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It's a scary new world

[from our 'under the bed' correspondent]

Richard Daughty
...the angriest guy in economics
The Mogambo Guru
Jul 27, 2005

- The big, big, big, BIG, BIGBIGBIG news is, of course, is that China has lowered the peg of the Chinese yuan to the dollar by 2.1% . As David Tribble commented, "From this point forward, the United States Federal Reserve no longer matters. The balance of power has shifted from the West to the East."  He is right, as the new currency regime is a "managed float" of currencies, and the people managing the float are the Chinese, so they run things from now on. It's a scary new world, and I am sure that you are, like I am, in the throes of hysterical paroxysms of fear, characterized by infantile screaming, crying, begging, moaning, and random bursts of gunfire at unseen enemies lurking in menacing, murky shadows.

At the same time, Malaysia also announced it would no longer tie their currency, the Ringgit, to our dollar, either.  Being a xenophobic paranoid lunatic who sees conspiracy everywhere, I note with alarm that both of these peoples with their distinctly Asian features look vaguely similar and may be related, they both have charming sing-song languages that I can't make heads or tails of, and they both eat really weird food, as far as I can tell from watching old documentaries and older movies on TV . But apparently this Malaysian currency untying does not surprise Chuck Butler, president of EverBank, and who is a guy that they say knows what in the hell he's talking about when it comes to this kind of currency stuff. Putting all this wisdom and education to work, he noted that the Chinese de-pegging would "lead to other currencies in the region to allow their currencies to gain vs. the dollar."

Aside from the problems of one more large group ganging up on us Americans (as if having all the Muslims in the world and damned near everybody else against us is not enough), there is no more permanent peg at all, although the government will allow a maximum movement of 0.3% per day . 0.3?  Like you, at first I said "A third of a lousy percent? That doesn't sound like much!" But it is! This percentage move is every (pause) freaking (pause) DAY!  It is like the little boy who killed his mother and father for twenty-five cents and explained "You know how it is, judge; two bits here, two bits there, it adds up!" It adds up!

My horror lies in the fact that after a few months of this "two bits here and two bits there", and the dollar could be down by fifty percent!  There is a lot of work done through the last few years that suggests that the Chinese yuan is overvalued by somewhere around 40%, so overshooting that overvaluation is not inconceivable to me.

If you notice that you are suddenly bathed in a cold chill, then you have passed a milestone in your quest for Total Mogambo Enlightenment (TME), as you understand that a giant disturbance has occurred in the cosmic continuum, and things are not going to be good.

Or perhaps you heard a bell, as Peter Schiff of Euro Pacific Capital suggests when he said "The old saying 'no one rings a bell,' certainly doesn't apply today, as China rang the 'mother of all bells.'  So deafening was its sound, that its vibrations will be felt around the world. Nowhere will the amplitude of these waves be more pronounced than in the United States."

You can tell what a class-act Mr. Schiff is, because he calmly lays it out, whereas I was unable to contain my hysterical fear, and am currently hiding under the bed, alternatively crying like a crybaby wuss and vowing blood revenge on all the guys who were responsible for the Federal Reserve destroying our money, which is pretty much everybody in any government job in any government around the world, and all the clueless, moronic teachers who have infested our schools for the last fifty years or so, and the equally clueless media "journalists" who cannot even comprehend what their damned "freedom of the press" function is, and I suddenly realize to my dismay that I don't have quite enough ammo to do the job, and now I am even MORE depressed.

Immediately (and this is the part that ought to make your trigger finger twitch involuntarily and your heart slam-dance against your ribcage), oil, precious, precious oil, which is priced in dollars, becomes instantly 2.1% cheaper for the Chinese!  The price to us is (big sigh of relief!) unchanged. So far.  Note the caveat "so far", which is very meaningful to those of you with sharp eyes.

But the oil exporters have to be looking at this, too, and figuring that getting paid in dollars is really, really, really stupid if they are going to turn around and buy something from the Chinese . If they do intend to buy some Chinese products (and who doesn't?), then petroleum exporters just lost 2.1% of their buying power!  In one day! Remember, these oil production companies are in the business of making profits, currently denominated in dollars, by pumping and selling oil. Then, in the natural course of events (and this is the best part!), they will take some of their new dollars and spend them on a few necessities and some other really neat stuff ("Did you see where Abdul has one of those fancy new satellite dishes with the optional polarized gaflugelizer?"). But when the wife gets to the store, she finds that the prices of everything are 2.1% higher!  And getting higher by 0.3% per freaking day!

