Provided as a courtesy of Agora Publishing and DailyReckoning.com.
-- Surprisingly, Total Fed Credit, which is the magical fairy dust of economics, went down last week, if only by a measly $1.6 billion. But the Federal Reserve helped make up for it by buying outright another $1.3 billion in US government securities.
The banks, always eager to please, placed another $37 billion in new loans last week, about a third of them mortgage loans, believe it or not, proving again that blind optimism still trumps fundamentals and statistics in America, sort of like my wife thinking that I am going to change one of these days.
The big news is that the Treasury Secretary and the chairman of the Federal Reserve are in China to hopefully make some deals, in which they will plead ("Please, please, please save our American economic butts!") with the Chinese to use their massive reserves, mostly dollars, and their growing political clout to keep this whole ridiculous economic mess from collapsing, and in return we will agree to give them missiles, weapons, fighter aircraft, war materiel, nuclear technology, supercomputers, a compliant Congress, our land, our businesses, our women, our children, barbeque sandwiches with a side of fries and anything else they want, as much as they want, anytime they want, which they will want because they are on their way to dominating the world. And now it is just a matter of negotiating how, and how much.
I say that we get the same thing in microcosm from Jim Willie and his Hat Trick newsletter, where we learn the sorry news that a lot of previous GDP growth was caused by people spending money that they got by borrowing against the artificially-increased equity in their houses, a dimwitted process known as Mortgage Equity Withdrawal (which should be known as A Stupid Idea To Increase The Size Of Your Mortgage Debt), that was created by the housing boom, which was created by a lot of desperate people who needed to make a lot of money in a hurry (mostly to make up for their stock market losses in 2001), which was facilitated by the loathsome Federal Reserve creating the money to finance it all, and allowed by an irresponsible Congress and government that routinely "looked the other way" at such reckless irresponsibility in the banks because so much money was to be made. But let me sneak off behind the garage to have a lousy cigarette, and it's some kind of big felony case or something. Go figure!
Now, says Mr. Willie "Cut in half, home equity extraction no longer comes to the economic rescue. The peak annualized cash jerked out of homes was $732 billion in 3Q2005. The latest recorded figure is $327 billion in 2Q2006, down by over half."
I admit that $400 billion is an incomprehensibly lot of money, and so to put this in terms low-life people like me can understand, suppose that last year I borrowed enough money from my generous father that I could spend $400 a week at Big Jimbo's Discount Squalor Gentlemen's Club, colloquially known amongst us regulars as "cheap rot-gut liquor and cheaper pot-gut women, all for a dollar at Discount Squalor", which usually seemed to get funnier the drunker we got. And further suppose that at $400 a week, I was their biggest customer by far, and everyone was real nice to me to my face (which would be a real nice change of pace if it were true!).
But now suppose I can only get a lousy $200 a week out of my skinflint, stingy dad, a cut which he thinks is supposed to teach me some stupid "lesson" about responsibility or something. It won't. It never has. But anyway, the question is "How much GDP growth will Big Jim experience, now that revenue from his best customer is down by 50%?" Hahaha! The answer is "negative growth"!
Unless (and this is the essential point of my argument) Big Jim loans $200 a week to me, so that I can spend and drink with my old reckless abandon, disregarding the fact that everybody else in town is also loaded to the gunwales with my IOUs and there is no way I can ever pay them even if I wanted to, which I don't. Think he will?
Now, substitute China for Big Jim, the falling dollar for the parsimonious parental unit, imported goods and consumer doodads for the cheap booze and ugly chicks. Think China will loan me the money?
Yeah. Me, too. But they will extort compliance from us and we will get the short end of every stinky stick from now on, and along the way the Chinese will teach some painful lessons to the Taiwanese, and the Japanese, and the British, and the Russians, and (of course) the Americans about what eventually happens to you if you ever act like vicious, bloodthirsty, barbaric, thieving, imperialistic scumbags towards the Chinese, who have long memories and a lot of face-saving scores to settle.
