E-Economic Newsletter

By: The Mogambo Guru | Wed, Feb 14, 2007
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Provided as a courtesy of Agora Publishing and DailyReckoning.com

-- Things economic are, thankfully, relatively quiet, which, of course, brings to mind that classic movie scene where someone remarks that it is quiet, and someone else says, ominously, "too quiet", which is always quite prophetic, as usually there are soon bullets and/or arrows flying everywhere, things exploding, people screaming and actors in non-speaking roles suddenly getting killed left and right. I am understandably tense.

To talk of more pleasant things, Andrew G. phoned the other day at the perfect time, as my boss was actually in my office at that very moment, as a follow-up to my recent Annual Employee Evaluation, which (as usual) didn't go all that, umm, well.

Anyway, a brief synopsis is that I work for a bunch of micro-managing persnickety nit-pickers, always poking around in my business, reading reports and taking issue with my charming customary inattention, leading (unfortunately) to making wrong executive decisions, leading to losing money by alienating all the customers, and being sued into bankruptcy because of it.

I was starting to panic, and I was hoping that a flash of explanatory accounting brilliance would help me "redefine" the departmental losses, and then I could use that, see, to show how I actually DO know how to do my job, even though my performance makes it painfully obvious that I don't have a freaking clue. That's when the phone, thankfully, rang!

I immediately put him on speakerphone just in time for my boss to hear him say that I actually have been right, gloriously right, about a few things, like oil up! Gold up! Silver up! Housing down! And he thought I would like to know that, and, man, oh, man, was he ever right!

As cheering as that was, it was all for naught, career-wise, as it turned out. But the investment lesson is as vital today as it was then! Buy gold, silver and oil, and lots of it, as we as a nation are doing all the wrong economic things, and that will make these items soar in price as the dollar falls in buying power!

And the lesson is even made more so since then, as nothing in the economic situation is better, and everything is demonstrably worse! Much worse!! And if you don't believe me, then how do you explain the two exclamation marks if you're so smart?

And when you follow my advice to buy gold, silver, oil and commodities, and thus wax prosperous, perhaps you will, like Andrew, one day similarly call to try and save my career bacon, which I will appreciate, at it is about the only hope I have at this point, short of divine intervention.

-- Mike Whitney writing at ichblog.eu estimates that the housing market falling is "cutting off the additional $825 billion of cash which was extracted from home-equity just last year." This has GOT to be very, very bad news (VVBN), as not spending $825 billion is (gulp!) not spending 7% of GDP! For crying out loud! We're freaking doomed!

Probably noticing that my face is turning blue and I am frantically clutching my stricken chest at this news, Mr. Whitney apparently thought it was a good time to change the mood. In that regard, he opted for the "performance arts" line of analogy, and immediately demonstrated his vast knowledge of the theatre by remarking about "The Blanche Dubois economy", which refers to a vapid, mindless, clueless, child-like character in a play/movie called "A Streetcar Named Desire", who famously said that she was "dependent on the kindness of strangers."

That's America in a nutshell, Bubba! We're dependent on strangers, who have no reason to love us, loaning us money so that we can keep shopping and building bigger governments so that more people can be "dependent on the kindness of governments!" Hahaha! That ought to last a long time! Hahaha!

-- Al Korelin at kereport.com quizzically notes that the statistics show that the supply of silver has actually been higher than the demand. Instead of shrugging his shoulders at the anomaly and moving on (like I would have done to avoid the actual work of research), he takes positive action to solve the mystery, and calls David Morgan of The Morgan Report to remark upon the table of the historical supply/demand on the Kitco Silver site, and say to him, "I don't get it; Kitco is well-known for accurate statistics and this one makes no sense."

The explanation was obtained when Mr. Morgan revealed that "these statistics were obtained from Goldfield Mineral Services from the United Kingdom, and of the three components making up the supply numbers, government sales and scrap supply, often known as 'above ground supply' are somewhat open to conjecture. The only component, which cannot be questioned, is 'mine supply', and there is a deficit between mine supply and total demand. This fact, coupled with the growing medical and industrial demand for silver, is one of the reasons that the price of the commodity is increasing." Nice analysis, Mr. Morgan!