So she runs home and come storming into the room, throwing the bric-a-brac at you and complaining that she needs more money, and you stammer that you don't have any money because you just put in that new satellite dish, and then she starts yelling about THAT, too!  So it would take a real dimwit to NOT run back to the office and raise the dollar-price of your oil, just so you can have a little peace and quiet at home without the wife screeching and whining about how I have to raise my prices to get some MORE damn money into this house, because the damned dollars don't buy squat anymore, and I tell her to shut the hell up because I have had it up to HERE with her stupidly saying she wants (using a high-pitched, snotty, mocking tone) "more money",  but what she REALLY means, but she is just too damn stupid to understand the basic concept, is that she wants more "buying power"!  And then she coldly looks me in the eye and calmly says that perhaps it is something like, for example, how she SAYS she wants to kill me, and how she is GOING to kill me one day real soon, but what she REALLY means is that she just wants to see me dead and gone. I laugh in her stupid face and tell her no, it is not like that at all, you hateful old bat!  Then, out of nowhere, she got into some little snit for no damned reason at all, and stomped off. Just like (insert footage of fingers snapping) that!

But this is not about my life in hell, but rather about that, as Americans, it will just get worse and worse and worse, as Chinese imports will immediately cost 2.1% dollars more, because the dollar is worth 2.1% in buying power, UNLESS (and this is the crucial part) somebody along the way agrees to make less profit, which is bad for the company, or otherwise cuts expenses. Both of these ideas will work, but crap for somebody else, because all of those lost profits or cuts in expenses were somebody else's income (shareholders or suppliers), and now THEY are suffering a loss of income!  There is nothing good about price inflation. Nothing. It is always bad news. Always.

So why have we jerk-wad American bozos allowed this? Occam's Razor mandates that we find the simplest answer. Thus I loudly declare that we, as a nation, are really, really stupid. A lot like me, personally, but without the crippling emotional problems. But perhaps there is something more to this whole thing, something in the line of, ummm,  destiny, as Bill Bonner of the Daily Reckoning perhaps suggests when he observes "An empire has to figure out a way to exhaust or destroy itself in order to make room for the next empire."  And that is exactly what we have done. We have destroyed ourselves so that the Chinese empire can assume dominance, continuing the universal cosmic dance of birth, death and renewal.

Out of the corner of my eye I can see Peter Schiff is bored with listening to me and this metaphysical philosophy, and is furtively looking around for a discreet way out . I figure "I'll teach him!" I spin around, point my finger at him, and say, "So, Mr. Schiff, what are your final conclusions?" Without missing a beat, the guy jumps up, snatches the microphone out of my hand, and, ignoring the audience cheering him on and urging him to use it to beat the hell out of me, says,  "In conclusion, July 21, 2005 will be another date likely to live in infamy. This time the aggressor is China not Japan, and the bombs are purely economic. Though there will be no immediate loss of life, and no American retaliation, the financial damages will be devastating. History will remember this date as the beginning of Chinese independence, and the beginning of the end of America's ability to depend on the Chinese."

So I confidently predict, without fear of contradiction, that the yuan will continue to gain strength over the long run. It will be, of course, in fits and starts so that the Chinese can "manage" the currency markets so that the local boys will profit from the ups and downs of the currencies, and Wall Street, the Federal Reserve and government will "manage" the stock and bond markets in the USA so that this whole stock / bond / housing idiocy will not implode, and at the same time allow American local boys to make profits from the manipulation. The whole cost will be shifted onto the average American citizens, paid for by suffering a huge, huge, decline in their standard of living, and the wrenching societal dislocations that will result, as the coming years and decades roll by.

And this will be peachy with China, as their strong currency makes imports cheap! Thus, they can import a lot of raw materials to the emerging Chinese consumer, whose average wage is increasing at ten percent a year, and who is a-hungering for the Promised Land of up-scale goods and downright luxuries.

So, and this is the important part for those of you who are whining, "When the hell is he going to get to the damned point?", with a strengthening currency they will import deflation into China, which will offset a lot of the monetary inflation . The downside is for everybody else to gag on, because when the Chinese import deflation, they simultaneously export inflation. So what will we be mainly importing from China? Inflation! Hahahaha!

