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The Twilight Zone

Richard Daughty
...the angriest guy in economics
The Mogambo Guru
May 19, 2004

I keep hearing a lot of crap about two things lately. One, how these new pills will finally calm me down without making me drool all over myself, and two, how the US economy is in some glorious growth mode. As to the former, I say "Yeah, like I haven't heard THAT one before!" And concerning the latter, it is not. If the economy, which is measured in prices received, was "growing" at 4%, and inflation is 4%, then obviously all of the "growth" is contained in prices alone. In other words, no additional widgets are being made, no additional services are being performed, no additional jobs are being created. Everything economic is exactly as it was, except that prices are higher and debts are larger.

This is the exact opposite of what the idiots at the Fed are supposed to be trying to achieve, because it means that everybody has a lower standard of living! So why aren't our Congressperson knotheads having investigations about THAT? This is Exhibit A of my indictment of Alan Greenspan as a clueless and inept bungler, and the loathing and contempt I feel for the entire creepy economics profession as practiced here in America, especially the asinine universities who teach that crap, the Congresspersons who are obviously incompetent, and that is why all of them are on my list to be rounded up and sent someplace horrible, probably next door to me so that I can keep an eye on them and make their lives, as claimed by my current neighbors, a living hell.

Jim Willie on FinancialSense.com writes "Goldbugs think rationally in an irrational world," and he follows that up with "
Gold investors are an order of magnitude smarter than stock investors." I'm not sure that I am any smarter, but I am a LOT more scared and paranoid, and I certainly DO live in a different world than most everybody I know, as far as I can glean from watching the neighbors very closely and keeping track of their activities and whereabouts as part of my implied duties as a Loyal All-American under the Patriot Act.

But he had a real nice article wherein he looks at the facts, looks at the charts of history, applies Austrian ideas about fiat money and all that stuff and concludes, in a horrifying and logical deduction, that, in effect, the Mogambo was right; we are doomed. And that
gold will once again reign supreme. And he isn't very complimentary to Alan Greenspan either.

And speaking of Alan Greenspan, Jim Tesluk, who is my main man in Hong Kong, writes that he has a new theory to explain how Alan Greenspan went from a classical hard-money man to the grotesque money and credit creating monster he has become. "Given Greenspan's membership in Ayn Rand's 'Collective' (viz. Gold and Economic Freedom, his 1966 pro-
gold essay in The Virtue of Selfishness), I think his preposterosity and incompetence may be a cover for a hidden agenda. If you recall in one of the early chapters of 'Atlas Shrugged,' Ragnar Danneskold accosts Hank Rearden in the middle of the night, not to rob him, but to give him bars of gold - a classic freaking Rand moment - as a 'down payment' for the injustice Rearden had suffered as an industrialist."

Well, no, I cannot say that I can recall any of the chapters in Ayn Rand's book. Oh, I tried recently to read it, but I made only a lackluster attempt to muster the time, and quickly jumped to the "thumbing through it" method and randomly reading from any place that caught my attention as I was skimming along while thinking of other things, lots of other things, such as damn near everything, featuring mostly delicious snack foods and sugary iced drinks, as the looming drudgery of reading such dense pomposity was something that is bearable only to very young people, as to them alone the novelty seems, somehow, "profound," but now in my advanced years I find it, ummm, difficult to keep from snorting in contempt at the arrogance.

He looks down his nose at me, as I can read in his eyes that he is saying "You call yourself an economist? And yet you haven't even bothered to read what Alan Greenspan considers a Bible?" Well, to answer that, I reply, with that cool look that I have where this one eyebrow is arched and there is this charming wry grin on my face, and I lean forward and look him right in the eye and carefully intone "I never called myself an economist. I prefer the term 'redneck cracker honky white trash,' as it is so deliciously piquant, although I will answer to most anything if you yell it loud enough."

But he ignores me, and continues "Richard Russell thinks the Dow and
gold will meet again, like they did in 1980; but this time at 3000. This explains Russell's characterization of gold as a 'screaming buy' below $400/oz. If he 's right, anything done to depress the price of gold below $3,000/oz is in the nature of a Danneskoldian gift. My Theory of Alan posits that his schtick is the fog, the cover and the obfuscation for his true agenda, which is to make a gift of gold to any one who has two neurons to rub together. Either that or he's barking mad."

Perhaps. But in light of the absence of facts, I prefer an old proverb that goes, "Never attribute to malice what can adequately be described by stupidity." And if there is one thing that defines stupidity, it is looking at the economic lessons of all of recorded history, and then deciding to do the same damn wrong things all over again, and ignoring the Constitution of the United States to do it! And then expecting that this time it will work out different! Now THAT is stupid!

Richard J. Greene, on the FinancialSense.com site, writes "The Bank of International Settlements estimates that total estimated derivatives are approximately $210 TRILLION!!!"

