This article originally appeared at The Daily Reckoning.
-- I am, apparently, on the edge of a nervous breakdown, as nothing is making sense anymore. For instance, Total Fed Credit created by the Federal Reserve actually went down last week by $5.2 billion. This sudden lapse into monetary sanity could be a ruse, because they say that Ben Bernanke, the new chairman of the Federal Reserve, has yet to gain the "trust" of the bond market until he can "prove himself" as an inflation fighter, which means heeding the advice of the stupid Mogambo to stop this insane over-creation of money and credit by the Federal Reserve, which must lead to higher debt loads and higher prices, both of which lead to misery and suffering, and one day they lead to economic collapse, as it always has and it always will. And then for the rest of my miserable I am going to be standing where the Federal Reserve building used to be (having been torn down by a betrayed, angry citizenry), yelling "I told you so, you stupid morons!"
But it is the "higher prices" thing that is the killer. As a perfect example (and which also personally gripes my big Mogambo butt (BMB)), when Alan Greenspan took over the Federal Reserve in 1987, you (meaning me) could get a donut and a cup of coffee for seventy cents, plus tax, leave a nice tip, flirt coyishly with the waitress, and then angrily take back the tip when she cruelly laughed in my face, all from a single dollar bill. Imagine my cruel surprise when I find that the price of a stale donut and a cup of weak coffee has now risen to $1.87! I was halfway through screaming at the snotty little waitress about how she is robbing me blind with her stinking little fraud, when she pulled out her H-P 12C calculator. Stunned, I watched as she deftly calculated that this was 5.6% inflation per year for those 18 years, like that was going to make it okay with me or something. But which it does not, which she soon found out to her dismay.
This inflation is NOT the result of a good job of fighting inflation, and, in fact, this is proof positive that Alan Greenspan is, without a doubt, the worst central banker America has ever seen, if not the world, which is saying a lot, because most countries' central banks are filled to the brim with this exact same kind of idiot. Which, of course, leads me to make the relevant point that their governments are also filled with the same kind of idiots that we have in ours, and how could I resist bringing up the point that their stupid citizens believe that governments exist to tax and spend in order to solve more and more of the problems of human failings, just like the idiot citizens in this country, but they are wrong, just like we are wrong in this country, too.
But the bond market wants an inflation-fighter? At this, The Mogambo laughs! Hahaha! What a load of crap! Hell, the bond market accepted the horrid Alan Greenspan for 18 inglorious years, and that demonic little creep exploded the monetary aggregates, created the bank financing for staggering amounts of debt, both public and private, created an impenetrable web of lies about what counts as inflation and what doesn't, devalued the dollar by half, and facilitated and financed the buildup of such monstrous amounts of derivatives that the total, global face-value of that whole glop of toxic waste is estimated to be somewhere between $350 and $450 trillion dollars! If this seems like a lot of money to you, then you are right! It IS a lot of money! It is a HELL of a lot of money, and in fact it is TEN TIMES as much as the entire GLOBAL output of goods and services of everybody on the face of the freaking planet, for an entire freaking year, which is, obviously, both 1) about $40 trillion per year and 2) an example of an obnoxious loudmouth (me) working himself into a fit of Mogambo outrage and anger (MOAA) about it.
But the point is that the bond market accepted Greenspan and his inflation. And they are accepting of this same monstrous expansion of money and credit around the world. And did I say "accepting"? Hell, they LOVE it! They are eating this stuff up so much that 6-month Certificates of Deposit at banks are yielding, according to the Money Rates table in the Wall Street Journal, 4.87%, which sounds good, relatively speaking. But we poor chumps who have put our pathetic little bits of savings into CDs are actually losing money. Out of that paltry 4.87% yield on the CD, we have to pay income taxes on the interest, probably averaging about 25%. That brings our after-tax yield down to 3.15%. Now subtract this 3.15% net yield from the real-life inflation in all the stuff we have to pay for each year, which is almost certainly running north of 7% a year.
When you subtract the CD's net yield (3.15%) from the rate of inflation (7%), if you do the math correctly you will get a net loss of 3.85% a year! Hahaha! You lose almost 4% of your buying power per year! If you close your eyes, you can easily envision Greenspan's nasty, leering face, with his demonic eyes burning into your soul, as he intones "Welcome to fiat money hell, suckers!" Hahaha!
