Greenspan, not a sturdy,
...the angriest guy in economics
October 29, 2004
- It was a busy, weird week,
as are most weeks here lately, it seems. Nothing seems to make
sense anymore. The Fed increased Total Credit by a couple billion,
Bought Outright another billion in government bonds, convinced
foreigners to keep buying our debt to the tune of $6 billion,
the Treasury increased total national debt by another few billion,
the banks continued issuing mortgages by another 9 billion. Yet
all these debt securities went up in price, and thus the interest
rates went down on that debt!
All of this while the dollar continued falling and gold went
up. Like I said; weird.
- And speaking of Alan Greenspan, and although the surveillance
tapes show that we were not speaking of Alan Greenspan, in my
Mogambo Mind (MM) I am always speaking to, or about, Alan Greenspan,
and that is why I said "And speaking of Alan Greenspan."
I am now referring to a speech entitled "The Mortgage Market
and Consumer Debt" that he delivered to the America's Community
Bankers Annual Convention, Washington, D.C. He said that everything,
especially in the housing sector, is just peachy, but finally
allows that there are "pockets of severe stress within the
household sector that remain a concern and we need to be mindful
of the difficulties these households face."
He has created the money that created the mortgages that created
the inflation in house prices and everything else has caused
"pockets of distress," and yet he wants US to be "mindful"?
With a snarl, I demand "What in the hell is THAT supposed
to mean, anyway?" How about if the Mogambo says "I
was stimulating the ammunition manufacturing sector and the aluminum
siding businesses of the United States and was shooting off a
few thousand rounds around the whole town, but especially at
a few houses in a 'pocket' over on 34th Street, so we ought to
be mindful of their 'difficulties.' "
But let me try that crap one lousy time and they send the SWAT
team over here, barricading themselves outside my house, and
then we yell at each other awhile, where one thing leads to another
and pretty soon everything starts going downhill pretty quick,
and then I wake up a few weeks later in some secret military
installation someplace with a throbbing headache, spilling my
guts about what I know about flying saucers and how space invaders
are assuming our identities with these big vegetable pods while
we are sleeping.
- John Hussman of the Hussman Funds (and I think it is more than
coincidence that a guy named Hussman works for a financial company
named Hussman. I mean, what are the odds?) says "In my view,
earnings are simply the wrong unit to place at the center of
the analysis. What matters, very simply, is the stream of cash
that investors actually have a claim upon, after all obligations
to other stakeholders have been met."
Richard Russell, who has been writing the Dow Theory Letter for
46 years, is of the same philosophy, and says that the trick
is to determine value, not price, and that value is the thing
to look for. And what is the highest value? Stocks that pay dividends,
and especially those that have a history of raising them.
You are saying to me "Okay, fine. Sounds good to me. But
so what? Why are you wasting my time with this stuff?" and
then I realize that I don't remember why I am wasting your time
with this stuff. My mind is suddenly a complete blank, and I
am standing there perplexed, with this confused look on my face
and what looks like drool starting to dribble down my chin. Mr.
Hussman notices my distress, and covers for me by continuing
"The reason for my concern here is that earnings are currently
quite elevated relative to nearly every other fundamental."
Notice the classy way he says this. Poetry! The benefits of intelligence
and education, I assume.
But being curious, as is common in my species, I run his sentence
through the Mogambo Translator (MT), and in Mogambo-ese, it comes
out as "The reason for coming over here and grabbing you
by your neck and trying to slap some sense into your thick head
is that you are buying stocks at prices that are so freaking
high, so stratospherically expensive, that they are, using Bill
Bonner's Things Are Out Of Whack Units (BBTAOOWU) metaphor, off
the freaking chart! And that means that they are more insaaaAAAaaaanely
overpriced than they will EVER be again in the rest of human
history, and that means, if you care to go find a book and look
it up, that this is the exact wrong time, in all of the aforementioned
human history, to be buying them!"
Well, I know that you are too sophisticated to be swayed by simple
argument, no matter how loud I yell. So why don't we just walk
over to the wall there and look at the Mogambo BBTAOOWU-Meter
(MBBTAOOWUM). "Hmmmm!" I say to myself, tapping on
the glass of the meter. I make a little notation on the clipboard
that I am holding. "You will see that it is redlined!"
And here I actually point to the poor little needle that is quivering,
banging itself against the peg at the far extreme of the meter.
Suddenly, there are sirens going off! Ah-ooogah! Ah-oogah!
My heart is pounding, so I slide slowly down the wall and sit
down in my paralyzing panic. As I do so, I happen to sit in a
puddle of water, and now I have this big wet stain on the back
of my pants, and I am thinking to myself, "Terrific! Just
freaking terrific! Redlined meters! Sirens! Wet pants!"
I want to die, but I probably won't.
Noticing my discomfort and smirking at my wet pants, Mr. Hussman
quickly goes on to say "That's another way of saying that
ratios like price/revenue, price/dividend and price/book are
still off the chart relative to historical norms, while the price/peak
earnings ratio is merely at the same level as the 1929, 1972
and 1987 market highs." Now, I know that you will say, in
that calm, detached and professional way that you have that is
so charming, "Hmmm. Now that IS certainly interesting!"
