 Stop
the presses, America!
Richard Daughty
...the angriest guy in economics
The Mogambo
Guru
Archives
Dec 21, 2005
[image courtesy of cyclesman.com]
-In case you didn't see the news item and accompanying photo
in your local newspaper, my mouth was hanging open in stunned
disbelief and my eyes had this glassy, distant look as the police
were jamming me into the backseat of a police squad car. The
reason for their rudeness was that things are getting so weird
in the world of economics that The Mogambo had one of his "spells"
of Mogambo outrage (SOMO), and there was an unfortunate "incident",
and the police thought that maybe some mental-health professionals
could help me, but I'm screaming at them "They are destroying
your money, you idiot fascist bastards! And you think that some
head-shrinking quack is going to change THAT inescapable fact,
you dimwit Gestapo morons?"
I am not sure what it was, specifically, that set me off, but
for one thing, the trade deficit goes up to a new record, yet
the stock market goes up! Weird! How about that the Federal Reserve
raises the Fed Funds rate by the 13th consecutive quarter-point,
and yet the stock market goes up! Weird AND weird! Hell, even
more bizarrely, the bond market goes up, too! Weird weird WEIRD!
Meanwhile, back at the ranch, the dollar is rolling over while
interest rates are being raised by the central bank, and yet
some knucklehead foreign bozos are increasing their demand for
US bonds, thus driving price up and the imputed yield down? And
then they get hit with an additional whack from the fall in the
value of the dollar? And yet they keep on buying US debt? This
is now totally beyond weird! This is spooky!
And how about the 2-year T-note yielding a quarter-point above
Fed Funds rate? This is insane! The 10-year T-bond is yielding
almost the same? This is insane, too! The yield on the 10-year
bond is less than the freaking Discount Rate, which is the rate
the banks themselves pay to borrow money from the Fed! I shake
my head in disbelief, and my ears comically go flappa-flapp-flappa
as they slap against my head.
These are the kinds of crazy things that makes a guy go "I
gotta get gold and get away from this insanity! And get away
from my wife and kids, too, now that I think about it!"
And then as you are packing your bags you get rattled further
when you see that the action in gold is getting really weird,
too! And the lease rates for gold! Maybe it's just me, but the
way I figure it is that since I am the suspicious and distrustful
type, which comes at the end of a long life (which is, in itself,
just a long series of being screwed over by hucksters, crooks
and liars), my sensitive Mogambo weirdness sense (SMWS) is highly
attuned to things that are the least bit weird, and right now
loud alarm bells from the Mogambo Weird-O-Meter (MWOM) are clanging
and clanging and clanging.
You can take it from me and the whole rest of human history,
that when things get really weird like this, something bad happens
that you are not going to like. For example, all last week my
family was real nice to me. Naturally, I am suspicious. Then,
sure enough, on Thursday, I accidentally bumped the rearview
mirror on my car and it broke off!
But things will continue to get weird, as Puru Saxena at DailyReckoning.com
answers that age-old question "How much debt qualifies for
the use of the term 'ridiculous' "? Well, Mr.
Saxena figures "The total American debt is roughly US$40
trillion whereas the size of its economy is around US$11 trillion.
So, the debt to GDP ratio is over 350%!"
And I will note, for the record, that the debt-to-GDP ratio at
the top of the stock market in 1929 was "merely" 260%
of GDP, which was, until today, America's worst example of rampant
financial stupidity. But we stupid Baby Boomers and our grubby,
mutant children have set a whole new world record in financial
stupidity and insanity.
And, in keeping with that level of ignorance and mental illness,
we now have Ben Bernanke as the new head of the Federal Reserve,
who actually thinks that he can engineer (in "cooperation"
with the Congress, I suppose) a permanent prosperity based upon
constantly-rising asset valuations? Hahahaha! I can hardly believe
that we Americans, who think that we are so smart and so educated
and so sophisticated, could possibly believe that such a thing
was even possible! Hahaha! Buy stocks and they will always rise?
