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December 20, 2006

E-Economic Newsletter
by The Mogambo Guru

Provided as a courtesy of Agora Publishing and DailyReckoning.com.

-- Things economic are not making any sense at all anymore, and so I naturally deduced that is because I have committed another accidental "medication error", either by taking too many of these pills or too few of those, and the only smart thing to do was start over with a handful of each, and wash the whole thing down with some bourbon to get things really moving. I'm sorry to report that it didn't help; things are still strange, only more blurred. And kind of spinning around, too.

But still weird, as, for instance, foreign central banks bought up a cool $17.7 billion in US government and agency debt last week, and stuffed it into their account at the Fed. Nice piece of change!

And at the exact time that the government desperately needs the stock, bond markets and housing markets to zoom (so as to lock in the glut of taxable profits that the Fed's explosion of money and credit created), Total Fed Credit fell by $4.7 billion. Pretty weird! But they bought up $2 billion in government debt, just to keep meddling and give themselves something to do all day, I suppose. But even weirder, the national debt suddenly went down by over $46 billion in the last week!

And then, as if things couldn't get weirder, the Bureau of Labor Statistics' new CPI index of inflation came out, and through (I assume) the miracle of lying through their stinking teeth, said that inflation is now zero!

I was steeling myself to delve into the report to both a) see how they explained this amazing development, and b) hopefully find about a zillion idiotic things that they have done/ not done/ assumed/ ignored/ glossed over/ made up/ lied about to arrive at such a laughable conclusion, all of which sounds like (I am sorry to say) actual work.

But then I remembered that by doing so I could then better heap loathing disrespect and utter contempt on them, which would be fun! In such an approach-avoidance situation, I am, of course, doing nothing except sitting, and brooding, and being sullen about the prospect of doing real work for a change.

Luckily for me, Tony Cherniawski, of the Practical Investor newsletter, is not anything like me, and is not (as my supervisor laconically described me in my last Annual Employee Evaluation) a "Lazy, worthless piece of human garbage." Mr. Cherniawski, without being forced to examine the actual report by a sadistic, slave-driving, nit-picking boss ("Is it done yet? Is it done yet? Is it freaking done yet, you stupid Mogambo moron (SMM)?" until I am sick of hearing it), sums it up with a good amount of appropriate snide sarcasm when he writes "Look, folks, there's no inflation! Can you believe it? What's even better is that the cost of energy went down 3.8% in the past 12 months! Now we can really tool around in our gas guzzlers."

He cleverly catches them in a lie when he gets more into the specifics. "By the way," he coolly starts out (so as not to tip his hand to the BLS that he is onto them and their slimy shenanigans), "if you can access the table in the BLS report, you can see just how much the cost of fuel has (supposedly) gone down in the last 3 months. (-7.2% in September, -7.0% in October and -.2% in November). Now, let me see...gasoline cost about $2.35 per gallon in August, so if we use the BLS calculations, we should be paying less than $2.00 a gallon now. Hmmm. The price of gasoline next door is, umm, err, ...drumroll, please...$2.35 a gallon."

The new Producer Price Index came out, and sure enough, plenty of inflation, as the PPI was up 2 percent last month, the biggest monthly rise since (so they say) November 1974. In typical government response, George L. sent the news that on page six of the report we read that the BLS must "feel our pain", and they are going to, again, re-jigger inflation calculations of the PPI by removing those pesky items that go up in price, but include more of those prices that don't, so everybody will feel better.

In actual government-ese, "The Bureau of Labor Statistics will soon update the value weights used to calculate Producer Price Indexes to more accurately reflect recent production and marketing patterns. The new weights, which will be introduced in February 2007 with the release of January 2007 index data, will be based on shipment values from the year 2002. All indexes will be affected by this weight update, including all the industry net output indexes, as well as those calculated for traditional commodity groupings." Hahaha!

So trust me when I say that if inflation is raging, the government is lying about it. And to prove it, inflation IS raging and the government IS lying about it! Why? Because of the downside of continual expansion of government: It continually costs more and more, and they "need" the money, which the Federal Reserve creates, which increases the money supply, which increases prices some more, which further increases the government's need to lie about inflation and their "need" for yet more money.

As proof, we can merely tune into MoneyWeek.com, where we see the point driven painfully home by news that, "the proportion of UK national income taken in tax rose 1.2 percentage points last year to 37.2% - the largest rise in Europe."