I shake my head in amazement at your serenity. Prices are "merely"
at the highs that were reached at the beginning of big market
swoons where lots and lots of people lost lots and lots of money?
And you think that is merely "interesting"? I can only
stare at you speechlessly in admiration and awe.
Perhaps this is a good time to point out some differences between
you and me. I admit that I am not a normal person like you, not
nearly as good looking as you, and I am much more heavily armed
than you because I am much more paranoid and angry than you,
and in fact, I am not even from this planet like you, which could
explain my paranoia, because none of my people who went into
Area 51 ever came back to tell the tale. But I hate it when somebody
whom I suspect probably knows what he is talking about, like
this Hussman guy, whose business is to sell stocks and bonds,
and so is seemingly cutting his own throat, says that all the
ratios to determine value are, let me check that exact quote,
"off the chart" and the P/E ratios are at the same
levels as 1929 (scream in horror!), 1972 (scream in horror!),
and 1987 (scream in horror!).
He goes on to say "If current, unusual profit margins, payout
ratios and returns on equity are now the norm, then fine, stocks
are simply overvalued to the same degree that we've seen in a
handful of previous instances. But if those margins aren't sustainable,
as they historically have not been in a competitive economy,
then stocks are actually even more expensive than price/earnings
ratios would have investors believe."
I raise my hand and I say "I have a question! I have a question!",
and he says "Yes, Mogambo? What is your question? But if
it is about loaning you money or letting you borrow my car, the
answer is still 'no.' " So I say, "What I want is to
know more about this 'handful of previous instances.' What happened
subsequent to THOSE periods of overvaluation?"
He looks at me. I look at him. He looks at me. I look at him.
He looks at me. I realize that I have apparently missed the point.
Sweating bullets and upset that once again I have proven to be
an idiot, I wrack my mind! Think! Think! What is it that I have
missed? And then I remember: 1929. 1972. 1987. "Oh!"
- Marshall Auerback is not a big fan of Robert McTeer, who is
on the board of the Fed, and neither am I, although I have never
met the guy. But the Way Of The Mogambo (WOTM) is to always "rush
to judgement" and banish him to Hell for what he says, or
what I think he said, or what he may have said. So Mr. Auerback
and I have this antipathy toward McTeer in common, even though
please don't tell Mr. Auerback because I hear he gets the willies
and becomes physically ill when he thinks he may have something
in common with a disgusting little twit like me, and he writes,
"For a man known to be one of the great apologists for the
country's ongoing and mounting current account deficit, (his)
recent comments mark a distinct change in tone and substance:
McTeer conceded that the current account deficit, which reached
$166.2 billion in the second quarter, 'is going to cause problems,
but we just don't know when'. At some point, he conceded that
foreigners would slow their investments in the U.S., meaning
capital 'flows will turn against us, and there will be crisis
that will result in rapidly rising interest rates and a rapidly
depreciating dollar that will be very disruptive,' ".
I am as
astounded as Mr. Auerback in this "change in tone and substance."
Suddenly, I can't remember why I disdain Mr. McTeer so much!
The guy obviously has a good handle on this economics thing!
Maybe I ought to go to the Mogambo Bunker and get out my Secret
Mogambo File Of Known Enemies (SMFOKE) and take his name off
When Mr. McTeer uses the soothing
term "rapidly depreciating dollar", what he means is
"price inflation", because that is the effect. And
although Mr. McTeer may be applauded for finally getting monetary
religion, it is this same McTeer character who is one of the
Fed boneheads that fostered all of this monetary inflation that
created a depreciating dollar, and who is now actually admitting
that what he has done is going to cause "problems"
and "disruptions"! Now that he has gotten us here,
he sheepishly admits "But I don't know what to do about
it." Here's a suggestion, butthead: Don't do anything! We
are in the fix we are in because you insist on doing things!
Stop doing things! The free market is more than capable of sorting
this out and meting out punishments enough, without you and your
Federal Reserve boneheads making it worse!
Or perhaps Mr. McTeer had lunch or something with Michael Woolfolk,
who said "The deficit is now approaching 6 percent of GDP
and rising fast. No country has ever sustained this level of
external imbalance without eventually succumbing to a currency
depreciation." And if you want to know why Mr. Woolfolk
used the word "succumb", then pull up a chair and stick
around awhile, and you will get a real useful lesson why a currency
depreciation is usually a bad thing. And for those of you who
are impatient and cannot wait, please turn ahead in your textbooks
to Chapter 27, entitled "The Twenty- Seventh Chapter In
a Row Where The Mogambo Is Screaming In Fear About Inflation.
