Ninety percent of everything is crap

Richard Daughty
...the angriest guy in economics
The Mogambo Guru
Provided as a courtesy of Agora Publishing & DailyReckoning.com
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Jan 31, 2007

-- On behalf of those of us who demonically persist in pointing out the sheer inflationary horror of what is happening with the Federal Reserve, the banks and the money supply, I want to commend Barron's for restoring their reporting of the Federal Reserve and bank data. On behalf of a grateful America, I say "thank you!"

And since we are talking about it, and since that is all I seem to talk about, I will note that Total Fed Credit, the fabled fountainhead from which springs forth, literally, money from thin freaking air (by creating credit, which creates debt, which creates the money, which inflates the money supply, which causes price inflation), has slowed its rate of growth, and last week actually showed a decline in Total Fed Credit of $8.9 billion.

This is, obviously, the proverbial good news/bad news situation, in that it is good that the Federal Reserve has stopped its insane inflation of money and credit which creates subsequent inflation in prices (which is the killer-diller), but it is bad because, by this time, we are so far gone that the only way this idiotic government-centric economy can keep going is by continuing to create- forever! -exponentially rising amounts of money and credit/debt! Forever! Hahahaha!

For a dash of some modern, mood-appropriate, surround-sound ambience, I now cleverly cue up a soundtrack of distant thunder and multitudes of desperate, tortured people wailing in despair. And over this mournful dirge I bellow "And now we're not, all of a freaking sudden!" Boom! Crack of thunder!

Of course, foreign central banks are still accumulating US Treasuries and agency debt as they are forced to do something, anything, with the constant flood of almost $900 billion dollars per year that keeps flowing into their countries via the American trade/current account deficit. And now their combined stash at the Federal Reserve has ballooned by another $6.8 billion last week alone, taking their hoard to an absolutely staggering total of $1.8 trillion!

This is astounding! In January of 2002, a short 5 years ago, the accumulated foreign holdings of American government and agency debt was $730 billion, which seemed enormous at the time. Now it is $1.8 trillion! In five years the government and government-sponsored agencies were loaned another $1.1 trillion!

-- I was so busy reeling from the lunacy I see all around me, and trying to erase the memory of the lunacy I see all around me with high dosages of cheap tequila faaAAaarr beyond what could be considered medicinal, that I almost did not notice that the new index of economic indicators was released.

Using my finger to pry open one bleary eye, I see that the Leading Economic Indicator (essentially future profits) was nothing to write home about, as it was up a miniscule 0.4, rising to 138.0 from 137.6. The Coincident Indicator (current business activity) was even more lackluster, rising 0.2 to 123.3 from 123.1.

The real action was in the Lagging Economic Indicator (burdens and inflation), which is the one that I always pay particular attention to because that is the one that reports inflation, rose a comparatively monster 1.1 as the index jumped from 127.3 from 126.2. Inflation is swamping current and anticipated future business activity! Gaaahh!

This is horrible news, both because it means that I will probably be berserk in just a few minutes as the full horror of this congeals my central nervous system, which means that my innocent family is in for some pretty rough sledding in the next few hours, which probably explains why the Mogambo Security Video System (MSVS) recorded them blasting out of here, engine roaring, tires squealing, just after I yelled "Holy hell! Look at that inflation in the Lagging Indicator!"

They left before I could tell them that the JOC-ECRI Industrial Price Index shot up 2.82 points as that index rose to 133.02 from 130.2. This is a hell of a big move in prices! But they'll find out about them soon enough.

-- And if the economic ignorance, stupidity and intellectual rot and corruption in which we are drowning is not enough to convince you go buy gold and hang onto it for dear, dear life, then perhaps the GoldForecaster.com will be enough to change your mind. They write "The European Central Bank is to adopt an accounting change that will strip out of reserve total assets the amounts of gold loaned and sold into the market."

Whoa! Does this mean that the fraud of central bank gold holdings (which are allowed to say that they still owned the gold that has actually been loaned out and sold) is about to be exposed? I laugh cruelly and contemptuously, "Hahaha!"

