E-Economic Newsletter

By: The Mogambo Guru | Wed, Nov 8, 2006
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Provided as a courtesy of Agora Publishing and DailyReckoning.com.

-- Oddly enough, I felt that things were "back to normal" when I saw that the Federal Reserve increased Total Fed Credit by $2.6 billion last week. This TFC is the magical fount from which spews (like vomit, if I may use a disgusting but highly-appropriate metaphor) regular increases of credit available to banks, created from literally nothing, at the literal touch of a button, and that new credit in the banks becomes more money when (and if) it is borrowed.

Therefore, the Fed is back to creating more money, always more and more money, at lower and lower interest rates. Which means, unfortunately, higher and higher prices, as creating exponentially-increasing levels of money and credit (the only way to exponentially-increase the levels of money in the economy) is the only way that such an insane economic system as ours can function.

As a Mogambo Classic Example (MCE), suppose you borrow a hundred dollars at 5% interest. You know that you have to pay it back in full, plus the interest, for a total of $105. In short, you pay back more than you borrowed. So where does the money to pay the interest come from? Simple: It has to be created by someone else borrowing money, and you hope, somehow, to end up with it! Hahahaha! See where I am going with this?

And sure enough, now these new guys have the same problem (they owe more than they borrowed), which will be solved (as nothing begets more insanity and stupidity than the temporary success of insanity and stupidity) by enticing somebody else to borrow some money, creating more money! Hahahaha! And creating more inflation in prices the whole freaking way, too!

Thanks to the Federal Reserve, at the end of the day, any day, every day, there is much more debt in the economy and more money in the economy, but much less than is actually owed, ultimately, to the banks.

Like I said, insane! But that is the abysmal, idiotic depths to which the laughable neo-Keynesian/econometric theory that prevails in America (and, I am sorry to say, the world) has sunk.

And if you don't think that prices are rising, then let's stroll on over to the latest Economist magazine and take look for ourselves. Hmmm! The Dollar Index for All Items is up 37.5% from a year ago. Sounds like higher prices to me! Food is up 20.1% from a year ago, and that sounds like higher prices to me, too! All Industrials is up 56%, which I am SURE is higher prices, and Metals is up 80.4%, which I am absolutely positive is higher prices!

The only thing that is NOT up in this table is Non-food Agriculturals which is still up 2.8% from a year ago, a level of inflation that used to be thought of as alarmingly high, back before Americans lost their minds 50 years or so ago.

Desperate to distract myself and prevent another hysterical Mogambo Fit Of Outrage (MFOO), we look to foreign holdings of government and agency debt at the Fed, and it rose a cool $8.3 billion last week. Again, just like old times. Almost soothing, in a weird sort of "been there, done that" kind way.

But apparently everyone missed the lead story from the always-dependable Mogambo Muckraker News Service (MMNS) since it was quashed by government censors. The bombshell was that "The big, ugly news (BUN) is that the Treasury increased the national debt by $90 billion in October! In one month! Ninety billion dollars in one month! That's $300 more debt for every man woman and child in the country! In one month! One!"

Always eager to show off my ciphering skills to my Uncle Jed, I multiply $90 billion times 12 months to show that federal debt is soaring at a $1.8 trillion per year pace!

If you were not busily dialing 911 because of the crushing chest pains at that news and had waited around for the bombastic Mogambo Editorial at the end of the broadcast, you would have learned that this is NOT just like "old times"! This is "new and horrifically bad!"

Now I am really starting to get freaked out, and in a last-ditch, desperate attempt to control myself, I latch onto the essay "Let's Get Real" by David N. Vaughn at the Gold Letter, who writes "Consider this: The Hoover Dam was the largest single public works project in the history of the U.S., with an estimated total cost of $2.22 billion in today's dollars. China will spend eighteen times that amount on the 2008 Beijing Olympics!"

Now as interesting as that is (very!), the exact quote that got me all excited was that Weiss Research stated that "...whenever government money is spent, it spreads through the economy. By the time the government's money works its way through the economy, the total economic impact might be up to eight times the original dollar amount spent."

Therefore (and trust me when I say that this is important, which I do because I think it is important, and that means it will surely show up on your final exam, and you will surely fail this course if you get it wrong, and if you have to repeat my course again I will be very, very cruel to you for having been soooOOoooo stupid), the more important thing is that he has suggested that the fabled spending multiplier is 8! In other words, every dollar that is spent creates $8 in additional economic activity! Eight!

