E-Economic Newsletter

By: The Mogambo Guru | Wed, Apr 4, 2007
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Provided as a courtesy of Agora Publishing and DailyReckoning.com.

-- Money must be getting tight, as Total Fed Credit was up only $1 billion last week, foreign central banks are cutting back on their gluttony (adding only $4 billion to their holdings at the Fed), and I am being forced to make the painful choice between paying for the kids' damned dental problems or getting that expensive new driver that is GUARANTEED to give me another 15 yards off the tee and cure my accursed fade-away slice problems forever, which will (in the final analysis) make me a whole lot happier, and last a hell of a lot longer, too, than anything that stupid dentist does ("See you again in six months, suckers!").

But it is not golf nor dentists that disturb my restless slumbers, but inflation that makes me wake up screaming in the night, trigger-finger spasming, my loud, irritating voice issuing both wails of fear and sulfurous curses to add to the incessant Mogambo Inflation Alert System (MIAS) buzzer, which indicates that monetary inflation is raging, raging, raging around the globe as all the central banks are busily, busily, busily creating money and credit at monstrously high rates of issuance, averaging (as I understand it) about 14% a year, and that means that inflation in prices will continue to get worse and worse, as will my aforementioned sleeping and trigger-finger problems.

And surely things are going to get heated up pretty soon, thanks to inflation, especially when the middle class starts whining, as Congress really comes alive then. And speaking of that, we have Ty Andross of TraderView.com newsletter reporting that "the broad middle class has not shared in the wealth of this expansion except for the bubblicious appreciation of their home values."

He adds, picturesquely, that they were "then robbed at night while their money was sitting in the bank and the Treasury's printing presses churned out dollars and credit by the trillions", which made every dollar of that appreciation in the house worth less! And then the homeowner had to pay higher property taxes and insurance premiums on the now-expensive house! Hahaha! I'll bet THAT is not in the stupid little econometric models the stupid Federal Reserve uses! Hahahaha! What dorks!

And all that inflation in prices was spawned by the Federal Reserve creating the money and credit to finance a stock market boom, and a bond market boom, and a derivatives boom, and a financial-services industry boom, and then a housing boom. All now busted, to one degree or another.

And while the inflation "problems" of the stock and bond markets is one thing to be officially ignored, the inflation in the effective prices of houses (taxes, mortgage and insurance) and the subprime mortgages that spawned it, now has the idiotic Congress frantically looking into it (at long last), now that the bust is here and it's too late to prevent the boom that caused the ensuing bust that they are so bent out of shape about.

And why will the government try and bail out these homeowners and investors who are looking at huge losses in a housing bust? Taxes, I figure! Same as always! Congress is surely aghast at the prospect of trillions of dollars of losses being deducted on tax returns next year, and for years to come, too.

I mean, next year the federal budget balloons to a whopping $2.9 trillion, up from $2.7 trillion this year, and so the LAST thing they need is less tax revenue coming in!

But feigned ignorance and subsequently being aghast at the results also comes naturally to the Federal Reserve, too, which has an annoying habit of ignoring (and lying about) inflation in prices, especially the kind of willful ignorance about the results of creating inflation in money and credit, as perfectly illustrated by the essay "Inflation and the Ironic Productivity Tax" by Richard Benson of Benson's Economic & Market Trends newsletter.

He writes that "it dawned on me that the one thing the government never reports on is that the dollar in my pocket will buy me more next year. Indeed, my dollar should buy more because of the relentless increases in productivity, and I should in reality be better off if I saved money, rather than spend it."

I leap to my feet and shout "Bravo! Well said! An increasing standard of living is the whole promise of productivity!"

Ignoring me completely, I finally sit down in a huff as he goes on to say "But, in my lifetime, my world has only known inflation, so buying goods today that I will need tomorrow, and stashing them away, has proved to be a better investment than saving cash in the bank. As a consumer, when I think about the escalating cost of food today, I realize I really didn't benefit at all from all those productivity gains!"

So where did the benefits of productivity increases go? He explains "With inflation, the government has basically stolen/taxed my share of productivity away."

After dryly and sarcastically noting that "It's ironic that the best and brightest at the BLS are employed to figure out how to use fancy statistics to rob their grandparents of their social security increases", he goes on to calculate that "If money and credit growth were restrained, I estimate the dollar could purchase about two percent more each year, and we would be living in a saver's paradise." And a spender's paradise too, as prices would go down each year!

He calculates that inflation, as measured by the Consumer Price Index, is deliberately understated by productivity, and "Taking productivity out of the Price Index means that when the CPI shows three percent, in reality it's more like five percent." 5% inflation! Yow!

