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The horrible New Deal quagmire

Richard Daughty
The Mogambo Guru
Posted December 19, 2003

The only real action in the Fed system is foreigners buying another huge chunk of US debt. Bank assets and banks savings are still slowly going down and down. The monetary base seems to be on a plateau. The money supply, as evidenced by the three M's, are acting weird, or as Bill Bonner at the Daily Reckoning put it, "America's money supply - M3 - is actually falling. It dropped 0.3% in November. Cause: unclear. Effect: unknown. Importance: unsure. Significance: ominous."

The Treasury, too, was strangely quiet, perhaps because the world's financial system is still gagging up blood from the forced feeding of having enormous amounts of American debt - and foreign debt too, for that matter! - crammed down its throat for the last few weeks, and months, and years. Or maybe they heard that at this time of year that not a creature was stirring, not even a mouse, and since they are all a bunch of rats, which gets my gratuitous snide remark about the government, including the Fed, out of the way.

An essay entitled "The Five Years 'Til Tragedy Rule" by Steve Sjuggerud is one of those rare essays where some new bit of economics arcana comes to light, and it makes me scratch my head and say, "Hey! Now I did not know that! Nor did I suspect that! Nor did I have any information whatsoever that this relationship exists, but now that it has been revealed to me by the brilliant Mr. Sjuggerud, I gotta say THAT'S interesting! And I am going to write that down somewhere so that I don't forget it, and in the meantime let's order a pizza to celebrate our good fortune!"

He goes on to explain, "In short, after a major stock market peak, there are five years until tragedy...five years until a dollar crisis - and soaring commodity prices." My keenly attuned ears perk up at the sound of prices that are "soaring," and yours should be, too. The reason is that there DOES seem to be a cyclical thing between making fortunes in financial assets and then making fortunes in commodity assets, and then financial assets, and then commodity assets, back and forth, round and round. And thus, the pizza-sharpened Mind of the Mogambo instantly extrapolates between our long bull market in financial assets, which is one of the longest and biggest on record, and the post-boom recession, which was the mildest on record, as regards stock prices and the usual attendant aggregate misery. So like a lightning bolt from the blue, the computer-like Mind of the Mogambo figures that the era of financial assets is coming to a close, as episodes of financial assets always do, and that the cyclical thing with commodities is beginning, as it always does. All I needed was the timing. And now, thanks to the remarkable Mr. Sjuggerud, we have it. Five years.

So where are we in that whole timeframe continuum? Well, in terms of prices from the middle of 2000, the height of the stock boom, to the end of 2003, which represents the "here and now," is a little over three years.

He even relates it to historical parallels, which are usually eerie, and normally I would refrain from even mentioning so scary a subject, since I am such a high-class kind of dude, but he relates it to FDR. I am intrigued, as I happen to despise FDR with some bizarre kind of irrational, gut-level, overwhelming hatred that I certainly can't explain, and nobody else can either, even though they call laughably themselves "professionals" and charge the big bucks, but they are all pretty sure that these new pills will be able to keep it under control whatever in the hell it is, but I am always interested in what people write about this FDR person. And you will notice by the way that I pronounced "person," dripping with snarling, sarcastic and disrespectful venomous loathing that I am on the verge of one of my "episodes." For some reason that I cannot fathom, Americans seem to LOVE this horrible guy and how everything is always "We have nothing to fear but fear itself," and how this FDR guy single-handedly mired America in the Great Depression and heroically delivered us into the belly of the communism monster, which is now regarded as a Good Thing (GT)! And, to be fair, if he were alive today, I am sure that he would despise me right back, that smarmy little commie bastard, and he'd have the FBI poking around in my life even more than they are already doing. But Mr. Sjuggerud says, instead, "FDR wanted to create inflation. It was a crazy idea. Never before had a country attacked its own currency for the purpose of creating inflation and rescuing debtors."

Hey! Earth to Commander Steve! Come in, Commander Steve! We are doing it again, and it is STILL crazy!! In fact, it is bigger and crazier than ever! And if what happened the last time is any indication, it will not, repeat NOT, be a pretty sight. Of course, just to show you how low the Democrats can actually sink, Hillary Clinton is running around wailing about how Bush wants to undo the New Deal that the nasty little socialist/communist FDR cooked up. So if you run into Hillary, tell her that if Bush is not up to the task of dismantling the horrible New Deal quagmire that her precious little FDR saddled us with, that the Mogambo is ready and willing to do it for him.