And when you remember that we have inflation, and we are going
to have lots more inflation for a long, long time, and then you
also remember that one of the Presidential candidates wants to
raise taxes, then you remember with a shudder that Lenin said
"The way to crush the bourgeoisie is to grind them between
the millstones of taxation and inflation." And then you
realize that The Mogambo had a very good reason when he suggested
that you get yourself some precious metals and large-caliber
weapons and a massive steel front door that has a slot where
you can stick out a machinegun and keep the postman from sticking
any more damn bills into your damn mailbox, because it ain't
a-gonna just be the law-abiding bourgeoisie that is going to
get ground up by taxation and inflation. Oh, no! Because the
lower classes will get ground up long before that, and those
poor people have nothing to lose by bonking you over the head
and taking your stuff and voting Democrat, which is something
that stupid people do!
- Chuck Butler is President of Everbank World Markets and writes
the Daily Pfennig column for the Daily Reckoning site, and he
is as happy as I am to report that a central bank somewhere,
anywhere, does NOT act like morons. He writes "The Thai
Central Bank hiked rates to 1.75%, which was a real surprise!
A surprise, because even though inflation is moving higher, the
rest of Asian rates remain low, and this could boost the baht
higher, which I can't believe Thai officials want. Thailand can't
afford to have the baht running higher while the Chinese renminbi
is still pegged. But, I've got to hand it to the Thai Central
Bank... they had the intestinal fortitude to provide price stability,
and fight inflation!"
Mr. Butler also reports that "Sakakibara, the former Japanese
currency chief whom the markets called 'Mr. Yen' because his
words alone could move the markets, recently met with U.S. Government
and Central Bank officials in New York, and came away with the
feeling that 'everybody had the perception that the current account
deficit was not sustainable.' " Well, duh! And we are supposed
to be in awe of Japanese wisdom?
Mr. Butler, who apparently has this eye on many currencies, also
reports that "the IMF believes that the renminbi is 25%
undervalued to the dollar. So, if the renminbi floats, it could
strengthen quite nicely, but the important point is that by virtue
of having a stronger currency, their fight with inflation would
be easier." For one thing, the price of oil, in dollars,
would be an immediate 25% cheaper in terms of renminbi. And there
are people all around my neck of the woods who will drive to
another freaking county to save ten cents on a gallon of gas,
so I can only imagine the Chinese joy of saving 25%!
- Mike Swanson, of WallStreet Window.com, gives a few little
educational tidbits to those of you who are of the technical
bent, because I like charts and graphs, too. This is because
charts and graphs instantly show what really happened, which
is a lot more instructive than anything the Federal Reserve has
ever done for me. In this case, his technical point is about
waves, and about gold. "This was the first wave of
a new secular bull market in gold. First
waves are characterized by the so called 'smart money' buying
and fueling a rally. These are people who are very knowledgeable
about a sector - the type of people who know that the fundamentals
behind the sector are beginning to change for the better and
realize that the stocks underlying the companies have reached
low valuations." These "first wave" people are,
of course, you and me, who have seen what the hell is going on
with the Federal Reserve and we are scared out of our freaking
minds with fear, and we are out there every day swerving in and
out of traffic to buy gold and
silver, and in our few spare moments we try to install machine
guns behind the fold-down headlights on our cars because that
would be so cool, just like James Bond, and that dude was always
scoring with hot looking babes!
He goes on to say, "If gold decisively
breaks $425 then it will enter wave two of its secular bull market.
What's great about 'wave two', which is typified by an acceptance
of higher market prices by Wall Street and the beginning of an
interest in the sector by the general public, is that it almost
always lasts longer and brings higher price moves than 'wave
one'." This makes sense to me, too, as there are a hell
of a lot more people out there than just you and me who will
now want to buy gold and silver, and it will take a long,
long time for all of them to steal some money out of their wives'
purses when they aren't looking and go down to The Olde Golde
Bullion Shoppe and say "Gimme twenty bucks worth, dude!"
So wave two lasting a long time makes, as I said, sense to me,
But it is wave three where the real fun is. "Wave three
is the final stage of a bull market and is marked by wide public
interest in a sector, wild valuations, a widespread belief that
the sector will always go up, and a manic type of investor psychology
and behavior. Just think of the Internets in 1999. We are nowhere
near that type of interest when it comes to gold."
In fact, he figures we are still in wave one! So that means we
gold bugs have the whole, huge rise ahead of us! Yahooo!
- The Labor Department reported that consumer prices rose 0.2%
during September, although they also reported a 0.4% decline
in energy costs! Well, to be fair, there was a huge drop in household
fuels, which explains why you see so many people driving their
houses down the highway.
- Kevin Kerr, writing for Outstanding Investments newsletter,
has a new essay entitled "Show Me The Oil!" and he
says that we are deluding ourselves if "They think the world's
top exporter should be able to boost capacity enough to bring
U.S. oil prices below $40... Sorry, it ain't gonna happen, folks."
He explains how he came to conclusion when he said that "Saudi
Arabia is the only OPEC producer with any significant spare capacity.
