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Debt: Right to the moon, Alice!

Richard Daughty
...the angriest guy in economics
The Mogambo Guru
April 28, 2004

Tom Webber, a reader of the MoGu who foolishly thinks that by sending me things to read that I will maybe get an education and hopefully smarten up one of these days, sent an interesting but somewhat lengthy article entitled "Fractional Reserve Banking As Economic Parasitism," by a guy named Vladimir Z. Nuri. The thrust is that the science of physics applies directly to economics, as in "applying statistical and computational modeling techniques to come up withtheories of money flow inlarge economies," and there is now an emerging body of research actually doing this, and he calls it "econophysics."

One of the techniques used is the equation-laden field of thermodynamics, mostly the ideal gas law and Boyles law, an example of which is to visualize an increasing money supply as a kind of pressure. As another example, multiplying the money stock times velocity corresponds to volume, etc. Thus he cleverly notes these and many other eerie parallels between physics and economics, and how many of their formulas resemble each other, which fascinates me for two reasons. Firstly, they are both concerned with how physical things, like money and gases, operate in the real world, and secondly because the current crop of mainstream economic theorists and THEIR theories and equations have done such a poor job that it apparently amounts to mere hocus-pocus, so we should be on the lookout for something better. Now, personally, people often say that I wouldn't know a thermodynamic from a hole in the ground, but I instantly take great umbrage at that, and I leap to my feet to proclaim, loudly, "That is a lie! That is a big ol' dangity-blang bleepity bleep bleep bleeping lie, as I can easily identify a hole in the ground at a mere glance!" And as my first witness I call my wife, who will testify that when I first saw the Grand Canyon, I exclaimed "
Man! That's one big damn hole in the ground!" And furthermore, I can almost as quickly tell that a hole in the ground is completely different from almost anything else you can name, especially my own butt, which I mention only because so many people say that I am so stupid that I cannot tell my own butt from the aforementioned hole in the ground. So, let me take this opportunity to say, yes, I can. Usually.

But, I sadly confess, that is about the limits of my expertise on thermodynamics. Oh, sure, now that you mention it, I sort of remember, peering through the mists of time and all that, hearing something about such things as "the ideal gas law" and Boyles law from high school chemistry class, and I am also dimly aware that pressure and temperature and volume get combined in weird and wonderful ways to produce perfectly accurate descriptions of natural processes that, in turn, produce questions on the midterm exams that I cannot possibly answer because I spent the entire semester hating the teacher because he assigned the biggest dork in the whole freaking school to be my lab partner when what I really, really wanted was to have the lovely Cheryl as my lab partner, and how this was just another example of how my teenage life was so angst-filled and horrible, and I remember thinking at the time how it will probably just get worse and worse because this guy is probably just the first in a long line of guys who are out to, you know, get me.

But let's move away from that rehashing of the horrors of my formative years, as whole teams of trained mental health experts are already delving into that sordid morass of despair and they are all whining about how they don't get paid nearly enough to listen to that weird crap. So, getting back to the article, he wisely instructs that one can be led to enlightenment by always remembering a Latin phrase, "cui bono?" which translates as "who benefits?" And then he caps that off with "caveat emptor," or "let the buyer beware." This is an adaptation of that other timeless credo, which is "follow the money."

He uses this transcendent insight to ask some (and here you have to imagine that here I am slowly stroking my chin in a thoughtful, pensive way and looking into the distance as if lost in thought) very interesting questions, such as concerning "Spending and circulating new dollarsthe key question is, who owns those dollars?" His conclusion, and my conclusion, and your conclusion if you have correctly used your Mogambo Decoder Ring, is that the bankers own the dollars because they are the ones who created the dollars in the first place, and that is why he writes "Whoever has or is given the authority to create credit has the authority to extract wealth from the economy by that same mechanism." And these people are, as they always are, the bankers. The bankers are, in other words, extracting the wealth of the USA to enrich themselves.

