This article originally appeared at The Daily Reckoning.
-- So I got back home from the Agora Financial Wealth Symposium in fabulous Vancouver, where everybody was real nice to my face, although I am pretty sure they were plotting things against me when my back was turned. But since I couldn't prove anything, I was in a particularly good mood, which was unusual, in that my speech was unexpectedly cut short by 25%, due to the Case of the Mysteriously Disappearing Soundman.
But even THAT I turned to happy advantage when I realized that I could still use the unused 25% last part of my speech (where I reveal the secret of immortality and eternal youth), another day, another time, another place, perhaps on another planet. So, to paraphrase Barbara Billingsley in the movie Airplane! who was similarly rebuffed when she offered to translate English to Jive, "Chump don't WANT no immortality and eternal youth, chump don't GET no immortality and eternal youth!"
And besides, gold is doing okay, and silver is doing okay, and oil is doing okay, so I'm doing okay, and I'm feeling pretty good until that old, familiar terror started to again overcome me as I noticed that Total Fed Credit was down by $4.8 billion last week, which meant that $4.8 billion was not used to extend more loans. This is the ugly reality of the new "good news/bad news" economy: Growth can only come from creating more credit, which creates more debt and the off-setting increase in "money". This creation of debt is how the banks create more money, which inflates the money supply some more, which is defined as monetary inflation, from which inflation in prices inevitably follows.
Oddly enough, against this $4.8 billion drop in Total Fed Credit, Doug Noland says that the trend of credit creation is still waaaAAAaaay up, as "Bank Credit surged $35 billion last week to a record $7.980 Trillion, with a y-t-d gain of $474 billion, or 11.3% annualized." That is a lot of monetary inflation, and a lot of price inflation is sure to follow.
And sure enough, after all these months and years of constant increases in bank credit, Bloomberg reports that the new Commerce Department release showed that inflation is getting worse, and that "In the second quarter, the government's core personal consumption expenditures index rose at an annual rate of 2.9 percent, the fastest since a 3.2 percent pace in the third quarter of 1994." Twelve years ago!
Biz.Yahoo.com reports it as "(AP) -- Heightened fears of inflation prompted investors to sell off stocks Tuesday as a key price index climbed to an 11-year high. While inflation-adjusted consumer spending rose a sluggish 0.2 percent in June, the Commerce Department also reported that consumer prices are up 2.4 percent year over year, the highest rate of inflation since April 1995."
From an encrypted Mogambo Free Anarchist Radio News editorial we read "While 2.4% inflation over last year is, indeed, 'the highest rate of inflation since April 1995', as claimed, it is also the biggest, lying piece of crap in history, as inflation is MUCH more than that! Much! In fact, real inflation is now so bad in comparison to the official government numbers (audience shouts out "How bad, Mogambo?") that The Mogambo, in his recent radio address, actually said 'What a load of lying crap! Inflation is much worse than that!', which accurately and eerily presaged this new government estimate of inflation, which is, in itself, perhaps the very lying piece of crap that The Mogambo, in a flash of inspiration, was referring to!"
And the result is much more sinister than that in effect, as Ty Andros of Tedbits newsletter writes, as this all results in a situation where "All loans and bonds are mis-priced, robbing the lender of his or her true returns." And who is the lender that is getting cheated? It is us! American businesses and people! We're going to get screwed! Gaaahhh! Now you know why I am screaming my guts out!
And while spending is up a little and wages are up a little, it's not enough, as the report also showed that "the savings rate rose to minus 1.5 percent from minus 1.6 percent in May. A negative rate suggests consumers are dipping into savings to maintain spending."
Paul Kasriel of Northern Trust reminds us that "These deficits are not just records in absolute terms, but relative to their disposable incomes as well - e.g., 6.15% of disposable income in the first half of 2006."
So, for the average American, spending only out of disposable income is not enough, and they are still spending more than they make. If the average American is like my family, it's never enough, and it will never be enough, no matter how much money you give them, and they are always whining "More! Give me more money or I will be more hateful than I am now!" and pretty soon you discover, the hard way, with scars to prove it, that they were deadly serious about that, too.
And then one day you realize that providing for your idiot family is a losing proposition, and you decide to cut your losses by running away to another city, in the middle of the night, with all the money and liquid assets in the trunk of the car, where you change your name, pick up a little plastic surgery and liposuction, and try to salvage at least a glimpse of happiness in these last few remaining years of your miserable life. Since this roughly corresponds to our collective American plight, I wonder when foreigners, who are now providing for us while we relentlessly clamor "Give us more of your money! More! More!", will similarly cut and run?
Well, it ain't last week, as foreign central banks gobbled up a huge, strangling, choking $11.2 billion mouthful of American debt last week, taking them to a new record. So it is really starting to get spooky around here.