Now, I never met this guy, and on Christmas morning there is never a present from him under my tree or even a lousy card, but he seems to react to some things just like me, and he has punctuated his revelation with three, count 'em three, exclamation points! Three! This is a literary device we writer guys use to indicate emphasis, especially me, which we, meaning me, have to use because we, again meaning me, can't come over to everyone's house and grab them, meaning you, by the front of their shirts and start roughly shaking them back and forth and screaming in their faces with these specks of spittle flying off our outraged lips that this is an economic emergency that is going to kill them, and we are all going to die a horrible, horrible death, and we are doomed doomed doomed!!! Please note the three exclamation points, which are, as previously explained, a literary device to indicate particular emphasis.

Then he does it again! "$210 TRILLION DOLLARS!!!" he says, "How can this figure be ignored? A derivative is supposed to be 'derived' from something. Is it not apparent at this point that there is nothing left big enough, (or bigger for that matter), for derivatives to be derived from?" Yeah! You go get 'em! Grrrrrr!

He is referring, in part, because if I were he, then this is what I would be referring to in part, to the global gross domestic product, the sum total of every good and every service produced in the whole wide world, and it totals to - ka-ching! - around $35 trillion. Perhaps if you add in the value of all the houses and factories and everything else in the world, it would STILL be less than $210 trillion.

This is, to me, the highly interesting mathematical paradox of this whole derivatives thing. How can you place a bet that is six times bigger than global GDP, and far more than twice as big as the value of literally everything?

He continues, "It is obvious to me that at this point, derivatives are nothing more than failed bets, on the part of financial players, doubled down on many times over." I look at it similarly, and perhaps an illustration would be helpful. Imagine two guys, A and B, played by handsome Hollywood stars, who take the two sides of a bet. Then if it turns out that A wins, then B loses. Then they simply make a new bet. A lets it ride, and bets his winnings, and B takes the other side, borrowing the money. If B wins this time, they break even.

But if A wins again, they do the same thing again. Only this time the stakes are doubled. Over and over and over, round and round, making bigger and bigger "double up to catch up" bets. The idea is, and follow me closely here, that they will eventually, theoretically, all break even! It is seemingly guaranteed, and you know how much we like the word "guaranteed," because it is the first thing you learned from Day One in statistics class: simple probability theory says it is impossible for B to always lose! You cannot flip a coin and have it ALWAYS come up heads! B has to win eventually.

All it takes is, and this is the crucial part, enough money to always be able to borrow enough to make a bet that is twice as big as the one you just lost, over and over, until you DO win. Sooner or later, you will win, and on the glorious day you will, theoretically, break even.

The buildup of leverage is to note that all that is actually bet is borrowed money, so it compounds and compounds in size. He says "The entire financial system is Enron and Long Term Capital times ten. There is no remaining equity to settle the unwinding of the derivatives!" That assumes, of course, that there WILL ever be an unwinding of derivatives! But why should they?

Marshall Auerback of Prudent Bear puts it another way, "What truly must haunt the Fed today is that current levels of leverage are so huge that the bond market could blow out before the Fed even gets around to raising rates. There are already signs of this appearing: historically, the bond market has seldom sold off so violently in the absence of rate rises."

For us guys out here who like historical precedent, especially the kind that are known as "never in the history of the world!" type stuff, Mr. Auerback continues "The 10yr yield now is higher in relation to trailing money market rates than it has ever been in prior to any rate hike by the Fed. And not just by an inconsequential amount, but something in the order of 50-100 basis points."

Well, it may have something to do with, well, let me give you an example. A lot of derivatives are bets on the movement of an asset, not the nominal price. They are betting on the amount of the MOVE in price from the strike price. So if the Fed raises the Fed Funds rate by one lousy point, see, this is actually a move that can be a big, juicy 100% move, or more (yayyy!) or less (booo!) in the derivative, because the rate itself doubled! It doubled from 1 to 2! Bang! Almost literally overnight, doubling your money! Less, of course, the endless commissions and fees and taxes, everybody pecking off pieces of your booty as you drag it back to your cave in the deep woods, making sure to circle back around and cover your tracks because you never know who is back there, although you are secretly hoping it is Rod Serling and this is all an episode of Twilight Zone, because, brother, that would sure explain a LOT of things.

But, and this is the important part, this is the fabled Big Money Fast (BMF)! And if there is one thing that gets everyone salivating, it is BMF.

And Big Money experiencing Big Moves means that somebody is bloody as hell, as their fabulous BMF is my crippling Lose Money Fast (LMF), and as an old options trader who often watched in horror as the markets were manipulated against me because they are all out to get me, it was usually me who got bloodied, and I still wince at the very thought, and, to wax poetic, I shall carry the scars upon my heart all the days of my life.

Mr. Auerback continues, "I am pretty sure that this kind of pyramiding of bets can't work out." This Mr. Auerback guy is a real class act, as I would have probably said something like, "Do you really think that pyramiding of bets will work out, you worthless piece of brain-dead dog crap? I can't believe you would say something so stuuuuUUUUUuuuupid!!!" There's those three exclamation points again, so you can see how worked up I am about this.

I know this sounds tacky, but what I really want to know is how can I, as an ordinary guy just walking down the street who could really, really use some extra money right about now, make some money on this? This is, perhaps, akin to that old joke about the guy was asking his accountant, "If I commit suicide right now, how much will I save in taxes?"