But this is not about how the government's Federal Reserve is screwing the people who save money. Nor is this about the people who do NOT save money, who are even worse off: They have to pay the whole 7% higher prices with ALL their income!
Instead, the whole point of my seemingly-endless ranting and raving is that the bond markets, around the world, are pricing variable debt at such premiums that all debt, regardless of length, is yielding less than the global price-inflation rate! Astonishing!
And the yields are even MORE astonishingly low, insanely low, never-before-in-the-history-of-mankind low when measured in how much money is being created around the world by the central banks around the world, which is so damned much freaking money and debt (audience shouts out "How damned much freaking money and debt, Mogambo?") that even trying to count it all, using all the fingers and toes of every man, woman, child and animal in the world, and making each finger or toe worth a billion freaking dollars, could not count it all ten times over! THAT is how much monetary inflation Alan Greenspan created in 18 short years!
And speaking of the bond markets, note that the government stopped issuing 30-year bonds in October 2001 because the government thought that they could save money by issuing more short-term debt at low rates, and not have to pay higher interest rates by issuing those long bonds. Now they are, ominously, back.
Perhaps you are wondering why your blood seems frozen in your veins. To understand why, perhaps we should turn to Peter Schiff, of Euro Pacific Capital, who opines " For the Government, refinancing trillions of dollars of T-bills into thirty-year bonds without dramatically increasing interest rates would be a feat of financial wizardly even the Great Harry Houdini couldn't pull off." And your blood freezing in your clogged little arteries shows that you have looked directly at the Gorgon of "dramatically rising interest rates", and the profound significance of this is turning you to stone.
And not only that, but he continues that the blameworthy villains in the piece are easily identified. "As long-term rates ultimately soar," he writes "American tax payers will be stuck making excessive interest payments for generations to come, all because some irresponsible politicians wanted to win reelection and an irresponsible Fed chairman wanted to be reappointed."
And, as a final point, these bond buyers are not only passing up a yield on 6-month Certificates of Deposit that is a third HIGHER than what they are getting, but they are also passing up the safety of the money never being at risk. Instead, they accept less yield, and lock up their money at this low yield for the next 30 years, pushing their risk of loss towards 100%! Hahahaha! Morons!
And yet the chumps of the world are eagerly lining up to buy variable debt, of every maturity out to 30 freaking years, to lock in an abnormally low, low yield that is guaranteed to, one day, rise significantly! Dumbfounding! Invest a thousand dollar's worth of buying power, and get back ten dollar's worth after 30 years, plus a few hundred along the way! Hahaha! This passes as brilliant investing!
I can't believe my eyes when I am looking right at people who are so incredibly ignorant of the very basics of Economic Reality 101 that they actually own these toxic bonds! They will suffer a HUGE loss, as the price of the bond varies inversely with the yield, so that when yields rise (as they will), bond prices will go down. And when yields rise a lot, then bond prices will go down by a lot, too, essentially wiping out the stupid bondholder, who richly deserved what he got.
The mighty stentorian voice of The Mogambo (MSVOTM) cries out "And who are these low-IQ buyers of this ridiculously overpriced debt, who are literally shoving each other out of the way in order to be the first in line to get some of this (did I already say 'crap'?) crap?"
Well, nobody raises their hands, as the violent reputation of The Mogambo has obviously preceded him. You could hear a pin drop. Trying to be helpful, I tenderly suggest "Well, part of the answer is the banks themselves, as they sopped up $9.1 billion in US government debt last week."
Still they sat there, mute. Far off in the distance you could hear a lone wolf howling softly. Finally, after what seemed an eternity of an eerie, strained silence, suddenly The Mogambo shatters the stillness and shouts the answer "Your retirement funds, you stupid Earthling morons! Your retirement funds, as part of some bizarre, twisted 'hedging' or 'diversification' or 'fully-funding' fairytale, are setting you up to suffer a huge, huge, HUGE freaking loss by stupidly buying these grossly over-priced, under-yielding bonds! Hahahaha! I laugh at the stupidity of you puny humans!"
