Sulphur and Cloven Hooves
...the angriest guy in economics
September 22, 2004
- Let's start off, as we usually do, with a look at the Federal
Reserve, mostly because that is the source of evil and misery,
although those Harry Potter books don't even mention it, even
in passing. If you want to know why I say this, I direct your
attention to two sure-fire tell-tale signs, one being the faint,
acrid smell of sulfur that permeates the Federal Reserve building,
and the other is that all the people who work there wear shoes,
which they do to keep you from seeing that they have cloven feet.
I rest my case.
Well, we can't help but notice that Total Fed Credit jumped by
another $4 billion last week. This is the ultimate measure of
pure credit being created. When trying to decipher why they did
this, perhaps it would be helpful to also note that the foreign
central banks were unusually muted last week, and their Custody
Holdings at the Fed were only up a piddling $450 million. This
is a big decline for them, as they usually buy a four or nine
billion dollar's worth at a crack. On the other hand, those foreigners
may have been merely busy, as their own economies are still rolling
around on the floor gagging and choking on the $327 billion of
US government debt that their own central banks have crammed
down their throats in the last twelve months.
But the American government, our bilious bastion of blowhard
bastards and constant corruption, is still spending, spending,
spending, and they need lots and lots of money, either borrowed
or printed up fresh. But as we noted, the foreign central banks
are showing a few more smarts than usual, which is up from zero
smarts, and have apparently decided that loaning millions and
billions and trillions of dollars to a nation of grubby, greedy
deadbeat spendthrifts is not the best plan they ever came up
And, true to form, the American banks themselves decided that
if the foreign central banks wouldn't act stupid, then they would
heroically gobble up $6 billion of federal debt in one gulp,
like a bunch of hyperactive college kids on Spring Break ("Chug!
Chug!). They do this because banks think that they can thrive
only by deliberately acting really, really stupid, and then requiring
that the taxpayers bail them out of the bankrupting mess that
they inevitably get themselves into by acting like that. This
is known in standard textbooks around the world as Business As
Usual In The Banking System (BAITBS). Well, it WOULD be in the
textbooks if the government wasn't censoring it out.
- The Commerce Department said the U.S. current account gap widened
again in the second quarter, to a new record of $166 billion
in the hole, and as a percentage of GDP this comes out to 5.7%!
Now, let me entertain you with a display of my legendary skills
with a calculator. After a quick search of my desk with papers
flying everywhere and me screaming "Who stole my calculator?
I'm going to kill whoever stole my calculator!" I finally
locate that elusive little booger, and I repeatedly multiply
$166 billion by 4, so that I can get an idea of the total annual
trade and investment deficit. This unexpectedly takes longer
than previously estimated, and with a lot more cursing and confusion
than one would normally expect from trying to multiply two simple
numbers on a little calculator. After awhile, I stand up and
announce that the annual current account deficit is $664 billion
a year! The crowd goes nuts! "Hooray, Mogambo! Yayyyy!"
Emboldened, I fall victim to the shallow flattery ("It almost
seems like you know what you are doing, Mogambo!") and make
the big mistake of agreeing to perform another feat of calculator
magic. I suddenly realize my mistake when I am asked to find
out how much money that is for every person in the country who
has a non-government job. With a sinking heart and guts churning
in fear, I slowly turn around to the blackboard, and I pick up
a piece of chalk. My mind races furiously, trying to come up
with a way to either do this thing or get out of doing this thing,
but all I can seem to think of is how far away lunch seems, and
how hungry I am, and how I could swear that I could--- sniff
sniff sniff! --smell pizza! And not some wimpy cheese kind of
pizza, either, but one loaded to the gunwales with every luscious
pork product you can name!
I look at that vast expanse of empty blackboard, seemingly stretching
out to infinity, and I say to myself "Concentrate! Concentrate!"
I can hear the audience getting restless behind me, so I start
to write, and as I do, I say out loud "Okay, there is $664
billion current account deficit, and a number that large means
that there are a lot of zeroes and commas and things, and so
I will write a lot of zeroes. But there are only 120 million
of us poor proletariat worker bees out here, and there are a
lot of zeroes and commas after that number too, only not as many
as the that $664 billion number." I suddenly realize that
I am out of numbers to write on the blackboard, or even have
a place to write them, covered as it is with a nightmarish mishmash
of zeroes and commas all over the place. With a flash of brilliance,
I seize upon the strategy of instigating a disruption to get
me out of this mess! I note with dismay that Bush has already
used that strategy and has gotten us into a war with Iraq to
divert our attention from our economic problems, and so nobody
is going to fall for that one again. I fall back on Contingency
Plan Number Two (CPNT), and say "There are only 120 million
of us poor bastards that do not have the benefit of working for
a government, and we have the supreme disadvantage of not being
paid far more than we are worth, nor having a grotesquely swollen
benefits package that is made of the blood of our children, and
who apparently cannot be fired even for extreme incompetence
or corruption, when it is obvious that most of them are one or
the other, and probably both." My plan, see, is that there
would be a government employee in the audience who would take
offense at that, then we would get into a long series of yelling
at each other "No, I'm not!" and me saying "Yes,
you are!" and them saying "No, I'm not" and me
rejoining "Yes you are, too!" back and forth until
everybody gets tired and goes home. But to my dismay, nobody
says anything. Damn!
