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When the pimple bursts it ain't a-gonna be a pretty thing

Richard Daughty
...the angriest guy in economics
The Mogambo Guru
April 21, 2004

Slowly crawling out from the cozy darkness beneath my desk where I have been cowering all morning, I peer tentatively at Total Fed Credit, which I do because that is where the proverbial "money out of thin air" initially comes from. I note with alarm bells clanging so loudly that my own screaming in fear is partially drowned out, that this particular cancer ballooned by a hefty $6.6 billion last week.

The reason for this continual creation of new money is perhaps best explained by Sean Corrigan himself, when he says "US commercial banks, foreign monetary authorities, and the Fed itself have bought such prodigious amounts of government paper, simply by expanding their balance sheets, that they have more than accounted for the whole increase in marketable debt. This process is called 'monetization' and it puts the US on the same inflationary road to ruin as has been traveled by all those previously practicing this subtle fraud." And when the Fed needs to buy something, this is where they get the moolah, and what they need to buy is debt, as somebody has to buy all of that debt, that mountain of debt that the Bush White House and the idiots in Congress are issuing, to fund their out-of-control spending excesses.

Being the rude type of fellow that I am, and that is probably why everybody hates me as recent surveys have shown that it is not due to my deplorable lack of personal hygiene skills, I abruptly stick my head out of the window and scream at people walking by that they should run for their lives because insane weenies are running the government, and the Fed, and the banks, and all the central banks of the world, and even if you collected all these people into one room and had their IQ's added together, even THEN they would STILL be laughably stupid as measured on the Mogambo Stupidity-O-Meter, because they think that this monetary madness will not end in disaster!


Or, as James Gipson of the Clipper Fund said, "For at least some investors, the relevant lesson of history seems to be that repeating the major mistake of the recent past is a really great idea." To paraphrase in Mogambo-ese, "For the morons in the government and the Federal Reserve, the relevant lesson seems to be ignoring the One Great Lesson Of History." Namely, creating excess money and credit is a recipe that does NOT result in a delicious chocolate cake, but rather results in something else that is chocolate brown, alright, but much stinkier and spread all over everything in the economy after it hits the proverbial fan.

It ended in disaster for every other idiot country that ever tried it all the way through history. And, if you can muster enough strength to get up and go over to the window and look out, you will notice that it is happening to us. Max Fraad Wolff, writing an essay entitled "Dissonance and Euphoria" on Prudent Bear site, has looked at business and America and asks "How did we regain - or nearly regain - 2000 profits? It would appear that trillions in additional housing debt, hundreds of billions in additional personal debt, trillions in trade and budget deficits, multi-decade low interest rates and a declining dollar did the trick. Wow! This great return to profit was done with no real increase in revenues. Fortune 500 revenue went from $7.2 trillion in 2000 to $7.5 trillion in 2003. Stunning 4% revenue growth may explain why federal, state and local governments are broke and 3 million jobs are missing from the economy. But it will not end in disaster this time, they think!"

Hahahaha! Max and I, and don't tell him that I called him Max, are laughing at such arrogance and hubris! Hahahaha! These guys actually believe that they are the first group of conceited hotshots who think they are smarter than everybody else who ever lived, and they have hit on what they think is the novel idea of having the government print up more money and credit! And they think they invented the concept that the government could print its way to prosperity and people could use this extra money to borrow their way to prosperity! Hahahaha! Ohh, stop it! My sides are hurting from all this laughing! Hahahaha! Stop! Stop! Hahahaha!

So how bad is it? No, not the level of stupidity and overarching conceit, but the level of money. How much money are we talking about? Mr. Corrigan provides the answer when he writes, "The broad M3 measure of money and credit is up by over a quarter since the end of 2000-a gain of around $3 trillion, which is more than the total stock of money called into existence in all of the first 208 years of the Republic."

Over in the banks I shoulder aside all the poor people who are casing the joint and pulling on ski masks because their desperation has finally pushed them over the edge, and they realized that if the heist goes badly then they could really use the free room and board and free medical care that a conviction for a busted bank job could provide, and I look around. For one thing, I notice that there are no more little trays of free cookies and coffee, and I grunt in dismay. But since I am here in the banks, let's take a look at their books. I continue to be astonished that Required Reserves never really change, and the levels of reserves wobbles around the same levels that it has wobbled around for the last decade or more. This is really, really odd, since reserves are supposed to be a kind of safety thing, and is calculated as a some percentage of deposits. But bank credit and savings are both up over 100% in the last ten years, and yet reserves have not moved at all, and if anything have actually gone DOWN!