Mr. Sjuggerud continues, and drops that nice little pearl of wisdom in our laps, "By coincidence or not, each major stock market peak of the 20th Century was followed by a crash in the U.S. dollar five years later. People who kept their savings in dollars saw the purchasing power of their savings shrink substantially. Yet those who invested in commodities made fortunes." Ergo, the Five Years 'Til Tragedy Rule.

There's that delicious phrase again! "Made fortunes!" I love the sound of that! It is kind of musical! Well, let me say that it is music to MY ears, anyway, because although I have never had a fortune, I think it would be very nice to have one, because all the people who DO have fortunes seem to enjoy them immensely. And so I would like to have one, too. So this Sjuggerud guy thinks that fortunes will be made in commodities, eh? Hey! What a coincidence! It is the same thing that the Mogambo has been saying all along!

The brilliant dudes over at the Daily Reckoning website wrote "On Monday, we took a look at the Bureau of much be-Labored Statistics website and discovered - right there in liquid crystals - that if you count all the discouraged, disparaged and disgusted workers, the rate of unemployment actually rose to 9.7% in November... rather than falling to 5.9% as the financial media has been so keen to report."

Did he say discouraged, disparaged and disgusted workers? That's alliterative! And so perfectly done that I can almost hear some comely country-western singer warbling sweetly about being "discouraged, disparaged and disgusted," another brave and beautiful woman done wrong, breaking your heart with every warbled syllable, and then you end up ordering another beer, and then another, and then another, and pretty soon you are disgusted AND disgusting, because you are trying to drown in alcohol your growing realization that you are one of those 9.7% who is living a life of proverbial quiet desperation. Well, I do, anyway.

Economist Gary Shilling said in Forbes "I hate to be the bearer of bad tidings, but if you expect the economy and the market to keep climbing next year, you will be sorely disappointed. The sober truth is that cutting costs is the only route to profit salvation these days." Well, nothing new there, eh? There has never been a time, as far as I have been able to glean from the little, tiny bit that I have read about economics in my whole freaking life, when increasing costs was EVER a road to economic salvation. So I am not sure, but I am fairly certain that the immutable laws of economics have not changed that much, and my snotty attitude reveals that I am pouncing on the poor guy as soon as the words are out of his mouth.

But then we see that the old Mad Mogambo was a little quick on the trigger, and we note with chagrin that what he was getting ready to say, before I rudely interrupted him with my loud mouth, was "Most costs, directly, or indirectly, are labor. And that means more layoffs." And that is the rub of it! That is the incandescent, radiant point of the whole thing! Jobs!

And I say, in my memorable adaptation of the Mexican bandit in "The Treasure of the Sierra Madre," there ain't going to be no stinking jobs. Today's jobs are all in services, right? And most services are one-on-one, right? I mean, you sit in the barber's chair and he performs a service on your hair, not too much off the top, and keep it long and perfectly combed over my bald spot or NO TIP! Or the services provided by the person who is selling me cigars and adults-only magazines down at the newsstand is one-on-one. Or the roofer. Or the guy who fixes your complicated car, an expensive-to-repair, Money Pit From Automotive Hell millstone around your neck. Services services services! But there is no other way for these guys to make any money, unless it comes from me, right?

So how much do you silly people think I make, that I can pay all these guys some fabulous "living wage," and their overheads, and 401(k) plans, and health insurance premiums, and a whole army of people they have to hire, such as daycare workers for the children and tax-form preparers, and myriad liability insurance agents, and on and on and on, as they purchase services so that they can provide me with services?

No, the only way I can pay more for services is if I, the guy who pays everything, the final consumer, the last stop on the line, the All The Bucks Come From Here person, make more money! And I ain't making more money! And I ain't GONNA make any more money! Because anything that I can do, or will do, or would like to do, or could do, or will sink to doing as a last ditch emergency to stave off starvation, is nowadays much more cheaply done by some Chinese dude, or some Indian dude, or some Philippino dude, or some Hungarian dude, or some Polish dude, or some Brazilian dude, or some Nigerian dude, or dudes from almost anyplace you can name on the globe, who are all willing - nay eager! - to do it for mere pennies on the dollar, and steal my job and thus kick me out into the street to starve in the gutter, and then they will walk by with their nasty foreign clothes and talking in their nasty foreign languages and pretend, in their nasty little foreign way with their nasty little foreign noses up in the air, that they don't even notice me lying there in the street, trying to beg a few measly pennies to feed my starving children! And now you know why I refer to these people as "foreign devils."

