When the pimple bursts it
ain't a-gonna be a pretty thing
...the angriest guy in economics
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
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
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
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
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
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!
"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
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
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
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
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
"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
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
The Wall Street Journal had it exactly right when they said "Where's
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
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
April 20, 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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