We glean a little macroeconomic forecasting lesson when he says that "So, when looking forward, it is important to remember that whenever productivity slows down, inflation will suddenly pick up", which I take to mean that if productivity drops, you should immediately short bonds! Hahaha! This investing stuff is so easy!

"Now that I clearly understand how this productivity tax works," Mr. Benson goes on to say "I am less inclined to buy inflation-indexed bonds and more inclined to buy gold and silver. I believe precious metals are more likely to track the real inflation numbers."

"And why is this?", you ask with that cute little innocent, quizzical look on your adorable, trusting face. Instantly I am on my feet to deliver a stirring and powerful condemnation of the Federal Reserve for creating all that money and credit, gradually working the crowd into an absolute blood-frenzy, see, ending with me being declared King Mogambo by cheering throngs of adoring people ready to obey my every command, and given unlimited powers of retribution and vengeance! I cruelly sneer as I laugh the hollow laugh of the damned, "Hahaha! Let the games begin!"

However, I was not prepared for Mr. Benson apparently being so appalled at the prospect of a King Mogambo, and quickly preempted my plan for a speech leading to world domination by pithily summing it up as "The U.S. is inflating like crazy, and it's only going to get worse."

Already angry at being thwarted in delivering my Speech Of A Lifetime (SOAL) leading to King Mogambo, the news that inflation is "only going to get worse" makes me angrier and angrier, until I race home to fire off flaming emails and faxes to my Congresspersons ("Dear Butthead, I hate you for allowing the Federal Reserve to create all that money and credit!") and the Federal Reserve ("Dear Buttheads, I hate you, too!").

But while stocks, bonds and houses may not be going up in price (and may be going down in price!), the stuff you and I have to buy, to satisfy our insatiable wants and needs for tasty morsels and various kinds of fun, is not. In fact, every one of them is going up in price! That is the horror of it all!

And speaking of raging price inflation, Doug Noland of the Credit Bubble Bulletin says that last week "M2 (narrow) 'money' rose $9.1bn to a record $7.164 TN (week of 3/19). Copper gained 2.5%. May crude surged $3.59 to $65.87. May Gasoline jumped 5.7% and May Natural Gas 4.4%. For the week, the CRB index gained 1.9% (up 3.1% y-t-d), and the Goldman Sachs Commodities Index (GSCI) surged 4.2% (up 7.9% y-t-d)."

And now Bloomberg.com reports that we have entered what I think may be characterized as the portals of the Worst Of All Worlds (WOAW); the economy going down and prices going up. More specifically, "Manufacturing growth in the U.S. slowed more than forecast last month" as "The Institute for Supply Management said its factory index fell to 50.9, from 52.3 in February."

Worse, "raw-materials costs jumped, reinforcing concerns that a cooling economy isn't reducing inflation" as "A sub-index of prices rose the most in seven months."

And worst of all, "measures of employment and new orders declined."

All of this is provided as more proof of the eerie accuracy of the Economic Indicators, like the Leading Indicator being right in forecasting future economic activity, in that it has been going nowhere for quite awhile and thus has been predicting today's lower economic activity.

Specifically, we now find that, in February, durable goods orders fell by 0.1% when you exclude aircraft orders, which was huge, as including aircraft, durable goods orders would have risen by 2.5%! Making an economy out of airplanes! Hahaha!

And this pathetic performance in spite of the fact that the government has been buying huge, huge, HUGE amounts of war materiel from the "defense industry" and running up enormous, enormous, ENORMOUS deficits to pay for it!

How much defense industry spending? Well, Mark Skousen, of Forecasts and Strategies newsletter, says that "the U.S. government's share of GDP spent on defense has gone from 3% to 3.7% since September 11, 2001." For perspective, he adds "while other nations collectively have declined from 2% to 1%."

Well, as uncannily correct as the Leading Economic Indicator has been in forecasting this slowdown, the Lagging Economic Indicator (which can be characterized as measuring burdens and future inflation) has been on a relative tear, and has been absolutely prescient in predicting the inflation that we are seeing.

And the Coincident Indicator has always been right about current conditions all along, too. It looks like three out of three!

-- On the site bbj.hu, which apparently got the news from somebody else, had the headline "Central Bank gold holdings fall to lowest since 1948" and that "Gold holdings by central banks and other government organizations declined for the eighth straight year in 2006, to the lowest in almost 60 years, figures from the International Monetary Fund show. Bullion holdings were 867.6 million ounces last year, down 1.2% from 2005."

