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Scare me... Come dressed up as the money supply

Richard Daughty

The Daily Reckoning
...the angriest guy in economics
The Mogambo Guru
October 14, 2004

- The Federal Reserve, tired of waiting for us idiot Americans to drive down to the bank in our almost-new SUV to borrow more money to buy new SUVs so that the money supply can expand, is moving into Buying Outright Mode to accomplish the same thing. This is, of course, the second-most ultimate monetary fraud, whereas the most ultimate monetary fraud being that you would accept an IOU from the Mogambo ("Money down the rat hole!").

And when you look at the category known as "U.S. Government Securities Bought Outright," it is up another $2 billion last week. The way it works is that, and you gotta admire the utter simplicity of it, the banks buy Treasury debt from the government, and the government spends the money. Then, later, when they think nobody is looking, the Fed sneaks around and creates some money out of thin air, and uses that new money to buy the debt from the banks, and then run that debt through the shredder. And since that gives the banks their money back, the banks use that new money to go out and buy up more Treasury debt, so that the government can spend some more money! It's like a miracle!

The Treasury was likewise emboldened that nobody has raised so much as a peep that they have exceeded the borrowing limit as set by Congress, and so they went out and sold another big stinking pile of American government debt, taking us to $7.420 trillion in total, which is up healthily over the statutory maximum of $7.384 trillion. But let me go over my MasterCard limit by a lousy ten bucks and all hell breaks loose around here like I got into a fistfight with Mrs. Kravitz again or something!

And where is all this money going? Well, a lot of it went into houses, of course, as everybody just knows that houses will always go up in value, and so therefore there is no price that is too high to pay for a house, and that everybody who ever buys a house will always make lots and lots of money in profits on that house, and one day we will all live in luxury by just buying and selling houses to each other.

Speaking of houses, Rick Ackerman, who writes a newsletter named Rick's Picks which is probably not coincidental, is in the middle of the controversy as to which Economic Horseman of the Apocalypse we will endure; inflationary destruction or deflationary destruction. He says deflation. "Make no mistake," he says "K-wave winter has begun, and debt is about to shrink precipitously as forced saving increases commensurately. Anyone who wants to bet against this prediction need only trade up to a much bigger house. Regarding your question of how the money supply will decrease, the answer is elemental: An epic wave of bankruptcies will cause zeroes to disappear from the global balance sheet much faster than the central banks can get us to borrow those zeroes back into existence."

And, getting back to this increase in money and credit going somewhere, somebody is apparently buying a lot of commodities, as the index of commodity prices is showing healthy strength. Except for the grains, which is such an outlier among commodity prices that we long-shot gamblers out here who have more money than good sense are being tempted to take a long position in grains, as they seem such a comparative bargain. Commodities that are not showing price appreciation when the monetary and fiscal levers are being pushed to the max, at the exact same time that China is buying tons of the stuff, at the exact same time as the dollar is losing so much of its buying power, is such a contradiction that an eventual profit is seemingly guaranteed.

But weird things are abounding. The biggest surprise to me is that there are a lot of idiots in the world who are not under court-ordered supervision who are buying bonds at the exact same time as interest rates are rising! Basic economic theory, the stuff you learned on the very first day of Economics 101, says that rising interest rates make bond prices go down. And if you own bonds, then you lose money, capital gain-wise. But yet, here these morons are, bidding up bonds, and thus saddling themselves with lower yields for extended periods and potential losses!

Most ominous, of course, is that Consumer Installment Debt decreased. The chart of how much debt us dimwitted Yankee morons are accumulating shows that it has been pretty stagnant for about four months. I know that I have not gotten any smarter in the last four months, and have probably gotten even more stupid, as hard as that is to believe. And so I assume that the average American has not gotten any smarter either, especially since they have shown such stupidity for so long that they have gotten themselves into this much debt to start with. So there must be some other explanation as to why my fellow Americans are not buying stuff with their usual abandon.

- The big news is that the new winners of the Nobel Prize in economics, Edward Prescott and Finn Kyland, won the coveted prize by essentially saying that Alan Greenspan and the idiotic course of monetary policy they are rabidly pursuing is wrong! I love this stuff! Ergo, they also win the Mogambo Prize (no money or fame, but I take them on a ride around the neighborhood while we play the radio read loud and honk at pretty girls), in that they, to quote the Wall Street Journal, say that their theory shows that "government policy makers invited long-term trouble" when they ran around like idiots to address short-run problems by throwing money and credit around by the profligate boatload, when, by doing so, they operate at the expense of ignoring the prudent long term goals of, I assume, low inflation and stable money supply.

In particular, again quoting the WSJ, "Most central bankers around the world typically espoused a commitment to contain inflation, but in practice central bankers would shift policy to tolerate a little more inflation the short run as a trade-off for stronger economic growth and rising employment." In other words, the Mogambo was right, and Alan Greenspan and the other horrid little central banking nitwits are morons! But am I, and my contribution, even mentioned anywhere? No!

These two guys also deserve some credit for putting, what is hoped, the last nails in the coffin of the whole stupid Keynesian economic theory, where the government comes roaring in and tries to desperately correct its nearly-fatal fiscal and monetary mistakes with the added mistake of more rampant deficit spending.

