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You'll know when you get enough

Richard Daughty
...the angriest guy in economics
The Mogambo Guru
April 7, 2004

For the first time in a long time, two things happened at the same time. First, I wasn't lashing out at a cruel world when I woke up, and the second thing is that Foreign Custody Holdings at the Fed decreased last week. In fact, it went down by a whopping $16.8 billion. I will pause a minute while you rub your eyes in disbelief at both of these revelations, as I think I speak for us all when I say that we are all dumbfounded that the Mogambo even HAS any mood other than "bad" or that foreign central banks would not want to continue to fund the appetites of a consumption-addled bunch of financial and economic dimwits like us Americans. What in the hell could they have been thinking?

The banks, since we are speaking of a real dimwitted bunch of losers, soaked up $18.2 billion of government debt in the same week, taking their holdings of that toxic asset to a new, all-time record, which indicates that their supply of smarts has hit a new all-time low, in a kind of symmetrical yin-yang banking thing. But then again, I am sure that you remember that the whole history of macroeconomic crises is always the result of banks acting like greedy morons, and that this sordid history lesson goes all the way back to caveman days, when the First National Bank of Og financed the Great Depression of the Thirteenth Year of the Rule of King Ga the Merciless, and I am sure that I do not have to recount for you the terrible aftermath, wherein all the mastodons, well, why go into that unpleasantness all over again?

A case in point is provided by Zbigniew Piekarski at the Warsaw Business Journal writes about "How Banks Balance Their Books." He says "Lenders continue to develop programs with ever easier terms, including low down-payment interest-only mortgages and 'self-certification,' in which you do not have to provide proof of your ability to service the debt." So it looks like the banks will allow you to say "Hey! Trust me! I'm good for it!" although I have found that in real life anybody who said that to me could NOT be trusted and they were likewise NOT good for the money. "The last time such easy loans were prevalent was in the late 1920s, leading up to the Great Depression when, during the fourth year, 1933, roughly half of all mortgage debt was in default and house prices collapsed by roughly 80 percent."

And, for reasons that will probably become clear very soon, and as soon as it does please let me know what it means because you know how-thickheaded I am, and I will need to have it explained me over and over about a dozen times or so, but the banks have suddenly increased their reserves! Of course, I see this as proof, from the perspective of the paranoid whacko, that they, too, are seeing the light at the end of the tunnel, and it is the headlight of speeding train that is barreling down upon us at full speed, and we poor schnooks are tied to the tracks, and pretty soon now that train is going to get here, and there aren't any Canadian Mounties within miles, and it is only the Mogambo who is watching this happening, and he screaming and yelling, and making what are supposed to be merely threatening phone calls, but which always end up as long strings of obscenities being screamed into the phone at the top of my lungs, and then they always just rudely hang up and report the Mogambo to the authorities, and then those dour sourpusses come knocking on my door, flashing their little badges and waving their court orders, and then I have to deal with THEM, too, as if I didn't have enough hassle in my life already! I mean, where is the justice?

And since we are speaking of dimwitted losers, it certainly behooves us to include the Treasury Department, which kept on chugging down the road to bankruptcy and ruination, and who is actually rumored to be one of the engineers on the train that is about to run us over, spent their week issuing another big clot of debt, to yet-- need I say it? --another new record of $1.132 trillion! Another, as I said, new record! This is to fund the raft of idiocies that the government loves rolling around in. But remember that doing that is what government does, and when the government gets to be this big, here at the end of the massive boom, the sheer size, scope and cost of government is the biggest since, and I throw this out as my candidate for the worst year in the history of America, 1913. Why 1913? The Fed was established in 1913, Woodrow Wilson was elected in 1913, and the Sixteenth Amendment was passed in 1913, and the seventeenth, too, and it has a 13 in it, which has that sinister feel to it, and if you don't think so, then go rent "Friday the 13th" and see how much fun THAT was!

