The Twilight Zone
...the angriest guy in economics
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!
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
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
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!
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.
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
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
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
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
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
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
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
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.
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.