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Monetary Incest

Richard Daughty
...the angriest guy in economics
The Mogambo Guru
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Jul 6, 2005

- Last Friday, around three o'clock in the afternoon, something snapped in my brain, and the last thing I remember was when I saw that the national debt exploded upward by $60 billion dollars. In one day! Then next thing I know, I am lying on the floor and staring up at the ceiling, wondering how in the hell I got here.

It was several hours and a pepperoni pizza later before I finally, and grudgingly, returned to my usual reality of being another face-in-the-crowd frightened paranoid lunatic, driven berserk by the insane monetary policy and the mutant brand of ridiculous economic theory that we are operating under. Then, just as I was putting my shattered life back together, I see that the banks, last week, gobbled up $53 billion in government debt! This was after these same banks SOLD $74 billion last week! My breath started coming in ragged gasps, and next thing I know, I am lying on the floor and staring up at the ceiling, wondering how in the hell I got here.

Of course, my suspicious and distrustful Mogambo nature (SADMN) immediately jumps to the conclusion that the government now creates debt and the banks create the money to buy the debt, which is akin to brothers and sisters marrying and having lots of kids, who marry each other and have lots of kids, who marry each other and have lots of kids. You end up with lots of kids, but not the kind you normally want, with the emphasis on "normal." Ditto with economies, if you catch my drift here.

So, staggering unsteadily to my feet, my eyes happened to focus long enough for me to read the statistic that the new Gross Domestic Product Deflator had been revised upward to 2.9%. I could feel my guts churning. The next thing I knew, I had this weird, swirling feeling of overwhelming déjà vu as I was lying on the floor and staring up at the ceiling, wondering how in the hell I got here.

This Gross Domestic Product Deflator thing, in case you were wondering, is the inflation gauge that they use to reduce the dollar value of raw GDP, which is, roughly, just the total dollar amount of sales and exchanges in the economy. But since the dollars that are spent have been continuously devalued in buying power, the prices paid have gone up. So, obviously you can't have a growing economy if last year you sold ten widgets at a buck apiece, and this year you still sell the same ten widgets, but at two bucks apiece. If you look only at income, it looks like the economy grew 100%! Wow! But I am sure that you noticed, with your penetrating and insightful glare, that the economy still only made ten lousy widgets, so actually the economy, in terms of output, had zero growth. So, you have to reduce those dollar-sales by the amount of dollar depreciation to get "real" (inflation-adjusted) GDP, as measured in constant units of buying power. That reduction is now about 3%.

And since the horrid Boskin Commission (the guys who came up with all those slimy trickster ways to let the government make inflation seem to disappear) was charged with the task of literally erasing about 1.5% of inflation out of the statistics, to get a glimpse of reality all we have to do is add back that 1.5% to the "official" deflator, and now we see that inflation is actually running at 4.5%!

And now, to show you that something very, very weird is going on, let's take a look at interest rates in the face of this inflation. Short rates are up a little, but long rates are not. In fact, almost all interest rates are actually below the rate of inflation! Damn near every interest-bearing asset, the world over, regardless of maturity, is priced so high that it yields less than the real, unadjusted rate of inflation! This is insane! This is beyond insane! This is out there, past the fringes, where not even The Mogambo will go, even when over-medicated to semi-consciousness!

The yield curve is almost flat, so I figure, and this is where I reveal my ugly, suspicious and utterly distrustful character, that this is caused by the guys who laid on all of those derivatives when the curve was steep, who are now so far underwater that it is threatening to implode the whole scheme. So what to do? Easy! Loan them more money to put on some spreads that bet that the curve will continue to flatten! And use the government to take the stupid, losing end of the trade!

I see hands go up, and being The Mogambo, I can read their minds, and the result is that about 80% of them are lost in pornographic daydreams, and the other 20% are wondering either "What in the hell is that jerk talking about?" or "Did I just pee in my pants?"

"But," I say, "as an offset, as the yield curve steepens, their existing steep-curve derivatives would be back in the money! And they can pay the losses of the narrow-spread derivatives! Everybody wins!" And to illustrate my point, I jump atop my desk and belt out a powerful rendition of "We're In The Money," where I use this really neat Al Jolson-like voice on the line "We got a lot of what it takes to get along"!