But we were speaking of debt, which we were talking about before I digressed into another of my ranting hissy-fits-- as I am doing again right! --which should PROVE that I am very disabled in a weird, mental way, but that is STILL not enough to get a lousy handicapped-parking sticker for my car. But anyway, the morons of the world, and you can tell who they are by noting who is buying long-term debt to garner yields that are actually less than inflation, knowing that bond prices will fall one day, handing them a big ol' loss that will easily swamp the paltry yields that they are getting on the bonds, which were, if you have been paying attention, already returning a real, after-inflation yield of less than zero! And sure enough, the morons got a whack to the head as bond prices sank Friday. The "worst showing in eight years," which I put in quotes although I am quoting from memory, according to Bloomberg, which I am also citing from memory. In the long run, this group of bond-buying bozos will get many, many more whacks to the head before this is all over. It's called "Getting what they richly deserve."

Many commentators have noticed the strange coincidence between the price of silver surging to over $8.20 an ounce and the massive letter-writing campaign to the regulatory powers-that-be, mostly Eliot Spitzer, orchestrated by Theodore Butler, who all demanded to know why it is that eight individuals, none of whom is the Mogambo I am sorry to say, have sold short more silver on the COMEX than exists in the whole world, and by a long, long shot, as measured in "years of world production." It looked like a manipulation, it smelled like a manipulation, and now that enough people have made a stink about it, suddenly the price of silver catapulted out of its doldrums and zoomed to over $8 per ounce. How coincidental, eh? - A nifty essay entitled "War Socialism at Work" by Sean Corrigan, who is one of those big-brained guys who demonstrates his smarts by 1) writing incisive essays that the world's intellectuals delight in discussing among themselves, and 2) ducking the phone calls from the Mogambo. He writes "50 years ago, there were two manufacturing production workers for every government drone in the Land of the Free..... since then the trend has been to an inexorable deterioration. If we had only stuck to the 1954-1999 trend-- bad as it was-- there would now be 'only' 178 Tax Eaters per 100 manufacturing Tax Payers; instead we stand slightly in excess of 215:100, which is more than one-fifth worse than we might have expected in just over four short years."

Since I am far too stupid to have an original thought, I fill up my days by lying to court-ordered mental-health professionals ("No, I never hear voices in my head!") and following the lead of people like Mr. Corrigan and scooping up what he says. So, let me 1) say that no, I never hear voices in my head and 2) this is only DIRECT employment, and does not count the millions of people who work for private businesses that are paid by government, as some ostensibly money-saving out-sourcing thing.

In short, and I find that I never tire of saying it because it is so true, and on my tombstone I want engraved "He never seemed to tire of beating a dead horse for some reason," the government, local, state and federal, literally IS the US economy. And history is very cruel to those idiot economies that adopt a philosophy of such a thing.

And if these legions of government employees were the best and brightest, then perhaps I would not be as gloomy. But they are not. A case in point is the home buying experience of the new city manager of Ventura, California. The guy could not afford to buy a home because prices were so high. So the city pitched in to provide a $325,000 down payment for a house which he wanted, for which was paid $675,000. Cole predicted that "this house is going to be a good investment for the city. I think it's going to outperform the city's investment portfolio." The article did not list his salary, but you can bet it is astronomical, as all government people are paid far more than they are worth, far more than the average non-government worker. And for people in the rarified air of Overpaid Executive Bozos in which Mr. Cole operates, namely one in which your buddies and you get to decide how high to raise taxes to pay ourselves whatever we can get away with in salary and the people's only option is to vote him out next election cycle, his salary and benefits package doubtlessly exceeds his worth by dozens of times. But this huge paycheck, so huge that he probably has to enlist the aid of several burly city employees to help him carry the thing to his car on payday, was STILL not enough to buy a house!

This example demonstrates the complete vacuity of people employed by government. This overpaid blowhard, and I hope he does not take this personally but I have a visceral loathing of how the attitude of government employees has changed over the years and so I have nothing but intense, raw disgust for all government employees everywhere including him, could not afford a house because prices were so damned high, and yet he figures that houses will continue to escalate in price! Wow! How much do are they paying this guy?

Perhaps, as city manager, he is going to have the city of Ventura loan everybody a third of a million bucks as down payment for houses or something. And with such assistance, house prices will continue to escalate as a function of government assistance. And given the experience with Fannie Mae and Freddie Mac, and the far-Leftist Californian system of government in general, I wouldn't be surprised.

