the increases in debt and the money supply! You're driving me crazy, you horrible man!" Fortunately, she is such a weakling that I easily broke her hold, sending her scurrying off in fear of an episode of Mogambo revenge (EOMR) at the failed coup, and I am soon back thinking and moaning and groaning about all these huge waves of money slopping around the world.

Searching for a perfect Mogambo analogy (PMA), it is sort of like how the ice caps are melting and gigantic icebergs are breaking off of the ice packs, which means that huge influxes of fresh water are disrupting the flows and stability of the salty ocean currents, and pretty soon I'm worried about THAT, too, as the repercussions of huge amounts of fresh water pouring into the oceans is as ultimately disastrous as huge influxes of money into the world's economy, which was the whole point I was trying to make.

And it is not just government bonds, as I cleverly surmise from an article in the Financial Times, written by Jennifer Hughes, who reported that "US companies have already issued almost $100bn worth of investment-grade bonds this year as huge acquisition-related deals pushed borrowing to its highest level in five years." And when you add in all the other, lower quality debt that was also issued, you can't help but think to yourself, "Oh, my God! The Mogambo was right! We are freaking doommmmmmed!"

And if you innocently raise your hand and ask "Where did all of this money come from to buy all of these bonds, mister Mogambo sir?", I will take that as an opportunity to run from the room and scream from the rooftops, "From the banks, you idiots! All financial crises are caused by banks! It's always the damned banks!" As proof of that Mogambo highly inflammatory statement (MHIS), I direct your attention to the fact that "required reserves" in the banks dropped last week to a miniscule $41 billion, which is so low (audience shouts out "How low, Mogambo?) that in 1995, required reserves were almost $60 billion!

A confused sudden hush falls over the crowd. They turn to each other, looking perplexed, and I could hear them whispering back and forth, asking each other "What in the hell is that Mogambo idiot yammering about now?" In response, I shall take some of my valuable Mogambo time (VMT) and explain that reserves are there to, theoretically, help insulate the banks from losses if some of their loans go bad, and also to provide a cash cushion in case they need to satisfy the demands from depositors who want their money back, if any. In either case, without the reserves, the bank would be, technically, bankrupt.

But banks hate having reserves. They say "Look at the waste! All that money sitting around, doing nothing all day! We want to loan that money out! We want to 'put money to work!' We don't care that it is dangerous and stupid, because with a fiat currency, we can always get the government to bail us out!"

Keeping that in mind, let's sneak off and leave the group, maybe grabbing a quick cigarette, and while we are there, let's turn back the calendar to 1995, which was eleven years ago, back when we were all younger and better looking. If I looked it up correctly, in 1995 the banks' reserves were about $60 billion, insuring against $206 billion in loans and leases, and $87 billion in savings. M3 was $4.3 trillion.

Now, in 2006, notice the amazing difference! Today, required reserves are only a measly $41 billion (down almost 33%!) as a cushion against a whopping $5,540 billion in loans and leases (2,700 percent bigger than in 1995) and an astonishing $5,150 billion in savings (5,900 percent bigger)! M3 is now $10.3 trillion.

Now, I am sure that there are lots and lots and lots of differences in the laws, regulations, definitions, court rulings, interpretive guidelines, changes in what is counted as what, and changes in what is not counted as not what, and blah blah blah. But the required reserves numbers speak for themselves, which is very good, because I am too distraught to speak coherently, as this is so suicidal, so insane, and so crazy that I am completely nonplussed.

But bravely I continue, and tell you that it is going to get worse, if we believe a headline on Bloomberg.com, which blares out "Bernanke, Like Greenspan, Won't Get in Way of Asset Price Rises". If you read on, you will note with horror that the article says "Federal Reserve Chairman Ben S. Bernanke, like his predecessor Alan Greenspan, doesn't plan to get in the way of surging home or stock prices." In other words, if you want to borrow money to buy stocks or houses and bid them up in a great big inflationary bubble, then he will create the money for you to borrow!

And all that new money (created when it is borrowed) will instantly devalue all the other dollars out there, including the dollars in YOUR pocket, and then pretty soon YOUR wife comes up and, like mine, demands that I fork over more money for food, because (so she conveniently claims) prices have gone up a lot. But when you ask her where in the hell you are supposed to get all this extra money, she says "Get a job, you lazy creep!" which opens up THAT whole can of worms, so don't go there.

And this "job" thing brings up a little aside, in that there is a rumor out there in cyber land that I am a shill for the gold industry or something. Wrong. Nobody has ever paid me a dime to promote, advise, hint at, suggest, bring up, mention, or allude to anything, ever. Nor has anyone, in any way, influenced what I write about, although many readers have, and sometimes in very unflattering tones.