Using this bit of timeless wisdom, he dissects Greenspan's famous 1966 essay entitled "Gold and Economic Freedom," and notes that Greenspan was correct when he described how, when the supply of money increases, that the "earnings of the productive members of society lose value in terms of goods," but that Greenspan was wrong when he immediately followed that up with, "When the economy's books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes." In truth, says Nuri, and the Mogambo leaps to his feet and proclaims "Verily, in truth!" the grubby bankers created the credit, therefore the bankers created the money, therefore the bankers owned the money, and therefore the value went into the pockets of, and I am sure that you have already connected the dots here, the bankers themselves. What everybody else ends up with is, predictably, pure price inflation, making them all worse off. And this inflation is due to the decreased purchasing power of the previous stock of money that has been diluted by the issuance of the newly created money. See how simple this stuff is? It makes you wonder why Alan Greenspan doesn't comprehend it.

Additionally, he also posits the concept of economics as an ecosystem, and, as he says, "building on it, an important additional theme proposed and explored here is that of economic parasitism." I naturally assume that he arrived at this ugly metaphor by talking to my wife, who habitually characterizes me as a blood-sucking parasite that has drained every bit of joy from her life and, even as we speak, her will to live. But his perspective is that parasites survive by utilizing various techniques to remain unnoticed, they use their anonymity to feed on their hosts, and, in many cases, actually alter the behavior of their hosts toward suicidal actions so that the next phase of their parasitical lifecycles can proceed. Politicians, bankers, overpaid CEO's and lawyers immediately come to mind, and the term "parasite" is probably a lot more descriptive than "vampires," which is another apt metaphor that is often used to describe these groups of people.

I will not take you farther down this ugly path because I am disgusted by the whole parasite concept, nor down the path of math and formulas because I am confused by that whole concept, too, and I spend more than enough time being disgusted and confused as it is, thank you very much. But I will take you gently by the hand and lead you directly to some of the conclusions, and from there to where we can make some money on the deal, and then maybe we'll all go out for a beer. The short executive summary (SES) is that he validates, through rigorous mathematical process, everything that the Austrian school of economics has been saying all this time, and everything that I have been saying all this time, too, although they say it with class, wit and erudition, which you can verify by going to the Mises.com website, while I spew what appears to be blubbering gibberish, which you can verify by reading anything I have ever written.

And the way to make money on the deal is to, obviously, own a bank, and/or own gold, because all bank multiplications of the money supply in excess of the growth of GDP lead directly to inflation. In fact, the main conclusion is that, like the Austrian school, expanding the money supply automatically produces inflation, as when he says "Price inflation is a precise, mathematical measure of the macroscopic energy dynamics of a system which adheres to physical laws." And where does this energy come from? Exactly where you thought it comes from; fractional reserve banking.

Further, he mathematically concludes that deflation is actually a good thing! He says "deflation can be a natural and beneficial redistribution of increased GDP or efficiency," although the horrid Alan Greenspan thinks otherwise, and that is why he is trying to kill us all with inflation. I, and a lot of other people, think that deflation is a good thing, too, because it is 1) the mark of a truly healthy economy, and 2) it is intuitively obvious that lower prices mean that a paycheck can buy more things, and buying more things is the very heart of increasing standards of living, which is the goal of economics.

Rick Ackerman, in his column entitled "Deflation Dead? Yeah, Sure," quotes a woman named Sheryl F., who says "I sold 99% of my metals today. A commodities trader I know thinks Greenspan will increase rates, making the dollar strong and pushing metal shares down in the short- to mid-term, meaning six months to two years -- too long for me to hold."

Six months to two years is too long for her to hold? What in the hell is going on here? Being the Mogambo, it is destiny to wander endlessly up and down the mall begging money from total strangers and providing enlightenment and education to people like Sheryl. And so slipping into Mogambo Pedantic Mode (MPM) I was mentally grabbing her by her neck with one hand and drawing back my fist to provide a little of that sorely-needed "education" with the other, when out of the corner of my eye I saw that Rick had made my efforts redundant.

He continued "Which brings me back to the theory that Sheryl F. finds so distressing ­ that 'Greenspan will increase rates, making the dollar strong and pushing metal shares down in the short- to mid-term.' We should ask, what possible incentive does the central bank have to push interest rates higher in order to strengthen the dollar? For if either or both of those objectives is achieved it will tighten the noose around virtually all who owe dollars (and I mean mortgage borrowers in particular, although certainly not exclusively). Does the Fed risk toppling a global debt pyramid just to beat down the rising cost of milk, eggs, college tuition and fuel in the U.S.? I should think not."

