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Monetary Insanity

Richard Daughty
...the angriest guy in economics
The Mogambo Guru
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Sep 07, 2005

- This week I am beside myself with outrage at everything. Seeing me standing there beside myself like that, I am captivated by my own snarling, supercilious insolence, vaguely reminiscent of Marlon Brando in "The Wild One", with a cigarette hanging out of the corner of my mouth, looking so cool, and how I am the original Rebel Without a Cause and, I might add, an all-around seriously bad dude who drives the chicks wild. My reverie is abruptly broken when my wife yells out, "Are you smoking a cigarette out there, you idiot moron?" I quickly throw the butt down, stomp it out, and yell back "No! Now just shut up and leave me alone, ya old bag!"

But this is not about my awesome Mogambo powers of imagination (AMPOI), but about how I am outraged, mostly by how the damned Federal Reserve increased Total Fed Credit by $6.4 billion last week! Note the exclamation point, which I cleverly use to indicate emphasis for some reason, mostly because I am, as I said, outraged.

Today I will be taking us on a little field trip, away from the hallowed halls of Mogambo Extreme University (MEU). So follow along in your Mogambo Guidebook Of Monetary Insanity (MGOMI) as we take you to where credit is created in that wonderful, magical place in Central Bank Fairy Tale Land. This spooky place is where the little magic fairies at the Federal Reserve come out and dance by the light of the moon, sit on toadstools, and literally increase the amount of potential credit in the banking system by waving a magic wand, or sacrificing babies, or pressing a button, or something. And this sudden supply of fresh credit drives down the interest rate as it swamps instantaneous demand for credit. Then, the next thing you know, total debt is up as people rush to borrow this new, cheap credit. Not surprisingly, all this increased demand for credit did NOT increase the interest rate, which you would expect, as the supply of credit expanded beforehand! And even better, in doing so - like magic! - borrowers create money at the very instant - poof! - that they sign the loan papers!

Standing up, groaning and moaning, to take a look out of the window at the banks, we see that, sure enough, the banks suddenly had another $22 billion in new loans and leases on their books last week. Peeking around the corner at the money supply, we see that the money supply blipped - blip! - up, too. And lookie there! Total debt went - blip! - up, too!

Predictably, the dollar went down, which means that the dollar now has less purchasing power , as befits the currency of a brain-dead country that produces nothing and consumes everything. Which means that (and you are going to really love this because it affects you), each dollar YOU have now buys less! And each dollar that you are going to get in the future will be worth even less, too, even though you are being paid under a contract written back when the dollar had a lot more purchasing power. Hahahaha! Sucker! But you are also selling some things under a contract that was written way back then, too, and so it, I guess, sort of washes out, although I know I am going to have a hell of a time explaining this to the Board of Directors, who are already out to get me. If I didn't have all those incriminating photographs and microfilm of them, I'd REALLY be on thin ice around here!

But this is not about the Board screwing me over for my incompetence and how I'll be lucky if I don't end up in jail about that blackmail thing. No, this is about your government letting the central bank screw you over with harmful monetary policy so that they can hide the inevitable, disastrous results of the criminally-stupid monetary policies of the Federal Reserve and Congress for lo, pilgrim, lo these many decades. And especially the last couple of decades in particular!

And I am also outraged, as you can tell by the way my hands are clenched into Mogambo fists of iron and steel (MFOIAS), they also used some of this magical credit themselves. The Federal Reserve is, after all, just a damn private bank that has been given pure monopoly power over the money, credit, and all the other banks in the USA. This awesome power was bestowed upon them in 1913 by a bunch of government guys (who are now all dead), and who were in cahoots with a bunch of banker guys (who are also now all dead, too). So the lesson is; when you support the adoption of a central bank, then you support the Roaring Twenties when the central bank started issuing excess money and credit, and then you support a Depression, and then when you make the final mistake and support a fiat currency in 1933, you end up dead. Dead!

And, since this will hopefully show up on your SATs, remember that 1913 was a time when theoretical communism and the beneficial rise of the Omniscient State was all the rage among the snotty intellectual crowd (and still is among the snotty intellectual-elite Democrat crowd).

And here is where the invaluable Mogambo Theory of Educational Sequencing (MTOES) comes in handy. If you first learn American history AFTER you learned economics, then your first reaction is, of course, sheer horror at what these people did. And your first instinct is to locate their graves and dig up their decayed, rotten bodies in a frantic, screeching rage, scatter the ashes, burn the bones to ashes and then spread THOSE ashes, too, and then obliterate the graves. Not that I would advocate such a thing, of course, but I could understand how you could be that angry about it.

And if incomprehensible rage and mindless violence is not enough to get the job done, then at least desecrate the graves of all the horrible people involved in this the Federal Reserve/ fiat money/ extreme fractional banking/ supranational agencies (e.g. World Bank and the International Monetary Fund)/ pandemic debt everywhere/ huge government/ hugely expensive government/ hugely expensive AND suffocating AND deadly government government government craziness! Whew! I am all out of breath!

