A hard rain's a-gonna fall
...the angriest guy in economics
May 5, 2004
Without even opening my eyes I can tell you that the Fed increased
Total Fed Credit last week, because that is what they do. The
only question is, how much? For this I look in Barron's, and
I simply read the amount, namely $5.7 billion. The foreigners
with holdings of American government debt, and deposited at the
Fed, actually decreased their huge wad of those assets by $1.8
billion for a change. Over in the banks themselves, things aren't
going so hot. But they still managed to soak up, amazingly, $15
billion in government debt.
This is the perverse nature of banking revealed in all its glory.
Even as the Fed meets to decide who lives and who dies (answer:
they live, you die) and how soon they can manage to bring interest
rates back up to within visual distance of normal (answer: sometime
between now and eternity), the banks are, and you will notice
that my eyebrows are arched in disbelief, buying debt! They are
buying this debt even though they know, with mathematical precision,
that whatever they buy will be worth less money pretty damn soon,
and probably measured in seconds, minutes, hours or perhaps,
at the outside, days. They literally know they are buying a loser
investment before they are buying it! And yet they do it!
But they are not the only ones, of course. Those trillions of
global and domestic dollars that went into buying our debt over
the last few years and last few decades are all going to be worth
less very soon, handing each and every one of those dimwits a
paper loss. But don't cry for them just yet, as most of them
have probably managed to sell out at a profit and stick that
load of losers into YOUR retirement account! Hahahaha! Welcome
to the real world, sucker!
I saw another of those dreadful shows about why the pyramids
look like they do, and how the universality of this building
plan showed up all around the world is some evidence of communication
between the cultures, countries, and continents, which is a nice
piece of alliteration and I didn't even plan it! It just came
out! I don't know how I do it, or even why, mostly because the
big-shot mental health professionals assigned to my case keep
assuring me that "You don't want to know. Trust us. We're
professionals." The fact is that if you want to build higher
and not have it collapse, then there is no other shape that is
possible. They must have tried squares, because their houses
were square, so obviously they had tried it. And obviously it
had failed, as it must. So what to do? Round? No, too many problems,
the most important is that round rocks tend to run away downhill,
since they did not have a United States Congress back in those
old days to solemnly pass laws against that insidious and terrorist-influenced
Force of Nature, Gravity. If they did take the precaution of
electing preening morons to their government, like we have, they
could have made it illegal for the Forces of Nature to operate
within fifty feet of a tall structure, or within a thousand feet
from a school just to show you that we are always "Saving
So round is out, too. How about triangular? Nope, because the
second layer of triangular stones would have all the weight concentrated
at a point, which will break the stones. Ergo, that is why all
tall structures are pyramids, on a square base, made with rectangular
With pyramids, it all comes down to one thing; gravity. The same
goes for economics. You can try and make an economic structure
out of many things arranged in many ways, but it is one thing,
inflation, that will bring it down. And that is why I am so fixated
on inflation. Which is a nice segue into where, on the Bloomberg
new site, we read "The Personal Consumption Expenditures
price Index, a measure of inflation watched by Greenspan and
other policy makers and tied to spending, rose at a 3.2 percent
annual pace, the fastest in three years. Excluding energy and
food, the core index rose 2 percent at an annual rate, the biggest
rise since the third quarter of 2000."
But these figures are not adjusted for inflation. So what was
that deflator? "The GDP price deflator used to adjust the
figures rose at a 2.5 percent annual rate compared with a 1.5
percent rate in the fourth quarter." So adjusting for the
change in prices makes the picture a lot less rosy. And remember
also that prices are chained, and the inflation measure carries
around with it all those low inflation costs from months and
months ago. "Once upon a time, bread was cheap, because
they had just invented bread. So we are keeping those low costs
in the inflation gauge, even though they have no meaning whatsoever
to you bozos in the checkout line at the supermarket today."
And these inflation figures are without those two pesky components,
food and energy. What is the inflation rate of THESE two components?