The news that Rothschild was getting out of running the
gold market London fix after all these years, 84 years according to one source, has caused all kinds of reactions. The range of opinions runs from, on the one hand, that gold will now fall to its purely industrial value, to the other extreme prediction that the collapse of the whole world is imminent and that everything EXCEPT gold will fall to its true value and that paper money will disappear and that the Mogambo's head will explode like a big pinata or something.

Whether this has anything to do with it I don't know, but the rumor is that some European countries need the money that selling their
gold would bring. So how much gold are we talking about, anyway? Well, in an article by Matthew Lynn on Bloomberg entitled "Why is Europe Now Breaking Into Its Gold Vaults?" he says that the U.S. is the largest holder of gold bullion, having more than 8,000 tons. Then comes Germany, sitting on about 3,400 tons, followed by the International Monetary Fund with more than 3,200 tons, which brings up the question, namely, how in the hell did the IMF get 3,200 tons of anything? A bunch of commie losers started with nothing other than loud mouths and their own inflated sense of self-importance, and they end up with 3,200 tons of gold? Anyway, next on the list, the French have about 3,000 tons. The Italians have 2,400 tons, and the Swiss have1,600.

Well, that is certainly a lot of weight, and not even the Mogambo, even with his bulging biceps and manly chest could lift that amount of weight over his head for very long, but what we want to know is: how much is that in cold, hard cash? Well, a hundred tons of
gold is worth about $1.2 billion at current prices. And adding up all those holdings, ex-US, it sums to about 13,600 tons. Dividing by 100 and multiplying by $1.2 billion, we have, if I have done the math correctly and there is almost no chance in the world that I have, a piddly $163 billion. Now, I gotta admit that 163 billion dollars is a nice chunk of change, and a lot of weeks go by when nobody sends me $163 billion. But as far as Euroland is concerned, I just don't see how $163 billion is going to buy that much of anything for very long. So I gotta admit I have no clue why Rothchild is getting out of the biz, and I assume that the move was for the same reason that other economic entities usually have a big change; managerial incompetence resulting in financial necessity. They even admit that their profits from participating in the gold market are peanuts compared to their profits from their financing of other things.

But my mood appreciably soured after reading an anonymous essay forwarded to me, that says this Rothschild thing is the harbinger of the last six to nine months of the American Financial Idiocy (AFI), even though they did not call it that, and that the BIS (Bank for International Settlements), which is headquartered in Basel, Switzerland, has actually engineered this whole economic debacle. The reason that they would do such a nasty thing is because they, too, hate our American guts, and they want to beat us up, steal our bikes and take our lunch money.

I am intrigued, also, by the claim that these treacherous Swiss also took the precaution to buy up the world's
gold at bargain rates, knowing that a collapse of the American financial system would collapse the dollar, a collapse of which would be exactly offset by the rise in the value of gold when priced in those selfsame dollars, ceteris paribus.

One predominant idea is that the Rothschild folks see that the whole
gold-leasing, price-rigging scheme is finally over. This is the deal where the governments try to a make a few bucks by leasing gold out instead of having it sit in the vaults costing them big bucks to store and maintain and account for and blah blah blah. And now the guys who leased and then sold the gold cannot pay it back. And so when that whole slimy fraud starts blowing up, they don't want to be around to answer a lot of difficult questions.

Bill Murphy at LeMetropoleCafe.com got into the action, too, and penned an essay entitled "This Is The Way I See It - Gold and Silver." He writes, "The real reason Rothschild is most likely leaving the
gold business: because the gold price-rigging scam is ending."

Tim Tesluk, commenting on an article in the Financial Times that "explained" that the Rothschilds are pulling out because, according to the author, they clearly see that the price of
gold has peaked, writes "Chairing the London fix on gold has nothing to do with either bearish or bullish considerations. Profitability on gold trading does not depend of the direction of the market, only on the skill of the trader. After all, if one is competent, one can make money on the short side or the long side. Rothschild's move, on its face, evinces no belief whatsoever. Time will tell, but given Rothschild 's status as the ultimate insiders, the exit from Ground Zero of the gold market could well portend an anomalous event of epic proportions with which the family wants nothing to do. The clown writing the FT editorial referenced below is either spouting bearish claptrap or is frightfully ignorant of the gold market."