So only a company run by 1) actual idiots or 2) the mentally ill would hire Americans, which is the archetypical "me," to do anything that didn't require actual, physical presence, when they could hire one of the aforementioned foreign devils to do it, for less! A lot less! And with a gigantically reduced level of hassle, too, since their governments are not as particular about hassling businesspeople about equal rights, affirmative action, ecology, workplace safety, safety equipment of any kind, insurances, benefits, nag nag nag, blah blah blah, the list goes on and on. So starting a business in America saddles you with the highest costs and exposes you to unlimited liability for things you did not even know you could be held liable for!

And you don't have to take my word on it, as Bloomberg reports "China's factory production grew in November at its fastest pace in nine months, surging as overseas companies move factories there to take advantage of wages less than one-twentieth those in the U.S."

Stephen Roach of Morgan Stanley writes, "Central banks have made the riskiest bets in modern history." He compares the record-low interest rates in Japan, America and Europe that have been engineered by the central banks, versus the humongous government budget deficits, which are, statistics updated by me, 8% in Japan, 5% in America, and 4% in Europe. He then utters what may be one of the most profound statements of the age, or let me change that to Most Profound Insights Of The Modern Age, which is, "The authorities have colluded in currency management in a period of unprecedented external imbalances."

And why would they need to, as he says, collude? Why did he pick the word "collude" instead of, umm, "cooperate?" Because what they are doing is, in the words of an erstwhile vendor of electronic appliances, INSAAAAANNNNNNE! And therefore probably illegal. And if not strictly illegal, then immoral, unethical, and probably a lot more similar adjectives that signify "something bad," and anyway the whole point is that competent, honest governments do not do these kinds of things. That is why they now "collude." And by which I screech, with a strange kind of circular logic, that the colluding governments are thus proved incompetent and dishonest.

Doug Noland points out that the central bank of China was a net seller of U.S. government debt in September. This is significant. I am not sure if it is significant in the way of "Hey! Look! That huge meteor is heading right at us!" or some other lesser level of significance, but if the Chinese powerhouse is getting out of US debt, then all the other not-so-powerhouse countries had better start getting with the program, too. And this makes the selling impetus greater.

But in a related note, there is the persistent rumor that China is buying oil to stockpile. And, to tell you the truth, I would be doing the same thing if I was running China, which I am not, but am willing to entertain an offer, because I think it would be a lot of fun to run China, and will do the job for a lot less than they probably figure. And I could do a lot of it right here at home, and in that way nobody will ever have to watch me eat, because trust me when I say that nobody wants to see that.

But the point is that oil is priced in dollars. The yuan is priced in dollars. Dollars have been going down. Therefore the yuan is extraordinarily cheap right now. That makes it valuable. The dollar is still overpriced. That makes the dollar less valuable. And remember Greshams' Law? It says that the less-valuable currency will be spent, and the more-valuable currency will get hoarded. Ergo, get rid of those damn depreciating dollars to buy something that you are going to need in the future. If they used those depreciating dollars to buy oil, they will be accruing stockpiles of it at a significant long-term discount that will pay off big in the future. And a lot of gold has been going somewhere, too, which is another thing that I would advise China to do if I was running China, which I am not, as we already covered, but would love to have the job, as we also already covered.

In a similar vein, or maybe even the same vein, Deborah Brewster, writing for the Financial Times on their website FT.com, writes "Foreign money flowing into the US stock market has slowed to a trickle and much of it appears to be heading back to its native lands rather than looking for fresh opportunities elsewhere." By elsewhere, I assume she means "not the USA."

She goes on to say that most of the buying is from foreign governments, which is filled to the brim with the foreign devils I warned you about earlier. But that the private-sector buyers are NOT buying US debt, even though they are also, in case you had a lapse of attention, actually just another group of foreign devils. If I close my eyes real tight and be real quiet, I can almost hear you thinking to yourself "Hmmm!" Or maybe that is what I am thinking to myself. Well, ONE of us is thinking it, anyway.