Of course, the slimy United States Treasury, in full "Screw you!" mode continued to, illegally, increase the total indebtedness of the USA by criminally, continuously, and consciously breaking the law by issuing (as of Valentine's Day) $21 billion more debt than they are allowed! Note the exclamation point to show special emphasis, as I never thought that I would live to see such blatant, provable, criminal lawlessness in the government of the United States.
As if that was not enough, the Treasury also had $3.128 billion more actual cash printed up, which comes to ten bucks and change for every man, woman and child in America.
Holding our noses to continue in this "slimy government crap" vein, perhaps it is time to report that President Bush unveiled his proposed 2007 budget, and the bloated, stinking monster weighs in at a new record, which is $2.77 trillion dollars. It already contains more than $400 billion in budget deficits, hitting a new record. And this does not even count the known, yet uncounted, future Supplemental requests for an estimated $120 billion with which to kill citizens of other countries, or any of the infamous "off-budget" expenses, the kind that last year alone required us to increase the national debt by $600 billion! $600 billion dollars more federal debt! In one year! $6,000 for everybody who does not have a government job in the entire country! And that does not even count the additional hundreds of billions in Social Security debt obligations!
I'm sorry that I am gulping air, trying to get enough oxygen to my pounding heart. But the biggest news, to me, is that he is proposing to not increase some Medicare and Medicaid payment programs, which means that my healthcare costs are going to increase a lot. The problem is that there is no change in the insane laws that require every hospital and provider of any healthcare service to provide full, first-class care to anybody who shows up. If the hospital provides less than full treatment, they are allowed to sue the hospital. In the beginning, the government used to pay for their own mandate. Now they don't pay as much, and just people with insurance pay for it.
As today's Little Mogambo Lesson In Real-Time Economics (LMIRTE), notice that now that Medicaid and Medicare are no longer going to pay the full amount of the hospital bills incurred by a huge group of indigents, illegal aliens and assorted deadbeat parasites, even though the hospitals must treat them all, the hospitals' un-reimbursed costs will merely be added to MY health care bills, again and again and again.
For the record, I am already paying half of my after-tax income for health care. Why? Because I am self-employed, and thus I really get hit hard by insurance companies, as they are all offering discounts to the big groups in order to get their business, and nobody wants the hassle of insuring us lowly scumbag self-employed trash. For my wife and me, I pay $9,000 for health insurance per year, two $2,000 deductibles ($4,000), little-to-no prescription-drug benefit to help pay for $10-per-pill medications, and if I submit to a test of some kind, then I get bills from almost every provider who has ever heard my damned name, hitting me up for the part of their outrageous bills that the insurance company won't pay.
-- Let's turn now from the horrid and ugly to the more beautiful world of gold, and how gold will save you from the depredations of the government and the banks. For example, David Bond at SilverMiners.com has read Salman Partners' opinions about the proposed silver Exchange Traded Fund, and summarizes "The average ETF-impacted ROI of the eight companies Salman looked at was 47.625 percent. It basically means for your average silver stock, it's trading right now at about two-thirds the price it will be when the silver ETF struts its stuff."
Apart from sheer supply and demand, Franklin Sanders of The Moneychanger newsletter says that the silver/gold ratio is pretty interesting from an historical perspective. " When any commodity returns to the same levels two, three, or four times during 100 years' trading," he writes, "I begin to suspect a pattern. And while past performance is no guarantee of future, a reasonable man would bet that from 1991's 100:1 we are headed toward 16:1 before this bull market ends, say, 10 years from now."
I know that he is expecting me to say something, but all these numbers swirling around and around make my head spin, and now all I can think about is how much longer it will be until lunch, and then I remember I already ate lunch, and now I am even MORE bewildered and depressed.
Seeing the blank expression on my face, he tries a different tack. " If gold reaches $1,250 (a modest target only 5 times its bear market low) and returns to a gold/silver ratio of 16:1, silver would reach $78.80."
Again he pauses with that expectant look on his face as he is waiting for me to say something, but I am completely lost. I am thinking "Gold will be up, and oil will be up, and soybeans will be up. So $78.80 silver may be ho-hum." I stare at him. He stares back at me. Finally he snaps, and yells at me, as I remember it, "In other words, it would outperform gold 400 times over!" Suddenly, I am galvanized! I leap to my feet! Gold is going to zoom one of these days soon, and silver is going to zoom 400 times more than that? Wow! The greedy side of The Mogambo (GSOTM) says "Let me have some that that silver action, and right now!"
