How huge, Mogambo?
...the angriest guy in economics
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
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
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
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
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
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
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
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
"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
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
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
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
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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