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A choice of poisons

Richard Daughty
...the angriest guy in economics
The Mogambo Guru
Jul 21, 2005

- Total Fed Credit, the marvelous, magical wellhead from which flows the fabled "money from thin air", is again sputtering and drying up, and it went down by $3.8 billion last week. Remember, it was only the week before that the Fed actually increased Total Fed Credit for the first time in a long, long time. Now it is being taken away again. But the good news is that if you squint your eyes, you can sort of see, if you tilt your head just right, what may be a slight general uptrend in new money and credit over the last month or so. Of course, for years before that, Total Fed Credit always went up like exploding rockets, and that is where the bubbles and booms came from. So this is quite a radical departure from their usual modus operandi.

But $3.8 billion in a week ain't much, although this remarkable slowdown in creation of new Fed Credit is, as you can probably tell by the way I am curled up in a fetal position and vomiting blood in fear, very bad news. Very, very bad news. And if the lack in growth of Fed Credit continues, it will continue to be worse and worse news. This is because for all prices to go up, somebody has to fork over more money, but if no more money is being created, then all prices cannot continue to go up. SOME prices will, of course, continue to go up, especially real estate, as we butthead Americans demonstrate world-class stupidity by buying houses that are so overly expensive that they actually stopped being merely expensive a long, long time ago, and are now in that weird, parallel Twilight Zone world where they would call it "bizarre" and Homer Simpson would call it "bubble-licious!" But without more money in the system, it's a zero-sum game, and so for some things to go up in price, other prices will have to, to compensate, go down. Probably a lot.

Fortunately, foreigners are still buying US debt and stashing it at the Fed, and that account increased by $4.7 billion last week, which is about par for the course for them, maybe a little on the upside.

And of course the Treasury was out there selling debt, and as of today it has risen to $7.852 billion. So the part of that number to the right of the decimal point is "billions" of dollars, so that ought to give you some idea of how freaking much money we are talking about a lot of money. Audience shouts "How much money?" Mogambo answers, "A LOT of money!" The government has borrowed $25 billion in just the last two weeks alone!

But it is not just the federal government. Oh, nooOOOoooo! It's damn near everybody, as far as I can tell, as I gathered when I heard that Kurt Richebächer wrote, "In the quarter, overall credit skyrocketed by $2,976.1 billion, close to $3 trillion, at annualized rate". I admit I gulped, and a lump formed in my throat, and my heart is pounding, and I'm thinking that this is another heart attack at the same time as my brain is starting to comprehend the enormity of so much debt, then I get this mental flash that maybe this heart attack business is a good thing because I am not sure I want to live if this debt thing means what I think it means. And I am pretty damned sure that it means what I think it means.

And I am pretty sure that Dr. Richebächer also thinks it means what I think it means, as he sums up by saying "To us, this looks more like monetary lunacy than monetary policy." Now, I will admit that he was NOT talking about "us" in the sense that he and I know each other, or that we are some big pals or something.

What he was referring to, when he said "us", is that he and his un-named associate (whom I assume is some really hot babe who lusts longingly for him and who tries to get his attention by strutting around all day, dressed in miniskirts, or hot pants, or Saran wrap) both have a "highly critical assessment of the U.S. economy." To which I say, "Welcome to the club, dudes!" But before I could begin to tell them about the club and the benefits of membership, if any, they just hurry on to note that the economy "is mainly determined by two extremely negative considerations: First, its chronic structural imbalances between consumption, saving, investment and debt creation have dramatically worsened since 2000; and second, both monetary and fiscal policies have virtually exhausted their stimulatory potential. There is little or nothing left for them to do when the economy slides back into recession."

Now, far be it from The Mogambo to take any exception to anything even uttered by the esteemed Dr Richebächer, and who the hell do I think I am, anyway? My face is a mask of calm serenity and servility, but in my mind I am thinking to myself, "Oh, ye of little faith!" I say that with a central bank, a fiat currency, a fractional-reserve banking system, and a compliant Dynamic Government Duo (namely Congress and Supreme Court), anything is possible! Anything! You want stimulus? They can give you economic stimulus, in spades, literally forever! Who's going to stop them? Me? You? Hahahaha!