OPEC producers are already pumping near 25-year highs. Simply
put, the well is running dry. Cartel production is near its highest
since December 1979, just below the 29.76 million it pumped in
November 2000. Demand is simply swamping available capacity,
and that means high oil prices are here to stay." And although
he is too polite to say it, you will probably notice by the way
I have leapt to my feet that I probably have something to say
about that, and indeed I do! "Get out your notes, students!
The Mogambo will now reveal the mysteries of the supply and demand
function!" I say "When the price goes up, the high
price draws in more greedy capitalist swine competitors. All
that new competition forces prices down as the competitors slug
it out in arena of price. But in this case, there are no more
suppliers! And even if there were, it will not be enough to meet
the increase in demand! And since we may have passed the threshold
of Peak Oil, there may NEVER be any more suppliers, although
there is no end to the increase in demand! This would means constantly
rising prices! Gaaahhhh!!"
- David Morgan, "It is a point of fact that most agree that
at some point the inflation of the money supply either destroys
the currency altogether, where currency basically has no value
whatsoever, or the currency actually becomes more difficult to
obtain and business activity slows down noticeably. In strict
parlance, there is a contraction in the money supply due to the
inability of debtors to service their debt.
"In plain English the lender does not get their money back.
The borrower declares bankruptcy." And then the lender,
who was leveraged to his eyeballs in all of this, also has to
declare bankruptcy. And the guy he borrowed money from to lay
on this leveraged loan was ALSO leveraged to the hilt on the
money, and now HE is having trouble paying HIS debts! Man kicks
the dog, dog kicks the cat, cat kicks the mouse, mouse kicks
the lizard, the lizard kicks the ant, the ant crawls up your
ankle and bites you, and it is painful as hell and you reach
out and swat the ant, which doesn't have a lot to do with economics
other than the fact that this is the way the world seems to work
around here anymore and I have an inflamed bite on my ankle to
"It is interesting to note," he says, that "bankruptcy
filings rose from 1,611,268 in the 12-month period ending March
2003 to 1,654,847 in the same 12-month time period in 2004, according
to statistics released by the Administrative Office of the U.S.
Courts." This is a gain of about 3%, which is very interesting
- A CNBC headline says that "40-year mortgages gain in popularity."
Let me see if I have this right: You can't afford to buy a house,
even with record-low interest rates, over 30 long years, because
the price is so high? But you figure that with 40 years to pay,
which adds another ten year's worth of interest payments to your
total cost, you will be able to swing it? You are also taking
out an Adjustable Rate Mortgage at the same time as interest
rates are at record lows? Don't tell me! Let me guess; you are
an American and you graduated from a public high school.
- Business Week in a an article about gold
entitled "Gold is Flashing Warnings" by Amey Stone,
showed another vacuity of the Federal Reserve. She advises us
to "Talk to Wayne Angell, a former member of the Federal
Reserve Board who now has his own economic consulting firm, Angell
Economics, and he'll tell you gold prices
are actually declining -- relative to an index of other commodity
prices, that is." So, let me get this straight: Inflation
in commodities is roaring, but the rise in price of gold, which is also a commodity, is also rising,
but not roaring. And so, when adjusted for relativity, gold prices are actually declining, even though the
price of gold is going up! Wow! I thought I knew
all about how the filthy government uses hedonic adjustments
to massage inflation out of prices so that they can lie to us,
but to say that something whose price is rising is, and you can
tell by the way my eyeballs are spinning around in my head that
my mind has snapped at this stunning revelation, actually declining
in price, simply because the price is not rising as fast as something
else's price, is a new one! Adjusting prices for relativity!
Get Einstein on the phone! I am overwhelmed! A price is rising,
but it's falling! It's up, but it's down! It's higher, but it's
lower! This ought to be written in stone tablet somewhere, and
not just in this stupid Mogambo Guru newsletter, because nobody
reads this silly crap, but this is immortal as the perfect example
of the quality of thinking of the Federal Reserve!
Mr. Angell goes on to say that he doesn't think the Fed will
need to raise interest rates to cool inflation, mainly by trying
to keep wages and prices in check. "Inflation isn't possible
unless we get an increase in wages that enables workers to buy
the products at higher prices," he says. Hahahaha! "Inflation
isn't possible!" Somehow oil is climbing to over $50 a barrel,
insurances and house prices are rising at horrifying rates, commodities
are rising at something like 25%, imports are rising in price
thanks to the falling dollar, and yet, and I can hardly stop
myself from laughing, "Wayne Angell says that inflation
isn't possible!" It's happening, but it isn't possible!
See what I mean? Priceless!
Perhaps Mr. Angell ought to read Doug Noland's Credit Bubble
Bulletin on the Prudent Bear website, because if he did, then
he would have read Alexandra Harney writing in the Financial
Times: "Rising world commodity prices are narrowing Chinese
exporters' already-slim profit margins and forcing them to charge
more for their goods. Chinese manufacturers at the country's
largest trade exhibition, the Canton Fair, said this week that
sharp increases in the prices of oil, steel, copper and plastic
were making it necessary for them to raise prices to foreign
buyers." In case you have been in a coma or have been held
hostage someplace and have not kept up on the news, or if you
are as clueless as Wayne Angell, these "foreign buyers"
she refers to are you and me. We are the foreign buyers. They
are raising our prices. Even though Wayne Angell, former Fed
governor, said that inflation was impossible without rising wages,
and while I don't know about you and YOUR wages, but around these
parts, wages are not rising. But prices are.