James Grant, in an article in Forbes magazine, writes an essay he calls, "The Case for Silver," and he writes, "But the major looming use for silver is the ancient monetary one. The metal that used to be money will serve as a store of value once again." Didja get that part about how he says silver will be used as money again? Well, he didn't say "money" but rather as a "store of value." Except, and I emphasize this because it WILL be on the final exam, that IS the very definition of money! That is, if you can get people to accept it as payment for goods and services! Interesting, huh? And if people will not accept silver in exchange for goods and services, because maybe they are allergic to silver, or they have some religious thing about silver, or they are werewolves or something, then you can always, as in anywhere and always, sell it to somebody nearby to get the kind of money that people WILL accept as payment for goods and services. So silver IS money, once-removed.

He goes on to say, "Gold is a better monetary asset than silver, but silver has better supply-and-demand characteristics than gold. Since the Silver Institute began keeping track in 1990, silver consumption has annually outpaced silver production, and not by a little. The cumulative 13-year difference adds up to 1 billion ounces." Which is, I helpfully add, a lot. And when demand outpaces supply, especially over the long term, then historically prices rise.

This also seems to square with the sentiments of Ted Butler, who writes over at the Market Update newsletter of Investment Rarities, Inc. Anyway, Mr. Butler says that, wait a minute and I will get you the actual quote, "(Silver) is the cheapest item in the investment universe, with no exception," who then goes on to lay out a pretty convincing case to prove it.

The December 10 WSJ in an article entitled "Fed leaves Rates At 1%, But Signals Shift on Inflation," we read this remarkable sentence: "Economists expect the economy to grow a healthy 4.4% next year." Well, I don't know who these people are that are being called "economists" and whose idiotic opinions are being quoted in the article, but I say that anybody who thinks that the economy will grow "a healthy 4.4%" is a world-class idiot, and believe me when I say that, as a world-class idiot myself, I am in a position to know.

Because a 4.4% growth in the economy at the same time that the government is running a 4.9% (as a percentage of GDP) budget deficit is NOT healthy by any stretch of the imagination, and my imagination is so huge (audience shouts out "How huge, Mogambo?") that I can imagine that women actually spitting on me, kicking me in the groin, and spraying Mace in my eyes is their cute little way of flirting with me, as alleged in official court documents.

These "economists," I assume, are the same lackluster dimwits who are the "they" in the follow-up sentence, "They also expect inflation excluding food and energy to rise half a percentage point, to 1.8%." This proves two things at once, showing a huge increase in productivity, because most of us can only prove one thing at once. One is that inflation, which is already higher than 1.8%, cannot "rise" to 1.8%, by mathematical imperative. And the other follows naturally, namely that American economists are obviously numerically illiterate.

But in the same issue of the Journal we have John Lipsky, who is chief economist for JP Morgan, on the op-ed page writing an article entitled "Remember Inflation?" He writes, "The Fed is going to wait longer than investors currently anticipate before raising rates. But once inflation risks begin to rise, the Fed will act quickly to withdraw the existing stimulus." Hahaha! I am laughing like a hyena here, and drool is actually dripping down my chin in my hysteria and making a wet spot in my lap, which looks like I have had an "accident," but I have not, but my explanation only sparks a fierce debate about whether or not drool stains are less revolting than urine stains. But saving that for another day, every single indicator of inflation is rising, and HAS been rising, and yet the Fed is still holding interest rates to absurd lows! So what kind of jerk does he think I am that I would believe that the Fed would act with any haste, at ANY level of inflation, when they are already proving that they have absolutely no interest in inflation, OR its deleterious effects, whatsoever, and in fact, and this is the important point, they are doing everything they can to create MORE inflation? At that I abruptly stop laughing.

Later on in the same article, Mr. Lipsky writes "Central bankers became convinced that maintaining low and stable inflation produces the best possible outcomes." Huh? I mean, what planet am I on? Is this still early twenty-first century Earth or not? If so, then the damnable Fed is on record, Greenspan is on record, Bernanke is on record, and I assume that even the mailroom clerks at the Fed are on record as saying that they WANT higher inflation! They are screaming loud and clear that they do NOT want, as Mr. Lipsky says, "low and stable inflation!" That is the whole freaking point of their monetary insanity! And yet, here is this Lipsky fella telling me the exact opposite? The mind reels, and I stagger and collapse into a chair, clutching my chest and gasping for air! I sense the world fading to black, as black as my mood, and as I mouth the words "Goodbye, cruel world!" I suddenly remember, and am cheered, that I don't have any money under management at JP Morgan.

