E-Economic Newsletter

By: The Mogambo Guru | Wed, Feb 28, 2007
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Provided as a courtesy of Agora Publishing and DailyReckoning.com.

-- Total Fed Credit, the magical fairy-dust stuff of which money is instantly made when it is borrowed from a bank, bumped up last week by $4.5 billion, taking us to $851.7 billion. That comes out to about $8,517 for every non-government worker, like me, in the country!

Doug Noland, of the famous Credit Bubble Bulletin at PrudentBear.com, naturally aghast that I would dare to use the word "worker" to describe myself, especially when "worthless human trash" seems so more apropos and (truth be told) customary, calculates that "Fed Credit was up $35.9 billion y-o-y, or 4.4%."

To show you that Mr. Noland is not the only one around here who can do a little flashy research, I recently saw an old movie on TV where I learned that in 1,000,000 B.C. the women were all a bunch of hot babes dressed in animal-skin rags of the decidedly miniskirt variety, while at the same time, Total Fed Credit was, literally, zero. Keep these two particular facts firmly in mind.

Now, fast forward to 1997, which is a span of 998,003 years ("investing for the long term!"), and we see that the dinosaurs are now all gone, the women are fully clothed head-to-foot, and Total Fed Credit is $440 billion, which is a loooOOooong way from the previous TFC of zero. Already you can see an ominous trend developing.

Undaunted, again we fast-forward, stopping at today. Looking about, we can see that things are really accelerating, as not even 10 lousy years later the women are not only fully-clothed, but also fat (although reader David C. figures "Americans are not fat. They are simply pulling consumption forward") and covered in weird piercings and tattoos in places where they are not clothed (which gives me the creeps to think what OTHER things, thankfully now covered with voluminous, opaque clothing, are so similarly bloated, pierced or tattooed!), and, at the same time, Total Fed Credit has almost doubled to $851 billion! If you have kept up with me so far, then you see that we are definitely on the wrong, wrong track here!

As my blood pressure soars past the 500/400 mark, I am able to heroically calm myself when I realize, humorously, that it is a "good news/bad news" kind of thing, where the "bad news" is, of course, that every worker has had the buying power of his/her money wages reduced by some multiple of 4.4% in the last year, and by 30% in the last few years, and by 97% since 1913.

The "good news" that this horror is much better than the usual flood of money that we have had since 1997! Hahaha!

Well, admittedly it's good news only in a relative, strictly-Newtonian sense, as the seemingly now-standard $40 billion per year increase in TFC is getting smaller when calculated as a percentage of the accumulated total. To demonstrate a little a mathematical whiz-bangery of my own, a $40 billion yearly addition in TFC, to reach $440 billion, is a big 9 percent boost in 1997, while that same $40 addition, to get to today's $851 billion in TFC, is now only rising by 4.7 percent!

Graph it out on a piece of logarithmic graph paper, and you'll see that the supply money is not increasing as fast, dude! This is going to be bad news for the stock, bond and housing markets very soon!

And the crux of the need for such monstrously outrageous increases in the creation of money and credit, guaranteeing a monstrously outrageous increase in price inflation, is the monstrously outrageous increases in government and government spending, all financed by the simple expedient of the Fed creating the money for people to borrow with which to buy government debt! What a racket!

And it's not just me that is outraged about this spending and government budget thing, as, for example, on Alternet.org we find an essay by Matt Taibbi of RollingStone.com, who is rightly outraged by the Bush budget.

Among many horror stories, he said "Not only does it make many of Bush's tax cuts permanent, but it envisions a complete repeal of the Estate Tax, which mainly affects only those who are in the top two-tenths of the top one percent of the richest people in this country", which he figures will hand the "rich", over the next decade, a nice chunk of change registering at, he calculates, "about $442 billion, or just slightly less than the amount of the annual defense budget (minus Iraq war expenses)."

I make rude, farting noises to indicate my disparaging disagreement, and shout "That's all the government ever does, dude! And now you're quibbling over some piddly $44 billion a year? Hell, the government deficit-spends, and borrows the money to do it, more than that every lousy hree weeks! Hahaha! Get real!"

Mr. Taibbi, stunned at the sudden interruption, stops and looks at me with this surprised expression on his face.

