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How huge, Mogambo?

Richard Daughty
...the angriest guy in economics
The Mogambo Guru
April 1, 2004

The Treasury admits that it has increased total federal debt by - in one month - $64 billion. When you multiply $64 billion in one month times twelve months, the mathematical theory is that you will calculate a whole year's worth of that debt action. With a flip of my hand I smoothly pull out a calculator, and my nimble fingers fly over the keyboard in a deft staccato, over and over and over again, because I cannot believe my eyes, as the number is a cool, yet tidy, $768 billion. This number is so huge (The audience yells out "How huge, Mogambo?"), that when you divide it by GDP of $10 trillion, it is a hefty 7.7% of GDP! The dangity-blang government is sucking up cash that equals 7.7% of GDP of the economy? Yow!

So if this truly indicative of actual government borrowing? Alas, yes. Since March 2003, they have sent us down the debt rat hole by just about that number.

I know what you are thinking. You are thinking "This Mogambo fella says that the federal government's total deficit, measured by the increase in debt, is 7.7% of the economy. And yet I happen to know that the budget deficit is only 5.1% of GDP. Ha! Let him explain his way out of that!"

All eyes turn to the Mogambo, as they sense that he is cornered like the nasty little rat that he is, and sure enough my beady little eyes are darting back and forth. With a sudden coolness usually exhibited by movie stars playing private detectives in low-budget B-pictures, I reply in that suave off-hand way that swoons the dames "The official deficit, also known as 'the budget deficit,' is only 5.1% of the economy. That is true. So, obviously," and here I pause under a street lamp to light a cigarette, the flickering of the match limning my chiseled features against a dark and dangerously-forbidding background. Inhaling deeply, I continue "the Congress is a bunch of filthy lying weasels, and they are lying, as they lie about everything they do, about their spending."

In my big bid for that elusive Nobel prize and that gorgeous million-dollar prize money, I attempt to answer that age-old question, "How big a liar is Congress?" Well, there are many ways to measure lying, and lining Congresspersons up by height is probably as good as any. But I am taking another tack here. I begin by noting that they have variously and bizarrely decided what to include in a budget and what to not include, and then they called the resultant clot of lies and omissions a "budget." But they cannot disguise actual spending, and so we have an iron-clad case that actually defines the size of their lies! I have done it! In this case, I calculate that their lying amounts to precisely 2.6% of the total economy! The audience spontaneously rises to their feet and bursts into applause shouting "Huzzah, Mogambo! Huzzah!"

So how come nobody but me is freaked out and in a state of perpetual panic? Stupidity and mind-controlling drugs, I figure, as either I do not have nearly enough of one and too much of the other, or everybody else does not, and which is which changes from day to day.

Frank Shostak at Mises.com has two essays that are of particular interest to those of us who are on the verge of panic and hysteria. In the first, the takes a look at the banks and asks "How Healthy Are The Banks?" The answer is the same one that the morbidly obese cancer-stricken alcoholic got when he asked the doctor about his health.

The other essay by this remarkable guy reveals the ominous statistic that there has been a 21% drop in federal tax revenues, compared to last year at this time. So as bad as you thought the deficit was, add another few hundred billions of dollars to previous estimates.

I had lunch the other day with two guys who are also scribblers about economics, Bob Wood and Steve Heller. We all wonder about a lot of the same things. One of them is, predictably, central bank policy. We wondered aloud why it is that Greenspan, an erstwhile gold-bug/sound money/Austrian-type dude, and therefore recognizably one of the more intelligent of the species, is now its exact opposite.

So why is this Greenspan guy, who not only knows better, but has actually proved that he knows better by writing one of the better defenses of
gold and the utter refutation of fiat money, doing this? Why?

Steve Heller thinks he is doing it on purpose. Greenspan so loves mankind that he is deliberately proving to the people of the planet that you MUST have
gold as money, and proving the profound wisdom of the Founding Fathers, who were so careful to write into the Constitution - the very Constitution itself! - that money shall only be silver and gold. And he is teaching this Grand Lesson to us via the brilliantly simple expedient of doing literally everything that a central bank can do, to every excess, when unencumbered by the strictures of gold, to ensure a boom. Including enlisting, using the global financial system, the cooperation of almost all foreign central banks on the globe, to do the same things! Gaaaahhhhh! Uh-oh! I feel one of my "spells" coming on.

