E-Economic Newsletter

By: The Mogambo Guru | Wed, Feb 21, 2007
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Provided as a courtesy of Agora Publishing and DailyReckoning.com.

-- Among the vile, sulfurous things I am muttering to myself under my breath is that the mind-control rays that the CIA are beaming into my head have affected my golf game, and now I'm slicing my irons into the sand traps and topping the ball off the tee! The bastards!

Even worse, the Federal Reserve increased Total Fed Credit by another $5.7 billion last week, thus creating more money (when loans are actually made by the banks) and/or putting downward pressure on interest rates (by increasing the amount of credit available), both of which are designed to entice people to borrow money for one reason or another (anything will do, but stocks, bonds and houses are preferred). The bastards!

The important part, from the Federal Reserve's point of view, is that somebody is borrowing and spending money, and lots of it, the more the better. Sort of like my family wants to do (and will do, if I don't watch them every minute!), only the Fed gets to print their money, and I have to earn it, which I can't because I am lazy and incompetent, which, I patiently explain, "Puts us back to square one, jerk, so shut up!"

And as for foreign central banks, who knows what in the hell they are up to? I mean, they speak foreign languages that we Americans can't even understand, for crying out loud! Anyway, this suspicious group of outsiders bought up another whopping $13.4 billion of American government and agency debt last week, too, and stashed it into their accounts at the Fed. Even Cash in Circulation got a little boost, up another $2 billion last week!

In short, our central bank is still creating excess money and credit with both hands, thus deliberately trying to create both direct monetary inflation and, as a consequence, price inflation in something, and then price inflation in some things, and then price inflation in most things, and then finally price inflation in all things as the money is eventually maximally disbursed into all prices, either more or less, according to their perceived relative value in the resultant new, inflated economic system of prices.

Thus, I am encouraged by the fear of higher prices to add a whole new protective layer of aluminum foil to the inside of the Famed Secret Bunker Of The Mogambo (FSBOTM) and make a fort out of the cushions from the couch in the living room (as a sort of rough-and-ready Plan B against a surprise attack).

I subsequently spend a lot of time just sitting and hiding, whimpering about the irresponsible monetary insanity these days, and how this will lead, as it always does, to inflation in prices that drives people to acts of desperation, and which drives The Mogambo's paranoia off the freaking scale, which almost always results in random bursts of suppressive fire in frightened response, which always results in the neighbors whining and suing me about some mysterious new bullet holes in their stupid garage, or their stupid washing machines, or their stupid kid's playrooms, and then daring to argue with me about what's "acceptable collateral damage" and what isn't! See what I have to put up with around here?

Thinking and pondering like I do, fingers on triggers, waiting for the economic earth to open up and swallow us all, I occasionally get up to check the locks, put some fresh ammo in a machinegun or two, and maybe firing off some fresh hate mail to the Federal Reserve ("Dear Morons, I hate your guts because you destroyed my country's economy! Yours truly, Angry in Florida") with a cc: to Congress and the Supreme Court, whose guts I also hate, and for the same damned reason.

And somewhere in my vengeance-laden philosophical musings and venomous correspondence, I realized it all comes down to "willing stupidity". Real Austrian economics (as opposed to the laughable, econometric equation-based claptrap taught in almost all universities and used by every government) is actually quite easy to understand: If you let the banks act stupidly by letting them create excess money and credit (a monetary boom), you will soon get an inflationary boom in the economy (as the money is borrowed and spent, increasing demand for things, and thus increasing the demand for making more things), and then you will also get inflation in prices, which will end in a systemic bust, with all the attendant misery and suffering that will dwarf the joy of boom that caused it.

It's the one horrible, indelible, enduring lesson of all of known economic history, and the reason why the Founding Fathers tried to make sure that our money was not so debased by over-issuance by writing into the Constitution that the dollar must be gold and/or silver.

And another big lesson from "all of the rest of history" is that the guys who opted for gold and guns do NOT show up on the list of "Guys who ended up penniless and pissed." Actually, the people who are not on that terrible list are the idle rich, as they have the ample leisure time to sit around creating lists of guys who are on it! Hahahaha! That's how you suffer an economic collapse in style, dude!