He has a point there. If the Rothschild folks were convinced that the price of
gold has peaked, then they could make a pot full of money by merely going short. So the argument that their leaving the biz was due to a dismal outlook for gold leaves one, ummm, unsatisfied. Mr. Tesluk then goes on to pen something that I would have been proud to write, if I was not such a poor writer, but fortunately I make up for my lack of talent by being a great plagiarizer and shameless stealer of other people's stuff, and so I unabashedly quote him saying "When that market blows up (and I mean UP), Chuckles will not be alone in his gaping incomprehension of how high real money will be valued, as bearish orthodoxy remains pervasive even as the 30+ year experiment in pure fiat 'money' shuffles inexorably towards the graveyard of Really Stupid Ideas."

First time claims for unemployment, including the people who were told by Donald Trump "you're fired," were up by a surprising 30,000 in the latest report, giving lie to the claim that the USA was in some Glorious Resurgent Recovery Mode (GRRM). And as I lay here in my bed at night thinking about this and listening to the CIA spooks outside my window spying on me laughing and giggling as they while away their time downloading porn on their portable notebook computers, I wonder who those 30,000 people are. And then I spend a little time wondering who is this strange woman beside me in bed, and then I remember that she is my wife, and then I breathe a sigh of relief that I dodged THAT bullet, and go back to thinking about those 30,000 people.

And 30,000 people is a big enough sample, involuntarily harking back to my college days struggling through Statistics 101, to make the statistical claim that they pretty much represent the true average. So I have a pretty good idea they are, on average, fat, their health is generally poor, ten percent of them are taking psychoactive prescription and non-prescription drugs, a bunch of them are alcoholics, a quarter of them smoke and wake up hacking and coughing, they have horrible little children who are taking prescription drugs at home to keep them from being so horrible, while popping, snorting, smoking and shooting non-prescription drugs with their hoodlum friends when they are not at home to make them MORE horrible, they are so deeply in debt that they will never see the light of a debt-free day for the rest of their pathetic lives, and that they are so unsophisticated that they cannot be made aware, even though I have volunteered to slap their silly faces until they at least try and understand, that their own government is financially murdering them.

And you don't have to be an economics whiz-kid to dimly realize that people without jobs make lousy consumers, and that a ridiculous consumer-oriented economy like the one that has developed in the United States cannot survive unless they, you know, consume.

In another pathetic bid for immortality by virtue of winning that elusive Nobel Prize and that cool one million bucks in prize money, I postulate that the lesson of the Great Depression that was learned by the Fed was that the government was too small. The distorted, ridiculous parody today known as The Grubby American Consumer, Stock Market and Real Estate Economy would have similarly disintegrated a long, long time ago, except that now everybody works for the government, either directly or a just a short hop away.

And the government was the only entity that could print its own money and therefore buy its way out of its problems, whereas those chumps in their private-sector jobs in the 1930's could not. Ergo, the American economy will probably continue bumping along until the monstrous inflation that Bernanke is promising, and actually working his nasty little tail off to produce, finally results in the rise of an angry, desperate, starving population that grabs flaming torches and marches around chanting "Mo-gam-bo! Mo-gam-bo!"

"Fed Officials Should Get Out and Shop" says Caroline Baum in the title of her article on Bloomberg. "In the rarified atmosphere at 20th and C Streets, better known as the Federal Reserve Board, there is no inflation. In the parallel universe in which most of us live, prices are going up." She was doubtlessly referring to the Bureau of Labor Statistics, whose latest report revealed a 0.5 percent increase in the CPI, and a 0.4 percent increase in the core index, which excludes food and energy. Bill Dunkelberg, who is the chief economist of the National Federation of Independent Business in Washington, says "The price hikes are pervasive and led by the service sector, which is not energy dependent.'' So price rises resulting from the rise in oil is not causing this price inflation, he says. Mr. Dunkelberg has also taken a look at recent prices action in finance, insurance and real estate, and found that nobody cut prices, while 43 percent of the companies raised them. Similar results came from the March NFIB survey, which noticed "the most aggressive price behavior seen since early in 2000,'' with 19 percent of all firms who have not had their phone service cut off and were hightailing it out of town one step ahead of the collection agencies, and who bothered to answer the phone, reported an increase in average selling prices.

So where does the Greenspan Fed get the idiotic idea that there is some deflationary crisis brewing? Where in the hell are the damn prices that are falling that are requiring interest rates that are the lowest in half a century? Nobody can see them except this Greenspan twit and his little playmates at the Fed.

