E-Economic Newsletter

By: The Mogambo Guru | Wed, Feb 7, 2007
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Provided as a courtesy of Agora Publishing and DailyReckoning.com

-- I remember the old days when a jump in Total Fed Credit of $7 billion in a week, like the one we had last week, would have sent me to the emergency room; heart exploding, brain bleeding and my Loud Mogambo Mouth (LMM) screaming in mortal fear and vowing bloody revenge for the price inflation that will surely follow such outrageous monetary inflation.

But now I am just kind of, I dunno, numb, as this economic outrage is so consistent, week after week, month after month, year after year, especially since 1997, when the execrable Alan Greenspan and his loathsome Federal Reserve started creating excess money and credit like never, ever before.

And speaking of Alan Greenspan, his forthcoming book is reportedly to be titled "The Age of Turbulence". Given my extreme contempt for him, his catastrophic chairmanship of the Federal Reserve that created bubble after bubble, who immediately resorted to lying about price inflation, and who created the economic horror for which we will pay a terrible, terrible inflationary price. And so it seemed natural that the word "turbulence" brought to my mind a scene of him farting in the bathtub. I dunno why.

I assume that this distastefully flatulent scenario is unpleasant to the more sensitive of you, but I also assume that this little drama will actually turn out to be quite preferable to the stinking lies and distortions that will undoubtedly run rampant in his actual book. So lighten up! I am doing you a big, big favor here!

But crude and infantile bathroom humor aside, and back to the current situation, the stacks and stacks of American government and agency debt soaked up by foreigners and stashed at the Fed ballooned by another $10 billion last week, too, taking their total holdings to $1.8 trillion, meaning that at an average of only a miniscule 4% yield, we will be paying foreigners $72 billion a year in interest payments alone!

It was at the same time that all of this silly, frightening crap is happening that I chanced upon Chris Martenson, who quoted the author Upton Sinclair as famously remarking; "It's difficult to get a man to understand something when his salary depends on him not understanding it."

When I read this, it seemed so, so, so profound, perhaps because it IS profound, or perhaps because I was simultaneously discovering WHY all those pills always come with a caution to never drink alcohol while taking them. "But," as I explained to my lawyer, "there is nothing on the label about not drinking so much alcohol that it overwhelms some stupid little pills! I mean, it's a matter of ratios, man! So, I'm the victim here! Can't you see that, moron?"

But the point I am trying to make is not about the sudden belligerence and staggering incompetence of lawyers who can't see how I am perfectly within my rights to sue them all (including him, the sleazy little bastard!), but rather that it IS a very profound thing for Mr. Sinclair to say, particularly as regards the absolute Sinclairian idiocy I see whenever I unlock the heavy armored door of the Big Mogambo Bunker (BMB) and nervously peek out at the egregious behavior of the banks, the schools, the media and the government, and the blatant intellectual and ethical corruption that made it so, so possible.

The thing that is sticking in my craw here lately is the fact that the notional amount of financial derivatives actually exceeds the entire total global output of goods and services by (and I gulp even to type it) ten times over! And yet (you had better sit down for this, as I did not, and now I have a big, nasty bump on my head when I collapsed to the floor in shock, and I also have a lot of new bruises where everybody kept kicking me to see if I was dead because they wouldn't believe me when I kept telling them I was not), I keep reading how this is all okay with everybody because nobody understands derivatives! Hahahaha! This is the level of genius at work here! We're freaking doomed, I tells ya!

The real, Sinclairian truth is that they understand it perfectly, as derivatives are very, very easy to understand; these are all just bets that were created, bought and sold for one silly equation-related reason or another, and the Federal Reserve created all the money to finance it. Is that so hard to understand? Really?

What is harder to understand is the sheer arrogance to think that now, after all these thousands of years of economic cause-and-effect, anyone can even think that the Laws of the Economic Universe are suddenly made amenable to any insanity if you can restrict everything to a handful of variables, and derive an equation by combining them in various clever ways! Amazing!

Then (and this is a bigger, and more amazing, part) a country is thus set free to create as much money as the banks, or the government, wants, and now nothing bad will happen this time, like it has happened every other freaking time it has ever been tried in all of history, which was most of the time! I mean, when was there ever a time when a government NOT want to spend more money, and was always working to find ways to get more? I have to laugh scornfully aloud "Hahaha!"