In short, a stronger dollar is that LAST thing that Greenspan wants. He wants a weaker dollar, and he, and the horrid Ben Bernanke, and Janet Yellen, and all the rest of those nasty Fed dunderheads are working like little trolls to achieve that very thing. The reason is simplicity itself; so that we American workers can sell our productive output to foreigners at prices that are so low, in world terms, that they cannot help but buy our stuff. The tradeoff is that the real wages of the American workers will be so low that even a $50 per hour minimum wage won't buy much of anything, as the dollar would be so weak and valueless in terms of purchasing power. Sad but true, but that's the point we have reached in Greenspan's America.

Mr. Ackerman is obviously on the same wavelength as the Mogambo about this whole inflation/deflation thing when he continues, "Mr. Greenspan has flatly stated that deflation is no longer a concern, but let me give you the straight skinny: No matter what he says, it is his ONLY concern. We can also be certain that he would much rather talk about raising interest rates than actually raise them. Count on it. And don't allow yourself to be distracted by recent increases in the prices of consumer goods and services; for they are no more than microscopic blips compared to a deflationary black hole that threatens to implode if even somewhat higher rates are applied to an estimated $150 trillion of very thinly collateralized derivatives. There is simply no alternative logic, and anyone who professes otherwise is either not in command of the facts, or a self-aggrandizing huckster like Larry Kudlow." To give Mr. Kudlow some credit, being a loudmouth stock booster is his job, and I'm not sure that he even believes the things he has to say to keep his job.

Mr. Ackerman continues, "Concerning the supposed threat of inflation, we are all so deeply in hock that we should be praying for it, not hoping Mr. Greenspan will 'fight' it. And if $50 crude and $3 at the pump should come to pass, do not mistake that for 'inflation' either, since, rather than being passed along through the economy as inflation was during the 1970s, it will only stimulate a tsunami of deflationary bankruptcies in industries such as trucking, air transportation and automobiles. And if you do not expect your wages to rise along with the price of gas, milk, eggs, tuition and medical care, then those price increases will not be inflationary for you, but rather deflationary to the extent they will cause you to curtail the consumption of other things. It thus follows that, in a macroeconomic perspective, 'inflation' itself has become deflationary." If that is confusing to you, imagine how perplexed I am, since I am sure that you comprehend these things a lot better than I do, as I am still unable to figure why the sun goes down on one side of my house and then comes up on the other side the next morning.

Well, I cannot speak for Sheryl, but I am staggering about the room under that onslaught of stark reality, vitriol and sarcasm, and I am quite distraught at having to face reality as it exists, and that means, obviously, that it is time to have my medications increased, and then everything will be fine again. For awhile.

As this week's gratuitous and snide disrespect for American economists, I highlight Joseph F Benning, a PhD no less, who says he is, get this, senior economist at the Chicago Board of Trade. This guy wrote to the Wall Street Journal to complain about two previous writers who were talking about inflation. Anyway, this Benning guy says "In pointing to rising prices for health care, education and other services as evidence that inflation is alive and well, they have made the elementary error of confusing a change in relative prices with a change in the overall price level, which is how inflation (or deflation) is correctly measured."

Now I don't know where this guy lives, but over here in my neck of the woods when things go up in price, then this is de facto price inflation, as these things were already included in the "overall price level" yesterday, and they are in the "overall price level" today, and the difference between the two days is that, today, prices are higher.

And the fact that there is nothing you can name that is NOT higher in price today than it was yesterday would indicate, and I am just throwing this out for discussion, that the "overall price level" is higher, too, and thus, and it just tickles the hell out of me to use the word "thus" like this, prices must be, you know, higher overall. And for us bozos out here buying things, we stupidly look at higher prices tags and think that it looks like inflation, it smells like inflation, and we conclude, because we are, as I said, bozos, that it IS inflation.