I can see by the look on his face that Mr. Richebächer didn't appreciate the joke, and the room became icy as he went on to say that if you look at the table of income growth and spending growth in the Personal Income and Outlays report from the Bureau of Economic Analysis, you will see something that will freeze your blood. If you are ready for a shot to the stomach, I motion with my hand for him to proceed, and he writes "We note a dramatic deterioration in income growth and spending growth. Given the high share of consumption in GDP, it is the best proxy for current GDP growth."

Notice the phrase "dramatic deterioration." As a highly trained economist, you will want to always take special note that phrase, because an exhaustive search of the entire history of the universe shows that that phrase is never a good thing (GT), and people who have heard it always regretted having heard it.

To prove that unexpected statement, they immediately go on to say, as if they haven't done enough for my bad attitude, which is even MORE paranoid, fearful and angry (MPFAA), "The published numbers for the gains in real disposable income are actually so disastrous that we hesitate to take them at face value." Jeez! Something so bad he does not want to read it? Uh-oh! By this time I am jamming a fresh clip of very expensive ammo into whatever weapon is most handy, and I am screaming "We're all doomed! But I want to live! And I WILL live, even if I have to kill every one of you morons myself! And your death as traitors-- TRAITORS! --will be scant payment enough for your incredible stupidity in allowing-- nay, encouraging! --the debasement of America's money by the Federal Reserve, and thus the destruction of the United" (squeeze off a few rounds) "States" (a few more rounds) "of America!" (long sustained burst until the clip is empty, and then there is sudden silence, no sound except the tinkling sound of the last spent brass ammo casings hitting the concrete, and then finally somebody, somewhere, shouts "What in the hell is that idiot Mogambo doing?").

Well, the best part is that my little tirade sent all the reporters scurrying to whatever little rat holes they live in where they don't have to face the awful reality of what I am screaming in their faces, and they don't get little drops of Mogambo spittle (MS) on their glasses. That's too bad for them, too, because while I was merely giving a history lesson, Robert Blumen writes about the future, which is always much more interesting because that is where all the stuff happens. In his essay on LewRockwell.com, he writes, "The reader of the Fed's papers and speeches will find a series of progressively more effective techniques for destroying what purchasing power remains in our money. From beginning to end these methods span the range from the unsound to the bizarre and terrifying. With the likely appointment of Dr. Ben Bernanke to the chairmanship following Greenspan, this outcome becomes more probable." At first I want to say "Hahahaha! Well said!" And then I come to my senses at the calamity of it all, and my eyes widen in horror. And so where are all the little reporters to pick up on this earth-shattering news? Gone! Gone like the lazy, worthless skunks they are!

Having heard enough to send me over the edge, I am in full lock-down mode here in the Mogambo Bunker, although I can still hear Dr. Richebächer through the walls, saying "Real disposable income in May 2005 was $8,211.6 billion, down sharply from $8,473 billion in December 2004." Now, I know that you are rich and smart and successful and good-looking, and that is why you make all the big money, but I am just an ordinary guy who is none of these things, and so to me $262 billion would be a big drop income. It is, on average, almost $1,860 for everybody that has a job in the whole country.

- The recent downdraft action in the prices of oil, gold and silver is a gift, as Lady Luck smiles at you, and gives you a chance to get in on the action by merely getting up off of your dead butt and buying some. And you traditionally answer "If I had any money, I would!" But I am not alone in my appreciation of the future of the price of oil, as David C. cleverly writes, "On tame days I am bullish on energy. On bad days, I am bearish on civilization." Hahaha! Funny, but insightful, so you get two-for-one, and all at no charge! Life is good!

- Martin Weiss says that because the "cushy" interest-rate spread in debt is almost gone, he is pretty damned sure that "Stocks of major banks will plunge by half or more. Stocks in almost any company related to the financing of consumers or businesses will suffer similar damage."