There are, to be fair and balanced, others who rightly say that I am an idiot (which is true) because there are no such things as multipliers (which is not true). I, personally, believe in them, and through the years I have seen it hypothesized to be in the range of between 4 or 5, sometimes 6, and now to, 8. Ahh! A new record!

The downside of multipliers, and probably the reason that nobody wants to admit that multipliers exist, is that the multiplier cuts both ways, and that in a downturn, for every dollar that is NOT spent, 8 other dollars are thus also not spent. Oops!

In oddly related way, reader Richard S, has seen something ugly about productivity at breakingviews.com. Notice the selfsame "cutting both ways" angle when writes that the article "points out that although productivity has increased, and from '98 to '04 it did increase faster than the two previous decades, it still was below the post war average. More interesting, I think, is the point that the housing boom flattered the productivity number. Housing output is recorded through sales prices so as house prices go up it looks like more output. Of course now that prices are falling it works in reverse and productivity is suddenly looking unproductive like today's 0 reading."

Indeed, he writes, taking a look at productivity growth of U.S. nonfarm businesses, as reported by the Labor Department, it "fell to 0% in the third quarter. Worse yet, "Unit labor costs -- a key gauge of inflationary pressures stemming from a tight labor market -- increased at an annualized rate of 3.8%." 3.8% inflation! This is awful, awful news!

Rex Nutting of MarketWatch.com noted that we are all being much too timid about this, and that things are far worse, in that "Over the past year, productivity increased 1.3%, the slowest growth since 1997. Unit labor costs are up 5.3% in the past year, the fastest increase in 16 years."

- Ken Y. sent the Treasury link that he thinks he may explain where some of the enormous money is coming from to fund the bloated, dysfunctional system we call Home Sweet Economic Home. It is a lulu, too!

The link describes the Term Investment Option (which has the acronym TIO). "In April 2002, the Treasury, through the Federal Reserve System, piloted a new investment option to test the viability of placing excess cash balances with Treasury Tax and Loan (TT&L) depositaries for a defined term and rate determined through a competitive auction process. Treasury announced in October 2003 that the TIO program would become a permanent cash management alternative for investing Treasury's excess cash balances."

Why are they doing this? They say "The program is designed to increase the rate of return earned on Treasury investments, add investment capacity to the TT&L Program, and to provide TT&L participants certainty in the terms of these investments." Ahh! So the Treasury Department is going to make more money by investing temporary excess estimated-tax remittances in an expansion of "investment capacity" of the banking system, and provide moral hazard underwriting to the whole thing, too? Wow! Things are worse than I thought, as this is too bizarre for words.

And after hearing that, you are not buying gold now, and I mean right freaking now? Then you had better start writing down all the reasons that you are not, because one day your little children and grandchildren are going to be groveling around in the worthless dollars covering the dirt floor of your drafty shack, and will they want to know why you did not buy gold when you could have and should have. In response, you can use that list of reasons to entertain them and keep them distracted from their miserable situation, and you also have something to brush the flies away from their filthy faces while you do it.

-- As an example of the greed of government that is coming to gobble us all up, because a government that is steadily increasing the amount of dollars it spends on an increasing number of people will always need increasing amounts of money, from Reuters we learn that "Toronto's main stock index plunged 2.4 percent on Wednesday after the Canadian government announced plans to tax the once-booming income trust sector. Ottawa said trusts that begin trading from now on will face the tax in the 2007 tax year, while existing trusts will have a four-year transition period. The S&P/TSX Income Trust subindex, which tracks the prices of 75 of the 253 trusts in the Canadian market, was down 11 percent on Wednesday."

To put it in cold, hard Canadian dollars and cents, "The drop represented a loss of more than C$20 billion ($19.5 billion) in market value for the income trusts, and more than C$24 billion including BCE and Telus's losses", which are two of the biggest trusts most devastated by this change.

And the insanely ludicrous thing is that this is, as I understand it, to prevent the government from losing a few billions of Canadian dollars in tax revenues from corporations, as the profits of the trusts are passed-through to the shareholders, who are taxed anyway! Hahaha!

So, the net effect is an immediate C$24 billion in losses to investors, plus another few billion in higher taxes sucking your investments dry, every year from now on!