Mises.com, and if you are serious about economics then you are already an Austrian School economist, and you have already been to Mises.com and have already read the article by Bob Hoye entitled "How a Currency Can Fight the Fed." To refresh your memory, he says, "Quite simply, soaring asset prices permit an equivalent credit expansion and, with the exhaustion of speculative abilities, prices turn down, which forces a credit contraction." "Exhaustion of speculative abilities." Man! I love that phrase! I would have used the more prosaic phraseology "You are an idiot about money, and you are up waaayyyy over your damn head in debt and nobody in town is stupid enough to loan you another dime, which you already know because everybody has already turned you down, and now the Mogambo, who is the stupidest man in town, has also refused to loan you a stinking dime, and therefore you are completely unable to buy another share of overpriced stock, or another overpriced bond, or another ridiculously priced house." Ignoring my editing suggestion, he continues "First of all, the 1990s' bubble recorded the greatest recklessness by the senior central bank since the first one in 1720 when the Bank of England was quite naïve about market furies. History's record is that no matter how responsible the senior bank has been, 'New Financial Eras' have not run shorter than nine years. Going the other way, no matter how accommodative, the party has never extended beyond nine years. For example, the duration of the 1990s' example was 116 months, which compares with the 116-month duration for the mania that ended in September, 1929."

Now, I find the nine years thing a little spooky. Sometimes even more than spooky, depending on my blood-sugar levels.

He continues, "As with more recent times, the collapse of speculation is followed by a contraction in business and tax revenues so the return of sobriety changes the mood from borrowing as much 'low-cost' money as possible to a compulsion to pay it down. In particular, this becomes very acute in the liquidity vacuum that is the consequence of any big speculative boom."

This is all part of the set-up, and he hits up between the eyes with "The world has experienced the biggest financial boom in history and this has included the biggest debt issuance in recorded history."

He concludes with "The recurring pattern starts with the euphoria of issuance, then doubt and consternation follows, and finally, with seemingly insurmountable debt and foreign exchange problems, a revulsion for debt develops." And why a revulsion for debt? You'll know soon enough, my darling little grasshopper, so be patient and enjoy the sunny days; soon enough the newspapers will be filled with stories about what crushing debt does.

A site called, as far as I can make out, Propaganda Matrix, posted an article entitled "Footprints of new 9/11 Seen in Markets." A guy named Jim Sinclair says that he "has spotted suspicious trading in gold and the dollar." The 9/11 reference was that there was apparently some suspicious trading in airline stocks just before 9/11, as someone or a group of someones looked to profit from advance knowledge of the coming carnage. This time, the suspicious activity is to profit from driving up both the dollar and
gold, the beneficiaries of another terrorist event that he figures will happen in the Middle East or Europe. The resultant flight or fright would be into dollars and gold.

All of this is a variant of my admonition that "something will happen," because it has to. And it has to because that is the inescapable result of massive and long-term mal-investments brought about by massive and long-term excessive creation of money and credit, just like the Austrian economists say, and it will be ugly.

But it was the last sentence of the article that really caught my eye. "The picture his analysis paints, leaves Sinclair scared to death." So there are two guys out here who are scared to death. And now you, too, probably. So that makes, running that new count through the computer, three of us. Three of us scared to death.

Bloomberg reports that "The U.S. economy added 308,000 jobs in March." Under normal circumstances, I would take come small comfort in this. Nowadays, though, any statistic that comes from anywhere remotely connected with the government is almost surely a blatant lie. And if there is one thing I have learned, and I have scars all over my head where it was repeatedly drummed into my thick skull, it is that basing investment decisions, especially involving your own money, on blatant lies and transparently bogus facts and figures is NOT a good idea, profit-wise. For me, anyway. It may work out good for you. I dunno. But for me, no. It has always, on the other hand, worked out as a good thing by the guys who are telling me the lies, especially the ones who get my money.

First off, we are treated to the fact that "Employment in service-producing industries, which include retailers, banks and government agencies, rose 230,000 last month." Take a look at that list. It's all services jobs, none of which actually adds value, namely the taking of some raw materials and making something out of it, and then selling it at a profit, which you use to sustain yourself and your family and pay taxes.

Now, keeping that in mind, take a quick look at the trade and current-account deficits, which is the sum total of what we spend with guys who DO take raw materials and make something out of it, and then selling it at a profit with which to sustain their families.