Sweating bullets and acting like the little rat that I am, I
nervously lick my dry lips. I pick up my calculator, and I ineffectually
and randomly peck at it with this look of concentration on my
face. After a little while I announce "This comes to $7,963,842,519,805,764,299.34
per non-governmental employee in the country!" A gasp of
disbelief and shock goes through the audience. One of the little
smarty-pants eggheads in the front row who has been busily performing
the same set of calculations on his own calculator raises his
hand and says "Professor, don't you mean $5,533 per non-governmental
employee?" I quickly tap at my own calculator a few times
like I am double-checking my results, and announce "Yes,
that is what I meant to say! $5,533 per non-governmental employee!
With a big beaming smile of smug satisfaction, I say "So,
annually, we are shipping $5,533 out of the country for every
person who has a non-government job in the USA. That's a lot
of cheeseburgers! Maybe we ought to go and get one before they
are all sold out! Class dismissed! I'm outta here!"
- A new published study by two current and clueless Federal Reserve
wonks (Bernanke, Reinhart) and one previous one (Sack) has shown--
urprise! --that they are doing a wonderful, fabulous job, that
everything is just peachy, that they are all much more handsome
and smart than everybody else, and that we are all stupid. Well,
maybe not you and your gigantic brain, but they say that they
are smarter than the Mogambo, although they do not mention me
by name, but you can tell that is what they are thinking.
In particular, the thrust of their precious little self-aggrandizing
study shows that when the Federal Reserve threatens to act like
profligate, inflation-stoking morons, the threat of deflation
goes away! Well, duh!
John Mauldin is a guy that not only puts out Front Line Thoughts,
an economic newsletter, but takes his responsibilities so seriously
that he actually reads things like this Fed paper instead of,
like me, sitting around getting really drunk all the time, watching
the Cartoon Channel and whining about how I never can seem to
get ahead in life no matter how hard I try. As soon as I sober
up a little bit I am going to call him up and thank him, because
he provides a quote that explains, in totality, the entire idea
behind Modern Economic Theory As Practiced By The Moronic Federal
Reserve And All The Other Little Dirtbag Central Banks Around
The World Who Are Equally Moronic.
First off, the authors provide a little economic background,
and they say "Central banks usually implement monetary policy
by setting the short-term nominal interest rate, such as the
federal funds rate in the United States." So right off the
bat they are letting us know that the supply/demand dynamic in
the banking business, the same one that has served American business
so well that we came to dominate the whole freaking world for
most of a century, has no bearing on interest rates anymore,
mostly because we carbon-blobs out here in the real world are
not as smart as Federal Reserve people, and we can't be trusted
to make decisions about how much interest we are willing to pay,
or at what rate we insist on being paid for the use of our money.
To show you how wonderful they are, they continue "However,
the success over the years in reducing inflation and, consequently,
the average level of nominal interest rates has increased the
likelihood that the nominal policy interest rate may become constrained
by the zero lower bound on interest rates." Well, they have
their opinion that they have had "success" in reducing
inflation (by re-jiggering how they measure inflation, known
to us out here in the real world as blatant lying), and I have
my opinion (by actually looking at prices) that they did no such
thing, and in fact have caused persistent, grinding inflation,
which is the exact opposite of what they are supposed to be doing.
But beyond that, notice that they say that (and you gotta pay
close attention here) they deliberately pound money into the
banking system to force interest rates down, see, and somehow
this genius at monetary policy has resulted in lower interest
rates! Wow! Amazing!