Nobody likes to talk about them, but oil hit $39 a barrel this
morning, and I don't pay any attention to food prices any more,
as all I can afford to eat is cat food, which is, in case you
were wondering, going up, too. An article in the Christian Science
Monitor was "Inflation Hits the Family Dinner Table,"
by Ron Scherer, who writes "In the category most families
would relate to - food and gasoline - prices rose at a 5.3 percent
annual rate." But even this may be too low, and I've heard
a 7% figure bandied about, which is probably too low, too, seeing
as how gasoline alone is increasing about 1% a week, and every
time I turn on the TV to get the news, some cute little thing
is looking into the camera and saying "Gasoline prices are
hitting new record prices at the pump" with her mouth while
her beautiful eyes are saying "I want you, I lust for you,
I am burning up with passion for you, Mogambo!"
And it just keeps getting worse. No, not my incapacitating paranoia
and repulsive personality, but this inflation thing. Bloomberg
further reports that "Benefit costs -- which include severance,
health insurance, vacation pay and referral bonuses -- rose 6.9
percent over the past 12 months, compared with a rise of 6.1
percent in the year-earlier period. U.S. costs for labor jumped
1.1 percent in the first quarter, as benefits costs rose the
most in more than two decades." Two decades!
In a similar vein, "The employment cost index, a gauge of
labor expenses for businesses and government, had climbed 0.8
percent in the fourth quarter, the Labor Department said in Washington.
Benefit costs rose 2.4 percent from January through March, the
most since the third quarter of 1982, and wages and salaries
rose 0.6 percent, the government said."
And we can thank Greg Ip ("Thanks, Greg!"), a columnist
for the Wall Street Journal, for helping us identify the culprits
in this horror. He posted an interesting article in last Friday's
edition, entitled "Fed May Have Acted on False Alarm,"
wherein we read that the Reserve Bank of Atlanta concludes that
"most of the drop in inflation between 2001 and 2003 was
due to unusual behavior of residential rents and used-car prices
indirectly caused by low interest rates."
So, once again, the Fed acted like clueless chumps, and like
ignorant children randomly playing with their little computers
and their precious little models, they incorrectly and stupidly
overemphasized how the Fed idiocy of desperately pounding down
interest rates to negative real rates affected things. Mr. Ip
concludes that "If the study is correct, underlying inflation
may not be as low as it appears." Well, I have no idea if
the study is correct or not, but if it comes from anyone connected
with the Federal Reserve, then I am pretty sure it is chock-a-block
full of stupidity, lies, and outright fraud. But I don't need
no stinking Fed study to tell me that inflation is higher than
they say it is, as I already have whole armies of snotty checkout
clerks who remind me of that every time they hit the "total"
button on their cash registers.
The Ip article goes on to say that "The study, which made
no inferences about monetary policy, doesn't represent mainstream
Fed thinking. Chairman Alan Greenspan and most of his fellow
policy makers consider productivity growth and the degree of
unused slack in the economy more important to the course of inflation
than the behavior of individual prices." Huh?
Please permit me to interpret this for you. In plain English,
the majority of the power-hungry bozos at the Fed are in total
agreement that prices going up does not mean that prices are
going up. They have also decided that the blazing sun being directly
overhead does not mean it is daytime, and by their calculations
the correct time is three minutes past midnight. They further
conclude that since there is some slack in the economy, the result
of idiotically massively overbuilding during the boom years,
then prices should not have gone up. And since they should not
have gone up, then they did not actually go up! And even though
they did, of course, go up, this just means that prices are rude,
and Miss Manners thinks that you should just ignore rudeness.
So they ignore higher prices, bringing us back, once again, to
their official announcement that prices are not going up, even
though prices are going up.
Of course, what is NOT mentioned by the same dimwitted "mainstream
Fed thinking" is that they do not consider gigantic, mind-blowing
creations of money and credit to be important to the course of
inflation either, especially as pertains to prices, which is
somehow, weirdly, perversely, not important to them at all. If
there was ever a reason to gather the townspeople together and
follow the Mogambo to march to Washington DC as an unruly mob
singing witty and catchy tunes about how the brave proletariat
worker will arise in glorious revolution to throw off the shackles
of the hated ruling class and take our Flaming Torches Of Freedom
to the Federal Reserve and to drive those idiots out into the
street and give them a good thrashing, it is their bizarre insistence
that price inflation has nothing to do with prices rising. It
is beyond insane to even say such a thing. Beyond Orwellian!