The purpose of this deliberate boom-bust cycle, with the emphasis on "bust," is to prove to the primitive savages, namely you and me, once and for all when the inevitable bust comes, so that there will be nooooOOOooo doubt in anyone's mind, that you cannot have a monetary system that uses a fiat currency, especially one in which you have fractional reserve banking, and DOUBLY especially when you allow such leverage inside the banking system on such an absolutely massive scale, and TRIPLY especially when the expansion is accompanied by bigger government and an economy receiving huge money transfers, which is the government literally handing out money.

Steve adds that this scenario has a spooky resemblance to the situation of Francisco in the Ayn Rand book, "Atlas Shrugged," who, as I understand it, purposely ruined his own company so as to destroy the people who were looting it or something.

I am sorry to report that Steve's theory did not have any place for extra-planetary influences, like strange, mysterious rays that are being beamed into our brains by alien creatures, especially ones that look like college cheerleaders in uniforms that are, on this planet, considered scandalously underdressed, if possible, although there are no reported cases of invaders from other solar systems have a "wardrobe malfunction," so that puts them one up on us lowly Earth creatures.

But you don't need a big brain to see what is coming, or Ayn Rand either, when all you need to do is stop drinking heavily, lay off those prescription medications that have a mind-altering component, and take a look at some of the other times in history when people did what we, and I am talking about us Earth creatures again, are doing. And the one thing that you would notice, if you were paying close attention with your magnifying glass, snooping around looking for clues as to what is going on around you, is what you did NOT see. It is another famous case of the Dog That Didn't Bark. Specifically, you never read of a people who used a fiat currency, to expand government and its spending, multiplied by a massive fractional reserve system of banking, and where everybody ended up rich and fat and happy. Instead, what you always read, and lots of time there are really neat pictures and photos with captions to make it a more interesting read, is how they all went broke and died of starvation in utter poverty at the end of the boom-bust cycle, usually involved in some disastrously expensive and destructive war.

Marshall Auerback, writing on the Prudent Bear website, asks "Why has the dollar not crashed?" in the face of "a massive net external debt and an unsustainable current account deficit." He explains that the answer is that the other currencies are not very attractive either, which is the same answer my wife gives when she is asked why she married me ("He wasn't much worse than everybody else"). He goes on to say, "It helps that nominal interest rates everywhere are negligible. It also helps that, in a world of ubiquitous excessive debt,
gold is the one asset that is no one's liability. Could gold's recent strength finally be signaling its re-emergence as a viable safe haven of choice? The next few weeks in the markets could be very telling indeed."

If he had bothered to call the Mogambo and asked, I would have screamed out my usual high-decibel stream of venomous invectives and blistering obscenities that is my charming way of saying that yes,
gold is re-emerging as a safe haven and how if you were not moving into gold with every dime of your assets then you were the biggest idiot I have ever seen and how I ought to come over there right now and slap some sense into your thick head for the sake of your family and descendents. And if gold is not zooming in price as a result of its "emergence as a viable safe haven of choice," then it will soon enough. That is the beauty of knowing what is going to happen.

I am not recommending that you put all your assets into
gold, however, as you should use a little of your money to arm yourself to the teeth and reinforce the walls of your house against the hordes of soon-to-be-angry people who will realize, too late, that they did not seek out that selfsame golden safe haven. In fact, not only did they NOT seek it out, but they actually mashed the accelerator of their new zero-down, zero interest for six months SUV to the floor, as they sped the other way, trailing empty candy bar wrappers, swerving off the Interstate Of Life at Exit 666, with its beckoning neon sign flashing "Bankruptcy-ville two miles ahead!" and then roaring down the street, around the corner with tires screeching, careening headlong toward the Economic Graveyard Of Guys Who Thought They Were So Smart, littering the countryside by throwing every dollar they earned, and every dollar they could borrow, out the window.

