A Monstrously Gigantic and Out-of-Control
Current Account Deficit

Richard Daughty
The Mogambo Guru
March 01, 2004

Foreign Custody Holdings at the Federal Reserve, which will be known by foreigners in the future as "The Filthy Toilet That Flushed Our Money," increased another $9 billion to another record of $1.135 trillion, as foreign central banks desperately try and save us from our own stupidity concerning money and credit. Thanks, dudes!

The Federal Reserve itself could not restrain themselves a moment longer, and ramped up Fed Credit by another $10 billion last week. And this is not just ordinary money! No, sir! This is the fabled High-Powered Money of story and song (S&S). This is pure, raw credit, the stuff that is literally created out of thin air, and then used by the banks to expand by a hundred-fold via the fractional-reserve multiplier! In his film "The History of the World, Part One," we saw the King of France, played by Mel Brooks himself, winking at the camera and saying "It's good to be king!" Which is, I gotta admit, a lot better than being the Mogambo, since I can't call down to my Treasury Department and say "Hey! I'm in a spending mood! Bring me a few billion dollars. In cash! And make it snappy!"

The Mogambo Way is the same way as all the rest of you people out there, who are angry and confused and scared and in desperate need of some cash: I beg money from people in front of the supermarket, and borrow spare change from the odd passerby. The good news is that The Marvelous Mogambo has decided to invest some money in biologically engineering a Golden Goose that will lay eggs of pure gold. So I have THAT going for me.

And, since we are talking about Golden Geese, why do those stupid kings in the fairy tales bother about Golden Geese anyway? Surely they had printing presses, because the trees were always festooned with printed Proclamations of one sort or another. And they could therefore obviously print up as much money as they wanted!

And how about all those guys who practiced alchemy? They breathed poisonous fumes trying to turn base metals into gold via chemistry and superstition and gossip, and all ended up insane and broke. And dead, you'll note, because nobody believes that stuff anymore. Or maybe the jobs as Alchemists have been out-sourced to India or something. I dunno.

And now that I think about it, I look at my watch and I see it is time for a little childish bit of ridiculous farce, and ask how that old-time alchemy stuff is any different from what Alan Greenspan is doing? He is trying to convert base metals (fiat money) into gold (a prosperous economy) via alchemy (using a little math, a little stupidity, unreliable computer models, and rigid adherence to a stupid and demonstrably false theory that disregards everything we know for sure about how economics works, which is clearly taught by Rothbard and Mises and that whole Austrian School of Economics, which is the camp that I put myself in, although when I go there and ask to come in, they turn off the lights and pretend they aren't home, but I know they are in there because I can hear them snickering and poking each other and trying to suppress their laughter at my expense).

Now all we have to do is find out who is going to end up insane and broke. Who? Or whom?

Well, it ain't a-gonna be me! And if you listen to me, it ain't a-gonna happen to you, either, because I know what is going to happen, and thus I own gold and commodities, and therefore I will end up with the riches of a king, just like all the other guys in history who faced what we are facing and who did what I did, and if you are taking my advice, do what I do, because those guys ended up owning everything and having all the money after the inevitable collapse, and they ended their lives rich and happy and actually squealing in delight at all the fun they were having, and calling all the shots, and making themselves into kings, and I'll bet if you could talk beyond the grave to one of them right now, they would say "Mel Brooks was right! It IS good to be king!"

Meanwhile, getting back to the Fed, which is what we were talking about before I rudely interrupted myself, the Fed is also allowing the banks to loan out everything they can get their hands on, by reducing required reserves to the point of silliness, as they try as hard as they can to get this damn economy perking again. I thought that by last week we would have seen the reserves/deposits ratio break the 1% barrier, but it is still hanging out just above that absurdly low figure.

Why do I care? Well, you let some of those assets of the bank go south, and you will be given a Real Lesson In Life (RLIL) about why the ratio of reserves to deposits has never been allowed to get this laughably low. One percent! I snort, and the sight of the snorting of the Mogambo is not any prettier than it sounds, which has really damaged my Hollywood career, but I don't want to get into that right now, thank you.

The consumer price index came out, and prices were up 0.5% in a month. Most of it was blamed on the rise on energy prices. A guy named Kevin Logan, who says he is the senior economist at Dresdner, Kleinwort, Wasserstein, opines that "Inflation still looks very low, and it's likely to remain low. Most of the rise was energy, and that's not likely to be repeated." Huh? Says who? I say the exact opposite on both counts! But then I am not a typical American economist, which is a euphemism for "moron," a term that I use when some bozo cuts me off in traffic, as in "Hey! Watch where you are going, you filthy little American economist!" or when I am advising visitors at my house to "Watch your step in the back yard, as I have a dog and I have not gotten around to cleaning up all the piles of American economist opinions."

The band vamps while I run backstage, only to emerge, seconds later, as The Mogambo! And you can tell by the way I am dressed in my snazzy Mogambo Guru outfit that I am here to tell you, and this Logan fella, that the prices of everything else will go UP, because energy prices are UP, and will keep on going UP, and so prices are NOT expected to remain "low," as far as I am concerned, and to tell you the truth it is my considered opinion that prices are NOT low now, and are in fact going UP at alarming rates, and if I have to I can bring in experts with impressive credentials from prestigious, big-name universities and colleges who can tell you, with eye-catching graphs and charts and all that stuff, that prices that are rising higher and higher are not, as you have heard, "low," and furthermore, are not going to "remain low," either.