And it is not just the BLS or the Brits! It's all of them are lying, because all of them are desperate for more money! I know that you are thinking "Poor, predictable Mogambo (PPM). Always raving and paranoid about the government, and how they are all out to get him, and claiming that the CIA is sending thought-control waves into his head right now, even as I am standing here thinking about The Mogambo and how much I hate him, and how we all hope the government IS out to get him because everybody hates him so much!"

But it doesn't matter what you think, because it's not just me! And to prove it, here is John Williams, he of the famous John Williams' Shadow Government Statistics site, who has issued an Alert which says that it looks like 2006 is a year of banner economic headlines, as evidenced by the triple headline "GAAP-Based Federal Deficit Jumps to $4.6 Trillion. Total Federal Obligations at $54.6 Trillion. Energy Pricing Gimmicks Distort CPI and Trade Deficit."

He says that this all comes from the U.S. Treasury, which has just released its "annual generally-accepted-accounting-principles (GAAP) basis financial statement, signed off on by Treasury Secretary Henry M. Paulson, Jr. The consolidated statements show that the actual annual federal deficit for fiscal year ended September 30, 2006 was $4.6 trillion, up from $3.5 trillion in 2005. Total federal obligations at year-end were $54.6 trillion, up from $50.0 trillion in 2005." Yikes!

Deftly coming up with some statistics based on this news as I sit, mute, dumbfounded at this news, he says "The actual deficit number was nearly 19-times the size of the gimmicked 'official' deficit for 2006 of $248 billion. Total obligations were 4.2-times annual U.S. GDP."

I am beyond agog at this news! The numbers were, of course, unbelievably huge, as they are all unbelievably huge anymore, because that is the way of exponential-growth curves after awhile.

But I have questions! Questions such as, "With all the lying and deception and accounting shenanigans, this horrible news is the best they can do? Those slimy, deceptive, lying pieces of government trash are too stupid to come up with something better than this horribly, horribly bad news? Or is it that they ARE lying up a storm, and even so, things are so desperately bad that this really IS the best terrifying glob of lying and distortion that they can come up with?"

Mr. Williams merely smiles, and doesn't answer me directly (which irritates the hell out of me) or even acknowledge my existence (which I am, by this time, used to), but apparently I was a little hasty in my blanket condemnation of government employees, as it is not all of them, as he goes on to note that "As usual, the Government Accountability Office (GAO) -- formerly the General Accounting Office -- would not certify the statement, due to 'material weaknesses in financial reporting' (page 27)." Hahaha! The GAO says that the government, as a whole, is so corrupt, thieving and incompetent the records are a shambles!

Well, of course, this staggering $4.6 trillion one-year federal deficit is obtained from the accrual method of accounting, and the paltry $248 billion budget deficit is from the cash accounting method. This is actually a very handy distinction, and I use it myself, and I recommend it to you, too!

To demonstrate, when I have to go over the monthly finances with the wife, per her wishes and her stupid little court order, I cleverly use the cash-accounting method, which shows only what cash came in and what cash went out.

The benefit is that I can show where we, as a family, pretty much break even every month: Cash in equals cash out. I thus appear to not be quite the complete and utter financial failure that they all think I am, just because of, well, you know.

And parenthetically, speaking of the family budget, the thing I am upset about in this month's report is that I see where we now spend more money per month on their stupid food and their stupid medical treatments than I spend on golf, and I feel like I am, you know, really getting screwed here!

But this is not about how my family is a selfish bunch of needy, whining little snots, but about how cash accounting makes things look better. This is possible because what is not shown in cash accounting is the debt from where that money is coming, and they would probably make a big stinking mess in their dainty pantaloons if they knew that I have borrowed so much money, from so many people, by telling so many lies, and committing so much fraud, that they will all starve to death in prison when the police finally catch up with them. And they will, as their names and reasonable facsimiles of their signatures appear on all the evidence, loan documents and checks. Suckers!

But this is not about the cute little Mogambo Inside Joke (MIJ) I am playing on my unsuspecting family, but about how this kind of important information is highlighted by accrual accounting, and ignored by cash accounting, and that is why The Mogambo and the federal government use it exclusively.

