This article originally appeared at The Daily Reckoning.
-- Total Fed Credit was up only $1.6 billion last week, and while the custody holdings of foreign banks at the Fed was up a strong $9.2 billion last week, I chose to start off the lecture by dryly saying "The big news, to me, is that the dollar has started collapsing. There are so many ugly ramifications of this that I would not even know where to begin. So, let me merely say that the dollar falling is Unalloyed Bad News (UBN), which means that you and your family are all doomed to die horrible financial deaths, screaming in pain and anger, and let it go at that."
The room erupted in panic and confusion until they finally remembered that I am an idiot, and I obviously don't know what I am talking about. Then they all felt better, until Doug Noland, he of the Credit Bubble Bulletin at the PrudentBear.com site, said "Everyone wants to believe that an orderly decline in the dollar poses few problems."
Mr. Noland, if I understand him correctly (and the chances of that are pretty damned slim, given my obvious cognitive limitations and deficits), is slightly less pessimistic than I am about the possibility of an "orderly decline" in the value of the dollar. I am so pessimistic (audience shouts out "How pessimistic, Mogambo?") that security camera video footage reveals screaming in fear, actual foaming at the mouth, and I seem to have embarrassingly peed in my pants, too, out of the same fear. Now, THAT'S pessimistic!
Mr. Noland, because he is a real smart and classy guy, doesn't even mention the dark stain on my pants, but presents, instead, a lot of tightly-argued reasons why an "orderly decline" of the dollar seems improbable. I, on the other hand, am The Mogambo! And I am sure, absolutely sure, more sure than anything I have ever been sure of, and in fact, this is probably the single-most thing that I have been the most sure of in my whole horrible, wasted life, and that is that the decline of the dollar will NOT be "orderly." It will be abrupt and ugly. A quote that comes to mind, although uttered as a comment on people's lives, is "Nasty, brutish and short."
My Infallible Mogambo Reasoning (IMR) is along the lines of "Suppose I told you that your money would gradually and continuously lose a lot of its value. Maybe half. Or more. My intuition tells me that you would not be happy."
I pause to gauge your reaction, which ranges between homicidal anger and paralyzing fear. Exactly so! Then I go on to say "But that same intuition tells me that you WOULD be happy, very happy, if I told you that I knew of a way to let you keep all your wealth, and you would not lose anything!" Ha! I can see by that smile on your face that I was right!
So how to achieve this miracle of wealth-preservation? All you have to do is sell all your dollars and dollar-denominated assets today, before the dollar is devalued further! Then you'd like to stick someone else with the whole loss!
Now you are ready for today's Mogambo Daily Pop Quiz (MDPQ). The question is "Would YOU stick around to take your share of financial lumps, of up to half of your net worth (or more), meted out month after month, year after year, in a promised 'orderly decline', or would you sell out now, and not take any lumps at all?"
Hahaha! Me neither! And neither will anybody else! So it's a trick question! At first, a few will say "That stupid Mogambo moron (SMM) is right, for once in his miserable, pathetic life!" and they will rush to the exits to get someplace to dump dollars. And then a few more will rush to get out, as little light bulbs blink "on" above their heads. And then a few more. And then more and more and more until it is a stampede!
Hahaha! A stampede! Maybe it will be an "orderly stampede!" Hahahaha! "Orderly decline, orderly stampede! You say to-may-to, and I say to-mah-to!" Hahaha!
If, on the other hand, you answered "yes" to the question, then I am sorry to tell you that you failed the test, but I will not record your failing grade in your permanent record if you write a little paragraph or two explaining what in the hell is wrong with you, and then I will have pity on you.
And it is not just the same dreary story about too many prescription drugs, and too many over-the-counter drugs, and too many illegal drugs, or even that all these people left in a rude rush to dump dollars and dollar-denominated assets, but that the more important point is "Where did they go?" I'll tell you where they went! They went home and quickly scanned the entire course of economic history to find out where all the OTHER people in history went, when THEIR economic system started down the crapper, thanks to the same sorry stupid economic sins we have committed today.