And it is price inflation that is the killer of economies, and price inflation is manifested, of course, as higher prices, but which is the same as a fall in the purchasing power of the money. Knowing that, you are ready to hear Rep. Ron Paul, who is (hopefully) the next President of the United States, writing at LewRockwell.com, who reports that when you deflate/inflate 2006 dollars to achieve buying power parity across different points in time, the buying power of the current $5.15 per hour minimum wage translates to"$9.50 before the 1971 breakdown of Bretton Woods." This is, of course, the infamous year that Nixon finally severed the official gold/dollar link.

And if you want some proof of his towering intellectual competence as regards economics, not only as relative to his fellow dimwitted Congresspersons but also in absolute terms, then I am happy to report that he went on to say "Congress congratulates itself for raising the minimum wage by mandate, but in reality it has lowered the minimum wage by allowing the Fed to devalue the dollar." This is exactly the mechanism at work!

I understand that as a possible Presidential contender, he wisely doesn't want to appear too alarmist. But, unfortunately for him, he is standing next to a guy (me) who all too happy to proclaim, loudly, the ugly fact that "Everyone suffers from price inflation, and it is evil!"

And those who will suffer first, and suffer the most, from price inflation are those who do not (or cannot) increase their incomes to match the increase in prices, and they will suffer piteously because their fixed incomes will not buy as much stuff as it did yesterday, and tomorrow will be worse, and every day for the rest of their lives that they do not, somehow, miraculously, get an increase in their income, it will be worse than the day before, and they will grow angry that they must always buy less and less, and pretty soon people are getting desperate, which turbo-charges "angry."

And while one can argue whether technology has made the guillotine passé as the weapon of choice of rioting mobs of angry people made destitute by price inflation, or whether the Uzi and the shoulder-fired rocket-propelled grenade are an advancement or not, but there it is.

Dr. Paul, judging by horrified look on his face, is obviously not "into" how this discussion has degenerated, but, again proving his intellectual mettle, makes note of the fact that I am not just another raving paranoid lunatic, but am an ARMED raving paranoid lunatic. Big difference! Wisely, he attempts a sort of compromise, and says "We must consider how the growing inequalities created by our monetary system will lead to social discord."

-- The new official Merchandise Trade Deficit came in at -$68 billion for the month. Sixty-eight billion bucks left the country in one month! Unfortunately, there are fewer people with jobs to make enough money to buy all this imported stuff, as from AP we learn "Jobless claims rose to 357,000 last week, the highest level since late November. The increase of 44,000 claims from the previous week was the biggest one-week increase since Sept. 10, 2005, when claims soared in the aftermath of Hurricane Katrina hitting the Gulf Coast."

Even worse, "The four-week moving average for claims rose to 326,250 last week, the highest level in nine weeks and an indication that conditions in the job market have softened."

-- One of the downsides of inflation in the money supply, leading to an increase in prices, is that the prices of commodities will go up, to which you should be particularly attuned, as commodities are what you Earthlings (meaning "we", since I'm stuck here, too) call "food". And by "food", I of course mean the delicious, often gravy or chocolate-coated stuff that we shovel into our gaping, slobbering maws with both hands, gobbling it down like the ravenous, messy, slurping, feral hogs we are, and we don't care who knows it, much less care whose hyper-critical, picky wife is crying and wailing out "Oh, Jesus! Can't we ever go anywhere nice without you embarrassing us like this, you stupid Mogambo pig (SMP)?"

But your wife's prayers for heavenly release from the torment of embarrassment may be at hand, as your gluttony will soon be attenuated by "lack of affordability", because commodities will go up in price not only because of the fall in the purchasing power of the dollar, but also because of scarcity of food itself, as implied by an article in Newsweek that read "There are ominous signs that the Earth's weather patterns have begun to change dramatically and that these changes may portend a drastic decline in food production - with serious political implications for just about every nation on Earth. The drop in food output could begin quite soon, perhaps only 10 years from now. The regions destined to feel its impact are the great wheat-producing lands of Canada and the U.S.S.R. in the North, along with a number of marginally self-sufficient tropical areas - parts of India, Pakistan, Bangladesh, Indochina and Indonesia - where the growing season is dependent upon the rains brought by the monsoon."

