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Lawn Sprinkler Economics

Richard Daughty
...the angriest guy in economics
The Mogambo Guru
May 19, 2005    

-I made a solemn vow to sober up, and this time I really mean it, when I read that Total Fed Credit did NOT, again, climb, it did NOT, again, remain constant, but last week it went down by $3.2 billion!  Naturally, I assumed that my bloodshot eyes are deceiving me or that I have finally killed the few remaining neurons in my brain that still work. Can this slowdown in Fed credit be true, and I can get back to a life of drunken dissolution with a clear conscience?  Time will tell.  

And what is the significance of Fed Credit? Because this is the magical and fabled Money From Thin Air, which is distributed to the banks by the Fed merely pushing a button, which use it to make loans, and when the bank makes a loan, real money is thus created, not from thin air, but from the increase in their reserves, which came from the increase in Total Fed Credit, which you realize DID, if you have been paying attention, come from thin air. So, without all this new money from thin air, the money supply has, umm, stagnated.

Mark Lundeen, a guy who literally drips data, sent me a graph showing the growth of Fed Credit since 1938. Back then, even after that arch-communist FDR was installing the socialist state in America, it was about $10 billion or so, and it was gradually rising and rising, faster and faster. Somewhere in the middle 70's, it finally grew to $100 billion, but it kept on increasing, faster and faster. Then, coinciding with the horrid Alan Greenspan being appointed as the chairman of the Federal Reserve, it really got going. Now it is at $783 billion.  

Sure enough, when we take a look at the money supply, as measured by the M's, we notice that they all fell, too, although for reasons completely different than why The Mogambo fell down, which was because I was going to unsteadily go over and finish off that bottle of tequila so that I would not be tempted to drink it. But the money supply probably fell because of a lot of reasons, mostly because more people were paying off their loans than were taking new on new ones. But it was nothing to write home about, but it does merit the kind of attention that one pays to small clouds on the horizon, knowing that small clouds can grow to big clouds, and then suddenly you get pelted by wind and rain and your new portable radio gets all wet and is ruined, and nobody wants THAT! So it pays to keep an eye on these damn clouds.  

Even Randall W. Forsyth, taking over for Alan Abelson in writing the "Up and Down Wall Street" column in Barron's,  remarked "The money supply (which is hardly ever mentioned in polite company anymore) has hit the wall, And while we're not high-church monetarists, a collapse in money growth always has presaged an economic slowdown and a punk market."

Now, let's analyze the last phrase of that sentence. "(A) collapse in money growth"  which probably has nouns and verbs all over the place, but who cares, is when money is no longer being created. And since it can only be created by people borrowing money (because that is how a fiat/paper money system works), this has "presaged,"  probably meaning something like meaning to "leading to" or "providing advanced warning about" or something in that vein, "an economic slowdown" which hardly needs any explanation because everyone knows what an economic slowdown is, and if you do NOT know what an economic slowdown is, then I know you are very young, and you are now going to get an education as to why your parents are probably the way they are, mostly yelling at me to stop watching that damn TV and get some work done, a task that has now fallen to my wife, who is even less successful at it.  

Clif Droke, editor of the Gold Strategies Review newsletter, notes that MZM (money of zero maturity) has not been growing, and concludes that this "makes an economic slowdown a near-certainty in the months ahead."  

Just as alarmingly as people wanting me to do actual work, the Treasury has apparently stopped selling new debt, which makes you wonder how in the hell they are going to finance their megalomaniacal visions of empire.  

But this is not about how the federal government and their willing little whore, the Federal Reserve, have apparently gotten tired of the Mogambo screaming bloody murder about this monetary insanity stuff, and have stopped this silly crap long enough to take a nice nap or something. It's about how frauds (and our current monetary policy is the biggest fraud in history) always come undone and leaves everybody weeping and then I get blamed for everything.  