Paul Tustain of GalMarley.com provides the perfect illustration of how inflation is such a horrid thing. He says he "recently wound up the estate of a great aunt, who died aged 95 after a 35 year retirement." She retired in 1969, and was fortunate enough to have a reliable pension, but where the monthly benefit was fixed at the day of retirement. So she received the same amount every month. Inflation made a mockery of the pension, as "by 2004 the total annual revenue from it failed to pay her local property taxes."  In short, the poor woman suffered a continually declining standard of living, even though she had the exact same income, for every one of her 35 years of retirement, until it could not even pay the damned taxes on her house.

And speaking of inflation, the good news is that we will soon be blessed with the new John Williams' "Shadow Government Statistics", which will begin publishing its own monthly index of consumer prices later this year, now that we can no longer trust the American government's statistics at all. This ought to be really, really interesting!

To get us started, Mr. Williams posted this as of last Friday; "Yesterday morning's report of 0.0% monthly CPI inflation (both seasonally adjusted and unadjusted) appears to have been a political fabrication, which was accomplished through the manipulation of reported energy prices. Here's where the hanky-panky comes in. For example, official (CPI) seasonally-adjusted gasoline prices declined 1.2% in June after a 4.4% plunge in May. Further, June 2005 gasoline prices were up just 6.9% from June 2004. The reported gasoline inflation rates, however, are demonstrably shy of reality. One good surrogate for seasonally-adjusted changes in gasoline prices is seasonally-adjusted retail sales of gas stations, and the June retail sales numbers also were released yesterday morning."

And what did these independent statistics show? "Instead of down 1.2% for June, retail gasoline sales were up 1.9%; instead of down 4.4% in May, sales were down just 0.5% (revised from a 1.6% drop); instead of up 6.9% year-to-year, gasoline sales were up 16.2%!"

Mark L. is thinking along the same lines about this, and sent along a link and his comments. "Gas prices down 34%!" he writes. "This is just like the government; they tell me I can get gas for less than $1.60 a gallon, but then forget to tell me where I can buy it!"

Sure enough, he provided a link to the LeMetropole site, and there we find that Bill King has apparently heard about this crap, too, and says, "The PPI has gasoline station prices DOWN 34.4% y/y and DOWN 25% m/m! Is this a misprint?!? Orwell lives! " Hahahaha! He sure as hell does, Bill! 

And there is a reason for that, too! Nobody ever told you the end of the story about the little boy who pointed out that the emperor was wearing no clothes. I will spare you the ugly details and vicious rumors, but unmarked black helicopters were involved, and there were FBI guys and CIA guys and NSA guys and Homeland Security guys everywhere, all bumping into each other, and there were state police and county sheriffs and city police, too, all bristling with their spiffy SWAT gear and dying for a chance to be heroes, and you never again heard of that damned kid saying anything about anyone's clothes, real or not.

- The most interesting thing, to me, was that Alan Greenspan is supposed to have said to Ron Paul, the only clear-thinking, hard-money guy in Congress, "Central banks have learned the lessons of fiat money." Now immediately you, like me, probably responded reflexively and shouted "You filthy lying bastard!" But perhaps we are being too hasty here. Nobody asked him WHAT they learned! And there, as Shakespeare said, is the rub.

I am deathly afraid that they think they learned something that is, in grim reality, very, very wrong . If they DID actually learn the lessons of fiat money, then central bankers would immediately stop that senseless, ceaseless crap of creating excess money and credit. But they are not stopping that, as I said, crap. All we see is more crap crap crap.

For example, Total Fed Credit went up again last week, this time by $4.3 billion. This takes them to a new, all-time record . So what is the lesson about fiat money that central banks have learned?

Almost all the other countries in the world are increasing their money supplies and driving interest rates into the toilet, too. So what lesson about fiat money have they learned?

Even more surprising was that Required Reserves in the banks dramatically dropped to $42.5 billion, down from $46 billion the week before. While it is not unprecedented for reserves to suddenly drop to these low, low levels, it is surprising, nonetheless.  Now, I will stand begrudgingly to my feet and under relentless cross-examination admit that the idea of requiring banks to hold reserves is an anachronism. In an age of purely fiat currency, there is no catastrophe that can befall the banks that the Federal Reserve could not immediately "fix" by simply creating as much money as needed to completely make up any loss or shortfall . So the whole exercise of keeping reserves is almost a charming, but useless, relic from the old days. And the way that reserves have diminished to almost non-existent levels only proves that the Federal Reserve agrees with me 100%.

