This article originally appeared at The Daily Reckoning.
-- I am happy to report that the Federal Reserve is not increasing Total Fed Credit with its usual disregard to the sheer economic insanity of constantly creating more and more debt, money and credit, although being down by $3.5 billion last week is nothing to write home about ("Dear Mom and Dad, It's been a swell week at camp! The Federal Reserve is tightening money by some insignificant little amount, and now we are going for a canoe ride! Love, Tommy.")
So I was surprised to discover that the Federal Reserve's frantic, exponentially increasing of Total Fed Credit since 1997 has apparently paused, as I gather from the cold, cold chart. Looking this up in the Mogambo Economic Book of Changes (MEBOC), popularly referred to as the Mogambo Ching, it reads, in its entirety, "Prepare to die!" This is a pithy MEBOC way of saying that with our stupid economic system of fiat currency created by debt, it takes ever-increasing amounts of money and credit to keep the whole stupid system from imploding.
In a closely-related vein, Thorsten Polleit, a professor at the Business School of Finance & Management in Frankfurt, and writing "Sowing the Seeds of the Next Crisis" at Mises.org, says "The income velocity of money -- that is the relation between nominal output and the stock of money -- declined sharply."
This velocity thing comes from the idea that the total value of goods sold must equal the total amount of money spent on those goods. This translates to the famous equation QP=MV, where Q is the amount of goods sold, and P is the price they were sold at. This must equal M, the total amount of money stock, multiplied by V, the velocity of money (the number of times each dollar is used in a transaction).
Okay, then for the equation QP=MV to be true, then, to balance the equation with a falling velocity(V), either the money supply (M) increased, or the quantity produced (Q) has decreased, or prices (P) have decreased, or a little of each.
As for the idea of prices decreasing, don't make me laugh! Hahaha! Look! I'm laughing, even though I told you NOT to make me laugh! The reason that I am laughing is because prices are going through the roof! So, jocularity aside, that means that either quantity of goods produced (Q) had to go down or money supply (M) went up. As it turns out, it was mostly M, the money supply, which increased all those years!
So what is this actual value of the velocity of money? He says "Velocity fell from around 1.65 at the end of 1994 to 1.25 at the end of 2005." Yikes! I'm jumping out of my Freaking Mogambo Skin (FMS) at this! As I stared at those velocity numbers over and over, feverishly jamming them over and over into a calculator, I came to the terrifying realization that velocity went down by 24%! A quarter! Now you know how it is that while prices and the money supply both increased, the economy's GDP did not increase as much as would be expected. The reason is that velocity went down! Money is not circulating as fast as it did, and was thus involved in fewer transactions!
Mr. Thorsten remarks "Taking into account the lessons learned from analyzing monetary matters from the point of view of the Austrian School of Economics, it becomes crystal clear that the very foundations of the monetary system on which economic prosperity of the industrial countries so heavily depends keep deteriorating at a rapid pace."
Those who majored in Mogambo Economic Studies in colleges and universities know that any massive, sustained increase, or decrease, of Total Fed Credit is the very thing that consumes whole days in the life of The Mogambo, alternately crying in crybaby fear and screaming in stark, raving horror, like I did when Linda Blair's character in the movie The Exorcist sat up, spun her head completely around in a full circle, and then mockingly asked, with a hideous grin on her horrible green face, "How do you like your little girl, now?" Gaaah! Gaaah!
The reason that I bring this terrifying thing up is that I am trying to be real clever and make the current economic situation analogous to this memorable Linda Blair scene. Except that this is real life, and the head that is being twisted around by the Federal Reserve is America's. And instead of hearing Ms. Blair saying her immortal, blood-chilling line, all you hear is cartilage snapping and bones breaking, and then the head pops off.