I will save you the trouble of getting up off of your fat, lazy butt to find out, as I share your opinion about getting up off of my fat, lazy butt, and all the damned time, too. So I will simply tell you what happened: Those who bought gold and silver preserved all of their wealth as their currency and economy took a dump, and they actually ended up with a fortune in gold. Everybody else did not.
And the reason may be contained in a witticism by reader Greg, who opines "Gold acts as a magnet to draw in excess fiat money."
Or the answer may be contained in the new tune by Steve Dore, of Boogiewoogie.com,
who posted his new tune "Purchase Power" at FMNN.com. It contains this perfectly
true universal truth concerning price inflation vis-à-vis gold, in a
handy sixteen-bar format:
"It's not the metal that's goin' up, it's the dollar goin' down,
Printing presses print away, but no store of value's found,
Over the years, as paper fails, as it will always do,
Gold endures the test of time, pure wealth, tried and true."
But no matter what the reason, they made money by accumulating gold, and the guys who made a fortune in gold went on to make bigger fortunes when they traded the gold for stocks, bonds, houses and real estate at the lows of the economic collapse, and they again prospered as the market values of all these things eventually went back up in the following decades after the collapse.
And if you want to see the advantage of gold in real-life action, then listen to this, from an essay written by Eric N. Young entitled "The Hyperinflation of Germany, July 1922-November 1923". He writes that in 1923, at roughly the height of the Weimar inflation and the end of Reichmark, "Although a loaf of bread cost $200 million marks in November 1923, it was possible to purchase an entire city block of prime commercial real estate in downtown Berlin for as little as $500 US dollars hard currency. The key was to have real money in the form of gold or silver, or currency backed by those metals."
An entire city block of prime real estate! Thanks to a gold-backed money! Of course, it took a long time (made even longer by WWII, which was, in turn, caused by the German people rebelling against inflation and injustice), but what is an entire city block of commercial real estate in Berlin worth today? Hahaha! A very long time horizon, to be sure, but that's how it works in real life!
So, from this fabulous bit of information we can generate one Fabulous Mogambo Market-Timing Tip (FMMTT) for those who are in the category of "Hyper-Aggressive Speculator", and the sub-species "All-Or-Nothing Risk Tolerance." At this stage of the cycle, the best advice to these people is liquidate every dollar-denominated asset they have (like cash, houses, stocks and bonds and everything in their retirement accounts), and use the money to buy silver and gold and commodities."
And the reason a lot of people don't do that may be for the same reason quizzical reader Roberta R. wonders about when she writes "I am writing to you about the paradigm of cashing in gold for fiat (money). I firmly believe in holding hard assets such as gold or silver; but what I have always had a hard time with is the concept of cashing in the gold. As you stated in your editorial, the Reichmark collapsed so far down that it took 87 trillion of them to buy an oz. of Au.
"This is where my brain begins to hurt. Now I am the proud owner of 87 trillion Reichmarks (FRN's) and maybe I can buy a couple loaves of bread. So, you cash out something with a real intrinsic value and you get fiat junk. But it just seems to me that you are back to square one the minute you sell."
She finished with "Working on a headache, Roberta."
I was happy to tell her that she was exactly right! She WAS back to square one! That's the beauty of gold! The answer why is contained in the problem: How much gold does it take to buy one loaf of bread, which costs $2 a loaf when gold is at $700 an ounce? Answer: 1/350th of an ounce. (You can buy 350 loaves of bread with one ounce of gold).
And then how much gold does it take to buy a $200 million loaf of bread when gold is at $87 trillion per ounce? Answer: 1/435,000th of an ounce! You can buy 435,000 loaves of bread with one ounce of gold! Hahaha! A little tiny flake of your gold ounce ought to do it! Hahaha!
So, Roberta, thanks to gold, your buying power has been preserved. THAT'S the beauty of the stuff! And in this particular example, you actually got wealthier, as bread became over 1,000 times cheaper in terms of gold! But notice that the bread cost 100 million times more, in terms of dollars!
-- Things are getting bizarre, as the huge losses in the gold-manipulation scheme of the last couple of decades comes unraveled, and the shorts are forced to either buy massive amounts of gold to cover their enormous short position, or do nothing and continue to lose more and more money. As a result of this panic and desperation, the gold lease rates are gyrating up and down, gold is zooming up and down, and the shares bouncing around. It's weird!
