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And you thought that I was gloomy!

Richard Daughty
...the angriest guy in economics
The Mogambo Guru
March 2, 2005

- Foreigner central banks took some more tranquilizers, took a deep breath, and stepped up to the plate last week to throw another $22 billion bucks into buying our debt and stashing it at the Fed for "safe keeping." This has given me a great idea, as it involves the two things that a successful business needs these days; technology and government money. The great Mogambo idea (GMI) is that I will sell an electronic device to these foreign governments. The internal working title of the project is High-Intensity Money-Sucking Machine (HIMST), although in my official proposals this fabulous new gadget is called The Great Mogambo Buying-Power Detector (TGMBPD). What you do is to carefully unpack the delicate device and assemble it, making sure that you insert Tab A into Slot B, and then aim the thing at the Federal Reserve. Through complicated programming and powerful cutting-edge computer-chip technology, you can actually see the purchasing power of your money leaking out under the doors, down the stairs, out into the gutter and finally down a storm drain. And with the Optional Sound Enhancement Component Sub-System (OSECS), you can actually hear the rats in the sewer complaining about the stinking deluge.

Almost like they were assessing this, Nouriel Roubini and Brad Setser have written an interesting paper entitled "Will the Bretton Woods 2 Regime Unravel Soon? The Risk of a Hard Landing in 2005-2006," which is unwieldy as a title, and if it was me, I would have shortened it to "We're Freaking Doomed!" which is both short AND highly descriptive, which ought to win me a few brownie points for productivity on my next evaluation! They opine, "The rest of the world will soon run out of the capability to absorb more dollar-denominated debt. Foreign central banks, especially China, cannot borrow enough domestically to purchase all of the bonds that they need to maintain their currency peg, so they print the rest. This is driving an inflationary boom in China that will run its course eventually and lead to a crash. The end game of this global inflationary boom will be a dollar crisis: a reduction in US consumption, higher interest rates, collapsing asset markets, and a recession."

And you thought that I was gloomy! Hahahaha!

But our own execrable Treasury Department is still on a campaign to drown us all in debt, and Total Public Debt is now $7.13 trillion, up $24 billion in one freaking week! And if you take a TGMBPD and aim it at your bank account, you will see the value of your money leaking out.

- Personal income dropped precipitously last month by 2.5%, which doesn't look like much, but when compared to offsetting statistic that the personal debt load went up, it is a HUGE drop! Of course, this was only in comparison to the previous month, when Microsoft let loose with a gigantic $32 billion in dividends. Without that reversal, personal incomes were actually up by a teensy smidgen. Not enough to cover the interest on the new debt we took on, but a smidgen. A teensy smidgen.

- Throwing my stupid two cents into the Social Security debate, I take a gratuitous and needlessly vicious exception to Thomas G. Donlan, who is the editorial page editor and occasional writer of editorials for Barron's, and who has written one this week entitled "Rope-a-Dope." He decries the idea to increase the ceiling on wages subject to the Medicare and Social Security tax on the wages of the high-income people because, and I quote because you are going to love this, "A 6.2% tax on high payrolls would afflict the nation's most productive employees, and the parallel 6.2% on payrolls would raise the cost of productive workers to the firms that hire them." What crap! Just like everybody else, bonehead! Hahahaha! For one thing, I am supposed to fall to my knees, weeping piteously, boo hoo hoo, because the rich might have to pay the same percentage tax on their incomes as poor people have to pay? And this would somehow cruelly "afflict" the high-income employees? But, at the same time, the working poor people, who can barely scrape by as it is, are NOT "afflicted" by the exact same tax at the exact same percentage?

For another thing, the total tax is not a measly 12.4% as he alleges, but the total bite (with the Medicare surtax) is 15.3%, which is almost one out of every six dollars that we ordinary trashy people make, and off the top, too.

And another thing is that there is a HUGE difference between merely making a high salary ("Thanks, Uncle Bob!") and actually being the "most productive," and often there is very little connection between the two, (Enron comes to mind), although sometimes there is a connection, as The Mogambo makes very little money and is so impossibly unproductive that he is grossly overpaid at that.