In the book "Fiat Money Inflation in France," the introduction by Henry Hazlitt lays it all out for us, and it is my nomination for "The Award For The Best Twenty-One Pages About Economics Ever Written." This book has been around since 1959, and I think it is spooky to read him in 2004, forty-five years later, saying "The arguments of the inflationists, then and now, are essentially the samepay off a debt and finance a budgetary deficit. Inflation was to be the 'short road to prosperity.' "

Then he tells us what will happen NEXT, which is what most of us want to know. I mean, it is not enough that my wife hit me on the head with a frying pan. What I really want to know is what she is going to do NEXT! Well, what we can expect, according to Hazlitt, will be "enormously increased envy, discontent and resentment, and accelerate and intensify the social upheaval and violence. Inflation aggravates the very evils it seeks to cure." Man! It just doesn't get worse than this!

And this is how inflation ends. We, as a culture, have seen far, far too many movies of post-Apocalyptic America to be surprised. It's a Nightly News kind of thing, of roaring prices and increased crime as desperate people take desperate measures in dark and forbidding cityscapes, scurrying around like rats in the dark, scraping together enough to feed themselves and their families and their children. Riots in the streets! Shots ring out! Screams are heard! Sirens blare! And the government fiscal and monetary response! And government armed response! Clawing and scratching, the revolt of the starving and desperate whose crappy minimum-wage jobs, with overtime every damn day and I can't remember when was the last time I had a day off, won't even cover the damn rent anymore.

Because it will not be a money thing that destroys the country. If it weren't for that, inflation would be little more than a harmless nuisance; Congress could easily allow you to claim full tax-credit status on the 1040 Form for the harm you have suffered from inflation. I can see it now! A fat, smiling, greasy white guy leans over and intones into the microphone, "Inflation causes harm. Harm, I tells ya! And think of the children being harmed! Children harmed! Vote for me and I will save you and your darling children from being, ummm, harmed!"

So it would be a cakewalk for the corrupt cesspool of incestuous inbreeding-did you catch that little burst of symmetrical alliteration there? --that describes our system of government, all the way up and down the line, to pass such legislation. This tax-credit thing would "make you whole" simply by sending you a check, which you can cash, for what you "lost!" Neat, huh? The reason they don't do that already is that it is horrendously inflationary, and people on "fixed incomes" are both 1) victims when inflation rises up out of the swamp and bares its fangs, which flash white and glistening in the light of the full moon, and it howls "OooooOOOOooooo!" which is Inflationbeast talk for "I'm coming for you, and I'm going to slowly eat you alive starting with your intestines and your liver, and one day soon you will be praying for death!" and 2) vote. And who are these "fixed income" people? Everybody whose incomes are not rising as fast as prices because of a stingy employer or benefactor. This are the charming kinds of thing you can expect from here on out. To no avail, as we shall no doubt soon see. And again I am reminded of that guy, whose name I forgot, who marveled at how ownership of
gold is so glaringly obvious, cheap and guaranteed.

Caroline Baum of Bloomberg is bright enough to see through the blatant fraud and litany of lies that spew from the lips of government jackasses, but takes the safe way out and quote a guy named Doug Lee, who is president of Economics from Washington, located in Potomac, Maryland. He says "Rising inflation isn't the only risk. Measurement credibility is an issue as well." By this he means, and here I am putting words into his mouth because that is the kind of lowlife scum that I am, that Caroline Baum and I see, as I previously stated "the blatant fraud and litany of lies that spew from the lips of government jackasses," who tell us that inflation is tame, low, benign, and non-existent, when every one of us mouth-breathing yahoos out here stumbling down the street can instantly recognize, at a glance, that inflation is NOT low, benign OR non-existent, no matter how drunk we get, and believe me when I say we can see this clear as a bell even though we are usually drunk as skunks by this time and can hardly get the keys into the ignition of the damn car so we can drive home.