Trust me that there will still be lots and lots of loopholes and exemptions, and long-delayed due dates for reporting requirements, and blah blah blah, so don't start thinking that sanity has returned to the world. GoldForecaster.com itself admits when they say "Gratifying though that may be, what we would like to see is the full detail with maturing dates, of the past and future maturing dates of the futures and options sales. At the moment, gold that has been sold by way of a futures or option transaction is not reported until the sale matures."

But my lot in life is not to expose corruption in America, as it would be a dreary, full-time job these days, but to find a way to make a lot of money in Big Freaking Hurry (BFH). And towards that end, I note that they report that it is not just you and I that are putting money into the gold and silver ETFs, but there is a wide-spread resurgence of interest in precious metals, as they report that "there are now seven products of this type trading on ten exchanges around the world"! Seven new ETF-like investment vehicles around the world, all to compete for a relatively finite supply of precious metals!

For this NOT to resolve with much higher prices is to make a mockery of the whole "supply/demand dynamic, equilibrated by price" paradigm that you learned on the first day of Econ 101! It's so laughable that it is tantamount to saying "The tenuous Mogambo fantasy/reality dynamic, equilibrated by gold, raw firepower and irrational revenge against real and imagined enemies, is no longer valid, either." And even a casual perusal of my voluminous "official" files gives the lie to that, too!

So, unless they have repealed the classic, ironclad interplay between supply and demand, then this may be the most bullish thing that you can possibly think of, other than somebody ringing the door bell and literally stuffing money into your hands and down your shirt when neither the spouse nor kids are at home, and so you don't have to share it with any of them.

And if it is not so bullish, then why am I standing here with this stupid, bug-eyed look all over my Stupid Mogambo Face (SMF) at my total astonishment that this opportunity is even happening at all? I mean, this is the kind of thing that usually only happens in Happy Mogambo World (HMW), a pleasant fantasy land where I prudently and intelligently buy gold and silver with every dime at my disposal, and I instantly get so rich that I am able to pay off the wife, and kids, and creditors, AND all their slimy little lawyers, and STILL have enough money left over to cut a wide swath of infamy wherever I go, setting local records in sheer disgusting excess and unpardonable gluttony.

But now it is happening in real life! This is going to be SO cool!

-- If you want a good reason why we are screwed, and you suspect that it may be because of the quality of our school system, then perhaps nothing could be more enlightening than "A Contrarian View: Save Less, Retire With Enough" from the New York Times.

The article starts out "A small band of economists from universities, research institutions and the government are clearly expressing the blasphemy that many Americans could be saving less than they are being told to by the financial services industry - and spending more - while they are younger. The negative savings rate, they say, is wildly distorted."

Before I went bananas at the utter preposterousness of this, I decided to read more, so that I won't be accused of "rushing to judgment." That is when I read "According to them, the financial industry, with its ostensibly objective online calculators, overstates how much money someone will need in retirement."

To give everything a kind of surreal quality, the article then goes on to say "A study last October by another group of economists, including two working for the Federal Reserve Board, found 88 percent of retirees age 51 and older had adequate wealth." Hahaha! This is too, too much! We are talking about $60,000 dollars or less! You can live as a retiree, for another thirty years or so, on $60,000? Hahaha! The Federal Reserve is saying this, too? Hahaha! Gimme a break!

They ignore my laughing and making rudely disparaging hooting noises, and blithely go on to say "Some, in fact, contend that financial firms have a pointed interest in persuading people to save much more than they need because the companies earn fees on managing that money." Hahaha! Of course they do, doofus! It's true! It's always true!

It's the same way that roofers think you need a new roof, the same way that housepainters think you need to paint your house, the same way that decorators think that you need a whole new "look" in the living room, and it's the same way that your wife's hairdresser thinks that you need to pay for an expensive "Oriental rejuvenating regimen" with rare oils, emollients and scented essences so that my wife's hair will be beautiful and youthful, like I'll be, I guess, I dunno, somehow happier about her kicking me in the groin if her hair looks nice or something. Well, we'll see!