Now, you are ready for the essay section of the SAT. Essay Question Number One: Compare and contrast those two systems.

It may help if you also know that "Manufacturing employment held steady last month. The manufacturing workweek fell to 40.9 from 41 hours in February." So total employment in manufacturing is unchanged, and slipping into Capitalist Pig mode, I cruelly remark "So, all the floor monkeys took home slightly smaller paychecks. Fabulous! Perhaps they will work all the harder tomorrow!"

But it is not just manufacturing employment that is taking home smaller paychecks, as we also read that "Average weekly hours worked for all employees fell to 33.7 hours in March from 33.8 the prior month."

But there was, thankfully, an offset to these smaller paychecks. "Workers' average hourly earnings rose 0.1 percent, or 2 cents." What was NOT mentioned was the average hourly debt payments rose by MORE than 2 cents, as the dimwitted graduates of American public schools, some of the world's worst, continued to go farther and farther into unpayable debt.

Of course, all this good news, if you want to spin it that way, was at odds with "A separate survey of households showed that unemployment rose by 182,000 for the month, pushing the unemployment rate higher." This was attributed to the fact that some unemployed people are suddenly getting back into the job market, and still can't find jobs. But perhaps we Americans have the excuse that we are as stupid in handling our careers as we are in our handling of our finances. So naturally we need some government action to remedy this.

Mises, William H. Peterson, "The Power to Destroy." "For here in fiscal 2004, which began last October 1st Commerce Department data show that transfer payments to citizens (in such forms as Social Security and Medicare) in the 3rd quarter of calendar 2003 came to $1000.4 billion, annualized, while transfers via 'grants-in-aid' to states and localities amounted to $341.6 billion. Add to those totals, $51.9 billion for subsidies to farmers and others and you find that Uncle Sam is spending more than three-fifths of the federal budget, then at $2.2 trillion, in welfare 'transfers'-or in "legal plunder," as Frederic Bastiat more honestly put it in his book, The Law, in 1848."

He says that Marx and Engels in their Communist Manifesto "pushed a heavily progressive income tax as one of ten key ways to undermine the market order and advance the march toward socialism."

He notes that the phrase "The power to tax involves the power to destroy" is attributable to Chief Justice John Marshall in McCulloch v. Maryland in 1819. He says two guys named Frank Chodorov and Sheldon Richman "Both come up with a lasting-and perhaps the only-fiscal solution: Repeal the Sixteenth Amendment."

No problem, dudes! All you gotta do is figure out some OTHER way for the government to be able to spend a third of GDP, because the entire country is totally dependent on those government checks of one kind or another. - I admit that I missed the new Al Franken Leftist whine-fest, which is supposed to offset the huge popularity of the Right on talk radio by polluting the airwaves with more Big Government "Save the Children" idiocy. Why they are doing this escapes me, as it is obvious that everybody knows exactly what their position is, as it is the same malignant vision of all government-loving creeps, including not only the government itself, but also the media, the schools, most of the religions, the entire Democrat Party, and every other conclave of "social action" dimwits living either above or under rocks, and so making a big production of the thing is a huge waste of time and money. In short, in case you just got here from Mars and are therefore clueless as to what I am talking about, their big Leftist hearts bleed for groups of somebodies, and their tiny little Leftist brains came up with the only solution they ever come up with, which is for the government to spend money, and raising taxes if necessary, to fund some entitlement programs to take care of them and their children, and their children's children, and their children's children's children, verily unto all generations of these pitiful afflicted people. In short, communism writ large via wealth-redistribution.

In saying this, I recommend that you subpoena Paul Mladjenovic as an expert witness, as he is the guy who wrote "Protect and Grow Your Wealth: 7 Financial and Economic Predictions for 2004-2006" He says "Politicians (both Republican and Democrats) are great at politicking but are generally terrible at economics. Whether they know it or not, they have done far, far more economic pain and suffering than they have ever alleviated." And I jump to my feet and spill my Big Gulp drink all over the floor in my excitement and people all around me are cursing the Mogambo and spitting at me, as I enthusiastically and loudly shout "Bravo! Bravo Mladjenovic! Bravo!" at the top of my lungs, although the name came out sounding like "Mablapnic" and then Mr. Mladjenovic gets all insulted and leaves in a huff. At least I think it was him, but every time I approached him at the party he would scream in horror and shove a crucifix in my face until I turned around and left. So I never actually met the guy.