Now we switch to Mr. Lee himself, who reminds us that not only can he speak for himself, but that he can do it in a much classier way. Then he proves it by saying "The inflation risk for investors is not so much that core measures of inflation will move higher but that these measures are losing credibility in financial markets." So he is also saying that not only are we deceived by a bunch of lying, corrupt weasels, but even their awesome powers ("We have badges!") are insufficient to completely erase the signs of inflation from the economic picture, and that even newborn babies laying in their bassinets blowing snot bubbles out of their cute little button noses and who merely glance at the newspaper can instantly recognize price inflation when they see it, even though they are still so young that their eyes don't even focus yet.

Mr. Lee goes on to say "Food prices have risen every year for at least the past 40. Energy prices rose about 11 percent in 2002, 7 percent in 2003 and at a much sharper rate in early 2004.'' Remember what I said about desperate and scared people taking desperate measures to feed themselves and their children? They feed themselves with food. Which is more and more expensive. Which almost certainly means something bad.

If you want desperate measures, Steve Heller says that he read a statistic where 46% of Americans now habitually spend more than they earn! They all know that they cannot continue, but they are banking on an inflationary boom to bail them out, I suppose. Weird, huh?

Caroline Baum has been patiently waiting for me to quit running my loud mouth so she can get a word in edgewise, and finally seizes a moment when I am gasping for breath to chime in with "In the first two months of the year, energy prices as measured by the consumer price index rose an annualized 46 percent." That's the second time that 46% has come up. Spooky!

Chad Hudson at Prudent Bear site probably felt the disturbance in The Force, and it prompted him to write, "Will Inflation Ever Be Acknowledged?" He writes ""The surge in commodity prices is directly related to the attempts to reflate the economy. While the reflation has certainly caused economic activity to increase, none of the imbalances that were created during the late 1990s were rectified. Now, more imbalances are being created and will likely end with greater consequences down the road."

If you want a good explanation of why things are so screwed up in the economic sense and why the United States has been led down the path to economic ruination, then look no further than the Wayne Angell article in the Wall Street Journal last Thursday, entitled "The Rubin Recession." This Angell character was a member of the Fed Board of Governors from 1986 to 1994, so you would think that he would have a pretty good idea what he was talking about when he is talking about economics. But then you'd be wrong, sort of.

The first sentence of the article sets the tone, as he blames the recession that started in "the third quarter of 2001" on, and hold onto your hat because it is going to comically jump up off of your head when you hear this, "the Clinton administration's attempt to pay down the federal debt." This is the first I've heard of that! And if you have been paying attention to the accumulation of government debt, then this will no doubt be a surprise for you, too!

So I know that this where I have to do a little research, because I'm sure that you are not going to take my word for it, as he is a former Fed governor and is a big shot, writing in the Wall Street Journal and advising important rich people, and I am just an angry, crazy man writing with a crayon on the wall and begging for spare change from people going into the mall, even though I am pleading "Please take my word for it! Please!" So I grudgingly get up off of my big, fat butt with a lot of whining and complaining, and I trudge over to where I keep some graphs, still whining and complaining, and I dig around in there awhile, and then I get tired and after awhile I forget why I am there. Then I come back and sit down and read what I wrote, and then I remember why I went over there in the first place, and then I do a little swearing and then, with a little more whining and complaining, go back, and finally, finally, I locate the graph of Treasury debt. I blow the dust off of it and hold it up to the light. Okay, admittedly from about 2000 until the third quarter of 2001 the accumulated debt does not go up that much. But it did not go down, and only slightly trended up for a few months, but that is a long way from the glib characterization that anybody was paying down anything. And he should know that.

Furthermore, this lack of borrowing was due, in the greater part, to the fact that the government was taking in bigger, gigantic loads of money via the expedient of higher taxes, especially the Social Security/Medicare tax, which was tragically boosted to a mind-shattering 15.3% of gross income, where it sits today.

But that "third quarter of 2001" is infamous for other things. That is the exact moment when two things simultaneously happened, 1) the debt really started to explode, going from $5.8 trillion to today's $7.1 trillion and 2) something else. And for all I know, there was a third thing that happened, too, because these kinds of things do not happen in isolation.