For one, GATA, the Gold Anti-Trust Action committee, is back with Eric Hommelberg leading the charge, who has even more strident denunciations of the manipulation of the gold market. That the gold market is manipulated is beyond doubt, but then so are all the other markets, too. One current example is the precious metals markets, and Ted Butler remarks "(T)he tech funs have never booked a real profit in gold or silver due to their buy-high, sell-low approach." An interesting detail is that "the dealers have never booked a loss." He notes that there are some who suspect some type of collusion between the dealers and the techs, me included, but then I always suspect collusions and betrayal, as that is all I have ever experienced.  

But there is good news in this, as Mr. Butler explains. "It has been the remarkably predictable trading pattern of the tech funds that has made the analysis of the COT (Commitment of Traders) so reliable. It is the predictability of the tech funds' behavior that has enabled me to consistently identify low and high risk points in the silver market for the past few years."  

But before you jump up out of your seat to delve into this revelation and make a few bucks for yourself by following the behavior of the tech funds, here is the interesting part: Things are suddenly different! In fact, he says so himself, as he writes "The numbers are different than anything we've seen in the past" and he surmises that it may be time to "throw the old COT guidelines out the window" because a lot of other big-money dudes have noticed this weird relationship, and are moving in to cash in on it, too.  

So what to do with gold and silver if you buy it? Well, James Turk, who writes The Freemarket Gold and Money Report, writes that "Last year, State representative Henry McElroy introduced HB 1342, which has been dubbed the New Hampshire Sound Money Bill. This bill enables people to use gold and silver in their transactions with the state of New Hampshire."  

If this passes, then New Hampshire will finally be free of the inflationary shackles of the illegal fiat monetary system that has been pounded down our throats since Wilson allowed the establishment of the Federal Reserve, and (as he has been called by Vin Suprynowicz) Franklin Delano Mussolini, who used it to destroy freedom from government in America and put us all in the thrall of the government and the banks, which was a big, big mistake, as you can see by just looking around you.  

But Mr. Hommelberg is addressing gold when he says "Knowing that the price of Gold was managed paved the road for the 'in the know' bullion banks to accelerate their profitable gold carry trade (selling gold being lend by the Central Banks). A declining gold price was win-win situation for many."  How was this a win-win situation?  Well, for one thing, the banks lent the gold and got a higher price for it, and they still had the damned gold on their books, if not actually in the vault!  The guys who leased the gold sold it, and now they can repay the borrowed gold by buying it cheaper on the open market!  Not only that, but Mr. Hommelberg notes "The US government welcomed a lower gold price since it lowered inflation expectations and strengthened the dollar." Now, the failure of the price of gold to rise did not, of course, prevent inflation. It just made it LOOK like there was no inflation, since people were not scrambling to trade in their depreciating money for gold.  

He goes on to write, "This effort [by the Federal Reserve, Bank of England and BIS to turn back the gold price] was later described by Edward A. J. George, Governor of the Bank of England and a director of the BIS, to Nicholas J. Morrell, Chief Executive of Lonmin Plc 'We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake. Therefore at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded. The U.S. Fed was very active in getting the gold price down. So was the U.K.' "  

In a related note, Switzerland has finished, as of March 30, with its sales of roughly 1300 tonnes of gold that it started in 1999. The odd thing is that even as they were selling, the prices of gold went up almost from the very day that they started selling it!    

-The Depository Trust Clearing Corp. has announced that in 2004 they cleared over one quadrillion dollars in securities trades, which translates into $4.5 trillion every day, which further translates into buying and selling securities at a rate that equals the entire US gross domestic product, GDP, every 2.7 days.  

This bizarre gambling mentality is one of the earmarks of the end-game of a long boom, born of inflation, where so much money has been created and so many things have been created to absorb all of that money, that it degenerates into nothing more than raw speculation and gambling.  

-From the Financial Times we read, "Real wages in the US are falling at their fastest rate in 14 years, according to data surveyed by the Financial Times by the Economic Policy Institute. Inflation rose 3.1 per cent in the year to March but salaries climbed just 2.4 per cent, according to the Employment Cost Index. In the final three months of 2004, real wages fell by 0.9 per cent."              

