Things are worse than you think. Much worse
- I note with some surprise ("surprise!") that Total Fed Credit did not go up last week, at the same time that Treasury Gross National Debt did not go up last week, at the same time as Foreign Holdings of US Debt held at the Federal Reserve went down by another $3.5 billion dollars last week. I recall saying to myself "Hmmm!" I cleverly use the word "hmmm" when I wish to indicate moderate surprise or interest, especially about things that happened last week.
Mike "Mish" Shedlock, writing at the WhiskeyandGunpowder.com site, notes that these latest reports notwithstanding, the national debt is growing, and that the growth rate in the national debt limit totals to "a stunning $3,015 billion ($3.015 trillion) in additional debt in just four years." I admit that it is hard to get your mind around the idea that the Gross Domestic Product (GDP) of the USA is probably somewhere between $11 trillion and $12 trillion a year. So it is even harder to get your mind around the idea that in four short years we have borrowed- in Treasury debt alone! -the freaking equivalent of a quarter of everything America produces in goods and services in a whole freaking year! And this is just the INCREASE in the debt!
And when you add in the additions to personal debt (mortgages and other credit debt) and the increases in business debt, you are probably looking at another quarter of GDP. Together they add up to around half of GDP! America and Americans together borrowed, in 48 months, the equivalent of half of everything we make in a whole freaking year! If your heart is trying to commit suicide by pounding and slamming itself into the walls of your chest and your brain is convulsed in spasms, then congratulations, as you are really starting to get the hang of this economics stuff.
Mr. Shedlock also makes sport of what he refers to as "$Ben Bernanke" for "suggesting that the problem is not with the United States, but rather that the rest of the world is saving too much!" Perhaps. To find out, the next time you see "$Ben Bernanke", ask him where he thinks the rest of the world GOT the money to save? He won't tell you. But I will! The Mogambo, brave and mighty Mogambo (BAMM), will tell you and the world EXACTLY where they got the money. The money they save originated from our Federal Reserve! What a surprise, huh? If the damned American Federal Reserve had not increased money and credit so damned much, so unbelievably much, so impossibly much, then those pesky foreigners and their savings and their surplus of savings would not have happened. And our ability to get in so far, so dangerously far, so insanely far over our heads in debt would not have happened either.
None of this is lost on Addison Wiggin, best-selling author and insider at the DailyReckoning.com website, who is, incidentally, a guy I have actually met, but now is "too busy" to loan me a lousy five bucks, or even take my call, writes "Now with pressure from all sides for the federal government to help citizens repair their lives in Katrina's wake, spending could blow the 2006 deficit projection sky high - shooting past last year's record of $412 billion. Unfortunately," continued Mr. Wiggin, "all of this is bad news for the dollar. We're already in uncharted territory. Never before in history has the 'reserve' currency of the world been so burdened by debt. And now, the government is being forced by this disaster to spend even more; all the while trying to conduct two wars and deal with runaway entitlement program obligations."
Oh, nooooOOOooooo! It's "Guns and Butter" government spending! Look out! It's the old "guns and butter" government philosophy that has caused serious inflationary problems before, and always will! If you have ever spent any time reading economics history, you will have noticed that 1) you cry a lot in frustration and anger of recurring governmental and central bank stupidity and the misery that comes from acting stupidly, and b) that there is NEVER an entry in the whole corpus of economics literature that reads "The success and healthy growth of the economy was made possible by massive long-term governmental deficit-spending to both a) wage war and b) invigorate domestic consumer demand, a philosophy known as 'Guns and Butter'. And then the economy sailed smoothly to Utopian bliss, thanks to accelerated consumer spending financed by accumulating massive amounts of debt to new, high, record-setting levels. The economy was again set soaring to fabulous perfection, such that Zeus himself could but stare in wonderment at the glory, as businesses augmented this glorious economic wonder by also assuming massive, record-setting quantities of debt. The icing on the economic cake was when savings dropped to zero, leverage was at its greatest, and the savings, investments and the retirement of every citizen was tied, directly or indirectly, to an over-priced stock market, an over-priced bond market, and an over-priced housing market, with a huge government directly supporting at least a third of the total population, meaning every third man, woman and child in the whole freaking country. Only then, after all these economic pieces were in place, could the economy zoom to Irving Fisher's 'permanent plateau of prosperity' ". And the reason that you will never, ever, read such a journal entry is because it is impossible to have a healthy, growing economy with these massive and massively stupid debt things. Instead, you get ruination and bankruptcy.