And perhaps one of the new "growing medical demands" for silver to which he alluded is reported by Mineweb.com, in that "Pioneering pyjamas and bed linen made with silver cloth could prove the key to limiting MRSA (a bacteria which has caused a number of illnesses and deaths to patients in UK hospitals) infections if a multi-centre trial being run by St Bartholomews Hospital in London and The London NHS Trust proves successful. Dr Peter Wilson, a Consultant Microbiologist at the Trust, believes there is strong anecdotal evidence to suggest that silver can be used to clear MRSA on the skin and therefore protect vulnerable patients."

Everybody concerned says that they are "excited" about the study, hopefully to verify the theory that they could actually eradicate the infection horror of almost-incurable MRSA by giving (oops, "selling at hugely obscene mark-ups") pajamas laced with silver to hospital patients.

And as a guy who owns some silver, I am likewise "excited" about this research, as this means a whole new, huge demand at the exact same time as the decades-long government selling of stockpiles of silver (and other things) into the market are almost gone! It's "perfect storm" time!

Suddenly, since demand already exceeds supply (and has for years), that old supply-versus-demand thing pops unbidden into my head, and the result is so compelling that next thing I know I am screaming to the family to clean out their closets because I'm going to need the storage space for a lot more silver!

Predictably, because they are not "team players", I can hear them grumbling and cursing under their breath that they are already storing so much silver that the only closet space they have left is just big enough for a change of rags, which, according to my calculations (when I add the set of rags they are currently wearing), is two sets of rags apiece. What riches!

And "Why do they dress in rags?" you ask. "Because," I patiently explain to you, like I patiently explain it them, and like I patiently explain it to those pesky, busybody social workers with their precious little court orders in their fat, greasy little hands, "they are just too damned lazy to beg or steal some clothes from the neighbors, much less get up off their lazy butts to go down to Salvation Army, and get something nicer to wear! The clothes are free! I mean, I could have dropped them off, on my way to play golf, almost any morning of the week! So shut the hell up and take those handcuffs off of me, you damned dirty apes!"

This was, of course, my clever way of trying to de-fuse the tense situation by adding some humorous allusion to Charleton Heston's famous line in Planet of the Apes, and which was, of course, not appreciated by the Gestapo apes either on screen or in my real life, although I note with a dismissive sneer that Charleton Heston didn't have to pay bankrupting fines or attend stupid classes on "How to be a Good Father" and "Anger Management", but instead he gets a nice, cozy cage to live in, free grub, free medical care, and has hot chicks half his age, dressed in hubba-hubba shortie outfits, brought to him for some XXX-rated Hot Monkey Love! I mean, where's the justice? I'm the freaking victim here!

But this is not about how the legal system is not about "justice", or even about cheerless government goons, but about how, if this study about silver pajamas preventing MRSA in hospitals proves effective, you can bet your sweet butteroo that these kinds of clothing will soon be selling in Wal Mart like hotcakes to worried, germ-o-phobic mothers the world over. And that kind of huge demand for silver, to meet the tidal-wave of demand, means that silver must be (as I can not even fathom the remotest possibility otherwise) preparing to go to the moon in price! Wheee!

Then, according to the Secret Mogambo Five-Year Plan (SMFYP), I'll take some of the silver from storage in their stupid closets (giving them back their stupid closet space), sell the silver, get rich with cash, give the wife and the kids a few bucks apiece, and tell them to "Hit the road, ya hateful parasites, always dragging me down!" As Hannibal Smith (played by George Peppard) of the A-Team so famously said, "I love it when a plan comes together!"

-- The famous Daan Joubert sent me an email that did not actually contain the phrase "You are the biggest idiot in the whole world", but you can tell that was what he was really thinking when he replied to an item in my last week's MoGu that Paul van Eeden proposed that the "real interest rate = nominal interest rate - M3 growth - inflation", which Mr. Joubert suggests "needs an adjustment".