Alan Greenspan, perversely ever-anxious to prove that he is probably the worst Fed chairman that the United States has ever installed in that post, or as the waggish Addison Wiggin at the Daily Reckoning cleverly put it, "Alan Greenspan - rebel without a clue," went to Capitol Hill to testify before the Joint Economic Committee about how there is no inflation, and that labor costs are not surging, and that simply everything is just peachy, thanks for asking. This is important, because, so the theory goes, it is us grunting and sweating laborers who take our pittance in compensation and go out buying things. And when we have rapidly accelerating wages, we mindlessly go out and accelerate our buying, and that this accelerated buying makes prices rise, because producers (the supply) cannot produce fast enough to keep up with our profligate, wanton consumption (the demand). But if labor costs DO start rising, not to worry! He figures that businesses can absorb those higher costs somehow, and without raising their own prices, because their profit margins are so high. My head spins! It makes me so dizzy that it makes you want to throw away those travel brochures to Bizzarro World, which is where I assume Mr. Greenspan comes from.

Caroline Baum of Bloomberg quotes a guy named Victor Zarnowitz, who is a member of the National Bureau of Economic Research's Business Cycle Dating Committee, and who says "Money is important for inflation." So far, so good. Then he says "Demand is important." Well, duh! And then, when our guard is down and we are reaching for another beer and flipping around the remote to see what is on the Cartoon Channel on TV, he hits us with "Cost-push doesn't create inflation." At that, something snapped in the Mighty Mind of the Mogambo (MMM), and leaping atop my comfy recliner chair I screech that I, the Mogambo, am here to tell you and this Zarnowitz character that higher labor costs MUST push profits down, and then the phone starts ringing and it is the stockholders screaming bloody murder at the drop in profits, and so we raise prices of the firm's output to restore our profits. Why? Because money-grubbing swine like you and me and the aforementioned stockholders actually make it a point to grind up the proletariat workers in the cogs of our capitalist machinery for the express purpose of making, and you might want to write this down because, for some reason, it has escaped the notice of a lot of people like Mr Z. here, profits.

And if labor costs are higher, leading to necessitating higher prices for the firms' output, then it makes somebody else's input costs higher (unless we are selling to the final consumer, who merely find that their final costs are higher), and then THAT firm has both higher costs for inputs and their own higher labor costs, and then THEIR phones start ringing with THEIR shareholders screeching and vowing death threats, and it makes them need to raise THEIR prices, too, and pretty soon prices all over the place are higher. And so I conclude, and you can tell by the way I have taken my crayons and drawn a little diagram with lots of random lines and arrows and things, that cost-push pressures DO create inflation, because the higher prices that they are paying ARE price inflation to start with!

I recently had lunch with Phil Spicer, who is one of the big dogs at Central Fund of Canada, and while we were waiting for the waitress to confer with the manager as to whether the law requires that she wait on me or perhaps there was some loophole where she could get some burly guys from the kitchen to throw me out because the whole idea of waiting on me gave her the willies, he commented that the sentiment indicators of silver and gold bulls had reached the elevated, over-bought levels where a pullback was inevitable, and sure enough, it had: gold has not been doing that well recently. "But," I said, "the forces of Nature being what they are, the force of economics being what they are, and cycles being what they are, and people being what they are, and history being what it is, there has to be another big up-wave in the future, and one of these days it will be huge. As huge as my ego! Maybe huger!"

One of the things that he was recently exercised about, and he suggested this as a title for my article, is that "The Looters Are Everywhere," by which he obviously meant that it was time for me to finally pick up the check for a change and to stop sponging off him all the time like he was made out of money or something. Seeing the handwriting on the wall, I naturally suggested that I noticed that we both could stand to lose a few pounds, perhaps by switching to a liquid diet, and by the way, a refreshing and nutritious drink could be made by stirring ketchup into a glass of water, and I was actually in the process of requesting two glasses of water and some extra packets of ketchup when the conversation abruptly changed course and we ended up actually ordering food for which somebody, and all eyes were on me, had to pay.

Being the intelligent and talented multi-tasking guy he was, he was speaking on many levels, not only referring to what he was about to do to my wallet, but also probably referring to a lot of other things, namely that the financial statements of companies have been hollowed out by lying, corrupt executives, lying and corrupt government agents and regulations, and corrupt lawyers are all eating us all alive, and how the government is out to get me, and then he says "No, they aren't" and I said "Yes they are," and he said "No, they're not" and so naturally I hit him on the shoulder and said "Yes, they ARE, dammit!" and then he winced in pain and conceded that all he knows for sure is that I am out to get HIM, and so I say "See there? What goes around comes around, and so I was right! They ARE out to get me!"