So this is, in reality, Bad News (BN). Maybe even Bad, Bad News (BBN). In fact, now that I have just updated my data, I see that the needle on the Mogambo News-O-Meter has actually moved into the range of Very, Very Bad, Bad News (VBBN). [editor: VVBBN?] My heart melts when you turn your beautiful little face to mine and ask, "Why is that VBBN, wise Mogambo?" I think to myself, "Are you some kind of idiot asking me that, you stupid little twit?" But instead I say "Ahh, young one! You have forgotten that our money springs into existence only when someone borrows money from a bank. Money for you is somebody's debt!" I beam as a flash of enlightenment flashes across your cherubic face. Sensing an opportunity to impart a transcendent lesson in cosmic truth, I innocently ask "And where does the bank get the money to lend?" Suddenly, I knew that my time here on earth was well spent when, as one, the entire class shouts out "They create it out of thin freaking air, the dirty inflationary bastards!" So, to celebrate my joy at such total comprehension, I took them all out for pizza. Later, after we had eaten, I discovered that I had forgotten to take my wallet, and they had to all chip in to pay for the pizza, which caused a lot of bad karma. But, fortunately, the pizza had a lot of onions on it, and onions give me gas. So I locked the door so nobody could leave, and created enough vibrations of the flatulent kind to level out the whole karmic imbalance. And then some! I am sure that they learned a valuable lesson.
Well, on advice of counsel I don't want to go any farther into this whole ugly scene, but instead get back to the damned point of the whole thing, which was, as I recall, about what happens when more money is NOT being created. It means that there is less money chasing goods and services, and that means prices of stocks and bonds and houses may not be going up any more. Umpty-ump trillions and trillions of dollar's worth of investments are NOT increasing in price ever again? Gahhhhh! We're doomed! We're freaking doomed!
Alternately, it perhaps means that the Federal Reserve has finally, finally, at long last, finally recognized that inflation is gnawing the guts out of the economy because the dollar is falling in purchasing power, which is tantamount to the dollar having its guts, as I said, gnawed out. Well, to be fair, the Fed already knew that inflation was, as I so cleverly phrased it, gnawing the guts out of the dollar because I helpfully call them up every day. In fact, communication logs already entered into evidence show that it goes something like this: Ring. Ring. The receptionist at the Federal Reserve answers the phone and says, "Hello?" and I say to the receptionist "Tell that butthead Alan Greenspan that inflation is gnawing the guts out of the dollar!"
To tell you the truth, I don't think she ever relayed my message to him. If she HAD relayed my important Mogambo message (IMM), and if Greenspan did NOT know that inflation was gnawing the guts out of the dollar, then he would surely have called back and inquired what in the hell I meant. I already had it all planned out that when he calls, I will put him on hold and laugh behind his back as I let him cool his damn heels for awhile. After a while, I would have come back on the line, and in this real cool way, I would have said "Alan? Mogambo here. Now listen up, you moron. Stop creating more credit, which turns into more debt, which turns into more money, which turns into more inflation, you dunce!" So, you can see that I have the whole thing planned out if he ever calls. Which he never has, I might add for the record.
But apparently without my help, they are acting like maybe something is wrong. And why, why, why are they finally, finally, at long last, finally recognizing that we have inflation roaring like the fires of hell all around us, and the country and the world are being devoured by constant, simmering inflation? Well, probably because China and Japan and Europe, and the whole world that is sitting on tons and tons of American government debt, all denominated in dollars, have an asset that is falling in value. And it will continue to lose value, as interest rates are raised and as inflation grows more fierce.