Panting like the winded thoroughbred that I am and gobbling nitroglycerine pill like the little pill-popping dope fiend that I am, I use my last remaining energy to look up into your soulful eyes and caution you that this is a big, big task, because there were lots and lots of them, as it includes the people infesting the public schools, and the media, and the universities, and your parents, and your neighbors, and everyone you probably ever knew, and they are all out to get you, and take all your money only because they are not allowed to kill your and drink your blood.

Anyway, last week these banker guys created the money and used some of it to buy up another $2.1 billion in government debt! Hahaha! It's hard to believe that foreign people are loaning us money, when we are blatantly committing this ultimate monetary fraud right in front of their eyes! And yet it doesn't seem to make an impression on them! Hahahaha! Buffoons! I'm sure that you noticed that I am hanging my head in despair and dismay, even as I laugh at these foreigners and their strange ways, and their funny accents, and the way they stupidly keep loaning us money, because it sure doesn't seem to make an impression on us Americans, either! Alas, this only proves that we Americans are NOT (like we think and still believe), smarter, and stronger, and bigger, and better, and better-looking than all the foreigners in the whole world put together. Well, we may be bigger and stronger and better-looking. Especially you, with your Hollywood movie-star good looks and all. Of which I am very envious and angry about, now that you brought it up. But we are obviously NOT smarter.

Ron Paul, one of the few guys in all of Congress (and maybe the only guy in Congress) that does NOT have his head up his fat, worthless wazoo about economics, has looked at this blatant theft of American wealth and writes "The greatest threat facing America today is the disastrous fiscal policies of our own government, marked by shameless deficit spending and Federal Reserve currency devaluation. It is this one-two punch-- Congress spending more than it can tax or borrow, and the Fed printing money to make up the difference-- that threatens to impoverish us by further destroying the value of our dollars."

If that is not enough for you, then give an ear to Addison Wiggin, who is a best-selling author, is big shot at DailyReckoning.com, and Agora Publishing, and all kinds of other successful stuff (and so I gotta listen to my wife saying "Why can't you be more like Addison?" and I say, "Addison?" And then I find out that he allows her to call him by his first name! But let ME try that crap and suddenly the battery mysteriously goes dead in my car!). But I brought this up because Mr. Wiggin was writing a web promo for the Richebächer newsletter, and he quotes Doctor R. as ominously saying, "The main [economic] problems in the world are all in America. What has happened in America in the last few years is the most irresponsible policies that have ever happened in history."

So you can see why I am outraged.

I am also outraged at other things this week, including the embarrassing incompetence of everything connected with the disaster in New Orleans, including the incompetent FEMA halfwits, the incompetent mayor of New Orleans, his whole staff, and the Governor, too, as far as I am concerned. I blame everybody but me.

As Kate Incontrera of the Daily Reckoning so pithily put it, "Despite all of the money and time and new policies the federal government has put into Homeland Security - we were still completely unprepared for a hurricane that officials knew about days ahead of time." And it wasn't just Homeland Security, either! This country has been pouring tens of billions of dollars every year into this emergency response crap, and they all have Hazmat suits, and Biohazard suits, and special trucks, and tons of equipment, and they go to expensive, special training in faraway places, and they give each other awards and things, and they belong to professional associations, and they are all unionized and bringing down some serious money and benefits packages, and yet this is the best they can do? Hahahahaha! And you thought The Mogambo was an overpaid, incompetent bozo! Hahahaha!

And this incompetence comes at the end of decades of continual incompetence, as Lew Rockwell put it in his essay entitled "The State and the Flood" on the Mises.com site "It was the glorified public sector," he writes, "the one we are always told is protecting us, that is responsible for this. And though our public servants and a sycophantic media will do their darn best to present this calamity as an act of nature, it was not and is not. Katrina came and went with far less damage than anyone expected. It was the failure of the public infrastructure and the response to it that brought down civilization."

Beyond this, a lot of people have sentiments that are echoed by Robert Tracinski, at TIAdaily.com, in an essay entitled "An Unnatural Disaster: A Hurricane Exposes the Man-Made Disaster of the Welfare State." He writes that "This is not a natural disaster. It is a man-made disaster. The man-made disaster we are now witnessing in New Orleans did not happen over four days last week. It happened over the past four decades. Hurricane Katrina merely exposed it to public view."

So what is the real disaster in New Orleans? He thinks it is "The man-made disaster is the welfare state. There were many decent, innocent people trapped in New Orleans when the deluge hit-but they were trapped alongside large numbers of people from two groups: criminals-and wards of the welfare state, people selected, over decades, for their lack of initiative and self-induced helplessness."

And why are all these people poor, and sometimes resorting to being criminals and on welfare? Because they cannot do any work that can pay enough wages to support themselves, you idiot! And why can't they get a job and support themselves? For two very good, damned good, extremely good reasons. One, because inflation has made things so damned expensive that they cannot make enough money to support themselves, and if you think that a little inflation, or ANY freaking inflation, especially over the long-term, is anything but a damned disaster, then take a look at these poor damn people in New Orleans, and then come back and tell me that you STILL think that the advantages of "a little inflation" outweigh their misery, and the combined misery of the unemployed, the handicapped, the sick, the dependent, the injured, those living on fixed incomes, and all the other millions upon teeming millions of people in America whose incomes, if they exist at all, are NOT keeping pace with inflation, and everyone's standard of living is spiraling down, and down, and down, until they end up here. This is the ugly, ugly face of persistent, simmering inflation spread over years and years and years until it evolves into a cancer.