But I am, in contrast to Mr. Donlan, in favor of increasing the ceiling to infinity, as I see no reason why the poor (everybody who made less than $87,900 last year) should be taxed on every single dollar they make, at the full, maximum rate, but a guy making $22 million, or $50 million, or $200 million (the despicable Dick Grasso, disgraced former head of the NYSE springs to mind) only has to pay 2.9% on all the money they make over $87,900 (to be completely fair, the rich pay the full rate on their first $87,900 of income). It's insane to even begin to support such wildly regressive tax policy idiocy in the first place, especially in a country as ridiculously socialist as the USA, as it is just another tax, and calling it a "contribution" to the Social Security welfare program does not change that fact one little bit. And in the second place the whole point is that the government is in desperate need of money, and with the class-warfare redistributionist bent of Congress you would think they would be all over this thing. And in the third place it is a bad, bad thing when there is a wide disparity of income in a society, and it should be embarrassing as hell to get up, like this Donlan character, and say that the working poor should pay a higher tax rate, and higher taxes as a percentage of income, than the overpaid rich, who obviously got where they are by virtue of who they know, and not WHAT they know.

- In the Economic Focus column this week in The Economist magazine, they ask "Are central banks watching the wrong measure of inflation?" Well, of course they are, but when you are a magazine with a reputation to uphold, you gotta ask these kinds of silly questions to set up the rest of the article. Anyway, they reference a guy named Ian Morris, who is an economist with HSBC, who includes in his estimate of inflation the things (like housing prices) that the government "conveniently" leaves out when they are desperately trying to disguise inflation. When Mr. Morris does this, he figures that inflation was actually running at 4.9%, which is bad enough, but in the true spirit of "You ain't seen nothin' yet," the Economist magazine updated his methodology to show that inflation is currently running at 5.5% in the USA!

But the damn lying government is still maintaining that inflation is low, very low, almost non-existent low, which is such an obvious lie that the Mogambo laughs-- hahahaha! --when he hears those lying idiots say such things, although he knows why they are doing that: so that people do not freak out, and so The Mogambo does not freak out, and so that The Mogambo will not be calling them up all the time and screaming at the poor receptionist at the Federal Reserve about how the damnable Fed is creating so much money and credit that they resultant inflation is going to destroy us all and how I want to talk to Alan Greenspan or whoever in hell is in charge down there and I am yelling "Don't you hang up on me again!" but she does anyway, and then it is a long drama of me hitting the speed-dial and her saying "Hello" and I say "Don't.." and then there is a scream and a click and a dial tone all day long until my finger is sore from hitting that speed-dial button, which makes me even MORE angry.

But it is not just me, as did some looking at the calculation of the Consumer Price Index, particularly at the fraction of the index for housing, which constitutes about a third of the entire index. They write "NEVER before have we seen this type of rate of change differential between the rate of change in the OFHEO home price data and the rate of change seen in the housing costs implicit in the CPI-Shelter data. NEVER. Is it fair to say that NEVER has the headline CPI been less reflective of real US residential housing price inflation? Or alternatively, is it fair to say that NEVER has the CPI been so understated relative to the actual accelerating cost of US residential real estate? In all sincerity, we believe the answer to both questions is a resounding yes." Note the use of all-capital letters in the word "never," which indicates that this is something significant.

As to the CPI as a whole, they write "The current 'core rate' quotes are really excluding the true costs of food, energy and housing. That being the case, how can we really consider this a 'consumer' price index when it is essentially excluding the true nature of the three largest and most important consumables, so to speak, in any consumers life? Although this is really a point in time comment more than anything else, the current CPI is telling us very little about real world cost pressures at the consumer level." Exactly!

- In another part of the new Economist magazine, in a sidebar entitled "Saturated," they note that total liquidity, which they define as "the sum of America's monetary base (notes and coins plus bankers' reserves held at the Federal Reserve) and foreign-exchange reserves held by central banks around the world)" has grown by more than 20% for the last two years! Note the exclamation point, which I used on purpose to indicate emphasis. What does this mean to you and me? Well, they point out that "In no other two-year period since 1975 has liquidity increased by so much." And 1975 ought to resonate in your brain ("boooiinnnggg!") as that was the fuel that started the crippling inflation that forced Paul Volcker to raise interest rates to usurious levels to try and stomp out the resultant price inflation.