And speaking of wages, the Labor Department reported last week that 274,000 jobs were created in April, although a close reading of the data shows that most of them (257,000 of them) were assumed to have been created (like the Federal Reserve creates money, out of thin air), as an expedient to make the numbers look good, as all government statistics are now massaged to make the government look good. But maybe there were more jobs created, as the Bush administration came up with another request for another $80 billion for their empire-building in Iraq and Afghanistan and all that money has to go somewhere.  

But, then again, maybe not, as first-time claims for jobless benefits rose 4,000 last week to 340,000, which is waaayyy over 300,000, which used to be bad news ("As long as first-time claims stay below 300,000, then it is okay!"), but is not even mentioned in polite company anymore.  

Moreover, the Labor Department also reported that factories eliminated 6,000 positions, on top of the 7,000 that were shed a month earlier, which probably explains part of the reason why the index of New York state manufacturing surprisingly fell this month. The index is now at the lowest level since April 2003, ending two years of growth in that particular index.  

But even without wage gains or employment growth, some consumers apparently found a way to justify going farther into debt, and so consumer spending went up 1.4 percent in April, and is actually running at a stronger pace in May. The really interesting part is that some retailers mentioned that the number of transactions declined, but that each customer bought more. Hmmm.  

At least most people got into the debt thing a little deeper, perhaps except the guy who wrote to Richard Russell, of the Dow Theory Letter, who was complaining because his credit card company has now raised the minimum monthly payment, and now he can't pay that much money, and is considering filing for bankruptcy as a result! Can you believe this? What a moron!  He has gorged himself with so much stuff that he can only afford to make the minimum payment?  Well, to show you what a class act Mr. Russell is, he only addressed the facts and was solicitous and gracious as usual. Whereas if he has written to The Mogambo with his pathetic little whining snot-faced tale of woe, I would have called up his mother and had her go over there and slap his stupid little face to 1) teach him a lesson in the benefits of going into un-payable debt and 2) punish him for embarrassing her by admitting to such stupidity in public, and now when she walks into the grocery store she can feel everyone's eyes upon her, and she can hear them whispering to each other "I wonder how much farther in debt her idiot deadbeat son got? She must be a bad mother!," and I tell her that she now knows how I feel when I go to the store, and I could hear them whispering "There's that stupid Mogambo. He must have had an insane mother! And father!"  

On the other hand, discount retailers reported weak result in April, as we lower-income proletariat scum, who primarily shop at discounters, and whose wages are falling, are finding it difficult to consume our way to nirvana, as it the current vogue.

-An essay entitled "Shanghai Surprise" on the DR site by Karim Rahemtulla has an interesting anecdote about the coming re-pegging of the yuan. "My Big Mac meal in Shanghai set me back $2.19 - about half what it would cost in the United States. This is a good indication, along with the 15 cents I paid for a Snickers bar and the 30 cents I paid for 16oz Pepsi, that the Yuan could appreciate quite a bit from current levels." Which I conclude means that the dollar could depreciate "quite a bit from current levels."    

Beyond that, he thinks that "China is a conundrum. It defies economic principles with low inflation, high growth, and huge money supply, and a socialist government all in one...someone is lying somewhere."  Putting these two pieces of information together, he says "My advice on investing in China is this:  To really profit from China, fly over with a few suitcases and spend as much as you can, buying goods at artificially low price," which is probably real good advice, since when the dollar depreciates, you will only be able to buy less stuff. So buy now, before the dollar falls, and get more stuff! It's the American way!      

-As my latest stupid bid to win that elusive Nobel Prize in Economics, I have happened upon what I think may be the defining metaphor for what is going on. I call it the Mogambo Lawn Sprinkler Theory (MLST). Like Newton having an apple fall on his head, whereupon he supposedly invented gravity, I, too, have had such an epiphany.  