But it all because the government needs money, and this may explain why Bloomberg.com reports "Retail-sales growth in the dozen nations sharing the euro accelerated in October as cheaper oil prices and increased hiring bolstered consumer spending." Well, retail sales growth may have had something to do with those things, but Bloomberg also reported that "German industrial production fell in September for the first time in three months as companies made fewer consumer goods such as washing machines and refrigerators and as energy output dropped."

I figure this all means that the Germans, already facing another announced 3% hike in the VAT tax starting in January 2007, thereby putting this "sales" tax up to around 20%, are buying like mad, right now, before the tax (and thus the total price) goes up. And now everybody else in the EU is thinking to themselves "Oh, my God! That stupid Mogambo was right! Governments really ARE a brain-dead bunch of commie/socialist re-distributionist morons who are going to destroy me with taxes and/or inflation!"

-- From DailyReckoning.com we read "Who is the world's biggest supplier of oil and gas? Russia. The west may have knocked out the old Soviet Empire, but now Russia has emerged in control of the world's most strategic asset - energy. Saudi Arabia supplies 18% of the planet's oil and gas exports. Russia puts out 19 percent."

And Russians, still smarting from the humiliation of us destroying their stupid communist economy and inflicting more than a decade of misery and suffering on them, are probably not going to be cutting any sweetheart deals with us Americans any time soon. And if I know the cunning, evil, treacherous Russians as well as I think I do from the way they are portrayed in James Bond movies, they are going to try and destroy us right back, putting THEM on top! Then can SMERSH be far behind?

-- Thanks to John Rubino of DollarCollapse.com and this excellent compilation essay "Best Quotes of October 2006" we discovered that we missed Adam Hamilton of Zeal Intelligence when he said "From its peak in mid-2001 to its trough in late 2004, the US Dollar Index lost a staggering 33.3% of its value in the world currency markets! A dollar spent internationally in late 2004 would only have purchased two-thirds of what the same dollar spent in mid-2001 would have commanded."

A third! The US debt and equities owned by foreigners have fallen in value, thanks to the collapse of the dollar, by a third! A 33% loss in five years!

Even more significantly, he says "Since currencies usually move with all the sound and fury of a glacier, this is a staggeringly large move, especially for the world's reserve currency."

And from Mr. Rubino we also get Captain Hook of TreasureChests.info, who enlightens us that "According to the Bank for International Settlements (BIS), the combined turnover in the world's derivatives exchanges totaled USD 344 trillion during Q4 2005. No, that's not a typo, that's $344 trillion of notional value, where if one were to annualize a total, it doesn't take long to figure out the world is now trading in excess of a quadrillion worth of this paper every year. Is that a big enough bubble for you? And it goes without saying this has been a boon to the brokerages and banks that deal in these formerly exotic financial instruments."

Of course, we galactic observers stationed on this planet are not too surprised to learn that slick operators and colluding bankers on yet another planet in the cosmos have rigged up something slimy to enrich themselves. But the horror comes when he goes on to say "Whether you realize it or not, even if you don't participate in them directly, simply by owning a mutual fund, or a bank account for that matter, indirectly you too are captive to this trend." Yikes! Now you know another good reason to hold gold and silver bullion, which is NOT even remotely connected to any of this crap!

This is, of course, a lot of money, and it makes gold look even more attractive, as Bill Bonner at DailyReckoning.com informs us that "Even at $600, the total world supply of gold above ground represents only 3% of U.S. dollar-based financial assets. As recently as 1980, the figure was 29 percent."

Hell, if you think that is something, then get a load of this: According to the Economist magazine, China has, literally, right now, more than enough money in foreign reserves (mostly US debt) to buy all the gold in the world! Right now! And you aren't buying gold? Wow!

And this is just American dollars, and all the big economies have been creating money like gangbusters for decades, too! Sum it all up, and that's how much monstrously more money there is than gold in the world. And if you think that there is, anywhere in history, one example where that silly, stupid situation lasted, then you were obviously like me in high school, and we both had History class early in the morning when we were still hung over and sleepy, and so that why we missed that important lesson.

But I have since learned it, and, now, so have you. And as soon as we get back from buying more gold, there is no reason why we can't get started on being hung over and sleepy tomorrow morning, just like old times, which is probably the best idea I have had all day.