- According to HalfPastHuman.com, the sun is putting out all kind of storms of energy and particles, and oceans of them are washing over the earth. The interesting part, for me, is when they pondered the significance of so much energy being absorbed by the earth, especially along the lines of the famous equation E=mc2, which would seem to dictate that our mass (m) could be increasing as a result of the input of new energy (E). Not much, perhaps, as the total energy input would be divided by the square of the speed of light, but some. Perhaps a lot.

And even if the energy is not converted to mass, the sheer amount of cosmic energy coming into the earth must have some damn effect! I mean, if my wife hurls a frying pan at me, I know she is going to miss me because I am ducking and weaving and taunting her ("Nyah nyah! Missed me again, ya old bag!") But the lamp, the wall and the floor are not so fortunate. So we have proved that large amounts of energy coming into the system WILL have an effect, even if only on the furnishings and bric-a-brac.

And this may explain why, sort of suddenly, there is all kinds of increased/weird atmospheric and geologic activity. Not to mention all the other kinds of behavioral weirdness that seem, suddenly, increased here lately.

- Walter J. John Williams is a guy who has looked at federal spending from an actuarial viewpoint, which means not only looking at cash-flow today, but the future impact of it all, "using generally accepted accounting principles (GAAP)." He adds that "a large portion of the expanded deficit is from the annual increase in the net present value of unfunded Social Security and Medicare obligations."

So how bad is it? He says "The U.S. government's fiscal ills have spun wildly out of control and no longer are containable within the existing system. The actual annual shortfall in U.S. government operations for fiscal year 2003 was $3.7 trillion. Put in perspective, that means if the U.S. Treasury had seized all wages and salaries in 2003 with a 100% income tax, there still would have been a deficit! The outlook for fiscal 2004 numbers is even worse." And to spare us further horror, he does not even mention that 2005 is going to be even worse! And then people wonder why I am so weird! But to use a line from Randy Newman's terrific theme song of the TV series "Monk," "People think I'm crazy for worrying like I do. If you paid attention, you'd be worried, too!"

But just this tiny smidgen of information should be enough to make you think to yourself, "The Mogambo was right! The government is a lying bunch of idiots that are destroying our economy!" As if to prove me right, he goes on to provide proof, and he says the "popularly reported 2003 budget deficit was $374 billion, one-tenth the number cited above." One-tenth! The government is admitting only one-tenth of the destruction that it is causing our economic system!

He figures that the true fiscal deficit for 2004 will be prove to be near $4.3 trillion, meaning that the deficit for 2005 ought to be about $5 trillion, which means that in three short years, the buttheads that we elected to Congress have not only spent everything they could get their hands on, but have increased our accrued debt by more than the entire GDP of the country! Everything we, as a nation, produce in goods and services, in a whole year! And this gigantic sum is just the ADDITION to the accrued national debt! And it is getting worse every freaking day!

Seeing that I am sitting here with this stupid look on my face, which he thinks means that I am totally clueless, and he looks at me in disgust. In truth, I am only partially clueless, and the tiny little piece of The Mogambo that is NOT clueless is stunned, and I look like this when I am stunned. Speaking as if he is talking to some slow-witted four-year old, or a Congressperson, he says, with that undertone of pity and contempt that these are "negative extremes never before breached outside the environment of third-world, net-debtor nations, jerk." Well, he didn't actually finish up by calling me a jerk, but you could tell that is what he wanted to say, so I added that part to show you how everybody hates me, and how they are all out to get me.

So what to do? If you listen to that idiot Mogambo, there is nothing to do, as there are no solutions, and that is why it is imperative that you not get yourself into this kind of stupid mess in the first place. But Mr. Williams is not so negative, or scary, or angry, or as heavily-armed. He says "The unfolding fiscal disaster faces one of only two very unpleasant general solutions. The first solution is draconian spending cuts, particularly in Social Security and Medicare, even if accompanied by massive tax increases. This appears to be a political impossibility, at present.