But the lesson about inflation is not entirely learned, as in the same October 12 issue of the WSJ, where we read an article by a guy named David Henderson, who is a "research fellow with the Hoover Institution and an economics professor." Anyway, he wrote an essay entitled "A Nobel Tiger in the Tail," wherein he characterizes Alan Greenspan as an "inflation hawk"! I rub my eyes in disbelief, as he goes on to write "In the last 17 years, U.S. inflation has averaged only 3%." Only 3%! Only! Three! Percent! My stomach churns in outrage, my teeth grind themselves into power, and my trigger finger spasms reflexively. Regaining control of myself with my usual Mighty Mogambo Real He-Man Effort (MMRH-ME). Snagging my calculator off the desk and furiously punching buttons in my fury, hour after hour, until somebody mercifully takes it away from me and uses it to figure out that that three percent inflation for three years is a 9.3% increase in prices. Remember, you pay prices with AFTER-tax money. Therefore, with a 28% tax rate, do you really think that over the next three years that you are going to get an increase in your before-tax income of 13%? You had better, because this is the amount of increase that you need to merely keep up with 3% inflation! If you do NOT think you are going to get a cumulative 13% raise in the next three years, then you will suffer a fall in your standard of living. NOW do you think that 3% inflation is "tame"? Do you think a 3% inflation is "low"? Huh? Do you?

I am too paralyzed with rage to continue, and anyway, passersby are stuffing rags into my mouth to try and muffle my screaming, and so will turn to someone who DOES comprehend economics, and by this I mean, of course, Mark Rostenko, of the Sovereign Strategist. He says that "The writing's on the wall, folks." So I look over a the wall, and sure enough somebody has written "The Mogambo is a big fat idiot!" But this is not what he is referring to, as he immediately proceeds to say he was referring to a figurative wall, in that "Long-term interest rates are falling. Retail sales are slumping. The consumer isn't making more money and the government is only making up job numbers. Are we in for another round of recession? Before you answer, consider that oil shocks = recessions."

Well, Mr. Rostenko's views gets immediately back to those two new Nobel Prize winners Prescott and Kyland (which, now that I think about it, is, by rights, MY prize and MY money, and not only do I get neither, but they act like they never heard of me and then they hang up on me when I call them up and demand my cut and then I have to call them back and they say "We no speakee English" and laugh at me and then they hang up again), who say that supply-side shocks, like "a surge in the price of oil," could have a big impact on economics, mainly by "causing a recession or a boom." See how all of this fits so neatly together?

Comstock Partners has apparently also looked at that figurative wall, and they note that we are currently "At a time when employment is still weak, consumer savings are at the low end of its historical range and debt has soared to record highs relative to GDP. For the first time in three years there are no tax refunds, the Fed is raising rates, and mortgage refinancing is down 77 percent. Added to this mix are the high cost of energy and the non-productive expenses of defending against the threat of further terrorism. All in all, this is hardly a recipe for robust growth."

Since it is the season for giving prizes, Comstock Partners gets the Mogambo Prize For Understatement.

- But it was a week of some other exciting theoretical developments in the world, one of which is the new discovery by David Bond, he of the Wallace Street Journal, who has revealed one of the new Laws of Probability, namely the Science of Probalism. And for this I have awarded him with the Mogambo Prize For Statistics for his seminal work on the science of Probablism. In explaining his marvelous breakthrough, he says "The science of Probalism has its roots in the 2002 EPA Coeur d'Alene Basin Record of Decision, and as a syllogism expresses itself thusly: If a thing cannot be disproven, it is thereby proven." And you were thinking that the EPA never did anything good for anybody, and yet, here they are, helping Mr., Bond discover Probalism!

Quick to capitalize on such a momentous discovery, he writes that he has decisively proven that Wallace, Idaho is the exact center of the Universe. Quoting from the press release, "Similarly, after a search of the literature, our government-contracted scientists in Moscow, Boise and Seattle have, after years of diligence, been unable to unearth one scintilla of proof that Wallace is NOT the Center of the Universe. In the absence of such proof, we are compelled to conclude that Wallace must therefore BE the Center of the Universe." And sure enough, it now is! Wow! I fall to my knees in awe!

- Kurt Richebacher has been comparing the USA and Asia, sees some disquieting parallels. "Both are courting extraordinary credit excess, but with a crucial difference: In the United States, the credit excess went, and continues to go, overwhelmingly into asset prices and personal consumption; in Asia, it goes overwhelmingly into capital investment and production, essentially creating a mass of overcapacity and malinvestments."

Well, we here in America have already created record-setting amounts of overcapacity and malinvestment and we are all still alive, so how bad can it be? Pretty bad, if you listen to Krassimir Petrov, PhD, who says "Conditions in China now are in many respects similar to the US in the 1920s." He further writes: "Economists hail the growth of China, many not realizing that China is undergoing an inflationary credit boom that dwarfs that American one during the roaring '20s."

The 1920s? Hmmm. Wasn't there something unwholesome about 1929? What happened that was so horrible at the end of the 1920's inflationary credit boom that he is talking about?

Well, he notes that Murray Rothbard wrote that America's Great Depression was caused by an unholy expansion in the money supply, and indeed he says that "Over the entire period of the boom, we find that the money supply increased by $28.0 billion, a 61.8 percent increase over the eight year period [of 1921-1929]. This was an average annual increase of 7.7 percent, a very sizable degree of inflation."