As proof, I refer you to Eric J. Fry, of RudeAwakening.com, who notes that "During the month of April, more than 40,000 metals futures contracts were changing hands every day, on average. That's double the volumes of the prior month and TEN times the volumes of the prior year."
There have been a lot of happy guys on the long side of those contracts that made a lot of money, while a matching lot of other guys are un-happy because they were the guys on the other, losing, side of those trades.
And they have plenty more potential losses due to their still-outstanding massive short positions. Therefore they are using their market-manipulating skills in a desperate, life-or-death fight. To capitalize on their well-deserved misery, and make a lot of money doing it, simply buy more gold and silver every time they succeed in driving the price down.
-- Bob C., who works at JP Morgan, reports that their bullion department reports that they are danger of exceeding their computer data capacity, which "currently only caters for a gold price of $999.999999. We have been asked to cater for a possible $1000.00 gold price within the next few months." Very interesting! Thanks, Bob!
-- If you are thinking of selling options as part of some money-making scheme, let me offer this bit of news; the guy who makes the market in those options is allowed to liquidate your short option position anytime they want to, and you will not even know about it for days. In short, you may be forced to absorb their losses. This happened to me more times than I care to remember, and was certainly NOT in the profit/loss options-trading model I had developed. Soon I swore that I would never again go short an option. And I never did, either.
-- I get a real kick out of people, like the Federal Reserve's chairman and governors, who admit that, "Yes, commodities are rising in price like some kind of rocket ship to the moon, but since inflation in a few, selected statistics (that ignore food and energy) are low, that means that the commodity price rises have not filtered into final prices, and therefore we are justified in keeping interest rates low." Hahahaha!
As an example, the Producer Price Index was up by a blistering 0.9% in April. Yet, the "core" rate was, after powerful massage, up only 0.1% or some other preposterous figure. But the ugly fact is that prices were up 0.9%! And ignoring them does not make that basic truism disappear. Prices were up 0.9% in one month!! And take particular notice the two exclamation points, which is a reliable measure of how hard my teeth are grinding together in anger and fear.
But I grow weary of standing on the roof, dressed in a darling ballerina tutu and firing an AK-47 assault rifle into the air to get people's attention, just so that I can wake these idiot people up to the fact that their money is being destroyed by inflation, and how they are such idiots to allow it, and how I hate them for their stupidity, and what their stupidity has done to us. But my rooftop antics don't work in practice as well as they do in theory, and I may soon stop it altogether, although I'd hate to give up the tiara.
So, taking a Bold, New Mogambo Tack (BNMT), I am now in contention for the Pulitzer Prize for Best Editorial Cartoon In Economics. It's a real nice two-panel job, and in the first panel, see, the scene is this drunken guy driving a beat-up, hopped-up convertible down a mountain road, and he is popping steroids, tranquilizers and anti-anxiety pills like candy. The car has "The Economy" written on its side, and the steroids are labeled "Federal Reserve credit expansion", and the pills are labeled "Fiat Money", the bottle of liquor he is drinking is "Government spending."
In the second panel, the car has, predictably, careened off the cliff. As it begins to plummet to the bottom of the cliff, a long, long way down, Federal Reserve officials in the foreground are holding microphones as they look into the camera, earnestly saying "Well, there is no damage yet! So it looks like all is well! Thus, monetary policy is still in 'accommodating' mode! Back to you in the studio, Ted!"
Now, THAT'S a nice cartoon! I am sure to win the fame and recognition that I so desperately crave, instead of the humiliation and failure that I so richly deserve. And it must be good, because Emanuel Balarie doesn't even try to compete against me, and instead wimps out, resorting to mere prose as he penned the essay "$1000 Gold: It May Be Here Sooner Than You Think" on FinancialSense.com, where he writes "I expect the high energy prices and higher raw material costs to eventually pass through to the Core CPI by the end of the year."