But what IS important is that this has suddenly freed up a lot of money all over the damn place, as the banks suddenly find that they have $3.5 billion of "freed-up" money that they can now lend!  Compounded by the fractional-reserve multiplier, which is now running at almost 100, that means that we have a brand-new $350 billion in lending power just sitting there in the banks! A potential $350 billion boost to the money supply!

So, what lesson about fiat money did the central bankers learn?

Perhaps coincidentally, alert reader Rich R. sent an interesting quote from a letter that he recently received from his credit union, Bethpage, which shows in black and white that the banks are bragging about it!  "As a result of a federal regulation regarding reserve requirements," the letter begins, "Bethpage will change the way it reports your Checking account balance as part of an aggregate total to the Federal Reserve Bank (FRB). Bethpage will now categorize checking accounts into checking and savings sub-accounts for regulatory account purposes. Bethpage may periodically transfer funds between these two sub-accounts, enabling us to substantially lower our reserve requirement balance at the FRB and increase the amount of funds available for loans and investments, thereby allowing us to better serve our members."  Hahahaha!  To better serve their members?  Hahahaha!  Making money for themselves, yes, but better serving their members?  Hahahaha!

Wiping the tears of laughter from my eyes, I think I know what lesson about fiat money the central bankers think they have learned. And, as I predicted, it was the wrong lesson.  And, suddenly stopping my laughing, I confidently predict that we will pay a huge price for allowing lying, manipulative idiots like Alan Greenspan and Ben Bernanke to seize control of our banks and money.

- Larry Edelson says that while people think CNOOC (The Chinese National Offshore Oil Company) wants to buy Unocal because the Chinese want to secure oil, that is only part of the story.  The lowly truth is that it is a screaming bargain. "Two years ago, when oil was trading at much lower levels, Unocal's reserves, based on the price-per-barrel of crude, were valued at $64 billion. But the total value of Unocal's shares was just $11.38 billion. So, in effect, by buying its shares, you could have bought its reserves for the equivalent of just 14.8 cents on the dollar."  Remember, this was two years ago.

Now, we fast-forward to today, where it gets even better!  Mr. Edelson takes up the story and says that he figures that "Unocal's reserves are at $102 billion. So you can buy the reserves for a puny 9.5 cents on the dollar."  Hahahaha!

But CNOOC trying to buy all the oil companies is nothing new, as I gather from Larry, and I call him Larry, even though he hates it, only because he is not here to make me stop.  He writes "In Angola, China's Sinopec purchased a 50% interest in offshore oil fields. In Sudan, CNPC has expanded oil production in the southern oil fields of the country, cutting trade deals with the Sudanese government. In Iran, Chinese oil and gas companies have signed several contracts to co-produce oil and natural gas. In Saudi Arabia, Sinopec is exploring and developing natural gas and oil in the Rub al-Khali desert. In Central Asia, Chinese oil firms have purchased major interests in Uzbekistan, Kazakhstan and Azerbaijan, including construction of a 1,860-mile oil pipeline from the Caspian Sea to western China. In Australia, CNOOC owns a stake in a natural gas project, co-operated by Chevron. In Venezuela and Brazil, deals in Venezuela's Orinoco Basin and with Brazil's Petrobras. In Canada, PetroChina, Sinopec and CNOOC signed deals for shares of Alberta's oil sands and for a pipeline to the Pacific coast, for transport via tanker to China."

And, now that they have the gas, all they need is a car to put it in!  Then we can all pile into it, take a nice drive down to a noisy bar, get really drunk and rowdy, maybe putting "the moves" on some ugly women . Perhaps to that end, a Chinese outfit just bought Rover, the last major car maker in England.

So, if you want to know where $700 billion a year in trade deficits go?  It is being used to let the Chinese buy the world . It's that old Jeffersonian prediction that those who engage in monetary stupidity will end up homeless and ruined in their own country.

- Perhaps adding impetus to the Chinese desire for oil is the news out of China's State Electricity Dispatch that this summer will be a really hot one, and it will come at the same time as China's worst energy shortfall in 20 years. They don't actually say it, but I figure that the energy shortfall is mostly due to the Chinese manufacturing crap like crazy, but also because they are also buying and using energy-gobbling doo-dads like air conditioners, and refrigerators, and dishwashers, and all the rest of that kind of stuff . I mean, they have been building power plants like crazy for years and years, and the situation is the worst in twenty freaking years?  It can only mean that demand is outstripping exponentially-increasing supply!