Abruptly I turn, grab Robert J. Samuelson, of the Washington Post, by his collar and haul him to his feet. Snatching him up close to me, I quickly whisper in his ear "Tell them about your latest piece on the federal budget, titled 'We're all welfare recipients now', nice and easy, and nobody gets hurt, Bobby-boy, including your little family. What's your wife's name, by the way, dirtball?"

Mr. Samuelson's face went pasty-white as the blood drained and rushed to the internal organs at my sudden, out-of-nowhere malevolence, and wisely decided that instead of arguing with me and maybe being a dead hero, he would do as he is told, and launches into showing that the government never stops spending by noting that in 41of the last 47 years (since 1960), the government budget was in deficit. And it is again this year, too!

He interestingly included a table that shows that in 1956, Congress spent 59% of the budget on defense, while today, in 2007, defense consumes only 19 percent of the budget.

On the other hand, we see that back in 1956, only 21 percent of the federal budget was for "Social Security & other payments to individuals", whereas nowadays 59% of the budget is for that very purpose! That's about $1.6 trillion a freaking year out of a $2.7 trillion budget! The federal government is already budgeting $1.6 trillion a year to give to these recipients of government money!

So this guy is squawking about $44 billion a year that won't be collected from the rich, when the federal government is already spending that $1.6 trillion freaking dollars a year on Social Security, Medicare, Medicaid and similar programs, which doesn't even count the hundreds of billions spent by every other level of government for the same thing? Hahahaha! Too much!

But from the perspective of this Rolling Stone writer, the horror is that some spending must be cut. "What is cut?" we ask. He answers by asking and answering "reductions to Medicaid over the same time frame? $28 billion. Commodity Supplemental Food Program, which Bush proposes be completely eliminated, at a savings of $108 million over ten years." He explains that this last program "sent one bag of groceries per month to 480,000 seniors, mothers and newborn children."

As heartless as it all sounds, the budget makes perfect sense just the way it is, but this Mr. Taibbi guy obviously doesn't understand the reality of the economic situation, which is that the economic system of the United States (and a lot of the world) is now a financial economy, where the majority of all profits are made from trading and accumulating stocks and bonds (and now houses), making and taking profits as the prices rose and kept rising as the Federal Reserve kept creating the money with which to do all of that extra buying. And a lot of the borrowing was for buying government bonds, as the Congress sent us into debt at unprecedented rates.

And now we suddenly make the horrifying discovery that not only are we (people, businesses and governments) up to our freaking eyeballs in debt ("putting equity to work!"), and not only is half the country depending on getting a monthly check from the government, but that everybody's retirement account, savings account, investment portfolio, tax revenue stream and everything else is invested in those selfsame stocks, bonds and houses!

And thus! Thus! Thus, all of our very lives are depending, totally and completely, on those markets continuing to go up, literally forever! Gaaah! If they don't, then not only is everybody's retirement wiped out, but the economy of the USA, and the USA itself, will die a horrible economic death. Gaaaaaaaaaah!!

Well, you don't have to believe me, and I would have no respect for you if you did because even I don't believe half the crap I say, but perhaps you will be more convinced when I tell you that reader Bill L. sent what he characterizes as "When the Ghost of Rothbard Flushes the Big Economic Toilet". Mr. Murray Rothbard, legendary big thinker, writer and real heavyweight in the Austrian school of economics, is credited with saying "The evolution of synchronized easy money world wide will be first increasing finance/stock bubbles and then, when these let go, a great destruction of paper wealth in a gigantic finance/stock crashes. These will likely be synchronized world wide. That destruction of paper wealth will be highly deflationary. First, as stock prices drop, for example, the valuations will drop like a stone, and trillions of dollars of paper money will literally disappear like smoke."

To prevent that from happening now, the Federal Reserve and the government, who have willingly painted themselves into this terrifying corner, now realize that it is now entirely incumbent upon them to frantically manipulate fiscal and monetary policy with desperate, reckless abandon, so that somebody, anybody, everybody is given access to more and more money from the Federal Reserve, to be used to keep bidding the prices of stocks and bonds up, and up, and up! And houses, too! It's just that simple!