See, what happened was that my good lawn sprinkler finally bit the big one, and now I am on auxiliary back-up sprinkler, which is so cheap that it was probably a free gift inside a box of breakfast cereal or something, or a gift from a realtor wanting to list my house for sale and then make a big fat profit, and then where would I live?  With my parents? They're dead, you moron!  I can't GO home!   But we are not here to talk about how I am now a pathetic orphan with no mommy or daddy, boo hoo hoo, or how realtors are beating the bushes for houses to sell, as if anybody would move into my run-down rat trap, much less pay money for it.  

So here I am, trying to maneuver this damn sprinkler around the yard, a little at a time. And that means that I have to go out there and physically pick the damn thing up to move it to another spot that needs some water. So I am crimping the hose with one hand to stop the flow of water that comes shprutzing out of this damned little sprinkler, but you can never completely stop it. No matter how hard I crush that stupid hose, there is always a little spray, sort of a mini-shprutzing, and so you have to be real careful when handling it or you will get wet. And you are almost never careful enough, because sooner or later you are going to get spattered by drops of water. And then the next time you are out there, adjusting the sprinkler, you are being extra careful, but you STILL get shprutzed by that damned hose!  And then, just when your clothes have dried off a little, you gotta go change it again. But this time, having gotten wet the last two times in a row, you are being extra, EXTRA careful, holding a cold beer in one hand and a cigarette with the other, while simultaneously holding and dragging and manipulating the damn hose, but it's flipping and flopping, and you can't seem to maneuver it into the exact damn spot you want, because this has got to be aimed correctly or some damn little stupid place is not going to get as much water as the wife thinks it needs, and then she is saying to me, with that ill-disguised undertone of loathing and disgust that is the bedrock of our marriage,  "My (insert name of some dumb plant that I never heard about that she planted within the last five or ten years that looks like a weed to me)  didn't get any water! Now they are dry and dying!"  Naturally, because I am The Mogambo, I politely tell her that maybe the plants would feel better if I came over there and shut her fat yap for her, and then she suddenly goes all weird on me (probably hormones or something).

But it was during one of these sprinkler-turning episodes where it suddenly occurred to me that economics is like a cheap water sprinkler; you can't do stupid things with it, and if you do, you will get very wet, because you are going to get a little wet anyway, even if you do NOT act stupid. And when that happens, it will look like you peed in your pants, and the neighbors come out and start pointing at you and laughing, "Hahaha!  Mogambo peed in his pants!"  and then I say "No, I didn't!" and they say "Yes, you did" and I say "No, I didn't!" and then I start to cry. Then the bitter tears of rejection and desolation are dimming my eyes, and everything seems watery and indistinct and surreal, and now the tears are starting to sting my eyes with all the salt, and I can't get a good aim at any of them, and my bullets are going everywhere. As my vision clears, I see that my shot pattern looks like I am some kind of rookie, and I end up wasting a whole clip of very expensive ammunition for nothing.  

So, just as getting wet is a bummer, so is the price inflation that is inevitable when the money supply expands so much, and now getting some more ammo is making a dent in my budget. That may explain why my kid wakes up in the middle of the night, screaming about monsters under his bed. I patiently explain that there are no monsters, and so therefore there cannot be monsters under his bed. And then he says "Well, the government says that there is no inflation, and they are liars!  Therefore, you are probably lying to me, too, and that is why everybody hates you! And you're all wet, too!"  

And while getting wet from a stupid sprinkler is bad enough, you will dry eventually, but your clothes are ruined. And so it is with inflation, as eventually it will end, too. But while your clothes will not be ruined, everything else about your life will be.  

-The Texas Hedge Report talks about the goings-on at the Berkshire Hathaway meeting where they discussed the gigantic fraud of Fannie Mae. They quote Warren Buffett saying, "Fannie's earnings were off by $9 billion from what the company originally said. Freddie's were off by $5 billion. People weren't necessarily negligent. It's just hard to estimate. A lot of relatively small assumptions go into the numbers. If you change one even slightly, it could have a big effect on the bottom line."  

Although they didn't mention it, this is the whole point behind Chaos Theory, which proved that any tiny, teensy-weensy, insignificant little change, in any of a thousand variables, or a million variables, or a billion variables, WILL give you a result that is wildly different than what would otherwise occur.  