And as the severed head lays there on the ground, the camera pans in for a close up, and you note with horror that the head is still alive! Its mouth is saying "Damn! That hurts!" Panning in for a closer shot, the talking head goes on to say "And what hurts even more is that the loudmouth idiot Mogambo was right! We're freaking doomed!" The eyes in the head start to glaze, and yet with a Herculean effort the severed head startlingly continues "Beware! Beware of a massive and massively expensive government, paid for by debt, financed by the Federal Reserve and the banks creating all that new credit so that someone could borrow it and use the money to buy government bonds, stocks and houses, and leveraging to borrow every scrap of equity that ever appeared in anything, including houses, stocks, bonds, receivables and God knows what all. And then," the drying, dying lips were barely moving now, "it was all securitized and sold back to us; we hold our own debt!"
With a final, dying exhalation of breath, the eyes closed and the lips stopped moving. America was dead. Next, a dog walked up, lifted its leg, and peed on the lifeless head, which was both a nice touch of comic relief and highly symbolic, given the subject matter.
The bigger news, and probably the cause of all the alarm bells in the Mogambo Bunker Of Wailing In Fear (MBOWIF) clanging and bonging and ringing and buzzing, is that the dollar fell in value. This may not mean much to you, right this very nanosecond, but it will mean a lot to you very soon.
But at least you are not Japanese or Chinese or European, who hold a lot of US debt and equities, and who now all have sudden, huge paper losses on their holdings in terms of their own currencies! Hahaha! Chumps! Okay, in nominal terms, it wasn't that much, but when you consider the leverage that is being used, then suddenly this is a huge chunk of money!
And puh-leeze don't tell me how the brilliant use of derivatives is some kind of savior here, as the total amount of money lost is the same either way. The only difference is that instead of a few guys getting slaughtered for being so stupid, the use of derivatives means that everybody took a tiny loss.
-- The most exciting, fabulous news is that the long-awaited Barclays' silver ETF, a store of actual bullion silver that trades like a stock under the symbol SLV, has opened for trading! Like all clear-headed, greedy little bastards who are salivating at the prospect of a "sure thing", I bought some, and my Mogambo Monster Market Tip O' The Day (MMMTOTD) is for you to buy some, too. As much as you can afford. It's like shooting fish in a barrel!
This startling, new financial innovation will allow ordinary money managers to invest in silver bullion, but without the hassle of storing it with elaborate, theft-proof safeguards, or accounting for it, or paying for insurance for it or any of that housekeeping stuff. I predict that this will prove to be an unstoppable phenomenon, as money managers sift the market data with one hand for stocks that are rising and noticing that SLV is rising mightily, and with the other hand answering the phone and dealing with disgruntled clients wanting either their money back or more gain.
What makes this so delicious is to remember the stories about how the Hunt brothers tried to corner the silver market 27 years ago. They almost did it, and they drove the price of silver to almost $50 an ounce in the process. Did you also know that they were using the futures market to do it, or how their use of margin was used against them by raising the margins and forcing them to sell when they couldn't come up with the extra cash, which caused them to bail out and thus the price to fall precipitously?
Exciting, huh? Well, you ain't seen nothin' yet! There is a lot less silver in the world than in 1979, and just a few large ETFs here and in foreign countries can actually, literally buy all of the silver in the world, with cash! And no margin calls to ruin the party! Hahaha!
So how much silver is there in the world? Well, GFMS, a metals consultancy, said identifiable inventories of silver have dwindled over the last 16 years from several billion ounces to less than 600 million ounces. Hahaha! There is less than a third of silver left from way back when the Hunt brothers tried this scheme, and they almost did it!
And it is not just silver that is going to rise, but gold, too, as the supply of gold sold into the market by the central banks is diminishing at the same time as demand is rising! Roger Wiegand of TraderTracks.com writes "We heard that Switzerland has sold half of their stored bullion and are finished with the proposed selling program. The ECB has said they are finished selling for the year. Germany and France still have some gold selling quotas available but look for their legislatures to roadblock and stall any remaining sales. Meanwhile, the Middle East, India and most of the rest of Asia is buying with both hands while trying to hide gold purchasing numbers."
