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March 28, 2007

E-Economic Newsletter
by The Mogambo Guru

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

-- As a guy who is always screaming about the Federal Reserve creating all that excess money and credit, and how that monetary inflation turns into price inflation as the money permeates and diffuses throughout the goods/services market, you would think that I would be happy that Total Fed Credit was actually down by $470 million last week, as looks like it is not growing as per its usual highly-inflationary wont of the last freaking decade.

But you would be wrong. I am never happy. I am sometimes not as angry or belligerent, occasionally not as fearful, but I cannot ever be happy when I know what I know, as I know what is going to happen economically, I know why it is going to happen, I know who is to blame, and I know that they will manage to escape punishment and retribution unless The Mogambo gets up off his fat, lazy butt and starts rounding them up, chaining them to trees in public parks, and maybe making a few bucks by charging people a small fee to let them poke these worthless wastrels and lunatic losers with pointy sticks, making them howl! Hahaha! Hey! I was wrong! I actually CAN be happy!

But this is not about how I cruelly delight in watching just desserts being meted out, but about monetary inflation, the kind that we read about at the BelfastTelegraph.co.uk site, which had the headline "Ex-Governor George Says Bank Deliberately Fuelled Consumer Boom".

The article said that, in Britain, "Lord George, who headed the Bank (of England) for a decade from 1993", actually admitted that "In the environment of global economic weakness at the beginning of this decade... external demand was declining and related to that, business investment was declining. We only had two alternative ways of sustaining demand and keeping the economy moving forward - one was public spending and the other was consumption. We knew that we were having to stimulate consumer spending", although he admits that "We knew we had pushed it up to levels which couldn't possibly be sustained into the medium and long term"!!

If you are protesting my editorial arrogance in adding those two exclamation points at the end of that sentence, let me use this as a Pop Mogambo Quiz (PMQ) to establish your punctuation-critiquing credentials.

To administer the test, please get out a #2 pencil and punctuate the following highly relevant sentence in the space provided at the end. "We bolted on a big supercharger, see, got it all fired up, and accelerated that old, rotten, rusted-out Ford Festiva to 127 miles per hour on the freeway, where the wind was roaring, the car was roaring, we were roaring drunk and watching in horror as actual parts of the car were flying off the car and hitting other cars, and while (to quote Lord George) 'We knew we had pushed it up to levels which couldn't possibly be sustained into the medium and long term', I held the accelerator to the floor as Bobby and Goober tried to squirt some kind of 'go-fast juice' (that they had bought from the auto-parts store for $3.69) into the engine's air intake manifold through a plastic hose they had stuck through one of the holes in the firewall, and that stinking, greasy crap was getting blown all over the place, making the steering wheel all slippery, and when I looked up, there was a giant freaking semi heading straight for us, brakes locked, tires smoking, horn blaring, and since I knew that our only hope was a huge burst of speed that would get us freaking airborne to fly up and over that damned truck, I yelled out 'Give it a big ol' squirt, boys, because we need a hell of a lot more stimulation right freaking now!!'"

But lying and things like that are even worse here in America, as Jim Willie of the Hat Trick newsletter reports "Last week the Board of Governors at the Federal Reserve System voted to reduce disclosure requirements in what are known as Call Reports for major shareholders and officers for member banks. Scratch your head now! They clearly desire more darkness to conceal backroom activity."

As an aside, as part of the answer to the perennial question "Who owns the Federal Reserve?", Mr. Willie reveals that "JP Morgan owns over 50% of the New York Fed, and Citigroup owns another 25% of the New York Fed."

-- The astonishing decision by the Fed to leave interest rates unchanged, in light of their own tortured inflationary statistics rising so ominously, has me sardonically laughing in Undisguised Mogambo Contempt (UMC). MoneyandMarkets.com newsletter has always taken a strict hands-off approach with respect to UMC, and they predictably ignore me again this time, but instead sums up the situation with their headline "All Indicators Point to Higher Inflation, Yet Bernanke Is Caving Anyway!"