But they do not want to get into a discussion about that. They
just want us to concentrate on the fact that they are the banks,
and that have the power to create so much money that interest
rates, and the economic fate of the United States, are just playthings
But the Mogambo is not able to calmly educate you right at the
moment about how stupid this is, as my loud, obscenity-laced
angry denunciation of this whole Bernanke thing is (so they say)
a violation of my parole or something, and as they are dragging
me away kicking and screaming, I whip out my Mogambo Emergency
Distress Signaling Device (MEDSD) and-- beep beep beep! --summon
Ludwig von Mises, whom we Austrian economists revere as the Father
of Economics, to step in for me. Even though he is now deceased,
he is likewise so angry that he opines, literally from beyond
the grave, that this is nothing new. "Credit expansion is
the governments' foremost tool in their struggle against the
market economy. In their hands it is the magic wand designed
to conjure away the scarcity of capital goods, to lower the rate
of interest or to abolish it altogether, to finance lavish government
spending, to expropriate the capitalists, to contrive everlasting
booms, and to make everybody prosperous." But as wonderful
as this sounds, he makes sure that we do not miss the important
point that there is still no free lunch, and that this Fed program
is just something that creates the rope with which we will be
hung by the neck until we are dead. He says, "There is no
means of avoiding the final collapse of a boom brought about
by credit expansion."
Kurt Richebacher shows where all this money comes from and where
it goes. "Asset price bubbles arise when money and credit
expand well in excess of economic activity. The excess money
winds up in the financial markets, propelling asset prices to
unjustified and unsustainable levels completely out of proportion
to the general price level. In this way, U.S. stock valuations
over the last year went from ridiculous to insane." And
not only that, but houses are now so expensive that only a minority
of people can afford one.
But this execrable paper is revelatory, in that they reveal their
entire theory of economics, and in just a second, if you keep
reading, you will realize why I used the term "revelatory"
to describe it. If you lower interest rates, then aggregate demand
will always be stimulated! It's their whole cockamamie idea in
a nutshell! They actually believe, without a single, tiny shred
of evidence to support it, that aggregate demand will always
be stimulated by lower interest rates! Always! They actually
believe, which shows just how insane they are, that there is
no set of conditions in the known universe where you will NOT
consume, and keep consuming with both hands, if interest rates
are lowered! You could be up to your ears in debt, frantically
filling our bankruptcy papers and fending off creditors who are
beating down the door demanding payment with one hand, and with
the other hand you are, theoretically, calling a 1-800 number
to order a jeweled water bowl for your dog or something! Hahahaha!
I am here to tell you, and you might want to write this down
because this is another Fabulous Gem Of Economic Wisdom That
Spews From The Mouth Of The Mogambo (FGOEWTSFTMOTM), that this
is one gigantic load of crap.
And not only that, but we are treated to the awesome stupidity,
and I am shaking my head in disbelief, resembling a wet dog that
has crawled up out of the water and my ears are comically going
flappa flapp flappa, that they think that inflation is the inverse
of money creation! The more money you create, the lower inflation
gets! Hahahahaha! Their arrogance is so unbounded that they are
not the least deterred by the evidence that this has never happened
in history, and that it is directly contrary to long-established
fact. These buttheads (and notice that Bernanke and butthead
both start with the letter "B") say that the entire
5,000 previous years history of economics is wrong, and just
because interest rates and inflation always eventually went up
after all the other central banks created so much money, that
was just an anomaly! They are saying that now, for the first
time ever, their theory is finally being proved! Hahahaha!
But they don't want to talk about that, as when I call them up
and demand "Put that jackass Bernanke on the phone immediately
because I am going to straighten his little butt out about a
few damned things!" they put me on hold, and then after
awhile they come back and tell me that he is not in the office,
but that they will be happy to take a message and that he will
call me back. But he never does! Never! See what I mean? They
don't want to talk about it!
No, what they want to talk about is what happens when, after
they have been dropping interest rates and dropping interest
rates and dropping interest rates and nothing happens, they decide
to drop interest rates to near zero. Oh, not the GOOD things
that happen, like when you are able to buy more stuff because
prices are lower. They don't mention that part. They say that
there are BAD things that will happen, and this is where they
reveal the idiotic underpinnings of their whole stupid theory
of economics, which I will obviously call Their Whole Stupid
Theory Of Economics. They write, and here they admit that the
crucial assumption underlying their whole theory of economics
is, actually, wrong, "When that happens, a central bank
can no longer stimulate aggregate demand by further interest-rate
reductions and must rely instead on 'non-standard' policy alternatives."
There! They admit that lowering interest rates will not guarantee
stimulation of the economy! After they just told us that it would!