And suddenly the music stops and I abruptly put my fingertips to my temples, and in my mind's eye I can see, yes, it's getting clearer and clearer, I can see through the Parting Veil of Time, and I see that energy prices will continue to go up, because oil producers will be perpetually loath to keep selling us their oil in return for increasingly worthless dollars, because everybody is laughing at them for doing that. "Ha ha! Stupid OPEC will trade oil for less real, devaluation-adjusted dollars! Nyah hyah hyah! OPEC is stoo-pid! OPEC is stoo-pid! Ha ha!" Especially when China's economy is growing like gangbusters, and whose appetite for oil is increasing every single day, and will continue to increase exponentially for a long, long time. And so it is child's play to forecast higher and higher prices for oil until, and you might want to get out your calendars and write this down, March 27, 3455 at, oh, around just before lunch, I figure.

And don't laugh at the ridiculous exercise of forecasting out that far! The government, your own government, at the request of guys you elected, is providing forecasts of the American economy 75 years out. 75 years! Hahahaha! 75 years! Hahahaha! Let's see; that means we can go into the dusty archives and take out the government's 1929 forecast for the next 75 years, which is, coincidentally, 2004, which is also, coincidentally, today. Perhaps it will prove instructive to see how well the government economists of 1929 predicted what is happening today!

Oops. Just got back from the dusty archives where I looked for that 75-year forecast, and boy, am I dusty! But as far as I can tell there is no "Government Economic Forecast For The Next 75 Years" published in 1929. And in talking with historians of that era, the reason is that it was always considered laughably stupid to even suggest such a stunt, much less to waste time doing it. Sort of like alchemy, and see how that references a previous section, pulling it all together?

And speaking of inflation, which I cannot resist doing because it is inevitable and it will kill my country, in an article in the USA Today we learn that "The price of a ton of hot-rolled coil steel in the USA hit $482 this month, up 66% from the recent low set in June." Now, if you are Alan Greenspan or any of the deliberately obtuse dolts who work for the Fed or the US government, then this means absolutely nothing to you, or if it does, then you are careful not to say anything. But if you are a person who buys anything containing steel, or who buys anything made by a machine made of steel, then it almost surely means a great deal to you, or it will very soon.

And soon after that, measured in minutes, you begin to understand the numerous nasty nuances of the ramifications of steel increasing in price 66%. But not even I, Moron Mogambo, can fail to be impressed with something, anything, so ubiquitous, so necessarily vital, and whose price has gone up 66% in less than nine months, and which looks to keep on increasing in price forever. It's spooky.

The article goes on to say, "Prices are rising because of a variety of other factors, most notably skyrocketing demand from China's rapidly expanding economy. Last year, China's steel demand rose 38 million tons, the equivalent of the annual steel usage in Mexico and Canada combined." This is just the INCREASED demand. And all of this fabrication of steel into useful things requires energy, and lots of it, and more and more all the time, and that is why oil at these low, low dollar prices is a real bargain. Although crude oil recently hit $36 a barrel, it is surely just a taste of terrible things to come, and why it is that I am saying we should load up on oil-related stocks and commodities futures, and maybe sink a few test holes in your backyard.

USA Today goes on to say, "For U.S. consumers, the rising costs will likely have little impact, because stiff competition is forcing steel users to absorb the higher costs." To this I say, hahahaha! And while I am busy laughing, I am reminded of Daffy Duck saying "What a maroon!" Only in America are we so bright that we have figured out a way for producers to not pass costs along to consumers? Hahahaha! Producers making less and less profit is "likely to have little impact?" Hahahaha! My stomach is hurting!

"But wait!" I finally stammer out between bouts of uncontrollable laughing. "If these guys are so bright, why don't they give their total production of goods and services to us free, and let them eat ALL the costs? Think of the increase in the American standard of living if we can get everything we want and need, and never have to pay any money for any of it!" Man, if we can talk these guys into this, we're going to be on Easy Street from now on!

But this is all for naught, and I am as disappointed as you, as a guy named Jim McGregor, who is the owner of Morgal Machine Tool and who uses a lot of steel in the fabrication of things, lets the cat out of the bag when he admits, "We're hoping that...we'll be able to pass this on. There's just no way that we can eat this." Bummer for us. And bummer for Jim McGregor, as he finds that the Iron Laws of Economics have not, as yet, been repealed.

The article notes, helpfully, "Other causes for the increases in steel prices" includes the falling value of US dollars, which they note has the effect of "making all imports costlier, including steel." Well, duh. That's the whole point, isn't it? Make imports more expensive, so that domestic producers can "compete?" And isn't "compete" just a euphemism for "Gouging the hell out of the customer"?

And why is the dollar falling, which is making the price of steel go up, which Jim McGregor is hoping will translate into rapidly rising inflation to save his butt? Because the damnable Fed and the damnable Congress are acting like, and have acted like, and promise to continue acting like - what was that quote again, something about "drunken sailors?" - for the rest of your life. And one of the Iron Laws of Economics, and I am sure that you remember the Iron Laws of Economics, is that printing excess money and credit has the effect of always destroying the value of money. Which makes things cost more, in terms of dollars.