This is tantamount to saying that they have developed a winning "system" to bet on horse races, lotteries, roulette wheels and coin flips, and that the secret involves borrowing money to place derivative bets, and selling parts of these bets and other bets to other people (who borrow the money to buy them), all of whom borrow money to place offsetting bets of their own, and then everybody uses them as collateral to borrow some more money to make other derivative bets! Hahaha!

And they say they can't understand how this monster derivative thing works? Hahahaha! To add a little Mogambo Educational Content (MEC) to this subject, I bring out the Mogambo "How To Tell If A Stupid Thing Is Bad, Even Without Understanding It, In Case You Can't Be Convinced By The Fact That It Even Sounds Stupid" Kit.

Opening the box, I take out two long, bare copper wires, and I put one in each of your hands. Onto my own hands I put thick rubber gloves.

Now, I turn to you and demand, "Explain electricity", which is, you gotta admit, simple enough if you understand anything about electricity. But if you get it even partially wrong (with grammar and posture counting towards your total points!), I cruelly jam the other ends of those copper wires into the wall electrical outlet and let the local power company give you (zzzzt!) the lesson of your stupid life about how stupid-sounding things you know nothing about can be Very Bad For You (VBFY)!

With this Highly Instructive Mogambo Lesson (HIML) firmly in mind, let's review again this Ponzi scheme of derivatives that is so big that (to repeat myself) it involves ten times as much "money" as the total output of all the goods and services produced by the entire freaking planet for a freaking year!

If your heart stopped, then you understand the situation perfectly. Mr. Sinclair and I applaud you!

-- Paul van Eeden writes that to calculate real, inflation-adjusted, interest rates, the kind that determines your buying power tomorrow, you combine the two inflations: Monetary inflation and price inflation. Ergo, "Real interest rates should be calculated by subtracting monetary inflation (as calculated by M3, for example) from interest rates. If you did, you would find that real interest rates are negative."

Wow! Negative interest rates! Let's see: 4% interest rates minus 11% inflation in the money supply equals (and I can't believe what I am seeing!) a negative 7%! What in the hell are bondholders thinking about, paying these ridiculous prices for bonds in order to lock in these insanely-low interest rates? What in the hell are the central banks thinking about when they create the money to let people borrow money to do that?

The big problem, of course, is the inflationary growth in the most inclusive of all of the measures of the money supply, M3, which, in turn, causes price inflation. And in that regard, John Williams at ShadowStats.com put out a flash alert that M3 is now growing at 11%! The money supply will, at this rate, double in less than seven years!

Even worse, Mr. Williams said "The Alternate GDP shows ongoing recession with 4Q06 annual real (inflation-adjusted) change at minus 1.4% versus minus 1.5% in 3Q06." So we're having a real, honest-to-God recession? Yikes!

To show you the incredible effect of using all the hedonic adjustments to GDP and inflation, all I have to do is point you to where he reports that GDP, according to the government's "Official reporting", was "3.4% for 4Q06." Hahaha! What a blatant disparity! And surprisingly consistent with Jim Willie, of the Hat Trick Letter, who figures that government "exaggerates the GDP by 4% to 5% in every quarter." Hahaha!

And worse yet, this kind of monetary lunacy is rampant all over the world, as I gather from Gary Dorsch, of sirchartsalot.com, who says that money growth is "explosive" all over the damned place, and that The Mogambo was absolutely right when he said that an inflationary bonfire was inevitable and we're all freaking doomed!

Well, actually he did not say that, and I just made it up, as I am obviously desperate for attention in a really sick kind of way like that. But while he did not say I was right about anything, or that I even exist as far as he knows, he did say that money supplies around the world are growing alarmingly, such as "In Australia, the M3 money supply is 13% higher from a year ago, British M4 is 13%higher, the Euro Zone's M3 is 9.3% higher, a 16-year high, Korea's M3 is 10.3% higher, China's M2 is 16.9% higher, a 16-year higher, Russia's M2 is 45% higher, and the US M3 has been reconstructed to show 10.7% growth in 2006."