And speaking of ETFs, Adam Hamilton of Zeal Intelligence implies that the recent downdraft in gold may have something to do with the gold Exchange Traded Funds. Beyond that, he notes that there are lots of other gold ETFs around the world, and "Together all these ETFs are creating conduits for global mainstream stock investors to take a small stake in a gold-tracking asset. Small stakes times hundreds of millions of investors equals enormous amounts of capital."
And small-time guys, it seems to me, are all out to make a lot of money quickly, as they don't have much money to invest, their other stupid retirement plans (stocks, bonds, mutual funds, real estate, Social Security) don't seem to be working out, and time is getting shorter and shorter. It's "desperate times calling for desperate measures" and all that, especially now that they are drowning in oceans of debt of all kinds, and if I don't get some big money fast, then I am going to be in a lot of financial trouble.
So we small-timers are dashing in and out of gold like crazed day-traders, trying to make that fast buck, churning up the markets and creating wild volatility. And with volatility like this, it will bring out the other small-time fish looking for an easy, fast buck, too, and that will bring out the sharks, looking to eat the little fish.
And in the middle of it all are the central banks of the world who have either 1) sold some or all of their gold, 2) leased out some or all of their gold, or 3) both, and are horrified that gold is rising in price, which demonstrates, for all to see, that the investors of the world have lost faith in the management of the economy by the idiot banks.
And the central banks are in that swamp with the bullion banks, which borrowed the gold and sold the gold, are still officially promising that they will return the gold to the central banks from which they borrowed it, good as new. But with gold soaring in price, that is turning out to be an impossibility. And because they pay less than 1% a year on the borrowed gold, which they sold and then used the money to buy interest-paying bonds, with rising interest rates they are getting doubly killed! Hahaha!
And each time the price of gold goes up by another dollar, it increases the losses of the bullion banks, and every time that interest bonds prices fall by another fraction of a percent, it ALSO increases their losses, and makes it evermore likely that the bullion banks are going to go bankrupt and central banks are going to get stiffed. So both of these corrupt agencies want gold to go down in price, and you can bet your sweet patootie that they are doing everything they can to get gold back down in price, no matter how corrupt, slimy or illegal.
But the Mogambo is not worried that the price of gold will go down, and neither are the Chinese, as we read in the China Daily that " China is planning to set up a gold investment fund, hoping to capitalize on the surging price of the metal."
-- In the fascinating world of deficits, December exports of $111.5 billion, versus imports of $177.2 billion, results in a goods and services deficit of $65.7 billion, taking us to a new record.
And it is not only trade deficits that are getting bigger, as Paul Kasriel, Director of Economic Research at Northern Trust, writes " In dollar terms, households ran a record deficit of $470.6 billion in 2005. Relative to their after tax income, households ran a record deficit of 5.2% in 2005. Households in 2005 ran a bigger deficit than did the federal government!"
At the Biz.Yahoo.com news site we read that "Critics say the rising trade deficit is a major factor in the loss of nearly 3 million manufacturing jobs since mid-2000 as U.S. companies moved production overseas to lower-waged nations. Many economists believe those manufacturing jobs will never come back."
Well, one of those people saying such terrible things is Richard Trumka, secretary-treasurer of labor's AFL-CIO, who says that "Such a huge trade gap undercuts domestic manufacturing and destroys good U.S. jobs. America's gargantuan trade deficit is a weight around American workers' necks that is pulling them into a cycle of debt, bankruptcy and low-wage service jobs."
But the news is not all bad, as there is always a high-paying government job! An article in Parade magazine reports that the average federal employee "now earns $63,125 a year", with even higher salaries depending on location, such as Washington, D.C, where the average salary is now $80,425. This is more than the average worker in America! And this does not even count all the many benefits that accrue to government employees, and all the expenses of their tools and computers and desks and agency cars and training seminars and supervisors and committees and paying for Continuing Education credits and the unemployment compensation costs and help with education expenses and the inevitable lawsuits and permanent disability retirees, and etcetera, etcetera, etcetera.
But since one out of every seven workers is a government employee, then each non-government employee has to, somehow, pony up, conservatively, his or her respective sixth of $100,000 per year, which comes to about $17,000 per non-government worker, just for the hiring of government employees!