Gary North and the Daily Reckoning people sent an e-mail over
the weekend, in which they issue what they term "An urgent
warning." I am not exactly sure what really happened, because
as soon as I saw the words "urgent warning" I immediately
ran into the Mogambo Bunker and slammed the door shut behind
me like the sniveling little coward that I am. This is because
when somebody issues me an urgent warning, it is usually the
neighborhood kids telling me that those pesky unmarked black
helicopters are circling over my house, or a friend is phoning
me up to tell me that my wife has now confirmed one of her suspicions
about me, or something like that, and what links all of these
things together is that pretty soon now somebody is going to
be whacking me on the head and I am going to be saying "Ouch!"
But this urgent warning is of a completely different nature.
They start off with the reason for the warning, namely "Fueled
by artificially low interest rates - and the dangerous policies
of Fed Chairman Alan Greenspan - millions of Americans are about
to be blindsided by an event more destructive than the Stock
Market Crash of 1929." Well, nothing new there for me, as
it is just the kind of thing that I have been raving and ranting
about for years, and now that you mention it, I cannot remember
a time when I was NOT ranting and raving about it, even though
official records are spotty during that period of my life when
I was in grade school, but newspaper reporters always note that
everyone still remembers that I was loud and obnoxious angry
misfit loner, and that all my old teachers agree that there was
"something definitely wrong" with me.
But they continue with a time frame that is more restrictive
than my nebulous "one of these days when you least expect
it," forecast. They say "This nation's enormous consumption
bubble - created entirely by the United States government - is
in its final days. In fact, the dominoes have already begun to
fall in a dramatic event that will come to a head as soon as
May 4." I look up at my calendar, and I note with some satisfaction
that Miss May is smiling with a come-hither look and is making
me forget the now-departed Miss April, but my little reverie
is shattered when I note with alarm that TODAY is May 4! Gadzooks!
And although the destruction of everything that we hold near
and dear may not necessarily be today, they assure us that it
is almost a certainly within three weeks. Three weeks! A gutsy
Of course, Marc Faber has been saying the same thing a long time,
too, and he said it again just this last week: "A painful
resolution of the current asset inflation is inevitable."
So, in slightly different words, he is saying the same thing,
but without the short time frame.
And what is this urgent warning that may descend upon us as early
as today? Nothing less than, and I quote the e-mail, "The
Total Destruction of the U.S. Housing Market." They note,
and they want me to note, and they want you to note, too, that
"the bottom is about to fall out of the U.S. housing market."
They figure that "A total of $2.5 trillion- or more - will
be wiped away in a matter of days." Wow! How they figured
that now is the time for all this to happen is beyond me, but
they say they have.
It may have something to do with the same thing that Tony Sagami
of Safe Money Report is saying, who writes that we will soon
be getting, "A new wave of disappointing results from big
name tech companies." And if there are two things that idiot
Americans believe, it is that technology stocks always go up
in value and that houses always go up in value. So if tech stocks
are hinting that they are all going to be erupting in flames
and incinerating everybody who owns shares in those companies,
maybe houses will be next. Who knows?
Or maybe it has something to do with Victor Hugo, an analyst
at GoldSignals, saying "Long term technicals on the Dow
Jones Industrial Average suggest that the last three weeks have
been setting up scope for an aggressive sell-off soon."
And since we have collectively re-mortgaged our houses and invested
the extracted equity in stocks, then a stock market sell-off
COULD have deleterious effects on the housing market.
Or maybe it has something to do with Mr. Hugo also going on to
forecast that "Momentum and cycle evidence say the dollar
is merely taking a breather before resuming its downhill trend
- 15% or more lower in the next year and perhaps still weaker
after that." And a weaker dollar means lower purchasing
power, and combining that with stagnant wages, the idea of continuously
bidding up overpriced houses seem preposterous.
Or it may have something to do with James Grant himself also
noting in his Grant's Interest Rate Monitor that the US dollar
is a piece of overvalued crap, as he writes "The pell-mell
purchase of dollars for yen, renminbi and other Asian currencies
constitutes the largest exchange-rate manipulation in the history
of the world," and that a massive devaluation of the dollar
is in the cards as soon as those Asians decide to stop acting
like trusting jerks.