I am sure that he is right when he says "I also believe we that we will have a spike in the Core CPI that will force the data dependent Fed to both acknowledge inflation and raise rates. Acknowledging inflation will drive a further round of buying into Gold, which has always been an anti-inflationary hedge. Higher rates will accelerate the housing slowdown, curb consumer spending, and have an adverse effect on the overvalued stock market. I do believe that we will most likely experience a crash in the stock market, rather than a slow decline."
-- If you want the optimal, and probable, solution to our nation's economic difficulties, here it is, as horrific as it sounds: We get into a shooting war with a powerful group of enemies that we owe money to, thus giving us the "right" to default on our debt to them. Then the government declares martial law and suspends the Constitution and Bill of Rights, giving them the power to confiscate our property and lives. And since I said "optimal", then expect the use of biological weapons to kill the older people, thus solving the Social Security and Medicare crisis, by reducing the population of old people. And most importantly, most of our infrastructure is destroyed, thus providing a lot of future work (and vast fortunes) after the war.
This is the kind of repugnant, horrifying things that have always become inevitable when you had a fiat currency, especially one created by debt, and when the people let the government (or, in this case, the Federal Reserve, the government's willing whore) produce too much of it.
-- With all the hoopla over the newly proposed tax cuts, I would like to take this opportunity to declare that tax cuts do not necessarily have an effect on the economy. Either you spend the money, or the government takes the money from you, and spends it. Either way, it gets spent. The only difference is HOW the money is spent.
If both the government and I plan to spend the money in the same way, say, on a new computer and a rocket launcher, then the economy is boosted by the manufacture (and sale) of one computer and one rocket launcher, no matter who buys them. The economy gains, and is unaffected by who bought them.
But if the government instead decides to spend the money on, say, increased welfare benefits, then the economy loses the sale of one computer and one rocket launcher, and the incentive to produce more of them, but it gains more subsistence consumption. Thus the economy mutates. But the same amount of money is spent.
Nowadays, "growth" in GDP is created only by increasing debt, which creates new money, which increases prices, which is also a measure of an increase in GDP, and then the inflation that produced the higher prices (and thus the higher GDP) is ignored, making it look like the economy "grew."
-- The famous letter that Iran sent Bush has been completely dismissed by the White House and by the American press, but not here at the Mogambo Bunker. And the reason is that it said that democracy has failed, and boy, oh boy, are the Iranians ever right about that!
It is democracy run amok here in America that has produced a huge, suffocating, expensive, socialist, communist, fascist system of local, state and federal government that consumes almost half of the income in the country. And then gives a monthly check to almost half of the people in America. And it is a government system that employs one out of every six workers in the whole country.
And why is the government doing this? Because the people, democratically, have created that kind of government! Year after year after year, decade after decade, they elected and re-elected people who actually campaign on a platform of providing a free lunch to more, and then more, and then yet more "deserving" people and organizations. This is insane! This is absolutely, preposterously, my-head-is-exploding, I-can't-believe-I'm-seeing-this insane! And if that ain't failure of democracy, then what in the hell is it?
And as for the Iranian's call for a more "religion-based" economy, the Bible is full of timeless, correct, and classic economic wisdom, all the way from the insistence on honest weights and measures to the admonition to "neither a borrower nor a lender be."
If we had merely (if nothing else!) adhered to the requirement of honest weights and measures, for example, then our money would still be gold (or function like it), inflation would always be zero, and there would be no frightening income mal-distributions (which is the condition where there are some people who are very, very rich, versus many, many, very, very, poor, poor people), because it would have been impossible with a fixed stock of money. It would be impossible for the rich to accumulate so much money, as it would constitute having accumulated ALL the damned money!
Instead, we have a fiat currency, produced by excess creation of credit and debt by the banks, which produces more money, which flows to the rich, creating obscene income disparity, and the attendant woes, one of which is the inflation in prices and social unrest that is going to consume us in a roaring bonfire. Ugh.
****Mogambo sez: The recent $22 plunge in gold and $2 plunge in silver is just the death throes of the scumbags who have engineered the huge short interest in metals futures, and are now being choked to death by it. Every dip like that is Lady Fate smiling on you, letting you buy gold and silver at a temporary bargain! Whee! Lucky you!