The Mogambo, who is the most pessimistic guy on the face of the planet as far as economics is concerned, agrees. And not only that, but the banks won't be alone, and by a long shot, because Chaos Theory has proved that all things are connected to all things, and the effects are felt everywhere after only a few iterations of the system, usually measured in seconds. And that means that a lot of other things, like stocks,will plunge, too.

- Bloomberg reports that Otmar Issing, who is the Chief Economist at the European Central Bank, said the outlook for inflation in euro-area has "deteriorated" lately. The previous forecast was for inflation to be less than 2 percent now, and it look like the latest reading is that inflation is running a tad higher, around 2.1%. So, inflation is rising over there, too, which isn't all that surprising, since the entire euro area has been expanding its money supply, too, as is everybody around the whole freaking world, except Switzerland, for some reason The point is that except for this one tiny little country, every other country in the world is trying as hard as they can to expand their money supply, to buy the debt that their government budget deficits require, as we all try and spend our way to permanent prosperity by going farther and farther into debt, with the banks getting more and more precarious from all these debts that they have financed.

Can they keep this up? Yes! They can keep this whole bloated, misshapen economy ticking over as long as price inflation does not happen. I am talking about price inflation, the kind that makes the wives upset because food and things cost so much nowadays and they need more money, and the kids are being really whiny about how their allowance doesn't go as far anymore and they need more money, and I'm already hardly paying the minimum payment on all my credit cards as it is, and my creditors are all calling me on the phone and wanting more money, and pretty soon everybody is complaining to old dad that they want more money, more money, more money, while all he wants to do is look at the color catalog of all the beautiful, shiny new boats, dream a little dream and, for once, have something to maybe smile about.

But when price inflation starts getting going, bad things happen, and people get grumpy, and then politicians start taking heat, and they don't like that. Then, as the government hurriedly tries to create and spend more money to alleviate the pain, they just make it worse and worse, and then prices increase more and more, and soon there are food riots in the streets, and then there is increasing societal collapse, and pretty soon the country is in a shambles, and tribal warfare breaks out, with murder and robbery and mayhem everywhere, and out of the smoldering ashes arises a strong ruler to restore order, thus beginning the reign of Mighty Mogambo, The Tyrannical, sort of like Stalin, but not as cuddly!

As you can imagine, nobody wants that, and thus nobody wants price inflation. But price inflation always follows monetary inflation. Note the word "always" in that sentence. I put in there on purpose. The money HAS to go somewhere. Where? So far, we have been lucky (?) in that the inflation has been in stocks, bonds, houses and government, and not so much in the way of rice and beans and fried chicken and pork chops. Well, actually, the prices of those items ARE up, but the government doesn't like that, so they lie about it and say that inflation is low. And they can get away with it, especially since the government has figured out that if something goes up in price, people buy less of it! And since they buy less of it, they don't spend as much on the stuff that goes up in price! So, magically, inflation is zero! Hahaha! Zero! It went up in price, but you didn't buy so much of it, so you spent the same amount on it, and so inflation is zero! Hahaha! It is embarrassing that Americans are so dimwitted that they allow their own government to get away with this blatant lying and manipulation.

Uh-oh! I think I'm getting myself all worked up speaking of inflation, and so I expected Larry Edelson of Money and Markets to say something calming and soothing, like "Calm down Mogambo! Just be calm and we will untie one of your hands so that you can wipe your nose, which is running, and it is disgusting." But he does not. Instead, he writes an essay entitled, "Asia's Next Big Export: Inflation" and he asks the intriguing question, "How could Asia possibly export inflation? Isn't its 2.3 billion population producing goods at a tiny fraction of the equivalent costs in Japan, Europe, or North America?"

To this we all leap to our feet and exclaim "Yes! Yes it does! And that is why we have what appears to be low inflation! And that is why we are 'losing' jobs to foreigners!"

For once, I think I got the right answer, as he seemed to confirm by saying "Yes. But consider the flip side: As their production capacity grows by leaps and bounds, so does their per-capita income." Exactly! And I don't know about you, but when my income goes up I spend more, and when I spend more the economy does very well, and whatever party is in the White House tends to get re-elected. And more spending usually means more price inflation.