In the same vein, Reuters reports that "Procter & Gamble Co. on Thursday said it would raise prices on tissue prices 5 percent to 6 percent this summer in order to make up for rising pulp and energy prices." Damn, I say! I am really upset because all these lousy economic numbers that are coming out make me use a lot of toilet paper because, well, never mind. It just does, because it scares me, and I'll leave it to you to connect the dots.

As an object lesson that ought to sear all this stuff into your brain, we have this from Buenos Aires: "Protesters, many of them masked and wielding clubs, obstructed 107 roads around the country including the major arteries of Buenos Aires. The demonstrators called for bigger welfare payments and other forms of aid, saying the economic crisis in 2002 and Argentina's currency devaluation exacerbated their poverty." Gosh! You mean that printing up oodles and oodles of money, and thus destroying the purchasing power of the few Argentine pesos that the poor have left, will "exacerbate poverty?" Who knew, huh?

So it looks like a falling Argentine peso, or whatever it is that they are using for money these days, is not the panacea that our own elected yahoos are telling us. In fact, a lot of Argentine people seem real testy about it. And I confidently predict that the number of people correctly evaluated as "testy" will get bigger, and bigger, and bigger, and they will be more testy, or exhibit more testiness, or, if you prefer, demonstrate increased levels of testitude.

Bill Fleckenstein, who writes the Contrarian Chronicles, quotes Otmar Issing, a former board member of the German Bundesbank and now chief economist for the European Central Bank, as saying "Prevention is the best way to minimize costs for society from a longer-term perspective." The object lesson is to see that there WILL be costs, and the way to make them minimal is to not act like a moron in the first place! Exactly! And I will go even farther than that! I will stand proudly to my feet, my hair waving in the breeze, tousling my boyish good looks, my strong profile perfectly etched against a cloudless blue sky, and say that if you do NOT prevent it in the first place, then there will ALSO be costs, and then there will be no freaking way in hell to make them "minimal," and in fact, they will tend toward "maximal" in an oddly satisfying yin-yang, karma-balancing effect. And if you want to know the literal definition of "maximal," we turn to the well-thumbed Meanings of the Mogambo, and look up "maximal," and it says, and I quote, "Everything is gone and you are dead, or at least wishing you were."

We owe Bill a debt of thanks, and on behalf of all of us I say "Thanks, Bill!" when he brought this quote to our attention. And he proves that his brain is firing on all eight cylinders when he takes that quote and says, "This is absolutely the most important thing I have heard anyone associated with central banking say since Paul Volcker ran the Fed from 1979 until 1987. This is the reason why one should not go down the path of bubble-blowing, because it is impossible to painlessly unwind a bubble once blown. The only way to solve a bubble with not much pain is to not let it get started in the first place." Painlessly is impossible. These are three words you don't want to see together.

And speaking of inflation and we brain-damaged idiots who call ourselves Americans, I got this in the mail from a guy who refers to himself as "A reader," mostly because he is ashamed to give his real name, and you will soon see why. He writes that his brother has responded to a line I wrote, namely "Try and recall anybody ever saying 'We can have prosperity once we destroy the value of our money!" He writes to me in perplexed astonishment when his brother, whom I assume has some mental disability and dropped out of school in the sixth grade with a very low GPA, replied, and I quote, "Inflation? Hell, yeah! Let's rekindle up one rip-snortin' inflation, a monetary expansion that will make those 1920's Germans look like a bunch of pikers! Why? So that I and millions of grunts like me can pay off our debts with a single day's pay. As soon as Al and Ben start dropping currency from helicopters, you'll hear hallelujahs from coast to coast. What better way to assure the American Dream than by handing the multitude $200,000 homes essentially for free, while discharging billions of dollars in crushing debt?"

I don't know where to start disabusing this brain-dead halfwit moron from such absurd notions, so I will not even try. I must assume that he is profoundly illiterate, as he surely never read anything so absurdly preposterous, as there is no author on the planet, either now or in any period of the past, who would dare to waste his time trying to get such a ridiculous statement published. And so I am left with other possibilities, such as how that he got this stupid idea from hanging around other similarly intellectually disadvantaged jackasses, probably sniffing glue or something. Or perhaps he is mentally ill, and in his bizarre little fantasy world the Germans of the 1920's were having such a wonderful time with hyper-inflation or something.

Or maybe he works for the Federal Reserve or the government or something, as they are, in reality, incredible as it sounds, actually trying to create inflation right now! But instead of filling up page after page after page of terrifyingly real reasons why no person in their right mind would want to start inflation, let me merely ask him to find one example, just one, in all of history, of any country whose fortunes were improved by inflation, especially the rip-snorting kind that he humorously refers to. Or, to make his task even easier, because I am sure that his days are full of picking at his toenails and having attendants feed him and wiping drool from his chin, and so he has precious little time for doing any historical research, so let him find just one country in the whole history of the world that was NOT destroyed when they took this course. Just one!