And these foreigners have created lots and lots of their own currencies to take those dollars off the hands of their citizens in the first place. So the asset (dollar-based American debt) that was used to create their money, is now falling in purchasing power! Hahahaha! Suckers! So, as the asset falls in value, their currency has more and more fiat characteristics in it! Which seems odd, since the dollar was pure fiat, but was treated as an asset by the foreign country's central bank, against which they issued more of their own money! But they thought that by doing so, they were not creating fiat currency of their own! Hahahaha! Chumps!
In a similar vein, Kurt Richebächer writes about the fiction that foreigners are "Attracted by superior rates of return on U.S. assets", and then he explodes the myth that "investors around the world have been scrambling to pour their excessive savings into direct investments, stocks, bonds and real estate in the United States, in this way financing the resulting huge U.S. trade deficit."
He goes on to explain "While this explanation may seem to make sense, there is one big snag: Not one word of it is true. First of all, in reality, private foreign investors have drastically curbed their investments in the United States. According to the Bank for International Settlement - the international organization of the world's central banks - Asian central banks financed 75% of the U.S. current account deficit in 2004. Private capital flows into the United States have slumped. Without the massive interventions by the Asian central banks, the dollar would have collapsed long ago."
But this is not about a bunch of rich Asians sniffing out investment opportunities. This is about inflation, as it is always about inflation. In that regard, Dr. Richebächer writes "What the Asian central banks truly recycle is the U.S. credit excess. But in flooding their banking system through the dollar purchases with liquid reserves, they transplant the virus of credit excess to their own economies."
And sure enough, we learn that alert reader Leslie M., an Aussie, has the time and money to gallivant around the world, but apparently doesn't have enough money to loan me a few bucks. The cheap bastard. But this is not about how Les, or "cheap bastard" as I call him, is too busy and too important to be nice to The Mogambo. No, it's about how he went to Singapore, and saw first-hand that inflation is every freaking where. "What you say in your articles," he writes, "is not limited to the confines of the USA. We are experiencing a global phenomenon."
So I can't believe that they fell for that one! Hahahaha! Stupid foreigners! And so when they wake up one morning and say to themselves, "Hey! The Mogambo was right! We ARE a bunch of idiots!", then THEY will call up the Federal Reserve and THEY will yell at the receptionist to tell Alan Greenspan to stop creating more credit, which turns into more debt, which turns into more money, which turns into more inflation. And you can bet your sweet butt that the message is relayed to Alan Greenspan plenty pronto!
But the slowdown in the creation of excess credit could also be because nobody wants to borrow any money, anyway. Would you? Let's see here: Interest rates are rising, and the Federal Reserve has indicated that they have every intention of raising interest rates some more, and things cost more, a lot more, and wages are not increasing as fast as prices. The economy is not growing, and is instead showing definite signs of severe debt-related stress, consumer spending is down, even as health care, housing and taxes go up. From a business investment standpoint, it is really ugly out there, which means risky, which means you will probably stand a better chance of making money by sending the cash to me, in a plain envelope, addressed to "Resident", and then waiting by the phone for me to call and tell you how much money you made.
Now, I hang my head in shame and admit I have no idea what to do about all of this. Fortunately, Dr. Richebächer DOES. He says, "We expect shocking economic weakness. All asset prices, depending on carry trade, are in danger, including bonds." So sell 'em all, unless you want to be sitting on something dangerous.
So what to buy instead? Mark Faber, who writes the famous Gloom, Doom and Boom Report, says that commodities of all kinds have surged here in the last couple of years, except, notably, grains. "In fact," he says "grains are at a 200-year low vis-a-vis oil." At this, your Super Sensitive Mogambo Investing Senses (SSMIS) should have sprung to full alert ("Beep! Beep! Beep!") when you heard that something that everyone needs is at a twenty-year low against something else that everyone needs, too. Apparently, Mr. Faber has a well-developed SSMIS himself, and will not benefit from the Mogambo Super Sensitive Investing Sense Home-Training Kit as he instantly intuits "As a long-term investor I would also consider buying some agricultural commodities."