And remember what I said about what happens when people have more money? Well, Mr Edelson says essentially the same thing when he writes "And with the income boom, we're witnessing a burgeoning consumption boom that's not about to stop any time soon. For instance," he says, and this is where it gets really interesting, "China's consumption of four basic commodities - grains, meat, coal, and steel - has already eclipsed that of the United States." See what I mean? Wow!

Even more surprising, he reports that "China bought 64 million tons of meat in 2004 - almost double the amount consumed in America. Steel use in China is also now more than double that of the United States. Coal consumption, responsible for nearly two-thirds of energy needs in China, has soared to 800 million tons, easily exceeding the 574 million tons burned in the U.S."

With an air of calm and surprising understatement, he says, "China's demand for oil is off the charts, up 34% in 2004." Referring to the news that oil exports to China were not characteristically robust for last month, he astutely confides that "and a minor single-quarter decline in consumption, reported yesterday, does nothing to change the trend."

And not only that, but the People's Daily On-line reports that "China had become the world's 4th largest gold consumer, who consumed 235.1 tons of gold in 2004."

This may be part of the reason that Merrill Lynch sees gold rising to $725 by 2010, five years from now, according to Graham Birch, who manages $8.5 billion in mining assets for Merrill Lynch in London, including the gold & General Fund. So with $8.5 billion to look out for, we figure that he has probably taken some time to pay attention to this stuff, and should know what in the hell he is talking about. He says "The price of gold may rise to $725 an ounce by 2010." Well, this is comes out to an annual 11.8% gain in price! Nice going! And why will gold do so well? He says that it is because "surging economic growth turns China into the world's biggest jewelry consumer." And since a lot of jewelry is made of gold, you do the math!

This, oddly enough, stops where Paul Van Eeden starts. Writing at Kitco.com, Mr. Eeden writes, "The US money supply (as measured by M3) has been increasing by an average compound rate of 7.8% since 1959. While gold devalues at the rate of 1.73% per year, the dollar devalues more rapidly. The value of gold in US dollars has therefore increased at an average rate of 6.07% since 1959. I estimate that the gold price should have been about $51.22 an ounce in 1959 and, compounding $51.22 at 6.07% for 46 years results in a current value for gold of $770 an ounce." So one guy ends his prediction for gold at $725, which is almost the price that another guy says it is worth today! This means that, if both of them are correct, that gold will STILL be undervalued in 2010 at $725, after rising almost 12% a year for five years, and so the price will get higher after that! Whoopee!

In perhaps a statistical oddity, Mr. Eeden has noticed that, "According to the United Nations the global population in 1950 was 2,519,470,000 and it is 6,464,750,000 now. That is an average annual compound increase of 1.73% and by coincidence the same rate as gold inflation. Because the inflation rate of gold and the increase in population are similar we should find that the value of gold remains constant relative to labor."

Mr. Edelson's analysis of what in the hell this means? I look at you. You look at me. We think we know, but we are always wrong about everything. So we pull our chairs up a little closer, and he looks down at us in pity, sneering at our pathetic stupidity, and says "All this demand is pushing up the prices of natural resources across the board. It is inflationary in itself."

- Before I forget, let me again state, for the record, that I think that uranium is probably a good investment, as the exponentially-increasing demand for power will, inevitably, result in the construction of lots and lots of nuclear power plants. This could, and maybe will, mean a bull market in uranium, although as far as I can tell all it does is produce heat, that boils water, that makes steam, that produces the pressure, that turns a turbine, that produces the electricity. So, therefore, I assume that the crucial variable is just producing enough heat. And for that matter, you can drill down towards the underground mega-volcano in Yellowstone National Park and get all the heat you want, to boil all the water you want, and all without anybody ever digging a single ounce of uranium.

But let's not forget the first lesson in the book "Freakonomics", namely that actions are always a matter of incentives. And a bull market in uranium can also come from the fact you can make nuclear bombs out of the stuff, and everybody can see how dangerous little countries with nuclear weapons are always getting their butts kissed, and given all kinds of stuff in attempted bribery by richer nations, trying to convince them give up the nuclear weapons. To which I say "Hahahaha!" in a mocking tone, as that is the LAST thing that they would want to do! They make their living by extortion, you stupid doofus! And extortionists don't ever voluntarily give up their weapons, which they need to extract the extortion money in the first place!

