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December 20, 2007

To Negative Infinity - And Beyond
by The Mogambo Guru

"In short, the banks loaned every additional dime of the trillions of dollars that they took in! And then more on top of that! No additional reserves at all! Not a freaking additional dime of reserves has been added in a decade or more!"

I look around the Hopefully Impregnable Mogambo Fortress Of Fear (HIMFOF) and wonder why I am so scared. Things don't "feel" right. I am nervous. I am edgy. I am, obviously, armed to the teeth, trigger-happy and "an accident waiting to happen."

My major problem is that money is being lost by the ton all over the place, as prices of assets are being discovered to be as flimsy and whimsical as a Mogambo promise to let someone else have the TV remote control "as soon as this program is over", which is a lie and everybody knows it. But as angry as they are about that remote control thing, I notice that people get angrier about losing money - especially lots of money.

Trust me; I know what I am talking about. Like the other night when my son sat down on the couch, 35 cents rolled out of his pocket. So I, quick as a bunny, reached out and scooped it up! Man, he was angry as hell!

And it is not just him; lots and lots of people are losing lots and lots of money. So I look at Total Fed Credit, the magical fount from whence springs credit in the banks, and I note with some alarm that it is actually down by $3.181 billion last week. I gulp in horror! Down!

This means that people are losing money and no new money is being created by the Fed to replace it! Yikes! This is Bad, Bad News Of The Monetary Kind (BBNOTMK), which is comically indicated by the way my eyeballs quiver in their sockets in my raw, unreasoning panic, meaning we are freaking doomed!

I know that you don't believe me, because I was at the street corner all morning long, yelling this same news to all the people who were driving through the intersection, and none of them believed me, either! Weird! Lots of horn blowing, obscene words and gestures, and the throwing of half-empty coffee cups at me, but no belief!

And they didn't believe the sign I had hung around my neck, either, which said, "Will work for food", which shows that they are particularly good judges of character. The fact that people can immediately discern that I am a lazy, worthless bum who hates work is surprising when these same people are so stupid about the inflationary implications of the Federal Reserve creating so much money and credit during a boom, and are now showing that same degree of ignorance at the bust! So I helpfully tell them "We're freaking doomed, you moron!" but they drive away without saying things like, "Hooray for the Mogambo for alerting us to this very important fact!" or "Bravo, brave Mogambo for exposing the demons at the Federal Reserve and in Congress (except Ron Paul)!"

So instead of fruitlessly arguing with you, too, about the implications of this drop in the creation of excess money and credit, I will merely raise my Bony Mogambo Index Finger (BMIF) and point you to Ludwig von Mises himself, who noted, "The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. The boom comes to an end as soon as additional quantities of fiduciary media are no longer thrown upon the loan market."

And in case you are of the weird and thoroughly-modern neo-Keynesian persuasion which says that all that is ever needed is more and cheaper money provided by the banking system at lower and lower interest rates, which means that you actually believe that there can never be too much debt and that debt can grow exponentially forever, then I will not come over there and slap your ignorant face, but merely again point to Mises, who says, "But it could not last forever even if inflation and credit expansion were to go on endlessly. It would then encounter the barriers which prevent the boundless expansion of circulation credit. It would lead to the crack-up boom and the breakdown of the whole monetary system."

It is times like now that I realize the value of education, and wish that I had paid more attention in school instead of acting like some juvenile delinquent moron and thus having to endure my parents endlessly arguing with the principal about whether I am the spawn of Satan or not. I now rue my ignorance because I cannot calculate how much freaking money comes from $3.181 billion of new credit when multiplied times the fractional-reserve multiplier in the banks.

I mean, if the banks must keep in reserves 10% of deposits, like in the classic textbook example, then the first bank in the chain can lend out 90% of this new deposit of Fed credit, or 0.90($3.181 billion) = $2.863 billion, and when that loaned money is ultimately deposited by the recipients into other banks, those banks can then loan out another 0.90($2.863) = $2.577 billion, and then when that money is loaned and ultimately deposited in other banks, those banks can lend out another 0.90($2.577 billion) =$2.319 billion, on and on and on until the last dollar is borrowed from the next-to-the last bank in the chain and deposited into the last bank in the chain.

To find the total amount of new money created, you have you add it all up, hour after hour of struggling with a stupid calculator, making mistake after mistake and having to start over again and over again until you are so frustrated and angry that you hit the little buttons so hard with your finger that you hurt yourself, and there is blood all over the calculator, and your finger is hurting like hell and you are raving, screaming, insanely mad.

Then, demonstrating Heroic Mogambo Determinism (HMD), you finally, at long last, your finger throbbing, find that the sum total of new money created is actually equal to the inverse of the fractional reserve multiplier times the amount of money deposited!

This means I could have merely multiplied the stupid $3.181 billion times 10 to get the answer, instead of laboriously adding them all up, one by one! This is a HUGE freaking time-saver, about which I learned only AFTER the nightmare described above, and that is why I remember it so well, with scars and a ruined calculator to remind me of the ordeal.

The point is that the "required reserves" in the banks is still about the same stinking $42 billion that it has been for the last eight years! No change! In short, the banks loaned every additional dime of the trillions of dollars that they took in! And then more on top of that! No additional reserves at all! Not a freaking additional dime of reserves has been added in a decade or more!

So you can see how my Puny Mogambo Brain (PMB) is confused and stymied in performing simple, first-day-of-class algebra; if deposits went up but reserves remained the same, then reserves are literally zero against new deposits, and thus the fractional-reserve multiplier is infinite! Infinite! How in the hell do you multiply $3.181 billion times infinity?

I know, thanks to Awesome Mogambo Powers Of Extra-Sensory Perception (AMPOESP), what you are thinking. Half of you are saying to yourselves, "What in the hell is this Dumb Mogambo Moron (DMM) yammering about, and why in the hell should I care about any of this? I am only here to find a way to get rich quick! And so this banking crap means nothing to me! Nothing! Let's get out of here and grab some lunch early so we'll be done by the time The Mogambo gets there, and then we won't have to be disgusted watching him eat, or keep him from stealing food off our plates!" And the other half of you are thinking, "Anything times infinity is infinity, you Brain-Damaged Moron (BDM)."

Pausing a brief moment to make a little note to myself to lower all your grades and ruin your GPAs in Petty Mogambo Revenge (PMR), either about that hurtful "lunch" crack or out of envy at your mathematical skills, I then say, "I can understand multiplying $3.181 billion by infinity to get infinity, but if you remember, which you probably don't because you are a bunch of low-IQ, crack-smoking, teenage scumbag trash, we are talking about a FALL of $3.181 billion in Total Fed Credit."

Seeing the blank looks of confusion on their faces, I explain, "Now multiply it out, observing the signs, and you get negative infinity, you ignorant human garbage! Negative infinity! What in the hell is negative infinity, you Lowlife Student Halfwits (LSH) who won't even share one lousy little piece of pizza with me? I hate you! I hate you all! And I will probably end up strangling half of you before the semester ends, and I will spit on your graves!"

Instantly, I could see that I had made a big impression on them, because they all got up and left, muttering under their breaths, probably to go out and ponder the imponderable, think the unthinkable, namely the existence of negative infinity, only to reach the inevitable conclusion, "We're freaking doomed!", thus attaining True Mogambo Enlightenment (TME). Ommmm.

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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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