Buy bonds and they will always rise? Buy houses and they will
always rise? Hahaha! But my charming and mirthful Mogambo ways
(CAMMW) are suddenly silenced. A look of cold, dead seriousness
gleams from my blue steel Mogambo eyes (BSME) and you wonder
to yourself "My goodness! What has happened to The Mogambo?"
What has happened to The Mogambo is that he has remembered what
happened in all the rest of the history when some idiot country
tried that inflation crap (and they all did); it did not work
then, and the result was catastrophe. And it will not work now,
and the result will be a bigger catastrophe.
I had planned to use this space for another official Mogambo
rant of outrage (OMROO), about, you know, the Federal Reserve
and Congress, and how they are murdering our money, and, by extension,
us. And, by further extension, everybody else, too. But then
I would get all worked up, angrier and angrier, more and more,
finally escalating into senseless, mindless, gratuitous use of
childish, gutter profanities at high-decibel volumes. And nobody
wants that, especially little kindergarten children who, it turns
out, get REALLY freaked out by it, and there's suddenly a lot
of screaming and crying and pooping in one's pants, and it's
a real ugly mess, and then the children start screaming and crying
and pooping in their pants, too. So instead, I think to myself,
"Perhaps young grasshoppers would be better instructed by
a genteel and refined approach!" Always willing to take
the easy way out, I graciously turn today's lesson over to Robert
Blumen on LewRockwell.com, and his essay entitled "Bernankeism:
Fraud or Menace?"
I admit that I almost didn't read it because I already knew the
answer; Ben Bernanke is menace. And I assume that you, likewise,
skipped over it, too, after seeing the trick question posed in
the title, and thinking to yourself, of course, "Bah! Any
child can see that the man will destroy our money with his insane
theories! But knowing that, I can personally prosper, making
plenty big money (PBM), by buying gold, and buying silver, and
buying oil, and buying damned near any commodity that you can
name! And then I will be rich, rich, rich! And you shall be poor,
poor, poor, and then The Mogambo and I will look out through
the bullet-proof windows of our lovely mansions and watch you,
in your filthy misery and squalor, rooting around in the dirt
for bugs to eat, and we will laugh at you, and bellow 'Welcome
to fiat money hell, you morons!' "
The class is suddenly silenced by my outburst. I am embarrassed,
and take my seat as Mr. Blumen calmly goes on to say "The
first principle of Bernankeism is that it is better to prevent
deflation than to attempt a cure after the disease has set in."
Hahaha! What a chump! Not only do they now teach this idiocy
in our schools, but Ben Bernanke was the chairman of the damned
economics department at Princeton! My hollow laughter drips with
contempt, which is not as easy as it sounds.
If Mr. Bernanke truly DID understand economics, then he would
have known that the REAL "first principle" of economics
is that it is best to prevent the inflation that LEADS to the
deflation!! And note the use of the rare "double exclamation
point" to denote particular emphasis, as befits its importance
in economics.
Likewise, commenting on other areas where I also have no competence
whatsoever, it is likewise NOT true that the First Law of Holes
is "When you find yourself in one, stop digging." The
REAL "First Law of Holes" is "If you don't want
a hole, don't dig one."
But this is not about holes, unless you think Mr. Bernanke is
a real first-class hole, if you get my drift, and if you don't,
then you soon will, as Mr. Blumen goes on to write, "Governor
Bernanke and his accomplices are obsessed with something known
as 'the zero bound problem.' " I interrupt to explain, in
case you ain't heard, that one of the new buzzes in the lucrative
profession of "economics masquerading as a science"
is the obvious notion that you can't loan money at less than
zero percent interest. This is, and always has been, obvious:
There is nothing cheaper beyond "free." This, then,
is the "zero-bound problem." For some reason, this
is now a big freaking deal (BFD) in central bank circles.
Proving my point, he goes on to say "Eight of the fourteen
papers and speeches that I examined deal with this problem either
as their main point or in passing. Bernankeism advises the central
bank to avoid the zero-bound problem by creating a constant state
of pleasant and benign inflation of around 2-3%." As I read
that last sentence, all I could hear was a sizzling sound as
my few remaining brain neurons overloaded. So I am not sure about
this next part, as the phrase "pleasant and benign inflation
of around 2-3%" sort of made my brain freeze up ("urrrkk!")
as my puny little Mogambo mind (PLMM) cannot accept the idea
that anyone, ANYONE, in their right mind would even think, much
less say, much, much less to say in from of witnesses, much,
much, MUCH, MUCH less to declare it to be monetary policy, that
a constant amount of price inflation, OF ANY AMOUNT, is even
benign, must less pleasant!