The second reason that they are that way is because productivity is how you reduce the use of manual labor in the economy, which is what these pathetic people have to do! In other words, the jobs they can do, with their limited set of skills and assets, don't pay enough as it is, and the government turns around and actually makes it profitable for businesses to replace workers with capital (machines) or outsource the work altogether to places with cheaper labor and expenses! Hahahaha! "We're from the government, and we are here to help you!" Hahahaha!

The news media rushes over to where The Mogambo is holding a press conference. When everyone is assembled and finally quiet enough to suit me, and enough of the pretty lady reporters are right up front where I can see them to suit me, and the most scandalously dressed one of them all is close enough and right in front where I can keep an eye on her to suit me, I step to the front of the podium and take the microphone into my meaty Mogambo paw (MMP). All eyes are upon me as I raise it agonizingly slowly to my lips, so as to "build the moment". After what seems like agonizing minutes, I finally intone "Inflation, at the root, directly caused the misery and disaster of New Orleans!"

The crowd is wowed! Or, they WOULD be if they had any idea what in the hell is happening. But they are "journalists", and you can tell by my snotty tone and that undercurrent of raw, undisguised contempt that I am not a big fan of journalists as a rule. They don't know anything! They report their "feelings" and sop up direct quotes from the government and government-sponsored spokesmen, mostly about how The Mogambo is a big fat idiot, and how I came here in a flying saucer, and how I obviously have mental problems concerning personal hygiene.

But this is not about journalists or the egregiously bad job that they have done for the last fifty years or so, but about inflation. And it is these kinds of horrors, and many more, each worse than the last, that come from inflation. And it is inflation that causes The Mogambo to rest but fitfully, and see how he tosses and turns in his sleep, and has violent, disturbing nightmares about what is going to happen one day soon that will be considered by future historians to be the "tipping point", or the "turning point", or the "straw that broke the camels' back", or the "thing that made The Mogambo finally lose it completely and go freaking berserk."

And speaking of going berserk, I am further outraged (and there are many scientists who thought I could not GET more outraged) that the gold lease rates literally collapsed last Friday. Suddenly, out of nowhere, the lease rates on gold collapsed to an historically anomalous single point, as the 1-month, the 2-month, the 3-month, the 6-month and the 12-month lease rates ALL dropped to virtually the same low, low, low rate!

Everyone has their own ideas about what this means, but they all, and we all, agree that it means something bad. Very bad. Perhaps even very, VERY bad. But then, when the markets opened again on Tuesday, they sprang- boing! -back up. Too strange to suit me!

So, what other outrage could there be but to rebuild New Orleans? Of course! Everyone agrees that building a city next to the sea, on land that is lower than sea level, that is sinking, and thus spending astonishingly large sums of borrowed money to disrupt the natural flow of silt down the Mississippi, is always a really, really, really good idea! And the umpteen billions and billions and billions and billions of dollars it will take, every year until forever, to build and maintain the levees will be considered to be well worth it, as it will give the shallow, spendthrift morons infesting Congress a reason to spend oodles of money, most of it going to their friends, by plunging us farther into unfathomable, unbelievable, un-payable debt.

In case you were wondering, just the interest on the national debt so far is about $318 billion per year. About $3,000 a year for every non-government worker in America! And this is just the interest! This is NOT a mandated "minimum payment" Just the freaking interest! Hahahahaha! This is the economic and financial and Congressional brilliance of the USA that we are so proud of! Hahahaha!

But perhaps it is rude to laugh when discussing death and suffering. Sorry. But apart from the death and suffering, of the hurricane, it is the effect on the gasoline situation that has everyone's attention, as well it should! This is America! We have priorities! We gas up first, then ride around looking for the dead and injured!

But gasoline, like everything else, is just a matter of price. If the price gets high enough, then you will see entrepreneurial people in leaky rowboats, bringing 5-gallon cans of gasoline ashore to waiting tank cars, rowing in precious fuel from dark and mysterious tankers anchored offshore somewhere, 24-hours a day, and we will have all the gas we need.

But I was speaking of inflation, although you have a point that all I ever talk about is inflation, mostly because it is the only problem that cannot be solved by finding out who is more heavily-armed. Continuing, I note that on the inflation front, it is roaring right along, and the CRB index gained 4.5% for the week, meaning that it is up 16.7% year-to-date. The Goldman Sachs Commodities index leapt 6.1%, or 49.2% YTD. Of course, these indexes contain oil, which has risen mightily in price lately. This is price inflation staring you right in the kisser! This is NOT benign!

In fact, this may have something to do with a Bloomberg.com new item that reported, "Manufacturing in the Chicago area contracted in August for the first time since April 2003, suggesting record oil prices are slowing factory demand, a private report showed"

Separately, the Commerce Department also said that factory orders fell 1.9 percent in July.