So where is all of this gold? Well, it turns out that "Of the 4.98 billion ounces of gold in inventories at the end of 2005, 52% was in the form of jewelry, 18% was in central bank vaults and 16% was investor owned."

As to why this may be important, we turn to the famous and handsome John Embry of Sprott Asset Management, writing in the March 30 issue of Investor's Digest under the title "The Time For Gold 'To Go Ballistic' Approaches". He starts off by explaining that "In reality, it isn't the price of gold that changes, but the value of the paper currency in which it is denominated. I have made the case many times that paper money is being seriously debased, and I think my position is strongly supported by the recent spate of money-supply growth numbers that have emerged from around the world."

He then ticks off the annualized growth of some broad money supplies, namely Eurozone M3 up 9.0%, UK M4 up 13%, China M2 up 15.9%, South Korea up 10.6%, Australia M3 up 13%, United States M3 up 10%, Russia M2 up a staggering 48%.

And if you are wondering how the dollar is faring right now, after this kind of debasement, Yahoo.Reuters.com reports that "The dollar fell around 3 percent against a basket of major currencies in the final quarter of 2006." This is a huge move! Huge!

I know what you are thinking. You are saying "That Mogambo idiot (TMI) has gotten off the subject again, which was supposed to be about the world's gold. And so why in the hell is he is yammering about money supplies? Who needs this crap? Screw this! What's on TV? We got any beer left?"

If you were not so rude, impatient or thirsty, you would have soon learned that Mr. Embry feels that "we are very, very close to that key moment when there could be insufficient central-bank gold to meet mounting demand. As I have said before, that is when the gold is price is going to go ballistic."

This agrees perfectly with Richard Russell, of the Dow Theory Letter, who says that he thinks "the dollar will die a slow, probably a very slow death. It will be death by inflation. In other words, the dollar will, over the years, lose an increasing amount of its purchasing power."

And as for gold, he says "Another irony is this -- essentially, holding gold is a rich man's escape. The reason is that gold doesn't pay interest, and it doesn't pay dividends. The rich man can hold a large amount of gold, and it doesn't affect his life style. The poor man, the middle class man, can't afford to hold a significant portion of his assets in gold. No, the average American remains at the mercy of his government and the Fed. He's doomed to see his savings (assuming he has any savings) taxed away or inflated away", as will his increasingly meager earnings, I might add.

To tell you the truth, I disagree that nobody but the rich can buy gold. When I see the enormous amounts of money the middleclass and the poor spend on pure trash every year, I say "And you want me to believe that out of all that money, they can't manage to buy a stinking half-ounce of gold a year? Or some silver? Hahaha! Don't hand me that crap!"

I think that the important point is that gold is a "rich man's escape", which means, by definition, that rich people will be buying gold to effect their escape! And given the staggeringly huge amounts of money now in the world (mostly owned by the rich!), versus the pitifully small amount of gold in the world, this could be Really Big Time Stuff (RBTS) indeed, because 1) history has shown that rich people always take their money and rush to the safety of gold at the inflationary ends of booms (like this one), 2) gold is essentially (like all markets) an auction market, and 3) rich people bidding against other rich people for a finite supply of gold, with unimaginable amounts of money, is the stuff of which auction history, and newspaper headlines, is made!

And the good news, the better news, the best news possible, is that gold is still selling at only about $660 a lousy ounce! What a screaming bargain when viewed against what is surely coming, just like it has always come! Unbelievable! But, "Whee!"

To a suspicious little creep like me, I naturally connect Mr. Embry's point that there may not be enough central-bank gold to satisfy demand, to Bill Murphy of Le Metropole Café citing a Dow Jones report that "The International Monetary Fund has proposed to increase transparency in the gold market by publishing statistics that reveal the amount of gold loaned and swapped into the market by central banks."

What? This surprises the hell out of me! Then I remember (and make some rude, disparaging noises) that the IMF has mismanaged itself, which comes mostly from the fact that no country needs to borrow any money from the IMF these days, as the entire world has long since gone completely freaking insane with creating all this excess money and credit in which the world is currently sloshing greedily around.

Now, with the slowdown in the "bail-out-and-meddle-in-your-sovereign-affairs" business, the IMF desperately needs more money with which to overpay themselves and maintain their expensive little lifestyles, empires and power, to which end they recently actually proposed to sell the gold (their capital) that the United States loaned them to fund the damned IMF in the first place! What thieving arrogance!