Or it may have something to do with Christopher Mayer commenting
on the same thing, namely how Asians are buying mountains of
dollars to effectively devalue their own currencies, all for
the sake of stimulating their imports of goods and services to
the USA, and then him saying "The end of Asia's vendor-financing
scheme will herald unhappy times for the holders of many U.S.
financial assets, but it will likely reward those that have hedged
or sold their dollars for assets likely to rise against the dollar.
The biggest casualty will likely be the U.S. housing market."
H.A. Scott Trask, always good for an informative and entertaining
read, had another of his fabulous essays on the Mises.com site,
this one entitled "Inflation and the French Revolution:
The Story of a Monetary Collapse."
He notices a lot of eerie parallels between modern America and
18th-century France. "As in so much else, the French revolutionary
regime (1789-94) was the precursor of the centralized, totalitarian,
managerial, pseudo-democratic despotisms that now reign over
the West. It is also a reminder that mass democracy and inflation
go together, as surely as thunder and lightning."
In those old days, he observes that the French government "was
spending enormous sums on public works projects in Paris and
for bread subsidies." In modern America, we are likewise
spending large sums on public works projects (e.g. the huge new
Transportation Bill in Congress) and bread (Medicare, Medicaid,
welfare subsidies). So make another mark in the margins to denote
"another Twilight Zone eerie parallel."
But not all French people were morons. "Many delegatesopposed
the measure on economical principles. They argued that the new
currency would depreciate, that it would be followed by additional
emissions, further depreciation, and that the calamities of John
Law's Mississippi Bubble (1717-20) would be re-enacted across
republican France. Their objections and warnings were brushed
aside." So far, it sounds EXACTLY like the USA, just as
the Mogambo is similarly brushed aside, and usually very brusquely
too. He goes on to say "The enthusiasts essentially argued
that economic laws did not apply to France." This is really
eerie, as this is exactly what the moron economists running roughshod
over economics and common sense here in the USA, and in the central
banks all over the freaking world, are all saying, too. Even
as we speak!
But to show how the modern economists are one up on those old
French fools when in comes to sheer nerve, today our economists
all proclaim that there ARE no economic laws, and that economies
do as they are told, because everything is like a big, interconnected
machine, and when you turn a fiscal knob or adjust a monetary
lever, the result is automatic! How's THAT for hubris?
So, anyway, the French kept on issuing money. "The consequences
of the second issue were just as the unpopular economists had
foretold: depreciation in their value, rising prices, feverish
speculation, complaints about a shortage of money, calls for
more, the prostration of commerce and industry, inordinate consumption,
and declining savings." Man, this is getting too weird!
All of these things and more are exactly, and note that I said
EXACTLY, what are happening right this very minute! And, again,
to show you what chump-change pikers those old frogs were, while
they were merely speculating on stocks, we are also speculating
on our very houses and our retirement monies, too!
Of course, the rest of the story is that France collapsed under
the deadweight tonnage of the ignorance and stupidity of THEIR
central bankers and government doofusses, while we are still
in the process of collapse. The inevitable result following a
collapse is the rise of the military strongman, who promises
to make things right through sheer force. In the case of France,
it was Napoleon.
But Napoleon did some good things for France. For one, he invented
a delicious pastry, the creme-filled Napoleon. For another, "It
took Napoleon to restore hard money to France. As First Consul
(1801), he introduced the 20 franc gold
piece and insisted that from thenceforth soldiers, contractors,
and merchants would be paid only in gold,
or its equivalent. The paper blizzard was over. Napoleon would
go on to conquer most of the Continent while on the gold standard." You never hear of any scholarly
paper where the guy says, "Freed from the confines of real
money, he took a paper, fiat currency and went on to conquer
Mr. Trask concludes with "His success gives the lie to generations
of scholarly and academic excuse making that for all its pitfalls
the assignat 'saved' the Revolution. On the contrary, it helped
bring on the Terror and set French progress back a generation.