In a related vein, perhaps without realizing it, Joe Carson, who is the head of global economic research at Alliance Capital Management, showed how hyperinflation gets started. What happens in a hyperinflation is that people start buying things, anything, everything, desperately getting rid of their money, spending all their cash to stock up on these things that are going to cost more in the future because their money is going to be worth less in the future. And then prices rise like they were rocket-propelled in response to this heightened demand. The result is that everybody who has any money that they were not able to spend is gradually bankrupted. Sure enough, Census Bureau statisticians report that "Some farmers have been pre-paying for their annual supply of fertilizer, getting a discount up front and immunizing themselves against price increases down the line. Some fertilizers are up 25 percent in price in the past year."

Then all this panicky buying makes prices go up even more, as a result of the old supply-demand dynamic, and thus reinforces the hyperinflationary price rises. Which causes more panicked buying. Which causes prices to rise even more. Which causes more panicked buying. Which causes, well, you probably get the idea.

But you wonder where the AARP is in all of this, as the Social Security benefits that its members receive every month are not going up nearly as fast as the rise in prices. The main reason for this decline in purchasing power of retirees is that the Cost of Living Allowance (COLA), with which monthly Social Security benefits are adjusted to for inflation, IS the fraudulent Consumer Price Index! So the government has engineered a fraud for the express purpose of robbing a lot of old people. Or as Richard Benson said in the title of one of his recent articles, "Using the Consumer Price Index to Rob Americans Blind."

In a similar vein and in a separate report, Bloomberg reports that "U.S. Economy: Consumer Prices Rise, Trade Gap Narrows," and sure enough the Commerce Department said that the trade deficit narrowed to $42.1 billion from a record $42.5 billion. Whoopee. A measly $400 million dollar change, or, in percentage terms, 1%, which is probably statistically insignificant, according to court-appointed psychiatrists who posit that 1% is the chance that I will ever say anything that is not laughably stupid.

Ms. Baum notes that "So far this year, consumer prices are rising at a 5.1 percent annual rate."

Perhaps this has something to do with the fact that, as she reports "The dollar has lost 11 percent of its value in the last two years against a basket of currencies from the biggest trading partners."

Against all of this surging inflation, which you will remember is what the Mogambo confidently predicted as the lone voice squeaking in the wilderness like some brain-damaged rodent, pitted against the mindless cacophony of the multitudes of the other clueless jerks who bill themselves as "economists" and who, almost to a man, all took time out from filling in their Daffy Duck coloring books to opine that there was no inflation, and that inflation was dead, and how we will all spend the rest of our lives living in a world with no inflation, and how the Fed printing up all that money and creating all that credit had no connection to inflation, and blah blah blah. Jackasses.

This is all at the same time as the Labor Department has been working double shifts to massage every bit of inflation from every price rise so that they could issue one of their laughable reports on the Consumer Price Index, so that they could show that inflation was non-existent. So even those corrupt wonks have now been overwhelmed by the sheer deadweight tonnage of evidence that inflation is NOT dead, but that it is rising by, at least, 5.1% a year. So you can take it to the bank that if those corrupt weenies are now backed into a corner enough to admit THAT, then the REAL inflation in America is undoubtedly much, much worse.

Of course, there are the inevitable opinions that the Fed will now be forced to raise interest rates to combat this surging inflation. I say, hahahaha! Says who? Who's going to make them? You? Hahaha! The Fed can sit on 1% rates forever if they want to, as far as they are concerned. And they probably will, as they have shown absolutely zero intention of doing what they are supposed to be doing all this time, which is to keep inflation from destroying the USA and to keep the idiot banks from financing ruinous bubbles, and I have serious doubts, make that VERY serious doubts, that they are going to start now.

In fact, Dan Denning of Strategic Investment says that the Fed CAN"T raise rates, "until the final piece of the inflation puzzle is in place: rising consumer incomes. Until that happens, rising prices will simply make consumers cut back on spending. Throw in rising interest rates and energy prices and you have two more factors which lead to slower consumer spending and economic growth. Bottom line: the economy can't grow until the consumer can spend more. And the consumer can't spend more when prices and interest rates are rising." Seems about right to me. So where does that leave us? Mr. Denning says, "Here's a prediction for you - the Fed will become so concerned with the market pricing in rising rates (and pushing mortgage rates up) that it will cut rates by 25 basis points at its May 4th or June 30th meeting."