But Mr. Auerback perhaps provides a clue when he says, "When the masses realize what has happened, they will run headlong to
gold and silver and the companies that produce them with such a fury will make the internet bubble look like a high yielding utility stock by comparison."

We won't have to sit around in some smoky bar getting drunker and drunker waiting for the Producer Price report to come out. It came out. Prying open one eye and inexplicably slurring our words, we complained that the words on the page were swimming around, and now that we mention it the floor seems to be spinning around, too, but we sobered up plenty quick when we realized it was bad news all around, and after reading it we all decided to crawl back into the bar and have a few more drinks to dull the pain.

With a vicious headache and hangover that came out of nowhere, I read that Bloomberg says "U.S. producer prices rose 0.7 percent in April. Wholesale prices were 3.7 percent higher in April than a year ago. Prices of crude goods, which are used at the earliest stage of production, rose 3 percent. Over the last 12 months, the costs of crude goods jumped 20.4 percent.

Energy prices rose 1.6 percent in April after rising 0.6 percent in March. Gasoline prices increased 3.4 percent. The cost of dairy products jumped 10.4 percent, the biggest rise since July 1946. Prices of steel mill products increased 6.3 percent in April, the biggest rise since a 6.8 percent surge in July 1974."

Then, I guess to add a little levity, in an odd coincidence that I hope you find as amusing as I did, Federal Reserve Bank of Chicago President Michael Moskow said "At some point, Federal Reserve policy makers will raise interest rates to ensure inflation doesn't accelerate." Hahahaha! And what point will that be, Mr. Moskow? Prices are rising at alarming, highly-inflationary rates everywhere you look, and they are accelerating with every tick of the clock, tick, tock, tock, tock, all the time with the ticking and the tocking! Prices going up click click click with every tick, tock, tick, and so it comes out sounding like tick, click, tock, click, which is driving me crazy!

Crazy, I tell ya! Tick, tock, click, clack! Yaaaaaaaaah!

The Fed has steadfastly ignored and even lied about inflation, just as they have ignored my calls and letters calling their attention to this fact. But they can't say that I did not warn them, as all my correspondence with them starts off with "Dear Butthead." And yet Mr. Moskow, who would be squirming his chair like a cornered rat if only the Mogambo could get into his office and confront him face to face, mano a mano, eyeball to eyeball, thinks that "At some point, Federal Reserve policy makers will raise interest rates to ensure inflation doesn't accelerate." Hahahaha! My laugh is mirthless and scornful, sir! Isn't this the same bunch of Fed, and pardon my French, jackasses who voted unanimously on May 4 to keep the Fed Funds rate at 1%, a 46-year low? And didn't this same Fed just say that they will raise interest rates at a "measured'' pace to head off inflation? And is one percent, a measly one percent, the astonishingly low rate that they just voted to maintain, a "measured rate"? And this is where the I hit the "play" button, we hear a clash of symbols and horns blowing fanfares, and I throw off my disguise to reveal, standing before you in all his glory, The Mogambo! The lights dim as the towering figure of immense power and mystery raises an arm and points the Bony Finger Of The Mogambo (BFOTM) at him, and with a cold voice of thunder that freezes the blood, says "And now, lowly infidel, you are telling me that they will raise rates 'at some point'?" Stunned to silence, the theater is deadly silent, until the Mogambo laughs, "Hahahaha!" The audience is delighted, another masterpiece, clap clap clap, curtain falls.

M. Auerback continues with that same "Never before in the any of the annals of history" type of narrative that I find compelling, "The 10yr yield now is higher in relation to trailing money market rates than it has ever been in prior to any rate hike by the Fed. And not just by an inconsequential amount, but something in the order of 50-100 basis points."

So take another look at that list, Mr. Moskow, and then tell me again how the Fed is going to raise interest rates "at some pointto ensure inflation doesn't accelerate." Hell, it is accelerating right now! And they did nothing! Nothing! Not only nothing, but they continued insanely-low rates to the point that it is inspiring things that have never happened before, ever, in all of history!

I instantly drop down to a cooler level, and with an oily, treacherous voice that drips honey to disguise the poison of my innermost demons, I say, "And, by the way, while we are on the subject, Mr. Moskow, perhaps you will be surprised to head that the Commerce Department said retail sales fell by 0.5% in April. The Labor Department reported initial jobless claims increased to 331,000, up from the 318,000 reported last week." I can see he is staggered at the revelation. Coldly, I relentlessly continue "The Labor Department, as we just mentioned, released the Producer Price Index, showing an increase of 0.7% in producer prices, an annualized rate of 8.4%." He collapses to one knee under the onslaught, clutching his chest. With no mercy, my eyes are by now mere slits, hiding steely blue eyes that glint with the gleam of cold ice, "The Consumer Price Index was released Friday showing the same unhealthy rise in price inflation!" He is now on the floor, gasping for breath! The referee counts him out, 8, 9, 10 as the crowd roars its approval! Yayyy! Yayyy! Viva Mogambo!