- "The Commitments of Traders Report - What is it? What
do you do with it?" by Wayne N. Krautkramer is a nice explanation
of the COT, which is always the subject of a lot of suspicion,
and is always very interesting to guys who are speculating in
commodities to know what other guys who deal in commodities are
doing. "As anticipated, we found that Large Hedgers and
Large Speculators had the best forecasting records, and the Small
Traders the worst, by far. We were somewhat surprised to find
that the Large Hedgers were consistently superior to the Large
Speculators. However, the predictive results for the Large Speculators
varied widely from market to market. Yet, we have to admit that
there were exceptions that proved to be quite dramatic.
"The most bullish configuration would show large hedgers
heavily net long more than normal, large speculators clearly
net long, small traders heavily net short more than seasonal.
Be wary of positions that are more than 40% from their long-term
average and disregard deviations of less than 5%."
He quotes Jim Bianco, President of Bianco Research, who says
"Historically, commercial hedgers have been right the vast
majority of time and the speculators wrong." But that is
not a hard-and-fast rule. "The small specs and the large
specs are quite capable of regularly taking money out of the
market and right out of the commercial category's pocketbooks
if they trade smart."
He says that Large Commercial's (Hedgers) are long the commodity
"by definition. Their primary concern is to avoid a price
break which would reduce the value of their inventories. A rising
market is not a major focus of their trading activities."
The relevant trading point is that "Therefore, it seems
likely that the Large Commercials (Hedgers) will be the best
guide for predicting bear markets. The very size of their positions
preclude trading for quick profits."
Mr. Krautkramer concludes that, alas, "Perhaps it's
time to downplay the COT Report. The COT is the most useful only
a small percentage of the time." Bummer. In my mind I had
already spent the fortune I was going to make with this BOT thing.
has been a change in the way the banks clear your checks. In
the old days, there was a delay of several days between the time
you wrote a check and when the money was taken out of your account,
because the check had to wend its way through a labyrinth of
clearing houses and middlemen and Patriot Act busybodies and
CIA snoops before it got back to your bank, which only THEN debited
your account for the money. This systemic delay was known as
"float." Now, thanks to some New Era government meddling,
the float has been legislated out of existence, and the money
is immediately taken out of your account, probably even as you
are writing the check, because the government has secret surveillance
cameras spying on you.
Why the change? Well, one reason would be to increase the velocity
of money, which is a measure of how many times a dollar is spent
in a year, or, in other words, how many times a dollar changes
hands. See, if it takes a month for a check to clear, then that
dollar can only be spent twelve times a year. But if the check
clears daily, then that dollar can be spent 365 times a year.
And what is this velocity that I keep yammering about? The calculation
of velocity is simplicity itself. Divide GDP by the money supply
(V=GDP/M). In that way you will calculate "unit of GDP per
dollar." Notice that this formula says that since velocity
is increased, then, since GDP hasn't changed, then the money
supply must have effectively been decreased! Could this just
be just a Fed "unconventional method" of increasing
the computed value of the dollar?
But if, on the other hand, we hold the money supply constant,
then doesn't the formula imply that GDP increased? Which is it?
Why are they doing this? Why am I asking you?
- Chris Mayer is editor of Fleet Street Letter, and he is a guy
who looks at history and sees if he can draw any parallels. "Just
as all hurricanes first develop over warm waters from pre-existing
conditions, financial storms are spawned by surging growth in
money, debt and speculation - the tres hombres of financial upheaval,
if you will." He notes that The Panic of 1837, which was
a financial debacle in 1837 that was so great that everybody
panicked and that is why they call it the Panic of 1837, was
precipitated by the fact that "Total bank loans and money
supply more than doubled in the six years running up to 1836."
And will there be a Panic of 2005, when somebody takes a look
at total bank loans and money supply since Alan Greenspan took
over at the Fed, and everybody panics, and then everybody wants
to come over to my house and get into the Mogambo Bunker with
me now that they know what is scaring me so badly and now they
are scared, too?
But it is not just the increase in the money supply and debt.
Rob Kirby, writing an essay entitled "The Numbers Never
Lie: MOC" (the MOC stands for "My Own Contribution"),
writes that the notional amount of derivatives in J.P. Morgan
Chase book of business increased in the quarter by $3.2 trillion.
Then he figures that if J.P. Morgan works twenty hours a day,
twenty-two days a month, twelve months a year, then the "Rate
of Increase in book size this quarter: $3,200,000,000,000 / 79,200
= $40,404,040 per minute." Forty million bucks in new derivative
contracts every freaking minute of every freaking day!
- I am happy to tell you about an essay entitled "Honest
Money" by Douglas Gnazzo on Financial Sense Online.com.