Working myself into a Mogambo frenzy of outrage (MFOO), I throw
the window up, lean out, and shout "Stop the presses, America!
I, The Mogambo, declare that anyone who would proclaim such an
asinine thing is a dangerous lunatic!" By this time I am
screaming like a wounded banshee in my rage, and neighbors were
soon crashing loudly into the room to wrestle me to the floor
and stuff smelly rags into my mouth, trying to get me to stop
screaming, but which only made me scream louder! Arrgghhh!
And another thing that I was screaming about is how Congress,
the biggest bastion of butthead bozos in the history of the USA
and an embarrassment to themselves, their families and all of
us, just sits there as this horrid little man is telling them
that we are going to have constant, simmering inflation, the
kind where, little by little, month by month, prices creep creep
creep upward, but your income does not. And every month you have
to borrow more money, or give up something else, or cut back
on something else, or reduce your consumption of something else,
and after awhile it starts adding up and up, and then one day
you get down to rationing basic necessities, and you get angry
and scared, and then angrier and scareder.
But we are not here to talk about how I am an angry coward, as
I am tired of hearing it. And while we are talking about it,
I am also tired of hearing how I am an ugly idiot and I stink,
too. So I quickly veer back to the subject and say that Ravi
Batra, who is an economics professor at Southern Methodist University
and author of terrific doom-and-gloom books with terrific titles,
goes beyond the anger and cowardice thing in his new book entitled
"Greenspan's Fraud." Anyway, he ties this all in with
what he calls the Wage Gap, which is the difference between the
rise in wages versus the rise in productivity. Here Mr. Batra
takes it up and says "According to this theory, the rising
wage gap creates exponential growth in debt, which in turn generates
an exponential rise in profits, leading to the share price bubble.
Eventually, debt growth slows, so the demand-supply gap, thus
far hidden by the debt mountain, comes to the surface; profits
plummet and stock markets collapse."
And you can tie that in with Bill Bonner of the DailyReckoning.com
when he correctly notes that borrowing for consumption is the
equivalent of a free lunch to businesses, as everybody gets to
sell stuff to people without first having to pay wages to those
people as workers! Money and sales come out of nowhere! False
profits!
But none of this is in keeping with the current theory of economics,
which is preposterous through and through. So what is this bizarre
new economic theory that allows ever-increasing asset values?
Mr. Blumen explains, "Dr. Bernanke accepts Milton Friedman's
theory of the Great Depression. In the Friedman view, a contraction
of the money supply brought about by loan defaults and then bank
failures turned what would have been an ordinary recession into
the Great Depression. This catastrophe could have been avoided
had Fed inflated sufficiently."
Wow! See how easy this stuff is? All the government has to do,
see, is make so much money available, see, at such low interest
rates, that (are you following me so far?) people can't stop
themselves from borrowing the money and goosing the economy by
producing and/or distributing the goods and services being bought
by the government itself! There is, literally, no upper limit
on the amount of debt that people can, or will, carry!
I am laughing! Hahaha! I laugh because, and this is the important
part, this is freaking insane! How can anyone possibly think,
even for a minute, even for a second, even for a teensy weensy
micro-second, that an economy that has grown because of government
spending and accumulation of massive public and private debts
is going to, one day, magically, be transformed into one that
does NOT depend on government spending and ever-higher debt loads?
Hahahaha! Then where is the money going to come from, moron?
Hahaha! I am laughing my big fat Mogambo butt (BFMB) off here!
Hahaha! Stop! Stop! My sides are hurting from all the laughing!
Hahahaha!
But, wiping the tears from my eyes, I get suddenly very serious
and note that Ben Bernanke, the next chairman of the Federal
Reserve, actually believes this, this, this
(pause
for dramatic effect) stupidity!