I mean, this is all at the exact same time as Bloomberg reports, "The Reuters CRB Index, an indicator that tracks 17 different commodities, from live cattle to crude oil, has risen 11 percent this year. Gold is $407 an ounce, up 17 percent over the past year. Copper is up 39 percent, oil 31 percent, and natural gas prices are 51 percent higher than at the end of October. In addition, the dollar dropped to a record $1.22 against the euro and fell to its lowest in more than a decade versus the British pound yesterday. That helps boosts the price of gold and other dollar-priced commodities on international markets and also makes imported goods more costly."

So while us bozos out here in the real world still live in our fantasy world, where rising prices is evidence of inflation, the Fed says no. They figure that productivity, output per hour of labor, is rising, offsetting the rise in raw materials. "So while the supply of some commodities may be temporarily scarce, raising their price, the supply - and price - of workers is not. That enables companies to absorb the commodity price increases without passing price increases on to consumers."

To which I say, hahahahaha! You guys crack me up! Hahahaha!

And then right below that, on the same page, we have yet another piece of ridiculous fluff, this time by Joshua B. Bolten, who is the director the Office of Management and Budget, which is apparently an office of government wonks that is used to employ mental defectives as another affirmative action-type thing. His asinine screed is entitled "We Can Cut the Deficit in Half."

First off, we have Mr. Bolten tracing the "roots of today's deficits" to the economic slowdown as Bush took office, three freaking years ago. Next, he implies that deficits are not important as Bush's policies, namely national security. Wow! Talk about your government-speak! Fiscal rectitude is not as important as policy!

So here we have another government spin-meister saying that deficits don't matter as long as it is paying for something nifty and wonderful, as when he explains how three-quarters of the deficits are directly related to the post 9/11 "enhanced homeland security and the global war on terror," as if somehow this justifies immense budget deficits, as this bottomless pit of spending madness will somehow metamorphose into healthy economic growth or something.

Then Bolten, and notice that I have dropped the "Mr." because I am obviously working myself into one of my foul moods and I am this far away (let the record show that I am holding up my thumb and forefinger, and that they are almost touching each other) from calling him a lowlife insect, probably something that crawls around in sewers, then says that the budget deficit is "entirely manageable, if we continue the president's strong pro-growth economic policies and sound fiscal restraint."

The audience spontaneously laughs at my exaggerated double-take, my head snapping around comically and my hair standing straight up into the air - fweep! - as I perfectly portray a man who cannot believe what he just heard. Restraint? This is the same guy who has run up the national debt by $1.3 trillion dollars in three short years! This is the same guy who is running a budget deficit of 4.9% of GDP! This is the same guy who has not vetoed a single spending bill in the entire three years of his administration! "Not one?" you ask in that darling and delightful way that melts my heart. "Not one lousy veto of any spending bill?" Nope!

And this is, and you would laugh if you saw me because I am comically rubbing my bloodshot eyes in stunned disbelief at what I am hearing, what the author calls "fiscal restraint?" Huh? Did he say "fiscal restraint?" Did he really say "fiscal restraint?" And right around in here someplace is where court-appointed experts figure that I was overcome with emotion, and, compelled by forces that I could neither comprehend nor control, was propelled to action. I grab a fully-loaded AK-47 that just, you know, happened to be leaning against the desk, and jump up on that selfsame desk and scream at the top of my lungs, "Did he say fiscal freaking RESTRAINT? I can't believe my ears! But I thought he said that the President of the United States is showing fiscal freaking restraint! RESTRAINT? You want restraint? I'll show you a little dang-blang restraint!" and I proceed to throw that rifle into full-automatic mode and, holding it down low against my hip like John Wayne storming a machinegun nest on some God-forsaken Pacific island in WWII, proceed to empty an entire banana clip of full-metal jacketed mayhem, shooting out all the lights in the place, plaster exploding off the walls and ceiling, framed pictures shattering in a hail of glass splinters, passersby and process servers ducking for cover, a cascade of smoking empty shell casings beating a tattoo of tinkling sounds as they hit the floor.