A normal man would have collected the trophy, picked up the prize money and gone home. But I am The Mogambo! So I reach down, and I pull his bloody head closer to me, and I scream in his face "So let me see if I have this straight, you horrible little twit. Sales are down, people are losing their jobs, and prices are up? And yet nobody sees this as iron-clad evidence that Alan Greenspan and his cabal of idiots at the Federal Reserve are incompetent boobs and their whole preposterous clot of dimwitted wishful theories are all wrong?"

This only proves what I have been saying; Americans ARE morons. All except me. And you. Which is not true, I know, but sometimes it sure FEELS like that.

As I wander around the net reading things that vaguely sound like economics or the promise of "Hot babes who want to meet YOU!" and reading and re-reading economics books, I find that things generally fall into one of two categories, both of them named "Man, that's weird." Only the emphasis in pronunciation is different.

First, there is the "Man, THAT'S weird" category, wherein we find new things, and the novelty is exciting! This rarely happens much anymore. The downside of acquiring wisdom, I suppose, is to become jaded.

The other category is the one called the "Man, that is WEIRD!" category. Note the change in emphasis. This is where we find things that I have seen before, and I have now run across again, only now there is now something unusual about it that catches my attention, so that we slap our Mogambo head and say, as implied in the title, "Man, that is WEIRD." And then I instantly make plans to track this important indicator and wonder what in the hell is wrong with me that I was not already tracking this apparently invaluable indicator. This week's example is the CBOE Volatility Index. I admit I don't keep up with it much, and I am aware that there are theoretical arguments validating its informational content. But it takes awhile for oddities in the squiggly graphs to be taken seriously. It might just be noise. Whatever.

But I noticed that for a year the graph has been falling. Then, and notice that the soundtrack is now full of deep, ominous tones, the graph shows that a month or so ago there was this huge outsized burst of activity, glaringly obvious, and standing out like a big, fat inflamed pimple in your yearbook picture, and when you look at either the graph or that photograph all you can see is, in the one, this huge spike and the persistent rise in the index, and in your yearbook picture all you can see is that huge horrible pimple that seems to have somebody's head attached to it. Your reaction to each is the same: "Yikes!"

Naturally, the Mighty Mind of the Mogambo springs into action like a super dooper supercomputer, and casts about for some correlation with some other markets. I look at the recent action in the bond market. Bingo! I look around in the stock market. Bingo! I look around at the dollar. Bingo! What in the hell any of this means, I have no idea. But it means something to somebody, because it indicates that whoever was on the other side of all those trades took a whack to the head.

So, for you technicians out there, this looks absolutely prescient.

According to H. L. Mencken "Most religions lean heavily upon the fallacious assumption that there is a strong desire for virtue." I can't speak for most religions, as none of them want me as a member and several of the smaller sects even passed new canonical laws creating ex-communication just so they could excommunicate me, as if always having the congregation stand up and point at me, shouting "Spawn of Satan! Spawn of Satan" over and over wasn't clear enough, and they should have known that I would get tired of that after awhile and then I would go home and then they could get back to their regular religious routine, whatever it was. So I never actually got to stick around long enough at any of them to learn all the nuances about the need for virtue of these religions.

But I CAN verify that it is the religion of the Democrat Party, as I have spent the better part of my whole life listening to that whining claptrap about how they love everybody, and if we just had more love then everything would be better, and the way to show your love is to help and hug and to really, really care, and now that we are talking about caring, there is this new group of pathetic people who are suffering, and will continue to suffer, and will suffer suffer suffer until they die of their suffering, and so please please please why won't I please Think of the Children, for God's sake, and they bleat piteously for me to please Think of the Children, and how these tear-stained, pathetic wretches who are either children directly or have children have suffered so grievously that hugs are not enough, and what they really could use is for the government to reach into everybody's pockets and take some money to pay for things to give these poor suffering people for the rest of their lives. And they think this is virtue. And I guess it is, in a twisted, Orwellian sense.

This is a nice segue into an essay by Joe Mysak entitled "States May Bear Brunt of `New Imperialism' Costs," who made that statement after reading Niall Ferguson's new book "Colossus: The Price of America's Empire." He writes, "That means states and localities will be paying more of their own bills. This is hardly welcome news for states, which earlier this month said Medicaid alone, now 21 percent of all state spending, was eating up more of their budgets. States pay just over 40 percent of Medicaid, which provides medical care for the poor. The federal government pays all the costs for Medicare, which covers the elderly and disabled. In 2002, Medicare cost $267 billion, Medicaid $250 billion, with the states paying $103 billion, according to the Centers for Medicare and Medicaid Services." Being always eager to show that I can add numbers together, I grab a calculator and add these figures together, and when I do I get a figure of $620 billion a year. This is $2,137 for every man, woman and child in the USA, which also includes the poor and deserving, who are the very recipients of all this money, and who obviously don't pay anything!