He actually does! And he is the next a chairman of the Federal
Reserve! I keep repeating this because my mind refuses to accept
the fact that we Americans, who like to pride ourselves on how
smart we are and how wonderful we are, would do something so,
so, so, so (pause for another dramatic effect) incredibly so,
so, so (a crescendo of a pause) stoooOOOOooopid! The mind screams
"Noooooooo!"
Mr. Blumen doesn't want to answer my question, but instead goes
on to send me screaming from the room by explaining "The
third principle of Bernankeism is the necessity of 'unconventional
measures.' The reader of the Fed's papers and speeches will find
a series of increasingly exotic plans for the dollar. From beginning
to end, these methods range from the merely unsound to the bizarre
and terrifying." Now, I don't know about you, but being
a real coward and crybaby little wuss, I don't like things that
are classified as either bizarre or terrifying. So with real
dread in my voice, I timidly ask "Like what, dude?"
Well, how about, for example, "money rains", whereby
the Fed would "give money away either through directly disbursing
currency to the public or by disbursing it through the banking
system." By this time I am sure your heart is beating like
a trip-hammer, boom boom boom at the very thought of such monetary
sinfulness! Nobody ever needs to work, because the government
will give everybody money to spend!
Then, with this wicked little grin on his face, Mr. Blumen goes
on to say that another scam is "to make money pay a negative
nominal interest rate, by imposing some type of 'carry tax' on
currency and deposits. A tax or fee on Reserve deposits of 1
percent per month, for example, would mean that those deposits,
in effect, pay a nominal interest rate of roughly minus 12 percent."
What?!? And note the use of two different punctuation marks,
where I was trying to be clever and failing miserably, to indicate
a mixture of anger, shock, disbelief, anger, fear, anger, terror,
confusion, some more anger, and the vague, tentative beginnings
of what appears to be jock itch.
But the idea is that you would spend all your money in a fit
of consumption, rather than saving it, because you would be paying
a 12% tax on it if you did! My heart is slamming into my ribs
at the very thought that anyone would actually advance such a
terrifying idea, much less the next chairman of the Federal Reserve.
So, is it any wonder that I strongly advise you to buy gold?
And is it any wonder that gold is doing so well? And is it any
wonder that gold will CONTINUE to go up in the face of this Bernanke
thing?
And it is not just us! It is everybody! Hell (and you can tell
from the plaintive cry in my voice that this is horrifying),
damned near every country in the world is creating lots and lots
of excess money and credit, too! Dan Denning of Strategic Investments
newsletter hears me screaming about this, steps out into the
hall and shuts me up by saying "Gold is rising because of
the fundamental mismanagement of the dollar by Alan Greenspan.
And to be fair, in the club of central bankers who destroy the
purchasing power of their currency, Alan Greenspan has a lot
of company. Their respective tactics and strategies might differ,
but the result is the same: decreased confidence in paper money
and an increased appetite for gold."
And that is why commodities are rising in price and will continue
to rise in price for a long, long time.
So, in light of all of this, it is a given that things are being
manipulated by the government, and you can bet on it. So much
money is in real danger of being lost, so much money that the
entire economy of the world would implode, with bankruptcy and
ruination up and down the line, that you can bet your sweet patootie
that Congress and the Federal Reserve are pulling every string
and are twisting every arm. To expect otherwise is to make The
Mogambo laugh at your naiveté, which is a French word
that implies ignorance, sort of like how Mogambo is a word that
implies "loudmouth know-nothing lunatic stinking pig."
Perhaps Paul Hein on LewRockwell.com said it best when he said
"To bemoan the manipulation of fiat currencies is to bemoan
the fact that north is opposite of south. How could it be otherwise?"
And it just ain't currencies and interest rates, dude! It's also
stocks! And bonds! And gold! And houses! Everything, dude! Everything!
Can it last? In the original Spanish, "No freaking way,
Jose!" So can you make money on this knowledge? Again, in
Spanish, "Si!" How? As George Soros once so famously
said, "Identify the trend whose premise is false, and bet
against it."