The article says that this is nothing new, but now "The evidence in support of these predictions has now begun to accumulate so massively that meteorologists are hard-pressed to keep up with it."

At first I think, you know, that the food has disappeared because so many people are so damned fat, and they just ate it all! Hahaha! Apparently, nobody is interested in my humorous and glib explanation, and with a sniff of condescension they go on "The central fact is that after three quarters of a century of extraordinarily mild conditions, the earth's climate seems to be cooling down. Meteorologists disagree about the cause and extent of the cooling trend, as well as over its specific impact on local weather conditions. But they are almost unanimous in the view that the trend will reduce agricultural productivity for the rest of the century."

Of course, this flies in the face of the huge, and hugely popular, "global warming" argument. But, either way, the common denominator is that both camps agree that the weather is changing dramatically, and this bodes ill for those that eat food that they have to pay for, as a Big Double-Chubby Cheeseburger Super Deluxe is more than just a couple of seeds, a few pounds of fertilizer and a cow.

And already there are reports of the increase in the prices of food. For example, onions, reportedly a staple in the diet in India, have tripled in price in the last year, and, of course, we just had the Tortilla Crisis in Mexico, as corn meal has soared in price. And I am very, very sure (VVS) that this is just the tip of the inflationary iceberg, if you like your metaphors in a Titanic vein.

-- All of this economic stupidity will end, in course, in tears, as it always has, as inflation in prices destroys economies by destroying a lot of people's lives. That is the problem with creating money: It shows up in prices, higher and higher, and after awhile you get so sick and tired of hearing the whining and complaining of your family about how they can't afford to buy anything, and how it is all your fault just because you are lazy and stupid, and how you are the worst parent and worst husband in the whole world, and one day you find yourself thinking of murder-suicide scenarios and what the newspaper headline would say, and then you say to yourself "Whoa!"

Better that you start thinking about robbery, or better yet to get money that does not depreciate in the first place; gold. And if you also want a little capital gain with that buying-power-security, then Nick Barisheff at Bullion Marketing Services Ibbotson Associates has some news that will be of interest to you. It concerns the Eternal Mogambo Truth About Gold (EMTAG).

He claims he never heard of the EMTAG, but notice that he does not explain how he stated it exactly when he said "It takes fewer ounces of gold to buy a house, a car, the Dow, or almost any other good or service than it did in 1971." And even more damning, he admits that he said "Gold will continue to increase in purchasing power as long as its inflation rate (mine supply) is lower than the increase in the money supply."

In case you were, like me, wondering, he added "Mine supply increases by about 1.5% annually."

So (and this is so exciting!) as the money supply has been expanding by almost 12%, so you would certainly expect gold to rise in price? Well, that is exactly what has happened, QED (picking my own entry and exit points to skew the data the way I want)!

And, since the money supply is still expanding exponentially, you can also certainly expect the price of gold to continue to go up, too! Whee!

Michael Nystrom at BullNotBull.com hears me chortling and giggling like a little girl in my childish glee about the coming rise in gold, and notes that Robert Prechter has pointed out that "the nominal Dow peaked at 381 in September 1929, and today it is hovering somewhere around 11,500, a 30X increase over 77 years. Not bad, right? But amazingly, measured in gold, the recent Dow highs are actually right about where they were at their 1929 peak!"

For those interested in the actual details, he says "It took 18.5 ounces of gold to buy the Dow on September 3, 1929. On May 10, 2006, it took 16.5 ounces of gold, so it is actually cheaper."

So gold made slightly more gains! Hahaha! He adds "As Dr. Gold would put it: One dollar won't buy what it did in 1929, but one ounce of gold (about $20 at the time) sure will (about $650 today)!"

I see the audience getting up to leave, obviously taking the lesson to heart, and are going out to get some gold immediately. I am suddenly in a panic, as I need them to come back for the next part of the presentation, where I hopefully sell them a sizable interest in my exciting, new Mogambo Time-Sharing Investment (MTSI)! So I leap up, seize the microphone, and order them all to come back and sit down- right now! -or I would hunt them down, one by one, and shoot them through the head, but, as usual, nobody listens. They continue to stream out, only now making rude hand gestures at me.