Reading between the lines, you can plainly see he is calling me, like so many others call me, "an insignificant little intellectual pygmy", all because I should have realized that "Broadly speaking, M3 growth should be in pace with the growth rate of GDP - nominal rate growth, else inflation is brought twice into the calculation."

So now I am feeling embarrassed and my feelings are hurt, and I am already beginning to formulate a plan for revenge against the insult, maybe using that new Howitzer cannon that my wife disparaged by saying "Why did you buy that monstrosity, you stupid Mogambo moron (SMM)? You'll never use it!"

But, as they say, "First things first." So let's re-calculate real inflation according to this new methodology! He apparently sees me fumbling with the calculator, stalling for time, and knowing that I will probably get the wrong answer half a dozen times before giving up by crying in despair, sighs in exasperation and supplies the answer by saying "So the real interest rate is not the -7% as you had it, but 'only' say -4% to -5%."

But the point is that real (inflation-adjusted) interest rates are- wonder to behold! -still negative! Negative interest rates! Too, too weird!

And notice his use of the modifier "only", as in "We originally thought a horrible disease was going to kill you in two weeks, and now we see that it is ONLY going to kill you in three weeks!" Hahaha!

I like my little joke so much that I have decided not to persecute Mr. Joubert, mostly because he has a very good point, but also because I am a wonderful, real peach of a guy, and only (again with the "only"!) partially because the enormous cost to ship one lousy Howitzer cannon will make you plotz. It sure did me!

But, being naturally argumentative, I like the idea (now that he has pointed it out) of double-counting some of the inflations by subtracting actual price inflation (which is inflation that has already happened to prices) from the nominal interest rate, and yet still subtracting the current monetary inflation growth in M3, as originally posited, because the future price inflation will certainly lag the current monetary inflation. And future price inflation ought to be relevant to borrowing/investing plans!

-- Larry from MoneyandMarkets.com newsletter says he "tore apart the government's 2006 financial statements", and here's what he found: "The actual annual federal deficit for the fiscal year ended September 30, 2006 was $4.6 trillion, up from $3.5 trillion a year ago. That's an astounding $1.1 trillion increase, or a 31.4% jump in the deficit." Yow! This is not to mention that it is more than a third of GDP!

As for the budget (a cash-accounting format), he notes that "The actual deficit is nearly nineteen times larger than the reported $248 billion deficit."

And lastly, but certainly not least, the accrual-system of accounting shows that "Total federal obligations at year-end were $54.6 trillion, up from $50 trillion in 2005 ... $46.4 trillion in 2004 ... and $32.7 trillion in 2002."

Did I say "We're freaking doomed!" in the last ten minutes? If not, insert said comment here. Maybe with an exclamation point or two to add the emphasis it deserves!

-- At this time, I note that I am getting a lot of email from people concerning solution to the world's problems, either proposing one or soliciting my opinion about one. You may have one, too! So to you, and to them, I sincerely say "I am charmed and heartened that you and so many others search for a solution to our economic inflationary mess caused by the Federal Reserve banking system overly expanding a fiat-currency money supply via creating enormous debt, and I sincerely wish you, and them, the absolute maximum-allowed-by-law best of luck.

"And you will need it, too, because if you succeed in finding a solution to the inflationary mess caused by the over-creation of a fiat money and credit, when all others in all of history have tried and failed miserably, you will be the most brilliant and famous person in history, deservedly loved by all, including me, and your achievement will justifiably rank as the greatest discovery to rival fire and the wheel."

I know that you are wondering why I am handsomely bedecked in this magnificent robe, this overly-large, bejeweled codpiece and ridiculous propeller beanie/crown. It is because, as this week's "parable-via-theatre", I wax eloquent as The Mighty Mogambo (TMM), starring as Everyman, in probably the finest performance of my career, as I casually bellow "It is true, beyond contention, that the growth and expense of government paid for by a grotesquely expanding supply of fiat money and credit has destroyed all countries that have dared such folly! And those that held the currencies of such knaves and fools were likewise destroyed! Destroyed!"