Then he goes on to castigate former Treasury Secretary Rubin et al that they did "not understand the first principle of macroeconomics." I can tell by the way your head snapped around that you are as curious as I am about this fabulous "first principle." I love this "first principle" thing, as it makes me think of Sir Isaac Newton, or "Izzy" as I call him, because his Principles of Physics are easy to comprehend, and there is never anybody saying things like, "Well, before we can get started we need a quick little review of the topographical hexadecimal mathematical system in N-space."

This First Principle According To Wayne Angell is, and I know you are going to love this as much as I did, "Output growth is not sustainable without a growth of total credit and debt." I say "huh?" I gotta tell ya that I have read a lot of things in my life, although lately it is mostly letters from collection agencies demanding that I send them some money real fast or they will take stronger action, but I have never, ever heard anybody tell me that "Output growth is not sustainable without a growth of total credit and debt." And especially never has anybody told me that it was some basic principle! Because I am here to tell you that if you want a Basic Principle that you can really take to the bank, and notice by the way that I capitalized the first letters to indicate some phony-baloney importance, output growth can be sustained by profits alone! And it usually was, all the way through the history of mankind! And at the beginning of production, output growth it can be started with savings alone! As it usually was, similarly all the way through the history of mankind.

But it gets better, as we now see where the current Fed idea of massive and irresponsible increases in Fed credit comes from, as he concludes that since the private sector has loaded up on debt that "this household debt burden continues to require both low interest rates and rising household wealth from real estate and the stock market to avoid deflationary pressures." In other words, the private sector has now gotten itself so loaded up on consumer debt, real estate debt and total reliance on the stock market that it is now necessary to continue to force interest rates down, and down, and down, down down down, downdy down down de down down, so that the idiots who got themselves into that kind of bankrupting mess can be saved from their own folly. And not only that, but that everybody thinks it will work! Hahahaha!

But, in a saving grace, he does admit that "What worries me more is the rate of growth of government spending." But then he turns right around and again says something bizarre, in this case "Government spending tends to crowd out private spending whether it is financed by taxes or by borrowing."

If he had said that government borrowing tends to crowd out private borrowing, then everybody would agree with him. Me, too. But as it is, I never heard anybody say that the government spending crowds out private spending! How the hell does one "crowd out spending" anyway? Because the Fed is right there, and the foreign central banks are right there, and Fannie Mae is right there, all of them are right there, working around the clock to loan you all the money you want, to buy anything you want, and day or night of the week!

The Mises.org had an essay by Robert. B. Ekelund, Jr., and Mark Thornton entitled "The Awful Truth About Republicans." Naturally, being a paranoid lunatic, I thought that they were drawing a bead on the Mogambo, since my voter registration card lists me as a Republican, and there are lots and lots of awful truths about me that I would not want to be reminded of, much less be made public so that people would read it and say "Eewww! I knew there was something really creepy about him!" Especially in an article with the descriptor "The Awful Truth," particularly by two guys I never even met, who maybe could be bought off, as in, you know, "a little money for you and the evidence turned over to me" kind of thing, if you catch my drift, and then everybody could win!

But I breathed a big sigh of relief when the lead-in was "Anyone who wants cuts in the size and scope of government should be concerned and frustrated with the policies of President George Bush and the Republican-controlled Congress."

Concerned and frustrated? Did he say "concerned and frustrated?" Buster, I can tell you that I left "concerned and frustrated" a long, long time ago. So long ago, in fact, that I cannot even remember what it feels like to be only "concerned and frustrated." And am now out here on the fringes of sanity where the rage of betrayal and bizarre homicidal tendencies roam free, and where there are voices in my head, insistent voices, loud voices, and they are saying some very disturbing things.

They quoted economist Jeffrey Frankel, who wrote in "the Milken Institute Review," that the "Republicans have become the party of fiscal irresponsibility, trade restriction, big government, and failing-grade microeconomics." Not to mention failing grades in macroeconomics, although the term "failing grade" is much, much too tame to suit me personally.