They sum up with the timeless observation that "Central banks are supposedly the guardians of money. Yet between them, they may have created the biggest liquidity bubble in history."

- I point out that economics was originally known as "political economy" as economics was actually the sad, sad story of governments acting like the brainless buttheads that they naturally are, and sooner or later they hatched some scheme to debase the money, and that caused big problems with prices, and things got worse and worse, and then wars were fought, and then people rose out of the ashes and swore that THIS time they are really, really, really, really, REALLY serious about not doing any of THAT silly excess money and credit crap again! Ever! And then they say things like "And we'll even put it in the Constitution that money shall only be of silver and gold, so that the damn government CAN'T do that fiat money crap, because the government can't print silver and gold," and then I will tell them that it was in the Constitution the whole time, and then they will say "It was?" and I will say "Yes!" and then they will ask, in that charming little way that melts the heart of The Mogambo (HOTM), "Then how come we were destroyed by a fiat currency?" and will I say "Because FDR did it and the Supreme Court said it was okay with them, as long as he kept the size of the Supreme Court at nine, instead of following through on his threat of increasing the size of the court and packing it with his buddies, who WILL say it is okay, and the Supreme Court, in an act of gutless cowardice, acquiesced. And then everyone in the media and the Congress and the schools all went along to get along with the scam, and the electorate, which is, in the aggregate, so stupid that they cannot comprehend a Constitutional imperative even when it is written out in black and white, sits in their own stinking slobber and watches and whines as the predictable, and thus the inevitable, happens, which is, if you care to get up and go over to the window and look out, economic ruination. And you think that now, after all these centuries of one moronic government after another trying this same lame scheme, it is finally going to work? A gigantic welfare government financed by debt is NOT going to fail? Hahahah! Stop it! You are making me laugh so hard that my stomach is hurting! You can achieve prosperity by going into un-payable debt? Hahahaha! Stop! Stop! Hahahaha!

But the lure of the free lunch and the self-congratulatory warm glow of smug self-satisfaction that comes from Congress helping thy neighbor, mostly by giving them money and services, but mostly money, and mostly MY money, is always too strong for the weak minds of the typical Congressperson.

And that is how we get to the cartoon on page 12 of this week's Barron's. In the cartoon, we see a bearded lunatic at the door of an office, and he is holding a sign that reads, "The end is near." There are two guys in the office looking at him, and one of them says, "The scary part is, he's our C.F.O." Hahaha!

Now change that to The Mogambo holding the sign, and the two guys in the office are Alan Greenspan and one of his soul-dead zombies. When you undertake that mental exercise, you will know exactly how I feel about what is happening, because this is always what happens at the end of long booms fueled by excess creation of credit and money, and it is the basis of Austrian Business Cycle Theory, which is, as we all know, the only true economics, and all others, especially this New Age central bank crapola that is all the rage for the last sixty years, are merely an idiot's delight. And when it does come to pass, exactly as the Austrians said it would, then the world will look up from where they are sitting in the dirt and says "The Mogambo was right! We WERE idiots to listen to Alan Greenspan and the vermin that infest the economics departments of our universities!"

- Several people have written to inform that the Bible DOES address the problem of currency debasement, mostly in the form of "unjust weights & measures," and they point me to Deuteronomy 25:14 & 15, and Proverbs 20:10 for the relevant passages. It is just too bad that the stupidity of fiat paper currencies was not invented back when they were writing the Bible, and they were still using gold and silver as money. I am sure that there would be a strong message about it in the Bible, too, probably with some parable about the Israelites worshipping paper money and how Moses had to come down and whack them on the head and admonish them with some rebuke, probably something along the lines of "What, are you a bunch of Greenspans? Dost thou thinkest that paper is money? Hahahaha! No wonder the Pharaoh kicked you out of Egypt, morons!"