So the old aphorism about how the Fed is supposed to take away the punch bowl after the party really gets started is now proved false. The new Fed paradigm is something more bizarre; the Fed is pouring pure grain alcohol down the throats of party-goers who are passed out drunk on the floor. Marshall Auerback at Prudent Bear says "Speaking of bubbles, the real enabler has been Chairman Greenspan himself, of course. Rather than issue mea culpas for having been present at the creation of the biggest stock-market bubble in modern times, maybe all time, he has focused his commentary over the past year on what a marvelous job the Fed has done in responding to the bubble, which in any case by his lights they never could have recognised or dealt with in advance. It is this extraordinary complacency, or hubris in Mr Greenspan's case, which ultimately sets the stage for the coming debacle, which the IMF and others have continued to sound the alarm about."

And sure enough, there are a lot of rumblings and grumblings from the World Bank and the IMF and a lot of other hotshots, all joining in the chorus that the silly Americans are on the road to calamity. Reuters reports that "The International Monetary Fund and Organization for Economic Cooperation and Development said in separate reports on the U.S. economy there was concern the positive impacts of the deficit in leading a global recovery could not last."

The OECD said "These measures should aim both at curbing outlays and, to the extent revenues have to be raised, broadening the tax base." Hmmm. No wonder nobody is paying any attention to the OECD; they want us to cut spending and raise taxes, when every doofus in town who calls himself, or herself, a Congressperson wants to do the exact opposite!

Mr. Auerback then goes on to write, "As for the US balance-of-payments and current account with the rest of the world, in such an environment Goldman Sachs' chief global economist Jim O'Neill has simulated a likely outcome with US external debt, now at a hefty 25 per cent of GDP, rising into the 40 per cent ­ 50 per cent range - a level that is characteristic of LDC debt delinquents."

Terrific. We can all be very proud that the Fed and the Congress have now borrowed and spent us into such dire straits that primitive people in Least Developed Countries are showing more smarts than we are.

Mr. Auerback continues, and it is not pretty. "In fact, it is almost nonsensical to speak of a 'credit system' in the US any longer, since the use of the term 'system' implies that there is some underlying rational structure, ultimately controlled by a responsible regulating entity, such as a central bank. As Doug Noland has illustrated time and again, this is a completely fictional construct: the whole US system today in effect works toward credit 'dis-intermediation', rendering some form of external constraint virtually impossible. Asset backed securities, convertible bonds, financial commercial paper, structured finance, the proprietary desks of the commercial banks, and the hedge funds all slice and dice credit out of any recognisable classical form that is still taught in Economics 101 textbooks: we see nothing more than acts of financial engineering, which eventually drive a wedge between the ultimate borrower and the ultimate lender so as to render the whole process unrecognisable.

"This is why the rise in commodity prices has been so telling: something is finally cracking in the system in spite of persistent denials of its relevance. Whether this is occurring because of the increased activities of leveraged hedge funds or a surge in genuine end-user demand is almost beside the point because both are two sides of the same coin: global liquidity run amok."

And it is not just us, as money created in one place shows up in every place as it zips around the world. "China is a prime example of this two-sided coin, as this where some of the consequences of the US policy strategy are being felt owing in part to the dollar/RMB peg. The unsustainable boom in productive capacity creation there (and the corresponding parabolic rise in commodity prices) can be traced back to the Fed-induced borrowing and spending boom over here, and the rock-bottom financing rates for risky ventures enabled by the sharply positive yield curve, precisely the sort of issues touched on by the IMF report."

And although the bozos who get quoted in the newspaper say otherwise, the same newspaper, I might add, that never has anything good to say about the Mogambo other than things like "Local lunatic Eludes SWAT Team For Third Day," this is not going to work out for the better. As Mr. Auerback puts it, "But no amount of warning, however well intentioned, is going to stop this runaway train until the wreck inevitably occurs."

Kurt Richebächer is not mellowing with age, either, when he wrote his latest essay, "Policy Traction." He writes, "In the past three years, America has experienced an interest rate collapse, a record fiscal stimulus and the loosest monetary policy imaginable... all of which fueled money and credit creation at a scale that has no precedent in history. Has it really worked?"

Well, I am frantically waving my hand, hoping he will call on me to answer this easy question, as I have spent the entire morning trying to answer tough questions, mostly in the vein of "What in the hell is wrong with you, you little twerp?" But Mr. Richebächer ignores me, and continues on as if I wasn't even there, "Well, in one way this policy of stimulus has had fabulous traction: It has engendered the greatest credit and debt bubble in history. Total outstanding debt, financial and non-financial, in the United States has ballooned by almost $6,500 billion since 2000, as against GDP growth of $1,238 billion. For each dollar added to GDP, there were about six dollars added to indebtedness."