The thrust of the article by Ekelund and Thornton is that the Republicans were traditionally, a long time ago, the Big Government-loving yahoos, and our supposedly modern alleged stance of limited government and low taxes, blah blah blah, is a recent innovation. Noting that the horrid Abraham Lincoln was a Republican, and you may notice with amusement that I pronounce that name with a hiss and that my hands ball up into fists of rage, their argument carries a lot of weight with me, because I am always looking for something to get angry about. They say that "The flurry of new laws, regulations, and bureaucracies created by Lincoln and the Republican Party during the early 1860s foreshadowed Franklin Roosevelt's 'New Deal' for the volume, scope and questionable constitutionality of its legislative output." They continue relentlessly that "Modern Republicans have built an unprecedented pile of debt." And that is why future generations are going to dig up our graves in their blind anger and do terrible things to our corpses in a fury of revenge.

On the other hand, there was a rumor that George Bush as "itching" to veto a spending bill. Hahaha! He has not vetoed any spending bill his entire Presidency, and in the last few waning months he is now willing to try something new? Hahahaha!

Edward Chancellor, "Inefficient Market: John Bull's Market" writes that the desperate need of people to get some money has produced a lot of risk-taking. He is a Brit, and he quotes another Brit, Walter Bagehot, who said, a long time ago, "John Bull can stand many things, but he cannot stand 2%." By this incomparable phrase he means, as he explicitly says, "When the yield on safe investments declines to this meagre level, the urge to speculate becomes overwhelming."

Mr. Chancellor notes that "According to Andrew Hunt, an economist, in the United States household and corporate borrowing for the acquisition of financial assets has climbed to around 85% of all credit activity, while total new borrowing last year amounted to some $13 trillion." Believe me when I say that $13 trillion seems like a lot to me, when the total GDP is only $10 trillion. But, who knows? I mean, derivative growth alone is about that size.

In the newsletter from Citigroup Smith Barney, analyst Alan R. Shaw figures that
gold is in a structural bull market, which is certainly not news, but it is nice when people agree with me, as that saves me a lot of time when I don't have to send them hate mail for daring to disagree with something I said. But the interesting part was when he shares some of his market lore, with the observation that oil has a theoretical long-term value of 1/16 the price of an ounce of gold. Showing his mathematical talents, he takes the prior prediction by a colleague that oil will hit $46 a barrel to mean that, multiplying $46 times 16, that gold will trade hands at $736 an ounce. Showing my own mathematical wizardry, I ignore those who are saying "Copycat! Copycat" and I multiply the current price of oil, at $36 a barrel, times 16, and I get $576. I compare that theoretical price to today's current price of $421 per ounce. I remember the phrase "Reversion to the mean." I get excited. I pick up the phone to order some gold. The guy on the other end of the line tells me I have no money to pay for it. I ask him to float me for a few days, and that I am good for it. He says "no" and calls me a rude name. He hangs up. I hang up. But don't YOU make that rookie mistake!

Mr. Shaw gets that $46 a barrel price for oil from fellow analyst Ronald F. Daino, whose section of the newsletter has the title "Consumption Up, Reserves Down, Technicals StrongPerfect Ingredients for Higher Crude Prices; Crude at $46?" The title says it all.

Was talking to Bob Wood, president of Kaizen Asset Management, and naturally we got around to talking about my newsletter and how he was astonished that such a worthless rag could ever attract any readers, and how that fact was a probably a testament to the abysmally low standards of Americans and how we don't lock up the mentally ill anymore. But brushing aside such negative comments like I always do, because responding to them all would be a full-time job, I pressed him for some newsy tidbit to put into the MoGu, as I am looking at a blank page and had exhausted my pathetically small pool of lame anecdotes and cockeyed, lunatic-fringe theories long ago. He helpfully offered that people might like to know that I was an idiot, and I naturally countered with the cogent observation that anybody who has ever read so much as a single sentence of the MoGu already knew that, so it was certainly not news. Then he suggested that people would probably like to know that when I eat I look and sound like a pig and it is real disgusting. While I agreed that certainly IS something that people would probably like to be warned about, that wasn't what I was looking for, as I was looking for something more in the economics vein. I saw that I had him backed into a corner, and I was licking my lips in anticipation of going in for the kill. He finally cracked under the pressure and had a slip of the tongue and revealed that his proprietary indictor flashed a major sell signal in mid-March. He also confided in me that he was nervous about making such a powerful call, and to please not tell anybody, but that he could not ignore the indicator which has proved to be so prescient before.