And perhaps the recent turmoil in Argentina, referred to above, will help him concentrate his efforts. Or better yet, perhaps he could fly down there! Sure! He could share his considerable brain power with the Argentine people who think they are so affected with the results of inflation! And then he could perform a great service for them, and show them how they should be rejoicing that inflation has arrived! Yes, rejoicing! With dancing in the street! And big noisy parties, all night long! Everyone celebrating how fortunate they are that they can pay off their big houses with one week's pay, and discharge all their debts so easily! I mean, after all, they just need is one week's pay, right?

Frank Shostak, at Mises.com, and if you want to get some Austrian-style economic smarts, that is the place to get 'em, writes "In short, according to Greenspan, the low interest rate policy of the U.S. central bank has strengthened consumers' and businesses' financial conditions. Our analysis, however, disagrees with this. Rather than showing strengthening in financial conditions, the data demonstrates that the exact opposite took place."

Mr. Shostak is exactly right, although I am sure that he does not need me to point that out for him, and probably resents it. Going farther and farther into un-payable debt, just because interest rates are low, has NOT, and I use their own words against them "strengthened consumers' and businesses' financial conditions." However, to be fair, IF the additional debt enabled them to survive, AND the economy really DID improve, and IF they started making enough money to pay down the debt, and then used the money to actually PAY down the debt, then, okay, it would probably "strengthen financial conditions." But those are a lot of "ifs."

But if any of these conditions are violated, however, then it most assuredly did NOT strengthen anything, except the "case for the prosecution" that the people and the managers and the executives all acted in an irresponsible manner, and worsened their financial position, and as such are guilty, guilty, GUILTY! of being low-IQ jerks.

But Mr. Shostak is aware, and I am painfully aware, that you are not going to take my word about that. So he has prepared some illuminating statistics to bolster our case. And when I say "our case," I mean, of course, where he does all the work and I try and steal a little undeserved glory by saying "Me, too!"

"Thus the household liabilities-to-assets ratio climbed to a new record high in Q3. Furthermore, the outstanding consumer credit-to-personal income ratio stood at a record in December." Now, I am as aware as you that dry statistics like this cause your eyes to glaze over, and believe me when I say that mine are as glazed as yours. Fortunately, he translates this into English and says "This record high ratio indicates that the pace of consumption by far exceeds the pace of wealth generation." So, we idiot Americans keep spending more money than we are making. And apparently we think that we can keep this up indefinitely. Hahaha! Like some kind of Tooth Fairy or something comes at night and puts money under our pillows or something! And after you ponder the significance of that, then you get a much better idea why people from other countries are trying to kill us; they want to eliminate obvious mental defectives from the world gene pool.

The upshot is that he figures that "This is likely to force consumers to curtail their borrowing and in turn curtail their expenditure in the months ahead." But Fred! This is against everything that we Americans hold near and dear! I mean, every time before this, just in time, the Fed and the Congress come through with some new scheme to enable people to get their hands on more and more money. Lovely, lovely money! Most of the time by literally giving them money, and sending Treasury checks out to anyone with a permanent address!

The latest and greatest one, of course, is the real estate bubble. This is where Fannie Mae starts granting mortgages at absurdly low rates, so that idiots are driven to purchase a huge house that they cannot afford in an artificial seller's market, which makes the prices of all other houses go up, which gives the owners more equity on paper, which the owners then borrow and spend, driving themselves farther and farther into debt! And then the higher and higher house prices bail out the guys who overpaid for the houses, who borrow more money against their increased equity, and buy more stuff, including houses, continuing the cycle!

Now here I am going act like the sneaky little rat that I am, and I am going to take what Kurt Richebacher writes, and make it look like he agrees with this assessment, when he says, "US economic growth is no longer based on saving and investment. Its essence is that credit excess provides soaring collateral for still more credit excess, creating still more asset inflation for still more borrowing and spending excess. It is important to see that the true name of this game is bubble-driven growth. And all bubbles end by bursting. America is the next Japan."

America is the next Japan? To which I say, "I sure hope so!" Being like Japan would be the best of all possible results, as they never stopped showing a trade surplus, and there was nobody starving in the street, and the population did not rise up in anger and set the whole country ablaze in their misery, and crime and pestilence did not increase, and the whole system did not break down, and they not all die a horrible death, and now the whole place is not stinky with dead people.

And us American spendthrift bozos are not putting any money away either, says Mr. Shostak. "Latest personal income data indicates that personal savings remain in free fall. The personal savings rate fell to 1.3% in December from 1.5% in November." This verifies Kurt Richebacher's remark that " US economic growth is no longer based on saving."

But Frank, and notice that by this time I am calling him Frank like we are old buddies or something, but don't tell him I'm doing that, adds "Also, the business liabilities-to-assets ratio remains at a lofty level." So businesses are driving themselves farther and farther into debt, too, betting on the eventual recovery and long-term growth that will, hopefully, save them. It won't, but that is another story.

He continues, "A renewed build-up of excesses is also seen in the production of business equipment in relation to nondurable consumer goods production. This ratio stood at 1.1 in December - the same figure as in November. The historical average of this ratio stood at 0.6. It follows then that contrary to what Alan Greenspan has said, the facts of reality indicate that the liquidation of past excesses has barely begun."