The other great quote of H.L. Mencken this week, and this pertains especially to economics, is "The human race detests thrift as it detests intelligence. The man who accumulates more than he needs and saves the surplus is disliked by all who either can't or won't follow his example. He makes them ashamed of themselves and they resent it."

"How is the 'graying of America' going to impact things?" asks a reader. Well, being one of the valiant vanguard of that demographic group referred to as "the baby-boomers", I am in a unique position to render my report from the perspective of an actual participant.

So it is with some actual authority that I can tell you that, if they are anything like me, they are a bunch of malcontent, sullen, angry and heavily-armed outcasts that see enemies in every shadow and are discovering that we have been given a pretty raw deal, namely that we paid all our lives into a system where the deal was that at age 65 we would be able to retire. But now, as we approach that gloriously fateful day, we are now screwed out of an entire year of retirement! We can't get full benefit benefits until we reach 66. And even then, the benefits promise to be less and fewer!

The scene shifts to the office of the sheriff, and Barney is explaining to Andy that the people of Mayberry are restless, and at this Barney hitches up his gun belt and sniffs, "The proletariat workers have resentment, Andy. A lot of (he spins around and looks Andy right in the face) resentment!"

And Andy says, soothing "Now, Barney" to which Barney interrupts by jumping up and being indignant and says "Don't you 'Now, Barney' me, Andy! You can consult any book you want, but they all say the same thing; you gotta to nip this resentment thing in the bud. Nip it in the bud. Just nip it!"

And so there is a lot of resentment on our part, and there is a lot of fear in those coming up behind us. We see them over there in the corner of the playground, all huddled together and saying things like "Hey, we could get really screwed here! I mean, look what they did to the Mogambo!" And then somebody else says "Nah! They only did that to screw him over. Nobody likes the Mogambo!" and I can hear them laughing and making fun of the Mogambo, and then I begin to imagine that Ted Kennedy voted for this bill to change the eligibility age for collecting full retirement benefits just to hurt me because he hates me, and he is out to get me, but he doesn't know that I often imagine him sprawled on the floor in front of me, while piteously begging me for mercy, and me laughing - ha ha ha! - at him in raw contempt, and then I make him admit that he was wrong, and he says "I was wrong!" and then I make him say "I was a real butthead" and then I make him say "I am still a big butthead" and then I make him say "I am the biggest butthead in the world, and my butt is big, and my butt stinks, and I love my own butt." And as soon as I am sure that I have that on tape, I'll let him go, and he'll get his big, blubbering butt up and slink out of the room crying and pouting, and THEN we'll see who got the last laugh! Me! Hahaha!

But, to answer the question, I'll tell you what a older population means. It means that somebody has to get screwed. The only question is who?

One after another, talking-head ignoramuses parade in front of the cameras, all proclaiming that their huge brains have determined that inflation, the same inflation that they never saw coming and are now surprised as hell to see, is not something to be upset about, because, and you might want to write this down because you may not have a copy of Greenspan's ridiculous remarks from which you can constantly refer, like these knotheads, who say that "There is so much slack" in industrial capacity and labor markets By this they imply that if any producer had the temerity to try and raise prices, that some agile capitalist exploiter of the worker and despoiler of the environment would arise out of thin air, and declare himself a competitor, would come swooping in like some winged devouring demon and gobble up some of that unused slack in plant and equipment and resources and labor, and start competing against you, and that this healthy competition would force prices back down.

What a load of, and I know you are going to love the way I use the original Spanish phrase here, el crapola! Prices are NOT being raised because some greedy capitalist swine wants more money. What is happening is that costs are rising, and all producers are being forced into raising prices just to keep in business and show a profit, and that those who are resisting raising prices are making less money. And when costs are rising, then there is no chance in hell that some new hotshot is going to some walking up and start producing and selling at lower prices. So regardless of what halfwits on TV and in the newspapers say, price inflation in those things that you MUST have are almost certainly NOT going to stay low, while those things that you do NOT need will likely fall in price. And the pressures will build and build and build, because inflation engenders more inflation, and deflation engenders more deflation, which engenders more inflation and deflation, until everybody is wiped out.

Now, I know that you are not going to believe the Mogambo, so I will add a little quote from the Bloomberg report of the PPI "Some companies such as Sherwin-Williams Co. are considering raising prices to assuage the rising cost of energy."

Please note that Sherwin-Williams did NOT say anything about raising prices because they are predatory money-grubbers, nor did they say anything about fearing competitors who are going to come sweeping in here and take up some of that slack in the production capacity.

But inflation in food and energy and those huge pills I have to take to keep from losing my mind at this monetary and fiscal insanity that I see right in front of my eyes are just symptoms of how I am sure that we would stand more chance of fighting blood-thirsty zombies with our bare hands than we are to escape, unscathed, from the bloated and blasphemous economic system that we have created.

Because believe me that I would love to be able to inflate all our problems away, if it weren't for the problem that price inflation rots the economy from the bottom up, as opposed to asset deflation which rots it from the head down. There is no salvation, and that is why it is so imperative that you NOT get into this mess to start with.

But once again, the government has done what it has always done, and they elected to screw over the poor, who are always the first to feel the effects of price inflation.