And what is this mess that we hope the Chinese will clean up that is so desperate that we are willing to accept that kind of deal? Rampant, stupefying corruption both public and private, bubbles popping, inflation in prices and a collapsing currency and economy, which is always what you get at the end of a long boom financed by creating excessive money and credit. It is amazing to me that anybody is surprised when it is happening again. A lot of embarrassing questions will soon be asked.
And the article "Housing Bubble Smack-Down" by Mike Whitney at Rense.com is also asking some embarrassing questions, such as "So, what was the 'Grand Plan' the Fed had in mind when they decided to anesthetize the American public with low interest rates and flood the planet with worthless green scrip?
"Did they think that Bush would corner the oil market and, thus, force the rest of the world to take our anemic greenbacks? Or were they just planning to steal every last farthing from the American people before they loaded the boats and fled to more promising markets in Asia?
"Or perhaps they were delusional enough to believe that really wonderful things would happen if they just kept tossing banknotes into the Jet-stream like New Year's confetti?"
Well, if Mr. Whitney had taken the time to call me, I would have told him that yes, some of them actually did think that! And still do! Milton Friedman, for example, said that the Great Depression would not have happened if the Fed had "just kept tossing banknotes into the Jet-stream like New Year's confetti"! And, astonishingly, Ben Bernanke is on record as saying that he agrees with that, and that not doing that exact thing was a mistake that the Fed will "not do again"! He really said that! It's in the public record!
In fact, the Fed actually stands in front of the cameras all the time and says that they really, really think that constantly creating more and more money with which to buy government debt, so the government could deficit-spend and expand, is great, great stuff, as their precious little equations and models have, they say, "proved".
But let me, The Mogambo, stand in front of these same cameras, pick a big ol' juicy Mogambo booger (BOJMB) out of my nose, hold it up for all to see, declare that it has thus turned into money, and everybody laughs! My face burns red with humiliation every time, but Alan Greenspan or Ben Bernanke will brazenly shoulder me aside, stand up there, basking in the limelight, and say that they will simply eschew the booger part, and not only create money and credit out of thin air, but also create a corresponding equal amount of debt out of thin air, and everyone applauds and goes wild with excitement! But which is actually more disgusting?
Mr. Whitney, obviously repelled by the repeated use of the word "booger", summarily cuts off the discussion by summarizing "Whatever the madcap rationale might have been, the country is now facing an agonizing wake-up call as the full-effects of Greenspan's tenure materialize and the stronghold of global consumerism deteriorates into Weimar USA."
And it will get inexorably worse, as the dollar falls and falls, as Bill Bonner of DailyReckoning.com, ever the clever wag that he is, quips "The United States can set up puppet governments in third world hellholes; it can whip any conventional military force on the entire planet; but it can't force investors to take dollars at par."
-- Housing prices coming down is all over the news, and for a little education in what, perhaps, all this means, let's turn to John Mauldin's Thoughts from the Frontline Weekly Newsletter, where we learn "When residential fixed investment drops 10%, we have had a recession in the US." This is all very interesting, of course, but it gets even more so when he continues "RFI is down by more than 10%."
Now, as part of today's Lesson in Logic, let's take a look at that paragraph again. First, we have "When residential fixed investment drops 10%, we have had a recession in the US." Then, we follow that up with "RFI is down by more than 10%." Now, as your pop quiz question, fill in the blank to the logical extension "Therefore..."
If you wrote "we will have a recession" you got the answer correct. If, however, you wrote "we are all freaking doomed, just like The Mogambo said, and none of us has enough gold or silver or guns!" then you will get extra credit, but about which you will not care, as, since we are all doomed, who cares about some stinking extra credit?
Mr. Mauldin, who doesn't need the extra credit, got some anyway when he reported on the ISM report, and, in a modern miracle of concise, professional brevity, sums it up as "New orders, production, employment, order backlogs, and inventories were down. Prices were up."
I have to admit that at this point I was not really paying attention, being distracted by the lovely Suzette, the cute little new intern reporter from the Herald, whose lips said "Stop touching me! And get out of my way, you ugly, stinking old man!" but whose flashing eyes and shapely legs were saying "Give me all your hot monkey love, my Mogambo stud muffin (MSM)!"