It all has to do with purchasing power, and if you want to tune in to one of the guys who comprehends the concept of purchasing power, then you can sit there and let me scream in your face, little flecks of spittle flying from my lips and you can see it landing in your coffee and feel the little drops hit your face, about how price inflation will kill you and your children, and how you are a big fat moron to sit there and NOT be upset. Or you could listen to the handsome and calm David Morgan, of, whose essay "Store of Value" contains the following cogent observation, "It is also worth noting that in a true gold standard, many financial planners would be out of business. As absurd as this sounds, follow the logic. If the monetary system were based on honest weights and measures, you would know, when you first entered the work force at, say, 20 years of age, exactly how much you would need to save by age 65 for retirement. Why? Because your purchasing power would remain constant. Under an honest monetary system, interest rates are stable and long-range planning is simplified. In a true gold standard, purchasing power actually increases slightly over time so that an ounce of gold would buy slightly more after 35 years than it did when you originally entered the work force."

Yes! YES! Exactly! And this is the ONLY way that you can possibly save up enough for retirement! And this is why you MUST have gold backing up your money!

- Rick Ackerman, who is the brains behind Rick's Picks, writes that he is not impressed with guys who think that inflation is on its way. He writes "In the view of a Charles Schwab trader quoted by the Journal, the 'worst case' means inflation and higher interest rates. Ya gotta love these guys. The Second Great Depression may be no further away than a downtick in real estate values, yet the pundits are getting all het up yet again about a supposed threat of 'inflation.' I keep having to remind myself that rampant inflation has become all but impossible now, given that it would rescue five hundred million besotted debtors from the hellfires of Murphy's Law. Yes, we'd all like nothing better than to have our homes rise in value to a quadrillion dollars, even if our paychecks were to go up during that time by a mere 100,000 percent."

He is probably right, in that deflation is almost certainly in the cards for assets. It seems to me, and don't quote me on this because I gotta warn you that I am a real stupid guy who can't remember things anymore (except for every time somebody does something bad to me, and then all I can think about from then on is how sweet revenge is going to be), that whenever some economic crisis hits, the value of assets falls, and I don't ever remember reading things like "As the crisis unfolded, stocks went through the roof and interest rates plunged and investors all got rich." Usually it is about guys leaping from their office windows as they are wiped out in the collapse of prices.

But the price of dollars is the inverse of the price of oil, which will skyrocket as the dollar falls, and the price of commodities will skyrocket, as they will be so cheap in world terms. Pretty soon, Chinese peasants are whining that they cannot compete against cheap American agricultural products, and the relative cheap food spurs additional world demand, and now Americans, with dollars that have very little purchasing power, have to compete against foreign consumers for food! And when demand goes up, prices follow.

I know you don't have to believe me, and if a guy dressed in a cape and a mask and calling himself The Mogambo was standing in my way begging some spare change and loudly spouting about monetary policy, I would be as skeptical as you. But while I have read a fair amount of economics in my time on your planet, and am aware of a lot of economic history on other planets, I cannot ever remember reading about an economic bust where there was a passage about "The basic commodities of daily life fell in price, and therefore food and fuel were abundant and cheap, and apartments rented very cheaply, and everybody ate like pigs and they all got real fat, and people were always stumbling around, happily woozy from their gluttony, and a lot of people remember the time with nostalgic longing."

But maybe you will believe Martin Weiss, who writes the Safe Money Report. I take your silence to mean that you WILL listen to him, which is a good thing, because he writes, "For the first time in 24 years, a key index of commodity prices -- the Reuters CRB index -- surged above the 300 mark, reflecting one of most dynamic demand-driven commodity booms of all time.

"Just in the past eight months, world steel prices have surged by nearly 70%, driving producers into a frenzy and consuming companies into a panic. Nearly half of the world's steel suppliers have canceled orders in January. Nearly all are slapping on special surcharges or renegotiating their contracts."

Now before you get all huffy with me and suggest that I take a few deep breaths and settle down and remark that just because a few things are rising explosively in price doesn't mean that inflation is going to kill us all, let's tune back in to Mr. Weiss, and as we do, we hear him say, "The commodities boom is sweeping through metals, grains, meats, and other foods. Nearly all commodities are being catapulted higher by supply/demand imbalances the likes of which have not been seen since the 1970s."

Or perhaps you will be more attuned to Tom Dyson, of the site, who quotes a guy named Kevin Kerr, who says "Since the U.S government has been printing money like crazy to jump start the economy and stave off inflation, there are more dollars chasing commodities, and the demand for raw materials like oil and natural gas is soaring. However, there has been limited production of raw materials over the past 20 you can imagine that with skyrocketing demand and limited supply, prices are going through the roof."