"Policy traction also surfaced in a second way: The runaway money and credit creation went with a vengeance into asset markets - stocks, bonds and housing. When the equity bubble popped in early 2000, the consumer simply moved on to the housing bubble that had been waiting in the wings, helped by the Fed-inspired bond bubble driving mortgage rates sharply downward."

"What, in fact, had emerged was an unprecedented dichotomy between the economy and financial markets in the effects of the Fed's aggressive monetary easing. Instead of jump-starting consumer and business spending, the Fed's extreme monetary looseness and rock-bottom short-term interest rates generated multiple price bubbles in the stock, bond, mortgage and housing markets."

"A frenzied stampede of the financial community into the highly leveraged bond carry trade sent bond yields plummeting, pulling in their wake highly correlated mortgage rates sharply downward with them. In the same vein, the loose money helped to boost house prices. Given, in addition, extremely aggressive mortgage lending institutions, eager to lend prodigiously against rising house prices...consumer borrowing just went parabolic."

"U.S. economic growth, therefore, is no longer based on saving and investment." This eerily echoes Marshall Auerback's assertion that "the whole US system today in effect works toward credit 'dis-intermediation' ", which can be interpreted to mean: outside of the banking system, where borrowers borrow what the savers save, with interest rates rationing the available funds against the demand for those funds.

Mr. Richebächer goes on to say "Credit excess has provided soaring collateral for still more credit excess, creating still more asset inflation for still more borrowing and spending excesses. It is a perpetual motion machine that just goes on cranking out wealth and spending."

And far be it from me to tell you that perpetual motion machines are an impossibility, even though I am sure that the Congress is marking up a bill right now that will suspend all those pesky laws of Nature that preclude such devices, since they think that the stars and the cosmos itself all revolve around what they want.

To show you the vacuity of both the media and economists, the Baltimore Sun had an article entitled "Surging Prices Signal Inflation" Here is one of the more, ummm, stupid things that was said: "Higher prices for a broad spectrum of goods and services - including steel, cable television, candy bars and Walt Disney World - are good news for now, economists say."

What? Who in the hell thinks that paying higher prices is good news? It is not enough to say "economists say." I want to know actual names, so that I can go and stand outside their doors and chant "Big economic dummy! Big economic dummy!" until they finally get enough of that crap and come outside and offer to buy me an ice cream cone, with any flavor I want, if I just go away, which is, of course, too good of a deal to pass up. But getting back to the point, and I know as well as anybody how hard it is to stop thinking about ice cream cones once you get started, but perhaps the producer of the goods and services who receive the higher prices, and of course the government, which collects more taxes, will welcome this as some good news. But I am here to tell you that, as guy who is affiliated with neither of these entities and who actually spends his time walking around behind these same guys and begging them to show a little patriotic thankfulness and buy a sandwich for a poor disabled veteran, although I am not actually disabled and only look this way because I am too stupid to groom myself, higher prices is NOT good news, and never has been. And if you don't believe me, and don't feel bad because nobody else does, either, then show me a time in all of time and space where it HAS been good news. I mean, isn't preventing inflation the whole point of the thing?

Next in the same article we read that these higher prices "show businesses are gaining confidence in the strength of the current economic recovery." Wrong again. The companies are being forced to raise prices because their costs are rising, and the fact that all their competitors are likewise forced to raise prices to keep from going bankrupt is NOT indicative of "Gaining confidence in the strength of the current economic recovery." It means that the customer does not how have access to a cheaper alternative, and the hapless customer is now forced to choose between paying a higher price or doing without.

Next, and I note that we are still in the same article because I read so slowly, my lips moving imperceptibly as I sound out each word and thinking to myself how this reading this was a whole lot easier back when old Dick and Jane were chasing each other around ("Run, Jane! Run! See Jane run!"), we eventually read "And experts say the pace of inflation isn't expected to become dangerous anytime soon." It used to be considered highly dangerous at THESE levels, for crying out loud! At least it was before the worthless Keynesian crackpots who took over the economics biz in America started bloviating to low-IQ media twits that a 3% inflation was not considered to be considered horrific any more. But it has always been horrific, and it is still horrific, as you will soon see.