If you want to study a relatively academic treatise on gold and money, especially in terms of the Constitution,
history, standards, customs, and lots of other neat stuff that
you wish you could remember so that if you ever get invited to
a party, then you could spring these money-and-gold
tidbits on the fellow party-goers, and then maybe people would
like you, and maybe I could finally have a friend, and maybe
even meet a girl that I didn't have to pay double the going rate,
but they always hold their noses and walk away and say "Ewww!
He's even weirder than I heard! And smells worse, too! Ewww!"
in those tiny little whining voices that sound like dentist drills
drilling into my head, "eeeeeeeeeeeee!" until I can't
stand it anymore and I jump up on the dining room table and kick
all the food and appetizers and canapés and dips and chips
off onto the floor, and scream "You want food? I'll give
you something to chew upon, you horrid little people! Sink your
teeth into the fact that a fiat currency, with a central bank,
that uses unbelievable amounts of fractional reserve multiplication
of the money supply, is going to strangle you and you will gasp
for air and your eyes will bug out and then you will be economically
killed! So chew this well, and taste its bitter-sweet poison!!
You will die, and I, The Mogambo, will live! I will live like
a king because I HAVE read economics, and economics history,
and this essay by Gnazzo, and so I will prosper! You
will have nothing! I will have everything! Hahahaha! Now, which
of you pretty ladies would like to go for a ride in my car?"
This is where I discovered the Big Flaw (BF) in my reasoning.
It never occurred to me that they would all rather die a horrible
death than to be seen in public with me because they might catch
my cooties or something. So while this Gnazzo essay is
NOT a sure-fire way to meet girls, alas and alack, it has educational
benefits, although I am not sure what "alack" means,
and I would go look it up if I wasn't so lazy, but I figure that
"alack" means "The mortal dread that comes from
having a central bank, a fiat currency and a fractional reserve
banking system, none of which is mentioned in the Constitution
and which, in fact, the Founding Fathers discussed many, many
times, and always ended up rejecting all of them, and for damn
good reasons, too!"
Okay, confession time. I got curious myself as to what "alack"
means, and so I made the ultimate sacrifice and walked all the
way over there and looked it up. It is used as "an exclamation
of sorrow, regret or dismay." And all of this is good to
know the next time the police want to know why you are standing
outside of the Federal Reserve making rude noises, acting like
a lunatic idiot and smelling like a pig. And because you read
this Gnazzo essay, you can easily show the police that
if they REALLY wanted 'To Serve and Protect' then they would
help me shoot out the windows of the Federal Reserve until the
economic terrorists inside get a little alack of their own! You
hear me, Greenspan? You're gonna get some alack! Lots of alack!
So, anyway, I am reading along, minding my own business, and
as I am reading, my lips are moving and I am asking her "What's
this word?" and she says "See". And then I ask
her "What is this word?" and she says "Spot".
And then I ask "What is this word?" and she says "Run,"
and then I ask "What does this say?" and she says "See
Spot Run. Run, Spot, Run! Look, Jane, look! See Spot, Run! Run,
Jane, Run!" and I don't want to give too much of the plot
away, because the book is terrific and I couldn't put it down,
but later a cat name Puff comes along and there a lot more running.
And while I am reading, minding my own business, like I said,
I was apparently making a slight, barely audible smacking-type
sound that is quite irritating to some people, and the next thing
I know my wife is saying "Darling, I hate to disturb you,
but that lip-smacking is disturbing my pounding headache, and
I am in great pain. Could you please, please stop reading for
a just a few minutes, my darling dearest? Please? Pretty please?"
and since I am The Mogambo, I naturally I respond by telling
her "Shut your hole, ya crazy old bag!" and she goes
crying from the room "Boo hoo hoo" which means I've
got about three minutes until she is back in here with that damn
.30-30 deer rifle of hers and there is hot lead flying everywhere
(Blam! Blam! Blam!) and she's screaming "Die, Satan! Die!"
and we're both slipping on spent cartridge cases that are spread
all over the floor and we'll probably trip on them and end up
breaking our necks or something.
So I don't have a lot of time to go into too many details, but
of special interest to me was Article I, Section 9, Clause 1,
which reads "The Migration or Importation of such Persons
as any of the States now existing shall think proper to admit,
shall not be prohibited by the Congress prior to the Year one
thousand eight hundred and eight, but a Tax or duty may be imposed
on such Importation, not exceeding ten dollars for each Person."
Now why did it say ten dollars? They knew all about inflation.
Inflation was nothing new. They knew exactly what caused it.
So why did they fix a fee at ten bucks, knowing that in a hundred
years or two hundred years a ten dollar tax would be silly?
Because they thought that they had forever banished inflation
from the United States, because they had put into the Constitution
that money shall only be of silver and gold,
and so there was no fiat currency, there was no central bank,
and there was no fractional reserve in the banks. Without these,
inflation is almost surely prevented, and thus the country is
Now to show you how an educated guy writes, he says "There
are very important distinctions of detail involved that have
greatly affected our monetary history especially our present
system of irredeemable paper fiat currency incestuously
wedded to its sibling: fractional reserve banking, spawned in
greed nurtured by the lust for power."