- From the newsletter View From Silicon Valley we get the news that semiconductor billings have dropped. They write, "About the same time I found this news, I also heard apologists speculating SEMI's B:B would 'rebound' to 0.90 in February. Is it just me, or does nobody really understand book-to-bill? Any sub-1.00 number is still a shrinking business! Semi's five consecutive months of sub-1.00 B:B (February would make six) tell us there is a problem. Conclusion: I don't care who else ignores it, a -$675M billings drop from SEMI is news. Recent semi market weakness is not a 'buying opportunity' based on any metric which I have seen or heard. Plan your finances accordingly."

- But the message of inflation and how that is good for gold has not been lost completely. From the AFX in London we get "Surging gold prices failed to deter buyers in 2004, with net consumer demand 7 pct higher than a year earlier, although economic factors could yield slower growth in 2005, the World Gold Council (WGC) said."

In the same vein, David McKay reports that gold output is the lowest in 60 years, and he quotes, which reports "Gold supply fell 13% in 2004 compared to 2003 recording the sharpest fall in mine production since the 1940s, the World Gold Council (WGC) said in its annual review." So raise your hand if you remember what happens to prices when rising demand meets falling supply. I see everybody knows that the price goes up. Good. Now parse this interesting informational nugget "Net consumer demand for gold, which is dominated by gold jewelry, increased 7% in volumes terms in 2004 (20% higher in dollar terms) compared to 2003, the WGC said."

- Mark Rostenko, who writes the Sovereign Strategist newsletter, is another guy who understands all of this stuff pretty damn good. He writes, "In order to sustain a long-term bull market you need long-term bullish fundamentals. Ask yourself: are conditions more or less favorable for stocks today than they were between 1982 and 2000? Well, let's see. We have rising inflation. A housing bubble that must and will burst in time. We're waging a costly war in Iraq and getting ready to wage another in Iran. The trade and budget deficits stand at all-time record highs, consumer and national debt are higher than ever and savings are near an all-time low." Whew! If you are like me, then you hate these little pop quizzes, and you wish that he would just TELL us what the answer is! So I raise my hand, and politely say, "I give up. Are conditions more or less favorable for stocks?" and he looks at me like I had just eaten a dead rat, and you can see the sneer on his face as he realizes that it is me, and he says "Oh, so it's you, Mogambo. I should have known. The answer is 'less favorable' " and then he said something under his breath, I'm not sure what, but it sounded like he said "You nitwit moron!"

- Richard Schlessel has been looking at the housing bubble, and concludes "But now, property ownership (net wealth) is not a general feature of our society, as it largely was until the Great Depression. Rather, net debt and complete dependence on a precarious wage or salary at the will of others is the general condition."

He goes to on talk about a guy named Larry Bates, who was a bank president for eleven years, a member of the Tennessee House of representatives, chaired the Committee on Banking and Commerce, a former professor of economics, and the author of the best-selling book, "The New Economic Disorder." Mr. Schlessel quotes Mr. Bates as saying, "I can tell you right now that there is going to be a crash of unprecedented proportions- a crash like we have never seen before in this country. The greatest shock of this decade is that more people are about to lose more money than at any time before in history, but the second greatest shock will be the incredible amount of money a relatively small group of people will make at the same time. You see, in periods of economic upheaval, in periods of economic crisis, wealth is not destroyed-it is merely transferred."

- As if things were not bad enough, the morons of the International Monetary Fund have been looking at the imbalances of our twin deficits and the housing bubble and all the rest of it, and they concluded that since such insanity cannot go on forever, that it must collapse one day. They said that "urgent combined international action is required to head off such a danger." Fabulous! America is now going to have to be saved by the communist buttheads of the IMF! How humiliating!

- SAFEUS sent me some timely quotes that seem eerily prescient. Both of them were by James Madison, former President, "If Tyranny and Oppression come to this land, it will be in the guise of fighting a foreign enemy." The other one was "The means of defense against foreign danger historically have become the instruments of tyranny at home."