Rebuffed, I guess, this proposed new disclosure rule by the IMF to reveal the actual gold holdings of central banks is, I figure, just the usual slimy blackmail. "Give us more money, or we will tell what you did!", which is sort of how I ended up getting married, but that's another ugly story, which I don't want to get into because I will cry like a baby and get all embarrassed. And then angry. Very angry. And nobody wants that!

But exactly what the central banks did, but not how much, is hinted at by the news that "Although they provide regular reports of their gold purchases and sales, central banks don't currently reveal how much gold is loaned and swapped."

But there are just too many tremors, and tremors in central bankers everywhere, not to think about predicting earthquakes in the gold market, and getting long gold.

And speaking of central bankers, from Bloomberg we read "Federal Reserve Chairman Ben S. Bernanke said monetary policy is still aimed at combating inflation even though risks to economic growth are multiplying. 'Our policy is still oriented towards control of inflation, which we consider to be at this time to be the greater risk,' he told the Joint Economic Committee of Congress in Washington."

Bernanke is reported to have said, with no hint of embarrassment, "uncertainties have risen, and therefore a little more flexibility might be desirable." The Mogambo is also reported to have said "Hahaha!" in snarling disdain, and if you didn't read or hear about it, it obviously means that this highly-illuminating Mogambo editorial comment (MEC) was censored by government goons, and that proves they're all out to get me, further proving that snooping government agents and spies are prowling around in my bushes, probably right now, and thus I am fully justified in ruthlessly hosing down the shrubbery with withering machinegun fire until I feel safe again or run out of bullets, whichever comes first.

Okay, well, maybe it doesn't actually mean all that, but it DOES mean that the Fed wants to ignore inflation, although preventing inflation and attendant boom/bust cycles is the reason that the Fed was given the power over America's money in the first damned place! They obviously haven't done their damned jobs (I mean, look at the record!), but instead have failed miserably. And, now, they still don't want to do their damned job, but, instead, want "more flexibility" to give us more of the same! This is insane! And yet Congress does nothing! Nothing! I am incensed!

But wait! I may be too hasty! With a sudden, powerful insight, I realize that I could use this unusual stalling technique to my own advantage: Since my Annual Employee Evaluation is coming up soon, I evilly twirl my mustache as I scheme to myself "This 'more flexibility' thing could come in very, very handy indeed!"

Goals not met? I cry out "I need more flexibility!" Losses mounting? I wail "I need more flexibility!" Employees and customers in open revolt at my arrogance and incompetence? With a tone of voice that speaks volumes about what I am going to do to my boss's car if this Evaluation thing doesn't work out for me like I want, I say, through clenched teeth, "I need more flexibility!"

Another way of looking at it was provided by Bloomberg; "Bernanke said the central bank last week dropped its stated tilt toward higher borrowing costs because policy makers wanted more room to maneuver." Thanks! Now I realize I need more room to maneuver, too! I need room to maneuver! For God's sake, give me room to maneuver!

The message is clear; my boss now hates and fears me more than ever, and the Fed is clearly signaling that lots of inflation is in our future, as it is the price we must pay to bail out the blinding, incandescent incompetence of the Federal Reserve under Alan Greenspan, who created the housing bubble, which was created to bail out the busted stock market bubble, and the bond market bubble, and the size-of-government bubble that he also created. Grrrr!

And how bad is inflation in consumer prices? Bloomberg itself provides an answer with "The Fed's preferred inflation benchmark, the personal consumption expenditures price index, minus food and energy, has been at or above the two percent comfort zone of at least six Fed officials for 34 months. The price measure rose 2.3 percent for the twelve months ending January."

Three years! Three long, long years of inflation above zero, which is de facto evidence of their incompetence, and even more so when you realize that, in reality, even that unacceptable recent 2.3% measure of inflation actually understates inflation by about 4 to 7 huge percentage points or so! Gaaaaah! We're freaking doomed!

Even worse, "An index of 18 industrial materials tracked by the JOC-ECRI Index is up 2.5 percent year-to-date, and 12 percent over the past year. Oil prices are climbing."

John Stepek, of MoneyMorning at Money Week.com, must have heard us talking about oil prices climbing, and says that in Britain "The rising oil price was one of the major factors driving official inflation figures higher across the globe in the past few years. It's also served as a convenient excuse for politicians to point to - 'rising inflation isn't our fault, we can't do anything about the oil price' - as Tony Blair effectively said last year."

He says that he was reading an interesting report from Donald Coxe of BMO Financial Group, who says "he's also not expecting the Fed to cut interest rates. And the reason is that the world is very short on food, at a time when demand has never been stronger."