The scene shifts to modern day China, and we see an aging photo of a smiling Mogambo pulling a rickshaw full of Chinese money as Dr. Petrov says, "China is undergoing an inflationary credit boom that dwarfs that American one during the roaring '20s. (The) money supply for (China in) 2001, 2002, and 2003 grew respectively 34.2%, 19.3%, and 18.1%. Thus, during the last three years, money supply in China grew approximately three times faster than money supply in the U.S. during the 1920s." Three times as bad! Three! We had the Great Depression, and now they are setting themselves up for something three times worse by expanding money and credit three times as bad!

He knocks on the door of the Mogambo Bunker where I have locked myself in and am cowering in the corner, whimpering "It's not happening! It's not happening!" to myself over and over, and he whispers to me, "Unless there is an unforeseen banking, currency, or a derivative crisis spreading throughout the world, it is my belief that the Chinese bust will occur sometime in 2008-2009." I'm listening and crying out in my pain, "No! No!" And then he says "Marc Faber, the foremost Austrian authority in the world on Chinese economic development, believes that the bust will occur sooner. Whatever the trigger of the bust in China, there is little doubt that this will provide the onset of a worldwide depression. Just like the U.S. emerged from the Great Depression as the unrivalled superpower of the world, so it is likely that China will emerge as the next."

Well, not only is this the current expansion of the Chinese money supply three times as fast as we did in the 20's, but it is also eerie that we are now expanding our American money supply at the same rate we did during the 1920s, which led to the Great Depression! So if you want to have a Halloween costume that is guaranteed to scare the hell out of me, then come dressed up as the money supply.

- David Morgan has posted "An Austrian Analysis of U.S. Inflation," another article by the aforementioned Krassimir Petrov, Ph.D. on his website Silver-Investor.com. I will not go into the whole thing, as I strongly advise you to go there and read it for yourself. But I will jump ahead to his fifth item, "V. MORE INFLATION AHEAD" as self-explanatory, and without even pausing or using my turn signals, careen directly into "VI. CONCLUSION" where we read "Only precious metals will provide the ultimate safe-haven in such an environment. Even though
gold is the ultimate choice, I believe that over the next decade, silver will outperform all investments, whether boom or bust, inflation or deflation."

- Oil surpassed $54 a barrel, although we can all join with the experts and breathe a heavy sigh of relief that it did not surpass $55 a barrel, because the American economy can handle oil at $54 a barrel, and so that means that this is the perfect time to buy some stocks and beef up that old portfolio, but there may be problems with $55 a barrel, because then we would be reading how all the experts are so relieved that oil did not exceed $56 a barrel because they had all decided that the economy can now handle oil at $55 a barrel, and so, (and here you have to really pay attention because this is the crucial part of their whole theory) that means that right now is the perfect time for you to run out and buy some stocks.

- A Letter to the Editor in last Wednesday's Wall Street Journal from Don Young (R., Alaska) and James Oberstar (D., Minn.), who are, respectively, the Chairman and the Ranking Democratic Member House Transportation and Infrastructure Committee, ought to give you some pause and reflect how your vote actually has ramifications. The reason for their letter is that they are arguing, of course, that they should be allowed to spend as much money as they and their little friends want on roads and bridges, and they are upset that the editorial board of the WSJ condemned the always-bloated Transportation bill as a "pork barrel monster." But the two Congresspersons are happy to take precious time away from their Making America Better By Passing More And More Laws to set the record straight, and, in doing so, provide a little free education to the editorial staff at the Journal, who are obviously so childishly ignorant that they cannot see the genius of government in general, and the Transportation Committee in particular. And, as a taxpaying citizens, they also provide a little free education to me (as part of the Leave No Proletariat Bozo Who Does Not Recognize The Genius Of Their Elected Congressional Officials Behind Act.

I don't know if the editorial staff of the WSJ appreciated the effort, or was even paying attention. But I sure was! And what an education it was! I still tingle with the excitement! They start off with "Traffic accidents and congestion cost America $300 billion a year." Wow! See what I mean? They do not, unfortunately for us dimwitted bozos out here who desperately need some of this free Transportation Committee education pounded into our, or my, thick skull, or skulls, as the case may be, exactly to whom this $300 billion is paid. But whoever it is, or whomever they are, I am sure that they must be aghast that the Transportation Committee wants to eliminate their incomes. And another nagging question is "If the $300 billion is potential income that was not earned due to this tragic traffic congestion, where would an extra $300 billion to pay for this economic activity come from, if this terrible traffic congestion was eliminated?

But I raise my hand to inquire, politely but with an unmistakable tone of underlying hostility and distrust, "Sir! Sir! I have a question!" but they know what I am going to say, and so they purposely ignore me and lead the rest of the class in laughing at my exasperation and rage until I whip out my Concealed Weapon Permit and they realize the potential folly of laughing at an armed lunatic as so many others have learned the hard way.

And indeed I am crazed to lunacy. Crazy with the cognitive dissonance of living in country that is literally swimming in colleges and universities, that traditionally makes education a priority, and at the same time being a nation of economic imbeciles. Because I am here to tell you that cutting spending, which is all the rage in speeches by politicians, is merely reducing one person's income, and increasing the income of some another person or group of persons.

But this is not about my stupid theories about economics. No, we are here to learn at the feet of Congresspersons. So without further ado, I present another of their terrific educational nuggets. They note that United Parcel Service estimates that they lose $8 million for every minute their trucks sit in traffic. Now, if those trucks work only 8 hours per day, 5 days a week, 52 weeks a year, then the bottom line of UPS will increase by $124.8 billion if we eliminate traffic jams? Huh? Wow! And when you add in FedEx, Airborne, and the Post Office and all the other package-delivery outfits, pretty soon you are talking about a trillion dollars, which means that 9% of GDP of the entire freaking country is spent in traffic jams? Wow wow wow!