And, to make matters worse, people borrowed against higher equity in their houses and invested some of that money in the stock market, which sounds clever until you realize that they have taken on more real, tangible, permanent debt, and they have pitted this against intangible, ephemeral equity that is NOT permanent.

Speaking of deflation, Sean Corrigan of Capital Insight says "A corollary of deflation will be a soaring dollar, as demand for cash increases when debtors come to sell anything they can, at fire-sale prices, while its supply decreases as lenders restrict their activity." Well, this demand for cash assumes that there is some doofus on the other side of every trade, even at fire-sale prices. And I am not sure that much money will be changing hands. All my other investments made money, so that now I am putting more money to work by buying your assets? Huh? I mean, how many dollars do you need to buy a factory at ten cents on the dollar, especially when you are sure that it will never make a dime's profit ever again? I argue that some, if not most, assets will sink to close to zero value, and there is nobody on the other side of that trade.

But Mr. Corrigan pays no attention to me, and to tell you the truth, I would have no respect for him if he did, as who knows better than me what a screwball I am? So it is only natural that he continues, "It is true that a central bank could begin a policy of severe restrictionism, raising short-term rates and limiting, even reducing, reserves in such a draconian fashion that credit becomes both more scarce and much more expensive. Thus implemented, the bank could indeed occasion a round of defaults and deferments, asset sales and margin calls, banking failures and a seizure of the credit system." Oops! Don't want that! Think of all the capital gains losses, which is lost income to the governments who depend on that income stream. Not to mention the entire retirement nest egg for the entire nation.

Mr. Corrigan again shows his class by ignoring my interruption, and without batting an eye says, "However, we must ask ourselves how likely it is that any presently instituted central bank, or political party - incumbent or otherwise - would actively promote such a policy, or, having stumbled into it, would persist with it. Indeed, the recent history of bail-outs, emergency rate cuts, the instant provision of vast swathes of 'liquidity', and other such interventions undertaken by the central banks in the face of anything from the Mexican crisis of late-1994, through the Asian Crisis of 1997/8, the Long-Term Capital Management fiasco, the Dot.com bust, Y2k, 9/11, and so on and so forth, argues strongly that whenever the US financial system (in particular) is threatened, the floodgates are opened without further ado, even if 'rules' have to be infringed and the dictates of best practice eschewed in the process."

Note that he calls them "the dictates of best practice" but when you look them up in the Mogambo Dictionary and Encyclopedia of Financial and Economic Terms As Gleaned From The Far Reaches Of The Known Universe And Now Have Fallen Like Pearls Of Wisdom From The Lips Of The Mogambo Into Your Lap, you will learn that these are immutable universal Laws we are talking about. Breaking a stinking lousy dictate ain't no big deal, but breaking one of the Iron Laws of Economics carries a penalty! A heavy, heavy penalty. And the more you pile up economic offense after economic offense until your indictment alone is so voluminous that it has to be brought to the court by a forklift, the heavier the penalty.

But not to worry! Sean reminds us that they think that there is sunshine everywhere, as "Should the banks need to raise this cash to pay out their depositors, be assured they have plenty of securities on hand to discount or to sell direct to the Fed and, again absent some external restraint like
gold, the Fed only has to write a cheque upon itself to pay for these." That is the beauty of fiat currency! If you run out, you can just print some more! Wheee!

Going even further, he says "If traditionally eligible assets were to run out in such a panic, the Fed has made its intentions clear that it would then monetize just about any identifiable claim necessary, from anything within the whole gamut of financial assets, right down to physical property itself." The Fed could buy my old car, for, say, ten times its blue book value, and force me to go out and buy a new one with the money? This could be sweet!

And it is not only federal people who are looking out for us! It gets better and better! Mr. Corrigan continues "Furthermore, if even this were to be of little avail in encouraging private agents to borrow and spend in some desperately uncertain tomorrow, we can also be sure that the State would instantly step in to fill up the gap. We only have to look at the record of governments everywhere in these past few years to see just how eager they always are to apply a little Keynesian snake oil to the system and to advance their prestige, their power, and their influence as they do." "Thus, I would contend that while it is possible that the complexities of the intertwining of today's overlarge financial architecture could contain all sorts of triggers and trip wires, or that unforeseen disasters and unintended consequences would abound, it is hard to see how the authorities around the world - acting in concert, but led by the Fed - would fail to find a vessel into which to pour all the new money needed to keep the system afloat thereafter."

And that is exactly what they will try to do! This is what all governments have always done when things got to this point. The only question is, can it last forever, or is there some natural limit to this blubbering, bloated blob of gob that we call The Economy? We'll soon see.

My bet is that price inflation will soar, misery and suffering will proliferate, and the affected voters will make things worse by voting wrong, again and again and again.

Stephen Roach of Morgan Stanley, always one of the saner voices, in an essay entitled "Global: the Long Road" writes "I continue to believe that the rebalancing of a lopsided, US-centric global economy will be the big macro call over the next three to five years. There are two principal avenues by which such a realignment can occur - a shift in the world's relative price structure (i.e., foreign exchange rates) and/or a change in the mix of real growth among the major countries of the world. The evidence suggests that the process has barely begun."