The fact that I constantly scream for you to invest in gold and silver and commodities is because history has a way of repeating itself, and especially the history of fiat currencies, and doubly especially the history of countries that have abused a fiat currency, and that's why I scream for you to buy gold and silver and commodities if you want to get rich on this monetary stupidity.

But you don't have to listen to me (and frankly, if you DID listen to me, I would have no respect for you at all!), because you can listen to Puru Saxena of the Money Matters newsletter, where he says "History has shown that each commodities bull-market in the past 200 years has coincided with a major war, without a single exception. During periods of conflicts, countries always embark on the road of massive money-printing in order to finance their efforts."

-- Ben Bernanke, the chairman of the Federal Reserve, was speaking at Princeton University, his old alma mater, and said that the central bank "doesn't really have good instruments for addressing asset price bubbles should they exist, particularly if they are in one particular segment or another" which is true, and I agree with him, as much as it goes against my grumpy Mogambo nature (GMN) to agree with anything this Bernanke guy says.

Bernanke also said "It's generally a bad idea for the Fed to be the arbiter of asset prices,'' which is also true! I shake my head in disbelief at what I am hearing him say, and then he goes on to say "The Fed doesn't really have any better information than other people in the market about what the correct value of asset prices is" which is also true! Again I have to agree with Ben Bernanke, and you notice how my flesh crawls because of it.

The article notes that Alan Blinder, who is a former Fed vice chairman and is now a Princeton economics professor (making him a colleague of Bernanke), "wrote a paper last year saying Greenspan may have been the 'greatest central banker' ever", which tells you all you need to know about Alan Blinder.

But Blinder explains the Greenspan-Bernanke approach to bubbles: It is magic! Something wonderful somehow happens when "basically, you do nothing and then the corollary to that is that you mop up after they burst to keep the financial system from taking a big fall.'' Hahaha! This never fails to crack me up! I am not sure what planet this doofus Blinder comes from or what kind of medication he is taking to make his mental processes so weird that even Princeton would hire him, but his vaunted "doing nothing" is easily contradicted by the fact that the Federal Reserve WAS doing something! For freaking years, decade after decade, the Federal Reserve has NOT been doing "nothing" you dimwitted lying piece of dog crap! They were doing something! Something horrible! They were creating whole oceans of credit out of thin air, every damned day of the week! Week after week! Month after month! Year after year! Decade after decade! And the money went into horrendous price inflation in stocks and bonds and houses and the size (and cost) of government!

And now businesses are complaining that they can't attract quality employees because housing prices are so high, and the government solemnly strokes its collective chin and says "Hmmm! This is serious! We need government action!" And utility prices are rising so high that voters are complaining, and the government against strokes its collective chin and says "Hmmm! This is serious! We need government action!"

But let's get away from this silliness, because as you can see that I am working myself into one of my hysterical, screaming Mogambo spells (HSMS). So let's return to his prepared remarks, where we cool down considerably, and actually agree with Bernanke when he said "stable prices are desirable in themselves and thus are an important goal of monetary policy." Hooray! Yes! Yes they are!

And then he also goes on to say "stable prices are also a prerequisite to the achievement of the Federal Reserve's other mandated objectives, high employment and moderate long-term interest rates.'' I leap to my feet and shout "Hooray! Hooray for Ben Bernanke!" and then I am shocked at hearing myself say it! I feel dizzy at the experience! Whew!

But he is lying, and he wants inflation, lots of inflation, and it is inflation that curses my soul and I have nightmares, especially now as new inflation figures keep coming out, and coming out, and coming out, until the sheer tonnage of horrifying statistics about how the prices of things are rising and rising and rising sends me crawling back to the closet under the stairs, where I whimper in dread.

So how bad was it? It must have been bad, as all I remember reading was that the Labor Department said "Consumer prices were up 4 percent for the 12 months" and then I woke up a while later, stretched out on the floor, insensate. Slowly regaining consciousness, hand-over-hand I crawled back into my chair, and found that the rest of the sentence was "ended in January compared with a 3.4 percent year-over-year gain the previous month. Core prices were 2.1 percent higher compared with a 2.2 percent year-over-year increase in December."

And how does one protect oneself, and offset this enormous rise in prices? Well, the bad news for us poor proletariat working trash is that working isn't going to do it! The same article added that the Labor Department reported "Weekly earnings of workers, adjusted for inflation, fell 0.2 percent in January and were down 0.4 percent in the last 12 months." Hahaha! Welcome to the hell of fiat money, chumps!

Even worse, from (Bloomberg) we read "Energy and food costs drove U.S. consumer prices up by the most in four months in January." When considering the cost of all goods, the report reveals "Goods prices are 3.8 percent higher than in January 2005."

And services, which was supposed to be some fabulous panacea, are inflating even more, as we read that "Service prices rose 0.5 percent last month and are up 4.1 percent over the last year."