And finally ("This just in!") from the racquetball courts in Pinellas Park, the latest survey of the people who play racquetball with The Mogambo (PWPRWTM) shows that all of them are very, very grumpy about the price of gasoline, and have actually cut back on other spending to make up for it. And they are grumpy about that, too.

But they must be the only ones, because, as noted by the famed John Mauldin, he of the Millennium Wave Advisors, "U.S. consumers spent more than they earned in July for just the second time in the last 46 years, the Commerce Department said Thursday. Personal incomes increased 0.3% in July, while spending roared ahead by 1%. As a result, the personal savings rate tumbled to negative 0.6%, the lowest since monthly records began in 1959." Hahahaha! What do you call a country that is doing something so stupid? Answer: Idiots! Hahahaha!

As to what this means, he ventures "My guess is that this is going to get worse as energy costs force families to adjust and dip into savings in the interim. This is clearly a condition that cannot continue." And so it is obviously time for the Congress, already exposed for the incompetent dorks that they are, to respond (insert blare of trumpets, "Ta daaaaaa!") with some of their "fiscal magic", and declare a whole raft of new tax credits, new tax deductions and more deficit-spending! Hahahahaha! Which only exposes them AGAIN for their incompetence! Hahahaha! And foreigners are buying our debt, why? Hahahaha!

But this is enough laughing. Then we get to the money part. As Mr. Mauldin says, "The estimates of how much all this is going to cost are all over the board. A leading catastrophe risk-modeling firm, Risk Management Solutions said today that Katrina and the flooding of New Orleans will probably cost more than $100 billion in total economic losses. In the grand scheme of things, that is less than 1% of US annual GDP. That is one reason why most economists do not think Katrina will push the US into recession."

Well, you know that The Mogambo is not "most economists", nor "normal" in any way measurable by modern science, and he is out here on the thin, razor-edged extremities of fear and panic, and I say that the enormous amounts of leverage that are so ridiculously extant in the USA will easily push the losses to ten times that much. And suddenly you are talking a trillion dollars, which is about 9% of GDP, which is plenty more than enough to CAUSE a recession, because it is plenty big enough to BE a recession, all by itself!

Enrico Orlandini of the Lasco Report agrees with all of this when he writes that "Unlike other moments in history, there is no safety net this time around. The average American hasn't saved, is deeply in debt, his wages are declining in real terms, and won't be able to stand the pressure. He'll give the keys to his house and SUV back to the bank and go rent a smaller house or apartment and use mass transit. Unfortunately, bankruptcies will skyrocket and unemployment will rise dramatically. I see a Depression with one big difference when compared to 1930. In 1930, the bankers jumped out of windows of their own free will. This time around, I suspect that disgruntled Americans will be helping them out. That translates to social unrest and should lead to serious and much needed reforms on all level." And as for the social unrest, again I direct your attention to New Orleans.

- And it is not just New Orleans that is swamped. Martin Weiss of Safe Money Report reports that the permanent, huge-discount sales offered by the new-car dealers have resulted in a lot of used cars being on the market, and a lack of buyers for used cars, too. "All over the country, used car dealers have been swamped and they now have an estimated 300,000 more vehicles on their lots than they'd normally expect at this time of year."

And speaking of cars, if you have ever heard the saying "What is good for General Motors is good for America", then get ready to wrap yourself in your ceremonial blankets and sing the death-wail for the USA, as Mr. Weiss reports that "Recently, GM announced its worst quarterly loss since the company narrowly skirted financial collapse 13 years ago. In response, they laid off 25,000 workers. And in the near future, you can expect a whole new round of lay-offs."

And there is no hope, either. "But it doesn't matter how many people they lay off," says Mr. Weiss, "because they're buried under an avalanche of debt. Last I checked, they owed 284 BILLION dollars. For every dollar of cash they had left, they owed $9. The interest alone is killing them. And every time the Fed raises interest rates, they have to pay more."

Just like everyone else who has large debts to pay, dude!

- The next time somebody taunts you for being a gold-bug, and how only idiots are gold bugs, and so that means you are an idiot, you can tell them that the International Monetary Fund, the IMF, believes in gold. From their website we read that one of their "principles" is that "As an undervalued asset held by the IMF, gold provides fundamental strength to its balance sheet. Any mobilization of IMF gold should avoid weakening its overall financial position."

So even the IMF itself says that gold is undervalued! I mean, what more do you want, for crying out loud? Buy gold!

As for their stash of the yellow metal, "The IMF holds 103.4 million ounces (3,217 metric tons) of gold at designated depositories." This is the gold that the USA, and the other signatories of the deal that created the IMF, literally gave them. I stare at you blankly for a few seconds, until I finally say, with a deadpan expression, "We gave them our gold." It should sink into your head how I feel about that, and that is how YOU will feel about it, too, or else you will do very badly in this class.

Anyway, they go on to say "The IMF's total gold holdings are valued on its balance sheet at SDR 5.9 billion (about $9 billion) on the basis of historical cost. As of February 28, 2005, the IMF's holdings amounted to $45 billion (at then current market prices)."