While President Madison was not referring to the Patriot Act and the war-mongering neocons who have taken over the US government, specifically, if he were alive today he WOULD be referring to the Patriot Act and the war-mongering neocons who have taken over the US government. - Bill Bonner at Daily Reckoning has some good advice for your financial planning. He says, "We don't know where this ends up... nor when. But we advise readers to expect that it won't be pleasant...and act as though it comes tomorrow." And if you say this to yourself every day, then one day it WILL come tomorrow, and you will be right! And then you will be glad you listen to Mr. Bonner!

- Bill Buckler, of the Privateer newsletter, says, "The Central Thing To Understand" he says, is that "it is of fundamental importance to understand that the total US economy has essentially gone nowhere since 2000." To put this in terms that make The Mogambo jump up and froth at the mouth, and then all the security guards keep fingering those damn electric shock devices because they know that once The Mogambo starts getting worked up that things are going to escalate until they are out of control. But keep this "going nowhere" phrase in mind the next time some yahoo Wall Street chucklehead clueless tout tells you that you can make money ("make a fortune!") by investing in the stock and bond markets over the long term. I mean, I am not going to get out a calculator because it would be pointless because all those little buttons and weird symbols and things freak me out, but exactly what return do you need to make up for five freaking years of zero growth in your retirement account? And how long do you think you are going to live, and make a living, that that you can make up for five years of standing still? Especially five years when inflation is eating the guts out of your money?

He goes on to say "The real economic danger to the US economy is that were these massive increases in credit, and therefore debts, to ebb away, the entire US economy would cave in. Economically, any slowdown of going into debt will act as a massive contraction in total (earned and borrowed) monetary demand for goods and services. " Knowing that you are as curious as I am, I leap to my feet and shout "I have a question! I have a question! Call on me! Let me ask you my question, quick, before I pee in my pants and then we will all be very, very sorry!" and so he sighs and says "Okay, what is your damn question?" and I say "And what happens to total sales and total income and total taxes paid when there is, as you call its, a 'massive contraction' in demand?" and he looks at me like I have just coughed in his face and he got a nose full of my bad breath, and he says "What kind of stupid question is THAT? That is the most stupid question I have ever been asked! What are you? Some kind of moron?" and I say "Yes! I am a moron, and I am real sensitive about it, too, and I prefer to be called 'intellectually challenged!' "

Mr. Buckler suddenly realizes that I am some kind of handicapped person, which he should have guessed just by looking at me, since normal people don't look like this, or drool as much. And as some pathetic handicapped person, I can sue him if my feelings get hurt, and I can really take him to the cleaners. So he changed his tune pretty quick, and he was all sweetness and light as he went on to say, in a soothing voice, "The Economic Truth Explained The Simplest Way: In effect, the US has borrowed very close to one third of its total Gross Domestic Product (GDP) since 2000. Economically, that one-third of GDP has been borrowed into existence. Should the borrowing slow down or end for whatever reason, the US GDP would contract by very close to the same amount over the following year. Once US expenditures (of all kinds) match and balance with earned incomes (of all kinds), then the US total economy would be only about 2/3rd of the size it is now."

And if you are thinking to yourself "Hmmm! I wonder what stocks will sell for when the economy has shrunk by 2/3rds?" then I am happy to finally show everybody in the class that I finally know the answer to one damn question, and the answer is, "Less! A lot less!" But instead of letting me bask in my one lousy moment of glory, Mr. Buckler takes control of the class and tells us that as bad as that is, the bad news is yet to come. He says "But even then, the total sum of outstanding debt would not have contracted in the slightest. Picture the plight of a man with an annual income of $US 60,000 and debts outstanding of $US 60,000 who had to take a pay cut down to $US 40,000. When geared to what he now earns, his debts have gone up by 50%. He still has to service these debts with his now lower income. Blown up, this is the situation of the entire US economy."

Now, once you have digested that, then you will know why I spend so much time in the Mogambo Bunker with the door locked, Intruder Alert System on and turned to "maximum," and ceaselessly carrying boxes of ammo from room to room while muttering to myself, "Be Calm! Be calm! It's going to be alright! It is going to be alright!" and then saying "You liar! We're all going to die a horrible death when our money dies!" and then I answer myself by saying "NO! NO!" and then screaming screaming screaming until I fall to the ground, exhausted and spent. And then wiping my pitiful tears from my bloodshot eyes, I realize that
gold will do very well, and I have some gold, so I will be fine! And then I don't feel so bad! Angry and betrayed, of course, but not so bad. Screaming at the neighbors and writing rude and threatening letters to the Federal Reserve about how I am going to come up there and slap the living hell out of all of them, of course, but not so bad.