- Martin Feldstein, former chairman of the President's Council of Economic Advisors to Ronald Reagan and now a Harvard professor, and perhaps the next chairman of the Federal Reserve for all we know, has weighed in with his essay in the Wall Street Journal, an essay entitled, "Saving Social Security". In essence, he thinks that he is going to get Congress to stop siphoning off the "surpluses" that the government rakes in from the excess Social Security tax remittances. Hahahaha! So right off the bat we know that this Feldstein character is not a real heavyweight in "how things really work in the real world" department, and he does not explain how in the hell Congress is going to fund its bankrupting, inexcusable, mentally-ill stupid spending excesses if they DON'T have this huge, huge, huge wad of money every month. But this essay is not about that. No, what he wants to do is to explain his plan to, as he says, save Social Security, which is to put this "surplus" Social Security money into people's "private" accounts, which are set up and maintained by, and you gotta love this part, the Social Security people! Hahahaha! This is priceless!

Undaunted by the sight of the security people dragging me out of the auditorium because I am either 1) creating a disturbance by loudly laughing in scorn and contempt, or 2) my rakish good looks reminds them of a young James Dean at his insolent best, he goes on to note that experience has shown that if you automatically enroll people in a program, see, and force them to go through the hassle and aggravation of filling out forms to let them UN-enroll if they did not want to join in the first place, that more people end up taking the easy way out, and end up being enrolled in the program. Well, duh. But perhaps that feature is its beauty, as he goes on to say "The automatic enrollment feature would also increase national saving, a high priority in its own right. A higher national saving rate would finance investment in plant and equipment that raises productivity and produces the extra national income to finance future retiree benefits."

It would? Well, maybe. If the money was put in a savings account, then yes, and businesses had to bid to borrow these savings with the banks acting as responsible intermediaries, then yes again. If you are as naturally suspicious as The Mogambo, your internal "rip-off" meter ought to be red-lining, too, and you innocently ask "But where is all this money to actually go?" Well, Mr. Feldstein proposes that we first buy the deluge of bonds caused by Congress desperate to get money, because they do not have as much Social Security "surplus" to spend, since it has all been taken away to put into these personal retirement accounts, managed by the Social Security Administration! Hahahaha! There's the money back, Congress! They borrow it! Hahahaha!

But wait! It gets better! He says that "These funds would initially be invested in government bonds, but after 2008 could be shifted into broadly diversified stock and bond mutual funds monitored by an independent government agency." Hahaha! For one thing, this guy figures that savings and investing are now synonymous? Hahahaha! Wow! Putting money in the bank is the same thing as buying shares of stocks, even though one of them can go to zero value and the other can't? Hahahhaa! But apparently Mr. Feldstein thinks so!

For another thing, you would think that someone as old, as educated, as experienced and as theoretically wise as he, would know that there is no such thing as "an independent government agency", and there never will be, and it sounds stupid for him to say such a thing. For yet another thing, it is obvious that this is NOT about saving, but about loaning money to the damned government (as money is used to buy bonds) and also for juicing up the stock market with a big inflow of money. But the stock market is where all the hopes and dreams and retirement accounts of everybody are now attached at the hip, and so the whole financial and economic enchilada for everyone is now on the line, with all the money bet on never rolling a seven, ever again!

As I am being dragged away down the hall, kicking and flailing, my senses are blasted when I hear Mr. Feldstein's voice grow fainter and fainter as he says that "The aging population means that the existing pay-as-you-go Social Security program cannot by itself provide adequate retirement incomes without a very large increase in the payroll tax rate." Or, alternatively, which he did not go on to say, by cutting benefits and screwing everybody out of what they were promised, which is a distinct possibility, as the government of the United States has never, ever, been reluctant to screw somebody over at the least provocation. Whenever you hear anyone say that something is "good for America", you immediately know that somebody is getting screwed right there.