They first postulate that aggregate demand can always be stimulated
by lower interest rates, and that gives them the "right"
to do it at their whim when the economy needs to be rescued,
again, from their utter failures at managing the economy. And
then they turn right around and in the same breath say, no, sometimes
even money available at zero percent will not "stimulate
aggregate demand." Even though their whole bag of tricks
is that one trick, namely that lowering interest rates will always
stimulate demand! Now you see why I have zero respect for the
And if that is not bad enough, the real horror is that they are
giving themselves the option, which they are calling "non-standard
policy alternatives," to do any damn thing they want to,
whether or not it conforms with the law, reason, intellect, convention,
or common sense! They even dress it up in with the neutral-sounding
word "non-standard," when the more accurate, though
lengthy, synonym would be "Outright fraud, intellectual
bankruptcy and legalized corruption by a fascist government that
has no idea what in the hell it is doing, the kind of behavior
that sends the Mogambo off the edge and the next thing you know
local television stations are breaking into their own broadcasts
to breathlessly announce that a heavily-armed raving lunatic
is creating a disturbance downtown and that traffic is snarled
- There has been a minor flurry of activity around here lately,
due to a letter written to the Daily Reckoning about me, by a
woman who describes herself as "in her 20's." She has,
I am ashamed to say, seen right through me, and describes me
to a T when she describes me, apparently based on her long experience
with this kind of thing, as "The nettlesomely verbose, pabulum-spouting,
foaming-at-the-mouth Mogambo Moron." This just sounds like
one of the so-called "experts" testifying in one of
my sanity hearings, blah blah blah, so my purely reflexive response,
honed by years of usage, blurts out of my mouth before I realize
it. It is referred to in official court transcripts as the phrase
"Up yours, you little egghead pipsqueak!" followed
by a very rude hand gesture and wild, maniacal laughter.
She continues, probably based on her many years and of experience
and education in theoretical economics accumulated in her long
20-something life, "Despite occasional recessions and forays
into the financial doldrums, the American (and world) economy
has proven remarkably robust." Well, I agree that they world
economy has proven "remarkably robust" because it has
survived, although umpteen millions and millions of people, some
of them also in the 20's, in Latin America, the Philippines,
Mexico, Argentina, Malaysia, Thailand, Korea, Indonesia, Brazil,
and a long list of other countries suffered paralyzing losses
when their economies collapsed due to their own idiot debt-o-holic
jackass governments pursuing the same debt-o-holic jackass economic
policies that we are following. These economic emergencies have
(the news just keeps getting worse and worse) transmogrified
the IMF and World Bank into monstrous, gigantic transnational
institutions doling out gifts of hundreds and hundreds of billions
of dollars belonging to American citizens to foreign countries
and their idiot leaders, trying to keep those selfsame countries
from degenerating into the absolute chaos of bankruptcy and ruination.
The fact that we Americans have wielded economic hegemony due
to our monstrous size, and that we used that power to bail these
weenies out time after time after time, is the only reason that
they did not permanently collapse back into the stone age.
And when you adjust all this "remarkable robustness"
by the fact that the United States dollar has been devalued by
98% from it's par value in 1913, the year that the monstrously
evil Federal Reserve was created, you get a wildly different
perspective on the meaning of "robust," as I am here
to tell you that every cent of that devaluation of the dollar
was paid for, all along the way, every day, by lots and lots
and lots of people suffering the misery of not being able to
buy as much stuff, buying less and less, week after week, spending
every dime but only getting fewer groceries, fewer medicines,
fewer clothes, fewer cars, fewer dinners out, fewer everything.
And furthermore I am afraid that this 20-something woman, despite
her obvious genius, confuses the anomaly of the last 54 years
with the last 5,000 years. And when one examines that historical
record, one finds there has never been an economy that has proven
to be sufficiently "robust" to permanently withstand
the kind of economic, death-by-debt stupidity that we are exhibiting.
They all failed, probably because they all had populations as
greedy and stupid as we are here in America, but certainly because
their politicians were as corrupt and stupid as ours. And that
is why I wax indignant and incoherent; they destroyed their money,
that destroyed the people, and the rest of their pitiful individual
national histories are not very pretty after that happens. And
that is exactly, and I mean exactly, the situation that we have
And whither from here and all this robustness? Well, if you had
asked Henry Hazlitt, one of the biggest of the big shots in Austrian
economics, he could have pointed to a passage of his that reads
"If the welfarist-socialist-inflationist- trend of recent
years continues in this country, the outlook is dark. It is a
prospect of mounting taxation, snowballing expenditures, chronic
deficits, a budget out of control, an accelerating rate of inflation
of the kind endemic in Latin America (at least for the last generation),
a collapse of the dollar, increasing world currency chaos, and
more and more ruthless price, wage, and exchange controls, leading
toward a regimented economy and dictatorship. And if this trend
is interrupted temporarily, it may be by riots, assassinations,
and a breakdown of law and order.