An interesting twist was that he gave me a book to read, mostly because it has some cartoons in it and he knows how much I love editorial cartoons. The name of the book is "The Hyperinflation Survival Guide" by Gerald Swanson and sponsored by Figgie International. The book was written in 1989, and was commissioned by the Figgie people as an investigation as to how companies can plan for operating in a highly inflationary environment, as that was what was raging in South America at the time, and it was causing all kinds of mischief.

The funny part, well not funny in a "ha ha" way but in an "interesting irony that makes the Mogambo toss and turn in his sleep and disturbs his wife with all that moaning and groaning and maybe that is why she is grumpy all the time but there is probably a lot more to the story than that" kind of way, was that the first page of the book-- the very first page! --has a graph of U.S debt from 1780-1988. For the first million years or so of America, which shows that I can't understand calendars, either, the level of debt was pretty flat. This indicates that America still had a functioning educational system and that people were cognizant that getting into crushing, un-payable debt was a really dumb idea. Then sometime in the '60's the debt starts rising, and started going parabolic. Then in 1989 these guys wrote this book. And then the line goes really parabolic, which means going straight up, as Ralph Kramden would say, "Right to the moon, Alice!" At the top of the graph, at the tippy-tip top, at the $13 trillion level, there is a little box that says "This is what the debt level will be in the year 2000." Hahaha! We should be so lucky! The current estimate of U.S debt is about $34 trillion!

Perhaps this has something to do with Chris Temple writing "America's economy has for several decades been the world's largest. U.S. consumers, though they have dangerously built their seeming prosperity on mountains of debt." He extrapolates beyond this, however, and adds that we " have nevertheless contributed to economic activity elsewhere by consuming so much. It can truly be said that, especially in recent years, Americans have virtually carried the entire world on their backs."

And why have we run up such a large debt? For this we turn to the witty and handsome Bill Bonner, he of Daily Reckoning fame, who says we fell prey to a big lie. "The big lie has been that people can live beyond their means - forever. People would not admit that they wanted 'something for nothing,' but hardly anyone expected anything less."

Getting something for nothing is a stupid idea, and so, moving right along, I proudly announce that in my current bid to win a Nobel Prize, I take this chart of the growth of debt, which involves absolutely no actual work by me and that is a big plus as far as I am concerned, and turn it upside down. Now the chart shows a line that starts at the top of the graph from 1780 and runs along the top 7/8 of the way across the whole page and then, starting about 1960, starts plunging. Around the year 2000 it falls to the bottom of the page. I take a blue crayon and re-label this upside-down chart as "Graph of the Collective Intelligence of America," put it in an envelope and send it off to the Nobel Prize Committee. I'll keep you posted on the results.

Jay Taylor of Taylor Hard Money Advisors says something along the same lines, and writes, "I think it is safe to say that Americans in our 200+ year history have never lived so irresponsibly as we are now." So which is it? Stupid or irresponsible? As with a Chinese menu, it is a little from Column A and little from Column B, as it is hard to imagine such irresponsibility, over such a long time frame, without massive amounts of raw stupidity.

And when you look for the reason why we are so unbelievably, irredeemably stupid, you need look no further than the ridiculous, dysfunctional school system of the United States, which is an abject failure when its students are compared to every other developed country on the planet, as our school system is apparently peopled by zombie morons who actually believe that having a big, compassionate heart will compensate for all their sin of no longer providing any real education. Stupid in school, stupid in money. It makes sense.

Anyway, getting back to the book, "The Hyperinflation Survival Guide," one of the very interesting things is that the author notes that in 1971 President Nixon took the extraordinary step of imposing wage and price controls to combat a roaring inflation. How high was this inflation rate that was so dangerously blazing? 4.7%. The only other time when wage and price controls were forced on the US economy was in 1951, when President Truman imposed them to beat down an 8% inflation. Read this paragraph again . Now you are prepared to answer Question One on your SAT's: "Compare and contrast how a 4.7% inflation in 1971 was alarming enough to force emergency dictatorial command-and-control powers over the economy, with what is happening now, when the inflation rate is almost exactly the same." Now think back to where the Mogambo has measured the low level of intelligence in America. Makes sense, doesn't it?