Not only that, but the IMF used gold as money, as is clearly indicated when they write that "A payment of charges (i.e., interest on members' use of IMF credit) were normally made in gold. A member wishing to purchase the currency of another member could acquire it by selling gold to the IMF." So, you are probably asking yourself, why didn't they just pay each other with a fiat currency? Hahahaha! They know the value of THAT crap! Which ought to tell you something, too!

All this was changed when "The Second Amendment to the Articles of Agreement in April 1978 eliminated the use of gold as the common denominator of the post-World War II exchange rate system and as the basis of the value of the Special Drawing Rights (SDR)." In case you were wondering, SDRs are just another fiat currency, a new and special "let's pretend" money used only to transact IMF business, and World Bank business, and God only knows what all. But they eliminated gold as the basis for their money because they knew that gold was going to get very valuable very soon, and sure enough, it did! It soon went over $850 an ounce! And remember that Nixon had de-linked the dollar from gold just seven years earlier, when gold was selling for about $35 an ounce! And anybody who had borrowed gold at $35 an ounce was going to pay it back with gold that costs $850 an ounce? Hahahaha!

Another principle that they say guides the IMF's policy on gold is that "The IMF should continue to hold a relatively large amount of gold among its assets, not only for prudential reasons, but also to meet unforeseen contingencies." And this is exactly what I have been screeching for YOU to do, too! But do you listen to me? No! But I feel a little better knowing that you don't listen to the IMF, either, and they have he fancy-pancy offices, and I am just a lonely guy who is paid to clean the toilets and refill the snack machine. So, and here's a tip, while I don't expect the fawning deference you would have for the IMF, a little respect might help me decide which one I do first.

Anyway, as we march relentlessly forward in time, we watch as our hair first becomes grey, then thin, and we don't notice that the IMF has also been busy. But they have. During the years 1976-80, under "Auctions and 'restitution' " we learn that "The IMF sold approximately one third (50 million ounces) of its then-existing gold holdings following an agreement by its members to reduce the role of gold in the international monetary system." In short, the IMF started selling the gold that we gave them to get the IMF started, and did it to try to gobble up some of the mountains of money that were being created by the idiot governments, hoping to prevent a world-wide conflagration of inflation. My God! Aren't we scared enough?

Anyway, how were they paid for the gold? Easy! "Half of this amount was sold in restitution to members at the then-official price of SDR 35 per ounce; the other half was auctioned to the market to finance the Trust Fund, which supported concessional lending by the IMF to low-income countries." Let me get this straight so far; we created the IMF, and we gave them a lot of gold to get started. Then, later, after IMF had screwed things up and a caused bunch of countries to become so highly-indebted that they are on the edge of default and so much money was created that it was literally sloshing around, threatening to produce roaring inflation, the IMF sold the gold, to again finance a bail out a bunch of low-income countries (with "concessional lending") that were so stupid as to follow the bad advice of the IMF, and which threatened to default on debts owed to our banks? Hahahaha!

If your heart is thumping ("boom boom boom"), and you have sharp pains shooting through your chest ("ouch!") and your left arm is numb, then you are starting to really get the hang of this economics thing. I'm proud of you!

Anyway, abruptly we are again off to the future, and after a short ride we get off the bus at the period 1999-2000. This is where we reach the historical spot where we first find "Off-market transactions in gold." This was initiated in December 1999, when "the Executive Board authorized off-market transactions in gold of up to 14 million ounces to help finance IMF participation in the Heavily Indebted Poor Countries (HIPC) initiative", which is, as always, another welfare giveaway program. And welfare programs always expand and expand until they bankrupt any country so brain-dead as to allow it to happen, which is, as it turns out, almost all of them. Including the USA, I am sorry to say, as almost a third of all the people in this country are supported by the government. And it makes you wonder what in the hell an "off-market transaction" is, but I don't want to know, as I know too much already, and if I really knew what in the hell was going on, I would certainly be on the evening news, and breathless on-the-scene reporters are yelling "It's The Mogambo again, Ted! He's really lost it this time!" and in the background you can hear the sound of gunfire and screams of pain and torment, yelling "The Federal Reserve has killed our money and are killing you, too! We're freaking doomed!"

Fortunately, my usual cacophony of screaming anguish and mortal torment are muffled by the thick walls of the Mogambo Top Secret Bunker In The Backyard (MTSBITBY), because when I think of the inflation that is coming our way, thanks to all the money that has headed our way, I have to ask myself, as you will no doubt ask yourself, "Is the .50 caliber machinegun truly adequate to defend against neighbors rioting in the streets because inflation has impoverished them all, and now they want revenge on The Mogambo for one flimsy reason or another, mostly involving a few un-repaid loans and an unfortunate incident that was eerily similar to the Hardy Boys book, 'Mystery of the Missing Lawn Furniture and Barbeque Grills.'? "

- To show you how weird things are, even the Federal Reserve has started listening to The Mogambo, probably because it is hard NOT to listen to the Mogambo, because every day I am calling them up and leaving messages, such as "Hey, you big fat stupid buttheads! Inflation is roaring in stocks and bonds and houses and government! Wake up, you morons! Inflation is every freaking where, dudes!"