It sounds like a lot, little realizing that $124 billion a year won't even begin to cover the cost of constructing all those roads and bridges and tunnels, and buying out all the present-day owners of all that land, and the impact fees, and the amelioration and restoration costs, and blah blah blah, and at the present, which I indicate by pointing at my watch, these roads are now costing up to half a billion dollars PER MILE to construct! Naturally, I cite this figure as a fact, knowing that you probably won't get up off YOUR dead butt and do the research to prove me wrong, and yet you sit there with that smug smile on your face and want ME to get up off of MY big fat ass and do the work, but I'm not going to do that, because when it comes to lazy, you aren't even in my league, punk! But I am merely mentally extrapolating from a road that they put in around here lately, which cost almost a billion dollars a mile, or a trillion, or a zillion, I forget which, but I do remember that it was one hell of a lot of money. And since we were talking about it, I also remember that one day I was driving along, see, minding my own business, which was mostly plotting righteous revenge on a cruel, cruel world that rejected me boo hoo hoo, and how delicious it would be to see everybody crying and regretting that they hurt the Mogambo, and I could almost hear their cries of anguish "We're so very sorry, Mogambo!" and I would laugh-- hah! --at their suffering, just as they laughed at my pain!

But, in another Mogambo Magical Moment (MMM), I cleverly spew productivity out of my ears as I simultaneously both 1) digress and 2) save the best for last! And trust me when I say that you are going to love this, because this is one of those little bits of economic savvy that I live for and for months afterward I wake up in the middle of the night, slap my forehead and say "Why didn't I see that? It's so simple!"

Anyway, these two worthies have made economic history of their own, as they have identified one of those elusive multipliers that some economists believe are real and other economists believe are not real! They have, all by themselves, ended the debate. They have found the Elusive Multiplier Of Story And Song (EMOSAS)!

These two guys, who are obviously smarter than all of the rest of us mediocre bozos out here in the real world put together, confidently say that multipliers ARE real! And this is the best part, because they tell us the actual size of the multiplier! I can feel your excitement! In honor of the occasion, I suggest that you have this number tattooed into your arm, because it is going to come up with increasing regularity because its discovery is such an Important Milestone In Economics (IMIE) that I am amazed that they didn't win the Nobel Prize themselves, is precisely 6.2! I shall repeat that in honor of the occasion. 6.2! So, not only IS there such a thing as a multiplier, but the size of the multiplier is precisely 6.2!

They start off crowing about how this is going to be so cool for employment, and that "Every billion dollars in federal investment in our transportation system create 47,500 jobs." Well, the Mogambo says that you can put a billion dollars into anything, and you will probably get 47,000 jobs somewhere!

But their penetrating analysis does not stop there, but they go on to say, and this is the moment you have been waiting for, that "That same billion also creates $6.2 billion in related economic activity." Eureka! There it is! A billion dollars is thus multiplied by 6.2 times! So the next time some lackluster economist or snotty security guard wonders how you got past the security checkpoints and how you can't just walk into the Federal Reserve and fire everybody on the spot and start throwing their things out the window, you can say "Well, maybe not! But multipliers are real! Two guys on the House Transportation Committee, one of them being the head of the committee, said so! And the multiplier is exactly 6.2! Now, go tell Alan Greenspan I am here to tell him what a putz he is!"

So let me get this straight for you, because it was hard for me to understand it, too: When people work and earn a living so that THEY can spend a billion bucks, no jobs are created and there is no additional multiplier benefit. But when the federal government (Sound of trumpets! The cavalry to the rescue!) spends a billion bucks, suddenly 47,500 jobs are created, plus another $6.2 billion in "related economic activity!" Wow! I say that we should send ALL of our money to Washington right away!

But, to be fair, they are talking about a billion in deficit spending, and actually the billion dollars was NOT taken out of people's pockets! It was created out of thin air by the Federal Reserve, because they are idiots, as two guys just won a Nobel Prize for proving. Therefore, there actually IS a multiplier! And it also multiplies the money supply, which multiplies inflation!

The camera records me swinging around in my chair, leaping to my feet, snatching a piece of chalk and scribbling a long equation that includes these multipliers and inflation deflators in a huge mishmash of numbers and exponents and integral functions and differential functions until, at the end, it equals to what seems to be something so negative, approaching negative infinity, that it can only be notated as a scream "Aggghhhhhhhhhhhhh!" that echoes across the universe until it is picked up by the sensitive antennas on my home planet, and then they will know "Hahahaha! Earth has again learned that a fiat currency in a fractional banking system is suicidal! Now, place your bets! Will they now listen to the Mogambo?" Back across the universe echoes their answer; "Hahahaha!"