"In the absence of political action, the second solution is the U.S. government facing some form of insolvency within the next decade or so. Shy of Uncle Sam defaulting on debt, the most likely outcome is the Fed eventually having to monetize U.S. debt heavily, triggering a hyperinflation. U.S. obligations eventually would be paid off in a significantly debased and devalued dollar. "

This brings up the point the dollar has grown so strong here lately that it is the highest it has been in over a year! See? I told you things are weird!

- Ned Schmidt has calculated that since about 1990, "the U.S. international net worth has been negative, and is currently just shy of negative $3 trillion. Interestingly, that period of negative net worth for the nation seems to coincide with the reign of Greenspan at the Federal Reserve. Federal Reserve policies seem to be the most likely influences that destroyed the equity of the U.S."

Even Bill Bonner of the Daily Reckoning, who is a real calm and intelligent guy, which are just two of the things that I am not (and by a long shot), has pondered this very thing, and thoughtfully muses, "How we would love to read the history books 100 years from now! What will they make of our strange Pax Dollarium with all its bizarre illusions and silly conceits? At the current rate, the United States squanders its national wealth at the rate of more than 6% of GDP and approximately 1% of its total balance sheet annually."

And this brings us, as you knew that it would eventually, and I can almost hear you groaning and whining "He's not going to start up about gold again, is he?" and I reply "Yes! Yes I am!" In a stage performance worthy of an Oscar, which I will not get again this year because of political intrigues, I stretch out my mighty Mogambo arm (MMA) as if summoning the thunder of Zeus from atop Mount Olympus, and with a stentorian bellow, I, ummm, bellow, "gold! gold, infidels! O, ye who worship at the altars of paper money and fractional banking, on your knees to gold! If not today, thanking gold for being there to save your nasty, stupid butts, then soon enough you will be on your knees, begging gold to at least save your children's nasty butts!"

And I say this, with all the beaming confidence that a guy who has no idea what he is talking about can muster, that gold will prosper against a paper, fiat currency because it always has and always will. And a fractional banking system does nothing but make it all a lot more so.

As a proof, I offer Prof. Werner Antweiler, of the University of British Columbia, who has calculated the comparative daily exchange rates of the Japanese yen, European euro, British pound, Canadian dollar, and the US dollar, all relative to gold. The result? I though you would never ask! They are all losing ground compared to gold! And what do these currencies have in common? They are all paper, fiat currencies! And everybody who uses those currencies would have made money buying gold! Hahahaha! See? I told you what would happen! And sure enough, it did!

And you don't have to take my word for it, or believe your own lying eyes. On the TocquevilleFunds.com site, they write "The dollar price of gold bullion is trading within 3% of a seventeen-year high, despite negative sentiment. Over the past five years, the dollar gold price has increased 50% vs. a 16% decline in the S&P 500 and a 18% decline for the trade weighted dollar."

Ned Schmidt has gone even further, to show you that he doesn't sit around all day goofing off and making prank calls to the Federal Reserve ("Hello? Federal Reserve? Alan Greenspan is a big butthead! Hahahaha!"), has calculated that other fiat currencies have suffered the same fate, too, and some of these countries are Australia, Mexico, South Africa and Switzerland. Inescapable conclusion, which is immediately comprehensible even to a pitiful moron like me? So I raise my hand and wave it excitedly, wanting him to call on me to supply the answer. But Mr. Schmidt acts like he doesn't even see me, and says, "What this ddtells us is that investors have been moving away from fiat monies, all of them."

Then, to lighten things up, he adds a little joke, and says that in one sense the USA has a negative book value. Then he asks, "By the way, how many of you would buy a stock that has a negative book value?" which I suppose would probably be real funny, except that all I do is shudder and wonder if I am sufficiently heavily-armed, because when things start reverting to their real value, there are going to be a lot of angry, scared, desperate people. And of all the things I fear, I dread mobs of angry, scared and desperate people, because I have seen a lot of movies, and in the ones that have mobs of these kinds of people, they behave very badly, and usually of a distinctly homicidal nature.