He goes on to say "This is a very important piece of reality for investors. Therefore, if you want to make yourself a more proficient and profitable investor, the following observation is indeed one of the greatest principles of successful investing: Count on government stupidity. It has created more massive economic and social problems than any other man-made entity in the history of the world. Understand this, you gain. Misunderstand this, you lose." The little propeller on my Mogambo beanie is spinning in a joyous whirl, and I am going insane with my happiness that here, standing before us, is a guy who can see that not only does the Emperor have no clothes, but is pointing out that the little Royal Weenie (LRW) is diseased and covered in pus-filled cankers (PFC) from the screw job that the government jerks have been dishing out to the people (meaning you and everyone you love, including me, which you probably do not love). "Government power comes into being in the form of taxes, regulations, war, currency mismanagement and so on. An economy that is overburdened by government eventually results in collapse." See? Didn't I just tell you the same thing? But then again, Mladjenovic and Mogambo both begin with the letter M, don't they?

Jim Cook of Investment Rarities says it about as well as any when he writes "Envy and ignorance of how free market capitalism works account for both the Leninists of yesterday and the liberals of today. Their animosity towards profit-making has saddled business with a host of regulations and social requirements that competitors in other parts of the world don't have to deal with." This how they destroy free enterprise. "Liberals love government and its multiple cures for every social ailment. They fail to realize that public social programs exhaust the resources of the nation and corrupt the citizenry." He also demonstrates the total ignorance of the Left by noting that the two best examples of the destructive power of large governments, the Roman Empire and the Soviet Union. But neither of these examples so much as fazes the Al Frankens of this world.

With that in mind, perhaps we should hope that Al Franken quickly fails, as Mr. Cook predicts that "Their continued success means the death knell of order and prosperity."

Then Mr. Mladjenovic shows what a nice guy he is and actually provides a little education for the benefit of Ben Bernanke, the halfwit who masquerades as an economist and who has weaseled his way into the Federal Reserve Board of Governors, who admits that he does not comprehend what caused the Great Depression. Mr. M. explains, "Excessive government size, scope and intervention have been the root cause of the Great Depression. Excessive government is in fact the real problem in poverty-stricken and strife-torn countries across the globe and throughout history. Every recession and every depression is the result of excessive government intervention."

For you multi-tasking New Age Americans out there who are too busy to read an entire paragraph because one of your many cell phones is ringing, I will search through the thing and see if I can pick out that one short phrase that sums it all up as an Executive Summary for you. Hmmm. Let's see. Okay, here is the perfect one, "An economy that is overburdened by government eventually results in collapse."

But bloviating on the supreme stupidity of allowing a Big Government is not the crux of Mr. Mladjenovic's essay, even though that is precisely what I spend the greater part of my day standing on the corner waving my little placard and screeching about, and I can see the drivers all gritting their teeth and staring at the traffic signal and saying "Come on, turn green! Come on, turn green."

What he wants to do is to take you to the logical extension of that, and using that knowledge. let you make a some money. Or, are we say in the South, a "big ol' pile o' money." He confidently forecasts, and I print his list verbatim:

1. The Dow will go below 6,000.
2. The dollar will drop at least another 25%
Gold will hit $1,000 an ounce.
4. Silver will hit $50 an ounce
5. The real estate/ mortgage bubble will pop
6. We will have a severe recession
7. We will surpass 2 million bankruptcies and foreclosures

Paul McCulley, portfolio manager at PIMCO, in an essay he calls "Doctor, My Eyes," we see another example of Henry Hazlitt's observation that, slightly paraphrased by me because I am too lazy to get off my fat keester and look up the exact quote, "The arguments of inflationists are always the same: Inflation is to be the 'short road to prosperity.' " In this case, Paul "Inflationist" McCulley writes "I have zero problems with what the Fed has been doing. The world desperately needs reflation and the Fed is reflating, openly and forcefully, with a falling dollar transmitting the reflationary impulse to the rest of the world. Bravo!"