Will the fiat dollar one day do the same to America?" A
better question is "WHEN will the fiat dollar do the same
Steve Forbes reviewed the new book on Alexander Hamilton entitled
"Alexander Hamilton" by Ron Chernow. It is probably
a real good book and all that, but if they want me to read a
biography about somebody, even old Alex, then there has better
be some good stuff in it, like "How to Score with Chicks"
or "Making Powerful Aphrodisiacs from Ordinary Kitchen Cleaning
Products" or something like that that people can really
But Mr. Forbes hits one nail right on the head when he writes
"The only thing missing in Mr. Chernow's biography is a
proper discussion of Hamilton's decision to put the dollar on
the gold standard where it remained - except
for the Civil Was period -until 1971. The gold
standard played a critical part in America's impressive growth,
since it saved the collar from Latin-American or French-style
inflations. Currency debasement undermine entrepreneurship and
the rule of law."
Brazil raised minimum wage by 8.3%. Bloomberg reports that "Brazilian
President Luiz Inacio Lula da Silva, seeking to keep the budget
deficit in check, raised the minimum wage by less than one-fourth
the amount unions were demanding, prompting the largest civil
servants confederation to call a work stoppage."
Now, you and I would probably love to have a nice 8.3% raise
in our wages, although you are so smart and well-paid that you
are probably having trouble spending all of that money you earn,
and I am the only one looking in the neighbor's garbage cans
for things to sell at a garage sale. So why are the Brazilians
so grumpy with such a nice raise? Inflation, you fool! It turns
out that the 8.3% raise is less than last year's 9 percent inflation
rate, and so prices went up more than their wages. This means
they had a falling standard of living, just like we are having
right here in the USA, as prices rise faster than wages. And
let's not forget that these Brazilians got a 17 percent minimum
wage increase last year, which was also eaten up with higher
prices, leaving them worse off.
A doofus named Gilberto Cordeiro, who is the head of the huge
Federal Civil Servants' Confederation, said "Shame on this
government." He wants to mobilize his union members to hold
a 24-hour stoppage on May 10 to protest the paltry increase.
He hits the nail right on the head when he complains "Workers'
spending power has decreased substantially during the past ten
years.'' What this lame-brain does not realize is that wishing
to shame the government into simply granting his people more
money is the same reason WHY they have had a fall in their standards
of living in the first place; the government idiots did exactly
what he wants them to do now! They borrowed more and more money,
they printed up more and more money, and they passed out more
and more money, spending everything they could get their hands
on! And now they are suffering the predictable depredation of
the currency. And now this dimwitted union twerp wants to have
MORE of the same, but expects different results! There is no
hope for these people.
While we are waiting for the Fed to make its "decision"
on interest rates, perhaps it is time to recall Hans Sennholz's
definitions of what interest rates are. "The market rate
of interest is a gross rate usually consisting of three distinctive
components: the pure rate, the inflation rate, and the debtor's
risk premium. The pure rate is the very core stemming from man's
mortality which forces him to view economic phenomena in the
passage of time. He ascribes a lower value to future goods and
conditions than to present provisions; the difference is the
pure rate. The inflation component appears whenever government
or its central bank inflates and depreciates the currency; the
rate of depreciation determines the size of the component. The
debtor's risk premium, finally, reflects the reliability and
trustworthiness of the debtor."
So let's take a look at our market rates. The pure rate is still
the pure rate, as the passage of time still, ummm, passes. The
central banks are still inflating the currency, so we still have
inflation. One result is, says Dr. Sennholz, is that "Such
credit expansion, unsupported by genuine savings and actual production,
generates illusionary gains making people believe that they are
more prosperous than they actually are." Or, as Bill Bonner
says, "The hotting up going on in the U.S. has little in
common with a classic business cycle expansion. What is expanding
in the U.S. is not production... but consumption; not the output
of goods and services... but the output of money and credit."
And I won't go into that whole trustworthiness thing, as I go
ballistic at the mere mention of trustworthiness in government,
and when that happens I never know WHERE in the hell I am going
to wake up weeks from now, although I hope it is in a cozy straightjacket
in some nice facility somewhere out in the country and with maybe
some little birdies to sing sweetly outside the window, and not
one of those ones where I wake up in some stinking alley, face
down in the mud and filth, being screamed at by bad-tempered
SWAT team guys with itchy trigger fingers who are yelling at
me to "Give it up, Mogambo!"