But everything's all a scam in the end, anyway, in one way or the other. Or, as I have heard it said, "Ninety percent of everything is crap."

Of course, the article goes on to say that "The findings of the economists are being met as most challenges to orthodoxy are: with stony silence or extreme umbrage." She quotes Christopher Jones, the chief investment officer at Financial Engines, as saying "I count myself as deeply skeptical."

If you are one of those people who enjoys dividing people up into groups, count me in with the guys who take "extreme umbrage" at such idiocy, as this may be the most ludicrous lunacy that has ever come out of an American university or the Federal Reserve, and I can prove it by simply noting that there is not one instance in all of recorded history, anywhere, when the "people" had saved enough money to live comfortably in retirement, especially in an inflationary period, doubly especially when the inflation is caused by a fiat currency, triply especially when the banks operate with a zero reserve requirement (and thus achieve the ability to infinitely multiply the level of deposits), and quadruplely especially when the whole thing is to finance a large, suffocating government that now employs, directly, one out of every seven workers, and is the sole means of support for about a third of the country! Not one time! Ever! Not even close! Never!

And not only did the "people" not save enough money to retire, but they almost uniformly ended their years in penniless poverty as a burden on somebody, as the persistent inflation cruelly destroyed the buying power of whatever little money that they had accumulated.

But I am supposed to believe that now, for no particular reason at all, inflation will suddenly cease? Hahaha! And retirement "nest eggs" will, for the first time in all of history, maintain their purchasing power against a guaranteed rising inflation, which will last from the instant of retirement through another few decades of this monetary insanity? Hahaha! Stop it! My sides are hurting from all the laughing! Hahahaha!

Hell, today, here we are at the tail end of the biggest boom in American history, financed by the biggest, most irresponsible explosion of excess money and credit, measured over whole decades, built up, whole trillions of dollars, for longer than most people have been alive, when money incomes rose and rose, and accrued as never before to government contractors and the holders of equities.

And yet retirees are now unable to continue in retirement, and are having to be given more and more goods and services (like the expensive the new Medicare Prescription Drug Coverage), on top of the years and years of receiving more and more goods and services, always with the idea of government offsetting the persistent, grinding of price inflation, primarily through rising Medicare and Social Security payments!

And the retirees are being given more things, too, to offset the inflation that is eating retirees alive, like special exemptions on their property taxes!

And yet, rubbing my eyes in shocked disbelief to hear such stupidity, here are these ostensibly educated, ostensibly sane people saying that now it is possible for most people to retire in comfort? This is too, too weird!

So, yes- for the love of God, yes! -put me in the group that takes "extreme umbrage" at these university eggheads and the equally ridiculous Fed studies, and further put me in the group of the subgroup group that registers in the "Extreme, very extreme, maximum extreme" range, past redline on the Umbrage Meter, as in "Run for the freaking hills! It's going to blow!"

But you don't need no stinking Umbrage Meter to know that it is a Timeless Mogambo Truism (TMT) that nobody will EVER be able to save enough money when a central bank can create excess credit, and thus create debt, and thus create excess money, and thus create monetary inflation, and thus price inflation, because they will. They always (pause for dramatic effect) do.

And what is even more, now that I am getting myself worked up), I will tell you for a Freaking Mogambo Fact (FMF) that it works out that if you want to have a month's income in retirement, then this requires that you save, at least, the equivalent of 100% of everything you spend in a month right now, and you do this every day of your life. In short, you must save everything you make, and live on nothing.

In chow and automobile-related terms, you need to invest a cheeseburger now to have a cheeseburger in retirement, and you need to invest a new car now to have a new car in retirement.

And there is no other way to do it, net of inflation, made worse by high taxes and the constant grinding down of your assets by the financial services industry with fees and expenses and charges.

And it ain't theory, or math, or my loud, penetrating Mogambo voice (LPMV) that makes this true; this is a grim fact of history, and all you have to do is look it up and work a calculator for about two seconds to prove it to yourself.

So, you want a scam? Without a doubt, the whole "everybody gets a secure retirement by investing in the stock market" is the biggest scam of them all, judging by the sheer number of people who believe such utter, utter nonsense.