I was, naturally, distracted in trying to reconcile this seeming paradox by gazing wistfully at her angelic face, and Mr. Mauldin was, I guess, surprised at my lack of typical over-reaction at the revelation that prices were up like that, especially since inflation is what always sends me into paroxysms of panic and despair.
So he pointed out, for my obvious benefit, "Notice that last three-word sentence in the above paragraph: Prices were up." Instantly, Suzette forgotten, my heart is beating like a trip-hammer, just like he knew it would, and I can see a little smirk of self-satisfaction on his face as he went on to say that the October ISM data showed that prices not only rose, but "went from 47 last month to 53.5 this month." Wow! Big percentage move!
But we were talking about real estate, not my heart, both pounding in fear and pining for the lovely Suzette, and sure enough, here is Kurt Richebächer, he of the eponymous Richebächer Letter, saying (I conclude) that we are right to be freaked out about this housing bubble thing, as "The use of credit in the wake of this housing bubble has been simply bizarre, outpacing all past experiences by far. Over decades until 2000, outstanding total mortgages accumulated to $4.8 trillion. In the second quarter of 2006, they amounted to $9.3 trillion. Mortgage growth over the last five years was almost equivalent to its growth over the prior five decades." Five decades of housing inflation in fives years! Yikes!
-- For those of you who think I am just another stupid, paranoid, lunatic, gold-bug, gun-nut, whack-o, pretty-boy pervert who over-reacts to everything, and that I would willingly gun down my own grandmother if she made any suspicious moves towards my stash of gold and silver, I say "Touché!", but even you have to agree that, even at my most outlandish, I am behaving appropriately to the roaring inflation all around us.
And not only us, but also for the Brits, as, according to Telegraph.co.uk, "The cost of living for many British households is up to four times the Government's published rate of inflation." Four! Real, wallet-emptying inflation is up to 400% higher than the lying British government is admitting, which is bad enough, as even "official" inflation is running at a hefty 2.4%!
They rudely ignore my handy statistical-oriented editorial blurb (the little limey snots!), but go on to say that "Millions of families are experiencing inflation far beyond the official rate of 2.4 per cent, new research suggests." In fact, they say that it "shatters the illusion that the Consumer Price Index -- used by the Bank of England to set interest rates -- represents the true cost of living as experienced by many households."
As you would expect, those on fixed incomes get the biggest whack to the wallet, with annual "inflation rates of almost 9 percent" for pensioners.
"Hard-up families," they go on to report, "getting by on £20,000 a year, saw their costs increase by 4.6 percent -- almost twice the national average and well above the annual rate of wage increases, 3.9 percent."
The article wimps out by not mentioning that these are the same stupid people who happily voted, year after year, decade after decade, for the economically-illiterate elected officials who allowed their central bank to cause this to happen to them. And I'll bet very few of them tuned into the Daily Mogambo UK Radio Show (DMUKRS) this week, which is too bad, as it was a big part, the major part, of my Mindless Mogambo Rant (MMR) editorial comment, in which I heaped loathing disrespect on the British variant of Earthling moron, and laughed cruelly at their pathetic whining about their miserable, yet so richly, richly deserved, plight.
More importantly, of the "news-you-can-use" kind, you should immediately move back home with your parents while you are still young enough, and strong enough, to beat the hell out of anyone, like your parents, who stand in your way, as "the increasingly large number of young Britons living at home with their parents -- and not paying mortgages or bills -- experienced deflation of 2.1 percent, since many of the items they spend their money on, such as clothes and electrical goods, are falling in price."
Deflation! These irritating little brats are experiencing a rising standard of living, while ours is declining! So, move back home today, and get some of that standard of living gravy for yourself!
-- The International Herald Tribune reported that America going down the tubes won't cause a global recession "thanks to a European resurgence and the boom in Asia." Hahaha! This is fabulous!
For one thing, it proves that the Chinese government is just as stupid as our American one and their fiat currency will be just as worthless because of it, which I cleverly deduce from the article by Shailendra Kakani, of Commodity Research, titled "Plunge in US Economy Doesn't Mean Commodity Bear". In it, we find that China is officially encouraging people to spend money as a direct attempt to increase aggregate demand, which will increase aggregate supply, which will provide the jobs to buy the output. All very, very classic-economics and all that.