They write that, theoretically, "The Fed's primary mission is to fight inflation tooth and nail." In reality, they say, "the latest inflation stats have been anything but tame: The Producer Price Index, which measures inflation at the wholesale level, surged 1.3% in February, more than twice the market forecast. The 'core' PPI, which excludes the impact of food and energy prices, jumped 0.4%. Core intermediate goods and core crude goods prices, which indicate inflation at earlier stages of production, rose at the fastest pace in several months. The Consumer Price Index climbed 0.4% in February, pushing the year-over-year inflation rate up to 2.4%. And the year-over-year core inflation rate rose to 2.7%."

Then he asks (and I can almost hear the incredulity in his voice) "Know what the Fed's unofficial target for inflation is? Between 1% and 2%!"

And in other inflation news, Doug Noland of the Credit Bubble Bulletin at PrudentBear.com reports that "Copper jumped 1.9%. May crude surged $2.70 to $62.28. April Gasoline jumped 4.8% and April Natural Gas 5.0%. For the week, the CRB index rose 2.1% (up 1.2% y-t-d), and the Goldman Sachs Commodities Index (GSCI) surged 2.6% (up 3.6% y-t-d)."

By this time I am literally drooling in numb, stunned incoherence, which is (so I gather from unsolicited anecdotal reports) neither as endearing nor charming as it sounds. And even though I was paralyzed with fear and could neither speak nor make rude gestures with my fingers, I could still think to myself "These are horrific numbers! We should be rioting in the streets, brandishing our Mogambo Flaming Torches and dragging huge ice chests filled with beer and tequila to Washington, D.C. to protest the inflation, take our revenge by kicking some Serious Beltway Butt (SBB), and celebrate by having a big, blow-out kegger! Whee-hoo! Party down, dudes!"

And it's not only here, but Canadian inflation unexpectedly accelerated to a four-year high last month, as the core rate rose to 2.4%. In the U.K., inflation accelerated in February as consumer prices rose 2.8% from a year earlier, and from Bloomberg we read that "European Central Bank President Jean-Claude Trichet said inflation will probably accelerate later this year."

MoneyandMarkets also reports that I am not the only one getting nervous, but the people who actually buy and sell securities are likewise impressed, and that "the Fed's new approach is causing the yield curve to return to normal. In plain English, that means short-term interest rates are now falling below long-term rates. That's an important signal! It tells us that bond traders are afraid the Fed will sacrifice its long-term, inflation-fighting credibility in order to try and 'save' housing. They're buying short-term notes, which will benefit from a rate cut. And they're selling long-term bonds, which will get whacked if the Fed lets inflation get out of hand."

-- John Stepak of MoneyWeek.com seems to instinctively know that everyone is nervously watching the housing-related bust thing, especially when he reports that the Congressional hearings about the sub-prime mortgage implosion has Sandor Samuels of Countrywide warning that "stricter standards would have meant that about half of the sub-prime loans made during the housing boom would not have been made." Half!

I know what you are thinking. You are thinking that, according to their precious little computer models and equations, all the Fed has to do is lower interest rates, create lots of money and credit, and everything will be fine. And you know this will work because that is what the Federal Reserve has been doing continuously, and everything is fine as far as you are concerned.

But Mr. Stepak warns that there is Big Trouble In The La-La Land Of Modern Economics, as "it won't work this time. Because even if the Fed relaxes its lending criteria, the lenders are now in a position where they have to tighten up their lending standards, like it or not."

In short, banks were forced to loan to borderline deadbeats because there was nobody else left to lend to, and now there is literally nobody to lend to, except human garbage like The Mogambo, and "that'll be a cold day in hell!" as bankers seem to delight in telling me. He says "The same thing happened in Japan - the main rate might have hit zero, but by then the banks were far too indebted and scared to lend money to the man in the street."

As an object lesson, he notes that "Japan's only just now, warily and unsteadily, coming out of its near two-decade slump - we wonder how long it will take the US to recover from the current credit implosion."