As an aside, apparently there are a lot of other people who watch old movies, as the sales of guns are shooting up, if you'll pardon the pun. Smith & Wesson Corp. said "firearms sales for fiscal 2005 are expected to increase by approximately 11 percent over fiscal 2004 levels."

- An interesting nugget from Marshall Auerback on the PrudentBear.com site says that, "Over the next fifteen years, to improve living standards, the authorities plan to move three hundred million workers from rural areas where they earn just over one dollar a day, into the towns and cities where they could earn four and a half dollars a day." This means that this is the exact equivalent of the whole population of the USA gradually getting a 450% increase in their incomes. This comes to 10.5% a year! A group the size of the United States is going to get annual 10.5% raises? Wow! Wow de wow wow!

As a point of discussion, what would you say would be the result of wages and salaries increasing by 10.5% a year, for fifteen years, in the USA? And can you equate that with the effect on inflation? Hahahaha! Me, too! We're freaking doomed!

And this is not something new, either, as Mark Faber tells us that "per capita incomes in China have doubled every 10-12 years for the last 25 years." No wonder they are growing so fast!

- Alert reader Jack W is one of those guys who sent along the perfect word to describe the how the American political system, as do all systems, has evolved. Kak·is·toc·ra·cy, which is a noun that means "Government by the least qualified or most unprincipled citizens." Hahahahha! See? I told you it was perfect!

- And it is not only us, that is being mismanaged into the ground. The Canadian Taxpayers Federation reports that Tax Freedom Day in Canada fell on June 26th this year, as calculated by the Vancouver-based Fraser Institute. They explain that Tax Freedom day "is the day you stop working for government and start working for yourself. Prior to June 26th the equivalent of all your income went to pay taxes to the three levels of government."

This year it occurs one day later than in did last year, "and fully 12 days later than it did in 1995!" They attribute it to the growing number and level of taxes that they have to pay.

In short, Canadians "worked 103.5-days to pay the federal government, another 64 days to feed the provincial government, and a final 9.5 days to satisfy City Hall. Total: 177 days, fully 48% of our incomes!" Forty-eight percent of income! And before you get all weepy-eyed about the poor Canadians, I remind you that we pay, to local, state and federal governments, roughly that much here in the USA!

- Martin Weiss of the Safe Money Report says that "the 'household debt service ratio,' which how much of the average household's disposable personal income goes toward debt payments on everything from mortgage to consumer debt. In the first quarter, it hit 13.4 cents per dollar -- the most ever."

This seems bad enough, but he goes on to say "And that's just an average! If you factor out the wealthiest families, you'll find that typical homeowners are spending 40%, 50% ... even 60% of their incomes on their house payments alone -- to say nothing of their other debts." Which are also so big that they have set a new world record!

- It looks like things are going to get rough in Mexico, as explained by Roland Watson in his essay, "Mexico: the State, Oil and silver" on 321energy.com. He says that untoward things are happening at the huge Cantarell oil field. "Since the field came online in 1979," he writes "reservoir pressure has continually dropped as production extracted more and more oil. The crunch came in 1999 when production began to decline and massive injections of nitrogen gas were employed to stabilise reservoir pressure. At 1.2 billion cubic feet of compressed nitrogen per day, nearly half of global nitrogen production was used on the Cantarell field." Wow! Now that's an interesting fact I never heard of! Half the global production of nitrogen is being pumped into the ground in Mexico! "Mexico joins the growing list of countries in oil production decline. So with liabilities of $88 billion dollars (four times that of Exxon) and an annual investment requirement of $10 billion just to maintain current production levels, Pemex is on the verge of bankruptcy." Uh-oh.

- The outrage over the Supreme Court's Kelo v City of New London decision to allow a city to force a homeowner to sell his house to a developer has occasioned today's installment of positively poetic justice (PPJ). To wit, a group of investors has petitioned to have the house of Supreme Court Justice David H. Souter turned over to them to construct a hotel, which they plan to call "The Lost Liberty Hotel." It will also feature a "Just Desserts Café" and a museum "featuring a permanent exhibit on the loss of freedom in America." I love it!