- "Government Economic Reports: Things You've Suspected But Were Afraid To Ask! --- Gross Domestic Product" by Walter J. "John" Williams was graciously posted on the GillespieResearch.com website as a way of trying to education the clot of blockheads known as the American electorate, and was immediately picked up by a lot of OTHER websites and again posted for the same reason, and sooner or later somebody wakes me up out of a drunken stupor and says "Here! You have to read this," and sure enough, even my blurry eyes and slurred speech can't stand in my way, and I read as Mr. Williams writes, "The GDP is compiled and reported by the Bureau of Economic Analysis (BEA) of the Department of Commerce. The distortions from bad GDP reporting have major impact within the financial system. With reported growth moving up and away from economic reality, the primary significance of GDP reporting now is as a political propaganda tool and as a cheerleading prop for Pollyannaish analysts on Wall Street." And how good is this report on the size of GDP? Not very. He writes, "Based on my analysis of the GDP/GNP revisions and redefinitions over time, over-deflation and economic reporting as published before later political corrections, reporting of real GDP growth at present is overstated by roughly three percent per year against a more realistic, pre-Pollyanna Creep period." Three percent! A year! Three! Not only that but he charges that these "upside growth biases have been built into reported GDP with increasing regularity since the mid-1980s." Just about the time that Alan Greenspan took over at the Federal Reserve, I note with a grim satisfaction that always looks like I am having some intestinal distress or something.

"The popularly followed number in each release." He continues, "is the seasonally adjusted, annualized quarterly growth rate of real (inflation-adjusted) GDP, where the current-dollar number is deflated by the BEA's estimates of appropriate price changes. It is important to keep in mind that the lower the inflation rate used in the deflation process, the higher will be the resulting inflation-adjusted GDP growth." Bingo! Just like that! Higher GDP, which any self-respecting central banker would love to crow about! Therefore you now more fully understand why the Fed and the government are so intent on coming up with ways to statistically lie about inflation. As Bob Wood enjoys saying, or hearing me say, they are all a bunch of lying whores.

But it didn't ever stop there! They are still doing it, year after year, after year, where now fully half of the items measured in the Consumer Price Index are now subjected to this fraud! But Mr. Williams is not so angry about it, and I admire his natural self control, as I can only achieve such relative serenity with the help of handfuls of powerful psychoactive medications, and sometimes not even then, and his entertaining amity extends to his remarks, too, as when he jocularly says "The upward bias shown in the revisions is due to what I call 'Pollyanna Creep,' where methodological changes regularly upgrade near-term economic growth patterns."

He also makes a good point when he assails the idea that free trade is always a boon to the world. He says that is not absolutely true, and that "Free trade theory assumes all involved nations are at full employment. When that is not the case, the wealthiest and highest salaried countries end up with a declining standard of living and redistributing their wealth to the other free-trade participants, as is the current circumstance for the United States." With a quizzical sideways look, I peek over at the economics books that are everywhere, and I am mentally searching through the extensive Majestic Mogambo Database (MMD) for an example of a country that was prospering because was redistributing its wealth to other nations in return for consumer items and a lower standard of living. Whirr whirr whirr, my little brain neurons are spinning. All I can come up with is that there is a short time during the Jurassic Period of Earth history where the records are a little spotty, and they MAY have had such a system, but we are not sure.

He also takes issue with aspects of the calculation of GDP, when he notes that "Personal income including what the average homeowner would receive from himself in rental income if he charged himself to live in his own house" is "an actual component of the income side of the GDP"! Hahaha! What will those government guys come up with next! Hahaha!

Other abuses abound, as when your bank offers you free checking, for example. Mr. Williams notes that our government counts this as "imputed interest income." And it gets even more weird, as he reveals that "Not only did imputed interest income account for 21% of all personal interest income in 2002, but also it grew at an annual rate of 8.3%! As an aside, renting the house you own from yourself gets imputed as 62% of total rental income."

So when I back these imputed incomes out of my dollar-income, how much is really left? I look in my wallet. It looks like three dollars, give or take.

Of course, all of this calculation of GDP and inflation plays right into the hands of Greenspan, who uses this, pardon my French, crap to justify his bizarre fixation on productivity. And this brings to mind a delicious quote by Richard Benson of Specialty Finance Group, who writes "It does seem that the less we produce, the more productive we are. Indeed, if America could get rid of the last factories that produce the 45% of production we consume, productivity could be made infinite!" Hahahaha! What a card!

- Peter J Cooper posted the article "Linking
Gold and Oil Prices" on the AMEinfo.com site. "Historically, the ratio of the price of oil to the price of gold has been relatively fixed: the number of ounces of gold required to buy a barrel of oil has averaged .06 ounces. For gold to reach the historical standard - with oil prices at a more modest price of, say, $42 per barrel - the precious metal would have to trade at $700 per ounce. Put another way, by historical gold-price standards, oil should be selling at just $24 per barrel."

Well, it is one thing to be able to do this kind of calculation. Interpreting the result to make an investment decision is quite another. He is taking words right out of my mouth when he says "By most measures, then, buying
gold is currently a smart investment. Which would make Kuwaitis the savviest investors in the Middle East, in terms of value. The emirate saw the greatest surge in gold consumption in the second half of this year, recording growth of 28 percent. Saudi Arabia, the largest market in the Gulf, saw growth of 23 percent, followed by the UAE at 21 percent, Bahrain at 20 percent, Oman at 18 percent and Qatar at five percent."

And if one examines the historical record, then one would reach the same conclusion that Mr. Williams did: "The last time the world looked like it does today,
gold prices were on their way to $800 an ounce."

And, if I remember my history and I am sure that I don't, it seems that there was another time that looked kinda like this, and the invading Crusaders were about to get their butts kicked by Saladin and some of his Islamic buddies.