But it gets worse, as the Chinese are also starting up with that whole neo-Keynesian deficit-spending crap, too, but now combined with their own brand of stinking commie redistributionist crap that always ruins everything, as "Simultaneously," the article continues "the government is doing everything to bolster the income of its citizens. Recently the government raised minimum worker compensation and increased welfare spending to get households to spend more and make the economy less dependent on investment and exports." Hahaha!
The stupid Chinese are deliberately choosing less dependence on investment, but more dependence on government handouts and people depending on the government? Hahaha! Does that sound like any other stupid government you know first-hand? Hahaha! So is communist China acting like America, or is America acting like communist China? Hahaha! This is too rich! The dollar is doomed, and the yuan that is killing it is also going to be doomed one day, too!
And then, after hearing this, you laugh at me in scorn for suggesting that you buy gold and silver? Hahaha! That shows that you don't know anything about economics or history, my misguided young one!
This brings up my criticism of the standard contrarian advice these days, which is "Own foreign currencies, precious metals and foreign stocks", with which I don't completely agree. For one thing, foreign currencies are being "managed" by their own governments, too, just like the disaster with the mismanagement of the dollar. So those currencies will be going down in purchasing power, too. So, the question is, "Is a relative haven a real haven?" I say not only "No", but "Hell, no!"
The only thing you can do is own gold, which is the only thing that will consistently hold its value. That is the Iron-Clad Lesson of History. And you don't have to actually read all of history, as all you have to do is listen to The Mogambo run his loud mouth about it, as I famously drone on endlessly, endlessly, endlessly about it, and will actually pursue you down the street to hammer it, hammer it, hammer it into your thick little head, louder and louder, and I never seem to shut up about it, according to whole baskets full of affidavits from family members and neighbors filed with the court, where, in case after case, the judges hand out Restraining Orders like candy or something.
Or you could read Addison Wiggin's book, Demise of the Dollar, to verify it for yourself, as there is a whole chapter titled "Short Unhappy Episodes In Monetary History". The quote to start the chapter, which makes the point I am trying so unsuccessfully to make, is from Norman Cousins, who said "History is a vast early warning system."
And, brother, is it ever! The chapter goes from the Romans debasing their money 2,000 years ago, to the Chinese, 1,000 years ago, first experimenting with paper money (which was soon abandoned because of the inflation it caused), to Rome, Spain, France, Germany, 18th Century United States, the Great Depression, and not even mentioning all the episodes of economic crisis in the last thirty years. And gold sailed successfully through every single one. Every one. Every.
And as for foreign stocks, I say forget foreign stocks, and foreign economies, and foreign people who all speak English with funny accents while rudely laughing at us Americans because we are so fat and stupid; if America is not going to be sucking up vast, sweeping flotillas of cargo ships full of their exports anymore because the economy is going down and prices are going up because the dollar is going down, then they are all going down the tubes, too, as we consume damn near a third of the entire globe's exports as it is! An $850 billion a year current account deficit proves it!
And as the dollar falls, because of the monetary and fiscal stupidity and the crushing debts which have destroyed us, imports will become more expensive for us, meaning that we American consumers will buy less when we can ("No more big-screen TVs!"), and buy less other stuff (things for children, like clothes, shoes and birthday presents) when we can't, because we must use our dwindling buying power to buy the necessities (gasoline and tacos).
-- To prove that the overwhelming majority of leading economists in this country are idiots, mostly because they think that their precious little equations are economics, and that the Wall Street Journal is just as ignorant of the fact that they are not, today the WSJ published an op-ed piece by a certain Mr. Edward C. Prescott, who is "senior monetary advisor at the Federal Reserve Bank of Minneapolis and professor of economics at the W.P. Carey School of Business at Arizona State University". Despite those seemingly impressive credentials, he wrote the execrable and laughable editorial titled "Five Macroeconomic Myths".