Richard Russell of the Dow Theory Letters is not so sanguine. He writes, "In knocking rates down to 1% and holding them there month after the month, what the Fed has done is created a series of inflationary monsters. Today we call the monsters by a different name -- we call them 'bubbles.' The Fed has created a bubble in bonds, a bubble in stocks, and a bubble in real estate." So while this may be wonderful for Paul "Increasing the circulating medium" McCulley, who runs a bond fund, it is not good news for anybody else, considering what the result will be.

In a moment of rationality, Mr. "More monetary madness" McCulley paradoxically quotes Fed Governor Kohn, "Some observers argue that the Federal Reserve has already been too patient. They are concerned that continued policy accommodation is distorting interest rates and asset prices and encouraging a build-up of debt, and thereby laying the groundwork for financial and economic instability." And although he did not mention the Mogambo explicitly, that is exactly what I have been saying, although Mr. Kohn probably says it with a lot less screaming and hollering and court-appointed psychiatrists pumping horse tranquilizers into each of his arms in some desperate attempt keep me under control. "Clearly, the low funds rate has held down long-term interest rates and boosted asset prices. These movements are, in fact, some of the key channels through which monetary policy has stimulated demand. But I think the hurdle is high - and appropriately so - for a central bank to tighten policy, and in the process damp an expansion of economic activity in the short run, on the suspicion that movements in asset prices and increases in debt threaten economic stability over the longer run." On the suspicion? Did he say "on the suspicion" that asset prices soaring above any semblance of rational valuation, where even lunatics stop howling at the moon to marvel at the surge in prices for assets, and increases in debt loads that are un-payable and clearly unsustainable somehow "threaten economic stability"? The guy is a master of the understatement! No wonder he is a Fed Governor!

Then Mr. "Make more money and make my day" McCulley gets into philosophy and wades into the swamp of the modern foolishness known as math-based economics, and writes "My essential point is that money is different than capital. The Fed funds rate is the return on money, which has zero default risk and zero price risk. In contrast, the private sector credit carries both default risk and price risk. Thus, I believe that the 'equilibrium' real short rate should not be equal to Taylor's putative 2%, but rather equal to: (the economy-wide marginal income tax) x (the Fed's inflation target)." Didja note how the people with money to loan and the people wanting to borrow that money have no say in this new determination of market-clearing interest rates? It is all done by smarty-pants eggheads playing with calculators, so that other eggheads, whom I assume run bond funds, can play one of their notorious carry-trade schemes.

He goes on to expand his vision of Utopia by remarking that "Money should pay a sufficient interest rate to make holders of money whole for two taxes: the explicit tax on nominal interest income and the implicit tax of inflation." I agree! And the people who hold money balances probably also agree. "But money should not pay a real after-tax rate of return! In the long run, the economy can 'afford' to a pay return only on capital that is at risk." Now, where in the hell he got this cockamamie idea is beyond me, as I have never heard of anyone telling anyone else what an economy can "afford." And I notice that he is not advocating that the Fed immediately increase short rates so to "make whole" the savers who are, even as we speak, getting clobbered by interest rates that pay less than half the current rate of inflation.

No only that, but get a load of this; "In a world of 'price stability,' investors must accept - and the Fed must enforce! - the proposition that real returns can come only with the taking of real risk." The guy is advocating the imposition of government regulation on what interest rate savers must accept, and it will be low, too!

My God! What is happening to us? For one thing, I have not noticed any "price stability" for the last ninety years, as the dollar has depreciated over 95% of its value in that time, and here lately it has really gotten bad. And for another, here is somebody who is telling us that the Fed must enforce the idea, probably by having the bloodthirsty Janet Reno and a team of armed thugs with uniforms and badges come to our houses and smash down our doors and kill us in cold blood or something, that money and capital are to be "managed " As, I suppose, all things are supposed to be managed by the government. And that 1) people with money to lend are to be required to achieve only a standstill against loss of purchasing power, and that 2) borrowers are not to be allowed to overbid for money, and that 3) the Fed-- the Fed of all people! --should be empowered to enforce such a foul philosophy! My mouth is filled with the taste of bile, or maybe it is just a taco that has gone bad. But it looked good and it didn't smell too bad. The taco, I mean. Not Mr. Sculley's horrifying ideas, which both look AND smell foul.

