Inflation Induced Brouhaha

By: The Mogambo Guru | Thu, Apr 12, 2007
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"In short, inflation in food prices, and all other prices, is everywhere you look, which is certainly understandable, since everywhere you look there are central banks creating more money and credit, and governments running budget deficits!"

Provided as a courtesy of Agora Publishing and

Last week, Total Fed Credit was up only a miniscule $128 million, taking us to $852 billion, which is about the same as when the year started!!! Mogambo scholars will quickly note the unexpected use of the rare "triple exclamation point", which would seem to indicate some special emphasis.

And indeed it should, as TFC is the magical pixie-dust from which new bank credit instantly appears, which the banks turn magically into actual money at the precise instant that somebody taps into this increase in credit by borrowing this new "money" from the bank.

And because of this mutant economic system of fiat currency and insane levels of fractional-reserve banking in which we have entrapped ourselves, there MUST always be a continual, increasing amount of money in the world, which means that Total Fed Credit should always be increasing.

You innocently ask in your charming way, "Hey! Big Blowhard Mogambo (BBM)! How come there always has to be an increasing amount of money in the world? Why can't we get along on the same amount of money? Like with a gold standard? Or even less? And don't use any of that Stupid Mogambo Gibberish (SMG) on me!"

In response, my answer is provided not with the usual SMG (per request) but by parable. Once upon a time, Mister Grasshopper borrowed $1.00 from the bank at 6% interest to buy a fancy car; thus he will be required to pay back $1.06. But he only borrowed a dollar. So where will he get the other six cents? Everybody else owes more than they borrowed, too?

It comes from Ms. Ant, who went to a bank and borrowed 6 cents at 6% interest to get the money to buy food for her starving children, and now owes $0.0636! But since poor Ms. Ant now owes the bank 0.36 cents more than she borrowed, she is wondering where she is going to get the money to pay the bank back. Whatever shall she do?

From this, it is obvious that when somebody goes to a bank to borrow money, he/she/it owes more than he/she/it borrowed. And thus debt and money grows and grows.

But then winter came, the house made of straw blew down, the wolf ate Little Red Riding Hood, the bank ate the grasshopper and the ant, and then the bank died by falling off of a beanstalk, and then almost everybody died of an inflationary economic collapse, except those who had gold, who got rich and fat, but couldn't get through the eye of a needle, even though some stupid camel could.

Well, okay, I realize that this is not the best parable I've ever written, but it suffices to show you why the money supply must always be increasing; otherwise, Winter Will Come (WWC), as in the famous Kondratieff Winter, which is described in the Mogambo Big Book Of Economic Stuff (MBBOES) as "the ugly part of the economic cycle when it all turns to crap."

So money must keep growing, and sure enough, as Doug Noland at the Credit Bubble Bulletin reports, "M2 (narrow) 'money' surged $38.9bn to a record $7.203 TN (week of 3/26). Narrow 'money' has expanded $159bn y-t-d, or 9.1% annualized, and $436bn, or 6.4%, over the past year." Whew! That's a lot of new money and debt!

And all this new money is called "monetary inflation", which leads to "price inflation", and according to Patrick Barta in the Wall Street Journal, price inflation is not only in the prices of stocks, bonds, houses and size of government anymore, but also, "Food-price inflation is climbing - in some cases sharply - in India, China, Europe". Plus, he goes on to add, Poland, Hungary, Turkey and South Africa and the USA to name (I assume) but a few.

In short, inflation in food prices, and all other prices, is everywhere you look, which is certainly understandable, since everywhere you look there are central banks creating more money and credit, and governments running budget deficits!

And to prove it, simply take my clammy hand, and we will leisurely stroll to the back of the Economist magazine, and take a look at their Commodity Price Index, where we note with alarm that the item "Food" in their Dollar Index is registering a 17% rise in prices since last year at this time. Yow!

To see why, let's meander over to a column titled "Budget balance as % of GDP", and look at the staggering number of countries whose governments are running deficits! And big ones, too! Yikes!