And I could hardly blame them for their disinterest, as I am as full of empty bluster as I am full of crap about most things, as a rule, which is as long as you don't keep pestering me, like that stupid credit-card reader at the damned grocery store that kept pestering me, pestering me, pestering me to "Enter PIN number", and I keep telling it that I don't HAVE a PIN number, it's a credit card, you stupid machine, and it keeps beeping, beeping, beeping for me to "Enter PIN number", and I am yelling that I don't have a damned PIN number, damn damn damn it, and it is still beeping, and we're all yelling and beeping, and after awhile I grab a can of stewed tomatoes and shout "You want my PIN number? Is that what you want? Okay, here's my PIN number, you damned beeping machine from bleeping hell!" and was winding up to really smash that hateful little device to little tiny pieces when the ashen cashier says "I'll enter your credit card number from here, sir! Just don't kill me or break the machine!" which I figured was a fair compromise. So I said "Okay."

But nobody was pestering me, in fact they were doing the opposite by leaving. But I could not blame them for leaving to buy more gold, either, as this is the everlasting beauty of gold: It preserved buying power over the last century, and over the millennia, while I laugh the Haunting Yet Scornful Laugh Of The Mogambo (MYSLOTM) at the dollar, the greenback dollar, the bigshot dollar, the Almighty Dollar, which as lost about 97% of its buying power in just 94 years, which it will never get back! And it had a 30% decline in buying power in just the last few years!

So if you have not had a net-of-tax, net-of-expenses, net-of-fees, net-of-everything profit of 43%, measured in nominal dollars, in the last four years, then you lost buying power, chump! Hahaha! So much for the promises of "investing for the long haul!" Hahaha! You invested a $20,000 car and netted a $25,000 bicycle!

Well, my laughter rang hollow in the now-empty room, as none of the audience came back, and now I am still stuck in my own crappy, dilapidated house, instead of being able to unload that eyesore on a bunch of suckers in the Mogambo Time-Sharing Investment Scam (MTSIS).

Thinking quickly, I deduce that one other good idea to make a lot of money, enabling me to get out of this dump and say "goodbye" to family, friends and angry creditors, would be to maximize some profits from the guaranteed rise in gold, that can be supposedly estimated by (for one thing) the percentage change of the fall in the dollar.

It's a lot, I know that, but now much is all over my head, of course, and it's all academic anyway. That is why we turn to Puru Saxena, in his Money Matters newsletter. He reports that the shares of gold mining companies go up when gold goes up, like you would expect, but (even better!), they go up as a multiple of the rise in the gold itself! He reports that "So far in this bull-market, mining stocks of precious metals have on average outperformed physical bullion by 300%. In other words, investors who bought the mining shares made three times more money than those who bought the physical bullion."

I seem to remember that this is also what happened after the stock market crash in the '30s, and everywhere else before and since then, too, when the government acted stupidly.

Like in Argentina now, where President Kirchner just had a government statistician fired when, as the Wall Street Journal put it, "she refused to alter the 'methodology' used to calculate inflation in January. Armed guards then escorted a political appointee to replace her." Hahaha!

Mogambo Memo (MM) to Argentinians: Buy gold now, while your money still has some buying power, because you will soon be screwed otherwise!

Speaking of actual money, Bob C. was wondering about the acronym "FIAT" when used to describe our "money". He says "I believe it is short for Financial Instrument Administering Theft, but I am not sure. Could you please confirm. Thanks!"

I can, and will, answer that question in genuine Inscrutable Mogambo Gibberish (IMG)! With a phony-baloney gravitas, my voice resonates "No, it isn't, but at the same time, yes it is. Thank you for coming. Please leave a donation on your way out. A big one! Now scram!"

-- Part of the money to pay for a bigger budget is revealed by Mark Nestmann,president of The Nestmann Group, who writes to his A-Letter readers that the Small Business and Work Opportunity Act "could include a little-known provision, which demands that expatriates pay a tax on all unrealized gains of their worldwide estate. The gains will be assessed based on the fair market value of the expatriate's assets and the tax due within 90 days of expatriation. Presumably, the phantom gain would be taxed as ordinary income (at rates as high as 35%) or capital gains (at either a 15% or 25% rate), as provided under current law." Yow!