Well, if you have ever tried to trade commodities or store soybeans in your garage, you know what a hassle it is. And you already know what a lazy little creep I am, so doing that much work is really, really, really out of character for me. No, what I want to do is buy something now, when prices are low, store it away somewhere that has no commissions to be paid, no account maintenance fees, no inactivity fees, and, in short, there is nothing for me to do and nobody is taking so much as a damned dime from me for any reason, or they get a dose of old Doctor Twelve-Gauge for their trouble.
And nothing fits the bill like precious metals. I suppose any metals. Copper. Molybdenum. Uranium. You name it. But especially gold and silver, and doubly especially silver. I bring this up especially because I was just at the Silver Summit in Wallace, Idaho, at the kind invitation of David Bond, who will probably lose his job because of it, but where I spent a delightful time ranting and raving, and meeting a lot of really nice people, and trying in vain to play boogie-woogie music on the fiddle behind the talented Steve Dore on piano and embarrassing myself in more ways than one. As a result of this sudden explosion of sensory overload, I am now even MORE convinced that 1) the upside potential of silver, as a percentage, is staggering, and almost guaranteed to happen, and 2) I like being around people who understand the importance of owning precious metals, since they do not introduce me as "Uncle Mogambo who is a gold bug and a real first-class lunatic, so don't stand so close to him or you might catch his cooties or get his drool all over your nice shirt."
But this is not about my cooties, dammit! It's about silver! I mean, the stuff is selling at just over seven lousy dollars per freaking ounce! When gold is selling at over $460! Most of the gold ever mined is still around. Most of the silver ever mined is all gone, and demand is higher than supply for the zillionth month in a row. And while gold has few uses beyond wealth preservation and jewelry, silver has myriad industrial applications.
Well, just between you and me, and don't let this get around, but to be entirely truthful, all of that is so much blah blah blah to me. What impresses me most of all is the historical ratios of silver to other things, like gold, or oil, or food, or anything else you can get data on. In every case, and I am talking every freaking case as far as I can tell (EFCAFAICT), in all of history, silver is at historic lows when compared to everything else. And when something is at historical lows, then there is only one way for the price to move; up.
Okay, but it is knowing the historical ranges of these ratios that tells you HOW high silver might go, right? Right! So, because you are so smart and thus you are my little teacher's pet, you immediately raise your hand with a question. With a beneficent smile of loving indulgence beaming in my Mogambo face, I point to you, and you say, in that delightful way that you have, "How high has silver gotten, your worshipful Mogambo-ness?"
Well, my little grasshopper, you will be surprised to know that there have been times when silver traded at a premium to gold. So if this was one of those times, silver would be at over $470 per ounce. It is selling for about $7 right now. So dividing 7 into 470, which is probably easy for you but difficult for me because I am so stupid (audience shouts "How stupid, Mogambo?") that I have to get out the instructions to turn the damned calculator on, I figure that the answer is, I hope, around 67. Your investment, if you bought silver now and the price rose to more than gold right now, would have a return of 6,700%! I have heard of lots often-bagger investment, but a potential 67-bagger? Wow! Truly rare!
So the upside of silver is so high that it boggles the mind that you can, right now, today, this very minute, get up off of your fat backside, grunting and complaining about your aching back, and simply walk over to a phone or a computer and buy all the silver you want at a lousy seven bucks and change per ounce! As Mike Maloney of gold & silver, Inc. put it, silver is "stupid cheap!" I immediately translated that as an insult to The Mogambo, who is both stupid AND cheap, but when he calmed me down and soothingly explained it a dozen times or so, I finally understood it to mean that if you are NOT buying silver on the cheap, then you are stupid. Being stupid, of course, I was not buying silver. But after learning that I could APPEAR to be smart by buying silver, I got a little. Well, unfortunately, nobody was fooled for a minute. But a few people did agree that because I was buying silver, I appeared to be slightly less stupid than I really am, but still, unfortunately, stupid, which, being stupid, I did not understand. But I still have the silver, and so should you, whether or not you are stupid. And if you think you are NOT stupid, then I will rudely point out that you are obviously reading the stupid Mogambo Guru newsletter, and that doesn't say very much for you or your stupid choice of reading material.