Here is a real life example. Every Saturday morning, my wife wakes me up with an exercise program, wherein she takes a pillow and jams it down over my face, which wakes me up, kicking and screaming.  Since I can't breathe, I start struggling to get that damned pillow off my face. But she is pressing down hard, and by the time I manage to free myself, I have worked up a good sweat and am wide awake, ready to face the day. But this morning she did not, as she was out meeting with a lawyer, who advised her to get a handgun, and so I completely overslept. Thus I missed today's episode of The Brady Bunch. See what I mean? The slightest change produced wildly different results.   

Now, I'll be the first to admit that Warren Buffett is a smart guy, which I surmised from his never taking a call from me (in fact has his secretary tells me "Mr. Buffett is not here. May I take a message?" and I can HEAR him standing behind her, laughing at me!). So you gotta wonder why he says stupid things like "I'm not crazy about gold as a hard asset, compared to, say, oil, See's Candies, or Coke. If the value of the dollar dropped by half, we'd sell See's chocolates at twice the price." Huh? You notice that I am uncomfortable with this whole pricing concept, the theory of which eludes me completely. I mean, if raising prices is so easy, then why in the hell doesn't he raise prices NOW, and make twice as much money NOW?  That's what I would do, and so would you, and so would every kid that struggled through microeconomics, because he or she knows that microeconomics is solely concerned with achieving optimal performance and profits. So, Warren Buffett, the fabled Sage of Omaha, says that is performing at, at most, 50% of potential?  Jeez!  How in the hell did this guy get such a great reputation?   

He also shows a kind of weird logic when he says, "If you go back to 1900, gold sold for $20 an ounce, and has risen to just $400 since then."  Well, duh! In 1900, the dollar was DEFINED in terms of grains of gold, for crying out loud!     

I know that this ragging on Warren Buffett is dangerous business, as he is a rich genius hot shot and I am just a guy, an ordinary guy, a guy with a broken heart and song to sing, a guy stupid enough to think that he can poke fun at Warren Buffett and moronic enough to think he can get away with it.  

So, naturally, my folly reminds me to start praying, (as Marlon Brando said in his role in the movie "Mutiny on the Bounty" as he was putting Captain Bligh adrift in that little boat in the middle of the ocean), to "whatever pig-god you pray to." Well, as it turns out, whatever pig-god that Captain Bligh prayed to is a pretty nice dude, as they miraculously made it to safety and testified against the handsome and young Marlon Brando and his fellow mutineers.  

So while I am not advocating that we worship a pig-god, even though it seemed to have worked out great for Captain Bligh, I nevertheless turn to the religious side, since the country seems to be waxing religious, which is one of the things that you will notice as things get progressively worse and worse. So there I am on one side, calling them a bunch of hypocritical, Bible-thumping cowards and morons who can't comprehend the Constitution, and everyone else on the other side, doing hurtful things like calling me "spawn of Satan" and "ugly, smelly little creep" and yelling "Hey! Quit trying to steal my lawn sprinkler, you thieving bastard!"  

So turn to your Mogambo Religious Book (MRB), and after I recite a relevant passage from the Book of the Naughty Nymphettes, you chant the appropriate response, which has been thoughtfully provided by The Mogambo, which you will find conveniently enclosed in parentheses. The congregation shuffles nervously as I adjust my religious headgear (the Propeller Beanie Of Infinite Compassion And Holiness (PBOICAH)), and in my squeaky little voice I begin, "And verily I say unto you, who the hell knows what gold would have been worth if the dollar was then, as it is now, a dumb-ass fiat currency?" ("The Mogambo knows!"). "And who amongst us knows what gold would have been worth if the banks and the Fannie Mae's had not been allowed to insanely expand the money supply then, like it does now?" ("The Mogambo knows!"). "And who is it that walks in our midst who can tell us what gold would have been worth if the government was then, as it is now, some giant borrowing- and money-distributing machine? ("The Mogambo knows!").  