But screw these foreigners! It is inflation that I am yelling about! Perhaps you will find it particularly instructive if you watch my lips when I tell you that it is inflation in prices that causes societal misery, as people listening to their children crying in hunger usually starts to wear on your nerves after a very short while. And that is why the Founding Fathers were careful to write into the Constitution that money shall be ONLY of silver and gold. To prevent inflation!
But the Founding Fathers are just a bunch of old, dead white men, while I am an old, live white man carelessly toying with a loaded, large-caliber handgun, so perhaps you should listen to me, and I, too, say you can only prevent price inflation by preventing monetary inflation, which you get when you let banks create excess money and credit out of paper and electronic digits. But since nobody can create gold out of thin air, you automatically prevent price inflation by preventing monetary inflation!
The first time I ever heard of this idea of benefits theoretically derived from constantly increasing the money supply, by constantly increasing debt, I made an almost fatal Mogambo mistake of analogy (AFMMOA); I figured, using this terrific logic, that the more weight I gained, financed by increasing debt, the more my family would love me! I admit that I was, at the time, desperate for even a flicker of a chance of getting any love from that crew of twisted, hateful boneheads, and was willing to try anything if it would shut them up for five lousy minutes.
To make a long story short, I learned that getting to be really, really obese is, alas, not a way to make your family love you. And I further discovered that when they threw objects at me, they apparently couldn't miss a target that big.
My hands are trembling slightly as I remember all of this, but that is normal. Then my gaze swept across a table in Barron's, and my fear turned to that old familiar anger, as I saw that the banks belonging to the Federal Reserve system (nearly all of them), sucked up $15.5 billion in U.S. government securities last week! This takes their total to $1.217 trillion, which is back to the historical high point, first achieved about this time in 2004, and then again in 2005.
So with a sigh, I direct your attention to a chart of government securities owned by the banks which shows that it has, overall, mostly hit a plateau in 2004. Varying a little bit up and down, we are now, for the third time, at the upper end of that range.
Since reserves in the banks have not changed (which even today are only $41.5 billion, and actually below the average since 1997). In fact, to show you how precise I am, I'll tell you that total reserves in the banks have been bouncing along like this since hitting the lows of under $39 billion in early 2001.
Then I groaned aloud when I noticed that the money supply (as measured by M2) is apparently falling, too, which is completely predictable, as there has been a widely-reported slowdown in the expansion of credit for mortgages and business investment.
All of this stuff is whirling, whirling, whirling around in my head as I pretend to listen to my stupid wife and nasty, bratty children telling me how wonderful it had been all week, and how they discovered, while I was away, that they enjoyed life after all. I think they were implying that they want me to go away again, or die, or both, when they said "Why don't you go away again, or die, or both?"
But this is reduced to mere background noise when I read that the "movement" to increase the minimum-wage is heating up. And this time it is not just the stupid, brain-dead Democrats that are leading the Big Parade Of Loudmouth People Who Are So Completely Ignorant Of The Rudiments Of Economics That Something Must Be Seriously Wrong With Them. Standing so close beside them that they are getting each other's cooties are the now-loathsome Republicans, demonstrating either a) things economic are now so completely desperate that they are willing to do, or say, anything to temporarily forestall us from drowning in the ocean of disgusting drool and slobber that comes from being a nation of economic and Constitutional imbeciles, or b) Republicans are now actually as stupid as Democrats, which, given the astonishing dumbing-down of the American school system over the last 50 years, is probably (Occam's Razor-like) the simplest and best explanation.
But I will admit that people needing higher wages because prices are higher is a valid point, but that is not the issue, as sad a tale as it is. The real issue is why the prices are higher in the first place, making their erstwhile perfectly-satisfactory wages suddenly inadequate. So I casually ask the class the innocent rhetorical question, "Why do people need higher wages?"
Well, the place exploded in a simultaneous shout "Because things cost more, you stupid Mogambo moron (SMM)!" and then they all joined together to laugh at me!
My eyes stinging with tears, I took out my Mogambo Educator's Daily Logbook (MEDL) and made a quick note to myself ("Seek revenge: Fail everybody and torment their parents for bribes!"). Then I fired back, my voice cold and heartless, "This is the effect popularly called 'inflation.' And why do things cost so much more?" Instantly, all their hands flew up, as they all know the answer by now: Price inflation follows inflation in the money supply, and the hateful, stupid Congress allowed the hateful, stupid Federal Reserve to act completely irresponsible in that regard since the 1960's.