But, and this may be some important news for Mr. Feldstein; if the government takes our money away via taxes, or takes our money away with these same silly shallow schemes and scams, or causes us to lose the purchasing power of our money through the horror of price inflation, we citizens are going to have money taken from us, either damned way!

But I am here to tell you that allowing the government to take money from you, and allow them to "invest" the money into the stock market and the housing market and the bond market and in the government contracting market, solely at the discretion of bureaucrats, is, probably, the worst and most stupid idea that I have ever heard. And this is really saying something, because being an older-type dude (call me "Armed Geezer-American") I have watched, year after year, as each layer after layer of government does nothing but come up with one increasingly-expensive, doomed-to-fail bankrupting idea after another. But, then again, he is a big shot Harvard professor, so what do you expect? Which only proves my point; not even HIS impressive credentials allow him to come up with a good solution, because there ARE no good solutions to the economic mess we are in. None. There never have been and there never will be. And that is why it is so damned crucially important that we NOT get into this stupid, bankrupting, idiotic mess in the first place, which is why the Founding Fathers were so insistent that money NOT be anything other than silver and/or gold, which is the only way to keep the damned government from creating too much money and credit, and thus getting us into this damned lethal mess.

To prove my point, he sums up with saying that this whole wheeze is "Supplementing the traditional pay-as-you-go benefits with investment-based personal retirement accounts." Note the "investment-based" part. He has, thanks to my yelling and calling him a stupid little jackass, finally abandoned the idea that these are "savings", because they are not. They are investments. And if you are new to this planet or you just woke up out of a coma or something, allow me to contribute to your education by pointing out one of the salient points of savings is that the value of the savings account either stays constant, or it goes up in value as they earn interest. Savings never go down in value in nominal value.

But investment, on the other hand, can also stay the same or go up in price, but they can also go down in price, and so you will LOSE money, and they always go down in price just when you want to sell. So, if the stock market goes down, you will lose the money in stocks. If interest rates soar, which they will, thanks to the profligate spending idiocy of the Congress and the willing complicity of the damnable Federal Reserve to constantly create excess money and credit, then your bonds will fall in value, and you will lose money in bonds, too. These are not "savings."

And let's not forget that the Social Security was originally a program to save retirees from the suffering of not having enough money to live on. And then, when the government got finished screwing it up, it was not enough anymore. Then retirement plans such as IRAs and 401(k)s were created to allow people to accumulate enough so that, as retirees, they will not have to suffer from not having enough money to live on. Now that the government gotten finished screwing that up, too, people who retire will suffer because it will not be enough to live on anymore And now, to save the day a third time-- A THIRD DAMNED TIME! --we have a proposal for yet ANOTHER big, stupid, government program to save retirees from suffering the pangs of not having enough money to live on. And it will fail, too. Some things never change, and some things can never change. Oooh! How poetic! I like it!

There will, of course, be a lot of people who will make a lot of money on schemes such as this. Just not the people it was supposed to help. So who will benefit? The guys who prosper now, as they wheel and deal, getting us up to our eyeballs in raw speculation. So how much do they make? Well, it must be a lot, as we find from Sean Corrigan, who says "To give some idea of the incredible rate of churn between specialists, brokers, and clients, consider that NYSE dollar volume has averaged $55 billion a day in 2005, while overall securities trading in the US topped $1 quadrillion (a one followed by fifteen zeroes!) in 2004." Yow! This sum is equivalent to about 85 times the total value of the total output of goods and services of the entire country in an entire year! No wonder that the financial industry makes 40% of all the profits in America!

- Today's Mogambo Quiz (TMQ) is "What country is this guy talking about?" Our mystery author starts off railing against "misguided leadership, systemic corruption, capital flight, economic mismanagement, senseless civil wars, tyranny, flagrant violations of human rights and military vandalism.

"These internal factors are themselves products of defective economic and political systems. Most of these systems are characterized by extreme concentration of both economic and political power in the hands of the state -- and ultimately one individual.

