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Sulphur and Cloven Hooves

Richard Daughty

The Daily Reckoning
...the angriest guy in economics
The Mogambo Guru
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 with.

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%! Wow!

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! Exactly!"

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 to them.

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 Federal Reserve!

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 for miles."

- 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 right now.

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 it."

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 January 2000."

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 2000.

- 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 currency crisis."

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 people...

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, huh?

- 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
Richard Daughty

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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