Money and Markets newsletter reminds us that American M3 can only be estimated these days, as "We are the only industrialized country that has ceased publishing the broad M-3 money supply measure!"

Jim Willie of the Hat Trick Letter expresses a lot of people's worst fears when he says "Global monetary growth is mammoth, a confirmation of my claim that we have already entered the Weimar Modern Era of unbridled money growth. Never in the history of central bankers has the hidden coordination, influenced pressure, gargantuan money creation, doctored statistics, and interference with financial markets been so broad, so deep, and so profound. My allegation is clear, that we now live in Weimar times. Collectively, they have abused the privilege of printing money, and in doing so, have guaranteed a gold bull market."

Depending on your perspective, it is either good news or bad news when he opines "Do not expect a return to normalcy in the United States, not now, not ever." For me, as a holder of gold, it is certainly good news, as I don't want things to be "normal" anymore, as I want out- out, out, out! -of this stultifying, suffocating rut of family and job so that I will never, ever again have to see any of their nasty faces, clean their spit off of my eyeglasses, hear how my work is "substandard even for a trained monkey", or any combination of the above, and God knows I've heard them all enough to last me a lifetime.

And speaking of gold, the International Monetary Fund, which we funded by literally giving them tons and tons of gold in return for a fistful of their new Strategic Drawing Rights, has now predictably grown bloated and mismanaged, and now wants to bail itself of its own budget problems by selling some of the gold! About 400 metric tonnes.

This is all too, too rich! The usual IMF advice (as part of an IMF bailout of one dirtbag country after another that tried something really economically stupid) is to cut spending and fire staff! But the IMF doesn't want to take its own advice! Hahaha!

The philosophic and comic angles aside, SilverForecaster.com says "The IMF has 3,217 metric tons of gold and the sale of 400 tonnes could raise $6.6 billion at current market prices."

But my problem is not with incompetence or corruption, as that is always everywhere at the ends of long booms, but with inflation. And as to that, he says that people who are buying bonds are idiots and they and their children should be taken outside and shot before they infest the gene pool with their mutant DNA.

Okay, I made that up, too, and I admit I am getting really pathetic in my twisted, desperate craving for some attention, but he actually did say essentially the same thing when he said "If accurate price inflation was reported, then prevailing interest rates would have to be 8% to 10% in order to compensate for the asset erosion risk."

Ty Andros of TraderView.com hits the problem right on the head when he asks "Do you really think inflation can be contained in the face of the global Tsunami of monetary stimulus? Inflation is set to runaway to the upside, along with the global asset inflation they are fostering. The poorest people in America are set to become a lot poorer."

And it ain't just the poor, as ditto the middle class, Mr. Andros. This proves that Lenin, former bigshot commie, was waaaAAaayyy too narrow when he famously said "The way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation."

If Lenin was alive today, I would go to his house and shout, over and over until the police came and dragged me away, still screaming, "In reality, everybody gets ground up by either millstone, you stupid Russian commie trash!" and he would have had to come out and admit that I am right, and that he is wrong. It would have been real embarrassing for him. And probably a career-killer, too.

From bitter experience I know it's death with chicks, too, so maybe he's actually lucky to be dead!

The price inflation millstone is, as we know, baked into the cake as a necessary result of the rampant monetary inflation. And as for taxes, look out! For example, President Bush (according to the New York Times) "will ask Congress to 'eliminate annual indexing of income thresholds'" in the Medicare prescription drug benefit, "so that more people would eventually have to pay the higher premiums"! Hahaha! What a scam! And this is just the tip, the teensy tippy tip top, of the coming iceberg of higher taxes!

And to remind you of the horror of the inflation millstone, we just saw that money supplies around the freaking globe are all increasing at 10% or more, meaning that this is opportunity whispering sweetly in your ear to buy gold, which is unlike the piercing screeching and criticizing you will get from your family when they find out that you knew you should have switched to gold, and could have switched to gold, but you did not switch to gold, and now that your precious paper financial assets, especially the stocks and bonds of companies providing "services", have fallen to intrinsic value (zero), you are all poor, while the people who owned gold and silver and oil and commodities got rich, rich, rich!