"Based on revised IMF data, it now appears that the United States accounted for fully 98% of the cumulative growth in world GDP over the seven-year period, 1995 to 2002 (the prior data put that share at 96%). America's growth contribution over that interval was more than three times its 30% share in the global economy. Conversely, this calculation also means that the remainder of the world economy - some 70% of global output - collectively accounted for only 2% of the cumulative increase in world GDP over the 1995 to 2002 time frame."

This is when Mr. Roach gives us another heaping helping of the "Never Before In The Entire History Of The World Since People Crawled Up Out Of The Primordial Slime Has A Thing Like This Happened," he says "This is a truly astonishing result. Never before has the modern-day world economy experienced such a protracted period of unbalanced growth."

But things are changing, he says. "By our reckoning, the US accounted for just 13% of the total increase in world GDP last year - less than half its 30% share in the global economy and far short of the 98% contribution over the seven-year period, 1995 to 2002." Oops!

He finds that "Virtually all of the rebalancing has thus far occurred through the currency. This reflects a 13% decline in the broad trade-weighted dollar index (in real terms) from its highs of early 2002 - an index which has subsequently rebounded by about 2% in the past few months."

We are both of the opinion that the relatively benign effects of the devaluation of the dollar are deceptive, and that such massive, long-term, pandemic distortions cannot be remedied by a little piddly dollar devaluation.

I got a call from a guy who is running for Congress to unseat the incumbent. He wanted to ask me some questions to make sure that he was on the right track with his economic agenda. Well, I was flattered, of course, that he would think to ask the Mogambo for an opinion, unless he was actually LOOKING for "the most stupid thing that an adult ever said relating to economics," but they did away with that award years ago, so there is no glory in it anymore, and the annoying phone calls soon stopped. But I am heartened to reports that he was right all the way down the line, so I am impressed and encouraged: perhaps we will soon have TWO guys like Ron Paul in Congress! It ain't much, but it's a start.

But I will not mention his name to keep with my Official Policy Of The Mogambo, which is that I am not really FOR people as much I am AGAINST people who have demonstrably failed, and cost the "company," which is a metaphor for "the common good," by which I mean, in this case, the entire freaking population of the United States of America, which includes me, and if you are one of those foreign guys reading this, you might as well know that it means the entire freaking population of your part of the world, too, and that includes you, buster, because after just a few iterations of the vast interconnected international financial system, every monetary and fiscal policy mistake of everybody is fully incorporated into everything else, everywhere else.

So the effect of monstrously insane money and credit-creation by all the central banks of the world, especially the recklessly irresponsible United States, combined with massive degrees of leveraging and re-leveraging, results in a spread of poisonous debt so big, so enormous, so gigantic, that if it was a monster that had been released from an alien spore, and it grew to enormous size and was now threatening Tokyo and is currently stomping on buildings and tearing out high-voltage power lines and smashing things as it walks along, roaring and bellowing, especially if it had laser beams that could come out of his eyes and when he opened his mouth this stream of molten fire would shoot out, and unfortunately the combined firepower of tanks and cannons of the whole Japanese military were useless against it, and, and, well, your brain explodes just thinking about! At least mine does!

Well, anyway, the next thing you know, your 401(k) has been affected, just that tiny little bit, by, oh, say, the change in the budget deficit-spending in, say, Bolivia, although I am not all that hip to the economics of Bolivia, or much of anything about Bolivia, but I think I can find it on a map after a short search, and I think that's where Butch Cassidy and the Sundance Kid wound up getting, you know, shot.

Speaking of which, the Germans are, and I love this so much that I am going to quote the World Watch section in last Friday's Wall Street Journal, "The already-shaken European Union fiscal rules aimed at safeguarding a stable euro encountered new setbacks. Germany, Europe's largest economy, confirmed yesterday that it might break the EU's cap on budget deficits for a fourth year running." Four years! They all agreed that running deficits was bad enough, but that running deficits in excess of 3% of GDP was unacceptable. And yet, here they are! So the next time somebody tells you that the prudent, stalwart Germans still remember the hyperinflation in the early years of last century, and how they are strict guardians of fiscal and monetary prudence, tell them that this proves that they don't know what they are talking about, and today's Germans are just as stupid as we are, and that is faint praise indeed.

This brings up a quote by a guy named Josh Billings, whose pithy and clever aphorism was the answer to a recent Cryptoquote, which read "The road to ruin is always kept in good repair, and the travelers pay the expense of it."

So I am encouraged that a guy is running for Congress with an Austrian, real-money philosophy. And I encourage all of YOU to likewise run for office and apply the lessons of the Austrian School of Economics to EVERY level of government! Personally, I am proud to say that I am doing my part by running for President of the United States, although my campaign has not done as well as originally anticipated. By this time, I had originally projected that the Mogambo for President movement would have five, six million registered voters under my thumb, ready to act as my Unholy Army of the Night in wholesale purging of the system of All Who Oppose The Mogambo. But, alas, recent computer reports show that contributions have remained steady at, let me check that figure again, zero. And the anticipated cadre of Mogambo Jihad Warriors that were supposed to spread terror everywhere by voting exactly as I told them is also, I am sad to report, also zero. But the Mobile Mogambo Mobile is all gassed up and ready to go if we ever do get some campaign traction!