- Christopher Farrell, writing the essay "Greenspan: Wizard or Villain?" on msnbc.com, divides people into two camps. On the one side, we have what he calls "The hairshirts," who "believe that for the health of the economy to be restored, the inevitable bust that follows a boom must be at least as great as the boom." Apparently we, speaking for the hairshirts everywhere, are the stupid scumbags of the world. On the other hand, we have what he calls "Growth proponents - and there's none greater than Greenspan - believe that it's better to limit the fallout of a bust and get the economy growing again as quickly as possible." Did you note that one side is dismissed as the pejoratively-labeled "hairshirt" idiots, and the other side is gloriously called "growth proponents" instead "raving lunatics"?

So it is better to let my daughter speed dangerously in her car and clean up the mess when she inevitably crashes, rather than stop her from speeding? And it helps the economy for me to constantly put bigger and bigger engines in her car the whole time? Wow! No wonder I always win the "World's Worst Dad" award!

Then to make sure that you understand that he is a "journalist" and not an economist, he goes on to say, "To the hairshirts' way of thinking, the great mistake Greenspan made was not allowing for a vicious economic and financial downturn to purge the speculative excesses built up during the heady '90s." No, you little jackass twerp! That is not it at all! The great mistake, and you might want to write this down since it is the whole crux of the matter, was allowing the damned speculative excesses in the first damned place! But nooOOoooo! Greenspan is directly responsible for the creation of so much, so excessively much, so incomprehensibly much, so impossibly much money and credit, which financed every damn one of the damn speculative excesses, which now need to be purged, because there is nothing else to be done with them, and with all of the attendant misery.

So we are NOT quibbling about how best to correct huge boneheaded and criminally-stupid mistakes with monetary policy. What we should be quibbling about is where in the hell YOU were, you and your rapier-like journalistic wit and vast economic-savvy, the entire time this Greenspan putz was doing this monetary insanity? And now we are supposed to think that this Greenspan fool, who caused our misery, is the best person to correct the mistakes he himself made? Hahahahaha! Journalists! Hahahahaha!

To prove that Alan Greenspan is a real first-class bonehead, Richard Schlessel sent me this snippet of an interview, where Alan Greenspan was asked, "Do you believe that personal retirement accounts can help us achieve solvency for the system and make those future retiree benefits more secure?"

Greenspan is reported to have said "Well, I wouldn't say that the pay-as-you-go benefits are insecure, in the sense that there's nothing to prevent the federal government from creating as much money as it wants and paying it to somebody." This is exactly right, they are secure Although he leaves it to the reader to extrapolate to the correct conclusion that the money that the government will print with such insouciance will be, as a result, worthless, as far as using it to buy things is concerned.

But then he goes immediately to a non sequitur when he says, "The question is, how do you set up a system which assures that the real assets are created which those benefits are employed to purchase?" What in the hell is THAT supposed to mean? Is he asking, "How do you keep inflation from destroying everything when all that money, that staggering, gigantic towering mountain of money, flow into the economy?" Is he saying that he wants to somehow direct all of that money into the stock market and the bond market and the housing market? What? What is he saying?

Mark Faber of the Gloom, Boom And Doom Report is another guy who also believes that the Federal Reserve is incapable of dictating where money goes. He writes that the Fed creates money like water, and "when there is a problem they just replenish the water level of this fountain, or of this lake, and then it overflows. And whereas the Fed controls the quantity of money that comes into the system - more or less, they don't control it 100%, but more or less - what they certainly don't control is where water, or the money, then flows to. It can flow, as I mention, in the 60s into wages, in the 70s into commodities, and consumer prices in the 80s, notably into Japanese stocks and real estate, and then in the 1990s into the Nasdaq, and now more recently into the real estate market."

That is bad enough, but even worse is that it is, as he says, "uncontrolled - and if the door is open, or the system, then the money can one day also flow out of that door, which leads to weakening currency."