But he couldn't resist, I guess, adding "The unbelievable $5.4 billion monthly decline in the seasonally-adjusted October trade deficit to $58.9 billion from September's $64.3 billion was more than accounted for by an equally preposterous plunge in reported oil import prices, which was on top of price declines in the prior two months that more than accounted for oil's recent drop. Without the phony oil price decline, the trade deficit would have risen to $64.9 billion."

-- If you are one of those people who bizarrely think that the stupid Mogambo (TSM) has enough smarts or education to have an opinion about anything, I laugh at you in scorn, and I laugh at you again when you ask for my Idiotic Mogambo Opinion (IMO) about the euro, now that you are getting scared of the dollar, as you should be. Being kind and charitable, as in "just before Christmas I'm as good as I can be", let me politely tell you, for the record, "Don't make me laugh, jerkface! (DMMJ)".

You may not know it, but this bizarre economic scheme of having one monetary policy and multiple fiscal policies is as popular around the Mogambo household as it is in Europe. The wife and kids have banded together into the Mogambo Union (MU), and their official position is that, since there are five of us, then all the money ought to be divided up equally, and everybody get a fifth of the money. My wife is siding with the kids in this idiocy because, I guess, she has formed some kind of "bond" with them over the last 15 years or something. Or just being hateful. Who knows? Who the hell cares?

But anyway, they are serious about the single monetary policy thing. And if you can contain your laughter for another second, you will realize that this is the exact same situation with the euro, and they are serious, too.

The only difference, what I call the "Crucial Mogambo Difference (CMD)", between the two systems is that in dealing with the Mogambo Union (MU), I control rogue members by bursting, screaming like a banshee, into their rooms with a baseball bat to knock some sense into their thick heads (which, fortunately so far, always miraculously occurs about halfway through my initial windup backswing), while in the European Union (EU), they don't. A crucial difference, to be sure, although the stupidity is exactly the same.

-- Susan asks "With the collapse of the dollar on the horizon and the 'Amero' lining up to take its place, how will this new currency affect our gold and silver?"

For one thing, the Amero is supposedly a proposed new common currency for (at least) Canada, the U.S. and Mexico that will replace our individual moneys, including the dollar, and morph us all seamlessly into one big, happy, multi-lingual, multi-cultural family with vast income and wealth disparities, which is funny enough in itself that rational people would even contemplate such preposterous stupidity.

But the economic mess that is engulfing us, precipitated by the dollar getting destroyed by the actions and inactions of the Federal Reserve and Congress for so many years, has to be resolved somehow! Why not the Amero? And if not the Amero, my Darling Mogambo Cherub (DMC), then what?

And with a worthless dollar, soaring inflation and a grumpy electorate, what better solution than to (like most other countries in history have done in times of their own well-deserved economic crises caused exactly like ours) expropriate the resources and assets of some other countries, such as Canada and Mexico? Hahaha! America at its finest hour! We have evolved to the point where we Americans can now, literally, conquer other countries, and acquire their assets and resources to bail us out of the economic mess we created (which is the impetus for all wars), all without firing a shot! Or even threatening to! A miracle of modern politics and corruption!

As to whether or not it is true, there surely are people who desperately want it to be true because they are all lining themselves up to make a big profit from it somehow.

And for how it affects gold, it will have, at worst, no effect, as that is the beauty of gold; it is impervious to currencies and their depredations, and its buying-power value over the last 4,000 years is almost a constant, which is the whole point of how gold "preserves wealth"!

In the best-case scenario, gold (and silver, and all commodities) will soar like they always have in the inevitable bust at the end of long booms, which are always financed by the massively excessive creation of money and credit, via the historically timeless and brainless expedient of a fiat currency, a reckless banking system and a complicit, intellectually-corrupt government.

And with the absolute, 100% certainty of a bust happening again, just like it always has, without exception, for thousands of countries and thousands of currencies in the last thousands of years, gold will rise triumphant, just as gold has always risen triumphant! And that one fact, alone, explains why I am always strongly suggesting, in a very loud and irritating voice, for you to get silver and gold right (pause) freaking (pause) now, if not sooner.

And it is because of the disdain of the ridiculous dollar, which is actually spreading, as we gather from an email from Christian S., who was kind enough to send an English translation of a posting from Argentinienaktuell.com, which is that, starting mid-2007, "Argentina and Brazil do not plan to use the US dollar" for commercial exchange between themselves. They will use their own currencies, the Argentine peso and Brazilian real, and the article hinted that abolishment of the dollar to effect commercial exchanges between Argentina and Brazil could be next.