Well, at last, the fusillade of gunfire is finished, and the silence that follows is punctuated only by the ringing in my ears and the sound of approaching sirens, and I sink to the floor, spent and exhausted, too weary to even reach for another full clip of ammo. But it isn't really needed, as I am sure that you get my point, which is to demonstrate "restraint."

But the next day, Friday, the Wall Street Journal had an op-ed piece by Brian S. Weebury, entitled "Keeping the Bush Boom Alive." In it, he owns up to the horrific state of the economic world, and says, "Nonetheless, beneath the surface problems are brewing. Government spending is soaring, business regulation is on the rise, and protectionism is gathering some momentum. At the same time, excessively accommodative monetary policy threatens an increase in inflation." Later he reprises that with "Big government and easy money is the perfect recipe for inflation."

And he has some suggestions on how to make this all work out, as if there is anything anyone can do to make it all work out, and I am charmed by his brave self-confidence, and the Mogambo smiles to himself, as if to say, "Ahh, little grasshopper! The sunny optimism of youth! To hear you is to make me remember my own youth, and I smile."

Martin Hutchinson, who writes The Bear's Lair, "If the multiple imbalances currently visible in the U.S. economy result in a substantial downturn, then an inflationary repeat of the 1970s, albeit with somewhat worse growth performance, appears the most likely scenario."

The only thing left to wonder is if the historical record has any instance of "multiple imbalances" that did NOT result in a substantial downturn. Nah. I don't wonder. The answer is no.

Gold Bullion Securities Ltd., which issues shares of ownership of gold bullion, started trading on the London Stock Exchange, in response to investor demand. Closer to home, the popular Central Fund of Canada, for whom I have a warm place in my heart because I happen to know Philip Spicer personally, and who has been officially clocked as having spent more than ten minutes talking to me at a stretch and did not end up screaming that I am the antichrist, which was a nice change of pace, even though I always point out that if you look closely, you can plainly see that the birthmark is NOT "666," but looks more like "686," but anyway the Central Fund also sells shares of ownership of gold and silver, and they have recently announced, with a certain proud fanfare, that they are increasing their holdings by another $60 million in bullion to accommodate wildly increased demand.

In short, there is increased demand for this type of investment, and these guys are providing it. And when demand goes up in the absence of increased supply, doesn't that imply rising prices to equilibrate the imbalance and clear the market?

Joseph Giannone of Reuters reports that sales of stock by corporate insiders hit a new record in November, indicating that they are even more bearish, or that they need the money or something. Time will tell, I suppose. But, and this is the important point I am trying to make, corporate insiders have been heavy sellers of their own stock for a long, long time. But this is, to refresh your memory, a new record in a long string of new records.

Richard Russell, he of the remarkable Dow Theory Letters, says "I believe that the United States and most of the rest of the nations are heading towards monumental events, events that will shake loose the entire monetary and economic systems of the world as we know them." I mention this only because Mr. Russell has been successful at this business for longer than the rest of us, and by a long shot, too, and it is good to listen to an "old pro," because you never know what you are going to learn from the wealth of his accumulated wisdom, and when the old pro starts telling you that a cataclysm is coming this way, maybe we ought to be looking for a tall tree to climb and maybe get out of the way.

Le Metropole, another newsletter that deserves high respect, even though the title of their newsletter is decidedly French-sounding and no self-respecting American can give any frog any respect these days, says that those Chinese dudes are accumulating gold though various secret and various sources. So the Chinese, ever inscrutable, are rumored to be accumulating oil and gold, just like the Mogambo has been suggesting that YOU do. A bunch of dumb chinks listen to the xenophobic Mogambo, but you don't, even though now that I think about it calling them a bunch of dumb chinks is probably not a good idea, since I am pretty sure that those dudes are going to rise up and eat our lunch, so maybe I should refer to them as "Our Asian Overlords" who are listening to the Mogambo?

He is also worried that the existing massive hoard of gold derivative contracts could cause an explosion if the price of it keeps rising, which he likens to neutron bombs.