To sum it up, and this is the part that I was reading, according to forensics experts, when my brain exploded, he writes "I applaud the Fed for pursuing reflationary policies. More specifically, I applaud the Fed for promoting unsustainably high asset prices as a means to stimulate aggregate demand, thereby putting downward pressure on unemployment. This is what the Fed is supposed to do, when it has won a war against inflation and pursuing the peace of price stability. Yes, such a strategy is a sure fire way to produce rational bubbles in asset prices. But that is a much less severe outcome than losing the peace on the deflationary battle field."

He does admit that "By definition, however, once reflationary policies beget reflationary consequences, it will be time for the Fed to dilute the ink supply for its reflationary printing press. Such a change will ineluctably involve bursting of asset price bubbles, as those who have bet that the Fed would fail in its reflationary efforts are compelled to reduce portfolio risk and leverage." So huge leveraged losses, where people lose huge wads of money from participating in an unwholesome explosion of asset price inflation that subsequently go bust, is some salutary paradigm? Now you see why my brain exploded, and why I have zero respect for Mr. Paul "Inflation as savior" McCulley.

In Barron's this week, the Editorial Commentary was entitled "Stop the Dollar's Slide" by Jack White and Doug Ramsey. They are rightly alarmed at the growing weakness of the US dollar, as they clearly see that there are ugly things that accrue from a depreciating currency. But that doesn't explain their "Panic Scenario #1: OPEC oil producers decide to stop their pricing their oil in dollars, and switch to a basket of currencies for both the pricing and settlement of crude-oil transactions." This is ridiculous. The fact is that nothing would change.

The mistake they made is that they stopped looking at things at the instant that the transaction was completed. In the real world, after OPEC has sold the oil for dollars, they are then free to convert dollars into those other currencies to buy the things they want to buy. So the selling of dollars for other currencies goes on regardless of the currency they initially got for their oil.

For example, if OPEC wants to buy something from Europe that is priced in euros, all they have to do is sell some oil for dollars, and then exchange dollars for euros, and then hop on a plane to Europe and buy the damn thing. They do NOT need to price oil in euros to get the euros.

So OPEC can, and does, get that exact same basket of currencies, per barrel, after the oil sale through the expedient of merely exchanging dollars for the other currencies. So how does changing the currency-unit of the initial sale affect anything? It doesn't. Bottom line: OPEC changing the medium of exchange for the initial exchange will have no effect on the dollar. It is other things, like lack of confidence, that have an effect on the dollar. - But economic stupidities abound. I read where one guy, who usually makes very cogent observations and therefore I assume that this was just some strange aberration in his thinking as a result of other things pressing on his mind, probably involving alcohol ("another alcohol related incident!") or drugs ("another drug related incident!") or thought-controlling rays from outer space ("another thought-controlling rays from outer space related incident!") so I will not use his name, is saying that higher tax rates reduce disposable income, and therefore consumption will fall. Hahaha! I laugh! How stupid!

Let me be perfectly clear on this, although I will continue to be purposely vague about where I was last Tuesday around four o'clock: Higher taxes WILL reduce YOUR income, and therefore YOUR ability to buy beer and pornography will fall, that is true. But that money flows into somebody else's pocket, and therefore it will INCREASE somebody ELSE'S income. So the aggregate consumption will be, theoretically, unchanged. Ergo, higher taxes do not cause a decrease in aggregate consumption.

The only difference is, and this is a crucial difference, that in the macroeconomy changes in tax rates is merely a change in WHO is spending the money, NOT the amount of money spent. And when the government, let me change that to "the damned government," or better yet let me change that to "The damned government that is bound and determined to destroy us and everything we care about," increases its size and scope to monitor and dispense this increase in money flowing through its hands, then you get another burst of malignant growth in the cancerous tumor, aka government, that ends up killing economies. Net result: those in the private economy have less consumption, and those in the government economy have more consumption.

Kevin Murtaugh, writing an article entitled "Hidden News From The BLS.," takes a look at the Bureau of Labor Standards, and finds that they are just another shameless bunch of corrupt lying weasels. "Rather than get into the politics of US employment and wages, let's just look at the numbers. According to the OC Register (OCR), 'Average hourly earnings rose only 1.7 percent' through February, 2004. '(T)he wage and salary portion of the Bureau of Labor Statistics' employment cost index, increased 2.9 percent last year, enough to keep workers a bit ahead of inflation, though not by much."