But, apparently, people are surprised that the debasement of the dollar has impacted coins, in that the metal in our pennies and nickels is worth more than the face value of the coins. So the government, instead of "doing the right thing" to permanently eliminate inflation by stopping its own cancerous growth and by preventing the Federal Reserve from creating constantly more money and credit, has instead simply made it illegal to melt or export quantities of coins!

It was from the New York Times that I got the news, in their article "Rising Metal Prices Prompt Ban on Melting and Export of Coins", that "The United States Mint, concerned that rising metal prices could lead to widespread recycling of pennies and nickels, has banned melting or exporting them. According to calculations by the Mint, the metal value of pennies, which are made of copper-coated zinc, is now more than one cent. The metal value of 5-cent coins, made from a copper-nickel blend, is up to 7 cents Adding in the costs of manufacturing means the Mint now spends 1.73 cents for every penny and 8.74 cents for every nickel it makes."

Hahaha! The penalty? Up to a $10,000 fine, and imprisonment of up to five years, or both!

Paul R. sardonically notes "Notice that I am only allowed to carry $5 worth of coins out of the country, because they have real value. But I'm allowed to take $10,000 of their worthless dollars with me, because they have no real value." Hahaha! Exactly, Paul!

USAToday adds the news that the government has changed the composition of coins lots of times ("The penny," they report, "which was pure copper when it was introduced in 1793, was last changed in 1982") and always in response, of course, to rising metal prices, which is more solid evidence of inflation and, thus, more proof of complete government incompetence, and if we had any brains at all we would rise up in vicious outrage and descend upon Washington as an ugly, drunken, mindless mob, unleashing our righteous vengeance on Congress (except Rep. Ron Paul) and the Federal Reserve, and then maybe other central banks around the world would see the carnage on TV and, glued in rapt fascination to the lurid screens, they would say amongst themselves "Oh, my God! We had better stop doing that same monetary crap right now! Hey! Is that a bag of flaming dog poop he's throwing? Ewww!"

Well, to be honest, USAToday did not actually say that, but they might as well have, and (in my opinion) should have. But they did say that copper averaged about 75 cents a pound in 1982. And how is copper faring since then? From ABCNews.go.com we learn "Copper prices are up more than 180 percent since mid-2003, selling for just more than $3 a pound." Almost tripled in three years? And yet there is no inflation? Hahahaha! This is insane!

ABCNews also quotes "coin expert and author" David L. Ganz, who said he wouldn't be surprised to learn that "people were exporting [coins for melting] to China to make washers", which fits rather well with the article's remark that "Rapid industrial growth in countries like China and India has dramatically driven up the price. In the United States, theft of copper material, like pipes from constructions sites, has been on the rise for several years as copper prices have skyrocketed."

Ignoring this huge rise in demand, Mr. Ganz says that the problem with melting coins is that "the slight profit is not worth all the trouble. It's very labor intensive, and the price is really not high enough at the present time." At this, I shout out to my secretary to take a memo to this Mr. Ganz about how he may be thinking short-term tactics when, since the dollar is destined to go down for the rest of our miserable lives, and China and India will continue to increase their use of copper as they vigorously expand for the rest of our miserable lives, the correct strategic move might be exactly the opposite!

But she doesn't answer, and then I remember that I fired her when I'd finally had enough of her snotty, sneering disrespect and calling me a "filthy little creep" every damned day, as I get plenty enough of that at home, thank you very much. So although Mr. Ganz may, thus, be left forever in the dark about this tactics-versus-strategy thing, don't you be.

And as bad is the devaluation of the dollar against copper, the dollar's woe is that it is falling against everything, as from Today.Reuters.com we learn "The dollar has so far lost nearly 12 percent against the euro this year, around 14 percent against sterling, and roughly 9 percent versus the Swiss franc."

And more recently, the dollar, as valued by the U.S. Dollar Index, fell from 87.50 to 82.50 in about thirty days. A monster move! A monster, monster move in so short a period of time! Holders of dollars are getting whacked!