And then, as if your Austrian Business Cycle Theory brain has not been battered enough by this economic horror, you go to the column of "Consumer prices", and sure enough, all this money is showing up as roaring inflation in prices all over the place! Idiots! We're all idiots!

It's too bad that the Economist magazine is no longer publishing their tables of the growth of countries' money supplies, which would tie it all together, nice and neat.

But reports that Morgan Stanley says the economy may be impacted, as "Spending is also threatened by a resurgence in food and energy costs that will whack $100 billion more from consumers' wallets." And note carefully that this is not a $100 billion, but a $100 billion MORE than the consumer's wallets are already getting hit!

For example, there is the reported $600 billion drop in Mortgage Equity Withdrawal, which is a big hit to the wallet, too! And the slowdown in housing-related jobs, commissions and taxes is hurting wallets, too!

And remember last year's economic slowdown that was attributed at the time to high gasoline prices? Well, guess what? The American Automobile Association reports that gasoline prices have risen 25 percent "since January", and around here, anyway, gas is now back to levels not seen since those "bad old days"! Look out, wallets!

Bill Bonner of the Daily says, "The world's credit system is no longer controlled by banks, and thus, no longer under the control of bank regulators. Instead, there is a huge pool of liquidity outside of the banking system. A news item last week spoke of giant 'dark pools' of liquidity that 'do not publish quotes on the open market.' But how much bilge is sloshing around in these dark puddles? How do they work? Where does the money come from? We don't know."

Instantly, I am on my feet with joy! "I know!" I gleefully shout. "Over here! Ask me! I know where all those 'dark pools of liquidity' come from! They come from the lying mouths of greedy scumbags! Hahaha!"

Before anyone could interfere with my sudden outburst of Inflammatory Mogambo Gibberish (IMG), I hurriedly continued, "The only legal way to create money is to borrow it from a damned bank! Nobody else can create money! If anybody could, they would do it! Hell, I'd do it! But nobody does it, and I don't do it, because it can't be done!"

Out of the corner of my eye I see serious men in somber suits and sunglasses excitedly talking into their walkie-talkies and looking at me with venom in their sour expressions, but I recklessly continue, "Therefore, there cannot be any real, 'legal' money sitting around in 'pools of liquidity' because these 'dark pools of liquidity' probably exceed the total money supply of the world, just like the total value of the global issuance of derivatives is, I dunno, something like 10 times global GDP!"

Waiting until the last second, I quickly bolt towards my planned escape route, mere steps ahead of some security goons, and as I run away like the scared little rat that I am, I hear Doug Casey, of the International Speculator newsletter, delivering his essay, "It's the End of the World As We Know It". He says, "The collective result is that our financial system has been wired up to $370 trillion dollars of privately negotiated investment contracts. They're usually written to shift risk from one bank, pension fund, insurance company or brokerage firm to another. And many are linked together in long chains, with each contract providing collateral for the next."

Okay, about six or seven times global GDP! But it's still an unbelievable lot!

But the point is that this whole "dark pools of liquidity" thing can be explained as, "Somebody is selling something that ain't his'n to sell, and it being bought by somebody with money that ain't his'n to spend!" This is, as rustic and charmingly homespun as it is, an actual quote from actual SEC transcripts of landmark legal case, "The United States v. The Mogambo Idiot (TMI)", and where the presiding judge said this very thing to me as a prologue to declaring that I was a "lowlife, lying, deceptive little creep."

This is relevant because the whole brouhaha came about because I tried this exact same "dark pool of liquidity" thing, but was immediately exposed as the crook I was, and only later exposed as the "lowlife, lying, deceptive little creep" that I am.

You are probably wondering, "What was this Terrific Mogambo Scheme (TMS)?" Well, the nub of it is that I got Sluggo to buy 100 Mogambo Interstellar Enterprises Gilt-Edged Bonds (MISEGEB), at a million bucks a pop. "These fabulous bonds are guaranteed to pay a princely coupon yield of 10% of par value!", I told him with a big ol' smile.