This is when your "loved ones" begin to stew in their envy, and they thirst for a scapegoat from which to extract a price for their misery, sort of like around my house, where I am blamed for everything. Like, for instance, how Joanie's boyfriend breaking up with her is, somehow, my fault, just because he came over to the house that one time and I casually asked him, in pleasant, idle conversation (She yells out "It was a freaking Gestapo interrogation, for crying out loud!") if he knew what caused inflation in the prices of things (answer: inflation in the money supply), and it turns out he didn't know.

Furthermore he had no clue! And he giggled nervously, like this was just freaking fine with him or something! And then I told him that proves that he was stupid, and I hated him for being stupid, and would always hate him for it, and I told him how I sincerely hoped that I would always be able to, like right now, for instance, control my burning natural desire to grab him by his little geek neck and slap, slap, slap some sense into his stupid, stupid head, over and over and over, until I collapse from sheer exhaustion or his stupid ead pops off.

So their sudden, unexplained break-up is too bad, too, as next time I was going to ask him if he knew how the price of gold reacted to inflation (answer: it goes up, a lot!), which would have been both highly educational for him and a good aerobic workout for me!

-- From the Richebächer Letter we read the good doctor saying "Private households in the United States embarked on their greatest borrowing binge of all time, fostered and facilitated by the rampant house price inflation and a most aggressive financial system. Over the five recovery years since the end of 2001, their overall indebtedness surged by 66%." Yikes! Increased debt loads by two-thirds? Like I said, "Yikes!"

For a lesson in very dry humor, Dr. Richebächer, writing at DailyReckoning.com, wryly juxtaposes Ben Bernanke, the chairman of the Federal Reserve, saying "there is little evidence that the weakness in housing markets is spilling over more broadly to consumer spending or aggregate employment" against the published fact that "private households have drastically curbed their mortgage borrowing. It amounted to $672.7 billion in the third quarter 2006, sharply down from $1,223.6 billion in the same quarter of last year. Mortgage equity withdrawal peaked at an annual rate of about $730 billion, or 8.1% of GDP, in the third quarter 2005. One year later, in the third quarter 2006, it was sharply down to $214 billion."

So roughly $500 billion has been taken out of the growth in spending from borrowing? How can this NOT spill over "more broadly to consumer spending or aggregate employment"?

This was too, too much for me, and I was instantly on the phone to the Federal Reserve! I naturally demanded that the receptionist immediately put me through to speak to Ben Bernanke himself. In reply, she sweetly said "My Caller-ID shows that you are The Mogambo, sir. Is that true?" Well, she sounded so nice and friendly that I was going to admit that I was, indeed, with charming "aw, shucks!" humble modesty, the aforementioned Mogambo, but before I could say anything, she went on to icily add "Are you that stinking little pervert weirdo that is always calling here? Is that you, you little creep?"

My eyes stinging with bitter tears at such a personal attack, I bravely masked my torment and pain, merely asking her to please give a message to Benny-boy, and she said she would. So I dictated "Personal savings was a negative $117 billion in December, which works out to a deficit of 1.2% of income! It's the worst savings rate since1933, during the Great Depression! How in the hell can you say that there is 'little evidence' of a housing decline having an impact, you stupid freaking moron?"

Then I politely said to her (just to make sure there are no miscommunications), "Okay, now read the message back to me, please." She obligingly chirps "Message to Dr. Bernanke from the stupid Mogambo (TSM): Personal savings blah blah blah. Thank you for calling! Goodbye!" Then she hung up on me! How rude!

I am furiously hitting "re-dial" on the damned phone to give this little receptionist twit a little Mogambo lesson (LML) in manners, but Dr. Richebächer ignores me, and says that he figures that "It means that the most important credit source for spending in the economy is rapidly drying up, even though money and credit remain, in general, as loose as ever. It is drying up because the decisive lever of this borrowing binge, rising house prices, has broken down; most importantly, this lever is not under the control of the Federal Reserve."

I leap to my feet and exclaim "But this lever IS under the control of the despicable Congress, which can easily pass new tax law to instantly make every house, no matter how overpriced, into a big, beautiful bargain! For example, how about deducting, on Schedule A of your tax return, not just your mortgage interest and property taxes, but a full 50% of your mortgage payments, too? Or 75%? Or 100%? Hahaha! Deducting your monthly mortgage payment, including principal, interest and property taxes, from your income! Hahaha! What is a house worth if its cost is completely tax deductible? Hahaha! A boom in housing is assured!"