But this is not to disparage gold. Alert reader Peter P. sent along an article from The Economist magazine "The price of gold reflects confidence, more than anything. When people are confident that their central banks will control inflation while permitting the economy to grow, when they believe that paper assets are worth something approaching their face value, they buy gold to wear but not to put in a safe. Alan Greenspan has achieved the remarkable feat of suspending disbelief in America's gerrymandered finances for the past few years. On his departure, watch the gold price soar."
And speaking of gold, from Australasian Investment review we read that gold is hot hot hot in Saudi Arabia. "Bullion imports have soared, exported scrap has dried up and jewellery shipment from Dubai have increased notably."
You can say what you want about Arabs in general and Saudi Arabia in particular, but they are showing a lot of smarts. For one thing, they had the good sense and foresight to put their country on top of a bunch of gigantic oil fields, which turned out to be a really good thing for them. And for another, they are suddenly buying gold like crazy, just as it appears to be starting its long-awaited boom. So they are apparently getting in at the bottom, on the ground floor of the coming bull market in gold, and making money from the get-go, too!
Speaking of oil, demand for oil is, according to reports, starting to fall, thanks to the high prices. For instance, the U.S. Energy Department said that "gasoline consumption in the USA fell by 4% in the week ending September 2." This brings up a couple of questions for me. For instance, if this is a result of less driving, where were all of these people going to, up to now? Were they just driving around, trying to pick up chicks, drag racing and looking for trouble like the little hoodlum punks we really re? And if they were going someplace to spend money, then what are those vendors going to do now, without all of these people driving up and spending money and flirting with the carhops?
And when people buy less, the retailer buys less merchandise from the manufacturer, reducing corporate profits, so they lay people off, and then those laid-off people spend even LESS money, and that means that retailers make less money, so they order even less merchandise from the manufacturers, who make less profits, and the management starts getting in trouble with the CEO, who is catching hell from the board of directors about this falling profits thing. And pretty soon the shares of the company are falling, and retirement funds and investors from all over the country are showing losses from investing so much money into shares of Mogambo Mega Monster Corporation, which are hovering around zero, and pretty soon I am forced out of my own company just because I am corrupt and stupid and obviously embezzling every dime I can get my hands on, and so I spend less money, and retailers stop buying from manufacturers, and, well, let's stop there. I get this sinking feeling down in the pit of my stomach just thinking about the capital losses and attendant misery that people are going to have to bear. Or maybe it is hunger pains, I dunno. Maybe both. Either way, take my word for it; it is very, very unpleasant.
- Henry C. K. Liu in Asia Times (atimes.com), in a nice essay entitled "Greenspan, the Wizard of Bubbleland", notes that "Raising the price of money to fight inflation in a debt economy is by definition self-neutralizing because high interest cost is itself inflationary in a debt economy." I can hear you thinking to yourself, "So, let me get this straight in my mind. If they drop interest rates in an inflationary environment, then inflation gets worse? Yes. And if they raise interest rates in an inflationary environment, then inflation STILL gets worse?" Yes! Hahahaha! What a kick in the head, huh? Hahahaha!
Now you are ready to answer question number 17 on this week's Mogambo Quiz (MQ); "Why does the Mogambo say 'We're freaking doomed!' all the time?" If you answer this question with something resembling Mr. Liu's comments, then you will get full credit for having a correct answer and good short-term memory, since I had just mentioned it. If, instead, you answer with something along the lines of "Mental illness and a bad drinking and/or drug problem", you will get NO credit at all, since any disinterested passerby can instantly figure out that much just by looking at me, or listening to me mumbling incoherently under my breath.