-- From a new advertising flyer for the incredible Richebächer Letter, we read that "If you use the real statistics to calculate unemployment, the way we used to calculate it back in 1980, the real unemployment rate is a much more devastating 12.5%."

My God! This is the horrifying level of unemployment seen only during depressions and dark, dark, dark and dreadfully dismal days for an economy, which is both 1) true and 2) this week's gratuitous use of alliteration for no particular reason at all.

The only thing that is different today is the sheer number of "safety net" government programs that exist at the local, state and federal levels, which is funneling money and benefits with both hands to a gigantic and ever-growing population of needy people, who have been made needy by the inflation in prices caused by the very act of the government borrowing money, which the Federal Reserve created (monetary inflation) so that they government can grow larger and give more money and expensive services to the needy! Hahaha! The government creating more needy people by helping needy people! Hahaha! How's THAT for a classic example of the perversity of government "helping"!

In a related note, even worse, Initial Jobless Claims rose to 325,000.

And speaking of jobs and Initial Jobless Claims, one funny by-product of Congress raising the minimum wage is that I think I see the sudden re-appearance of discussions of the "wage-price" spiral, where higher prices means labor demands higher wages, which forces businesses to raise prices to cover the higher labor cost, which makes workers demand higher wages, which makes prices go up, which makes workers demand higher wages, which raises prices, around and around.

The funny part is that the enormous salaries and benefits paid to CEOs and all the other executives (and to a lesser extent the rising wages and benefit packages of workers and retirees) have already made prices go up, and nobody complained! I mean, the average new car now costs almost $27,000, which is a hell of a lot of money, and the reason they charge so much is that they have to charge a high enough price to get back all those wages and expensive benefits the company paid to employees and retirees, which all kept rising every year, and thus every dime of it showed up in higher prices, as it eventually must.

I blush to admit that in an effort to emulate this tempting philosophy, for a time the finances of the Mogambo household were so arranged. I kept borrowing more and more money, and taking the better part of the kid's babysitting and lawn-mowing money, and spending it all on myself (mostly on tasty things that contained a lot of calories or had a high "fun factor", as it turns out).

Unfortunately, as I grew gloriously fatter and fatter, and the household grew more and more in debt, I had to cut back on foolishly spending so much money on the wife and kids for things like, you know, their food and clothing and their stupid prescription medications. Predictably, they started whining about that, too, saying "We're poor and sick and starving! Help us, daddy! Please help us!"

And so I explained to them, for what seemed like the zillionth time, that they were all a bunch of malcontents, and drove the point home by saying "Just look at me! Do I look poor to you? No! I wear expensive clothes and drive a brand new Cadillac! Do I look like I am sick? No! I play golf five days a week! Do I look like I am starving? No! I'm freaking enormous! Now, go to hell, you little whiners! This kind of luxury and overabundance proves that the Mogambo household economy is in fine, fine shape, all thanks to my Fabulous Mogambo Genius (FMG)!"

Unfortunately, several adverse court decisions discredited the FMG in a hurry, but not so for the Federal Reserve! They just kept going! And now, after all this time, as the Federal Reserve made it all worse and worse by providing the excess money and credit that financed it all, and the Congress kept deficit-spending to add to the pressure to create more money and credit, prices have gotten so high that Congress is mandating a 40% increase in wages? And yet they say that there is no inflation of any kind? Jeez!

-- The sad state of the debasement of the dollar by the Federal Reserve is made chillingly clear by the link that Chad T sent. It was to News.Yahoo.com, which had the article "Coin shortage could turn pennies to nickels". It was there that we read that Francois Velde, who is the senior economist at the Chicago Fed, argued that "The best solution would be to 'rebase' the penny by making it worth five cents rather than one cent. Doing so would increase the amount of five-cent coins in circulation and do away with the almost worthless one cent coin."

His argument is Gresham's Law ("Bad money drives out good money") in all its glory, as Mr. Velde notes by saying "History shows that when coins are worth melting, they disappear."