Naturally, I take his IOU for $100 million in full payment to me, and I give him the bonds, which really are legally binding after all, despite being amateurish and so cheap that I literally made them with a crayon. This is according to recent court rulings, which surprised the hell out of both of us, and which (parenthetically) ruined our planned "fall back" defense strategy at a stroke. Damn! This "legal niceties" thing is harder than it looks!

Anyway, to continue with outlining the TMS, I bought back the rights to all of the coupon payments of the bonds from Sluggo, and left him with the stripped bonds. Then I "paid" him $50 million for them, using an IOU that I created on the spot and that I signed with a magnificent flourish to give it that air of authenticity and to indulge my own outlandish, arrogant vanity.

At the end of the day, Sluggo had a stack of bonds "worth" $100 million and an IOU for another $50 million. I, on the other hand, have an IOU for $100 million, and a book entry of $50 million in ownership of all the coupon interest payments from the Mogambo Interstellar Enterprises bonds (which, sporting a par of $0.10, comes to, in total, one cent per year per bond).

But the banks didn't know this, and investors didn't know this, and depositors didn't know this, and regulators didn't know this; and that kind of pervasive ignorance is all you need to turn a lie into a "dark pool of liquidity", as these clueless people loan money against these millions, and billions, and trillions of dollars in "assets"! Hahaha!

So, our legal defense switched to the "greater good" variety, in that Sluggo and I would get rich, which we admit, but we would also pay a lot in taxes, and increase the incomes of a lot of bartenders, barmaids, pole-dancing cuties, creditors, creditors' lawyers, various blackmailers, and any business that will deliver ready-to-eat food and drink of the yummy variety.

Our summation was succinct: "And therefore, your Honor, with all the multiplier effects, the world would be a wonderful, richer place all around, because of us! We're heroes! Like Robin Hood! Only better, because even the Sheriff of Nottingham's tax collectors make more money! One must surely be compelled to proclaim the brave Sluggo and the valiant Mogambo 'Not guilty!'"

But alas, according to a stupid kangaroo court with a biased "Out To Get The Mogambo" judge (who was a complete idiot and corrupt down to the bone, and who was so stupid he couldn't even seem to understand that, no matter how many times I told him what a jerk he was), the whole deal was adjudicated to be a scam.

Mr. Bonner, I am sorry to say, also disagrees with Sluggo and me, but agrees with the stupid presiding judge, but thankfully without the power to lock me away until science can figure out what in the hell is wrong with me, and says "But we know that pools of liquidity do not really make the world a richer place. They just increase the odds that you will step into Enron or New Century...and sink."

I had lots more to say and ask, but I couldn't, as my last question was, "And why are these security guards hustling me out of the door?"

From Junior Mogambo Ranger (JMR) Ajit V. we get the link to where we find the essay "Where Do Your Tax Dollars Go?" Well, as it turns out, this is not a rhetorical question, and we immediately learn where it goes:

Military ($558 billion), Health ($428.5 billion), Interest on the Debt ($398.6 billion), Income Security ($123.5 billion), which, "includes federal funds outlays on the function area income security with the exception of housing assistance, and food and nutrition assistance."

What?!? Well, before I could work up a good hissy-fit of confusion and indignation at the fact that the government is just giving people so much cash that it equals $1,000 for every non-government worker in the whole country, the list continues with Education ($93.2 billion), Veterans' Benefits and Services ($68.9 billion), Nutrition ($53.9 billion), Housing ($38.3 billion), Natural Resources and the Environment ($31.3 billion), and Job Training ($6 billion).

And if that's not enough, the category labeled "Other" was larded with $254.8 billion in spending, including "everything else not listed above and is comprised of the following function and subfunction areas: international affairs outside of international security assistance (included above in military); general science, space and technology; energy; agriculture; commerce and housing credit; transportation; community and regional development; labor and social services outside of training and employment services; justice; general government; and undistributed offsetting receipts."

I get a creepy, lost feeling, like I am in some kind of bizarre-world of strange, new laws of physics when I contemplate that the government is spending so much money on all this stuff that is mentioned nowhere, or even hinted at, in the Constitution, and then made even more horrifying by the brain-busting proposition that "undistributed offsetting receipts" is listed as "spending."