But all is not lost. There are also examples of people who have
NOT lost their minds after being educated in the American public
school system, which exists solely to turn out ignorant little
government-obeying robots who think that the Iron Laws Of Economics
do not apply to us Americans. As evidence of this, another reader
who wrote to the Daily Reckoning site said "America at the
moment, with its faith-based currency, faith-based economy and
faith-based government, might be a heaven for those who love
faith, but it's a hell for those of us that respect evidence."
Exactly right! He even quotes a passage from the Bible, namely
Proverbs 27:12 (ESV), "The prudent sees danger and hides
himself, but the simple go on and suffer for it."
After I am elected Supreme Ruler of the World (although I am
not yet on the ballot in all states), I will amend that Biblical
section, as the arrogance of the Mogambo knows no bounds, and
the Mogambo Version (MV) shall henceforth be known as Proverbs
27:12 (MV) "The prudent sees danger and hides himself in
his steel-reinforced concrete bunker and locks the door, whilst
surrounding himself with gold, and silver, and commodities, and
victuals, and many powerful armaments with which to protect the
gold and silver and commodities and victuals, and he shall have
multitudes of cases of both brewed and sugary beverages with
which to slake his thirst, but the simple go on and suffer for
Another astute reader notes that "Looking at the hard facts
of the predicament of the United States in this world - the colossal
debt, the profound depletion of resources, the precipitous decline
of the industrial base, the demographic challenge - it is difficult
to envision how things will work out to create a better correlation
of events for this nation in the long term." And the reason
that it is difficult is that it is, in a word, impossible, and
if you have ever tried to do something impossible, then you realize
that it is always very difficult.
And indeed, the United States, for all its "robust"
characteristics, is now on the hook for an estimated $60-74 trillion
dollars (depending on whose estimates you are looking at) in
discounted present-value dollars, representing both present and
future liabilities. This huge bill, which is already bigger than
seven times the entire annual Gross Domestic Product (GDP) of
the entire nation, and is indeed over twice as large as all the
goods and services produced by every nation on the whole freaking
planet, is, and will be for the rest of your life, coming due
and payable, and, even worse, getting bigger and bigger.
And no matter how young you are, there will never be a time in
your life when you will not be paying this bill that has been
run up. And you are going to pay every dime of that bill, either
by suffering higher taxes, or by suffering crippling, ruinous
inflation. There is no other way, because if there was, then
someone along the way through the last 5,000 years of economics
history would have thought of it.
So all that crap about a "robust" economy is just that;
crap. It has been bought, but not yet paid for.
But I am happy to note that she is still in her 20's, so she
will have a nice long life ahead of her to realize her profound
error, namely thinking that ridiculous socialist dogma and trust
in government, all financed by unfathomable debt is not, and
has never been, the path to economic Nirvana. It is, and has
always been, and will always be, the path to economic hell.
But I am just shrill and irritating on a mainly theoretical level.
Let me turn things over to Larry LaBorde, who manages a family-owned
drilling company, who has had an opportunity to look at the state
of engineering here in America, the business of making things
in general, and the casting and milling of pumps and things in
particular. Perhaps he has something that he can add about the
"robust" nature of the American economy.
"Perhaps we can turn the entire US into a service economy
where we do each others dry cleaning and serve each other hamburgers.
Somehow we may make enough money that way to import a few manufactured
goods from abroad - I just do not understand how. As the only
growth industry (government programs) gets larger and the domestic
manufacturing industry gets smaller I do not see good things
ahead for the US economy. The only thing ahead is what I call
the 'great equalization' where the standard of living gets better
for the 3rd world and it gets worse for us.
"The fact that the dollar is the world's reserve currency
has a little to do with it. As long as foreigners are willing
to accept our dollars in exchange for their finished goods and
let them pile up in their central banks as 'reserves' then the
game can continue. Whenever the foreigners decide they have enough
dollar reserves and start to spend our IOUs then the game is
over. There will be a rush for the exits as central bankers around
the world dump dollars and spend their U.S. IOUs at the same
time while trying to exchange them for anything they can before
they devaluate even further.
"At that point in time the US economy will be exposed for
what it has become - just another 2nd rate world economy. In
order to trade with the world for goods that we no longer produce
we will have to export something - any ideas?"
He then tells you what to do about this parlous state of affairs.
"Trade your dollars for precious metals while your dollars
are still worth something. When all those dollars finally do
come home flooding the US economy they will certainly be worth
less. If we are ever to become a powerhouse economy again we
must PRESERVE and accrue capital to reinvest at the right time
in the future."