I cross to stage left, and with a gauzy blue spotlight now limning my manly Mogambo face (MMF), I heroically continue "So what, pray tell, if not currency of the realm, what has provided safety for one's hard-won wealth, lo these many cruel, cruel centuries?"

Really warming to the role, I drop to one knee, dramatically raise an extended arm while gazing heavenward, and wail "Oh, Fate! Oh, Nature! Reveal to us now thy elusive philosopher's stone that has preserved wealth 100% of the time in history, when all others searched in vain for a solution to an idiotic big-government economy, financed by a fiat currency multiplied by the banks, creating unholy excesses of money, credit and debt. And don't tell me gold and silver, because we already get plenty of that kind of advice from that Mogambo halfwit (TMH)!"

The answer, in case you have to run home to check on the kids and can't stick around for the climatic end of Act III, is gold. And the reason all excess-money-and-credit systems fail stems from the inescapable fact that there are only a few things to vary by manipulation, and all of them can (and do, when the privilege is abused) guarantee price inflation! And it is price inflation that causes societal anger and upheaval!

I mean, what is there besides cash money, credit creation, interest rates, tax policy, and regulatory policy to play with? All of these have been tried and tinkered with many, many times in the sordid history of the world's countries playing with fiat money and unbridled debt, and all of them experienced dismal, abysmal, complete, 100% failure as far as preventing inflation from destroying the economy. So what possible tweaking permutation of these few variables are left untried that could possibly, possibly work this one time in all of history, when all other combinations have failed so abysmally?

To wax nostalgic for a moment, it all reminds me of one of my earlier failed ventures, as chronicled in "The Mogambo Fiascos; the Early Years", in this case The Mogambo Television Repair Shop (TMTRS) Fiasco.

It all started when I was building houses as Mogambo Construction Enterprises (Motto: "Cheap, crappy, fast and amateurish, passing the savings on to you!"), but was abruptly and rudely forced to change careers as part of a stupid court ruling in favor of a bunch of crybaby customers and building-and-zoning officials who disagree with my definition of the line between "standard" and "substandard", and a stupid, arrogant judge who says he has some arbitrary obligation to "protect society" from people like me.

So there I am, starting out fresh as an eager, confident rookie in the exciting world of television repair, but all I had in the way of tools was a hammer, a saw and a screwdriver, all of which proved to be completely ineffective in fixing televisions, as I learned to my ultimate dismay and the dismay of more lawsuit-happy ex-customers.

But the principle is the same: If you have only five levers, it doesn't take long to try every possible combination. And the bigger lesson is the same, too: If nothing ever works, and it never does, stop trying. And the penultimate result is the same, too: The government will never stop trying.

And the ultimate result is the same, too: The only difference between my blazing incompetence and the incredible, incandescent incompetence of the Federal Reserve (in that they are sworn to protect the value of the dollar, which has fallen by 30% in the last few years, and by 97% since they took over in 1913!) is that I can get sued, while they are immune, even though we are both just private corporations doing a very, very bad job (VVBJ).

Regardless, this all leads, inexorably, to this week's Confident Mogambo Investment Tip O' The Week (CMITOTW): Since the government will never stop trying to buy non-inflationary prosperity by creating more money, and they will always fail, the dollar will never stop going down. Thus, gold and silver (measured in dollars) will never stop going up. Ergo, buy gold and silver today. And everyday!

-- As if everything you see is not enough to make you bullish on gold, from FreeMarketNews.com we read that it, FN Arena and Goldseek have in tandem discovered that "Three more central banks have begun buying gold unexpectedly, according to IMF statistics."

The specifics are that "Russia bought 7.45 tons of gold to increase its reserves; however, the Russian central bank had already announced its intention to increase its gold reserves last year. In a surprise move, Kazakhstan bought 7.38 tons, Greece bought 3.56 tons, and the Philippines bought 1.4 tons."