As to what this means, he correctly notes that I am an American, I am stupid, and carefully tailors his answer with "This means that US consumers are about to find that their burgers, their buns, their daily pint of milk, and everything else they eat are going to tick up in price over the coming year."

By this time I am actually gagging on Mogambo Vomit Of Fear (MVOF), and was so preoccupied with making the crucial decision of into whose lap I was gonna barf that I almost missed him saying "The latest US producer price index data from February showed that food prices rose 6.8% on the previous year. It's little wonder - data from the US Department of Agriculture suggests that the amount of coarse grains left over this year to carry over to the next 'could be the lowest - in relation to consumption - in decades.'" Gaaaaah! MVOF!

And this is at a time when there have been "16 straight years of favourable growing conditions in the Midwest - the world's leading producing region. This is an historic winning streak."

So, to recap, we ended up with nothing in savings, at the end of remarkably long booms in stock markets, bond markets, houses, size of governments, and now even in commodities, too? Hahaha! I laugh in derision because, I mean, isn't this supposedly an overwhelmingly Christian nation, and thus shouldn't we, as a people, overwhelmingly know about the Biblical admonition to save during the fat years in preparation for the cyclically-inevitable lean years? Hahaha! We're religious idiots, too!

As further evidence of that, I point to the Economist magazine article about Lynn Westmoreland, "a Republican from Georgia", appearing on the Comedy Channel's hit show, the Colbert Report, who "co-sponsored a bill to have the Ten Commandments displayed in the Capitol." Mr. Colbert reportedly asked him to name the Ten Commandments. He could name, in all, seven.

-- And it is not just The Mogambo and a few of you other gold-bug, whack-job, paranoid lunatics out there ("Hi, Lucy!" "Go to hell, Mogambo!") who are buying gold, as MoneyandMarkets.com breathlessly reports that "Dubai's Gold Souk, an open-air market that contains some 500 gold shops, is the largest retail gold market in the world. An estimated 500 metric tonnes of gold, or nearly 18 million ounces, are bought and sold each year. In the gold souks of Dubai, both the ultra-rich and regular citizens are buying gold. I watched wealthy businessmen, construction workers, and imams all snatching up the yellow metal."

-- And speaking of prices and gold, Junior Mogambo Ranger (JMR) Richard D writes "I got this from Sinclair newsletter. 1941 prices.
Gallon of Milk $0.34
Loaf of Bread $0.08
New Auto $925.00
Gallon of Gas $0.15
New Home $6,954.00
Average Income $1,231.00 pa
Dow Jones 110
Gold $34.60"

I note with a certain satisfaction that gold pretty much held its own, since 1941, against all of the rest of the list, which are all up about 20 times, except milk (which is government-subsidized, so who knows?) and the Dow Jones, which is up by over 100 times (which is now also government-subsidized by the Plunge Protection Team, so, again, who knows?).

So, is the stock market overpriced in relative comparison to everything else, or is everything else under-priced in relation to stock prices? A lot will depend on your answer, and it is bad news either way. Ugh.

****Mogambo sez: If GATA is right that the gold market is being manipulated with the collusion of the central banks (and I have absolutely no doubt that it is, and would be stunned, absolutely stunned, to learn that it wasn't), I again think of John Embry and his phrase "the gold price is going to go ballistic" when central banks can't meet demand.

My Mogambo Profit-Sensing Gland (MPSG) recognizes the screamingly obvious profit that will come when this kind of manipulation ends (as it must), and it squirts a jolt of "greed hormone" into my bloodstream. In response, I look at my pitiful stash of gold and silver, and I compare that to how freaking much wealth I want to have when the inevitable explosion in gold finally happens, and I wonder "Do I have enough?" which is Polite And Genteel Mogambo-Speak (PAGMS) for "Has my embarrassing, gluttonous greed and unspeakable depths of avarice been satisfied with this pathetic little pile of gold and silver?" Upon reflection, I find the answer is, of course, "no".

Then I wonder "Should I get a job, to earn some money with which to buy more gold and silver?" Again, upon reflection, the answer is, of course, "no".

Then I wonder "Should I make the wife and kids drop out of school, get second jobs so that they can buy their own food and clothes (saving me a bundle!) and maybe pay a little room and board around here- the little worthless, parasite freeloaders! -and then use the money to buy more gold and silver?" At last, I arrive at a solution I can live with. Even optimal, in its own way!

So while I don't know how it works out for you, and you'll do what you do, but whatever you do, you'll find that you are usually better off if you do what you know you should do, as this gold and silver thing is "do it or it's doo-doo!"



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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