Warming up to the role, I raise my arms dramatically, and peering off into the infinite distance as if perceiving wisdom from the reaches of the, again, infinite universe, I loudly conclude "And who resides in the bosom of our community who can know the person responsible for this calamity that soon befalls us? ("Alan-freaking-Greenspan, the chairman of a damned private bank they named the Federal Reserve!")      

Now that we have finished quoting scripture, it is time for the sermon. Mr. Buffett is right, of course, when he says that people who hold gold "would have to pay for insurance and storage." And he is also right that "The Dow, by comparison, was at 60 or so in 1900; it's now around 10,000-and has paid dividends along the way." And while he conveniently forgets, taxes were paid, and you paid your brokerage all kinds of fees and costs and commissions, too!   

And let's not forget that indexes are manufactured, where the custom is to drop any companies in the index if they go bankrupt, which may explain why the Mogambo Money-Grubber Company cannot be found in any index nowadays. Notice that there is no accounting for the losses that were incurred by the holders of the bankrupt stock that used to be in the index. How convenient!  

Mr. Buffett is also anti-gold, as he proves when he says, "Gold is just about the last thing we'd want to own. Other alternatives have utility, which gives them value. I'd rather have the ability to sell a pound of candy 20 years from now." Well, so does everybody, dude! That is the whole point! We want you to be ABLE to sell a pound of candy twenty years from now!  And a destroyed economy is NEVER conducive to selling chocolate candy!  

Seeing that I am winded and out of breath, I reach out and slap the hand of the Texas Hedge, signaling them that since we are in this tag-team match together, they ought to get into the ring with Mr. Buffett awhile. Bounding over the ropes, they say, "We do not disagree with Buffett in that under most circumstances gold is a poor asset to hold when compared with a solid operating company over long periods of time. However, this is no ordinary time. The Fed and the powers that be are attempting to debase our currency like no time in recent financial history. Buffett himself has seen fit to take $21 billion in a basket of foreign currencies for the first time in 50 years. He recognizes the same trade and current account issues that make people bullish about gold."      

But it is not just gold they like, but also, as does Warrant Buffet, silver. They note that "Silver, for instance, has a wide range of industrial applications. We are more bullish on silver than gold for supply/demand fundamentals."  Then they give Mr. Buffett a whack about his 130 million ounce silver purchase! Hahaha! Take that! Hahaha!  

But they, like The Mogambo, can't stop thinking about all that candy. "Likewise, the ability to sell a pound of candy versus holding a quantity of gold is a point well taken, but paying an absurd multiple for the right to sell that candy (akin to the expensive stock prices prevailing today) versus purchasing gold still near the lower end of its 20-year bear market range and with a once-in-a-generation current account problem doesn't seem so foolish to us."  

Sitting ringside, nursing a bruised jaw while watching the action, I say, to no one in particular, "That's what I figure, too."

-In my younger days as a young larva, I would spend the warm summer days in my cozy cocoon, trying to think of some way that I, The Mogambo, could come up with a way to get us out of this suicidal economic mess caused by creation of too much money and credit, made worse by operating in tandem with a fractional-reserve banking system, and then made suicidally worse by being coupled with a fiat currency, all under the control of a monstrously large and expensive central-planning government  that is trudging down that same tiresome road to socialism that lead everyone else to ruin. All my hoodlum friends said to me "Quit wasting your time!   Everyone in history has grappled with this problem without success! Why don't you figure out a way to get us some reefer or some beer?"

Bill Bonner of the Daily Reckoning.com, who has neither reefer nor beer, or if he does, he isn't sharing any of it with me, says roughly the same thing when he says "Greenspan is trapped. He needs to 'normalize' rates to encourage saving and investing, otherwise the economy cannot really grow in the future. But he needs to lower them too; otherwise the economy might collapse now."