So to whom to give the money? If you give the money to the poor, see, they will spend it on food and imported consumer items, worsening both the inflation in food prices and the trade deficit.

But (and pay attention here, as this is the crux of the matter), give the money to the rich (!), who are already wasting huge fortunes of cash throwing outrageous parties with drunken, giggly Hollywood starlets running about willy-nilly, having food fights with caviar, and who have so damned much money already that the only thing that they CAN do with more money (with a minimum of hassle) is give it to their financial advisors to invest it in something, like stocks and bonds and bigger houses.

So, in light of all of this, as Bill W.'s girlfriend used to say, "Above all, remain calm. Help will arrive soon".

Thus, the 2008 budget in all its glory.

-- To lighten the mood, I now turn to a report from the Mogambo Inter-Galactic News Service (MIGNS), from whence comes the news that Earthlings are now, again, officially, the most stupid race of beings in this galaxy. The title was wrested from us (by an ugly species of what looked, to me, like a bunch of slugs with tentacles) on Tri-Gamma Nebulon that tried to use phlegm and slime (of which they had plenty!) as currency.

Well, without getting too much into the ugly subsequent details, let me just sum it up by saying that once that revolting floodgate of almost-unlimited money was opened, it was off to the inflationary races, and soon they had to resort to using other bodily wastes as sources of more money, which about where I lost all interest in the whole report, as the photos were plenty disgusting enough: Tentacles, disgusting liquids and repulsive unidentified glistening semi-solid globs everywhere! As my children say whenever I take off my shoes, "Ewwww! Gross!"

Anyway, soon swimming in phlegm, slime and various bodily wastes, they soon switched to a "fiat excretions and fractional-reserve banking" scheme. That's when their inflationary fate was sealed, and now comes the news that their economy has just collapsed. Game Over Player One.

On a happier note, Earthlings can now be justifiably proud of being the most stupid beings in this whole quadrant, as they have worked so hard for the honor at keeping this same essential scheme going. On this planet, of course, we use also fiat currencies and fractional-reserve banking, but now with (fanfare of trumpets) derivatives, which has just as much "Ewww! Gross!" factor when you are attuned to the cosmic vibrations of the Universal Laws Of Economics. Ommmm.

Of course, Earth will suffer the same disgusting, horrifying inflationary results as the slug-people, only here, at least, you are not up to your knees in filthy, stinking crap, which was, according to the Official Judge's Scoring Report, the only thing that kept us from winning in the first damned place.

-- For a lesson in the evolution of an economy that is paralyzed with inflation and corruption, like Zimbabwe, the point is superbly illustrated by The Globe and Mail's Update report that "The government of Zimbabwe will nationalize the diamond industry, a potential blow to international miners doing business in the southern African country." In short, the government now steals your stuff directly, but only as a last-ditch effort after stealing the value of your money with inflation, which is now running at over 200% a week, as near as anyone can really say.

-- This week's entry into the Most Pithy Investing Advice Contained In A Headline Or Title contest is "Profiting From Companies That Sell What China Wants" by Michael Dawson of TheTimeAndMoneyGroup.com. The title says it all!

There used to be a song that went "Whatever Lola wants, Lola gets", which implied that this Lola chick was so enchanting that men gave her presents, which she greedily took, and kept demanding more, which I gave her, too, always more and more, until all my money was gone and I was forced to loot the employee retirement fund, steal money out of my wife's purse and invent reasons why the kids wouldn't be getting an allowance this week ("Sunspots made the money radioactive!") so that I could give it all to her. Only her name wasn't Lola, and in fact, as I remember it, they went by various names, none of them Lola, but the point is that 1) this title says it all, and 2) the case is made when I point out that both Lola and China have two syllables.

And, I expect, they will both end up with all my, and our, money, and then it's "So long, sucker!" just like always.

-- If you are tired of my constant, irritating harangue to buy oil stocks, in one way or another, based solely on my stupid Mogambo say-so (SMSS), then I proudly present John Loeffler, appearing with James J. Puplava on the Financial Sense Newshour, who buttresses the "Peak Oil" case by saying that, looking at oil production, "If we look at the number of countries that have peaked versus remaining, so far 64 countries have peaked in oil production; 36 remain."