USA Today, citing the American Farm Bureau Federation, reports, "Easter eggs will cost U.S. consumers about 25% more than last year," as "The average U.S. retail price for a dozen large eggs was $1.51 in the first quarter, 43 cents more than a year earlier."

The explanation offered for this staggering increase in the price of eggs was that "The increase stemmed mostly from higher corn and soybean prices," which are used in the production of chickens, as "ethanol demand drives up feed prices."

I sense that you are asking, "How can eggs be up by 25%, and yet the lying government, and the lying Federal Reserve, and their lying collaborators in the lying Congress, the nations' lying universities, and the lying newspapers all say that there is no inflation in prices? What am I, some kind of stupid poopie-head that is supposed to believe that silly crap?"

By way of explanation, let me first say (with all due respect) that you are a stupid, ignorant boob and you don't know squat about how to calculate inflation these days.

The answer is, obviously, that the Federal Reserve, the government and their ignorant lackeys all say that inflation in egg prices is zero (although the price of eggs is up 25%) because the hedonically-adjusted increase in price (43 cents) is not the price of the egg going up, but is the additional cost of additional benefits that you now receive! As just one example, part of the additional 43 cents is to pay for the benefit of happier chickens, thanks to free-range chickens and less crowding.

And if the chickens are happier, see, then the eggs are not affected by, for example, stress hormones, and thus they are, somehow healthier! So, the eggs are of higher quality!

So THAT'S the benefit for which you are paying more. It has NOTHING to do with the price of the basic egg, which is, when the price of these benefits is stripped out, completely unchanged in price! Thus, inflation in egg prices is proved to be, after applying officially-sanctioned hedonic adjustments, zero!

See how I am doing this? It's easy! I don't know why government wonks get paid so much to do this stuff!

Anyway, the result is that you, as the consumer, get a big benefit from knowing that chickens are happier, and you and your family are healthier from eating higher-quality eggs, for which you paid another lousy 43 cents instead of having to eat unhealthy eggs from stressed-out chickens.

But it's not just the eggs that are affected by the ethanol-from-corn fiasco, or all the other things that are higher in price because of it. So merely choosing corn doesn't seem to show a whole lot of smarts to start with.

As proof of that snide and disrespectful statement, I refer you to a chart sent to me by good ol' Phil S. It comes from Goldman Sachs, apparently using data from the U.S. Department of Agriculture, which shows the "[percent] of final energy output consumed in production of ethanol" of some "selected crops".

The sad-but-funny part is that turning corn into ethanol requires as much as 70% of the energy that comes from the ethanol itself! Hahaha! The only worse choice would have been wheat, which needs about 90%.

It would have been much, much better (and seemingly a lot smarter) to get ethanol from sugar cane (10%), or cellulose (25%), or soybeans (37%) or even rapeseed (40%)! But we chose corn at 70%? We're idiots!

I am again running for President on the Mogambo Raving Lunatic Party (MRLP) ticket, and one of my campaign promises is to immediately legalize marijuana. Reefer is now reported to be the biggest cash crop for 15 states! Fifteen! In 30% of the states, it is their biggest cash crop!

And of this agricultural bounty, the states themselves receive not a freaking dime in revenue, and in fact suffer a net loss, as they must pay to apprehend, prosecute and lock up the potheads! Hahaha! What a weird country!

And this does not include the revenue the government would receive from the tons and tons of pot smuggled into the country if it was taxed. You want money? Here is it, dudes!

Michael Phoenix at writes, "A few years ago I started to do some digging around the Fed as my distrust in the fight against inflation had become too strong to ignore. I found the very words I needed in the transcripts of a FOMC meeting. It's on page 82. You will note the remark is followed by laughter, I kid you not."

So I went and looked at page 82 of the transcript of the meeting of the Federal Open Market Committee, dated August 22, 2000, which was almost seven years ago, and realize that Mr. Phoenix is right, and this is a very revealing look at how the Federal Reserve operates.