So there you have it! If you want to be famous, like I do, and if you want future generations of people to sing your praises, like I do, then all you have to do is solve one stinking little economic problem, like I can't!  And you owe a debt of gratitude to Mr. Bonner here, who has just told you exactly how to do it! All you have to do is to simultaneously a) lower interest rates to stimulate the economy and b) raise them to choke of inflation at the same time!  If you find a way to do that, then you have it made, and thus your genius will enable people to forever buy more and more stuff, going farther and farther into debt, forever buying more and more stuff!  And you better hurry, because they are so sodden with debt that  you can actually hear them slosh when they walk past me without leaving any money in my hat as I play my guitar and singing the blues, mostly plaintive 16-bars of heart-wrenching pathos and desperate despair along the lines of "Oh, the Federal Reserve destroyed our money, and now we're going to die (doo wah, doo wah),. Oh, the Federal Reserve destroyed our money, and now we are going to die (doo wah, doo wah).My woman done left me, I don't know why. But it may be that she is tired of me just because I can't hold a job, and I can't hold a job because my bosses are government goon-squad robots (doo wah, doo wah)."  

If you do NOT find a way to solve this riddle, then Mr. Bonner provides a little incentive for you. "Empires do not always die gracefully."    

Even Bill Fleckenstein, who writes the "Rick's Picks" newsletter, [editor's note: Rick Ackerman writes "Ricks Picks." Bill Fleckenstein writes "Market Rap."] says that he agrees with me and Mr. Bonner, although he is quick to add that while he DOES agree with Mr. Bonner, he does NOT agree with me about anything, mostly because I am an idiot. So naturally I get all huffy and explode "But we are saying the same thing, you butthead!" and he says "I know. But he never called me a butthead" and I reply "But I didn't call you a butthead until you said that you did not agree with me!" and then he says "See there? You called me a butthead again!"  

Seeing that this is going nowhere, I drop the whole subject, and merely report that he says "Sane adult central bankers throughout history have tried to avoid asset bubbles, because the aftermath of them is so ugly. The Fed, though, has decided that bubbles are not dangerous, as they think they can remedy their aftermath."  

Then he goes on to agree with Mr. Bonner, The Mogambo and the entire corpus of economic history, from the present all the way back to when the first primitive creatures walked up out of the sea and started putting up condominiums on the beach, where it has been proved time and time again that "Bubbles are not solvable. They are only preventable."    

-When things start getting weird, things start getting weirder. The latest example is the announcement from the Pentagon, although they are currently fighting belligerents all over the damn place, has announced plans to close 180 military installations, including 33 major bases. Weird enough. But, I guess, budgets being what they are, there has to be a little belt-tightening. So how much is this going to save?  You're going to love this; $48 billion over 20 years! Twenty years! That comes to $2.4 stinking billions per year! Per YEAR! Hahahaha!   Hell, we need that much money per DAY, every damn day of the week, just to balance the trade deficit! And that is roughly the amount of money that is being spent per DAY by this year's budget deficit alone! And these base closings are so important because we are going to save $2.4 billion a year?   Hahahaha!  

And it is spread over twenty years! Hahaha! They can't project a damn thing from one month to the next, but here they are promising to save money over twenty years! Hahahaha!      

But offsetting money is being spent in other places, such as Florida, which will see a big benefit, including $47 million for an Armed Forces Reserve training facility right here in my little town of Pinellas Park, to train reservists, which I figure is just a cover, and they are turning out the robots to be used as federal goons squads, and they are going to be coming over here, and then one day I will just disappear, and everyone will say "Whatever happened to The Mogambo?" and someone will tell them "The government robot goon squads came and got him," and then everyone will nod their heads knowingly.  

So, on net, regardless of the $48 billion in saving, all the spending is continuing.  

Then we go on to learn that tens of thousands of direct jobs will be, in those locations, eliminated. And not like when they fire The Mogambo, which involves them shooting tranquilizer darts at me from behind the water cooler and I wake up under a bush in the park (and it's a good thing, too, because if they don't, then I scream and throw things and break everything and make death threats against everybody, including that snotty little mailroom kid).  

But the point is that there will be a roughly corresponding increase in other places, so, on net, again, there is not much reduction in anything, including employment.  