Maybe all this has something to do with why Paul Craig Roberts (former Assistant Secretary of the Treasury) writes that it is worse than we imagine. "The US economy came up more than 7 million jobs short of keeping up with population growth. Over the past five years the US economy experienced a net job loss in goods producing activities. The entire job growth was in service-providing activities--primarily credit intermediation, health care and social assistance, waiters, waitresses and bartenders, and state and local government."
In summary, he figures that " US manufacturing lost 2.9 million jobs, almost 17% of the manufacturing work force. Economists who look beyond political press releases estimate the US unemployment rate to be between 7% and 8.5%."
Seeing my eyes glaze over at the sheer horror of it all, he hits me with one final punch between the eyes. "The total number of private sector jobs created over the five year period," he says, "is 500,000 jobs less than one year's legal and illegal immigration!"
-- Even as I watch this gut-wrenching fall in the price of gold, I really have to keep myself from laughing at how cheap gold and silver are, and how people who are buying them now are going to make, probably, the biggest freaking capital gain in the history of investing, so much so that, years from now, the stories of how much money was made by those investing in gold and silver and commodities will be urban legends.
Dan Denning, the editor of Strategic Investment newsletter, hears me yammering about gold, comes out into the hall, and looks right in my eyes to tell me that he predicts that the "bull market in energy (oil, gas, electric, nuclear) was going to be one of the longest and strongest you and I would see in our investment lifetimes. The big drivers are the growth in demand from China and India." Then he stops and looks at me with this smile on his face, like he just trumped my ace or something!
So I am naturally thinking, as I usually do, that Mr. Denning is smart and handsome and tall and successful and happy and popular, whereas I am none of these things, and I secretly hate his guts for it. But since I hate everybody, and for these exact same reasons, I quickly "get over it" and extrapolate that a bull market in energy means higher-priced energy, and that means that everyone who uses energy will have higher energy costs, and higher energy costs are passed along in higher prices, and since higher prices is one of the definitions of inflation, then gold, which historically tracks inflation, will go up, too! Which was my original point! Hey!
Indignant, I charge into Mr. Denning's office and demand my ace back! But he acts all surprised, like he doesn't know what I am talking about, and while he is frantically dialing the security guards on the phone, I am ransacking his office, looking for my ace that he trumped in a previous paragraph. But this not about energy, or gold, or how The Mogambo never got his ace back, but about inflation in something other than stocks, bonds or real estate. This time, it will be inflation in commodities, which includes precious metals, but particularly precious metals. You can store gold, silver and palladium forever, at zero cost, and without ever getting dirt and filthy crud all over you, as when you try to store oil, corn, or (big mistake) live hogs in the garage.
And speaking of gold, t he Times of London newspaper reports "Former Federal Reserve Chairman Alan Greenspan said that the high price of gold is due to investor concern about major geopolitical conflict."
Greenspan was speaking "to an audience of international investors in Tokyo via video link from his apartment in New York," which is good, because I expected those unnamed investors to laugh in utter contempt at that statement, because they knew that the price of gold went up mostly because Greenspan had devalued the dollar so damned much! Geopolitical tensions are just icing on the cake.
He followed that up with another thigh-slapper when he reportedly said "Cheap oil prices were a thing of the past due to a lack of oil refining capacity." Hahaha! In one sweeping simplistic statement, he says that Peak Oil is a fiction, increased global demand is a mirage, the purchasing power of the dollar will increase, and government taxation of petroleum products will not increase! Paying a high price for gasoline is purely due to problems of refining capacity! Hahahaha! Tears of laughter are running down my face!
"Greenspan," they go on to note, "said high gold prices did not reflect inflation or the strength in commodities." Hahahaha! I wish I had been there to see that! For the first time in history, gold is NOT responding to inflation in commodities? Hahaha! And the United States had this moron as the chairman of its central bank for 18 years? No wonder we are so freaking doomed! Ugh.
****Mogambo sez: As it gets weirder and weirder with each passing day, the reasons for owning gold, silver and oil get stronger and stronger with each passing day, too. If you are as weak-willed and greedy as I am, you cannot resist the temptation to make a killing in these commodities. Go ahead! Buy some! You will be glad you did. Trust me.