So if you are feverishly buying gold and silver to get in on the coming explosion, then congratulations! You're going to be rich! And if not, then at least you know why you are not going to be rich.
Don't believe me? Well, in the weekly commentary at iTulip.com "Textbooks in U.S. schools teach that The Great Depression made everyone poor. In fact, deflation made a number of people very rich. Those who played it well made money during the bubble and preserved it by storing their wealth as cash in the bank, which at the time meant gold. During the deflation that followed the collapse of the credit system, the purchasing power of this hoarded cash increased. In this way, the rich got richer."
Tying the fall in the dollar in with precious metals, an interesting essay posted on SafeHaven.com entitled "Update of the US Dollar Index" by David Petch of TreasureChest.info notes that "Assume all the gold ever mined till 2001 was 145,000 tonnes, with approximately 90% remaining in circulation (10% lost over time from sinking ships, industrial applications etc. etc) bringing the number down to 130,500 tonnes. There are 32,150.72 ounces in a tonne, bringing the total ever mined (including 2500 tonnes per year from 2002 till the end of 2006) to 4,597,552,960 ounces. Taking the gold price close of $632.50/ounce, the total worth of gold in the world is $2.91 trillion dollars. I could not find any statistics on the amount of total money supply, but assume there will be around 90 trillion dollars at 2010 (assuming 15-20% global monetary inflation between now and then) in cash from each country thrown in a pot."
At this point my head is swimming with numbers, and I petulantly raise my hand to ask "What in the hell does this have to do with making a huge fortune and then buying Wild Willie's Pizza Palace and firing them all and that snotty waitress in a fit of pique?" Mr. Petch arches his eyebrows at the curious interruption and answers "In order to balance things out, the price of gold would have to rise 30 fold from current levels to $18,960/ounce. Note that I have not included the 54 billion dollars of unfunded liabilities in the US or other countries, which if included could be in the hundreds of trillions. The bottom line is that gold is still very undervalued and may go higher than all of us believe."
-- The AP newswire story "Bernanke Issues Fresh Warning on Inflation" reports that "Bernanke said the Fed 'will not hesitate to act' to keep the economy moving and inflation at bay" Hahaha! This is the kind of self-contradictory nonsense that comes out of the mouths of Federal Reserve and American mainstream economic morons! Hahaha! Do these halfwits really, honestly think that they can do both of these things at one time when nobody else in all of history could? Are they so damned silly and arrogant that they actually think that they can suspend the Laws of Economic Nature? Of course they do! Hahaha!
And speaking of Ben Bernanke, I missed most of his testimony before Congress, as I could not bear to watch it, although I knew that I should, because I would have lots and lots of nasty stuff to write about. But I missed it because, at this late date, it is all theatre of the absurd anyway, which I normally kind of like, especially if the accompanying music video had pretty girls in them, especially the ones where they look directly into the camera so that I can read their minds and hear them say "I want you, Mogambo! I burn for your kisses!"
So let me summarize Mr. Bernanke's remarks without even hearing them; "Everything is fine. We're watching everything to make sure it stays fine. And if it is not fine, then we can alter the whole universe at our sole discretion and make it fine!" Hahaha!
-- Axel Merk, of the Hard Currency Fund, and writing at SafeHaven.com, says that The Mogambo was right when I said that China is going to eat our freaking lunch and we are in for some hellacious price inflation in commodities and that will unleash a hell on earth the likes of which are darkly foretold in the Mogambo Chronicles, Book of Revelations. Well, I sheepishly admit that he did not actually say that, but he might have, because he did write "It is time to get rid of a myth: China is NOT a low cost country. China is a low wage country, but producers in China also face high raw material prices like the rest of the world."
Obviously Mr. Merk is not familiar with the Mogambo Chronicles, especially the aforementioned and terrifying Book of Revelations, but he eerily says the same thing when he writes that inflation is going to consume China, too. And since the Chinese yuan is going to go up against the dollar, that means we American idiots are going to be importing inflation. Lots of inflation. Lots and lots and lots of inflation.