Justice Litle, the energy expert at the Daily Reckoning, sees me hanging out here all alone with this Chinese energy-usage idea, and takes pity on me, and in my defense says to the bullies who are always picking on me that "In China alone, electricity demand is 150% higher right now than it was when China first started to boom, back in 1980.  Last year, over 6,400 factories in China had to shut down because they didn't have enough electricity to run their machinery. Another 10,000 manufacturers had to ration power."

And it is not just the Chinese, either! Mr. Litle notes that "Demand for electricity is continuing to soar worldwide.  Worldwide electricity demand is expected to explode by another 85% before the year 2020, faster than demand for any other kind of energy."  Almost double in fifteen short years?  Ouch!

And somebody has the nerve and gall and arrogance to look me right in the eye and tell me that the price of oil will NOT go up and up and up and up and up and up and up and up and up? Hahahaha!  Just because I am stupid and gullible, people think that I will believe EVERYTHING I hear! Hahahaha!

And, additionally, let's not forget that if oil gets priced high enough, it suddenly becomes profitable to install expensive, extreme-extraction equipment on all those tapped-out, dried-up, capped-off oil wells in Texas and in that whole region, wells that still contain some residues of recoverable oil, but which cannot be pumped profitably now. And I can think of a few guys in power who would profit immensely from that!

- This year, they expect that the median price for an existing home to rise 9.4% to $202,600. New-home prices are increasing 5.8% to $233,900. But, and you can believe this because your own government told you so, there is no bubble in housing. And even if the bubble DID burst, then the Fed again will again merely lower interest rates to more low, low, insanely-low levels to reflate the bubble, or create a new bubble in something else, or the Congress will do the same thing with tax-code tinkering.  THAT is the lesson Americans, and the world, have learned.

- From what I gather from reading the transcripts of Alan Greenspan's testimony at the Congressional banking hearing, it was weird, as he seems to contradict himself sometimes. Maybe I am just being paranoid, but at Jesse's Charts we read that maybe I am NOT being just paranoid, as they write  "Perhaps our greatest concern is that the problem has been getting increasingly worse, and the best examination we can perform seems to indicate that the Federal Reserve and Treasury are employing most of their resources in masking the symptoms of the problem so as to avoid a panic."  And I am sure that he is right, as Shoemakerconsulting.com gives us a little more education when they write, "History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible, to maintain their control over governments, by controlling money and its issuance."

Greenspan, for example, recently said that, in order to control inflation and sustain growth, it "will require the Federal Reserve to continue to remove monetary accommodation."  Huh? Where in the hell did THAT come from? I never heard anybody, ever, say that growth in an economy is dependent on the removal of monetary accommodation! This is the exact OPPOSITE of their whole stupid neo-Keynesian philosophy, for God's sake!  You get growth when you PROVIDE monetary accommodation, you idiot!  And it works!  It produces growth! It also produces cancerous mal-investment, over-investment, a drop in savings (as people try and escape low bank deposit yields), bubbles, and, inevitably, an inflation in prices that matches the foregoing inflation in the growth of money and credit, ruining everything.

It is a sad, sad day when somebody as stupid as The Mogambo has to explain something so basic to the chairman of the Federal Reserve because he can't get his own ridiculous theory right!

But maybe I am too hasty. As Julian Roberts of the Tiger Fund said, the American consumer may be "out of gas", being so far in debt already, and thus unable to borrow to buy more stuff. If so, then maybe lower interests will one day fail to do the trick. One guy who apparently thinks so is Peter Warburton, author of the book "Debt and Delusion," who said, "There is something big coming. It is the destruction of the economy at low rates. This is going to be the big surprise that the economy will go into a prolonged slump even at very low nominal interest rates."

Now,  don't know if Kelly K. Spors of the Wall Street Journal knows Julian Roberts or Peter Warburton or not, but she is certainly hip to our debt problems and how they just keep getting unbelievably worse and worse. The article itself reveals the extent of the problem. "The debt service ratio, the Federal Reserve's estimate of the ratio of debt payments to after-tax income, hit 13.4% in the first quarter of this year, an all-time high since the Fed began tracking it in 1980. The financial obligations ratio, which adds automobile lease and rent payments, homeowners insurance and property-tax payments to the debt service ratio, was 18.45% last quarter, near the record high of 18.84% in late 2002. Total household debt grew 11.2% in 2004, the largest year-to-year increase since 1986."  We're not only up to our eyeballs in debt, but it is getting deeper!