And why are they doing this? They have to! Bill Bonner at DailyReckoning.com quotes Rick Ackerman as saying "With Helicopter Ben talking incessantly about the supposed 'threat' of 'inflation,' it didn't take a rocket scientist to figure out that inflation was the least of his concerns. Like the rest of us, the Fed chairman has known all along that the 'good' kind of inflation - the kind that pumps up everybody's assets so that those assets can be hocked to the moon - is all that stands between our spectacularly over-leveraged economy and a Second Great Depression." Yikes and criminy!

As you are now properly prepared, it is at the juncture that I proudly introduce my fabulous, all-new Mogambo Balsa-Wood Airplane Theory Of Economics (MBWTOE), which I heroically developed by drinking dangerous levels of alcoholic beverages, thus sacrificing myself upon the Altar of Inspiration in exchange for a way to explain the idiocy of economics as taught in the nation's universities, and as practiced by all the world's central banks.

It came to me after a clerk at the convenience store wouldn't sell me any more beer, and so instead I got one of those little balsa-wood airplanes that "flies" by virtue of a wound-up rubber band spinning a little plastic propeller, and where, to assemble the thing, you merely slide the wing, tail and elevators into pre-cut slits and slots, and then finish the project by affixing the wheels, propeller and the rubber band.

I figured "Tape a couple of razor blades along the leading edge of the wings and -Voila! -instant air superiority!"

However, if you carefully examine the wing, as I eventually did, you will note that it is just a flat piece of balsa wood, and is definitely NOT an airfoil in cross-section. There is no shaping of the wing to provide Bernoulli lift! Therefore, the little airplane does not "fly", but is just a propeller dragging some big sails sideways through the air by brute force, prey to every errant, wispy breeze and microscopic change in air pressure, which explains why most of the time the thing immediately crashes, and you waste hours and hours of precious, precious time as you endlessly fiddle and diddle with the fore-aft placement of the wing, the elevators and the rudder, adding more rubber bands and winding, winding, winding them tighter and tighter until you can actually hear wood fibers snapping from the strain, just trying to make the stupid thing merely take off, fly over Mrs. Kravitz's house, drop a little pile of stinking dog crap on her precious, shiny little stupid car, and then come back and land safely at my feet, ready for another Mogambo Mission of Revenge (MMOR). Is that too much to ask of a $3.19 airplane? I think not! Money comes hard around here!

Anyway, this is not about how I got ripped off by being sold a defective fighter aircraft and how it put my plans for Mogambo World Domination (MWD) months behind schedule, but that this Mogambo Balsa-Wood Airplane Theory Of Economics (MBWTOE) is, essentially, a perfect analog to current economic theory as actually practiced by the Federal Reserve and all the other central banks of the world; the stupid thing can't possibly work, but it looks roughly correct in that the major parts are all there, and it is fun to keep messing with it, adding more rubber bands, substituting bigger plastic propellers, adjusting the size, shape and position of the flat wings, elevators and tail, trying over and over again to completely negate, by sheer overwhelming force, the very Laws of Nature! And to get paid for doing it? Wow! What a great job! Hahaha!

But, just like with the ill-fated Fearsome Mogambo Air Force (FMAF), it never even seems to work for very long, you wind up with everything all busted, slashed and ruined, and you get a lot of dog crap all over everything except the one damned place you wanted it.

-- An interesting twist on the lying, corruption and deceit that has now permeated everything, including the mortgage sector, is when Business Week magazine reported that an outfit named LoanPerformance performed a "stress test" on a bunch of mortgages, and found that "within months of getting their original mortgages, some 50,000 of 169,000 borrowers had already gone to either the same lender or another bank to tap into the dwindling equity that remained in their houses - without the lender's knowledge."

The bad news is that piling debt on top of debt makes for a big pile of debt, and now "these borrowers have an average loan-to-value ratio of 95%, with some of the loans at more than 100% of the value of the house."

-- Junior Mogambo Ranger (JMR) Steve N. remembers a Gary North newsletter, in which he "once saw a cartoon of a counterfeiter who had a graph on the wall. The line sloping downward and to the right was 'value of money.' The line sloping upward and to the right was 'price of paper.' The upward line had just intersected the downward line. The counterfeiter yells: 'Stop the presses!'" Hahaha! Good one!