The article laughably quoted a guy named Mayland who said that "when companies start making money they produce more goods that they sell at higher prices and hire more people to keep production humming." Maybe. Let me give you an example. I make widgets out of soybeans. Soybeans are now 100% higher in price. I raise my prices to cover my higher costs. In short, I am NOT making more money, and I am NOT hiring more people. I am merely standing still, although I am, in the loosest definition of the term, "making money."

Another worthless quote from this sorry article is "Inflation correlates positively with profits." Wrong yet again! Higher inflation merely correlates with higher costs. And profits come AFTER paying costs. What they didn't notice is that, and if they had bother to call me I would have been happy to show them, inflation correlates positively with lower purchasing power.

The head of the 9/11 Commission, looking into the abysmally-poor quality of our intelligence-gathering agencies, which I note with a sneer is doomed to fail because they almost exclusively employ graduates of the lackluster American school system, has on the panel a horrid little woman name Jamie Gorelick, who is now infamous as the person who tied the hands of the FBI and the CIA, thus preventing them from coordinating their efforts in trying to keep terrorists from killing us on that fateful September 11. There have been calls for her to resign from the Commission, one of them being from me, as she is obviously not a judge but a witness, and hopefully one day a defendant.

As an aside, and you will find this on Page Two of the Supreme Indictment Of The Mogambo that I haven't written but am still mulling over, this awful woman resigned from the Janet Reno Justice Department to become vice-chairman of Fannie Mae, the quasi-public company that has caused the explosion in housing prices. To make matters worse, she was also knee-deep in the Reno Justice Department cover-up of the Clinton scandals, particularly of his receiving secret campaign money from communist China and, and it just keeps getting worse and worse, she is rumored to be one of the aspirants to become Attorney General to Kerry, should he be elected President! If you had any lingering doubts that the United States was doomed, this ought to dispel those thoughts.

But that is not the most horrific part. The head of the 9/11 Commission, Thomas Kean, says that he resents people accusing her of the obvious offenses she obviously committed, and that he has no intention of asking her to resign, since she is a real nice person and will probably win the Miss Congeniality Award. He goes on to say that he wishes people would "Keep out of our business."

Newsflash to this horrible little twit: Everything you do IS our business, bozo, and don't you forget it. And when we charge that the integrity of a panel, especially one peopled by overpaid and dimwitted Congressional lowlifes to start with, is fatally compromised, it is your duty to explain WHY we are wrong. It is NOT your duty to tell us that you are going to do as you damn well please, no matter how many sewers you want to slop around in, and how you are so self-righteously incensed to have us taxpaying voters not having the requisite servility to "mind our own business."

The Wall Street Journal had it exactly right when they said "Where's the outrage?"

Richard Russell, who is the brains behind the Dow Theory Letters, writes "So what the Fed and the US government have done is to build the greatest edifice of debt ever seen by one country in history. And this debt continues to build. For the US government, the debt build-up is continuing at the rate of over $13 billion a WEEK. The current rising trend in interest rates will bear down on this ocean of debt. This pits the forces of deflation directly against the forces of inflation. This impending battle of inflation vs. deflation is going to be one of the most critical economic confrontations seen in decades."

Mr. Russell is also recently famous for saying that the rapid escalation in the price of
gold is probably over, and that if you are a trader, then perhaps you should dump some of your holdings before the price falls. But if you read farther into the article, he says HE is not selling any of HIS gold, as he is not a trader, but is accumulating gold to keep himself from being wiped out in the coming cataclysm. This is probably some of the best advice you will get for a long, long time.

Eric Fry, one of the brainy and clever people at the Daily Reckoning website, is commenting on the rise of inflation. "Of course, President Bush did most of the heavy lifting by borrowing billions of dollars to buy bombs, which were then dropped from helicopters and airplanes over Iraq. The Bush reflation effort was a bit more complex and a bit messier than Bernanke's version, but the monetary results are similar."

Kurt Richebächer wrote an his article entitled "The Great Deluder," and it refers to Alan Greenspan, although if I had written the piece I would have called it "the Great Brain-Damaged Chump," as only a complete idiot could possibly believe that his theory of economics even remotely resembles real life. But Mr. Richebächer ignored my suggestion, as he always does, and then he goes off on a tangent, in this case, about the "American economic recovery." I put that in quotes to denote a demeaning, snide sarcasm, exactly as court-ordered mental health professionals do when they refer my "intellectual capacity."