Speaking of the Chinese, William Pesek, Jr., a columnist for Bloomberg, writes, "China has named its price for playing nice with Washington: Taiwan." Well, China wanting to absorb Taiwan has been a fact of life for, oh, about as long as I can remember. And one powerful country exerting its influence over another is also as old as anyone can remember, especially an economic influence, and doubly especially when one country is a heavily indebted, consumption-addicted wastrel, like us, and the other is the big, young and vigorous up-and-comer getting old enough to swagger around the neighborhood and start getting the hang of extortion on a grander scale, like them.

But then he goes on to say something that I think is right, and if you are looking for a way to invest in China, it makes a lot of sense to me, ceteris paribus-wise, but this is certainly outside of my limited range of expertise, so don't take this as some hotshot investment advice, even though if I was investing these days, which I am not, it is enough to make me say to myself, "Hmmm. China is the play of the future, but I am leery of Chinese protections of my rights, and they even restrict me to ownership of this mutant Class B shares that are created for us Occidental devils. So what do I do if I want to make a gigantic fortune in this China-as-the-future thing, so that I can go back to my next high-school reunion in an expensive limo and gloat and strut around like I am such hot stuff, and have everybody envy ME for awhile, and let them look at me in awe and jealousy at my incredible wealth, instead of that mix of pity and disgust?"

Well, perhaps Mr. Pesek has provided the answer to that question, and offers the clever suggestion that maybe investing money in Taiwan is a backdoor way to invest in China, if you think that Taiwan will be able to withstand Chinese hegemony, and it might for awhile. Long enough to make a few bucks, anyway.

The Mogambo For President campaign is gathering strength, as I have had a 100% increase in support in the last week alone. Last week it was just me voting for me, total votes = one, and this week we have Gordon Rollins AND me voting for me, total votes = two, although I had to offer him the spot of vice-president to get his endorsement. He is naturally aghast that the Mogambo, a recipient of the esteemed Rollins Prize in Economics, did not zoom to the top of the polls at the mere mention of a possible candidacy. Me, too, Gordon. Me, too. Pearls before swine.

In a chilling example of government run amok in the throes of police-state idiocy, we need look no farther than Canada. Canoe, on their website cnews, posts this remarkable article, dateline Ottawa, "Forcing reluctant witnesses to testify at secret court hearings is an acceptable practice in the fight against terrorism and doesn't violate anybody's rights, federal lawyers argued Thursday. 'There is a moral and civic duty on all citizens to aid in enforcing the law,' Justice Department counsel Bernard Laprade told the Supreme Court of Canada. 'Parliament has created a most reasonable regime. . . . There is no constitutionally protected right to refuse to assist police.' "

Fortunately, we have the Bill of Rights here in America, so that ought to protect us for a few weeks against this kind of thing. But one has to wonder for how long beyond that, seeing as how this Laprade fella lives right next door, and his fascist-cooties might waft over to our side of the border on some errant breeze.

It takes a man with a strong will to read Doug Noland's weekly column over at the Prudent Bear website, but I am just a sniveling little gutless coward, and always have been, as far as I can tell. But every once in awhile I like to, as the saying goes, "Take a walk on the wild side," and in one of those rare moods I found myself disregarding doctor's advice and reading Mr. Noland's column. But I rapidly re-evaluated my resolve when Mr. Noland hit me between the eyes with one sentence, "It was another strong week of debt issuance." Government issues, investment grade issues, junk bonds, and asset-backed securities went flying out the door, bought by people strangely eager to take on such low-yielding debt. The total issuance of debt rose to new historical records, to lofty heights that sane people heretofore thought to be impossible, barring mass insanity caused by alien spores from outer space infecting the population.

On the inflation front, he says, "The CRB index jumped 2% this week, with 2-week gains of 5%. The CRB today closed at the highest level since April of 1996 and is up 44% from the lows of October 2001. Please take note that the dollar is at 6 to 7-year lows, gold prices at 6 to 7 year highs, commodity indexes at 6 to 7 year highs, Chinese inflation at 6 to 7 year highs." This is not even to make mention of the headline-making rises in real estate, the permanent double-digit rises in health insurance premiums and co-payments and many, many other things.

With a cold, clinical detachment we notice that our hands are clammy and shaking in fear, dreading the horrors of price inflation, because the entire historical record is pretty explicit that sustained price inflation is The Surefire Superhighway To Hell And Damnation. Then we look into the magic mirror hanging on the wall, and peer into a weird, parallel dimension, and read where the Fed says, in the actual minutes of their big shot Open Market meeting, "The probability of an unwelcome fall in inflation has diminished in recent months and now appears almost equal to that of a rise in inflation."