And the trend away from gold and the gold standard was a trend
whose premises were false, and those who bet against it made
a lot of money so far, and are going to make a LOT of money in
the near future. And the trend to have central banks constantly
manipulate the markets to bail out its friends is ANOTHER trend
whose premise is false, and again it leads directly to how gold,
cold, hard gold in the hand, is the only friend you have.
- A lot of people are suddenly somewhat distrustful of ETFs and
other gold-storage deals since their investment in the gold stash
may, or may not be, unallocated. In short, owning unallocated
gold is when the investors do not own individual bars of gold,
but the sponsor is the actual owner of the gold, and the investors
own shares of the entire collected stash of gold. Therefore,
the investors are not owners of gold, but are creditors.
Bill W. sent me a relevant paragraph from a description of gold
EFTs, in particular, the Gold Trust. "The Gold Trust's gold
will be stored at a variety of vault locations by the custodian
and its sub-custodians, which creates some risk of fraud regarding
the actual existence of identified bars of gold. This risk does
not exist if an investor takes physical possession of gold, which
is why the more paranoid gold bugs reject ETF gold as a true
investment in gold. Anybody not willing to accept this risk should
avoid Gold Trust units."
He did not mention me by name, for which I am thankful, but being
the epitome of distrustful and paranoid, I naturally take a dim
view of anything that requires me to have trust in someone. So,
is an ETF or other gold custodianship deal a good place to put
ALL your money? No. Some money? Sure! A little here, a little
there is the essence of diversification.
- Did you ever wonder how much money-denominated debt there is
compared to the amount of actual cash? Well, if you have, then
Robert Prechter is the guy for you, as he says "Every bank
account is an I.O.U. for cash, not cash itself. Needless to say,
the $64.3 billion in cash in U.S. bank vaults and at the Fed
is insufficient backing for the 38 trillion dollars worth of
dollar-denominated credit outstanding, not to mention at least
twice that amount in the implied promises of derivatives. The
ratio is about 1 to 600. This ratio has grown exponentially under
the easy-credit policies of the Fed and the banking system."
So, for every dollar of actual money, the banking system has
multiplied it by 600? Hahaha! The things we let banks do! Hahaha!
No wonder we are doomed!
On a slightly different topic, I note that Mr. Prechter agrees
"Von Mises was exactly right: 'There is no means of avoiding
the final collapse of a boom brought about by credit expansion.'
"
Lyndon LaRouche, interviewed in China's People's Daily, does
not mention either Mr. Prechter or me, but obviously agrees with
us, as he is otherwise quoted as saying "Today we Americans
have been exhausted. Our infrastructure has not been replaced.
We have not replaced our power stations. Our railroad system
is dead. Our economy is dead, in whole parts. Our people don't
have the skills they had 20 or 30 years ago.
"We are losing our water systems. We're losing our power
systems. We're losing our transportation systems. We're losing
our health-care systems. All these physical things on which the
prosperity of the economy had depended are now worn out. They're
gone. So we are disintegrating. Europe is disintegrating. We
are a lost nation. We are a failure. Europe is a failure, in
general. So the world economy has failed. We have a tremendous
amount of financial debt that we can never pay. Our rate of production
is collapsing. And therefore we are at a point where the system
is going through a systemic collapse. This is the biggest collapse
in modern history, it is now occurring. And the idiots just deny
it. They just deny it."
How the hell did we get to this point? Well, I knew you were
going to ask me that question, so I was going to launch into
a long and boring discussion about the horrors unleashed by the
Federal Reserve, but at the last minute you have been saved by
Mr. LaRouche, who sums it all up perfectly when he said "It's
collective insanity, mass insanity. It's cultural insanity."
In case you are wondering how I would grade this, I would take
off some serious points for not using an exclamation point. I
mean, cultural insanity does NOT call for an exclamation point?
Hell, even he goes on to say "It's how whole empires disappear.
Suddenly it collapses." Again, no freaking exclamation point!
- Since I am always on the lookout for examples of how inflation
is a terrible thing, Gary North of Reality Check newsletter gives
us a different way of looking at inflation, and writes that "the
price tag for a new Rolls in 1958 was $13,550."