So what does this have to do with anything? Nothing. I just think
it is quaint how some of us old timers still remember when interest
rates were the result of negotiations between savers and borrowers.
Nowadays, of course, interest rates are merely a function of
Alan Greenspan's mood or something.
Peter Schiff at Euro Pacific Capital has taken a look at the
new GDP numbers and says "The startling reality of today's
GDP figures reveals an economy in which weaker than expected.
Growth is occurring against a backdrop of accelerating inflation.
However, upon closer review it is clear that the 4.2% figure
consists largely of soaring federal spending that overcame decelerating
private sector growth. For example, Federal spending increased
by 10.1%, with defense spending growing at a rate of 15.1%."
And then I remember the huge defense budget and this whole War
on Terror thing, and so obviously we are making new weapons,
and weapons are classified as "things." But even though
they are "things" you still can't get a simple Building
and Zoning Permit to install a "Second Amendment Thing"
in my backyard, which they INSIST on rudely labeling as "An
anti-aircraft cannon, for God's sake, you freaking lunatic!"
which means, so far, "no."
But this advance in GDP just shows how spending, all spending,
by everybody, all eventually flows into all the little nooks
and crannies of the economy, just like water will flow into all
your nooks and crannies, no matter how snugly your bathing suit
fits. Rather than showing some wonderful economic vigor, it merely
shows that somebody, somewhere, spent a bunch of money. In this
case, most of it was military spending, some of which went to
the actual guys who were fighting and dying, but mostly the really
BIG money went to the suppliers of all that military hardware.
It is a scary return of Dwight Eisenhower's admonition to beware
of the dreaded "Military-Industrial Complex."
One-half of the "Military-Industrial Complex" (MIC)
is the defense industry which exists to produce lotsa weapons
for the military, plus the ordnance needs of your modern domestic
variety of armed paranoid paramilitary groups, plus many nasty
foreign dictators and revolutionaries, and, of course, the Mogambo,
who is not "para" anything except paranoid, and who
thinks that is plenty enough in itself. The other half of MIC
is the government, which exists to fund the defense industry
by giving them money, taxing everybody in America money to pay
for the distortion of the whole economy, and having a lot of
foreign guys in other countries pay with their lives.
Without any debt to pay, a case can be made that it would make
a pretty sweet deal, especially if you weren't one of the guys
who were being killed. But with debt to pay, the dollars are
not re-cycled by government spending. They are gradually paid
into the pockets of the rich, who are the only guys who are either
1) rich enough to afford loaning that kind of big bucks to the
government, or 2) capable of dealing with that much money. And
then the rich merely get richer and the poor get, predictably,
poorer. And the economy is transformed into something ugly and
weird that cannot exist on its own.
David DeRosa of Bloomberg wrote a timely article entitled "Four
Questions IMF Candidate Rato Should Answer," which refers
to the former Economy Minister of Spain Rodrigo Rato being in
line to head the IMF.
One: "Do you believe in strengthening creditors' rights?''
Mr. DeRosa is alluding to the fact that "The IMF has done
a splendid job of advocating the rights of debtor nations. It
was rewarded for those efforts when Argentina stopped paying
its obligations on $99.4 billion of debt in December 2001."
So somebody had to eat those defaults.
In a very similar vein, Mr. DeRosa asks Question Two: "Mr.
Rato, do you endorse Acting Managing Director Anne Krueger's
proposal for a Sovereign Debt Restructuring Mechanism? Or is
that a dead issue?"
This is the plan to appoint the IMF to run a corporate-bankruptcy-style
process to resolve a sovereign default, with creditors put on
hold. This idea goes against the grain of the IMF, whose motto
is "More money for everybody, and less responsibility for
Three: "What do you plan to do if countries begin to default
on IMF loans?" Argentina, Brazil and Turkey account for
more than 70 percent of the fund's $107 billion in outstanding
loans, and so any one of them defaulting would be catastrophic
to the IMF. And that means that the IMF would turn, once again,
to the US to please, please, please give them some more money,
so that they could continue to eat in the finest restaurants
and fly around the world in cushy first-class seats while doling
out more money and idiotic economic advice.