And then he finishes up with a piece of priceless, timeless advice
that has served every generation of people well. "No matter
how little or how great your income, save something every month,
and live below your means."
- Jay Shartsis is referred to as "an options pro,"
which I think is pretty cool, because I am always referred to
as "a big fat idiot" which I DON'T thing is very cool,
especially when some guy shouts out "Hey, lady! Your husband
is a big fat idiot!" and she shouts back "Yeah, I know!"
Anyway, option pro or not, he thinks that the current rally is
closer to its end than its beginning. He doesn't just say these
things off the top of his head like I do, but he actually has
some basis in fact for saying that. "One gauge flashing
danger here," he says "is newsletter writer Joe Granville's
'Climax Indicator.' This on-balance volume measure of the Dow
components has just generated its fifth upside nonconfirmation.
Joe notes that every major top in market history has been preceded
by a cluster of such nonconfirmations. The current number of
five was only exceeded by the seven seen in September 1929 and
And you don't have to be much of a market historian to grasp
the significance of (listen to the suddenly somber background
music to grasp the significance of this) September 1929 and January
- George Ure at Urban Survival.com notes that it is not only
us Americans that want to run around the world invading and occupying
other countries and killing the inhabitants and taking their
stuff. The Russians are making noises that they know where a
bunch of no-goodniks live, and they are making to plans to go
there and kick some butt. "The Russians planning to strike
preemptively at locations outside of Russia is a big worry, too."
Didja think that it was only us Americans that would want to
go around the world killing people?
As if that was not bad enough, he has some web bots scouring
the Internet, and they have been turning up evidence to support
the idea that "Iraq is headed for civil war, and damn quickly
at that." Iraqi people are upset to be under occupation
by a foreign power that is colloquially known as "The Great
Satan"? Who knew? Get George Bush on the phone immediately,
because he thinks that the Iraqis were going to love what we
are doing to them! Somebody has to tell him!
Okay, political and civil strife thanks to government making
life a living hell for a population of people is nothing new.
I have my own gripes about my own government, mostly about how
they are tapping my phone and the government agents who are supposed
to just be surreptitiously listening to me and gathering evidence
against me so that they can send me someplace far away where
I can get the "help" I obviously need, are instead
using my phone to run up huge phone bills to some sex-chat business
called "Madame Fifi's Hot Babe Network" at $3.99 a
minute, and there isn't even a real person named Madame Fifi!
So what a ripoff, huh? Anyway, he makes note of something else
going on around the world, namely "Unprecedented flooding."
He concludes that since farmers can't figure out how to make
crops grow under water, that we maybe will be looking at "global
famine in 2005, or it's first cousin, food shortages, will be
much larger than expected."
This is Mother Nature reaching down and smacking you on the top
of your head, saying "Food shortages! Go long commodities,
you little idiot! What do I have to do, send that jackass Mogambo
to tell you to go long commodities?"
- I read where the World Gold Council reported that Argentina
bought 42 tons of gold bullion recently. Of course, there are
those of us who hope that the Argentines have decided to go back
to using gold as money, so that the citizens of Argentina will
never again have to suffer the woes of inflation and crushing
debt. And then maybe people in other countries will take note
of how happy and prosperous Argentina is, and they will also
demand to start using gold as money, and then the next thing
you know everybody is on the gold-as-money bandwagon, and the
world is suddenly full of happy people, and beautiful and fragrant
flowers are springing up, and every day is sunny and bright,
and everyone lived happily ever after because governments no
longer had the suicidal option of printing up excess money.
Who hopes this? Well, me for one. And maybe David Morgan, of
Stone Investment Group, too, who writes "With Argentina's
leadership there is little doubt that other countries will buy
gold to secure some type of stability in a world awash in all
types of paper currencies. In fact, I would go as far as to state
this is a clear signal that we are not too far from a perceived
And it is not only the Argentines. The guys at the World Gold
Council and China Financial Services think that maybe the huge
appetite for gold in China could cause the sales of that metal
to soon rise from the current 200 tons a year to 600. They figure
that "That would add about 12% to current world demand."
They didn't mention India, nor the Argentines, who are also buying
more and more gold, and they didn't mention you, who I assume
is also buying lots of gold because you are smart enough to see
the writing on the wall.
In a similar vein, Drew Hasselback wrote an article for the National
Post entitled "Price of Gold Manipulated. He writes that
John Embry, who was a senior money manager at the Royal Bank
and is now chief strategist at Sprott Asset Management Inc, the
same guy and the same company that came out with that blockbuster
report "Not Free, Not Fair: The Long-Term Manipulation of
the Gold Price." They lay out the case that the price of
gold is being held artificially low. This means that one day
it will rise in price to its natural level,and thus the people
who own gold will, at that exact point in time and space, make
a jillion dollars in profit.