To that I say, "Amen, brother" because I am not sure that ANY liquidation of past excess has begun. He goes on to say, "Furthermore, increasing pressure on the pool of investable resources is coming from ever growing government outlays. Between December 2000 and December 2003 government expenditure increased by 33%." He says that the government is spending a third more in just three years! A third! Look at me when I am talking to you! A third! Government spending is greater by a third in three short years! And now you know why I go absolutely ballistic when a fund-raiser calls me up and wants to know how much money I am going to pony up for the re-election campaign of George W. Bush, and how my screaming in outrage fills up the receiver with so much spittle that it shorts out all the little circuits, and there are these sparks flying all over the room, and thin wisps of smoke are rising up into my nose and making me sneeze - ker-chew! - and anyway the caller hung up long ago, right after I started going ballistic, but I don't care. I just keep screaming into that fizzing and popping phone until SWAT team guys are banging on the door, demanding that I shut the hell up or they're coming in again, and they are sure that I "know what that means," and brother, I sure do know EXACTLY what that means, so I finally shut up.

And here is where it gets so spooky. He says, "Given the fact that the mortgage debt-to-income ratio remains at a record level it wouldn't surprise us if mortgage refinancing continues to weaken further." This is really spooky to me, and you can tell by the way my face is ashen and my hands shake uncontrollably when I talk about it, that this is spooky, and it is scary because of the sheer huge volumes of money involved. So we doofus Americans have taken on huuuuugggge mortgages, that now average well over five year's worth of gross income, and are now spending a record-high part of our income on mortgage payments, leaving, by mathematical imperative, a record-low part of our incomes to buy everything else that we want and need. Mostly want. But anyway, this is, and for this part of the presentation I have dressed up as Mae West, and am looking deep into the limpid pools of your eyes, and breathlessly saying "Fabulous. Just freaking fabulous."

But technology marches on, while this isn't my beat, I gotta tell you that Intel says that they have made silicon chips that can switch light! Just like electricity! This makes possible the transmission of data "hundreds or even thousands of times faster than possible on today's Internet." And without heat, I assume, as light passing through a conductor creates no heat, but passing electricity through it, on the other hand, the conductor will get so hot it will fry your hand - zzztt! - if you grab it.

And I think, perhaps in my little pea-brain or something, that this is highly, highly significant, and that is why I am talking about it, and it is the reason that my eyes are opened wide in astonishment and my mouth is hanging open in stunned stupefaction. Up to now, it was always electricity that was switched. Now it is light! This is one of those (pause for effect) Turning Points In History (TPIH), as far as I am concerned! Although I probably misread the article, and missed the point entirely, and now that I think about it, maybe it was just a figment of my imagination, and yes, doctor, I am feeling much, much better now. But light! Think of it!

As an apparent aside, Intel said that they can send data at speeds as much as 50 times faster than the previous switching record, and the company has now pushed the switch rate above two billion bits per second.

Max Fradd Wolff wrote an intelligent essay on the Prudent Bear website entitled "Mercantilist Stirrings in the Land of Laissez Faire," and as part of that article he writes "America has begun to enact and follow a protectionist and mercantilist path. Recent policy on visa restriction of business persons, closed contract awarding, disqualification of non-US firms, steel and textile tariffs, stalled FTAA and WTO talks, ham handed diplomatic misadventure and heavy state tinkering with markets are noteworthy." Noteworthy, yes, particularly if you are giving a lecture on "Things that the government is doing wrong and which will soon backfire and make everything worse, and give Americans what they so richly deserve for electing the morons they have elected."

He continues, "Yawning budget deficits and aggressive expectations management of financial markets threaten to change the global tune. While the impulses may be understandable, the likely cascade of retaliations and responses will cause great anger and risk escalating rounds of beggar-thy-neighbor retaliatory policy responses." This is the part that comes before the "Kill the beggars" part because, first, you make them into beggars, and then you kill the beggars because they are bringing everybody down, and you need a scapegoat. And nobody likes a bunch of suffering beggars hanging around, begging and suffering. It's so depressing and all.

But, hey, Max! Settle down, dude! All we have to do is remind those guys that we are Americans! We can do anything we want, and they have to like it! Right?

Ignoring my remark, he goes on to say, "Our trade deficits and profligate borrowing have led to the accumulation of potentially dangerous levels of dollars and dollar denominated assets in foreign hands." Giving foreigners enough power to destroy us at a whim is dangerous? Who knew?

Just to show you and Mr. Wolff that we are not the only people on the planet who slink into raw protectionism, The Times of India reports that "The Saudi government on Saturday began enforcing a decision to bar foreign workers, including Indians and Yemenis, from gold and jewelry shops in a move a leading economist said sends 'a strong signal' that the retail sector will be 'Saudized' to provide jobs for nationals."

And to show you that the Muslim world is also filled with laughable morons, too, get a load of this quote from an article, thanks Phil, in the Gulf News in Dubai: "In order to formulate and monitor the monetary policy centrally and to ensure the desired price stability, the creation of the Islamic Central Bank becomes a concurrent requirement." I say it does NOT become a requirement at all. Merely a convenience. But the writer has not stopped making a fool of himself, as he goes on to write, "The creation of an Islamic Central Bank would ensure not only the price stability in the Islamic world by controlling the growth of money supply and keeping inflation under desired targets, but also safeguarding the value of Islamic Dinar by short-term open market operations."

