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Greenspan, not a sturdy, floppy-eared workmate

Richard Daughty

The Daily Reckoning
...the angriest guy in economics
The Mogambo Guru
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!" I say.

- 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 the list!

When Mr. McTeer uses the soot
hing 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, too.

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 prove it.

"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 indeed.

- 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.

- There 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 saved.

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 States.

"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 of inflation.

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 debt?"

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
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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