I told him the same thing I am telling you, which is, and please pay particular attention here, as this is something you will want to know so I have indicated its importance by displaying the audio-visual picture of a guying having a hole bored into his head with an electric drill, and then a funnel installed in that hole, and something from a bucket labeled "knowledge" is poured into the guy's head, because this sentence will reverberate in your brain all the days of your life until you get old and on your deathbed you will implore "Oh, Mogambo! Why did I not listen? Forgive me, but I did not listen! Boo hoo hoo!" that the coming collapse of the stupid economy that we have built it is, in a word, inevitable. And there is a certain satisfying comfort in knowing, with a 100% certainty, that something is going to happen.

Then, and this is the timeless lesson, so pay attention, then it is all just a matter of money management, isn't it? Doling out your money bit by bit in a series of gambles, rolling up, so that when the Big One hits you will make some real money!

Mexico is raising interest rates to try and stave off surging inflation. This is certainly odd, since we Americans are inflation-loving morons and we share a border with those guys, and I have never heard a theory that said surging inflation was thwarted by borders. But then again, I am a real stupid guy, so this little nugget of economics-savvy could easily have escaped me.

So how high is inflation in Mexico that has caused them to twice-twice! --raise interest rates to fight this surge in the monster of horrible inflation? Numerically, 4.5%. About the same as here! Apparently the Mexican authorities, which used to have a reputation of being corrupt morons who wore big funny hats and took long siestas, are now the knights in shining armor for its beleaguered people, and it is us dumb gringos, who used to enjoy the reputation of being virtuous Guys In White Hats, are now the New Age corrupt liars, since our Federal Reserve and governmental agencies are clogging the world's e-mail in-boxes with ceaseless spam about how inflation is low-too low! Far too low! --at these same levels of inflation! And, contrary to what the Mexicans say, our government says that what the world really, really needs is more and more inflation!

Historically I have been unstinting in my hysterical, raging antipathy towards Mexico and most of Central and South America for their continual low-IQ embracing of every kind of idiotic communist, socialist, Big Government stupidity that you can think of, with the resultant poor track record of persistent boom-bust failure, pandemic poverty and abysmal ignorance. But at least in this one instance, they have put us to shame, and I hang my head and shuffle my feet in my abject desolation, and as I slink into the sunset I raise up pathetic little clouds of dust as I trudge slowly home, where I will cry myself to sleep when I contemplate how far America has fallen, and I will wake up tomorrow more fearful and angry than ever. Probably a lot more.

Adam Hamilton at Zeal Research, writes the article "The CRB and Long Rates." Now this reliance on the historical record is the kind of thing that makes a big impression on me. First off, he notes that "The venerable CRB Commodities Index is trading near 23-year highs." And then he gets right at my jugular vein, when he reveals that "As history has shown, a secular commodities bull often exerts great influence on the prices of both stocks and bonds. There is usually a very high correlation between the prevailing long-term trends in commodities prices and interest rates." Sounds about right to me. Later he reveals that this correlation is in the .90-.95 range, which is in the range colloquially known as "Almost a dead-bang certainty."

"As commodities power higher in a bull market," he explains as I look out of the corner of my eye and note the rise in commodity prices, "interest rates often march higher in lockstep." Not only that, but he says that "interest rates tend to move in unison with commodities through major bull and bear markets."

Then he shows a chart that has the CRB and the 10-year T-note, and sure enough, they trend together, merrily up and down and up and down, like a happy roller-coaster zig-zagging along through time. Now the sound track erupts in booming kettle drums and horns blaring, as the two lines are suddenly diverging! Commodity prices rising straight up into the air like they are shot from a cannon, yet the interest rate yield perversely plunging towards the floor! Weird! And spooky, as you can discern from the discordant brass section!