- Chapter eight of Michael Panzner's book "Financial Armageddon" is titled "Hyperinflation" and he opens the chapter with a quote from Robert Mugabe, the moron who has destroyed Zimbabwe by creating so much money that inflation is running at hundreds of percent per month. The quote is "I will print money today so that people can survive." Hahaha!

And speaking of inflation in Zimbabwe, a reader asked "Hey, big stupid Mogambo (BSM)! How much has an ounce of gold risen in Zimbabwe, the country with the highest inflation in the world, and which is now running at almost 2,000% a year? Did gold rise enough, as you claim all the damned time with your big, fat stupid mouth (BFSM) yammering yammering yammering until we are sick of hearing it, to preserve buying power in Zimbabwe? If not, drop dead, you miserable, filthy little creep!"

Instantly, I realize that this sounds exactly like the way my mother used to talk to me! But since she died a long time ago, I figure that her ghost has taken over the writer's body, and is using his fingers and email skills to dig at me, one more time, from beyond the grave.

The only way to ever shut her up was to prove that her accusations and lawsuits were baseless, and so to do that we go to People's Daily Online to discover the fact that "the Reserve Bank of Zimbabwe is offering a gold support price of 28 US dollars per gram."

And how much is that in ounces? Google says that "1 troy ounce = 31.1034768 grams." The Mogambo Arbitrage Sensor (MAS) instantly realizes that if the Reserve Bank of Zimbabwe is willing to offer $870 an ounce for gold, where are the arbitrageurs buying gold in the USA for $660 an ounce and selling it to these idiots in Zimbabwe for $870? It seems (I say with arched eyebrow) too nice of a juicy plum to turn down!

The fact is that there are surely tariffs, duties, fees, legal issues and taxes enough to make a complete mockery of the bank offering a "support price of $28 US dollars per gram", or else that bank would be up to its knees in gold bullion right now!

In a more realistic vein, AllAfrica.com writes that, that in local currency, "current gold producer price stands at Zim$16,000 per gram." This is the producer price, which works out to Zim$497,655.63 per ounce.

Zimbabwe Miners Federation (ZMF) president George Kawonza, says "with the inflation rate standing at 1,729.9% we agreed that the gold price should be pegged at around Zim$180,000 per gram", which comes out to Zim$5,598,625.86 per ounce, although with inflation raging at almost 2,000% per year, there is no exact "price" for anything, although I imagine that gold selling for around Zim$6 million per ounce comes close enough.

So, given the fact that less than twenty years ago the Zimbabwe dollar and the U.S. dollar had roughly the same value, and thus gold was priced the same in U.S. dollars and in Zimbabwe dollars, I would say "Hell, yes, the value of gold has preserved its buying power! And not only that, but everything else in the damned country has turned into worthless crap, which makes the miracle of gold even more spectacular! Hahaha! In your face, mom! Hahaha!"

So, the lesson is clear; those Zimbabweans who put their savings into gold, instead of Zimbabwean dollars and assets that can be easily seized and devalued by a government, made out very well, just as the theory predicts!

-- I got an email from Junior Mogambo Ranger (JMR) Tom D. that clearly explained one of the finer points of the modern voodoo of Hedonic Indexing of inflation statistics when he wrote "Dear Mogambo, I'm afraid you still don't have this substitution thing down. You see, as the cost of food rises, people will 'substitute' eating (which is expensive) with starvation (which is free)! Therefore, as the price of food rises, the CPI decreases. I hope this helps."

Boy, did it ever! In this bizarre, alternate-reality world that I commonly refer to as "beyond Kafka-esque", it actually DOES help make sense of what is happening with the Federal Reserve and Congress! We're freaking doomed!

-- Michael Nystrom is the Editor of bullnotbull.com, and as such is my natural enemy, because after awhile you just get fed up- up to freaking HERE! -with editors angrily crumpling up your creative sweat and blood right in your face and saying things like "What in the hell is this trash? Do you call this 'writing'? This is crap! You are crap! Everything you do is crap! What in the hell is wrong with you, you worthless Mogambo moron (WMM)? Get out of my office! Go someplace and die, you stinking no-talent hack!"