-- At this stage of the show, I was going to do this terrific magic trick where I pull a rabbit out of my hat, but then I wondered "What do I do with the rabbit after I pull it out of my hat? And what if it takes a crap in my hat? And where can I borrow a hat?"

So I decided, instead, to pull a bucket of fried chicken out of a hat, and it went so well during the rehearsal that I ate it all, and now I am bloated and sick and never want to see another damned piece of fried chicken again.

Instead, looking for something easy, I am now going to answer, in a comfortable, semi-recumbent position, the most frequently asked questions of people who are so stupid that they, in the first place, read the Mogambo Guru newsletter, soon discover that I am a really stupid guy, and yet will still ask me a question after they found out how stupid I was!

Getting started, the most often-asked question is, of course, "Are you abysmally ignorant, or are you really as stupid as you sound?" My answer is that I have more than enough of each, and thanks for asking.

Next in frequency is the question represented by a recent email from Dennis, who said, as I remember, "You're always yammering about gold and silver until I am sick of hearing it. So, tell us what 'type' of silver and gold to invest in; coin, numismatic, bullion, ETFs, mining stock, etc."

I raise myself up on one elbow, and announce that according to the Patented Mogambo Investment Method (PMIM), what you want, first of all, is to get some pure gold and pure silver bullion, and take delivery. I recommend pure gold and pure silver so that you can maximize the "dollar value/cubic foot storage space" ratio, to be very scientific, and which has the added benefit of extending the length of time before your wife, or husband, starts whining about how their precious little closet is so full of gold and silver that now there is no space for their precious little shoes, and you have to politely remind them that they have too many damned shoes, and if I had feet as nasty as theirs, I'd wear big boots all the time anyway, and then for some reason that sets them off and blah blah blah.

Partially for that reason, I also suggest that you get some mutual fund shares that specialize in precious metal stocks, which conveniently store as mere pieces of paper.

Then, following this invaluable PMIM advice to the letter, the floorboards are eventually warped and the house is sagging on its foundation from the sheer tonnage of silver and gold that you have accumulated. And then, one day, you will trip over an errant 100-ounce bar of silver for the last damned time, and while putting bandages on various bleeding areas and asking your loving family members to kiss your boo-boo and make it better and they are laughing that they hope you die from an infection, you will suddenly swear that, from now on, you are buying only paper assets because nobody ever broke a leg banging into a piece of paper in the dark. Maybe slipping on one. But not banging into it!

That is near the point where you stop accumulating bullion, and start accumulating more shares of mutual funds, and a little ETF action, and individual shares of companies involved with mining, refining, finding, exploring, or other stuff connected with gold and silver, and some related stuff like copper and other commodities, especially oil and whatever is the latest Congressional scheme-du-jour larded with tax incentives.

At this point you will be so rich that you don't even want any more damned gold or any more damned silver, or anything, and if one more damned gold company sends me another damned notice of a damned shareholder meeting to vote on another damned batch of proposals designed to blatantly and obscenely enrich the company officers, by literally giving them oodles and oodles of shares and options, that you will go freaking berserk.

But this is not about the bunches of greedy, self-serving scumbags have taken over the gold mines, and taken over the corporations, governments, schools, newspapers, courts and everything else, but about investing in gold and silver, although I will note, for the record, that pandemic corruption and raw, ugly greed in gold companies is just a reflection of the massive corruption and raw, ugly greed that is always maxed out everywhere at the end of long financial booms. That's the nature of the beast, and thus it is so because has always been so.

Finally getting back to the point (and preventing the launch of another Tiresome Mogambo Tirade (TMT) about the problems that come from having a Federal Reserve that is so corrupt, brain dead and despicable as to deliberately create the money to finance it all), as far as numismatic coins are concerned, I am not a collector, and thus have no appreciation for the premium that "collectible coins" routinely sell for, often as some seemingly-insane multiple of the actual gold or silver content.

A big, BIG reason in their favor is, perhaps, the "collector mentality" that is a function of a yet-undiscovered "hunter/gatherer" gene that meant actual survival, and collectors are merely following those innate instincts to hunt down rare coins and gather them. I dunno.

But I assume it is this instinctual drive which compels collectors to pay such premiums for a mere rarity, even though there are lots and lots of rare things all over the world and nobody is collecting them (old Mogambo toothbrushes, for example), much less paying through the nose to get them.