In a Business Times-Asia editorial "Don't Bet Big On Wall Street Bull," they write that "The reality is that a fast-depreciating US dollar, a ballooning American domestic debt, a record high trade deficit, meagre levels of capital spending, marginal productivity increases, rising unemployment, a possible bubble in US real estate and the increasing likelihood of rising inflationary pressures do not provide a stable base on which to build a sustainable bull market."

I raise my hand and respectfully note that he forgot to mention falling real, inflation-adjusted wage rates, which I think is pretty damn important, too. But the author ignores my helpful suggestion, and I sit back down in my chair in a huff, and I proceed to cross my arms and sulk in my chair like the whining little snot that I am, as he continues "Moreover, there is justification in the notion that a recovery built almost entirely on consumer spending, tax cuts and cheap money is not sustainable." Talk about your understatement! Hell, NO economy can be based entirely on these things, and there has never been any moron that ever lived, until the Fed, that would dare to enunciate such idiocy! Building a viable economy by borrowing and spending money on an alliterative gadgets, geegaws and gimcracks? Hahahaha!

Marc Faber, and if you don't know who Marc Faber is then you haven't been around economics very long, says again and again that there is a coming boom in commodities and oil, especially oil, and in fact he actually says that while there is some room for doubt about most commodities, a "very bullish long-term fundamental case can be made" for crude oil.

He then goes into a lot of that tightly-reasoned argument and factual enumeration about why all of this is so, but I am not going to get into that right now, mostly because I am too lazy, and I have said it many times before, and he has said it many times before, and if you are so unconcerned that you will not even go and look it up yourself, then perhaps that says something ugly about YOU, so leave me alone!

Anyway, he did say something that is interesting, if you think that impending doom is interesting, and lately my own impending mortality is all I dwell upon anymore. He says "In the past, rising commodity prices have led to an up-turn of the historically well-documented War Cycle, as nations became concerned about sufficient supplies of vital resources. Thus, an increase in geopolitical tensions is only a matter of time - another negative for equities."

David Bond, who covers mining stocks for several publications, has underscored this very idea. He says "Speaking of history, World War III was declared politely enough last week. The declaration was politely reported in the very polite Platts Metals Week's extant edition. It seems Europe doesn't have any feed for its copper, steel and aluminum smelters. According to Platts, the European Union has asked Russia to abolish the Kremlin's strict controls on the exports of copper, aluminum and steel." It seems that the a burgeoning Chinese economy has immensely increased their appetite for commodities, especially industrial metals, and this has produced a scarcity of all kinds of things. And then I remember that Japan attacked Pearl Harbor to make us stop interfering with THEIR acquisition of industrial commodities. Something clicked in my mind, but I don't know what. I don't want to know what. I just know that I am scared.

Three headlines that appeared one after another on the Prudent Bear site last Thursday sent me into paroxysms of laughter, so much so that I became weak from yukking it up and got dizzy and started coughing and then people around me thought they'd try to help, so they started pounding me on the back, and when that didn't work they started hitting me on the back with a sledge hammer, and when that didn't seem to help then somebody got the idea that maybe a few whacks to my head with it would help and, well, I don't want to get into that because I have a splitting headache for some reason, but the three headlines were "Greenspan Says U.S. Growth Yet to Produce Inflation (Bloomberg)", followed by "March Producer Prices Rise 0.5% (Bloomberg )" and "Greenspan: Rate Will Eventually Rise (Reuters)." I am trying not to break out into laughter again because I notice that everybody now has these damn sledgehammers by their desks, but on the planet that I come from this humorous juxtaposition of headlines would be regarded as very, very funny.

The Aden sisters, who write the Aden Forecast, have taken a look at the recent reversal in
gold, and say this is just one of the wiggles in the line of prices, and that the fundamentals for gold going higher are still in place. These fundamentals include the decline in the dollar, budget deficit, trade deficits, a war in Iraq that is getting more and more expensive, terrorist threats, and, to cut the list mercifully short, abnormally-low low interest rates. They say "The bottom line is, nothing has really changed. Gold's major trend, which is the most important, remains up and the dollar's major trend is still down. And with inflation now starting to perk up, we believe these major trends will continue since inflation is very bullish for gold."

Switching to a technical perspective, they write "One simple tool we've found to be extremely valuable over the years is
gold's 65-week moving average because it's been very good in identifying gold's major trends. Currently, gold is above its moving average and it has been since 2001. This tells us gold's major trend is up and that'll continue to be the case as long as gold stays above the 65-week moving average, which is now at $375."