Since I can never actually dispute the dismal facts of their argument, I can instead take delight in plotting and seeking revenge. So you can imagine my delight at running across some essays written by this same Mr. Nystrom! I think to myself "Aha! At last, the tables have turned!" Prepared to gloat in glee as I mercilessly rip into him, hammer and tongs, I was horrified to note that they shared a terrific title; "Three Bears, No Goldilocks"! Hahaha! Fabulous! I love it!

The bad news is that now, instead of just being mad at him from a purely irrational distrust of editors in general, I now also hate him out of pure, shameful envy for coming up with such a great title and exposing my creative incompetence. "Three Bears, No Goldlocks!" Hahaha!

Anyway, even better is that in Part I and Part III he reviewed both the new books by Peter Schiff ("Crash Proof" with the subtitle "How to profit from the coming economic collapse") and Michael Panzner ("Financial Armageddon" with the subtitle "Protecting your future from four impending catastrophes"), and did a terrific job. Now I hate him for that, too, the little bastard show-off!

I am currently reading both books, but the news is so horrific and bleak that, after just a few paragraphs of either one, I have to drink bourbon and other alcoholic brown liquids just to calm my ragged nerves, more and more, until my nerves are, at last, comatose. The time-line data shows, in case you are interested, some lagged vomiting, too.

And believe me when I tell you that you will want to know what happened to the economy, as that is what everybody will soon want to know, and it will be a very popular subject on the TV news shows and with Congress for a long, long time. Or, as Mr. Panzner himself put it in his book, "The dangers that a few observers had foreseen- which were discounted, misunderstood, or overlooked -will be the only thing that growing numbers of Americans will be able to think about."

Such as Junior Mogambo Ranger (JMR) Tim J., who writes "Dear Mogambo, I too am angry about this inflation. The dog food which killed six of my elderly friends was up 10% from last year." Hahaha! Sublime!

-- SilverForecaster.com has noticed that the silver market "has moved from a seasonal one to one driven by macroeconomic incidents. The investment side of the market is having a steadily increasing influence on the price, so it is logical that seasonal price influences will have a diminishing impact on the price."

In an odd coincidence, Ted Butler, writing in the James Cook Market Update at InvestmentRarities.com, says that silver is unique in that it has both commercial and investment value, which means that silver is going to get very exciting soon, not only from the boost from the general inflation in prices as the general inflation in money and credit, but also from the huge, market-exploding pressures of the 60 year-long "structural deficit" in silver finally being over.

Now that the government has dumped virtually all of its 9 million-ounce "strategic stockpile" of silver over the last 60 years, from now on things will be very, very different, as he says "the end of the silver structural deficit marks the end of one phase and the beginning of another, potentially much more bullish, phase."

What this all means becomes clear when he goes on "Just how bullish this new phase in silver will be is hard for me to describe without going over the top." He suffices it to say, with characteristic understatement, "For the long term silver investor, the magical phase, the age of profits, is about to begin."

If you listen carefully, in the background you can hear me saying "Whee! Buy silver now!"

-- As an example of the typical low-life halfwits that infest the Federal Reserve, the Wall Street Journal had an article by Greg Ip, who reported on some remarks by Fed Governor Frederic Mishkin along the lines that the Fed has had "greater success in adjusting interest rates to alleviate upward and downward pressure on inflation", which is obviously a load of pure crap; the Fed and the government achieve this apparent miracle by lying their heads off about inflation, and then using that as an excuse to lower interest rates, and then providing more money and credit to the people who were enticed to borrow, which created more price inflation to lie about. And yet, people wonder why I say "Ugh"! I know why I say "Ugh." Ugh.

****Mogambo sez: If you ain't got gold or silver (or even oil), then we cannot be friends, as one day very soon my fellow precious-metals fanatics and I will be rich because we own them, and you won't be because you don't, and we will have nothing in common anymore, unless you are a young and pretty girl who is desperate enough to do anything, and then maybe we can work something out. Otherwise, scram, moron!

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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