"After all, the CPI excludes food (up 3.3% 12-months ending February, 2004) and energy (up 3.8% y-o-y) and politicians then claim with a straight face inflation is only up 1.2% (y-o-y)." Yeah! Go get 'em, Kevin! "Now the BLS is poised to show a reduced unemployment rate by flattening, the top-line population number. This is really news!"

He relentlessly continues, "As employers push more of the cost of healthcare onto employees, this deduction is NOT subtracted from the BLS wages! Then wages can be counted as up, even as increased healthcare costs push net wages down." I'm beside myself with rage!

Like a big bully kicking the Mogambo when he is down on the ground, writhing in pain from the agonies inflicted on him from the preceding paragraphs, he metaphorically kicks me in the head with a hob-nailed size-12 boot when he says "As a side note, the BLS CPI report shows medical care was up 4.2% y-o-y but talks are under way to 'adjust' this figure for 'quality' which would reduce (eliminate?) its impact on the CPI."

There was an editorial in yesterday's Wall Street Journal entitled "The Dangerfield Economy," which had the general thrust that everything is so peachy, so why can't the "booming" economy, like Rodney Dangerfield, get any respect? Well, perhaps a better question was "Why can't the Wall Street Journal get any respect?" The answer to that question is easy, as they start off their essay with "Friday's report of roaring job numbers for March, along with sharp upward revisions for the previous two months, was good news that even the chattering classes couldn't deny." Well, as one of the "chattering classes," although admittedly one of the more stupid ones, I am here to not only deny it, and I will start off my own little retort with "Friday's report of less-than-roaring job numbers for March, along with sharp upwards revisions for the previous two months, was such a blatant blob of manipulated malefactions that all but the most clueless halfwits should immediately take offense that their intelligence was being so severely insulted."

"By any objective measure," they claim, "the US economy is strong and getting stronger." They then cite the absurdly low unemployment rate, which is preposterously low because the government is actively modifying the calculation of the numbers, and so it is certainly NOT "objective." The WSJ then cites the inflation rate, which is also preposterously low because the government is lying about it, and so this is yet another measure that is not "objective." And from this I can only assume that the editorial writers at the Journal are the only guys on the planet who have not heard about hedonic inflators and "adjusting for quality," or if they have, then they are too dimwitted to comprehend what that means, or they have some other reason for saying things that are obviously not true. Or perhaps I should say, are "objectively not true."

They then cite the laughable government statistic that the economy is growing at an annual rate of 6.1%, which is true if you use inflation in prices to measure growth, which they do. But after subtracting inflation, the economy is NOT growing. An economy that produces 100 widgets that sell for $2 each is NOT really twice as big as an economy that produces 100 widgets at $1 each.

They go on to state that Americans are "richer than ever before." Clueless chumps buy stocks that are vastly overpriced. Then, if the stocks get MORE overpriced, then it DOES look like they are "richer." And they WOULD be richer if they sold right then. But they don't.

Then they note that real estate has risen, and made Americans look like they are richer, too, although they again allow that "not everyone is convinced that the real estate market will hold up."

Then they make a mockery of themselves again by saying, "Nevertheless, when a record 68.6% of household own their own homes, that should at least create a feeling of security." I am here to tell you, and the people at the WSJ, that merely living in a house with a gigantic mortgage is NOT de facto evidence of owning anything, since they do not really own anything. They are merely in the process of buying it from the bank, which loaned them the money to buy that damn thing. And owing a lot of money on a huge mortgage for a long period of time is NOT something that creates a feeling of- - what was that word they used? ---security. Ugh.

---Mogambo Sez: As Larry Edelson of The Real Wealth Report puts it, "I'm more excited about
gold now than I have been in nearly three decades." So that is the asset I recommend most highly, and now all we need to do it determine a dollar figure top put into that asset that I, you know, recommend most highly. Or, as Tom Webber, a loyal reader, asks, "How much gold is enough gold?" My answer is poetry itself when I reply "You'll know when you get enough."

April 6, 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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