But, to the credit of the Chinese, they are raising interest rates to try and cool down the overheated Chinese economy. Which makes the dollar even less appealing.
And it is not just the Chinese, according to Chuck Butler of Everbank, who notes that "the IMF has recently upgraded their forecast for Eurozone GDP. This report reminded everyone that while the U.S. probably is going to raise rates one or two more times, the ECB is also going to raise rates, and probably 3 to 4 more times!"
-- Andrew McKillop, who is a "policy consultant", asks, in his essay on Financial Sense.com entitled "Whatever Happened to Oil Price Elasticity?" Price elasticity, in case you were wondering, is the notion that when prices go up, demand goes down, and when prices go down, demand goes up. Perfect elasticity is when, for example, prices go up 10% and demand decreases 10%.
For example, suppose my family starts whining that they want pizza for dinner, and I can't afford a pizza, and I tell them to shut up and eat the nutritious garbage that I laboriously picked out of their neighbor's trash cans, which I, thankfully, can afford. But then suppose pizzas start going for "two for the price of one." Market watchers note a sudden little spike in the Pizza Index. Somebody is buying! Then comes the "Three pizzas for the price of one" sales campaign, and pretty soon the Pizza Index is off the charts, and snotty "field agents" from the county social services department are down here snooping around just because my ungrateful family is tired of eating pizza for breakfast, lunch and dinner every damned day.
But this is not about two jive social workers and their usual, off-the-cuff assessment that I am the most horrible man they ever met. No, this is about, instead, this "price-goes-down/demand-goes-up" elasticity thing, and how my response was perfectly natural as a Living Mogambo Example (LME) of "perfect price elasticity."
On the other hand, if prices go up but demand does NOT decrease, then this is known as "price inelastic."
With this week's gratuitous use of Silly Mogambo Hillbilly Patois (SMHP), I note for the record that he slides the microphone out of my hand slicker than a goose booger on a wet doorknob and says, continuing his fascinating foray into the price elasticity of oil, "Continuing with classic or fairytale economic analysis, it is claimed that final consumers, as well as intermediate users of energy, will one day come to their senses and suddenly reduce their oil demand, because it is too expensive. The most immediate question is why these economic agents will 'come to their senses' and use less oil. What will they do thereafter?" Hahaha! Exactly! In short, if you gotta have it, you gotta have it, regardless of the price. He writes "Nobody uses oil and gas 'for the fun of it', or at least very few persons." In summary, he concludes "The fatuous unreality of 'classical' economics, regarding energy, is thrown into high relief by simple facts."
And while I succinctly summarize all of this with the Immortal Mogambo Phrase (IMP) "We're all freaking doomed!", Mr. McKillop says simply that there is no way out. Even more ominously, he observes that there is no magic energy substitute to save us, either. "Equally, the famous 'hi-tech emerging new energy' substitutes and alternatives simply don't exist. They may exist on the Nasdaq or in people's heads and PCs, and in cute business video presentations, but not in the real economy."
-- The Commerce Department says that the economy, as measured by real GDP, is up an annualized 4.8% (but up a blistering 8.2% before adjusting for inflation!). Therefore, the official inflation figure is, from these figures, 3.4%, which is exactly what the stinking liars and cheats of the government are saying.
Actually, if you have bought anything in the last couple of years, then you know that real inflation is really running at more than 8%. So GDP, which went up because prices rose, would have shown a real, inflation-adjusted growth of literally zero! Zero! Hahahaha!
And, even worse, while the Dept of Commerce facetiously announced the US economy grew by 4.8 percent in the first quarter, the Labor Dept threw some cold water on the party and that wages gained the least in seven years!
Anthony M. Cherniawski quotes the bea.gov site for the report of GDP. He notes that "In the 4th quarter, personal consumption expenditures fell by 16.6%. This quarter they rose by 20.6%. Do the math: Consumption has been flat for the last 6 months!"