I know what you are thinking: You are scratching your chin and thinking "Down by two-thirds? Hmmm! Maybe that stupid Mogambo idiot (SMI) is onto something significant here with his recommendation to buy oil!" And you would be right!

But if you went on to think to yourself "Maybe that SMI is not as dumb as I thought!", then you would be, I am sorry to say, wrong.

-- I'm sure you already heard that the Bureau of Labor Standards reported that the Consumer Price Index for All Urban Consumers, also known as the CPI-U, increased by 0.3 percent in January. Or perhaps you heard my loud scream of anguish and subsequent Hysterical Mogambo Violent Outburst (HMVO) at the report; in a lot of places it made the front page!

Either way, the latest report shows that, on an annual level, the January reading of that index, 202.4, was 2.1 percent higher than in January 2006.

Actually, nobody believes that inflation is really that low, and the government has already repeatedly admitted that they hedonically-adjust inflation statistics in a lot of different, although equally slimy, ways. This means that inflation is well over 3%, which is a number I choose because it is, historically, the point where smart people are panicking in the street, where shameful government and banking officials are being sacked, and there is turmoil everywhere, most of it instigated by The Mogambo's incessant screaming "I am your king! Bring them to me and I shall deal with them harshly!"

But everything is, oddly, still calm, even though overall consumer prices, as a whole, rose 0.2% for the month, mainly reflecting that the prices of food, air travel and medical care went up a lot. And even core inflation (which excludes food and energy prices, so it is supposed to have a calming effect on our nerves) was up 0.3% for the month, which was NOT calming in the least.

And stepping away from sterile statistics, we get the same thing from Sprott Asset Management when they say "In the real world, by all indications, the Malthusian shortages that began a few years ago with the most recent synchronized global economic expansion are continuing in earnest as we head into 2007. Nowhere is this more evident than in the rampant cost increases (a.k.a. inflation) that the companies we analyze are experiencing."

George Ure, of the famous UrbanSurvival.com site, hears us talking about shortages, especially of the Malthusian kind, and he reports that his web bots looking for Internet references to "shortage" and scarcity have, "for the first time since I started tracking, passed the 20-thousand hits level." So, two guys have noticed shortages appearing! Shortages are up!

If you are wearing your Expensive Junior Mogambo Ranger Watch (EJMRW), the on-board Supply/Demand Ratio Alert is beeping right now. If it is not, it is probably broken, and there is nothing you can do, because while the Certificate of Authenticity is certainly valid, the Lifetime Guarantee (like the guarantees on all Mogambo Inter-Stellar Enterprises (MISE) products and services) is not worth the paper it is printed on, if any, or even implied, if ever.

You will be hopefully consoled to learn that the value you received is not in the watch itself, for which you obviously overpaid, but in the lesson you just learned.

But the astute Junior Mogambo Ranger (JMR) don't need no stinking watch (which may explain why sales are down and repeat sales are zero), and has already conjured up a mental image of the graph of the supply/demand dynamic, and has adjusted it to reflect the change in the supply curve to reflect these reported shortages, and said "Eek! Higher prices are coming!"

Mr. Sprott sends a nervous glance over at me to see how I am taking this news about inflation. My breath is shallow and rapid, but I am not actually screaming in fear or even twitching visibly. Thus emboldened, he goes on "The largest companies in the world in the mining and energy industries are all stating, with nary an exception, that the cost estimates they made a few years back for some of their biggest projects are now grossly understated."

Reader George P read these same remarks from Sprott, and he thought that this line was most remarkable; "We've heard estimates by knowledgeable sources that global money supply grew 18% last year - so shocking as to be almost unbelievable."

And if you are the least bit conversant with the bountiful plethora of examples in the historical record of what happens from such cancerous growth in a money supply, then your heart is undoubtedly beating like a trip-hammer, although you are unsure exactly why.

If you are more educated than most, and are completely familiar with what happens, then you are naturally thinking that although you have an Uzi in each hand, a Bowie knife between your teeth, are sitting on your weight in gold and silver, wearing a tinfoil hat and some cool shades, you still feel exposed and defenseless! And you need more of each!