But not only is this interest rate thing true, and not only is this the answer to question number 17, but it is also at the heart of the famous Mogambo truism about bubbles (FMTAB), namely that bubbles mean "We're freaking doomed!" See how it all comes back around, thus proving itself with circular reasoning? And you thought I did not know what I am talking about. Ha! You were right! But it is, nonetheless, true. Hahahaha! I said we are doomed, doomed, doomed! Hahahaha!
- Peter Schiff, of Euro Pacific Capital, notes that "the Philadelphia Fed's manufacturers report for September revealed that despite a sharp slowdown, its prices paid index surged 257 points."
Now he did not include the level of the index, so we don't know if something surging 257 points is even statistically significant. But here is a little Mogambo Detective Tip (MDT) about that; firstly, they would not have made the gradations that small if 257 of these gradations was not a big deal. And secondly, Peter Schiff would not have made such a big deal about it. Inescapable conclusion; it's inflation rearing up like a tall brick smokestack toppling over to come down on you like a ton of, well, bricks.
He goes on to talk about the trade deficit. "As an example of the power of diminished expectations, July's horrific $57.9 Billion trade deficit was greeted as good news, as it was less than the slightly more horrifying $60 billion that had been feared." As, like he said, horrifying as that is, it is not the end of it! He goes on to say "the second quarter current account deficit, which came in at a higher than expected $195.7 billion, would have been a new all-time record, had it not been for the upward revision of the first quarter current account deficit to $198.7 billion." Hahahaha! What a racket! Just change the previous number to reduce the change from that number! Hahahaha! I can't believe those guys are getting away with that crap! Hahahaha!
But it is worse than that, as "The $3 billion narrowing in the quarterly current account deficit (the first time since 2003) can hardly be seen as progress, as it resulted entirely from a $4.4 billion reduction in foreign aid." Jeez!
What does this all mean? Well, Richard Russell's opinion, and my opinion, too, is "Two decades of persistent U.S. current account deficits is another way of saying two generations of economic illiteracy from American policymakers." Hahahaha!
But you are probably wondering about something more in the line of dollars and cents. Well, I have an idea, but in case I am wrong, let's first see what Mr. Schiff thinks it means. Reading down a little farther, he writes "Widening trade and current account deficits will exert additional downward pressure on the dollar and upward pressure on consumer prices." Yep! That's what I was going to say, too! Honest!
- Ben Hill, of Best Minds, Inc. makes an interesting observation when he notes that in 1966 Alan Greenspan wrote an essay on the about the Roaring Twenties and the subsequent Great Depression, in which he wrote, 'The excess credit which the Fed pumped into the economy spilled over into the stock market - triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in breaking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed.' "
Now, change the date from 1929 to 2005 and read it again. Scary, huh?
- Speaking of inflation like I do, alert reader Otto B. sent me two photos that he took of "a letter from Berlin, Germany to Geneva, Switzerland, in 1923 that required 200 million German Marks in stamps to mail!!!!" Man, you want to know what hyperinflation looks like? Well, imagine that four years from now it will take $200,000,000 in postage to mail a single letter! Hahahaha! Welcome to the probable future of America, dudes!
Perhaps Bill Bonner, also of the DailyReckoning.com website, is really on to something profound when he says, "The American empire has the distinction of being the most incompetent empire that ever existed." It sure seems that way!
***The Mogambo Sez: Things are worse than you think. Much worse. They are so bad that Alan Greenspan went on TV to say that because of Shumpeter's notion of "creative destruction", wildcat finance masquerading as "creative financing" and the Fed's constant monetary stimulus, that nothing bad will ever happen to the economy again, ever, since these are signs of "resiliency" and "flexibility." Hahahaha!
Lesson? Buy gold and silver every time the price goes down by a little bit, because this ridiculous Greenspan thing is one of the Seven Signs of the Apocalypse. Trust me on this one.
Sep 27, 2005