A central bank protecting the value of a currency? Hahahaha! A central bank promoting prices stability? More hahahaha! A central bank keeping inflation under desired targets? Triple hahahaha! What the hell is the matter with the Islamic jerks? Can't they read history and see what happens when you have a central bank? Can't they at least look around and see what the current crop of central banks have done? And yet they want to start ANOTHER central bank? Aaggghhhh!! It staggers the mind! And then people want to know why I scream in outrage all the time!

In short, while the introduction of a Golden Dinar may do plenty of wonderful things for the Muslim world, and using gold as money is one of the things that I think would be a wonderful idea, the creation of a central bank will instantly negate any of those benefits, and is guaranteed to spread inflation and monetary horror through the whole system. And if you do not believe me, then just take a look at the consequences of the Western world having powerful central banks and how well they have worked! Hahahaha! For starters we have a currency that has lost almost 50% of its value in the last few years, soaring trade and budget deficits, staggering indebtedness in every corner of the economy, increasing joblessness, rising inflation, astonishing overvaluation in financial assets and real estate, and, and, well, the list goes on and on, including rap music and body piercing.

And yet they want to create another central bank? What morons! Richard Maybury, writing in his newsletter "Early Warning Report" hits the nail right on the head when he says "History repeats because governments keep making the same stupid mistakes."

Susumu Saito is the director of the Trilateral Institute, Inc. which is a private think tank based in Tokyo, and who wrote an interesting essay on Asahi.com, entitled "Looks Can Be Deceiving With US Economy."

He writes, "Fashionable nowadays is the news that the U.S. economy has rebounded strongly since 2000 from the shock of the bursting of the stock 'bubbles.' U.S. Federal Reserve Board Chairman Alan Greenspan proudly praised the resilience of the U.S. economy in his self-congratulatory testimony to the U.S. Congress last week. Indeed, the Fed has been apparently preoccupied with its own determination not to repeat the mistakes of its Japanese counterpart in the 1990s following the cave-in of Japan's asset-inflated economy. To wit, Japanese policymakers at that time acted too late and with too little in the way of monetary and fiscal policy to counter the contractional economic forces."

What caused these contractional forces, you ask? It is such an easy question that I leap to my feet to answer before anybody else beats me to it. I clear my throat - ahem! - and with a delightful ringing quality to my voice I clearly announce, "Because debt got too big, prices got too high, and too, too much leverage that enabled them both."

Mr. Saito goes on to say "The challenges facing the U.S. economy are at least twofold." This is not as bad as it seems, since I have been advised that my personal problems are at LEAST two-fold, and in fact the official tally, according to eye-witness testimony, runs to about fifty pages. "One is that the U.S. economy has already used up an even larger dose of monetary and fiscal medicine over the past four years than the Japanese economy did during the first seven years of the 1990s. Another is that the U.S. economy cannot finance its economic expansion with its own internal resources, as has been exemplified by the ballooning current account deficit. This is unlike the Japanese economy, which retained a sizable current account surplus even in 1996, the seventh year after the bubble burst." And, to show you that even the Mogambo will get up off his lazy butt once in awhile, especially when the materials are right there on the desk in front of him, I report that, after looking at the table in the back of the Economist magazine, Japan still has, in spades, a huge freaking current account and trade surpluses for its size.

This sizable current account surplus is what has allowed Japan to keep from imploding. We have no such cushion, and in fact we have not only a sizable current account deficit, and not only that, but a massive current account deficit, and not only that, but we have a monstrously gigantic and out-of-control current account deficit that literally dwarfs everything. And if we did not have this impossibly humongous current account deficit, then all those little dirtbag countries out there who are showing current account surpluses, like the aforementioned Japan, would not HAVE a surplus. They need us! Because while global GDP may not be a perfectly zero-sum game, it is darn close to it, and behaves like it is, too.

Mr. Saito continues, "The Fed wasted no time in firing off its monetary silver bullets. In January 2001, only a year after the stock market began its steep slide, the Fed started cutting the federal funds rate from a high of 6.50 percent down to 1.00 percent by June 2003.

"Indeed, the Fed has been apparently preoccupied with its own determination not to repeat the mistakes of its Japanese counterpart in the 1990s following the cave-in of Japan's asset-inflated economy. To wit, Japanese policymakers at that time acted too late and with too little in the way of monetary and fiscal policy to counter the contractional economic forces.

"Secondly, the Fed is quite unlikely to raise interest rates despite the ballooning current account deficit and a falling dollar if its primary focus remains the continued growth of the U.S. economy." Perhaps he is hinting that one day the Fed will NOT be preoccupied with growth financed on the cheap?

"Also, the U.S. fiscal authorities appear to have acted more swiftly and forcefully than their Japanese counterparts in the comparable period after the bursting of the stock bubbles. For the past four years, the total swing in the budgetary position has amounted to more than $760 billion, or 6.8 percent of gross domestic product in the final quarter of 2003." This brings to mind the wailing and gnashing of teeth in Europe, where the idea of budget deficits in excess of a lousy 3% of GDP caused them to drink the poisoned Kool-Aid, and scrap their own Growth and Stability Pact.

"All the contradictions arising from U.S. monetary and fiscal policy appear to be masked temporarily by massive interventions to support the dollar, primarily by the Japanese central bank, and to a lesser extent by the other Asian central banks. Such operations in the currency market have amounted to larger and larger purchases of the U.S. deficit bonds." He calls them "deficit bonds" I like that. And don't miss the part where he says "masked temporarily."