His solution, then, is that "Rebasing the penny would ... debase the five-cent piece and put it safely away from its melting point." In short, use the power of government to declare that the penny is now a nickel, and stop making nickels!

This is all very, very interesting from the point of view that stating the obvious-yet-ugly, brute-force fascist solution is a lot less than one should expect from the bigshot senior economist at the Chicago Fed, who should have said, instead, "The Mogambo was right! We are a bunch of idiots and raving lunatic wankers for having debased the dollar by creating so much of them! And the only way to solve this crisis is to make the nickel again worth more than the metal in the nickel, and the penny worth more than the metal in the penny, and the only way you can do this is to act like you got some smarts and for the Federal Reserve to stop this stupid, insane regime of excessive creation of money and credit!"

But, instead, we pay this guy the big bucks for ruining the dollar and then declaring that, by fiat backed by unlimited government force, the penny is now- magically -a nickel. Hahaha!

But let me try to salvage a little silver lining out of this dark cloud by calling up the Fed on the telephone ("ring ring!") to have them, exactly likewise, declare that I am an irresistible, hot babe-magnet, and they throw up their hands and roll their eyes, like "We can't do that!" Fabulous. Just freaking fabulous. Thanks for nothing.

-- George L. sent the link to where the Treasury says that they are going to be issuing the 30-year bond more frequently. The site notes that the "Treasury will issue 30-year bonds on a quarterly basis beginning in February 2007", and that "Total bond issuance in 2007 is likely to rise slightly to ensure liquidity in the new issue."

My sensitive nervous system detects trouble ahead, as they are issuing 30-year bonds more often, and announcing that they are going to issue a lot of them, too! Uh-oh!

And my heightened sense of panic is elevated all the more when George notes that "In 1993, they changed 30-year auctions from quarterly to semi-annually, ostensibly because of 'taking advantage of low short-term rates.'" I wonder what it all means? I'll bet it's not good!

-- Being the kind of guy who is pretty much out of it most of the time, I didn't notice an important nuance in the way the Social Security benefit is calculated. So imagine my surprise to be reminded, according to the form titled "Your Social Security Statement", which is Form SSA-7005-SM-SI (10-2006) from the Social Security Administration, that "Remember, it's your earnings, not the amount of taxes you paid or the number of credits you've earned, that determine your benefit amount."

Now comes the kick to the head; "When we figure that amount, we base it on your average earnings over your lifetime." What? I scream in outrage! Hell, that ain't the way I remember it!

Now, instead of using the average of the 10 highest quarters of income (which is how I remember it) to determine by benefit amount, they now average my income to include the time when I didn't make squat, like just out of high school! And I made practically nothing while in the Army, and, as a starving college student trying to make it on the GI Bill, I made nothing then, either! And graduate school was even worse!

And now they are going to average my earnings to include all those ten lean years (a quarter of my working life when I made almost zero income), in calculating my benefit? I'm screwed!

But this is not about how another communist/socialist/collectivist benefit program cooked up by a communist/socialist/collectivist government has failed and caused ruinous inflation in desperately trying, and failing, to make it work, but about the lying and blatant fraud to which they will stoop to renege on their end of the deal when their expensive efforts are for naught, which proves that, to the politician palefaces, we're all still just a bunch of stinking, heathen savages with worthless treaties in our grubby, dirty little hands that don't mean squat to the Great White Father in Washington.

Ugh.

****Mogambo sez: You should be buying gold, silver and oil stocks with every downtick in those markets. If you are, you will soon be wealthy. If not, you will soon be educated, which some say is almost as good. But it ain't.

Jan 30, 2007
Richard Daughty

email: RichardSmithGroup@verizon.net
Daughty Archives
Provided as a courtesy of Agora Publishing and The Daily Reckoning

Richard Daughty is general partner and C.O.O. for Smith Consultant Group, serving the financial and medical communities, and the writer/publisher of the Mogambo Guru economic newsletter, an avocational exercise the better to heap disrespect on those who desperately deserve it. The Mogambo Guru is quoted frequently in Barron's, The Daily Reckoning and other fine publications.