Ken Gerbino of KenGerbino.com wrote something that is posted as the Essay of the Month on the Investment Rarities site. The question posed was "Where do you stand on the Inflation-Deflation debate?" Mr. Gerbino's answer was as pithy as they come, and he replied "There has never been an economy or country ever that has had a multi-year deflation with a paper money system. End of argument." But I note with my usual sneer that there are plenty of examples of economies that have had multi-year inflations with a paper money system, and lots of them that have had multi-DECADE inflations with paper money systems, too, and I would be remiss if I did not point out that there are lots of them that were debased to the point of ruination by inflation.

Gary North of Reality Check has an opinion about that too, and says, "I have been listening to a handful of deflation predictors -- the same people -- for over three decades. Their arguments do not change. The inaccuracy of the prediction also does not change. Using the Median CPI as the standard, the prediction has been accurate for three months out of 435 months since January, 1967."

Kurt Richebächer is pretty pessimistic about the future, because he has looked at history, too. He notes "Not one single credit- and debt-driven major asset bubble has ever ended in a 'soft landing.' " Not content with merely predicting a "hard landing," he says that "America's bubble economy is the worst of its kind in history." Which, again using history as a guide, I figure means that our landing will be so hard that the landing gear will collapse, tearing a big hole in the runway, and as the crash team converges on the scene and looks into the pit they will see nothing but flames and smoldering wreckage, and if they cock their ears to the wind, they will hear me and Doctor Richebächer laughing "I told you so!" Well, maybe not him, because he is such a class act. But me anyway.

Bill Buckler, of the Privateer newsletter, writes in a similar vein, and says "When the largest economy on earth is so far out of any real economic balance that it requires an enormous budget deficit, an even bigger credit expansion, and a huge monetary inflation to the tune of 25% of GDP, an equally enormous recession lies just below the horizon. This borrowing orgy is only postponing the arrival of that recession."

Speaking of
gold, Howard Ruff, who at one time could influence the markets by merely clearing his throat, has a new book out, "Safely Prosperous or Really Rich." In his own blurb he refers to himself in the third person, and says "Ruff first issued a now-famous precious metals buy signal in 1976 when gold was under $180/oz. and silver traded at less than $2/oz. In 1981, three years following the publication of 'How to Prosper,' he issued a likewise-famous sell signal on gold at $750/oz. and silver at $35/oz. and subsequently stayed bearish on gold and silver for more than two decades." Now, in his new book, he is wildly bullish on gold again.

For an example of how bad things are in the economics biz, very weird and scary things do not come only from Alan Greenspan and Ben Bernanke and those guys in the Federal Reserve. If you want to be scared out of your mind as regards "weird and scary things," check out the Economic Beat column in this weeks Barron's. It is penned by a guy named David Ranson, who is president and head of research at an outfit named H.C. Wainwright & Co. Economics. The title of his article is "A Lovely Deficit" with the sub-head "Three cheers for the trade imbalance." I never thought I would live to see a title like that, and so I sat back and got ready to be educated, so that in the future when people say to me "You are so stupid, you don't know anything about anything," then I can say "That's not true! I know that deficits are lovely!"

He starts of by acknowledging that "According to popular understanding, a wide deficit reflects the propensity of an irresponsible American population to consume more that it produces or to spend more than it earns." To this I say, yes, that is EXACTLY my understanding. If this weren't true, then there would not even be a trade deficit to start with.

But, and this is where it starts getting weird, he tells us that we are wrong. He says that large trade deficits are not some horrible thing, but indeed are, and I quote, "as friendly and health-promoting as a beloved pet is to your family." This will certainly be fascinating news to my dog, as well as the IMF, the World Bank, the BIS, the OECD, the direct experience of every country for the last 3,000 years and the authors of every economics textbook I have ever read, all of which reached the exact opposite conclusions.

He correctly notes that every transaction "has two sides. The important question is which comes first: the international flow of capital, or the flow of goods and services? Which is the cause and which is the effect?" He says that the capital flow is first, and that foreign investors are initiating the trade deficit by first investing in the USA. He even goes so far as to say that "The balance of trade is driven by investors, not consumers."