And the Harper's Index notes "Percentage change since 2000 in the average amount U.S. workers spend on out-of-pocket medical expenses: +93."

I like the Reuters headline better, as it conveys a little more urgency, when they write "January Consumer Prices Surge." I would love it more if the headline was a quote from The Mogambo, namely "Inflation is coming to kill you and your family!"

But nobody wants to remember what happens to prices when you expand the money supply so much, which is that prices rise to accommodate all the money, and you get inflation in prices. And if you think higher prices is a non-event, then get a load of this AP headline: "Families' budget squeezed by rising costs". The article went on to say "From an economic point of view, core inflation - for now - isn't overly worrisome but it is 'generating some angst within the Fed,' said Sherry Cooper, chief economist at BMO Nesbitt Burns." Apparently Ms. Cooper is unaware of the irony that the article in which she is being quoted says that families are being "squeezed". And I guess it is a matter of opinion whether or not a family being "squeezed" is "overly worrisome", although if Ms. Cooper would care to come over to my house, I will happily put her head in a vise and then she can tell ME whether or not getting squeezed is "overly worrisome."
The article went on to say "Electricity prices soared 5.5 percent, the largest one-month rise on record."

-- John Williams of ShadowStats.com writes that The Mogambo was right and that we are freaking doomed. Well, actually, he doesn't exactly say that in so many words, but you can tell that is what he meant when he wrote "Real unemployment right now-figured the way that the average person thinks of unemployment, meaning figured the way it was estimated back during the Great Depression-is running about 12%. Real CPI right now is running at about 8%. And the real GDP probably is in contraction."

As if that wasn't bad enough, he added a whack to the head for senior citizens, as Mr. Williams says that "if the same CPI were used today as was used when Jimmy Carter was President, Social Security checks would be 70% higher." Hahaha! Welcome to hedonic statistics hell, you old geezers! By lying to you about inflation, the government gets to send you stupid seniors your paltry monthly checks that are 41% lower than they would normally expect, just to stay even with inflation! Hahaha!

But Mr. Williams is aghast that I would laugh at the plight of the old-timers, and tries to change the subject. He says that if you account for government spending and programs like a Generally Accepting Accounting Principles (GAAP) business, then "on a GAAP basis, accounting for Social Security and Medicare, in 2003 the deficit was around $3.7 trillion; in 2004 it was $3.4 trillion; and in 2005 it was $3.5 trillion. We've had three years in a row here where the GAAP deficit has been basically $3.5 trillion." Even though my brain is shocked and refuses to believe what I just read, I am still able to calculate that just the budget deficit of the federal government is one-third of the total Gross Domestic Product of the USA! The federal deficit alone is one-third of all the goods and services this whole country makes in one whole year? Yow!

"In fact," he says "the fiscal 2005 statement shows that total federal obligations at the end September were $51 trillion; over four times the level of GDP."

The funny part is that if you "included a one-time spike of about $8 trillion to account for what Congress and the President did in setting up the Medicare drug benefit without funding it going forward", then "The one-year deficit in 2004 was $11.1 trillion. That's trillion, not billion. That amounted to almost 100% of GDP at the time." Hahahaha! This is insane! We are truly a nation of morons!

-- There has been a lot of talk about the unwinding of the yen carry trade now that Japanese interest rates are rising up from zero. This "yen carry" thing is a scheme where you borrow money from the Japanese at virtually zero (so it costs you no money) and use the money to buy US debt (which pays you money), pocketing the whole difference! Up to now, it has been very, very profitable, and very, very popular.

Now that the Japanese are starting to increase interest rates, this whole scheme would be less lucrative, and impossible if Japanese interest rates rise to match ours.

- If you want to hear something that will haunt your nightmares, there is talk of the Bank of International Settlements (BIS) floating the idea of reducing the number of currencies in use around the world to four or so. And there is also, and I shudder to think of it, the loathsome United Nations making noises that they want to exploit the coming chaos to grab power and rule the world.

-- In the "Up Close and Personal With The Mogambo" segment of today's show, I see that I got a lot of mail from people who think I was too insulting about Democrats and their idiotic "All you need is love and government funding" legal and fiscal philosophies. Most of them think that the Republicans are worse. I agree. And it pains me greatly to say that I think George W. Bush is the worst President that America has ever seen, and the whole Republican-majority Congress is about as bad, with the exception of Rep. Ron Paul of Texas, of course.

And, since I am ragging on my own Republican party because of the satanic horror that they have turned into, I am not a fan of Reagan's crackpot economics either, as he, too, merely went on a long spending spree, and financed it by replacing the necessary taxes with debt, which is such a lame-brain shallow trick that I am aghast and ashamed of him for doing it and the Republican party for aiding and abetting it, and for letting it be part of the permanent government fiscal landscape ever since.