But I ignore them, and go on "And when inflation in prices gets so bad that you are forced to buy less stuff, then that is popularly called..." and before I could even finish the sentence the entire class again yells out "A fall in the standard of living!" and then they all high-fived each other and laughed some more. I sense that my lectures have become somewhat predictable, so I pull down my zipper so everybody can see my Spiderman underwear. I laugh as I think to myself "Predict THAT, you little bastards!"
Over the sounds of disgust (mostly "ewww!" and gagging up vomit), I blithely continue, as if I did not hear them, "a fall in the standard of living." I don't tell them that a reduction in the standard of living results in a constant clash of cultures (The family: "We're starving and dressed in rags! And we need medicine, too!" Me: "Your point being what?").
And a fall in the standard of living is, in effect, inflation. It's a horror. In fact, inflation is such an economic horror that it is the only economic variable that the Founding Fathers tried to control in the Constitution! They tried to prevent inflation by preventing the government's ability to create excess money. Why? Because inflation should be, now and always, zero.
And if the economy is operating perfectly, inflation would be less than zero! Prices would always be slowly dropping, year after year, as the promise of productivity and competition paid off in more goods and services, resulting in higher employment, but also with lower prices! A huge rise in the national standard of living!
But since the filthy, traitorous Supreme Court keeps on allowing the money of the United States to be mere paper and promises, instead of gold and silver as literally required by the Constitution, and as long as the filthy, traitorous Congress allows the Federal Reserve (an un-audited private bank, partially owned by foreigners!) to create excess money and credit (that they own!), we will suffer from inflation, wailing and crying the whole time, or at least listening to The Mogambo wailing and crying the whole time, interspersed, as it usually is, with obscenities and vague death threats.
The minimum-wage worker can't make ends meet now because things cost too much to be able to afford them. So (and here is where The Mogambo laughs and laughs and laughs (LALAL) at the sheer stupidly of mandating higher wages), businesses are now required, as a result of paying higher labor costs, to charge their customers higher prices to make up for it! Hahaha! Higher prices, caused by requiring higher wages, is the solution to higher prices? Hahahaha!
This is the genius of the electorate? Instead of stopping inflation by reining in the Federal Reserve, we are going to make the inflation situation worse by mandating higher wages? Hahahaha! What suicidal idiocy! It makes you wonder why anyone has any respect for democracy at all! Hahahahaha!
And there are a hell of a lot of people who do not have jobs, and therefore do not have the ability to get higher wages, who are going to suffer. One of these groups is the criminal class. When prices go up, organized crime's net profit falls, and you don't have to see many movies starring Al Pacino before you realize that those guys don't take that kind of news lightly.
Therefore, as my new Mogambo Conspiracy Theory Of The Week (MCTOTW), the reason that California is so hot to raise taxes on cigarettes to about $7 a pack is that there will be a boom in smuggling, as Canada has found out, which has contributed to a drop in the sales of legal smokes by almost 9% in the last year since they instituted such a tax.
So the proposed enormous tax on cigarettes is really just a "New Jobs for the Smuggling Industry" government program, giving the unemployed-and-desperate something to do to get some cash, as dealing in drugs and prostitution won't even make ends meet anymore.
-- It's time for Mogambo Game Show (MGS)! Today, we first tune in to Paul van Eeden, in his essay "Bells Ringing" as he says "They say the stock exchange does not ring a bell at the top of the market. Well, I can hear all sorts of bells ringing: when investors buy stocks because they believe the economy is slowing down, it is a sign that______"
Now, to win the fabulous prize behind curtain number one, you have to fill in the blank! Did he go on to say A., "we are a nation of idiots"? Or B., did he say "our money is being invested by idiots"? Or did he say C., "we have reached the top of the market"? The answer is C, but I am sure that if you gave him a moment to think about it, he would join me in chanting "A and B! A and B! We're freaking doomed here!"
-- John Stepek of the Money Morning newsletter makes the interesting observation that, in Britain, "lenders have now stopped offering 0% interest rates on credit cards." How that I think about it, I'm suddenly not getting any offers like that anymore, either!
-- Anytime a government allows a central bank to create excess credit and money (and they are all doing it!), it is a good time to buy gold, especially if you want to make a lot of money in the short-term. Which I do. Unfortunately, over the long-term, on the average, you will only preserve your purchasing power by owning gold. But considering the alternatives, (all losers) gold is the best-case scenario!
And when a desperate people get a bad case of Mogambo Gold Fever And Boogie-Woogie Flu (MGFABWF), as all previous generations have done after their idiot governments created an economic mess like we are in, and they all start running to the Mogambo Triad Of Power (MTOP) of gold, guns and good grub, and start running away from the U.S. dollar, then the price of gold, as priced in U.S. dollars, will soar.