- Richard Duncan, author of the book "The Dollar Crisis:
Cause, Consequences and Cures" has a new essay entitled
"Understanding Interest Rates in the Age of Paper Money".
He addressed the paradox that the gargantuan borrowing of every
financial entity in the USA should have caused interest rates
to increase, since there was such a huge demand for people's
money and the competition for that money would have caused interest
rates to rise because the old supply/demand rule says that increased
demand should cause prices (in this case, the price of money)
to go up. But interest rates did NOT go up. Why?
The answer lies in-- you guessed it --because the US Federal
Reserve created so damn much money! So while there is a big demand
for money, everybody in the USA is issuing debt, the damn Fed
and the foreign central banks are creating so damn much money
that there is more than enough new money for everybody to get
as much as they want! And it is so cheap, that insanely low interest
rates are more than enough to turn a profit for the lender, who
borrowed the money to make the loan, and is thus merely living
off the spread! Therefore, interest rates fall!
Specifically, Mr. Duncan says "Today, the interest rate
on the US 10 year Treasury bond is determined primarily by the
relationship between the demand for money from the US Federal
Government and Government Sponsored Enterprises (like Fannie
Mae) and the amount of paper money created by the United States'
trading partners, which, in turn, is generally (but not always)
determined by the size of their trade surplus with the United
"That's why interest rates fell. More paper money is currently
being created as a result of the rapidly expanding US current
account deficit than is needed to fund the budget deficit and
the GSEs' demand for credit. This surfeit of money also explains
why the interest rate spread on corporate bonds over treasuries
is at multi-year lows."
This is not a free lunch, however many jerk politicians or jerk
Federal Reserve people or jerk American economists flap their
lips about it. The price of this monumental mistake, namely printing
all this money and credit, will be paid for, as it always is,
in inflation. And inflation is the one thing that nobody wants.
And the inflation will be measured in Mogambo Misery Units (MMU),
which is simply a moving-average of the number of times per day
that I look at something and say to myself "I sure would
like to buy that spiffy anti-aircraft cannon to shore up the
perimeter defense in the backyard, but the price is now too high!"
And if you want to see the effects that inflation has on people,
as measured in MMUs, ask one of the 50 million Social Security
recipients, now equal to a third of the work force and a quarter
of adults in the whole country, how their recent piddly 2.7%
increase in their monthly benefit is less than how much prices
have gone up. Ask them! Ask them how happy they are to have a
falling standard of living. As a research project for which I
will give extra credit, and so when it comes time to fill out
your report card, maybe some of you will have a chance in hell
of ever getting out of my class, especially you Democrats who
do not believe anything that history says, or anything that textbooks
say, or anything the Mogambo says, and most of you could really
use this extra credit, and if you think I am talking about you
then I am probably talking to you, so listen up. Ask them to
give you a list of things that they had to give up, or are giving
up, because they can't afford them anymore. Then compare that
to how they like the prospect of having a similarly falling standard
of living for the rest of their freaking lives! And their children,
too! And their grandchildren too! Go ahead! Ask them!
And even that piddly raise in their Social Security checks is
chicken feed, and the recipients of those checks have been experiencing
a falling standard of living for quite a while now, as explained
by Walter Williams, who writes "Changes made in CPI methodology
during the Clinton administration have understated inflation
significantly, and, through a cumulative effect, have reduced
current social security payments by 30% from where they would
have been otherwise. That means Social Security checks would
be 43% higher."
So the latest fall in the standard of living for seniors is just
a little icing on their cake, as they are already down by 43%!
Hahaha! Stupid old people! They are the ones who always vote
en masse, and look who they voted for! The same elected bozos,
time after time! And look what these elected officials did to
the seniors who elected them! Hahaha! How's that old saying go?
"Getting your just desserts"?
"In like manner, anyone involved in commerce, who relies
on receiving payments adjusted for the CPI, has been similarly
damaged." Well, that is certainly true of The Mogambo, who
is usually involved in that part of commerce that says "Sorry,
dude, we didn't make any money this month, so we can't pay you,
and even if we did make any money we wouldn't pay you because
we don't like you" and the reason they didn't make any money
is that their costs are all suddenly rising.
But all is not lost! For every winner there has to be a loser,
so that the cosmic yin-yang works out, and he says "On the
other side, if your are making payments based on the CPI (i.e.,
the federal government), you are making out like a bandit."
See? Don't you just love how this whole balancing of karma keeps
things in neutral? Now you see the cold, hard logic of it all.
And Alan Greenspan and Congress are in the heart of it.
And speaking of Alan Greenspan, Bob Hoye has his new essay on
the Prudent Bear website, and its title is "Central Banking
is a Speculation". In it he criticizes "the Fed's reckless
accommodation of Wall Street during the 'Roaring Twenties' ",
and says that this reckless accommodation "was competently
criticized by no other than Alan Greenspan in some essays published
in The Objectivist in 1966. Then, as chairman, he has presided
over the most reckless credit expansion by the senior central
bank since the Bank of England 'accommodated' the notorious South
Sea Bubble of 1720."