The Mogambo reassuringly says "That's right! It's that damned terrifying!"

-- For those who think there is no price inflation, Girl Scout cookies are now $3.50 a box. I don't remember how much the cookies cost in 1964, or much of anything else of my junior year in high school, but analytical reader Everett S. does, and he sent the report that "when I was growing up during the 60's, gas prices were anywhere from sixteen cents to thirty cents per gallon. Most of my friends look at me as if I am nuts when I tell them that gas, today, is still around a quarter a gallon. A regular quarter, backed by silver, would still buy a gallon of gas today, and then some."

For the research to back this up, he included a link to coinflation.com, where we learn that, indeed, a 1964 quarter is worth $2.62, and therefore if gasoline costs $2.62 a gallon, then a 1964 quarter WILL buy a gallon of gas today! The site also calculates that the silver in the coin is 1,048.19% of the face value of the quarter.

While I, personally, would use this to demonstrate the value of silver and show how you are a stupid freaking moron that should be slapped if you don't run out and buy some silver right now, Everett distills another essential lesson, although, in my opinion, lacking in "punch." He writes, "I am telling my nieces and nephews to save their pennies and nickels, as Gresham's law will soon drive these coins out of circulation."

-- Peter Schiff of Euro Pacific Capital opines that "The market is calling the Fed's bluff. Gold investors may have finally concluded that when it comes to fighting inflation, the Fed is all bark and no bite. Despite the tough talk, many are now convinced that Bernanke will not risk pushing the U.S. economy into recession in an effort to contain inflation. With the sub-prime mortgage market unraveling, the last thing the Fed wants is to add kerosene to the fire in the form of higher interest rates. If gold investors now believe that the Fed will tolerate higher inflation, then any signs of heightened inflation can now be seen as purely bullish for gold."

An appreciative murmur went through the crowd! I notice with interest that the audience is warmed-up and obviously predisposed to making appreciative murmurs! Anxious to get a little attention for myself, I stand up and interrupt to exclaim "Well, I am one of those people who believe that the Fed will tolerate higher inflation, because if they don't, then were screwed!" I waited for the appreciative murmur, which never came.

Like the conceited, little limelight-seeking bastard (CLLSB) I am, I increase effort to get more attention by blurting out "And so you should buy gold immediately!" Again, no appreciative murmur, but a lot of people suddenly making rude and disparaging remarks like "Shut up, jerk!" and "We already heard that from Mr. Schiff! Don't you ever have anything original to say?" to which I can only stammer "Well, uh, no, but, uh..."

Suddenly, Mr. Schiff, being a real gentleman, sees me struggling, and does me the honor of validating my message- in front of witnesses! -by saying "On a somewhat related note, the current Wall Street bull market hype ignores the fact that all the major stock market averages are underperforming the price of gold. For example, year to date, while the Dow is up about 1.5%, the price of gold is up about 8%. Going back to January of 2000, while the Dow is only up about 15%, the price of gold price is up 150%, literally ten times as much. If you compare the Dow to gold starting from the Dow's October, 2002 low of about 7,200, the Dow is up about 75% verses 125% for gold."

Then he says "Call me crazy but how can we be in a bull market if investors are making more money owning gold than owing stocks?" And again he gets an appreciative murmur! Damn!

-- Peter F., my fiddle-playing budderoo, sends this quote from Thomas Paine's second book, "Common Sense". He writes, in the middle of the 18th century, "As parents we can have no joy, knowing that this government is not sufficiently lasting to ensure anything which we may bequeath to posterity: And by plain method of argument, as we are running the next generation into debt, we ought to do the work of it, otherwise we use them meanly and pitifully."

Which is exactly what we are doing. If he only knew. Ugh.

****Mogambo sez: I'm not an expert on distress signals, but flares shooting into the air all around the world must mean SOMETHING! And if it means what I think it means, then soon, more than ever, you will appreciate the immense value of gold and silver, as will all other sentient beings between heaven and earth, as the meteoric rise in their market prices will attest so, so dramatically. And those who have them will be, especially relative to everyone's poverty, wealthy.

Now, all you gotta do is decide if you want to have a lot of the wealth for yourself, or do you just want to envy those who do? It's yours to choose right now!



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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