The SP500 is about where it was in 1996, eight years ago. So by foolishly putting your money into these stocks you have not made a dime in eight long years, and in the meantime all the prices of all the things that you buy are much higher than they were then. Net-net, you have lost purchasing power by "investing for the long term." This is the price you pay for listening to stock brokers, financial planners and all the rest of that lying clot of Walll Street hucksters, who are, in the final analysis, merely oily salesmen who have hustled us good.

From the Daily Reckoning site we read that Peter Stansberry is also gracing us with another "Things You Never Thought You'd Live To See Because It Is So Weird" says "Never before have bond yields been so low when the dollar was unbacked by

Doug Noland quotes Pimco's Paul McCully late last month at a symposium sponsored by the Money Marketeers of New York University, who says "I think the nominal Fed funds rate should be sufficiently high to cover you for two taxes on money: an explicit tax and the inflation tax. And that if the Fed funds rate is held at a level that covers those two taxes, then the Fed has achieved its mission of preserving the real purchasing power of money." This proves that Paul McCully is an idiot. The fact that there is inflation is de facto proof that "the real purchasing power of money" is NOT being preserved in the first place! If it were, there would be no inflation! But this McCully jackass says that if the Fed raises the Fed Funds rate high enough to cover that, then the purchasing power of money is thus preserved? My God! This is beyond stupid!

It may cover the concerns of his big shot friends and moneyed investors, alright, but there are many, many other people in this world to whom a lousy few points of interest income is completely irrelevant. As a guy who is living hand-to-mouth and is living with his worldly possessions in a shopping cart under a bridge and who doesn't have huge wads of cash socked away in Mr. McCully's precious bond fund, interest rates mean zip to me. What DOES matter is price inflation, as in the price of gasoline that I need to get me to a job interview so that some flunky employee in Personnel can suggest that maybe if I took a bath and maybe stopped babbling incoherently that it would increase my chances of landing a job, and I am deeply concerned about the price of food and the cost of everything else. So to hell with Paul McCully and the all the preposterous preening putzes like him who think that the whole freaking world rises and falls on interest rates, while in fact there are plenty of us who literally go hungry because of the price inflation that he and his jackass little Keynesian buddies like so damn much, and who actually cause our misery with their asinine theories. He goes on to say that money market funds have "zero default risk, zero price risk and zero liquidity risk. Zero, zero and zero. You can redeem your money market fund tomorrow at a buck with certainty, with no bid/offer spread. I don't understand where the risk is in that instrument."

Apparently there are a great many things that Mr. McCully does not understand, but the risk, Mr. McCully, and I will pause here in case you want to get a pencil and write this down because it has obviously escaped your notice, that the dollar that I get back today buys less than the dollar that I invested yesterday. I could buy a whole loaf of bread with that dollar yesterday, but today that same dollar only buys me half a loaf. THAT is the damn risk that you don't see, jerkface.

The BBC reports that, according to the Chinese State Statistical Bureau, "China's annual rate of inflation hit a seven-year high in April, underlining fears that the economy is overheating. Consumer prices rose 3.8% in April from a year earlier, driven mainly by increases in food costs." Hey! What are they complaining about? We got worse than that here! All those Chinese dudes need is some Boskin-type liars from one of their universities to re-jigger all their indexes to eliminate inflation completely with statistical sleight-of-hand and financial wizardry, and then hire a bunch of cheerleading jackasses to convince everybody that things are under control! It's working like a charm here, as you can hardly turn on a TV or read a newspaper without some moron pointing to the fraudulent inflation indexes and saying how inflation is tame, non-existent, benign, falling, and how everything will be fine once prices start spiraling out of control.

Peter Eavis, senior columnist for TheStreet.com, has taken a look at things and concluded that "A gigantic credit bust is about to happen in America. The prospect of that, not political or international events, is what's driving the stock market down." And where did all this massive credit come from that is threatening to go bust and take your 401(k) with it? From the Federal Reserve! He says, "Keeping the economy afloat by inflating a credit bubble is the stupidest thing any central bank could do, but they do it again and again. The Fed under Greenspan took that stupidity to a new high. And America is about to pay with the greatest credit bust of the last 50 years."


---Mogambo Sez: I peer through the periscope of the Mogambo Bunker, and I note that things just keep getting more and more weird, and they all see me looking at them through that periscope, and they all think I am getting more and more weird, and I AM getting more and more weird, and so that proves that they are ALSO actually getting more and more weird.

But holding
gold in one hand and a powerful handgun in the other seems to calm me down. I am calming down. I am getting calmer and calmer. I am calm. I am perfectly calm. I can make it through another day.

May 18, 2004
Richard Daughty
The Daily Reckoning

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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