Anyway, whether or not they actually DID listen to me, Stephen Roach of Morgan Stanley notes that "Belatedly, Alan Greenspan has finally paid lip service to the mounting perils of the Asset Economy. In his recent swan song at Jackson Hole, the Fed chairman cautioned that 'history has not dealt kindly' with investors (i.e., American consumers) who may have gone too far in 'accepting lower compensation for risk' on their asset holdings. Even couched in all the oblique caveats so typical of Fedspeak, this is quite a confession. The Father of the Asset Economy now fears he has created a monster."

Well, duh! Isn't that exactly what I have been saying over and over and over for years and years? And isn't that ALL I have been saying? And isn't that why I have no friends (but plenty of new enemies), and I am now old and bitter and very, very angry? And did I mention very, very scared and paranoid? I meant to.
So if you are a holder of stocks or bonds or houses, then you should be afraid.

And if you hold bank stocks, you should be especially afraid, too, as Alan Abelson, in his "Up and Down Wall Street" column in Barron's, noted that 61% of the total credit of the nation's banks is (drum roll, please!) mortgage-related assets. And when you remember that economic crises always come about as the result of banks acting crazy and irresponsible, then, as the saying goes, "be very afraid."

And it is NOT just us American swine, as we are referred to by the Gestapo in those old movies, who are acting crazy and irresponsible. Who do you think that been buying all those tons and tons of debt we have created? Hahaha! Foreigners! Hahahaha! Guys with funny accents who get all the good-looking chicks even though they probably smell bad, too! Serves them right!

Speaking of oil, Hugo Mackenzie of the newsletter M2 has some "Venezuela presently has little interest in achieving its OPEC mandated quota @ 2.9 million bbl/d; despite all the mass media pabulum to the contrary. Chávez is first and foremost seeking reparations for previous Kleptocratic resource rape and pillage executed prior to his tenure."

So where is Chavez looking for someone to pay those reparations? "In October 2004, he began raising royalty fees to an average of ~ 17% from 1%. More importantly, he began exercising currency seignorage in paying for contract services in nonconvertible Venezuelan Bolivares as opposed to U.S. Dollars."

Smart move! It will increase demand for Bolvares, strengthening that currency, and they will get an extra boost from the way we are devaluing our own money, too! Nice move there, Mr. Chavez! It looks like I owe an apology to Mr. Chavez and the rest of the world's Leftist collectivist idiots, as I usually criticize them, and everything they do and say, by getting right in their stupid little faces and screaming at them in a really, loud, snotty voice, dripping with the acid tones of Mogambo contempt and disgust (MCAD), about their pea-brained stupidity in believing that socialism or communism could ever actually work in the real world.

Speaking of oil, another Mogambo Alert Reader (MAR) named Feizal M. has a friend who works at the Saudi embassy, who says "A friend who works in the Saudi oil ministry, told us that the US pays for Saudi oil with inflation-linked securities. Which might explain the repeated adjusting of the components of the official CPI."

Further, Feizel has looked at the ratio of oil to gold and decided that "At yesterday's prices of $434.5 vs. $68.94 it stands at 6.3 barrels of oil per ounce of gold, which is absolutely the cheapest it has ever been for a century if not more."

- In the newsletter View from Silicon Valley, they featured an essay by Rick Merritt, of EE Times, who says that a friend of his named Martin went to China, and came back, and reported "China reminds me of what this business was like in the U.S. 20 years ago. "People are young, enthusiastic and curious about what will happen next. You don't see that so much here anymore."

Naturally, anytime I hear somebody criticizing someone as being old and unenthusiastic and having no curiosity left, I figure that they are criticizing The Mogambo, as I am not young, nor enthusiastic, nor curious. But before I fire off an email dripping with venom and containing just enough veiled threat of me coming over there and stapling his tongue to his forehead to keep him off my damned case in the future, I belatedly note that he was NOT being critical of The Mogambo, but was instead noting how China is going to eat our lunch. Oops! My mistake!

They suggest that Silicon Valley, that iconic jewel of the New America, could be the next "Rust Belt"! Hahaha! The march of time!

Pay and promotions are getting scarce. Even jobs are scarce. One guy wrote, "I work for Nortel. We haven't hired new engineers in five years." And others say things like "We've only laid off workers the last four years", and "All new hires are from non-U.S.A. markets"

In response, the workweek is now averaging 47.1 hours per week. One guy says "I am required to carry a cell phone 24/7. I am called any time there is a problem, and expected to answer. We have had people terminated for not answering phones."

The surprising part was when I read, "Despite tough times, 68 percent of engineers said they are generally satisfied with their employers and careers. A whopping 88 percent said they were very or somewhat satisfied with engineering overall."

- I think it is interesting that nobody is standing up and saying that they want to be the next chairman of the Federal Reserve when Greenspan retires next January. I am hoping to be the surprise, dark-horse, write-in winner. So, if anybody calls you asking for suggestions about the next chairman of the Federal Reserve, I would appreciate it if you would tell them "The Mogambo! Go, go, Mogambo!"