One of the reporters in the back of the room raises his hand,
and asks "How did the manipulation scheme work?" I
say "It worked very well, thank you!" and then I notice
that nobody is laughing at my spontaneous witticism. Embarrassed,
I sit down in a huff and throw the microphone at Mr. Hasselback,
who deftly catches it in midair, and explains "They worked
like this: Central banks would lend gold at extremely low interest
rates. Borrowers would take that gold, sell it short, then invest
the proceeds in bonds paying higher interest rates than those
charged by the central banks. The borrowers were therefore making
two gambles: the gold price would fall, making it easier for
them to cover the short position; and bond rates would remain
higher, making it possible to generate a profit on the spread."
This is where I jump up out of my seat and rudely break into
the conversation. I say "Of course, most of the gold has
now leaked out into the market, and there is no way that the
borrowers can return the borrowed gold! So the idea is that there
is a gigantic short squeeze coming, and this stark fact represents
one of the best investment ideas you ever heard of!"
Another reporter raises his hand and asks "Why are they
doing this?" and I scream at him "Because they are
out to get me, you jerk! They are all out to get me!" Richard
Benson of the Specialty Finance Group slaps his hand over my
mouth to try and shut me up before I embarrass myself any further,
and while I am trying to wiggle and squirm my way out of his
grasp, remarks that this very question was addressed in has his
latest screed, entitled "Complacency and the Rain Dance
for Money," which touches on this whole manipulation thing.
He writes "You might wonder why our government is so actively
involved in keeping the price of gold down. Well, a logical reason
would be that when the price of gold takes off, even the investment
masses will focus attention on the real problems of massive trade
and federal deficits and world-wide money creation."
Well, being the Mogambo, I finally grab him hand away from my
face and blurt out "Maybe yes, and maybe no!" This
set off the security guards, who instantly swarmed all over me
at that point, so I didn't get a chance to say that I know that
the one sure-fire things that they WILL pay attention to is the
money that is being made in gold, and they will want some, and
they will buy gold, and that will make the price go up even more,
and then other people will notice the money that is being made
in gold, and they will want some, and they will buy gold, and
that will make the price go up even more, and then some other
And since we are talking about gold and China (well, to be fair,
I was talking about gold and China and you were sitting there
with that glazed look in your eyes that means "Will this
Mogambo idiot ever shut up?") Julian D.W. Phillips wrote
an essay posted at the Financial Sense.com site. He says "Considering
that China and its approaching 2 billion people are growing in
wealth at a dynamic rate perhaps one of the most important statements
made about gold was made this week. In no uncertain terms, the
Governor of the Bank of China has shown that the government of
China, is determined to increase the levels of gold held in China,
by Chinese citizens. It is a lot easier to encourage this than
for the Central Bank to go into the open market to acquire gold
for its reserves."
The Xinhua News Agency quoted Zhou Xiaochuan, the central bank
governor, as saying "Trading in gold will provide another
choice for individual investors who keep their money in bank
accounts due to a lack of desirable investment options."
Looking at transactions on the Shanghai Gold Exchange, 235.35
tons of gold valued at 22.96 billion yuan (US$2.7 billion; euro
2.3 billion) was trade last year. Compare that to "In the
first seven months of this year, trading volume jumped to 363.76
tons valued at 36.9 billion yuan (US$4.5 billion; euro 3.6 billion)."
- Presidential wannabe Kerry, for reasons that I can only guess
about, published an article entitled "My Economic Policy"
in the 9/15 issue of the Wall Street Journal. My advice, if you
make more than $200,000 a year, is to run for your life and take
your family and all your stuff with you, because you are going
to pay for everything.
After first screeching hysterically about the Bush tax cuts and
how they are so awful and ineffective, Kerry turns right around
and makes tax cuts the center of his entire economic plan! Cut
corporate taxes by 5%! A two-year jobs tax credit to encourage
employment in manufacturing! "Cut middle class taxes!"
and make them "permanent for 98% of Americans!" Then
it really starts getting weird, when he says that even that is
not enough, but he goes on to say "I support new tax cuts
for college, child care and health care- in total more than twice
as large as the new tax cuts President Bush is proposing!"
And not only that, but somehow during all of this he is going
to "cut the deficit in half in four years," by imposing
caps on so-called discretionary spending (except for "security
and education"!) so that spending does not rise faster than
inflation! So he is cutting taxes, and actually giving money
away via tax credits, while raising total spending, albeit at
the rate of inflation! All of this to be paid for by taxing people
who make more than $200,000 a year! Wow wow wow wow wowowowowowow!