From the look of disdain on Dr. Richebächer's face, I surmise that he is not particularly interested in my keen tax savvy or my raw contempt of Congress, and merely notes that "Between 2000 and third quarter 2006, the mortgage debt of U.S. private households soared from $4,801.7 billion to $9,497.4 billion. In barely six years, it has, thus, almost doubled." Twice as much mortgage debt!

This is big stuff, and I am maniacally trying to dial the Federal Reserve so that Ben Bernanke can hear this, too, but I can't get through! My call is being blocked or something! So while Bernanke may be thus left in the dark, we are not, as we are right there as Dr. Richebächer says "Considering the dramatic reversal in the housing bubble, a virtual collapse of consumer borrowing is definitely in the cards for the United States."

And this lack of new borrowing is already having an impact on the prices of houses, as he goes on to report that "The median price of a new single-family home fell 9.7% year over year in September - the largest percentage decline since December 1970. The median price of an existing single-family home fell 2.5% year over year - the largest decline in the history of the series."

-- And for the people who think that the stock market is doing so hot, the Elliott Wave International people have some grim news, while they simultaneously have some good news for those who think gold is where the action is. They say "The DJIA in terms of gold has seen the index fall by 64%, and when the DJIA is calculated in terms of the CRB, it is off 50%!" Well done, gold bugs!

-- The New York Times reported that the government is vastly expanding the size of government by contracting services from the private sector, in effect creating virtual government employees that are not, in fact, government employees. It has gotten to the point that "far more people work under contracts than are directly employed by the government", and that "On the rise for decades, spending on federal contracts has soared during the Bush administration, to about $400 billion last year."

And this is just federal contracting, and it does not count the massive out-sourcing and contracting by state and local governments, all of which makes it that much more chilling to be informed by the NY Times that "Companies, unlike agencies, are not subject to the Freedom of Information Act."

The bottom line is that (and this is the part that astounds me) the governments of this country employ directly, or cause to be employed indirectly by contracting, or cause to be employed so as to cater/retail to all the many new needs, almost half of the workers in the USA! Half! This is insane!

-- George Cocalis of the Brewer Futures Group, writing at FinancialSense.com, writes that, in China, "the average personal income wage has risen 24% in the last three years, most rapidly for the younger class. The annual salary on average is $10,000, which is the equivalent of $40,000 in the U.S. It is estimated that about 30% of the Chinese population is experiencing this rapid salary growth, but remember that less than 25% of all the Chinese is still more than the entire population of the United States!"

More frightening, he reports that "In a study conducted by Credit Suisse First Boston, the Chinese consumer will likely have displaced the U.S. consumer as the engine of growth in the global economy by 2014." In only seven years! Less than two Presidential terms!

And that means (counting on my fingers) that in only six years, they will "almost" replace the U.S. And that means that in five years, China will be "nearing the time" to replace the U.S. And that means that in four years China will be "well on the way" to replace the U.S. And all of that means that, starting right now, and for every year from now until the rest of your life, the Chinese will be gobbling up more and more commodities.

And if there is one thing that can make it possible to have this much growth without the usual attendant inflation in prices, it is to export the inflation. How pleasant to send inflation to, for instance, the United States, by letting the dollar and the idiotic American economy collapse, taking with it all the other idiotic economies so similarly arranged.

Thus China would emerge as the economic colossus of the world, and will be able to buy anything they want, as much as they want, any time they want, paying bargain-sale prices as the yuan becomes stronger, and continues to get stronger and stronger, and thus all of the imported inputs to Chinese industry will be (thanks to the strong and strengthening yuan) relatively cheap, and always getting cheaper! And that's how you can export some serious inflation, dude! Hell, we have been doing it for decades ourselves!

The flip side of the coin is that somebody has to import that inflation, and that will now be us. But don't get me started about price inflation, or about how we are all freaking doomed, because you know how I am about that stuff. Ugh.

****Mogambo sez: Gold and silver, and silver and gold. Whichever way you say it, it is just perfect. And the more you have, the more perfect it is, too!



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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