This is a good move, as I know exactly what to do. And since nobody likes me anyway, I don't have to worry about making people mad at me. The first thing to do, of course, is to disable the button that creates money and credit in the banking system, and then go to lunch. And stay there. From then on, Adam Smith's famous "invisible hand" of the marketplace will take care of everything, as each person will seek to produce, so that they can consume, everyone fighting it out in the open marketplace with the twin weapons of price and quality, slashing and thrusting, dog-eat-dog, relentlessly driving prices down and quality up, which produces a rising standard of living for everybody, with the glorious blessing of zero (or falling) inflation, so that everybody partakes in the blessings of a perfectly-run economy, and everyone is happy, and everything is wonderful, and then they don't have to work so much, and then people could spend a lot of time gorging themselves on barbeque, and dancing the night away in the streets, reveling in a staggering, drunken haze at the monthly celebrations of the Monthly Mogambo Festival (MMF), where all people celebrate their beloved Mogambo, whose wise economic leadership made it all possible, but who merely followed the macroeconomic prescriptions as laid out by Mises and the only true theory of economics, the Austrian School of Economics. But just make sure that we understand one another, The Mogambo gets the glory and the money.

As an example, Joseph Z, in casual conversation with friends who are police and hospital ER workers, has found out that heroin is cheaper than it ever was, especially when you adjust for quality. He writes " 'Dime bags' STILL cost US$ 10.00 and have more content (and is) around 60-75% pure. So how does this 'commodity' [and I use this term MOST loosely], increase in purity, AND in amount but stay the same price in nominal US$?"

The answer is that the marketplace for heroin, as are most drugs, is large and has been around a long time, and now there are lots and lots of producers and suppliers. And anytime you get that much competition in anything, they must all compete with each other on the basis of quality and price. It's how economics works when unfettered by a fascist government. It's as simple as that!

This is the wonderful beauty of free enterprise! You end up with higher quality and lower price, which is the same as increasing the quality of living! And I am sure that you are NOT going to argue with me about whether or not heroin addicts have received a higher standard of living, in that they have experienced zero inflation in price and gotten higher quality!

- To show you that the news about inflation is finally getting around, there was a cute little self-test at Newstarget.com, that they called their Gullibility Factor test. The question is (true or false) "Inflation is a natural side effect of a healthy, growing economy."

The answer is, of course, false. But beyond that, they deliciously explain it as "FALSE. Monetary inflation, which saps the buying power of your dollars, is intentionally caused by the expansion of the money supply which is, in turn, controlled by the Federal Reserve. The net effect is a hidden tax on Americans' income and savings (a tax most people never notice). In an honest economy, the money supply would remain constant, and the annual inflation rate would be zero. Inflation is not natural, it's a manipulation that acts as hidden taxation."

I leap to my feet and shout "Bravo! Well said! Bravo!"

And suddenly I am excited, since it was looking like I might have found another test that I could pass, unlike calculus or that damned impossible Driver's License test. Anyway, I stuck around to read more. Another question was "When you deposit money in a savings account at a bank, that bank holds your money for you until you ask for it back." The answer, again, of course, is "FALSE. Banks do not hold your money, they use your money as a reserve and then lend out ten times as much money to other customers."

This is where I took points away for being hopelessly out of date. (The crowd shouts in unison "How far out of date, Mogambo?"). I answer, "To show you how far behind the times these guys are, the ratio is now almost a hundred to one! The banks have given themselves permission to loan out almost a hundred dollars for every dollar of deposits! Hahahaha! It's fractional reserve banking gone mad!"

Then they go on to explain fractional banking. "The entire U.S. banking system is a fractional reserve system, meaning only a fraction of your money is held in reserve. Banks are counting on the fact that only a small percentage of their customers will ever ask for their reserves on any given day." So, in "bank-think", this is "idle money".

So they loan out a hundred dollars for every dollar of deposits. The money supply is increased by $100. And when each of those newly-loaned dollars get spent and deposited in some bank somewhere, then THAT bank loans out a hundred dollars for each newly deposited dollar! Now the money supply has been expanded by $10,000. And then when THOSE new dollars are spent and deposited in some bank somewhere, then the bank loans out ANOTHER hundred dollars for each dollar deposited, and the money supply has expanded to $1,000,000! And around, and around, and around it goes, new money being created at each step! We started off with one lousy dollar, and after just three iterations of the system, we have a million dollars! A million! And after just three iterations, we are not even CLOSE to being done! Now you see why I am so insane about this thing? The economy hada money supply of one lousy dollar, and suddenly there are a million dollars in the money supply, all chasing the same amount of goods and services! It's inflation! Gahhhhhhhh!

- Since I haven't brought up my usual demand that you stop downloading pornography from the net and go out and get some gold, you think I may have forgotten about it. Ha! Although things look bleak, Bill M. writes "Trust me. If you can survive, it will only be with gold and silver." But it will not be an easy task, as "Fascists and Socialists can, and do, do anything they want, unless they are stopped. And the 'stopping' this time will bugger your wildest imagining." Hahaha! "Bugger my wildest imagining"! What a terrific phrase! And so delicately reminiscent of how pleasant it will be getting royally screwed big time.