And I am not the only one looking at these historical precedents. G. Lammert, whom George Ure describes as a "fractal analyst," writes "The daily and yearly markets represent a continuous fractal plot and graph correlative of ongoing credit availability with periodic market saturations and contractions." This is usually the case, apparently. But when there is an exception to this rule (and notice how the soundtrack music is all gloomy and scary), and he cites several all the way back to Cathage, Something Bad Happens (SBH), and that something is "the destruction of a government and its dependent markets." I think he is suggesting that we are seeing one of those exceptions right now, and to tell you the truth, it wouldn't surprise me a bit.

- Dan Denning of Strategic Investment made this interesting comment that makes you stroke your chin and go "Hmmm." Well, that's how he affects me, anyway. Anyway, he was recently writing about the strength or weakness of currencies. He writes "Things that make a currency a buy: high interest rates, a stable central bank, low inflation in domestic prices, and a growing economy." Then he follows that up with "Things that make a currency a sell: high government debt-to-GDP, low economic growth, inflation, and unstable central banks, and a stagnant economy."

Obviously, he doesn't like the dollar, and he doesn't like the euro, either, which he calls the "John Kerry of Currencies," namely because people are attracted to John Kerry just because he is not George Bush, and likewise they flock to the euro just because it is not the dollar. But, when you get right down to it, neither of them is worth a toot. And don't get me started on
gold again, because you know how I get.

- Another round of debt relief for poor countries is gaining momentum, which seems only natural, since the poor countries who come begging and pleading for more and more money have never paid back a dime of any loan that I know of, and always got debt relief before. Now the IMF and the World Bank are meeting with Britain and America to come up with some new plot to eliminate the un-payable debts of these deadbeats.

Britain, of course, is our main rival in this permanent welfare idiocy, which history has proved over and over and over again just breeds more welfare idiocy. Quoting an Economist magazine article entitled "Clean Slate" in the October 8 issue, Britain wants "debt relief of up to 100%" for all poor countries, and Gordon Brown, the chancellor of the exchequer, says that "Britain would pay its share (10%) of the debt service owed by poor countries to the World Bank and the African Development Bank."

So let me get this straight: the government confiscates money from the taxpayers to give to the World Bank, which loans it out, and then when the recipients of these loans continue to act like corrupt Marxist morons and don't pay back the loan because they have wasted the little bit that they didn't embezzle, we are now going to turn right around and give the damn World Bank MORE money to pay them back for making the soured loan in the first place? My God! And I am supposed to have the least respect for any of these jackasses? Well, I don't! And I don't have to! As the Libertarian candidate for President famously said "Anywhere I stand is a free-speech zone!"

But this is almost a fait accompli, as so much debt has been written off that the Economist notes that "More than half of HIPC debt stock has been written off, saving the borrowers $900 million a year in debt-service payments." And yet even this is not enough! To hell with the IMF and the World Bank! And the damnable United Nations, which I realize is not even mentioned in all of this, but I hate to miss an opportunity to throw an insult at the U.N. only because they so richly deserve to be insulted and run out of town and if they want to know who is calling them up at one o'clock in the morning and calling them "Big doo-doo heads" and hanging up, it's me! The FBI knew it was me whole time, but they didn't tell you because they don't like you either!

- Paul Kasriel of Northern Trust, has a new article out entitled "Investment Implications of the Inevitable Rebalancing of the U.S. Economy, or Making Lemonade Out of Lemons." The interesting part is that when I went to the site, the little button on my toolbar said that I had opened something called "Phase One of Fed Tightening Is Nearing an End." Hmmm! I am running it through the Mogambo Master Computer to see if it is some secret message or something.

- David Bond, the editor of the Silver Valley Mining Journal and the newsletter Wallace Street Journal, has written a witty article entitled "
Gold, silver and Winchester blue" The story is that a guy named Steve Quayle posted on his website, www.stevequayle.com, an essay written by another guy. The Executive Summary, for you busy people out there who don't have the time for long explanations about how it is YOUR turn to pick up the check because I picked it up last time, is thoughtfully provided by Mr. Bond himself, and I include it only because it so completely captures both the thrust of the entire article, and is so well written that it even includes gratuitous sarcasm, which means I can save my venomous scathing sarcastic barbs for other worthy targets like, oh, I dunno, like, maybe, Alan Greenspan, but you knew I was going to say that! Admit it! You had a feeling I was going to say him! "Bottom line is, Bush and the neocons have out-scammed even the Fed, which is no mean feat, and they're also hocked our silver and oil."

The article, in case I forgot to mention it, was written by Al Martin, which would serve him right because he never mentions me and when he writes, and when he walks by, he never even says hello or even drop a lousy quarter in my tin cup, so to hell with him. Anyway, his are that he is "Retired US Navy Intelligence" and has written something called "Bushonomics Explained (Part IV): Where Are the Missing Billions?"

He writes that, among other things, the Bush-Cheney White House has "presided over" (and you might want to take a seat because you are not going to get out of here early as this list is pretty extensive and extensively plagiarized) "aggregate budget deficits of some $1.5 trillion, an aggregate merchandise trade deficit of yet another $1.5 trillion, an increase in total national debt of some $2 trillion, a 38% decline in the trade-weighted exchange value of the U.S. dollar, depletion of all inherited accrued fiscal reserve balances, as well as all contingency reserve accounts of all federal agencies, sold some $5 billion worth of metals, minerals, fuels, fibers and food stuffs from the so-called national strategic stockpiles without the required congressional approval, drawn down (since March 2001) about 2900 metric tons of
gold from the national gold reserves, completely depleted the national silver reserves without prior consent of Congress, depleted what little remaining cash balances were left in the nation's 42 public trust funds." And they did all of this before lunch!