And the funny part is that these are only recommendations, and the closing process can't even start for six years! Even if the plan is adopted right now! Which it won't be, because there is a long and arduous appeals process, and input gathering and blah blah blah, which means more money for lobbyists, and individuals and companies that provide the dog-and-pony shows, and the data gathering, and again the blah blah blah, and at the end of it, historically usually only about 15% of the recommendations are adopted anyway. What a system, huh?    

-The going rate on Certificates of Deposit has been moving up, although still in the range known in Mogambo-ese as "junk assets" as it pays an interest rate that is less than the inflation rate plus the tax rate, so you are steadily losing money by buying one. And the rate is now 133% of the rate they paid just twelve months ago, up from 1.5% to the current 3.47%. Still crappy, but the percentage move in the yield is pretty impressive!  

So CD holders, when they renew their CD's, are going to be relatively happy, as they are now going to get a yield that is more than twice as big! Much more than twice as big!  

Of course, they will never make up for all the buying power that they lost for the last five years as prices climbed and their interest-income dropped below the rate of inflation, as Alan Greenspan and the asinine Federal Reserve pounded interest rates into the toilet to bail themselves and the damned banks out of the mess they created in goosing the stock markets to insane levels. And even at the now-relatively princely interest rate of a 3.47% rate, depositors are still underwater, simply because they will owe the marginal tax rate on the 3.47% yield, which, at 25%, means that the take-home, after-tax yield is reduced to 2.6%, at the same time  (Hahahaha! I can hardly stop myself from laughing!) as inflation is twice as high as that!   So people who own certificates of deposit can actually chart exactly how much poorer they got: How much interest did you collect last year from your certificates of deposit? Then you lost that much buying power!  But it is better than the calculations of last year, when they were losing triple the going rate! Hahahaha!  "We're from the government, and we're here to help you!"  Hahahaha!    

-Speaking of inflation, last Friday the Labor Department said that U.S. import prices rose 0.8 percent in April. As if that was not bad enough, March's import price numbers were revised up to a 2.0 percent gain, up from an initially reported 1.8 percent rise. For those of you who like your inflation statistics spread over a longer period of time, total import prices have risen 8.1 percent on a 12-month basis. 8.1%. Horrendous inflation!

And it is not just import prices that are rising, but April export prices were up 0.6 percent, too!  Prices are increasing everywhere!  

They also said that, so far this year, producer prices are rising at a 5.6 percent annual rate compared with a 4.4 percent increase at the same time last year. Costs of intermediate goods, those used in earlier stages of production, rose 0.8 percent last month and were 8.2 percent higher than they were in April of last year. Prices of raw materials, used at the earliest stage of the production process, rose 2.7 percent and were up 11.8 percent in the past 12 months.  

And yet all I hear is how inflation is "contained" and "low!"      

-Dan Denning, of Strategic Investment, has been taking a look at the deflation/inflation debate, and has concluded, as I have, that "I haven't changed by long-term view that tangible assets will be in a bull market while financial, retail and housing stocks will 'deflate.' In fact, there's abundant evidence that the entire commodities complex is in the midst of a long-term super-cycle secular bull run."  

-An outfit called Investec published an interesting article entitled, "Howzit my China?" which is a nice piece about China and how it is the future and blah blah blah, but they took time to note that all financial crises are always the fault of the damned banks, and in the US they remind us that. "During the period 1873 and 1914, there were 11 banking crises; from 1884, they occurred every three or four years[1]. Between 1875 and 1900, 700 railroads with over 50% of the nation's track ­ or 100,000 miles ­ went bankrupt."  

And things are no better. Now that the moronic idea of the Federal Reserve has plunged us into such extraordinary levels of debt, debt owed to banks, that financial crisis is inevitable.


***The Mogambo Sez: The lease rates for gold on the Kitco.com site show that the rates are rising a lot. This should cut down on the current push to crush the price of gold. Theoretically.

Richard Daughty

email: RichardSmithGroup@verizon.net
Daughty Archives
Provided as a courtesy of Agora Publishing and 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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