So, while I am generally opposed to buying numismatic coins that sell at such high prices, I cannot argue against the fact that they DO sell for those high prices, and there is no reason that I can think of to make me suspect that it will be any different in the future, collectors being what they are, and genetics being what it is. And, too, one day the Chinese, who will be the rich people of the world, will experience a fad of collecting old American numismatic coins. So do what you what you think best.

One other, recurrent argument for buying numismatic coins is that the Constitution says that the government has to pay you the market value to confiscate your gold, or silver, or both, or anything else you have that the government wants. Thus, numismatic coins were exempted when that arch-villain FDR confiscated all the gold in, ummm, 1934(?) simply because it was seen as folly to buy up 99% of all the gold at $35 an ounce, and then buy the last teensy fraction of 1% that was contained in numismatic coins by paying their market value, representing (as it did, thanks to collectors) thousands of dollars per ounce. "Let the babies have their precious numismatic coins", you can almost hear them sniff. "It ain't worth the hassle!"

And, finally, we come to the people who write "Okay, suppose I lose my mind and actually take your stupid advice, and suppose that for once in your miserable life you are not wrong about everything, and gold actually DOES soar. So, when do you sell the gold, and what do you do with the money, Mister Smarty-Pants who thinks he knows everything?"

This is where The Mogambo smiles. "The answer," his buttery voice floating on the air, "is when inflation has hit its peak, which will roughly correspond to the peak in gold prices, which will roughly correspond to the peak in interest rates, and thus roughly corresponding to the low in bonds, and which will roughly correspond to the lows of the general stock market, as there will be fewer surviving companies."

At that point, you get out of gold at the high, and put all that money into bonds, which will be selling at their lows, but which will soon be gaining in price, and for a long, long time, as interest rates start coming down, and economic vitality returns to the economy over the next decade or so.

And to make it even better in a delicious, greedy, nouveau-rich kind of way, you will be earning 25% on your money every year until you sell the bonds at some huge freaking multiple of what you paid for it!

The Mogambo sinks back onto his couch, takes a long pull on a bottle of some really cheap tequila, wipes his slobbery mouth on the sleeve of his silken robe, and says "This, my Darling Mogambo Cherubs (DMC), is how successful long-term investing is done!"

After everyone leaves, there is one guy left standing there, all alone. He asks, his plaintive voice weak and pleading, "Mister Mogambo, he whose heart breaks at the pitiful plight of the poor as they must continually pay higher and higher prices, thanks to the Federal Reserve continually creating excess money and credit, what can I do, since I, too, am poor, and have no money to buy gold, or anything else? Help me, Mogambo! I have nothing and I am scared!"

The Mogambo puts down a half-eaten burrito, looks over at him standing there, and thinks to himself "Poor child. Poor doomed child. Poor doomed collateral-damage child. The victim of perpetual inflation created by the misuse of a fiat currency and a bizarrely dysfunctional fractional-reserve banking system." I look at him. He looks at me.

What can I say? I wept and went home.

It wasn't until later that I remembered the burrito, so I rushed back, but by the time I got there, it was gone. He probably stole it and ate it, the little bastard. Now I'm glad he's doomed!

-- Mike Larson of Money and Markets writes "Now thousands of former apartments that were converted to condos are being RE-converted to rentals. Result: Supplies of apartments for rent are going through the roof. Apartment REITs are going to take a big hit."

But this increase in supply of apartments will cause, I assume, the price of rent to fall, and a fall in rents will obviously show up as a reduction in the inflation statistics as measured by the Consumer Price Index, and so we ought to be prepared for it, as there will be a virtual deluge of economic zombies intoning "Inflation is low! Inflation is low!" thanks to the effect on the CPI number.

But it will all be a lie. A big, fat lie. Ugh.

****Mogambo sez: The day is almost at hand. "What day?" you ask. The day when you realize that The Mogambo was right, and now you hate my guts for not forcing you to do the right thing and buy gold and silver.

 


 

The Mogambo Guru

Author: The Mogambo Guru

Richard Daughty, the angriest guy in economics
The Mogambo Guru

The Mogambo Guru

Richard Daughty (Mogambo Guru) is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the writer/publisher of the Mogambo Guru economic newsletter, an avocational exercise to better heap disrespect on those who desperately deserve it. The Mogambo Guru is quoted frequently in Barron's, The Daily Reckoning, and other fine publications.

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