Whew! I'm exhausted. With my last remaining strength, I raise my hand and ask "And where are we getting the money to deficit-spend?" Hold onto your hats, because he says "The budget and trade deficits being accrued by the policies of the current regime were consuming 78.4% of the entire planet's net savings rate, a figure that has now grown to 81.3%, in order to finance U.S. debt." Gaaahhh!! Now, not only are we consuming 81% of the world's saving, but the Government Accounting Office (GAO) notes that, if we continue on this path of spending and acting like irresponsible dimwits, that "by the second quarter of 2009, the U.S. would no longer be able to service its debt" because "the economies of the rest of the planet could not generate sufficient capital in the form of savings for the U.S. to borrow in order to finance its debt." We will have to borrow more than the entire rest of the world saves, every freaking year! And this 2009 he is talking about is only five short years away!

Now you know why I said "Gaahhh!!

This dovetails perfectly with Peter Schiff''s comment about the latest jobs report, that "As I have written repeatedly, an economy in which consumers borrow money to buy imported products is an economy incapable of producing significant job growth. America's beleaguered manufacturing sector, once the source of its industrial might, shed another 18,000 jobs. It is worth noting that the jobs added in the over-bloated service sector should be considered temporary as they are completely dependent on the American consumer/borrower, who intern depend on the continued irrational behavior of the foreign producer/lender." The ones who are already loaning us 81% of everything they can save!

He continues "In order for foreigners to continue exporting products to America, they must continue importing inflation from America." This is where I jump to my feet, and show a little prescience, as one day we are going to be very disrespectful of all foreigners. I say "Well, to be fair, these are filthy foreigners, remember, and we Americans don't care about foreigners, we don't HAVE to care about no stinking foreigners, as we only care about 'What is good for America' and so I say to hell with foreigners!" He looks at me with that look of disgust and loathing that I have come to expect from arresting officers, and then without even acknowledging my remarks, goes right on to say "This one-sided game is nearing its end, as foreigners will soon tire of paying higher and higher prices for oil and other commodities while watching Americans indulging on the fruits of their labor. Soon they will tire of sacrificing current consumption by lending to Americans, while watching the value of their savings vanish as a result of their efforts to support the dollar."

Well, I hate to disagree, but I think that these foreigners are too stupid to put that all together, and instead they will resemble Americans, who are also unable to put that together, either, and those filthy foreign devils will just get angry at watching prices going higher and higher, and how they still don't have anything to show for it, and they will rise up yelling and blame the Mogambo, even though it was ME that was telling them to stop that silly crap years ago because this is what would happen to them! But did the Chinese listen to the Mogambo? No! Did the Americans listen to the Mogambo ? No! Did the Japanese listen to the Mogambo? No!

He sums up with the comment that "Indeed, should the current regime remain in power, the economic outlook for both the United States and the world remains bleak", to which I note that apparently this guy has not been talking to David Morgan, of the Silver-Investor.com newsletter, who has put a lot of thought into this thing and said it doesn't matter who in the hell wins the election, because "The American election on November 2 will be a matter of determining who is skipper of the Titanic after she hits the iceberg." And I have to agree, both because Mr. Morgan could pound me to a pulp anytime he wanted, and also because even the Mogambo himself, armed with photon torpedoes and fully-charged lithium crystals, could not save this economic beast.

Speaking of David Morgan, and if you are talking about silver then sooner or later you're talking about David Morgan, says that he loves you so much that he is going to repeat himself so that even a dunderhead like me will know the importance "China is going to need, want and use silver. And a lot of it." He says this because they want TVs and refrigerators and all kinds of electrical thingie-bobs, too, all of which consume silver. Seeing the look of blank, uncomprehending stupidity in my eyes, he does not realize that this is the natural state of affairs for the Mogambo, and helpfully repeats himself, "China-silver, China-silver, China-silver." I nod, thus signifying that I now understand, and as my way of saying "thank you" for waiting for me to catch up with you and your big brains, who saw the China-silver connection a long time ago.

- Talking about the Philippines in his article on the Mises.org website entitled "Raiders of the Taxpayer's Money," Grant M. Nulle writes that their own clot of elected idiots are now "Staring acute financial hardship in the face, government officials are imploring the nation, particularly Filipino taxpayers, to bail them out of a crisis of their own making." And what is this crisis? Is the Mogambo coming to town? No, but close enough! The crisis is that they acted like Americans! They run large budget deficits, issued a lot of bonds as "the government also resorted to public spending to stimulate growth."

And guess what? They now find that their situation is exactly as the Mogambo predicted, and just as everybody who has the faintest notion of how economics really works and/or who has ever read any history of economics at all could have predicted with their eyes closed and their hands tied behind their backs, and we are now standing around with our hands tied behind our backs alternately pleading to be untied and laughing at the Philippine government and the people who elected them.

But Mr. Nulle is not interested in making fun of the Philippines or laughing at the Philippines or pointing fingers at the Philippines and saying hurtful things like "Philippines! Stupid as America! Nyah nyah nyah!" and politely elects to talk only about economics, and says "Government servicing of these obligations could become impossible to manage if global interest rates continue to rise and recurring budget deficits cannot be attenuated." Attenuated recurring budget deficits? Ha! Like THAT'S going to happen!"