Bill Buckler, from his newsletter the Privateer, weighing in on this subject, says that the Asians have to make a choice about whether to buy the continuing avalanches of US debt that will be issued from the US Treasury. If they buy the debt, they have to expand their own money supplies. If they don't, then the dollar will fall. "They know that they can either crash their own economies, or crash the US Treasury." What a choice, huh?

Mr. Saito goes on to say "The problems arising from such ad hoc measures are multiple. First, the trans-Pacific trade imbalance has tipped further, resulting in the buildup of massive countervailing forces to be unleashed later in the currency and other financial markets." After that sentence is Mogambo-ized, latter half then reads, "massive enraged and rabid pit bulls to be unleashed in the currency and financial markets."

He goes on to say, "Second, counting on the seemingly insatiable appetite of the American customer, the allocation of economic resources in the Japanese and other Asian economies appears to have been distorted to a larger extent than before."

"The problem is that the response of the American economy, despite the massive doses of monetary and fiscal medicine, has not been so impressive as the U.S. policymakers would have us believe."

This brings to mind Robert Prechter of Elliott Wave fame, who is as gutsy as they come, and who has declared that "Yes, Ma, We Are in a Depression." He figures that "The U.S. economy entered a depression in 2001. Still, you can see effects of the depression if you bother to look. Employment is not recovering. Tax receipts are falling. The manufacturing sector of the economy is not merely contracting; it is crashing. CTC warned about the coming debt downgrades and the cutbacks in government services." So it seems like Mr. Prechter and Mr. Saito are on the same wave length, and they may be the same man for all I know, as I have never met either one.

To show you the fabulous effects, Mr. Saito notes "Most readers might be surprised to hear that the U.S. economy actually lagged behind the Japanese economy in the first three and a half years after their respective stock bubbles burst of the U.S. economy." Well, after hearing what Mr. Prechter had to say, I, for one, am not surprised. But we spent twice as much, in half the time, to keep from "being like Japan," and yet we are still lagging? Bummer. So the Fed's plan has not worked for the entire four years, just like it has not worked in Japan for fourteen years. And yet we are still keeping on keeping on. I shake my head in weary resignation.

A Daily Reckoning reader notes that "Any regular reader would, several years ago on reading the 'reckoning' forecasts, have put up his umbrella, canceled all trading, withdrawn into a defensive shell. And in the meantime missed out on a great bull rally."

Hey! He's right. That's why I say let's sell everything! Stocks! Bonds! Houses! Cars! Everything! Sell 'em all! And use the money to buy crack cocaine because, after all, we don't want to miss out on the chance for a party!

Eamon Fingleton, whose website Unsustainable.com is dedicated to the yawning trade deficit and the problems it brings, asks "How big is a trade deficit of $570 billion dollars?" He gets out his calculator, and answers, "If delivered in dollar bills, it would weigh 510,000 tons - or about eleven times the weight of the Titanic. The money would require a fleet of 4,500 Boeing 747 freighters to transport. Placed end to end in dollar bills, it would stretch about 56 million miles - or about half the way to the sun. If the dollar bills were stacked one on top of the other they would rise 39,000 miles into space."

Stephen Roach of Morgan Stanley wrote an essay entitled, "Central Banking Discredited." He eerily echoes the Mogambo when he writes, "They are yesterday's heroes. Central banks ruled the world during some 22 years of disinflation. But like most champions, they have overstayed their welcome. The world's major central banks - the Federal Reserve, the Bank of Japan, and the European Central Bank - have squandered the capital they built up in the long and arduous war against inflation. And now, with their policy arsenals dangerously depleted, they are woefully ill-equipped to cope with the ever-daunting complexities of a post-inflation era. Bondholders beware: Your once-proud defenders have met their match. I fear modern-day central banking is on the brink of systemic failure."

While I do not doubt that the central banks of the world have squandered everything, and have said so myself many times, I am not sure that I agree that we are in a post-inflation era. In fact, I am pretty sure that the inflation era is just getting started, although asset prices may drop to, oh, let's say, zero, or thereabouts, inflation is just getting started.

Paul Kasriel of Northern Trust, penned an essay entitled, "Future Inflation is Chief US Export." He starts off by telling you what I have been screeching about all this time, namely, "The U.S. dollar prices of most goods, services, and assets are rising at a faster rate these days. About the only exception to this is in the 'official' measures of consumer prices." By which he means, and I am shamelessly putting words in his mouth, that the government is lying to us about inflation.

But then he goes on to foreign central banks, who, in frantically buying up all those dollars sloshing around the globe by printing their own currency, have started slitting their own throats, which he characterizes as "These currency-induced moves by foreign central banks will have the effect of eventually making the inflation rates abroad higher than they otherwise would be."

So what is the upshot of all of this? Mr. Kasriel asks the same question with a question of his own. "How long will it be until U.S. exported inflation becomes an irritant to foreign central banks? China, which was experiencing a mild deflation at the start of 2003 ended the year with a mild inflation. Japan's deflation appears to be nearing an end. My bet is that in 2005, foreign central bankers will have had their fill of countering the dollar's natural inclination. When that happens, the dollar will likely go into an uncontrolled tailspin and the Fed will have jack up interest rates. It will be interesting to see how the most highly-leveraged U.S. economy in at least 55 years (as far back as my data go) reacts to all of this. In the interim, commodity prices in dollar terms, which already have been on a tear, will likely continue to rise. The combination of falling dollar and global reflation is a recipe for higher commodity prices."