- In the insane, desperate grab for yield, out of all the bonds that were sold last year, the percentage of CCC-rated bonds, which is the lowest ranking, was a full fifth of all bonds issued! Imagine that! One out of five bonds sold over the whole year was the lowest grade of toxic debt crap that is even possible to be sold legally (except for those debentures that get the special grade of M, which stands for "Mogambo Grade," where the risk of loss and default is actually beyond 100%, as not only do I keep all your money and screw you out of every dime, but I also come over to your house and steal stuff from you at night, figuring that anybody so stupid as to invest in Mogambo Long-Term Gilt-Edged Guaranteed-Loss Bonds is obviously so stupid probably they wouldn't even notice if anything was gone).

- Reader Chad T decided to check into the oft-reported wonders of Chile's private pension plan, which is being trumpeted as sporting annual returns of an astounding 10% a year since 1981, and how this "proves" that privatization of Social Security is some hot shot idea for America. Well, Chad found that the change in their CPI works out to 13% a year. So let's sum, up, shall we? They make 10% a year on their investments, and they lose 13% a year in purchasing power as prices rise faster than their returns, handing Chileans a net loss of 3% a year. Now, you know that I am the biggest dumb cluck in town, but I just can't get my the three little neurons in my tiny little brain to accept how losing 3% a year in purchasing power is something that is "good for America" or how it will "save Social Security."

- Alan Greenspan may think that it is a "conundrum" for the ten-year T-note to be selling at a higher price (and thus a lower yield) when inflation is rising, AND interest rates are rising, AND will continue to rise, and what kind of idiot would buy a bond in such an environment and blah blah blah. He used the word "conundrum" to denote some kind of insolvable problem, but it is certainly not appropriate, since we've already seen how the foreign central banks are buying our debt to keep our interest rates absurdly low, so that we can continue to borrow and spend, so there is a ready explanation right there. And furthermore, in case that is not enough, private investors are buying them because they know that we are in for a significant recession or depression because only a real moron could think that the result of our monetary madness will NOT result in collapse. But they figure that the Fed will do what they always do when faced with the abysmal results of their previous economic mis-management: force MORE money into the system to force interest rates down, and that makes bond prices go up. So, given that scenario, buying bonds right now would seem to be a good investment move! End of conundrum!

But Alan Greenspan has spent his life demonstrating that he does not understand economics, and the fact that he does not understand this "conundrum" is just one more thing that he does not understand. Even the Economist magazine noted that "Markets don't like it when the man who sets interest rates says he doesn't understand them."

But he may be almost forgiven for not comprehending what is going on, as Jim Willie CB, editor of the Hat Rick Letter newsletter writes "Let this be known, NEVER IN THE HISTORY OF THE FED HAS THE LONG END FAILED TO REACT WITH SHOCK TO HIKES IN THE SHORT END. Welcome to the Kondratiev Winter."

And if you do not know what the Kondratiev Winter is, then believe me when I tell you that you are happier not knowing, and if you make the mistake of looking it up, then be prepared to spend a lot of time on your knees, praying to God, "Please, God! Don't let the Kondratiev Winter be real! Please! Please!" and then you will cry yourself to sleep when you realize that God has never answered any of your prayers before, especially that one about letting you get that home run with the bases loaded in Little League, and the chances are pretty good that He is not going to answer your prayers about preventing the economic devastation of a Kondratiev Winter, either.


**** The Mogambo Sez: Today (Tuesday, March 1) the price of
gold went down by $4.70, so it looks like there is another opportunity to buy gold and silver at reduced prices, so load up! Buying when prices are temporarily down is how money is made, dudes! Or, as Porter Stansberry, noted economics columnist, said, "If I get fired from my job, my speculations go horribly wrong, America hits the wall, my house burns down, and my bank gets targeted by cyber-gangs, I'll still have my gold coins and an opportunity for a fresh start. It's insurance... and right now, insurance has never been cheaper."

March 1, 2005
Richard Daughty

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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