"(T)he state reserved for itself the right to intervene, plan, and restructure almost every conceivable aspect of (the) economy and society. The centralization of economic power turned the state into a huge patronage machine and bred elite cronyism. Lucrative state jobs were parceled out to cronies and government largesse doled out to loyal supporters. In pork barrel politics, avaricious elites absconded with the goods, leaving the people to starve.

"By concentrating so much political power at the center, the state also became an irresistible prize for which all sorts of groups and individuals competed to capture. Once seized, the instruments of state power were used by these groups/individuals to enrich themselves and further the interests of their own ethnic groups or professional class. All others are excluded."

Give up? It's about Africa, in an editorial by George Ayittey, on FreeAfrica.org, entitled "How Africa Marginalized Itself". But it sounds eerily like what I have been screaming about here in America, doesn't it?

- Bill Hoyt, who is Investor Relations Manager for Timberline Resources, reports that an outfit named AcryMed released research findings that show silver is "effective in combating MRSA topically." MRSA, which is the acronym for methicillin-resistant staphylococcus aureus, is a particularly nasty type of new germ, due to its resistance against penicillin and other antibiotics. This is how evolution works; the susceptible germs were killed off, but a few of the mutants survived. They reproduced. And now they are everywhere.

Anyway, the point is, as I understand it, that all kinds of bacteria and icky stuff that can make you sick are killed by coming into contact with
silver. Mr. Hoyt reveals an interesting piece of trivia when he says "Your grandmother knew it - that's why she used to drop a silver dollar into the milk to keep it from spoiling." Hmmm! I didn't know that!

Just one more reason about how silver is so under-priced, and what an absolute bargain it is. And that brings me to how if you would loan me some money, see, I would buy some silver. We'll talk.

- The latest release of government-produced Producer Price Index (PPI) is supposed to show, so the government says, inflation at only 0.1%. But George Ure at UrbanSurvival.com took a look at the actual BLS numbers and concluded that, in June 2004, the index stood at 100, and the June 2005 index stands at 103.6. Immediate conclusion? Inflation is that index is actually 3.6%!

And it will get worse as the reality filters through the system. He lays the whole scheme out as "Raw materials ---> PPI # -----> Retail Sales -----> CPI # ----> Market reaction ----> Fed Policy."

So, if we look at the commodity indexes, we see that they are up. The next step is that the higher prices feed into the PPI, which is it. Next, according to this algorithm, price increases should start showing up in retail sales. I note that Consumer Installment Debt is actually contracting, perhaps from higher prices. Oops!

- A survey by the accounting firm Grant Thornton found that 75% of 101 executives expected the high price of oil to, in polite terms, "negatively affect their firms' financial performance", and that 44% of these guys aid that they expected that they will have to raise prices or fees in response. So, I take it that 33% of those executives expect to raise prices or fees! Hahaha! There is no inflation, but a full third of executives expect to raise prices in desperation because the prices they pay are going up! Hahaha!

And speaking of oil, Morgan Stanley economist Andy Xie is supposed to have said that since Chinese oil imports dropped 1.3% in June, compared with last year, and they imported 21% less refined petroleum products in June, too, he concluded that "At some point, the oil market will abandon the fiction of endless Asian or Chinese demand, and when the expectation turns, oil prices are likely to collapse." Hahaha!

He might as well have said, "At some point, the Chinese people will have to abandon their demand for washing machines, refrigerators, freezers, air conditioners, cars, motorcycles, trucks, big-screen TVs, computers, more and better clothes, more and fancier shoes, and more and better food. Then oil prices are likely to collapse!"

To underscore my point, Jiangxi Copper Corp said that it expects copper consumption to hit "3.5 million metric tons this year, and continue rising over the coming years." They think that there will be a 9% increase in Chinese demand for copper next year. He Changming, the company's general manager, figures that copper could rise to $4,000 per ton sometime this year.