And this is why, in case you were wondering, I say that inflation is just getting started.

John P. Hussman of the Hussman Funds, writing in an essay entitled "Too Much of a Good Thing," says "Last month, new inflows into mutual funds hit $40.8 billion - the highest figure on record. One would think that this might have bullish implications, at least over the short run. But then, one would be wrong. Mutual fund inflows are statistically correlated with movements in the stock market, but they are both a lagging and a contrary indicator. Specifically, mutual fund inflows are positively correlated with past stock market movements, and negatively correlated with subsequent stock market movements."

So the negative correlation means that all this money flowing into mutual funds harbingers a falling stock market. Which makes sense. While all the money flowed in, it bid up prices. Now that they money is all in, there is no new money to bid up prices. So they fall. Nice and neat.

Theodore Butler, the silver analyst for Investment Rarities, reports that he may have detected the abandonment of the outrageous volume of short positions in the manipulation of the silver market, which he thinks may mean that the game is drawing to a close. He is livid that the total short position in silver is three times bigger than the known bullion inventories. It does seem really, really weird: it seems that the insane amount of shorts, three times world inventories, would be an irresistible target for short a squeeze play!

He notes that the COMEX "struggled to deliver a stinking 5 million ounces of real silver that the Central Fund of Canada bought some 7 weeks ago." Hew hints that maybe this abandonment of adding more short positions, and liquidating some short positions, may have something to do with the Gold Anti-Trust Action group vowing to pursue the rigged silver market as a way of exposing the rigged gold market, and a lot of pressure being brought on Eliot Spitzer to look into this rigged silver market. The upshot is that, if it plays out as Mr. Butler envisions, silver is set to explode to the upside.

USA Today this week broke the news that in 1997, banks financed an average 89% of a new vehicle's cost. The Consumer Bankers Association, says that last year they financed 101% of a new vehicle's cost, which is, if my sixth-grade education is any good, more than 100%, which is more than everything, which is more than the total cost of the vehicle. In short, consumers took out loans that covered not only the total cost of the new car, but then borrowed even more money to pay off what they still owed on the old car that they were getting rid of!

The article went on to say that 40% of all trade-ins come from people who owe more on their old cars than they are worth. 40%! Almost half!

Gary North: "The greatest single problem facing the world economy over the next few years is a sudden breakdown of the derivatives market. This would be what Alan Greenspan has described as 'cascading cross defaults.' What is this market? It is an interconnected system of debts, mostly unsecured, mostly unregulated, that bonds together the financial markets. They are speculations placed on the future value of income streams."

My prosaic example is that I bet two bucks on Lucky Linda in the fourth race. Then I package up a derivative on my ticket, and sell you the chance to make a buck, and all you have to do is give me a quarter. Then you sell that chance to make a quick buck to another guy for a dime. Then he sells a chance to make that buck to another guy for a nickle.

"In the energy and electric utility sectors, for example, companies used derivatives and trading activities to report great 'earnings' - until the roof fell in when they actually tried to convert the derivatives-related receivables on their balance sheets into cash. 'Mark-to-market' then turned out to be truly 'mark-to-myth'..."

He goes on to say "Derivatives also create a daisy-chain risk. In our view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal"

Chris Temple, who writes are real nice newsletter, says "Our nation has adopted much the same attitude as it did under the Nixon Administration back in the early 1970s." This was the era when the federal government tried to fight the war in Vietnam and the War on Poverty at the same time, to the inevitable sorry results. "As the dollar crumbled, U.S. financial markets became unattractive to foreign investors. Eventually, the drop in the dollar and rise in commodity prices gave us rising interest rates, stagflation and the worst bear market for stocks since the Great Depression. A few of us think that we'll eventually suffer the same fate." And when he says "a few of us," I assume that he includes the Mogambo, who does not only think that we will suffer the same fate, but that it is inevitable and unstoppable.

Jim Grant of Grant's Interest Rate Observer has an interesting take on the way foreign central banks are collecting such huge gobs of dollars. He calls it "the biggest vendor financing scheme" in history. Vendor financing! Hahahaha! It looks like the Japanese have learned from the American automobile industry, and are offering us stuff at zero down and zero interest!

From the "Great Quotes" section of he Investment Rarities website we get Dan Norcini saying "The bubble that has been created cannot be allowed to deflate without ripple effects resounding throughout the entire economy at large. The dollar is not going to enter a bull market. Gold is going significantly higher and the Maestro is going to go down in the history books as the man who created one of the largest bubbles in world economic history." And the Mogambo says that it is axiomatic that bubbles burst. If they did not, they would not be called bubbles." Ugh.

---Mogambo Sez: Gold had a nice sell-off last Friday, and that was a Gift From Above, and all you had to do was walk over there and pick it up. You did? Good!

Richard Daughty
February 25, 2004

Copyright © 2000-2004 Agora Publishing, Inc. All rights reserved.

The Mogambo Guru Lives!

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.

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