Mr. Noland then takes a hard gander at the extraordinary efforts of central banks to orchestrate inflation. Rather than acting Mogambo-like and start screaming that it is long past the time when we need to take up flaming torches and storm the offices of the central bankers and send them fleeing into the dark and gloomy forest where they would spent the rest of their nasty little lives eating roots and berries, dodging angry citizens and ravenous wild animals until they die some horrible death that they richly deserve, and their bones bleach white in the sun, he merely says, "It has been a long time since inflation enjoyed such widespread adulation." And it has been a long time since vicious, rabid animals were considered cuddly, which I figure is next on the World Panorama Of Increasing Weirdness.

Some people are wondering why the Federal Reserve would be trying to economically murder the citizens, and it does seem disconcerting, since perversely creating inflation usually condemns the offending nation to economic death. The answer is simplicity itself; too many people and too many institutions owe too much money. The idea is that if money is cheap enough, then the "too many people" who owe the "too much money" will borrow some more money to pay a little bit of money to the people they owe, so that none of them goes bankrupt in the meantime, and eventually prices will rise so high that the amount of money they owe won't seem so onerous.

Perhaps an example will illustrate the point. If I borrow a dollar from you to buy a loaf of bread, and I never pay you back the dollar, but instead keep borrowing a few cents of cheap money to pay you the low interest on that dollar, and I keep doing this year after year after year, then one day I will look at it and realize that I have borrowed and paid you two dollars, when I only borrowed a dollar to begin with! Which I still owe! It looks bad!

But compared to the price of bread in the future, which is five dollars a loaf, it was quite a bargain! So that is how inflation benefits debtors. Especially seeing as how I borrowed against the equity in my house, and so all the interest expense was deductible against my taxes!

But that particular bugbear about inflation is my own nightmare, and Mr. Noland has other fish to fry. In particular, his thrust this week was in looking at a report by the Office of Federal Housing Enterprise Oversight (OFHEO) about Freddie Mac. Writes Mr. Noland, "In the back of my mind, I presumed that Freddie's management had likely been forced into using questionable accounting to counterbalance imperfect and confused accounting regulations that, if used as prescribed, would have misrepresented the true economic situation of the company. What they did was clearly wrong, but I have hesitated to think of it in terms of a malicious fraud. I have been wrong. Freddie Mac... had orchestrated an increasingly sophisticated fraud."

It just proves what Mises and Hazlitt and others, mainly the whole Austrian school of economics, and now Doug Noland, have noticed, namely that at the end of long booms the amount of corruption is off the charts. Ugh

---Mogambo Sez: We are getting to the end of the portfolio fraud season, where the accounts are totaled up, losers are sold and the winners accumulated, and blame and losses are shifted to somebody else, and things are done and mistakes are made, and all of the other slimy things that occur whenever huge amounts of money are involved, because if there are huge amounts of money involved, then the government is not far away, and that is the path to utter ruin, QED.

But soon it will be the new year and a new game, and it will get worse and worse in every material respect, day after day, until some unforeseen event causes the whole thing to just, one day out of the blue, go "bang!" And that, and I am talking about at that exact moment, when you fully comprehend, in a flash of incandescent, total enlightenment, the real value of gold.

And soon after that you will have another epiphany, in which you will comprehend the great value of cannons, and guns, and bows and arrows, and knives, and pitchforks, and machetes, and axes, and slingshots, and clubs, and sharp sticks with which to fend off the mobs of suddenly-impoverished people who ALSO have suddenly comprehended the real value of gold, and they don't have any, and in fact they don't have anything anymore, except debts and creditors hounding them day and night, and then after awhile you get tired of answering the phone and trying to explain to one collection agency after another that if I had any money then I would certainly be happy to send it to them, but as it turns out I don't have any money and so why don't they just stop calling, but they never do, and then I finally just stop answering the phone, and turn off the lights and cower in the corner behind the sofa and use some throw pillows to cover my ears to try and muffle the sound of the phone as it rings and rings and rings and rings...

Richard Daughty
December 17, 2003

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The Mogambo Guru Lives!

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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