He says, "Looking at the economic aggregates that truly matter for people and the economy, like employment, incomes, and production, the U.S. economy over the past three years has performed most miserably among the industrial nations." I know that this comes as a shock to you, as you cannot turn on a TV or dial in a radio or read a newspaper without somebody telling you how this economy is some sort of economic world-beater and how foreigners all over the place are just dying to emulate us. Nevertheless, it is true. "What went wrong in the first place?" Mr. Richebächer asks with that charming way of his. I offered my suggestion that perhaps the cost of Oreos was too high, but he dismissed my suggestion with a snort and said "Actually, it seems easier to first identify some factors that have plainly not been among its causes. It is the first economic downturn in postwar history that has not been precipitated by rising inflation and monetary tightening."

Well, let's take a look at history and find another example of an economy that was likewise not precipitated by rising inflation and monetary tightening. Well, Jamestown springs into our consciousness, mostly because they were wiped out by Indians, probably because the colonists were trying to set up a central bank to deal in fiat wampum, but the facts are lost to history and so I am only proffering a theory. But people are not being wiped out by Indians horrified at the prospect of a central bank and fiat wampum today. No, today we are being wiped out by Islamic terrorists. I am not sure that the parallels are pertinent, although we are trying to force democracy down their unwilling throats, and so a central bank and a fiat currency can't be that far behind.

He continues, "Since this downturn was definitely not caused by tight money or credit, loose money alone cannot be the solution." It was, and I am offering another of my patented helpful suggestions here, because we acted like the moronic chumps that parade around on the Jerry Springer show, and on the Maury Povich show, and on Divorce Court, and on BET, and on practically any television program you can name: We celebrate loudmouth ignorance and stupidity on a grand scale, and the government and the Federal Reserve have made it their stock in trade business to hand out the money to fund, as I said, profound ignorance and stupidity.

"In our view, America's Great Deluder has done a miserable job: he has papered over existing maladjustments from the boom through even bigger, new bubbles and macroeconomic maladjustments, heralding much worse to come in the future. The structural damage to the economy has become far too big to lend itself to a mild correction. The next downturn will not be pleasant."

A Bloomberg article "Yuan Peg Presents China With Monetary Dilemma" by David DeRosa contains one of those truisms that make you glad for the Second Amendment, namely "Short of brute force, the central bank has to accept that it can't make the banks buy paper at below market rates."

But brute force is not needed, as there are plenty of other guys who are, for reasons that escape me, willing to buy debt at ludicrously low yields. Gary North, who writes the terrific newsletter Reality Check, has apparently seen it to, and says in his essay entitled "Discount Punch At The Never-Ending Party" that he has taken a look at Commercial and Industrial Loans, and notes that "Except for a spike in the middle of December, both indicators have been headed downward for over a year. What this chart tells me is that those businesses that can tap into the bond market are doing so. They are selling long-term debt to individual investors and institutions, taking advantage of today's historically low interest rates. Either the corporation executives are stupid or else the investors who are lending them long-term money at 6% are stupid. This tells me that bankers and corporate decision-makers think that rates will rise. I think so, too."

An essay by George J. Paulos & Sol Palha on LeMetropolecafe.com, entitled "A Day Late and A Dollar Short," comments on this very phenomenon. "With all due respects to Joe Sixpack, we have to conclude that the consumer is the dumb money. By racking up unprecedented debt within an economic slowdown, the average consumer has set himself up for crisis. There is simply insufficient growth in income to manage the increased debt service load. People should know that they are in over their heads, but they refuse act responsibly and slow down the credit machine. So who is the smart money and what are they doing? US businesses (the smart money) are actually paying down debt. Commercial and Industrial loans have been falling since the end of 2000. Looks like the smart money once again bailed out before the dumb money."

But it is not just Joe Sixpack that is the new "dumb money," as we read Messrs. Paulos and Palha saying, "The central banks of China and Japan are buying enormous quantities of dollar-denominated assets, mainly short-term U.S. Treasury debt paying less than 1.5%. They are creating money out of nothing to make these purchases. They are supplying discount punch to a nation of truly serious party-goers. For as long as they are willing to do this, the party will go on."

Bill Fleckenstein of Fleckenstein Capital, "I believe that the best-case outcome for our economy is stagflation." A stagnating economy and higher prices are the best we can hope for? If history is any guide, yes it is. And let's hope that hoping will get us what we hope.


---Mogambo Sez: I get the feeling that things are building to a head, sort of like a great big pimple. And, again like a great big pimple, when it bursts it ain't a-gonna be a pretty thing.

April 20, 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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