Jim Puplava, seeing Mr. Faber and me yammering back and forth and getting all the attention, says that he agrees, too. "When central banks stimulate, or print money - it stimulates something: sometimes production; sometimes employment; sometimes assets." The worse part is that "it annihilates thrift; it destroys, in my opinion, moral and intellectual values; it creates the wealth disparity."

Mr. Farrell then writes, "The critics say Greenspan has transformed the economy into a giant bubble, concocting one even greater than the one that already burst. The longer he delays the day of reckoning, the worse the fallout will be when the bubble pops." Yes, that is EXACTLY what I say, and that is exactly what history proces, and that is what everybody who knows the least bit about economics says.

But Mr. Farrell is not interested in any of that. In fact, he dismissed me with a wave of his hand, as if shooing away a perky fly, as he goes on to say "That's a severe indictment - but not necessarily a valid one. A problem with the anti-Greenspan mindset is that hairshirt economics was largely discredited during the Great Depression." Huh? It was? Excitedly, I pull my chair up closer, because this is big news to me! I am on the edge of my seat to hear how this was "discredited during the Great Depression"!

Seeing that I am at full attention, ready to hang on his every word to soak up this important new knowledge like a sponge, he says "Mainstream economists of all schools, from Keynesianism to monetarism, turned away from hairshirt economics after the Great Depression." Huh? Another new revelation! I never heard that before, either! Sensing my stupefaction at the enormity of what he is saying, he explains "They realized that the government could play a positive role in counteracting contractionary forces in the economy." Hahahahaha! I laugh in contempt at such a statement!

Wiping the tears of laughter from my eyes, it is difficult for me to stop laughing, because everyone, in all periods of history, all know from the cradle to the grave that the government can cause a boom! This is because history is essentially one long, tiresome lesson in how all governments did this very thing, at one time or another, and the economy always got the boom, and then they all paid a heavy, heavy price, sometimes literally destroying the economy. And then every government, facing the inevitable economic contraction, then went after more money, usually by declaring a war, so that they could, as he says, "play a positive role in counteracting contractionary forces in the economy." And yet this Farrell guy thinks that only after the Great Depression, not even eighty years ago, (which was caused by the newly-formed Federal Reserve acting like profligate jackasses even then, creating huge amounts of money and credit to counteract, supposedly, the recessionary slowdown following WWI, and thus financed the Roaring Twenties), did people realize, and pardon me from laughing out loud, but I can't seem to help myself, that deficit-spending by a government could counteract "contractionary forces"? Hahahaha! I can't help myself! Hahahaha!

But, to be fair, Mr. Farrell is, after all, just a journalist. And we have learned that nobody requires journalists to know what in the hell they are writing about, but only that they write something to fill up empty pages.

But this is not a valid excuse for the esteemed Economist magazine, and they need one, as you will discover when you read the Economic Focus page, entitled this week as "Beware the Bubbles." First they describe how massive imports of low-cost Chinese goods kept the American consumer's "market basket" from going up in price, thus preventing inflation in those goods, as "Deregulation, new technology and the integration of China into the global economy have also reduced the prices of many goods, making it easier to keep inflation low." Wow! Let me see if I have this straight, since being a real stupid guy makes it so hard for me to understand these difficult concepts; China made stuff and sold it to us cheap, and this kept some prices down, and thus inflation, as measured by the movement of prices, was extraordinarily low. So now we turn right around and say that the central banks kept prices down and inflation low? By doing what, you morons?

But then without even pausing for breath, they launch into how the Bank for International Settlements (popularly know by its acronym, BIS), is growing concerned "about a different kind of risk: the rapid growth in debt and asset prices. Ironically, this is partly due to the central banks' success in defeating inflation." Hahahaha! What a bunch of morons! After explaining how a lack of consumer-price inflation was due to China and other low-cost producers coming on-stream, the Federal Reserve is given credit for it!

Hahahahaha! Pardon me while I double over in laughter at the thought! Hahahaha! Notice how I am already grinning from ear to ear, on the verge of busting out laughing like some demented hyena-like creature, only with more drooling and snarling, at that punch line. And the punch line is that the central banks have had "success" in defeating inflation! Hahahaha! Snarl! Drool! Snarl! The damned central banks have been creating inflation with both hands years and years, and the only things that have NOT shown price-inflation is because of the consumer items made by the Chinese? And yet this is some kind of weird proof of "the central banks' success in defeating inflation"? Hahahaha! This is the Economist magazine, so you have MORE proof that things are getting really, really, really weird!