And speaking of alert readers, Mike in Long Beach wrote to say that he was impressed with my argument that silver is a screaming buy, although silver has been a losing bet for him for almost a decade. Even so, he captures the surprising devaluation of silver as "Imagine a saloon in 1900.'Hey, barkeep!' you say. 'Give me a beer.' Barkeep says 'Comin' up... One ounce of silver, please.' "

What would have been the result of charging an entire ounce of silver for a lousy beer? Mike figures "BAM, BAM, BAM! No mo' barkeep." Hahaha!

What is the moral of the story? Silver is rock-bottom cheap at these prices, as in "never before in the annals of time" cheap. And if you go rooting around in those annals of time, you will likely be impressed with how much things stunk in the old days, mostly because there were horses and animals taking a crap everywhere you looked, but you will also be gainfully instructed by how everybody who ever bought any real asset at the "lowest prices in history" always made some serious money in the end.

Another Mogambo Alert Reader (MAR), Scott G., reports that "Steve Liesman said that the total destruction of New Orleans would be an economic plus to the good ole US of A." Hahahaha! Thanks, Mogambo Alert Reader Scott G.! I was going to actually run a contest about who would be the first to say that they were totally ignorant of the Bastiat Broken Window Fallacy. I just never imagined that it would be the chief economics hot shot of CNBC! Hahahaha! Of course, I do not actually know if this is true or not, but it is just too, too, too delicious a piece of vicious gossip to not pass along.

Dr. Gary North, of the newsletter Reality Check, is behind me on this one, too.. He writes, "There are still economic illiterates out there who think that a catastrophe is good for business. After all, it will lead to increased employment in the construction industry. But this analysis ignores the fact that nobody was ready to spend this kind of money voluntarily prior to the hurricane. There are winners, but there are far more losers."

And Bill Bonner of the Daily Reckoning is another guy who is really, really, really hip to this economics stuff, too, and he writes "A few dimwits imagine that a natural disaster can be a positive thing. They see the clean-up and the new building as economic boons. Of course, if it were that easy to make economic progress, we could knock out the levees every few years. No, the hurricane is a negative for the wealth of Americans. It will cost money to undo the damage."

- On Bloomberg we read that the dollar is responding to the inexorable pressures of Gresham's Law, were bad currency is shunned. "China and Russia may stop using the dollar to service bilateral trade. The two countries started moving in this direction by letting their banks open corresponding accounts with each other."

- As another example of the horror of inflation, as if you needed another one, the Census Bureau said that "another 1.1 million Americans fell into poverty last year, bringing the total to 37 million people living below the poverty line, defined as $19,307 for a family of four." In terms of percentage of the population, they say that "The poverty rate was 12.7 percent last year, up from 11.3 percent in 2000 before the beginning of the last recession." So the percentage increase in poverty was 12.4% in five years? That comes to 2.36% a year! Just about the same as the inflation rate! Coincidence? Ha! I think not!

At 40 hours a week for 52 weeks a year is, that's 2,080 hours of work (and paid holidays). When multiplied by $5.15 an hour, the worker earns $10,712! Of which he has to pay 7.67% right off the top for FICA! Hahahaha! So the most the worker can take home, assuming no income tax or other deductions at all, is $9,892! So TWO minimum-wage workers, pooling their wages from full-time work, will take home $19,784, which is $477 more than the poverty line! Hahahaha!

So the next time you see Alan Greenspan or Ben Bernanke or any of those other bozos, what I want you to do is strike up a casual conversation, talking about the weather or something, and then, unexpectedly, you grab him by the tie, haul his face down to the page, and scream "Look at it! Look at it, damn you! This is the result of your consistent, persistent, grinding, impoverishing inflation, you despicable loathsome morons!"

But you won't. And they won't let me get near the place anymore.

Ugh.

*****The Mogambo Sez: A new report published by Sprott Asset Management of Toronto, entitled "Move Over, Adam Smith: The Visible Hand of Uncle Sam" concluded that the U.S. government has manipulated the stock market to keep asset prices up so many times, and for so long, that "what apparently started as a stopgap measure may have morphed into a serious moral hazard situation, with market manipulation an endemic feature of the U.S. stock market."

That anyone doubted it is what surprises me. They HAVE to keep the stock market up, as the financial services industry produces 40% of the profits made by the whole freaking country! Every level of government has borrowed and spent with the idea that inflation will always be around 3%, which means that their tax revenues will increase forever, and they have spent accordingly!

And, as if that wasn't dependence enough, everybody's retirement plan is also totally dependent on the stock market! My God! And you thought the government was NOT intervening in the market? Hahahaha! When the tragic results of the market falling by 50% would only put it in the middle of historic range of the price to earnings (P/E) statistic? Hahahaha!

Like they say, at the end of long booms brought about by the creation of excess money and credit, the amount of corruption is off the charts.

Sep 06, 2005
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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