And the next thing you know there are sirens and police cars
everywhere, and the people from Channel Nine News are standing
in front of cameras, wondering aloud why I am standing on top
of the library, scarfing down a bag of donuts, screaming "We
are doomed! Doomed! Doomed!" And then they send up a police
negotiator ("Hi, Jim!" "Hi Mogambo!") to
find out what I want, and I tell them I want what I always want:
Alan Greenspan to admit that he is destroying my country with
his over-issuance of money and credit! And a pizza! Suddenly
I get hit with some tranquilizer darts, and the last thing I
remember is the news reporter is looking into the camera and
saying, "And now back to you in the studio, Chuck!"
This is typical Democrat insanity! I cannot understand how they
cannot find, somewhere in the ranks of the Democrat Party, one
guy who is not a gigantic lying idiot.
- And since we are talking about things I do not understand,
corporate bonds are still rising in price, to the highest prices
in memory, driving yields to lows never seen before, even as
interest rates are rising!
- The latest government measure of inflation came out, and you
will probably be relieved to learn that official inflation is,
so they say, down, but still slightly positive, just like the
Fed wants, and just like the government wants, as we find ourselves
only six weeks before the elections. What a happy coincidence,
- The Social Security Board of Trustees has taken another look
at the "fiscal gap," which is a measure of the difference
between what the federal government expects to receive in revenues
and what it has promised to pay. The difference? Well, a couple
of short years ago, the astonished world learned that it was
the astonishing sum of $44 trillion, and the world howled in
dismay, and raised its voice as one and chanted "The Mogambo
was right! They ARE out to get us!" This sum was roughly
four times the total GDP of the USA. Now it is $72 trillion,
which is close to seven times our own GDP!
Laurence Kotlikoff, who has a good grasp of this kind of mathematical
stuff, figures that Social Security benefits would have to be
cut by 45% - 'immediately and forever,' while still keeping the
taxes high and growing, I assume.
- After staying up for three nights in a row so that I am
so sleepy that I cannot concentrate, and then popping a few handfuls
of powerful tranquilizers, and then following that up by taking
a long pull on a bottle of cheap rot gut whisky, I thought I
was ready to read Doug Noland's latest Prudent Bear "Credit
Bubble Bulletin" column. My wife had correctly anticipated
that I was wrong, and had taken up her usual post, cowering behind
the couch, holding a Tazer stun-gun in each hand.
But even Mr. Noland is weary from it all, as evidenced by an
eerie calm detachment. To show you what I mean by "eerie
calm detachment," note the cool matter-of-fact way he blandly
states, "Total Credit Market Borrowings (non-financial and
financial) increased at a $2.59 Trillion seasonally-adjusted
annualized rate (22% of GDP) to $35.18 Trillion." 22% of
GDP! We're going farther into debt at the rate of 22% of GDP!
And he didn't even use an exclamation point! What a guy! I marvel
at his coolness, when he knows as well as I exactly what this
means, and while he goes sauntering off like he doesn't have
a care in the world, I am collapsed on the floor, babbling and
drooling as the exploded shards of my brain refuse to function.
Then he goes on to other things, and after documenting that Consumer
inflation is in China is a blistering 9.5%, and property prices
are up 13.5%, he quotes a Bloomberg article by Samuel Shen who
said "More urban Chinese are willing to increase their spending
even after consumer prices rose for a second month, a People's
Bank of China survey found. The bank found 32.3 percent of people
surveyed think that it's more reasonable to step up spending
this quarter, even by borrowing from banks, given current interest
rates and consumer prices."
In short, the Chinese know that abnormally low interest rates
engendering undue demand for borrowed money creates monstrous
credit creation, and that makes for money inflation, which is
the necessary precondition for price inflation. And it is that
"Buy now because prices will be higher tomorrow" attitude
that is the basis for an inflationary expectation that is hard
to eliminate, and that makes inflation worse. And now the Chinese
are getting infected with that attitude. Ugh.
*** The Mogambo Sez: I get more scared every day, as things
get more weird every day. People stop me on the street and ask
me, "Hey Mogambo! How ya feeling'?" and I answer "Weirder
and weirder and scareder and scareder." I can only imagine
with horror the fear of people who do NOT have gold, silver and
powerful handguns, but do have crushing debts and a job that
is increasingly tenuous, and which doesn't pay enough to quite
cover the higher prices that is the hallmark of price inflation.
Sep 21, 2004
The Daily Reckoning
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
and other fine publications.