Anyway, the BIS apparently recommends, according to this article, that we immediately raise interest rates "even if inflation remains tame." And if inflation does NOT "remain tame?" Hahahaha!

- Senators Lindsey Graham and Charles Schumer have been convinced by Alan Greenspan and John Snow to drop their idea of levying punitive tariffs on Chinese imports, designed to force China to release the peg of the Chinese yuan to the dollar. The idea, and you are going to love this, is that our exports would become relatively cheap, although we Americans would not notice any difference in the prices we pay. But with this price differential, people in other countries would be unable to resist a bargain, and so we would sell more American-made stuff to them, and the American economy would again grow strong and we would again strut around the world, thumping our chests in pride and crowing about "the American way" and killing anybody who disagreed with us.

But the plans for the tariff are on hold (insert exciting video footage of a hand flipping a switch to "off") because the Senators have been told by these Federal Reserve and Treasury Department worthies that the have some secret, inside poop that the Chinese will revalue their currency within the next couple of months. Guaranteed. This is news to everyone else, I am sure.

Especially those foreign guys who have long-term contracts specifying that they be paid in dollars, and who must have soiled their pants when they heard that, like I almost did, but I never smelled anything, and I didn't want to look. So no harm, no foul.

But this re-pegging this is nothing but bad news. If the Chinese re-peg the yuan against the dollar, thus devaluing the dollar, then if oil (which is priced in dollars) does not change in price, then oil will become instantly that much cheaper for the Chinese. They will, I assume, buy more at the lower price, driving up demand. But supply, which is already being pumped at the extreme limits that the production / shipping / refining system will allow, will not increase. Therefore, oil will go up in dollars, thanks to the demand /supply imbalance, as dictated by Economics 101.

Even worse, the oil producing nations will soon get very, very tired of accepting dollars that are losing value, and will either 1) suffer the loss, which I don't expect, 2) raise the dollar price of oil, or 3) start asking to be paid in some other currency that is NOT losing value. That means that the price of oil, in dollars, will go up some MORE! Yow! As we near Peak Oil (half of the world's recoverable supply is gone) and its increasing crimping of supply, plus a dollar that is losing value, the price of oil will thus continue, for the rest of the life of the silly paper US dollar, go up and up.

And not only that, but American products like food will be cheaper to the Chinese, so they will buy more, which will allow American producers to charge more, which makes prices go up, which even we Americans will have to pay, and this is the whole ugly side of price inflation. Damn! It's like I've been saying all this time; there IS no way out of this stupid mess caused by the Federal Reserve.

- Bill Gross of PIMCO, the big bond fund behemoth, predicts that the Federal Reserve will lower interest rates by this December, sixth months from now. The economy will be slow slow slow, with money being lost at such a clip that the Fed will be forced into creating more money and credit and lowering interest rates to entice people to borrow and spend and go farther and farther into un-payable debt. This could very well be our fate.
This is, of course, the Japanese fate, who also famously created too much money and credit and have suffered for their profound error for fifteen freaking years in a row, and it may be our fate for fifteen years or more, probably more.

But you will never hear of anything that ever even hints that anything is wrong with the economy. One reason is all comes down to the famous, (or infamous, depending on your perspective) line of crap from that commie-bastard FDR, namely "We have nothing to fear but fear itself." Wrong, bozo! Even in the best of times, there is plenty to fear. And in the worst of times there is much, much more to fear.

- There have been increasing howls about the cost of the Iraq war. Relax. All that money is going to somebody, and then it goes to the employees and owners, and to the suppliers, and then to THEIR employees, owners and suppliers, then somebody else, and, on and on and on, until eventually it filters down to you and me, you by earning it through hard work and long hours, and me getting it from complete strangers if I promise to just go away, usually with the proviso that God's sake I will shut up about how Federal Reserve monetary policy is destroying our money, and how we are going to be destroyed, and I always figure, "Sure! Why not? A buck's a buck!"