In the same vein, Marshall Auerback of the PrudentBear.com site, has borrowed through the  2004 Financial Report of the United States Government.  He notes, with his usual cool and unflappable style, like this doesn't affect him at all, that "The table published in the Overall Perspective on page 11 shows an $11.1 trillion annual deterioration  in the government's net worth."

- Eric J. Fry, who writes Daily Reckoning's Rude Awakening column, notes that a lot of  "Wall Street analysts have been rushing to issue 'Sell' and 'Underperform' ratings on various resource stocks. The stocks are 'fully valued,' the analysts explain." Now if it was me that was breaking this news, I would begin by laughing at the idea, and then move on to naming names of the morons who have been issuing these recommendations so that you could look them up in the phone book, and give them a call at 2 a.m., and tell them that they are morons, and then go "Hahahaha!" before hanging up on them.

But Mr. Fry is too sophisticated for that, and merely says only "Maybe yes, maybe no . But we suspect these recent downgrades will seem ill- advised, when viewed from the 20-20 hindsight of July 2007 or 2008. In other words, we'd ignore the dubious advice to sell lowly-valued resource stocks in the middle of a resource-stock bull market."

Hahahaha!  Selling cheap stocks into a bull market! Hahahaha!  I laugh because I happen to be an expert on selling a stock too cheap, only to see it rocket higher and higher within an hour of me selling it. So I am also somewhat of an expert when I say "what morons!"  But these analyst windbags still pull down the big money for nothing, just like the irritating Dick Grasso, who somehow got the NYSE to pay him about $190 million a year to strut around acting like a big shot, which comes out to about $800,000 per day!  He says, in his own defense, that he is worth 800 grand a day!  But after being ignominiously fired from the NYSE for his grotesque, grubby greed, everything at the NYSE is still running along just peachy, which maybe shows how little Mr. Grasso was REALLY worth.

But this is not about how over-paid clueless weenies with their eyes on your money are everywhere, but about us smelly proletariat vermin out here trying to make a little money by savvy investing, so that then maybe we can afford to slip out this dump in the middle of the night with the money and start a new life, trying to enjoy a little happiness in the last few precious years of our miserable lives. While Mr. Fry does not address this specifically, he does provide a clue on the savvy investing part when he says "To be a seller of resource stocks, the long-term investor must believe that the bull market is over. We do not.  Nor do we believe that the long-term demand for energy products, base metals or most other resources will slow enough to trigger a long-term sell-off in resource stocks."  So, if you are paying attention, like I know you are because you are as greedy as the rest of us, you doubtlessly noticed that the prices of commodities and resources are 1) in a bull market and 2) will continue to be in a bull market. So we have determined what asset will be going up.

The next part of the strategy is revealed when he says "To be sure, short-term volatility - sometimes wicked volatility - will nip at the heels of resource investors.  But, we would be slow to interpret such periodic nuisances as reasons to abandon long-term investments in the sector."  Nuisances?  Man, that volatility thing is not a nuisance! It's a series of buying opportunities! Dollar-cost averaging will wring profits out of the whole run, nuisances or not!

I see a couple of you have raised your hands to ask a question. Using my Mogambo Mind-Reading Powers (MMRP), I see that you want to know how this squares with the idea that China is growing too fast, and how its banks are a mess, and how this means that the boom in China can't continue, and how that means that the boom in demand for commodities and resources stocks can't go on much longer, either. Mr. Fry adroitly disposes of that argument when he says "We would also note that the price action in nearly every one of the world's major commodities refutes the notion of a slowing Chinese economy. The prices of copper, iron ore, coal and oil are all hovering near all-time highs. Copper inventories on the London Metal Exchange have dropped 45 percent this year, down to their lowest level in 31 years. Somebody must be buying this stuff."

He does not mention that for the growth in China to stop would mean that there is no more pent-up demand in China, or anywhere else, and that, finally, everybody has enough television sets, and washing machines, and cars, and air conditioners, and snappy new duds. And while I am not an expert on China (although I have eaten a lot of Chinese food over the years), around MY neck of the woods demand is NEVER satisfied, and, as an example, even though we already HAVE a dishwasher, she wants a new one!  Why?  I don't know, as I think that the strips of duct tape stuck over the rusty spots adds a really nice, bright metallic sheen to the whole kitchen!  Snazzy!