Hahaha! But this is not about the headaches of the rich, but
about how inflation was such a killer-diller. He writes, "If
I were going to do a book on the Federal Reserve System, I might
consider this headline: 'At 5% inflation per year, the loudest
noise in this fiat money system is the screaming of widows and
orphans'." Not to mention retirees on fixed pensions, other
annuitants, and the people who have NO income. Now all their
plights are made worse by inflation.
And maybe it is not just us paranoid whackoid lunatics out here
who are accumulating gold, because GoldWatch newsletter says
that "we can now confirm the Germany's government as well
as its Bundesbank President does not wish to sell gold whatsoever!
This has to influence other Central Banks, who were previously
inclined to sell. The tide is turning!"
- I had an interesting email from a guy who says that the drop
in Consumer Installment Debt was due to write-offs at the banks,
as all those overly-indebted people rushed to declare bankruptcy
before the laws changed to make it harder to walk away from debts.
And more expensive. An interesting tidbit, methinks.
- Chris P. says "I saw a good bumper sticker yesterday.
It read, 'Stupid SHOULD be painful'. " Hahaha! It usually
is! But if you are talking about being stupid about economics,
then trust me, Chris; it will be painful! Very! And for the guys
who are the most stupid of all (we Americans) it will be the
most painful of all! It's just that you can't get all of that
on a bumper sticker.
- If you are starting to think that maybe the stock market is
the least bit enticing, then listen to John Hussman of the Hussman
Funds, who has taken a look at what happens to stock markets
after periods of the Federal Reserve raising or lowering interest
rates. He writes "when favorable valuation meets favorable
market action (even if you restrict market action to Fed-controlled
rates only), you get some amazingly strong outcomes." In
this case, "favorable valuation" means a price-to-earnings
multiple of less than 12. The P/E ratio for the SP500 is currently
over 19.
"There is, of course," he goes on to say, "a flipside
to that story. If you look at periods where the price/peak earnings
multiple was 16 or higher on the S&P 500, the final rate
hike of a tightening cycle was actually associated with losses
on an annualized total return basis, averaging -7.18% over the
following 6 months, -9.94% over the following 12 months, and
-5.87% over the following 18 months." So where are we now,
and should you be putting money into the stock market? "Given
the current multiple of 19 times peak earnings on the S&P
500, this would be the relevant set of comparisons even if the
latest rate hike was the final one." Which it won't be,
which means that interest rates are still heading up, and so
this whole discussion about what happen at the end of rate hikes
is waaayyyy premature. But what is the essential Mogambo lesson
(EML) to be learned? Buying stocks at these idiotic high prices
is almost certainly, almost assuredly, almost definitely, almost
guaranteed to be a bad, bad idea (BBI).
And yet people buying bonds at these absurdly low yields is another
BBI, because when rates rise, bond prices fall.
And if you want to share a recurring Mogambo nightmare (RMN),
keep thinking about how everyone's retirement fund accounts are
almost certainly buying common stocks and/or bonds with every
tick of the clock. Ugh.
***Mogambo sez: No news is good news, and there is nothing
new in the Mogambo Retirement Portfolio To Amazing Wealth (MRPTAW);
keep accumulating oil, gold and silver, and things related to
them. The recent declines in prices is just a benevolent Lady
Luck being very nice to you, so that you can leisurely walk over
and pick some of these things up at bargain prices. Don't be
a chump. Do it!
Dec 21, 2005
Richard Daughty
email: RichardSmithGroup@verizon.net
 Daughty
Archives
Provided as a courtesy of Agora Publishing and 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.
Recent Gold/Silver/$$$ essays at 321gold:
May 07 Gold Looks Great & Silver Is Superb Stewart Thomson 321gold
May 07 Why Inflation is Going Nowhere Clif Droke 321gold
May 06 Gold Sector: The Early Stages of a Multi-Year Bull Run Bob Hoye 321gold
May 03 Gold Stocks: Bulls Have A Slight Edge Morris Hubbartt 321gold
May 03 Gold's Pullback and Miners Adam Hamilton 321gold
Apr 30 Gold Stocks: A Pause With Grace Stewart Thomson 321gold
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