And not just gold, but silver, too, as Theodore Butler, writing at InvestmentRarities.com, has an interesting perspective on the manipulation in the silver market. He writes "The silver manipulation is a downside manipulation, which is very rare." Hey! That's right! Most manipulation in prices are to the upside! I am delighted at his pointing out the novelty!
The novelty ends, however, when he says "But as bad as manipulations are, when they are terminated, the market moves dramatically in the opposite direction of the manipulation." Mr. Butler sees the blank expression on my face, clearly communicating that I am stupid and confused, so he adds, helpfully, "Since silver has been manipulated to the downside" and here he pauses to stare at me while the words sink slowly into my tiny little brain. I am looking back at him and thinking to myself "Wow! The way he is staring at me, this must be important! What did he just say? Something about silver? Will the price of silver go up or down or something?", a befuddlement which he instantly clears up when he says "the big move will be to the upside when it is resolved."
And if that is not enough to confidently predict higher prices for silver for the rest of your life, it gets better when he says "The increase in oil and energy prices greatly increases the cost of mining, melting and refining." I am suddenly mesmerized, as higher costs means producers must charge higher prices, just like in the minimum-wage thing!
Just as I am wiping the Mogambo Drool Of Greed (MDOG) from my chin about the profits to be made in silver as the price is inexorably forced higher and higher, he makes it all the more delicious when he says "Peak production concerns seem to be creeping into a broad range of commodities. In other words, the 'easy' oil, copper, zinc, etc. has already been found and exploited. New mineral discoveries are smaller and more expensive to develop and may not keep up with current production levels. Silver is no exception."
And speaking of commodities and the impact of rising oil prices, generous reader Laura S. sent me a report by the Commonwealth of Australia, "Reference: Australia's future oil supply and alternative transport fuels." In it, we read of a Dr Samsam Bakhtiari saying "Crude oil is a commodity unlike any other. It is simultaneously a strategic raw material, a unique industrial feedstock and the most essential of fuels." Perhaps from this you get such curious results. "For example," he writes, "you have no free market in oil. Naturally, you can go to the NYMEX stock exchange and buy as many barrels as you want at the price of $74 now, but these are paper barrels." In short, fractional-reserve oil!
This suddenly reminded me of the glut of fractional-reserve paper silver, and fractional-reserve paper gold, and fractional-reserve paper commodities, and even fractional-reserve paper paper, which makes for a gigantic short position in all kinds of things. I was going to bring these eerie, spooky and ominous parallels up to Dr. Bakhtiari, but he just smoothly went on, saying "If you try to buy 10,000 barrels a day of real oil, of genuine barrels, you will have enormous problems getting that much oil on a regular and sustainable basis. So that is one of the problems that we will encounter in the medium term."
He goes on to say that all of this "all things being equal" and linear extrapolations aside, "we cannot accept the projections of certain institutions like the International Energy Agency in Paris, which predicts that the world will be consuming 118 million barrels per day in the year 2030 as realistic, because I cannot see how the world can get over 81 or, say, 82 million barrels per day right now, let alone in the future."
Here is where video news footage showed that I jumped to my feet, startling everybody, and shouted "Hahaha! Exactly right, good doctor! There haven't been any big new discoveries of oil in a decade or more, and yet total oil consumption is going to be able to grow and grow and grow until it is 50% higher in 24 years? Hahahaha! Good luck, world, and good point, doc!"
The audience erupted in anguished cries of "Shut up, you stupid Mogambo idiot" and angry demands that Dr. Bakhtiari rip me a "new one." But, being the classy guy that he is, he controls his rage, and calmly summarizes as "So you have an enormous discrepancy between what these institutions publish and what we believe in, whether it is in reserves or whether it is in production of crude oil per day."
And that all assumes at least some growth in oil production, and the good doctor does not agree with even THAT modest assumption. Almost as an afterthought, he ominously says "I believe we are in decline."
Maybe all this has something to do with Doug Noland, in his Credit Bubble Bulletin at PrudentBear.com, from whom we also learn whether or not your heart can stand terrifying shocks, who reporting that last week "the AMEX Oil Index traded to a new all-time high (up 21% y-t-d). The Philadelphia Stock Exchange Utility Index also traded to a record high (up 7.3% y-t-d)."
My Sensitive Mogambo Nose For Danger (SMNFD) catches a whiff of the overpowering stench of a looming disaster writ large, as inflation in the price of energy is, if I may lapse into official theoretical economist-speak, the "Revenge Of Stark Reality" theory, which, if you are even passingly familiar with the term "revenge", is all you need to know to be afraid and paranoid, as you should be. Ugh.
****Mogambo sez: Gold, silver and oil have been a winner for the last three years, and they will surely be a winner for the next three, too. And almost certainly more.
So keep loading up with them. One day you will be very, very glad (VVG) you did.