In attendance was a "Mr. Jordan". The transcript takes us to, "Regarding the language on the balance of risks, part of me would like to say that the statement should always be that an unavoidable, permanent feature of a fiat money system is a balance of risks toward higher inflation. [Laughter]."

So Mr. Phoenix was right! They know this stuff, and yet they laugh at revealing the truth!

In that regard, the Federal Reserve has never acknowledged that creating too much money and credit (monetary inflation) causes prices to go up (price inflation). They profess total ignorance of such a concept. In that regard, an important and timeless lesson for the Federal Reserve (and for all of us) was found in the Sunday comic strip "Get Fuzzy" by Darby Conley. The lesson itself came from a sardonic cat, who said "Ignorance doesn't make stuff not exist."

And in the minutes of the meeting, it really devolves into "Kafka-esque bizarre" when, we read, "in some of the discussion today and in previous meetings it sounded to me as if we worry that higher productivity through various avenues - through demand increases, wealth effects, higher real interest rates, and liquidity injected by the central bank - causes higher inflation. And as Governor Meyer suggested, we worry that lower productivity causes higher inflation."

The next part is part is pure Federal Reserve genius in all its glory, as he sums up, "So, until we sort out a little better whether higher productivity causes inflation or lower productivity raises the risk of inflation, we are not quite ready to explain why we think the risks are toward higher inflation." Hahaha!

I am delighted and surprised to be invited to the Agora Wealth Symposium in Vancouver this July. I figure that it is a comical clerical mix-up, and that I got the invitation in error, while somebody else got my "Go to hell and stop bothering us!" letter. Some innocent clerk is going to lose their job, but as long as nobody notices until after the Symposium, who the hell cares, eh?

And it looks like The Mogambo will be appearing, as usual, at the Silver Summit in Coeur d'Alene in September, and hopefully not as the hapless victim in the dunking booth, where my job is to taunt ignorant bonehead passersby into paying money for the chance to try and hit a target with a ball, which trips a lever, dumping me into the water, and I come up half-drowning and coughing up water and hating all of you even more for laughing at me, and it is only my burning desire for revenge that keeps me warm. Sounds like fun!

John Hussman at writes that a way to check for overvaluation or undervaluation of stocks is to find the value of the SP500 that has historically denoted a 50/50 chance of delivering 10% growth. By this metric, the 50/50 line is at "850 - about 40% below current levels."

In short, to think that you are going to get 10% growth in stocks from here is, historically, ludicrous. has this delicious quote from the famous Walter Bagehot: "Much has been written about panics and manias, much more than with the most outstretched intellect we are able to follow or conceive; but one thing is certain, that at particular times a great deal of stupid people have a great deal of stupid money".

Roger at the Rocklin Coin Shop writes, "We've been noticing some frightening observations. In a strip mall near our store is a long standing $0.99 store. It use to have many daily very few. My wife and I visited the owner and asked what [seemed] to be the problem. He stated that for the last number of months, people just don't have the money to spend anymore and that they (the owners) are now forced to close their business."

And continuing in that same lugubrious vein, "Near Rocklin is a huge Indian casino...the [third] largest-ranking revenue casino in America. The place used to be jammed with customers and difficult to find a place to park. Now in the last few months there are hundreds of empty parking spaces and maybe [half the number of] people gambling. The local coffee shops I visit in the mornings are seeing about [half] the customers they use to. In our coin shop we are now seeing only buyers" even though they "are in an upscale area."

He figures, as I figure - and as anybody with half a brain figures - that all of this means, "we are not headed for what some might seem to believe is a minor recession, but towards a crunching depression."

And worst of all, the world supply of barley, the ingredient that makes beer, is in very short supply. Ugh.

**** Mogambo sez: I'll say it again, as if I haven't said it enough already: The dollar is going down because we acted like idiots, and so load up on gold, silver and the shares of oil companies to save yourself.

This Mindless Mogambo Strategy (MMS) has worked like a charm for quite awhile now, and so it IS "the trend." And as everyone knows, "the trend is your friend!"

P.S. To get The Daily Reckoning sent directly to your inbox, sign up for our free email newletter, or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.



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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