So looking at the chart, what SHOULD the interest rate be on the 10-year note, if the inflation in the commodities index were reflected in rates, per historical tendency? About 10%! And rising!

Mr. Hamilton is much more restrained than I am when viewing this graph, and he says only that "They reveal a current anomalous divergence between the CRB and interest rates which is almost certainly unsustainable." He further thinks that "the recent massive disconnect between the price of money and the price of the commodities of the CRB is very intriguing." Intriguing! If you are a holder of bonds, then I will bet, at gigantic odds, that you find this much, much more than simply "intriguing." If you are a bond holder, then that sound you are hearing is the noise your heart makes when it explodes from the shock of impending doom! Doom! Doooooommmmmm! I can hear the non-believers out there, and you know who you are, who say "Hey! Surely this has happened before, or else I would have be taught about it when I was in school, or read about it in the newspaper, or the government would warn me because they love me, and we all know that nothing bad can happen to you if you just have love!" To which I say "Hahahahaha!" and all that sudden laughing makes me fall to the floor, whereupon I start gagging on my own vomit as I realize that there are people in America who are actually that stupid to say something that stupid. But Mr. Hamilton has anticipated your objection, and says "Provocatively, the only two negative correlation zones between the CRB and 10y Treasuries occurred around the only two major long-term secular trend changes in the CRB." And brother, when he says "provocatively," that is exactly what he meant, as one contemplates the awesome change in the structure of the world resulting from a reversal of a 20-year bear market in commodities.

He goes on to remind us that "As investors slowly start to realize that general prices for living are rising rapidly all around them regardless of what government statisticians claim, their investment preferences gradually shift." Perhaps that is what causes the phenomenon of "'Rising rate environments inexorably force bond and stock prices lower over time." There was an article entitled "Prices Rising Despite Low Inflation Rate" in the Chicago Tribune, which I did not read, as I was first required to register and "sign in," and you know that the Mogambo does not voluntarily give identifying information that will enable third parties to send me mail, solicitations or death threats, or be able to track me down and demand their hedge clippers back. But the title says it all for me, and recalls George Orwell's "1984."

But even the Wall Street Journal is not too hip to this inflation stuff either, and Timothy Appel's "Outlook" column in Monday's edition had this timeless sentence; "By one estimate, less than 10% of moves in commodity prices end up reflected in the prices of finished goods, with less than 3% making it to consumer goods." This look like good news until he reveals, later in the article, that "Commodities account for less than 10% of what it costs to produce all goods and services." Notice that he does not give the name who came up with this "one estimate."

And this is only looking at strict prices. He illustrates how sales and profits declined when commodities rose in price at Lindsay Manufacturing, who had a 29% drop in profit due to higher steel costs. So if Lindsay did not pass on a lousy dime's worth of higher prices to consumers, the higher commodity prices were passed on to the shareholders in the form of reduced profits. And how about the employees who did not receive higher wages or benefits? And how about the people who were not hired, thanks to expansion plans being put on hold? And how about all the people whose incomes depend on THOSE people spending their Lindsay Mfg. paychecks? Tell me again how higher producer prices are not passed on to consumers.

So I am here to tell you that you can work all the statistical magic you want with inflation and prices, but the higher costs are always fully paid with somebody's misery, and then somebody else's, and then somebody else's, and then it comes back to haunt the commodity suppliers themselves. And anybody who tells you otherwise is an idiot, and probably works for the Federal Reserve.


---Mogambo Sez: In response to overwhelming demand for a way to hold
gold, an asset that has been doing very well and is guaranteed to do well for years to come, such is the demand for shares of the Central Fund of Canada, which is now so huge and popular that they are now selling their shares on the American exchanges. Apparently there is a big enough American demand for aggregated gold and silver bullion ownership that does not want to go through the Canadian exchanges, and be subject to all of that cross-border, cross-currency hassle. So this is a way for Americans, using dollars, to directly own gold in its most highly liquid form: actual vault bullion that sells as shares on an exchange. So why don't you tell me again how gold is such a barbarous relic, and how nobody is buying it?

March 31, 2004
Richard Daughty

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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