- Doug Noland reports that the American federal government is going like gangbusters. "Spending levels are inflating. Year-to-date Total Spending is running 7.3% ahead of last year to $1.854 Trillion." 7.3% more spending! My surprise caused my hat to comically fly up into the air, although it may have been knocked off by wife whacking me with a vicious backhand, but she denies it. He goes on to say "By major department, Social Security spending is up 5.5% to $391.6 billion; National Defense is up 7.1% to $360.1 billion; Income Security up 3.1% to $272.6 billion; Medicare up 9.6% to $217.8 billion; Health up 4.1% to $189.9 billion; and Interest up a notable 13.1% to $140.8 billion." Up up up! And going up at rates that are multiples of inflation! My eyes spin in their sockets in shock and disbelief, and everyone laughs at the sight, which only makes me MORE mad. So later, when they start to go home, they get to the parking lot and they see that someone has let all the air out of their damned tires. Like them I say, "This can't be happening!" And then I laugh at THEM as I drive off.

Perhaps this increase in spending has something to do with, according to Mr. Noland, "In a replay of 1999/2000, Bubble Economy receipts are soaring. Fiscal year-to-date Total Receipts are running 14.6% ahead of last year to $1.604 Trillion. Corporate Tax receipts are running 41% ahead of last year at $197.8 billion. After nine months of the fiscal year, Individual Tax receipts are 16.3% above last year's pace at $693.7 billion. Employment taxes are 8% ahead of last year's pace at $564.1 billion."

So, and let me write this down; if the government borrows gigantic amounts of money and spends those gigantic amounts of money, then with all those taxable sales, and all the taxable sales that they engender as the money cascades like a pinball-- boinka, boinka, boinka --through the economy, tax receipts will go up? Well, duh! But the government has borrowed and spent almost $600 billion in the last year, and this is the best we can do? We're freaking doomed!

He also reports that Import Prices in June were up 7.0% from one year ago. He actually says "Import Prices have been up more than 5% y-o-y for 14 consecutive months."

He also reports a bit of humor when he quotes Edmund L. Andrews, writing in the New York Times, who says "For two months now, federal banking regulators have signaled their discomfort about the explosive rise in risky mortgage loans. First they issued new 'guidance' to banks about home-equity loans, warning against letting homeowners borrow too much against their houses. Then they expressed worry about the surge in no-money-down mortgages, interest-only loans and 'liar's loans' that require no proof of a borrower's income. The impact so far? Almost nil."

The funny part is when Steve Fritts, associate director for risk management policy at the Federal Deposit Insurance Corporation, said "We don't want to stifle financial innovation." Hahahaha! What a moron! Nothing, I repeat nothing, has been innovated at all! There is nothing new! It is the same old, tired deal, where somebody goes into debt to buy a house, and somebody else is still loaning the money for that debt while charging interest on the money the loaned. Where is the innovation?

Oh, do you mean that the innovative genius of bankers that allows them to make very little profits? It that the innovation that you are talking about? Or do you mean the stupidity, gullibility and daring of people to get waaayyyyy in over their heads? Is this new-found stupidity the innovation that you are talking about?

Or could the innovation be in WHO you are lending to? To illustrate why I raised that particular point, on the PostGazette.com site, we read that illegal immigrants from Mexico are getting help from the U.S. government to "help them realize their dream of owning a home"! Suddenly, banks are falling all over themselves to offer home loans to illegal aliens! And, according to the website, "they are getting help from government agencies, such as the Federal Deposit Insurance Corp. The FDIC encourages banks to lend and invest in underserved markets regardless of customers' immigration status." Is THIS the innovation that you are talking about?

He does not answer me. In fact, he ignores me. Without even acknowledging my existence, he goes on to say "We have the most vibrant housing and housing-finance market in the world, and there is a lot of innovation. Normally, we think that if consumers have a lot of choice, that's a good thing." Oh! I see! If you give someone poison, then that is a bad thing. But is you give someone a CHOICE of poisons, then that is a good thing? Wow! Thanks for explaining that to me! I knew that imbecility was rampant in the mortgage industry, but not to this degree!


***The Mogambo Sez: Things are too, too, too weird. And the historical lesson is that people run to gold when they wake up to the fact that things are this weird. And the good news is that gold is selling at very low prices. The bad news is that you can't afford to buy it. But the good news is that gold is selling at very low prices, just in case you come up with any extra money.

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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