Bill Bonner is casually walking by, and hears us talking about China. Off the top of his head, he comes up with a perfectly apt simile when he opines that "China is almost the exact opposite of the United States.  If they are joined at the hip, commercially, it is strange beast they make. One works; the other eats. One saves; the other spends. One gets rich; the other gets poorer every day."  Leaving me standing there with my mouth open at the unexpected profundity of it all, he walks off!!

Mr. Fry reaches out and, placing a finger under my chin, closes my mouth for me, and goes on to say, "The real problem is that the United States has lived beyond its means - enabled by the Fed, China, Wall Street, greed, fantasy, and imperial conceit. China can dump her deadbeat U.S. customers. It won't be painless or easy, but there is plenty of ready need and purchasing power in Asia."  So, once again I am in agreement with the estimable Mr. Fry, a point that I will be bringing up the next time somebody says to me "Shut up, Mogambo! You are always wrong about everything!"

And what can be done about it?   And, eerily, while I am always loud and strident in my conviction that nothing CAN be done, Mr. Fry is seemingly agreeing with me again when he says "But here is no conceivable adjustment that can be made that will spare the United States a drop in living standards"

And in case you are in a casual conversation with somebody and they are not quite familiar with the phrase "a drop in living standards", then the Mogambo Desktop Reference Dictionary (MDRD) can be your salvation. Looking up "Living standards" and going down the subheads to "Drop in, defined", we read that it means "You get poorer."

- From the Texas Hedge we read that "The adult citizens of China, all one billion of them, have recently been given the freedom to own gold", which we all already knew. But the new wrinkle is that they report "Now the government is actually encouraging them to purchase gold as a form of savings."  And it all relates to the un-pegging of the dollar to the yuan. They write "As the Yuan strengthens against the Dollar and other currencies, gold becomes cheaper for the Chinese to buy. We have long known that the day of revaluation was coming, now that it is here, the light says 'green' for gold."

How green is that light at the start of the dollar crisis? Well, Paul van Eeden says that "During the Mexican peso crisis in 1995 the price of gold in pesos doubled. When the yen fell in 1995 and 1996 the gold price in yen rose by 35%. In 1997 the gold price rose more than 40% in both Philippine pesos and Malaysian ringgits, 67% in Korean wons and more than 400% in Indonesian rupiahs. From 1999 to 2002 the gold price increased more than 40% in euros. We are currently in a US dollar bear market. The gold price has already increased by more than 60% in dollar terms and I expect it to increase another 75% or so before it's all over."

- An editorial in the Springfield News, by Representative Peter DeFazio, about how CAFTA (Central American Free Trade Agreement) if another NAFTA-like rip off that will plague us, pretty much sums it up for me when he writes, "The combined economic might of the five Central American countries is only $151 billion, about what the U.S. economy produces in five days. Even if every penny of these countries' economies was devoted to buying U.S. goods, which isn't going to happen, the impact would be insignificant in the $11 trillion U.S. economy. The bottom line is that CAFTA is not about creating U.S. jobs and exporting U.S. goods. It is about creating a favorable climate for multinational corporations to export U.S. jobs and use Central America to export goods back into the U.S."  Well, maybe not back into the U.S., because if all the jobs are exported, what are we going to use for money to buy those things with?

So is this some idea to help the Central American countries?  Obviously not. He notes that "The U.S. already has a trade deficit with the Central American countries of $1.6 billion, which will only grow if CAFTA is enacted."

So the countries affected by the proposed CAFTA legislation are already showing trade surpluses! What the hell is the problem that we need CAFTA? It probably has to do with China. Our whole problem is that American wages and costs are too high to allow us to compete with China. So, with typical Yankee know-how, we change the law to produce tax advantages to get our grubby hands on some cheap Central American labor!  It reminds one of the old line about how "The machinery of capitalism is lubricated with the blood of the exploited workers."


***The Mogambo Sez:  Addison Wiggin of the Daily Reckoning has some advice gleaned from technical analysis that is better than anything I could come up with. He writes, "Since the beginning of the Dollar Standard era, every time an ounce of gold could buy less than 10 barrels of oil, an investor would do well to buy gold. Today, an ounce of gold buys only seven barrels of oil. The message from the markets it clear: Buy gold."  

And this devaluation of the dollar makes that analysis even more clear and compelling.  

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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