-- For another fabulous reason to invest in commodities, merely listen as Jim Rogers, famous fund manager and author, says "We have a looming food shortage. The world is consuming more food than it is producing. The inventories are the lowest since 1972 and the number of hectarage devoted to agricultural products has been declining."

This is dangerous, dangerous stuff, because if you think people are going to calmly sit around, quiet and docile in their suffering when they are hungry and their children are crying in hunger, then hang around my office late one day, close to dinnertime, when my blood sugar is very, very low, and you may find it highly instructive when I abruptly drag you and those irritating, crying kids out of my office by the hair and throw you down the damned stairs. How's THAT for quiet and docile?

Ergo, angry demand will go up, and prices will go up because supply is already insufficient, making people more angrily demanding and fearful of future supplies, and will begin hoarding, making prices go up more. And that is how you make money with investing!

And, I am happy to note, to add a nice little turbocharged boost to your investing prowess, prices of commodities will also rise even more because the dollar will decline in purchasing power! The old double whammy working for you for a change, instead of against you!

So, if you ain't getting on this commodities bandwagon in some way, then you are making a big, big, big mistake (BBBM), like when I volunteered to come to this stupid planet, and I have regretted it ever since. Perhaps there is a lesson in there for you.

And speaking of lessons, Dan G., proud Junior Mogambo Ranger with Oak Leaf Cluster, writes with the encouraging results that "You know, I took your advice a few years ago and every morning when I woke up, I asked myself - 'Do I have enough silver?' If the answer was no, I bought some more. You were right! One morning, I woke up and said - 'I got enough!' I have slept like a baby ever since. You are, like, some kind of genius."

And in case you were wondering, he really did write that last sentence, and nobody is more surprised than I was to find out that I was right about something for once in my whole sorry life, and I am not going to get sued over something I said! A true ripple in The Force!

And maybe there is a lesson in there, too, for you!

-- Stephen Church, in his essay "The Consumer Crunch Update: Party Over?" at Prudentbear.com, writes "The latest economic statistics show that consumers depended on new debt for 90% of their cash flow during 2006."

That's a lot of money and a heart-stopping statistic, but this is nothing new, and I was going to say (with a big theatrical yawn for dramatic effect) how bored I was, but before I could say anything, he went on to say "Any decline in debt flow will constrain liquidity and should cause a decline in the growth of consumption and household investment."

Okay, at this point I am really yawning from the stultifying ennui, and I'm thinking to myself "I came all the way down here for this crap?", like it is big economic news or something that "If people don't keep borrowing more and more money to consume more, then they are going to consume less." Well, duh!

Then, abruptly, he makes it clear why he started out like that. He says "consumer liquidity is about 20% below the liquidity level at the start of the last recession in 2001. It also shows that liquidity is still declining!"

If there were any punctuation professionals in the room, they would immediately tell you of the importance of that exclamation point, and to be on the lookout for some important, perhaps terrifying, news! And sure enough, he goes on to say "The pace at which debt service and consumption depletes money supply has accelerated in 2006 to about $30 billion per month. In order to immediately improve this measure from ($30) billion to $0, households would need to cut nominal spending by nearly 4%."

Before I could laugh uproariously at the absolute absurdity of cutting aggregate spending by 4%, my voice caught in my throat when he deduced "This environment should cause falling M-2 growth", which is such bad, bad news in a "zero-savings/debt-financed" economy that I heard that (okay, I made it up) the very thought of a falling M-2 money supply made Ben Bernanke's anal sphincter seize up so tight that it cut off blood flow to his stupid head, which is an old, childish and ridiculous joke, I know, but which, somehow, perfectly suits my Melancholy (pause) Mogambo (pause) Mood (MMM) these days. Ugh.

****Mogambo sez: Gold and silver are doing well, as expected when the dollar falls, but oil going down like this is such a rich, juicy plum that I gotta- I just gotta, I tells ya! -emphasize it as the Mogambo Investment-Sector Pick O' The Week (MI-SPOTW).

Richard Daughty, the angriest guy in economics
The Mogambo Guru

Richard Daughty (Mogambo Guru) is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the writer/publisher of the Mogambo Guru economic newsletter, an avocational exercise to better heap disrespect on those who desperately deserve it. The Mogambo Guru is quoted frequently in Barron's, The Daily Reckoning, and other fine publications.

Copyright © 2005-2009 Richard Daughty

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