-- Lately I have heard disparaging remarks about the guarantee of the legendary "full faith and credit" of the U.S. dollar. To these people I send the following message; "Don't worry; a fiat dollar is completely safe and absolutely guaranteed. You will never, ever, at any time, be in any danger whatsoever of the bank refusing to honor your dollar. And since I speak so authoritatively, and with such a sincere look plastered all over my stupid Mogambo face (SMF), you can confidently believe me when I say that you will always, always, always be able to take any used, dirty, ratty dollar bill to any bank in America, and they will happily give you another brand new dollar for it."

If, on the other hand, you are asking "Will the dollar will maintain its buying power?", I have some equally sincere news; it won't.

Dollars are not worth all that much anymore, anyway, as we learn from Reuters, which reported that, starting in December 2003, "The Federal Reserve sent record payouts of more than $4 billion in cash to Baghdad on giant pallets aboard military planes shortly before the United States gave control back to Iraqis."

So, 364 tons of American money (about $5 billion) was wrapped in plastic, shipped to Iraq, and distributed willy-nilly. Altogether, it is reported that $8 billion can't be accounted for, which the guys running the Iraq mess dismiss as a mere inconsequence. And I guess it is, compared to the hundreds of billions spent so far!

Beyond the sheer horror of the monetary inflation of such a thing, what did the recipients do with all that money? I'll tell you what! They bought stuff from some guys, and those guys bought something from some other guys, and those guys bought some stuff from some other guys, on and on and on, increasing demand all along the line, driving prices up!

And where will some of this money go? Well, beyond the gobs of money spent to buy awesome WMDs from the American "defense" industry (thus stimulating GDP), some of it will go, as I gather from Daily Reckoning's Desidooru Saloon, to the Iraqi insurgents themselves, as "while Iraq's other main Shiite militia, the Badr Brigade, concentrated in 2005 on packing Iraqi intelligence bureaus with high-level officers who could coordinate sectarian assassinations, al-Sadr went after the rank and file. His recruits began flooding into the Iraqi army and police, receiving training, uniforms and equipment either directly from the U.S. military or from the American-backed Iraqi Defense Ministry."

The result is that the government, police and army are composed of traitors and assassins whose only allegiance is to their own sectarian brethren, and who are draining the American taxpayer blind. And the United States thinks that it is going to win a "war" against this kind of intransigent, dysfunctional, murderous social disharmony, and unite them in a mutually beneficial democracy? Hahaha!

Michael S. Rozeff, writing at LewRockwell.com, notes that all of these kinds of things are folly in the end, as "The war to end all wars (World War I) initiated more wars. The war on poverty created more poverty and dependency. The war on alcohol stimulated greater alcohol use and crime. The war on drugs has imprisoned hundreds of thousands without stemming drug use. The war against terror has stimulated more terror than ever."

This, then is the genius of the American government; deadly, expensive stupidity!

So the end result is an artificially-stimulated Iraqi economy which will collapse as soon as the infusions of money start to dry up, and a new source of inflation in prices both locally and, by obvious extension, to everyone else, as this is always the result of the creation of excess fiat money and credit by a central bank/government as it diffuses through the world's economy. Ugh.

****Mogambo sez: Gold, silver and oil should do very well for a long, long time until their prices (and lots of other prices) go parabolic as the dollar finally loses its last remnants of value at a quickly accelerating pace. And this means that every time the price goes down, you should buy some more, or have a really good reason why not, because you will soon be asking yourself "Why didn't I buy gold, silver and oil when I knew I should have? What am I, some kind of moron?"

The answer is, of course, "Yes, you are a moron", or else would not be reading the stupid Mogambo Guru newsletter in the first place, doofus. Check and mate!

But tomorrow, they say, is another day, and seeing the errors in one's ways is common enough to be a cliché. Which is kind of poetic and musical because it rhymes, so you know it must be true! So do what must be done.

 


 

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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