- Some bad news in China is that their stock market is at an 8-year low. The cumulative fall is, so they say, greater than the fall of NASDAQ. No wonder that their government is, like ours, desperate to get them back up.

- An interesting follow up to last week's blurb about the Banister case and the income tax. It turns out that he was actually acquitted only of conspiracy, and it has nothing to do with the income tax itself. The more interesting part is that, although there is some confusion as to whether the Sixteenth Amendment (authorizing an income tax) was ever actually ratified or not, it doesn't matter. A subsequent Supreme Court ruled that an income tax was already allowed by the Constitution, because it was, according to these Supreme Court guys, an indirect tax, as opposed to a direct tax. The distinction being something about how one is levied to the states in some disproportionate degree, according to a tax/population ratio, I suppose, or something, and the other is not, or something.

The result? Banister was acquitted of conspiracy because he was not conspiring to do anything illegal. The guy who did not pay his taxes, based upon the theory, went, predictably, to jail for not paying his taxes. A sad tale ends even sadder.

- A new wrinkle in the credit fabric has appeared, in that I was called on the phone about a new program for Discover cardholders. For the sum of, as I recall, eighty-five cents per month per hundred dollar's of credit balance, you can enroll in their little program that will allow you to freeze your account for up to two years. During that time, you can't buy more stuff in this "frozen" account, of course, but you don't have to make any payments, nor will they charge you any interest on the balance.

The kicker, as I discovered when I asked some further questions of the girl on the phone (e.g. "Can I borrow your shoes?" and she says, playing the coy little temptress that she was, "Ewww! Ick!"), is that as soon as you choose to start paying off that frozen account, (or, presumably, at the end of two years when you are REQUIRED to start paying off the account), interest again starts being charged against your balance! And at an interest rate that will be determined at that time, and they don't want to make a guess about how high the interest rate would be, as THAT is certainly not frozen! So for paying a monthly fee of 0.85% of the total amount you owe, a fee that compounds to over 10% a year (alarm bells should be ringing in your head, going "ding ding ding ding!"), you get to stop buying stuff and stop paying for stuff! Hahahaha!

- Dan Denning of Strategic Investment makes the astounding prediction that "China's Communist government will collapse within 10 years." He thinks that this is inevitable since "when you unleash the powerful human desire to be rich, the desire to be free is not far behind', which is probably true. But according to the Mogambo dim view of things (MDVOT), I figure that governments always want more money than they can reasonably get, and sooner or later they go after the rich guys to get more money out of them, and THAT is why the urge to be free follows the urge to be rich. Oddly enough, the best idea is to first be free, and that freedom produces the riches, prosperity and wealth as Adam Smith's "invisible hand" of free enterprise performs its magic.

But no matter what follows what, it is working in China, as we conclude from Marc Faber, who has also done some interesting analysis. He says that "China has officially a GDP of $1.3 trillion and the US has a GDP of $11.7 trillion. It doesn't reflect the reality. The Chinese GDP, adjusted for the price difference between China and the US, is probably already about 60% of the US economy, and the second largest economy in the world."

Now, if the Chinese yuan would be devalued by almost half, would the Chinese economy then be equal to the American economy according to this analysis? Yes. And if two economies are equal in size, which one gets to be dominant?

Ugh.

***The Mogambo Sez: I am surprised at how gold is going down here lately. From the various lease rates for gold, it looks like to me that that money is being put into a calendar spread. Inescapable conclusion: I have no idea what I am talking about. But if I did know what I was talking about, I would say that this looks extremely, extremely bullish for gold, and that the temporary fall in the price of gold is a fabulous buying opportunity.

But it is more than that, as Billy, one of the guys I play racquetball with and who likes trying to make a little money by playing in some market or another, or hatching some business deal, or exploiting some price discrepancy, or some exploration or something, it's always something, but never gold, is suddenly interested in gold. After all this time. He says he has heard some good things about gold and is convinced enough to get some. This is how manias begin, not how they end.

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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