Well, I got some BIG news for this guy. There might have been a time when this was true. But those days are long gone So he is 100% wrong, right off the bat, and doubly so because the modern American trade deficit really has only ONE side. Namely, we print up and borrow money to buy their goods, then they use the money to buy us up as an "investment," thus recycling our own money back into our economy. Today, if the consumer did NOT come first, then those foreign investors would not have the damn money to invest in the first place!

As if that wasn't enough to send me to the medicine cabinet to gulp down handfuls of powerful tranquilizers, he goes on to say, and I know that you are going to love this, that "The trade deficit is a consequence of a successful economy in the present and not a menace to economic growth in the future. Countries with deficits are growth opportunities." Huh? Stunned, I can only shake my head and exclaim "Wow! This is the first time that I have heard this!" So, extrapolating that silly argument, we should immediately stop exporting any goods and services at all! We should launch directly into 100% import consumption! Because that would mean that we are more successful! Apparently William Greider at The Nation don't agree, as he writes "Historically, when a mature economy suffers perennial trade deficits, it is usually understood as a sign of weakness, especially if the deficits keep getting larger." And, hitting a little closer to home, in the very same issue-- the very same issue! --of Barron's, we have another guy name Raj Gupta, who manages RHG Capital, addressing the current-account deficits, and who says that it is a "serious imbalance," and that it could cause "the dollar to fall a lot further."

And the other side of the same coin is that those loser countries that are showing trade surpluses are NOT "successful economies"? Like I said, wow! Where in the hell has MY head been all this time, huh? So let me get this straight because I just know that somebody is going to question my understanding of this important new concept: Foreigners are making money and accumulating investments in the USA, and as a result are growing wealthy, but they are NOT successful? But we gluttonous Americans are going into unfathomable debt to consume these imported things and selling our assets to these foreigners, and as a result we are becoming less wealthy, and yet, according to this, this, person, and you can tell by the way that I am spitting out that word between clenched teeth, this shows that we ARE successful? Is that what you are saying?

Like I said, weird and scary. Actually, beyond weird and scary. Like, loony toons.

Steve Saville of SpeculativeInvestor.com, is one of the more savvy dudes in this biz, and has recently penned an essay responding to the current idea, by George Paulos and Sol Palha in their essay "A Day Late and a Dollar Short," that the massive debt is actually a huge short position on the dollar. Further, the authors themselves admit that there is no limit to the amount of debt creation, and say, "Because of our fractional reserve banking system, there is a virtually unlimited ability to create new dollar debt, regardless of the actual quantity of reserve cash available. The limiting factor for debt is the capacity to make payments rather than the amount of cash in the system."

In other words, if you cannot make the required payment on your debt, then the easy Greenspan solution is to borrow some more money to make the payment. And next month, if you are again short of funds to pay the bigger bill, borrow some more. Mr. Saville acknowledges that and remarks, "If US household debt represents a short position on the US$ it is a short position that will never be covered. And nor will there ever be a serious attempt to cover. That's because the survival of the current monetary system relies on the continuing expansion of credit, that is, it relies on the continuing expansion of the US$ short position."

As if that wasn't scary enough, he sounds suspiciously like Mogambo in hyper mode as he goes on to note "In a nutshell: there is nowhere near enough money in existence to pay-off the current debt and there is nowhere near enough new money created each year to even pay the interest on the debt." Trying to extend and expand this ridiculous money and credit expansion explains why Greenspan, and the GSEs, and the Treasury, and the Congress, and Wall Street, and the banks, and everybody even tangentially connected to money and credit is working overtime to keep this absurd Ponzi scheme going. It is too late to turn back.

And besides, look on the bright side! For all we know, after all these centuries of everybody who ever lived trying, and miserably failing, to come up with a solution to this very problem, maybe somebody finally will. But I don't think so. Ugh.

---Mogambo Sez: I again quote William Greider of The Nation, "Unless the historic meaning of debt has been repealed, no nation can borrow endlessly from others without sooner or later forfeiting control of its destiny, and also losing the economic foundations of its general prosperity."

Or, as a Simpsons character named Arnie Pie famously said, although in a different context, "It's a silent testament to the 'Never give up' and 'Never think things out' spirit of our citizens."

April 27, 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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