To start off, he says "Myth #1: Monetary policy causes booms and busts." Hahaha! This mouth-breathing cluck says that it wasn't excessive creation of money and credit that caused the boom of the '90's, even though a hell of a lot of money and credit were created, which he doesn't mention. But instead, it was the product of "intangible capital management", which includes "R&D, developing new markets, building new business organizations and clientele!" Hahahaha! According to this amazing theory, the money for all of the boom just appeared out of nowhere! Poof! Pure coincidence! Hahaha! This is too, too, too rich!
He gets back to reality with "Myth #2: GDP growth was extraordinary in the 1990s", in which he says that GDP growth was not such hot stuff, historically, especially compared to the '60s and '80s. True, but horrifyingly so.
The '60s was the time of Johnson's big twin deficit-spending programs of the War in Vietnam and the War on Poverty, which caused the eventual economic "malaise" of Nixon and Carter, which tried to keep them both going, and caused Nixon to "close the gold window" in 1971, and thus caused the big inflation of the 70s that Volcker had to step in and almost the destroy the economy to fight, by raising interest rates to more than 20%!
And the '80s, freshly freed from inflation and bursting with pent-up demand, was the advent of both a huge increase in demand for stocks and bonds, thanks to the Congressional innovation of "tax-deferred retirement plans" (which meant that, as a result, anyone could start companies and sell stocks and bonds for damned near any reason, at any price), financed by deficit-spending, and then we had the idiocy of the Reagan years, where he slashed taxes, but went on a massive, insane borrowing binge to finance massive military and domestic spending programs!
And then the 90s was Clinton, which was merely more of the same expansion of government through deficit-spending (with more low-end, welfare-type spending), but boosted by much more "lying with statistics" about inflation, and with massive increases in money and credit. And it is even been massively downhill from there.
It is "Myth #3: Americans don't save" where he seems to make the insane, Hedonic jump of logic that buying stocks and bonds is "saving" (which has no possibility of loss of principal), when it is actually investing (where there is the good chance that you will lose money nominally, and the near-certainty of losing purchasing power of the invested money thanks to inflation, and probably both).
And he goes farther than that to actually say, and I am rubbing my eyes in disbelief because I can't believe I am reading this, that "saving" should include government investments, "like roads and schools and business intangible investments!" My hands are visibly shaking in outrage, but I am choking on my laughter!
"Myth #4: The U.S government debt is big" is next, and here we are treated (as if we are not entertained and thoroughly engaged enough so far to be busting a gut laughing) to the bizarre notion that only counting privately-held government debt is relevant, and that you should not count the tons and tons of government debt held by the Fed, or government debt held by the government itself! Hahaha!
He is saying that the government debt held by the government is not a debt! It's literally free money for the government to spend! I can't believe my eyes that I am reading this stuff!
But he saves the best for last with "Myth #5: Government debt is a burden on our grandchildren". This is the best example I have ever read of econometric stupidity combined with halfwitted socialist/communist dogma, as he says that debt is not a burden, as "theory and practice" have somehow "proved" that "the optimal amount of public debt that maximizes the welfare of new generations of entrants into the workforce is two times the gross national income, or GDP" Hahaha! Not according to any history of practice that I ever read, dude! Hahaha!
So (and notice how I am heroically trying to compose myself from screaming in outrage), if optimum debt is twice national income, and we get one more entrant into the workforce, you should increase debt by twice his contribution to GDP, and by going into debt this is supposed to maximize economic welfare?
I scream. I weep. I sigh. I am tired. Ugh.
****Mogambo sez: Today I impart this True Mogambo Gem Of Wisdom (TMGOW): "You can't do anything to thwart the greed of people for a free lunch, and thus you cannot thwart the boom-bust cycle, and thus- and thus again! -the only remaining option is to (like judo) use their weight and stupidity against them by buying gold and silver, and thus to become, as reader Brian says, Filthy Stinking Rich (FSR) when this current popular-and-laughable Federal Reserve economic idiocy and towering incompetence finally destroys the currency.
"And then you can do anything you want, legal or not, as you will have so much money that you can usually settle disputes out of court, or, failing that, hire enough lawyers to tie everything up in the court system for decades or more which, at the rate at which you are burning the candle at both ends with all that wealth, will be more than enough time to die naturally with a big, beaming smile on your stupid face."