Paying a tax on unrealized (paper) gains! You ain't sold nothing, and you ain't made no profit, and yet you are paying the tax on the paper gain, just because you don't live in America for one reason or another? Wow! Things are much worse than I thought, if they are starting to pull this kind of crap!

Suddenly, I am galvanized into arming myself in preparation for the armed resistance I figure will result from this outrage, because, if this is true, there are no "paper profits" anywhere that are safe! Talk about a stampede to get out of US stocks and bonds and houses! And exchanging the money into gold!

Giddy with excitement and trembling with fear at the same time at the prospect of people rushing into gold, I am dropping handguns and spare ammo all over the floor. Mr. Nestmann tries to get me to remain calm and put the hand grenades down nice and easy by explaining that this could work out well, as "When the assets are actually sold, no further U.S. tax will be due (although the gain might be taxed again by the country in which the expatriate resides, leading to double taxation on the same income)"

I figure that this scheme is almost certainly true, as it neatly solves the tax problem inherent in investment losses; they are deductible against future capital gains, and against another $3,000 of income, per year, until completely recouped! So how much income tax will you pay, over the rest of your life, if you make $50,000 a year, pay a total of $15,000 a year in various taxes, but you have losses totaling $200,000? Hahaha! You'll never pay any tax on gains (if any) for the rest of your freaking life, and you will pay less income tax, too, by not paying any on that $3,000 of ordinary income!

Now, if you were a government with its back against the wall, in desperate need of money, right now, you can see the attraction of this unprecedented tax policy. Scary stuff!

But it's not like they need the money right now, as Doug Noland in his Credit Bubble Bulletin reports that "With one-third of the fiscal year now completed, y-t-d federal Receipts are running 9.7% ahead of comparable 2006. Corporate tax receipts are running 21.8% ahead and individual income tax 12.6% ahead of last year's level. Indicative of the ongoing systemic Credit boom, y-t-d receipts are running 21% above comparable 2005."

Of course, "Fiscal 2007 y-t-d Spending is 2.1% ahead of 2006's level (up 9.7% from 2005)."

He also reported the news from Bloomberg's Shannon D. Harrington, from whose report today's Mogambo Pop Quiz (MPQ) is derived. "The credit-derivative product companies, or CDPC, are seeking to tap into a market where outstanding contracts surged to more than":
a) $26 billion last year
b) $260 billion last year
c) $2.6 trillion last year
d) $26 trillion last year
e) more money than the human mind can comprehend.

The correct answer is either d or e, which are, actually, completely equivalent in every respect.

The part where you keep reading and re-reading the same sentence over and over as your brain refuses to believe your eyes is "The new entities are driven partly by the ability to secure top AAA ratings, which allow them to sell protection without having to post collateral."

And, somehow this "gives investors on the other side of the trade counterparties with the highest ratings." Hahaha! This is insane!

I mean, hell, let me in on this deal! It is so eye-poppingly unbelievable that I am actually slavering (which is not as charming as it sounds) down the front of my shirt at the prospect of being able to "secure top AAA ratings", for zillions of dollar's worth of instant assets, "without having to post collateral" or probably even any money! Hahaha! This is insane!

-- Robert G. called and wanted to know what I thought about a proposal to have totally electronic money, and to get rid of cash altogether. To this idea I laugh uproariously, as only cash allows criminal activity, payoffs, rake-offs, bribes, corruption, political graft, prostitution, drugs, CIA activity and everything else that is the least bit frowned upon or outright illegal.

So, totally electronic money? Hahaha! Can you imagine a world where every expense, by everyone, is traceable all the way back to the original bank loan that created the money in the first place? Do you really think that the American government would do what it does, if the money could be traced that easily? Hahaha! Actually, "Ugh".

****Mogambo sez: Gold, silver and oil have suddenly declined in price a little bit, and that can only mean one thing; it's getting to be time to buy more, and you would buy some, too, if you had some money, which you don't anymore. Welcome to the hell of inflation!

 


 

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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