- Eric Cotton thinks that I unfairly use the word "jackass"
in a pejorative sense, but that the jackass is, indeed, a fine
and trusty animal, whereas Alan Greenspan and Congresspersons
are neither. Furthermore, the jackass will carry you around and
give you nice little ride, but the Congressional jerk rides YOUR
back and wants you to give THEM a free ride! "As an Arizona
native," he says "I can testify to the fact that the
thickheaded jackass is hard to deal with, but he is not as stupid
as, let's say, a Fed Governor."
He suggests "Perhaps we could start using the term 'greenspan'
in place of 'jackass' ... as in, 'Hey, why don't you use your
turn signal, you greenspan!', or 'I heard Jim got himself one
of those Credit Cards that draws money directly out of his 401K
- what a greenspan!' Also, comparing a jackass to Greenspan actually
runs the risk of COMPLEMENTING Greenspan. People might start
to think of him as a sturdy, floppy-eared workmate rather than
a festering, fetid boil on the butt of economics."
Well, I thought I was the Grand Prize Winner in the category
of "Disrespectful and Tasteless Remarks Directed At A Fed
Official, Congressman, Congresswoman or Mutant Congressthing,"
but I gotta say that this Eric dude is some pretty stiff competition.
- Tom Dyson of Daily Reckoning, website of some of the finest
writing in economics-dom, is also in total agreement with me
on this inflation thing (which is so much nicer than when people
say "Mogambo is a stupid jerk" and then they go on
to prove it, and then everybody knows that I have no idea what
in the hell I am talking about half the time), writes "In
economics, they teach you that inflation benefits debtors and
hurts creditors. Not in the real world. Inflation makes everyone
suffer." This is exactly right, because nobody is a pure
debtor or pure creditor. Everybody has to pay the higher prices
The Daily Reckoning site is also who reported the news to me
that the Financial Times newspaper "broke the story of the
Treasury note auction and the vanishing foreigners." This
sounds like a murder mystery to me, and I can almost hear the
Perry Mason theme tune, da daaaaah, da dah! The Case of The Vanishing
Foreigners. Well, not really vanishing, but just not being around
when the call goes out, "Who wants to buy some fresh Treasury
The spooky, Twilight Zone Meets The End Of The World atmosphere
becomes apparent when Wall Street traders, not foreigners, had
to buy almost all debt at the entire auction of American government
debt. The head of treasury trading at Barclays Capital, who would
seem to be a guy who can tell when things are not quite right,
says "I don't think I've ever seen this before."
Mr. Dyson goes on to say "Here's the numerical evidence:
In August, foreign private investors actually sold $4.4 billion
more in Treasury bonds and notes than they bought, the first
time in a year that net foreign purchases were negative."
Not only that, but "That followed a 20 percent decline in
July that shrunk net foreign purchases to $18.3 billion."
And not only THAT, but "Bond purchases by foreign central
banks also dropped sharply in July, falling 76 percent, to $4.1
billion. A rebound in August brought them back to $19.1 billion."
And not only THAT, but "Foreign purchases of stocks are
down as well, going from net purchases of $9.7 billion in July
to a net sell-off of $2.1 billion in August."
Not only THAT, but the August monthly capital inflow dropped
from $63 billion to $59 billion, and foreign private investments
that same month dropped from $72 billion all the way down to
a piddly $37 billion.
So what does this have to do with anything, and why am I quoting
this Dyson character when I should be doing a little real work
around here? Because he mentions something that I think is a
good investment right now, and that is gold.
"At the beginning of 2000, it took 40 ounces of gold to buy the Dow. Now, it's down to 23.8... the
long run average is around ten. So, allowing for some overreaction,
a regression to the mean should roughly cut the Dow in half and
double the price of gold."
And speaking of gold, Richard Russell, he of Dow Theory
Letter fame, gets asked where to invest money, and he replies
"What to do? For most subscribers I'd recommend cash (money
market funds, T-bills, T-notes) and gold
and gold shares."
And Ed Giobbe, president of ESG Capital Management in New York,
is quoted that he thinks that over the long-term, "gold will moving much higher -- to as much as $500
an ounce next year and potentially even $1,000 an ounce in two
to three years."
And this will almost certainly be because the dollar will be
so worthless, in terms of buying power.
** The Mogambo Sez: A week from today we vote for a President,
although our fate was sealed the day Alan Greenspan took over
the Federal Reserve.
October 26, 2004
The Daily Reckoning
is general partner and C.O.O. for Smith Consultant Group, serving
the financial and medical communities, and the writer/publisher
of the Mogambo Guru economic newsletter, an avocational exercise
the better to heap disrespect on those who desperately deserve
it. The Mogambo Guru is quoted frequently in Barron's, The
and other fine publications.