He even ferrets out the admission that "Personal outlays increased $166.9 billion (7.4 percent) in the first quarter, compared with an increase of $84.6 billion (3.7 percent) in the fourth. Personal saving -- disposable personal income less personal outlays -- was a negative $50.5 billion in the first quarter, compared with a negative $15.8 billion in the fourth." What does this mean? He goes on to explain "The personal saving rate -- saving as a percentage of disposable personal income -- decreased from a negative 0.2 percent in the fourth quarter to a negative 0.5 percent in the first." So we Americans, who like to pride ourselves on how smart we are, again spent every last dime we got, and borrowed more, driving us deeper into the debt hole! Hahaha!
He also goes on to note that with the global rises in interest rates, the addition of China to this rate-raising has consequences. "Despite Ben Bernanke's comments about a pause in interest rate hikes, it is getting harder and harder to sell US Treasury bonds." And the way to sell slow-moving Treasury bonds is to lower the price, which raises the yield, which is a de facto increase in interest rates, which is NOT good for a growing economy.
He goes on to note that it's not just interest rates that are worrisome. "We are in week 89 of an '80-week' cycle," he says. "The longest 80-week cycle on record is 102 weeks, also at an important market top."
As if that was not enough to make your hand shake so much that you spill your beer in your lap, he goes on to say "The NYSE Summation Index has been going down since the beginning of February. The Summation Index is an indicator of broad market momentum and stock participation. What you see is warning, 'Look out below!'"
Finally he notes, in response to all of those who are paranoid and scared that the Federal Reserve has suspiciously chosen to not ever again publish M3, the broadest measure of the money supply, that "Thanks to the folks at nowandfutures.com, it appears that we can still look at the rate of money creation by the Federal Reserve even after they have stopped publishing their own numbers. Their data sources are M2, Institutional Money Market and two weekly reports from the Fed - H.8 and H.4.1. Is it any surprise that they don't want to show that the annualized rate of money creation is now over 9%? That's right. A half a trillion dollars created out of thin air in the past six months."
A 9% increase in M3! Yow! Yow yow yow! And to make sure you comprehend the catastrophic enormity of this, he adds, helpfully, "Remember, M3 is borrowed money." So debt went up by 9%? Yow yow yow!
-- Alert reader Jared F. has developed a new economic indicator that he calls "Number of Items Returned at Cash Register Because of Not Enough Money (NIRCRBNEM)." He says that while in the grocery store, "I have been noticing this former check-out girl putting items back on the shelf from nearly full baskets. I asked her if there were more of these items being returned and she said most definitely, that before it was a part time job to put the items back, but now they have someone doing it full time, with some additional part time help when it gets busy. I asked if this was a seasonal thing and she said that it had never happened before, as near as the managers can recollect, and it had them worried."
His analysis? Inflation! He went to two other stores, and it was the same thing, as "People buy what they are used to buying, but when it comes time to pay, they are surprised at how much more money it is, and have to put some back."
-- Two items appearing on the same day demonstrate what a bunch of lying, cheating scumbags the government is. The first is the news that the interest paid on government-issued I-Bonds, which sport a variable interest rate that is supposed to protect the investor from inflation, are now being issued with an interest rate of 3.41%, down from 6.73%. Why? As the St Petersburg Times reports, it is "based on a big drop in the rate of inflation."
The other, contradictory news item is from the Wall Street Journal, which reported that the Commerce Department declared a "larger-than-expected increase in its index of consumer goods prices' of 0.3% in March", which is "at the top of the 1% to 2% range that the Fed considers acceptable."
And even that "acceptable" 1%-2% "core" inflation disregards both energy and food, plus every other damned thing you can think of. In short, the Federal Reserve is chock-a-block full of idiots and liars, which is exactly what you would expect. Ugh.
****Mogambo sez: If you are not buying gold and silver and oil, then don't come crying to me in the coming years. And if you are buying gold and silver and oil, then you will be rich, and I will soon be calling you up to ask to borrow some money. You only have to decide which is worse.