But the Standard & Poor's people have a plan. "The S&P's advice indicates a proper method to resolve the Philippines debt situation, albeit not in the manner the rating agency advocates. Instead of devoting more of their income to Manila's debt problem, the Filipinos should press the government to repudiate all outstanding obligations to multilateral and private lenders alike."

I can see the headlines now. "Philippines to World: Drop dead!"

Then he finished up with a clever, memorable sentence. "Hopefully, debt repudiation by the Philippines would serve notice to prospective lenders that states, the only entity in society besides criminals that exist at the expense of others, are parasitic and wasteful consumers of capital, undeserving of investment."

- I am surprised that nobody has brought up the fraud of the Ownership Society. The way it works is this: My neighbor says he can get me a great deal on a car. So I give him my money to buy the car. He buys the car, rides around in it, continually borrowing more money from me to make the payments and put gas in it, but he never drops the car off. Later, much later, when it is finally worn out and broken, he drops it off in front of my house, brakes squealing, leaking oil, wheezing and backfiring, the paint gone and the body panels dented and rusting away, tires deflating, radio dead. He honks the horn, and says "Yo! Mogambo! Come on out and take possession of your new car!" and walks away.

And this is the answer to Question Number Four on last night's homework assignment, "What is the difference between getting this car and getting control of a bankrupt Social Security system, a healthcare system that is ridiculously expensive and an entire economy that is bankrupt and over-indebted?" The answer is C, "With the car, you get a horn that goes beep beep beep."

- I watched the Presidential candidate debate Friday night, and almost got physically ill from my seething rage about the constant talking about Iraq Iraq Iraq. So when the subject finally got around to the economy, I stopped making crank phone calls to the Federal Reserve ("Hello? Fed? Do you have pizza? You don't? Then why don't you print up a few billion dollars and go get one, you ignorant monetary jackasses who are killing us with your constant creation of money and credit? Hahahaha!") and when the audience member finally asked what kind of jobs are we supposed to get in the future, that is when I really started getting excited. "This is going to be so cool!" I said to myself. "Now all I have to do it listen carefully, and I will find out what kind of job I can get tomorrow, so that I can move into a nice half-mill McMansion of my own! And buy some new SUVs! And a few plasma-screen high definition TV sets! And jet-skis all around!" I have to admit that my mind started to wander a bit as I started thinking of all the wonderful things I was going to buy when I got one of these fabulous jobs, and I snapped back to reality when John Kerry mentioned that an example would be in child care. Child care? CHILD CARE? Did this guy think that I can afford a house with a half-million bucks in mortgage debt on what I can make as a child care worker? Does he even know what child care IS?

Well, maybe the government is actually moving into child care, because the employment report showed that manufacturing lost 13,000 jobs (showing a net job loss for the millionth month in a row) and government payrolls increased by 37,000 jobs. I told you that things get really weird at the end of these long booms.

Well, sadly, this is the end of the list of specifics on how these two hotshots are going to revitalize the economy. But at least we got a few laughs! For example, we can look forward to an economy composed of taking care of each other's children! (hahaha!) Both Presidential candidates plan to cut the deficit in half in four years (hahaha!), which means bringing the budget closer to being in balance (hahaha!), which means cutting spending (hahaha!) or raising taxes (hahaha!) or reducing the growth of entitlements (hahaha!) by also reducing the number of new groups of people who want to be given money (hahaha!). Oooh! My stomach hurts from laughing!

Of course, there was also a lot of talk about tax credits (the government literally giving money back to people) and tax cuts (the government not taking as much money away from people), all of which makes the budget deficit worse.

- The Aden sisters, who publish the Aden Forecast, have also apparently watched the debates, and as a result are bullish on
gold, and as far at the Presidential election is concerned, "The bottom line is that there isn't much difference between the two candidates as far as how it would affect the metals markets. As investors, this means you want to continue buying and holding gold, silver, and gold and silver shares. These markets should continue to do well, outperforming other markets in the period ahead, and the action is currently very good." This is, I assume because the chart action for gold is in a "C rise" wave, which, I gather, is really good news as far as rising prices are concerned, but I am not sure I could tell a "C rise wave" from a hole in the ground. No, wait a minute! Now that I think about it, I'm sure that I CAN tell the difference! I swear! You make money on a rising C wave, and you don't with a hole in the ground, right?

- At least South America is consistent, and the AP wire reports that Hugo Chavez, President of Venezuela, threatened Venezuela's Central Bank that "if it doesn't allow him to use part of its international reserves to fund his social programs for the poor, he will get a Supreme Court order to do so."

He is reported to have said, and if you are a Leftist moron then you will love this, "Be assured that I will fight until I can get the last cent to give to the people."

It's too bad that "Central Bank directors have said that using the reserves for government programs is illegal, and that such use would undermine the local bolivar currency and harm the country's standing in international financial markets." But crushing the people by ruining their currency is okay, as long as he can "get the last cent to give to the people," who will be dismayed to find that they can't buy much with the money that has turned to garbage, and are now worse off than ever. Some people never learn, and by "some people" I mean, of course, Venezuela. And America.

He may be right. All money is in existence because somebody borrowed it. So if that loan goes bad and disappears, will the money also disappear? We'll see.


***The Mogambo Sez: The election is a couple of weeks away. Theoretically, the bizarre behavior of the whole world should abate soon after that. I sure hope so anyway, because the things that are happening to keep this whole thing animated until then is scaring the hell out of me.

October 13, 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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