In weak, partial defense of the Republicans (if that is even remotely possible), we are merely the ones currently holding the bag as the whole bloated, cancerous, mal-invested economy starts the inevitable decline that comes after a period of excess creation of money and credit by the banks. So they are merely doing what all governments have always done at the end of the long boom when the economy is on the verge of collapsing after such misshapen, inflationary growth; they borrow and they spend more than ever!

But we don't want to learn, and never will, apparently. It's like my wife bringing me a cup of coffee in the morning. She doesn't just call out sweetly to me, "Wake up darling!" and hand it to me. Oh, nooOOOOoo! Instead, she throws it in my face, and the scalding hot coffee wakes me up screaming, "Oww! You're supposed to hand it to me! HAND it to me, dammit!" and she goes, real innocent like, "Oh? I guess I forgot!"

Well, the whole basis of my legal case against her, and the Democrats, and the Republicans, is that neither she, nor they, forgot anything. They just don't WANT to remember, because it is more fun that way!

-- If you want another reason to get the hell away from the equity markets, then Marc Faber of the Gloom Boom & Doom Report is the guy you need, as he writes "Mutual fund cash positions in the US have declined to a record low and that such low readings have, in the past, preceded serious market corrections or bear markets."

But it is not just cash levels that are flashing warning signs, as we learn when he writes "Moreover, the US stock market has become technically over-bought." So what happens when a market is overbought? I was getting ready to answer, but he jumped in and said "such over-bought conditions have usually been followed by meaningful stock market corrections."

Now, here is something I'm not sure I ever heard before. He says "Another indicator, which is negative for the US stock market, is that foreigners are once again buying US equities at an almost record clip. As is the case for every stock market around the world, heavy buying by foreigners occurs usually near market tops, while foreign selling has always occurred very close to market lows such as we had in late 1998, in October 2002, and March 2003." Hmmm!

And here is my entry to the Understatement of the Month Contest. He says "As to the catalyst that will trigger the correction, I suppose that inflationary pressures may necessitate more additional interest rate increases than the market now expects." Hahaha! The bond market expects NO inflation! And they expect NO real profit, as the yield they are demanding is less than inflation plus taxes! If you don't believe me, look at the yield and compare that to the inflation rate of 4%!

"Therefore," he fearlessly forecasts, "rising interest rates and declining bond prices could at some point weigh on all asset markets." Did he say "could"? Grabbing my infamous Mogambo Blue Editing Pencil (MBEP) I cross out "could" and substitute "must." Then I cross that out, too, and write "will". And then I cross that out and write "will rise so much that trillions of dollars in value will be lost and people will be jumping off of buildings in despair because they are wiped out, as the morons that manage their retirement funds loaded up on bonds." Oooh! I like that much better!

Anyway, he is not impressed with my editing handiwork, and cruelly dismisses me by airily saying "But it does not really matter what the catalyst will be. When all asset markets are as extended as they are now, it does not take much for a vicious sell-off to get underway."

I know exactly what he is talking about. As an example, when I throw my towel on the floor after I take a shower, the wife probably won't say anything. But after a week or so of that crap, then one day she, too, is "extended" and there is usually plenty of "vicious."

Mr. Faber finishes up by saying, as I have been saying, "I maintain that gold and other precious metals will continue to out-perform financial assets. My view is that we shall, eventually, be able to buy one Dow Jones Industrial Average with between just one and five ounces of gold."

-- Phil S, waxing lyrical, writes "The seeds of monetary ignorance, fertilized by arrogant stupidity, bring forth hellish harvests of financial and social destruction! Unfortunately, lethal seeds have been sown and this unnecessary and evil madness prevails. Batten down the hatches."

-- Last week I misquoted a phrase of Ben Franklin, who said that the political system of the USA was "A republic, if you can keep it." I had him calling us, erroneously, a democracy. Actually, as many people pointed out, the Founding Fathers hated the idea of a democracy. In fact, I was directed several times to "A Republic, If You Can Keep It" by John F. McManus at the newAmerican.com site, where he writes "The Founding Fathers supported the view that (in the words of the Declaration of Independence) 'Men are endowed by their Creator with certain unalienable Rights.' They recognized that such rights should not be violated by an unrestrained majority any more than they should be violated by an unrestrained king or monarch. In fact, they recognized that majority rule would quickly degenerate into mobocracy and then into tyranny."

And we are getting to the tyranny part (checking my watch for the exact time) right about now.


***Mogambo sez: Emphasize silver, as the looming ETF in silver will mean, as Ted Butler writing at InvestmentRarities.com says, that "There's no way this much silver could be bought without sending the price to $100 an ounce." And with silver selling for less than ten bucks an ounce, that's a nice ten-bagger gain!

February 28, 2006
Richard Daughty

email: RichardSmithGroup@verizon.net
Daughty Archives
Provided as a courtesy of Agora Publishing and 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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