Four: "What gives the IMF the right to insist that it gets
repaid ahead of all other creditors?'' The author has a better
idea, "Let the IMF be paid last. Since the IMF is never
shy about giving out economic advice, maybe it's time the fund
had a taste of its own cooking."
And while we are asking questions, perhaps we ought to be asking
the United Nations some questions too, such as "Will the
United Nations ever be more than just a den of know-nothing,
loudmouth, anti-American thieves?"
At the 321gold site, there is an interesting article
in their archives entitled "Billions for the Bankers, Debts
for the People. The Real Story of the Money-Control Over America"
by Pastor Sheldon Emry.
He writes in 1960 "Current fractional reserve requirements
allow them to use that $1 billion in bonds to 'create' as much
as $15 billion in new 'credit.' " How quaint! Today, circa
2004, which is, if I am using my calculator correctly and am
looking at the correct calendar, and there is that Miss May again
with a twinkle in her eye, a scant 44 years ago. But turning
to Barron's and gong to the data on the banking system, we note
with wry amusement that Required Reserves are only $42 billion,
and that Total Reserves is not that much better, coming in at
So how much money has been loaned against that $44.3 billion?
Somewhere north of $4,600 billion. So $44.3 billion has been
multiplied by 109 times! Hahahaha! If there was ever anybody
who doubted that the Federal Reserve and the banking system are
killing us, this ought to shut them up!
Hahahaha! That means that in the last 44 years; the fractional
reserve requirement has expanded from the textbook example of
10:1, to 15:1, and now to 109:1! One lousy dollar of reserves
has created $109 in new lending! Hahahaha! This is insane!
Leonard Kaplan, of Prospector Asset Management, writes that there
is an unwritten law in the commodity markets, which he titles
"Kaplan's Law of Perversity." It succinctly states
that "the market will always do whatever hurts the most
people at any point in time."
It seems funny, but on sober reflection it is mathematically
imperative that the markets work like that, and when I sober
up, I'll reflect on it a little. He correctly notes that "Remember,
the laws of probability dictate that it is virtually impossible
for the majority to win money from the minority in the markets,"
even though it is not the laws of probability, but the laws of
simple adding and subtracting.
To illustrate, if everybody has a dollar in the market, then
for a third of the people to make a 300% profit, then 2/3 of
the people have to lose everything. Ergo, Kaplan's Law of Perversity.
If you want to know the jobs of the future, here is a hint. Here
in Florida our legislators recently authorized the position of
Anesthesia Assistant, which is a person who, according to the
article in my hometown rag of a newspaper, this newly-enfranchised
Anesthesia Assistant will be "helping doctors put people
under for surgery." What it means in practice is that now
another position in the healthcare system is filled by a lower-paid
Actually, the need for doctors needed to actually do things is
declining. As an example, when I went to the specialist heart
doctor on a follow-up after my heart attack, I got hooked up
to this whiz-bang EKG machine with all those electrode wires
pasted onto my chest and back and side. For awhile the machine
kept shocking me, and I could hear the doctor laughing to himself
as he fiddled with the knobs, but then he got it adjusted. The
machine read the inputs from those electrodes, evaluated the
information, and consulted with another EKG machine in the closet
and so both of them could file for payment from my heath insurance
carrier, and then the machine printed out its findings. Which
the doctor merely read to me! He quoted the machine verbatim!
I mean, how much am I paying this guy? And for what? So look
for EKG Machine Attaching Assistants, Splinter In The Finger
Assistants, and, and, well, I am sure that you can name lots
of other things.
Of course, I also figure that businesses installing beds in cars
will also be very successful, as more and more people will be
reduced to living in them.
The Wall Street Journal had an editorial today (Tuesday) entitled
"Tax-Happy Taft," which excoriated the governor of
Ohio, Bob Taft, for increasing taxes after promising that he
would not, and who then acted like a slimy little toad to extract
more money from the citizens so that he and his little government
playmates could have some money to spend on themselves and their
grubby, greedy little friends. In short, government business-as-usual.
The interesting part is where the lackluster WSJ editors compared
Ohio's budget in 1994 of $14.4 billion, with the 2004 budget
of $24.8 billion. Running those numbers through the old HP 12-C,
we note with a smug smile on our face that that is "only"
a 5.5% annual inflation compounded. "What?" you ask.
"Only 5.5% inflation?" So how is it when food and fuel
rise at that annual rate, it is somehow "benign," "low,"
or the ever-popular "too low?" But when a state does
it, then it is NOT "benign," "low," or the
ever-popular "too low."
My question is a little more personal. I ask "How is it
that the editors of the WSJ have a hissy fit about that, but
they don't have a conniption fit, like the Mogambo, when Bernanke
or some other jackass Fed weenie stands up and says that they
are actually trying to get inflation roaring?"
Dennis Gartman shares a little of his forecasting acumen, and
says that if he had only one indicator, it would be the Ratio
of Coincident to Lagging Indicators. They apparently have taken
some heat for their philosophy, and say "Let the economic
sophisticates take issue with our thesis; we find that it works;
works well; works easily and remains uncommonly useful... and
until proven otherwise, that is our story and we are stickin'
Not content to do that, they even go farther and save you the
trouble of going back and looking up all those numbers and dividing
one into another and then looking at them hour after hour comparing
them to other charts until your eyes are bleary and red. No,
being the sweethearts that they are, they do the work for you
and tell you "Unless something terribly untoward happens
in the next several months, we can push the envelope for any
possible return to recession out seven months hence... if even
John Mauldin - the guy is a prince! - has done a little work
validating what Dennis has to say! "When I look at the actual
ratio," says John, "I find it does indeed turn down
prior to recessions. It also turns down prior to slowdowns that
do not become recessions, so in that sense it can give some false
Then he, and the treasure trove never stops, also analyzes the
graph, too "But combining that ratio with the yield curve,
even if we guesstimate a natural curve, suggest that barring
some unknown event, we are not due for a recession this year
and probably not until the second quarter of 2005 at the earliest."
And since we are talking about econometric models, I would be
remiss if I did not mention Tom Fenlon, who has come up with
a novel explanation of Fed announcements. According to this bold,
new theory, Greenspan has his head so far up his own butt that
when he opens his mouth to speak, it always looks like the light
at the end of the tunnel.
To show you another example of hyperinflation caused by a falling
dollar coupled with abnormally low interest rates, the scene
on CNBC changed from some story of real estate prices and how
they are in this boom, then cut back to the studio, where one
of the anchor-ladies on CNBC made the ad-lib comment that she
was thinking about putting some money into this real estate thing
to cash in on some of these juicy profits!
And that is how hyperinflation starts. And it makes perfect sense,
as long as money plus interest is lower than the price of the
house times inflation. Or, in math terms:
And then when the day comes where that equation is NOT true anymore,
then the cost will be increasing faster than the price. And that's
when, and I'm talking about the exact moment in space and time,
these speculators slap their hands to their foreheads and exclaim
"What in the hell am I doing? I gotta get out!" So
they stop paying while they look for a buyer. They ending up
dumping the houses back onto the holder of the mortgage, which
is, nowadays, not the bank, but Fannie Mae, which sold the debt
into the retirement accounts and investment portfolios of millions
and millions of unsuspecting people, both here and abroad. You,
Bob Dylan is right when he sang about "a hard rain's a-gonna
A blurb on Bloomberg about Indonesia was "Indonesia's 231
million consumers could become a big draw for investors, although
their potential won't be realized as long as per capita income
remains subdued." Hahaha! Where has this guy been? Doesn't
he know that you don't need any damn income to consume? Credit,
man! Credit! It's how we Americans do it, and if it is good enough
for Americans, it ought to be good enough for Indonesians, too!
---Mogambo Sez: The recent downdraft in gold
is a buying opportunity, and I hope you took advantage of it.
The investment paradigm of the next, oh, zillion years or so,
will be to buy gold and commodities on dips.
Thus spake the Mogambo.
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
and other fine publications.