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No water, no air, no Starbucks, no nothing!Richard Daughty The prevailing theory is that pre-Christmas "currency in circulation" increases, then supposedly declines after the gift-giving season is over. It never seems to actually do that, and it ain't happening this time, either. In fact, looking strictly at currency in circulation, since 1992 it has risen at pretty steady pace, compounding at an annual rate of 7.3%. And in other news, the Treasury sent us to another new record of debt, but the Fed is actually stepping back slightly on their creation of raw credit. Hmmm. And finally, in the Economist magazine, their statistic of "Budget Balance as %age of GDP 2004" finally went over 5%! Five percent!
Finally it finished downloading and I began to read. Witnesses later reported that it wasn't long before EKG monitoring machines started beeping, and sirens and klaxons began wailing, and flashing lights began to signal an emergency situation! Bravely waving back the would-be rescuers, I heroically continued reading, each new number slamming into me like a .50 caliber bullet, and my body jerked with the impact of every one. "During the fourth quarter, Total Credit (non-financial and financial) expanded by a record $804.8 billion ($3.22 Trillion annualized!), or 9.6%, to $34.45 Trillion. A record quarter capped off a record year of Credit creation. For 2003, Total Credit expanded by $2.75 Trillion (up 8.7%)." Fighting off waves of nausea and wiping the sweat of fear from my eyes, I heroically read on. "Over the past six years, Total Debt was up $13.12 Trillion, or 62%, while GDP increased $2.68 Trillion, or 32%. Total Debt is now 314% of GDP, up from 1997's 257% and 2000's 279%." By this time brain neurons are bursting into flame, and I am spitting up blood. "For the quarter, Total Mortgage Credit expanded at an annualized $939.2 billion, a rate of 10.2%, to $9.47 Trillion. Mortgage debt has now increased $4.2 Trillion, or 80%, since the beginning of 1998. In the process, the ratio of Total Mortgage Debt to GDP has jumped from 63% to almost 82%." At this point, doctors in attendance became horrified at my dangerous reaction, and their liability insurance lawyers are yelling at them, and finally they snatched the plug from my computer. In the sudden eerie quiet the only sound was my heart pounding pounding pounding, and those damn heart monitors beeping, beeping, beeping, and my screams reverberating off walls for blocks around, "Nooooooooooooo!" To add emphasis to this, as if any was needed, because I am drained from the effort, the latest Consumer Debt statistics came out, and we added, as a nation of consumption-addicted imbeciles, another $14.3 billion in debt in January, which was all spent on final consumption. The employment report came out, too, and once again it was pretty ugly. Jobs are not being created, and the reported 21,000 new jobs is really lame. That is the exact figure by which the number of government jobs increased. Must be some kind of coincidence! Goods-producing jobs, of course, went down again. This is very ugly. The jobs report bummer was reflected in the Consumer Confidence number for February, which was down 9.1 points. And this is ugly, too, in its own ugly way. I think they will both get progressively worse. Let me tell you why: because I, Madman Mogambo, said so. Now, I realize that there are a lot of you out there who are unconvinced that I have the answers to everything, which is rooted in your own raw racism, and you hate me and fear me and say nasty things about me behind my back, just because I come from a planet in a galaxy far, far away, with powers and abilities far beyond those of mortal men. But you can believe me when I say I know what is going to happen economically, because 1) I read a lot of economic history, and 2) me and my people have been observing this planet through powerful telescopes for a long, long time, and a lot of things that are happening on THIS planet have happened before, on many other planets, all over the place. Well, we can hardly keep track of them all, because nothing is more universal than creatures that want something for nothing, and who, as Bastiat says, are desperately trying to live at the expense of everyone else. And I'm not supposed to tell you this, so keep this under your hat, but you know that Mars Rover thing? You know, the one where these two armored vehicles are running around Mars, sampling things and looking at things? The truth is, and don't tell anyone I told you, that Mars was actually the first planet in this solar system that had a central bank and a fiat currency. Yeah! Surprised, huh? And now look at it! No water, no air, no Starbucks, no nothing! In fact, Earth was originally populated by a few rich Martians who barely escaped the devastation of Mars when the inflation reduced the value of the currency to the point where the economy was destroyed, and then the people were destroyed, and then the planet was destroyed. They barely made it here with their lives! And you can sorta prove it to yourself, too, simply by finding out what happens when you make the huge mistake of combining a central bank with a fiat currency, like those Martians. Especially when they are held together by corruption in the law and society in general. You can either 1) do a seemingly endless study of the available literature, up one blind alley after another, and down another cockamamie theory or other, or 2) make it easy on yourself and pick up a copy of Bonner and Wiggin's book "Financial Reckoning Day." Now, simply follow the Mogambo Path to Economic Wisdom and Enlightenment, as used by rich, Hollywood stars! Step A: turn to any page at random. Step B: read any paragraph in a similar random fashion. That's all there is to it! With this fabulous no-fuss, no-muss system, hereinafter referred to as "the System," you will easily see how economic idiocy, which is the kind practiced by our own Federal Reserve, worked out in the past. On this planet, anyway. And when you do, you will never vote the same way again. And when you are finished reading that one paragraph on that one page, and you find yourself being gradually consumed with a horrible feeling of dread and impending doom, and you find yourself hurriedly gathering up your loved ones and your few belongings to cower in the corner of your basement and whimpering in fear like the gutless little coward you are, well, maybe not you, but definitely like the gutless cowardly Mogambo, and in your panic all you can think about is wondering where you can get a belt-fed machinegun at this time of night. No, my darling little grasshopper, and attend to my words, it is up to Greenspan and Bernanke, and you can tell by the way I pronounce their names with undisguised disgust and loathing, and the rest of those morons at the Fed, which I also pronounce with loathing and disgust, to explain how it is that THIS time, this one damned time in all of history, an unrestrained creation of excess money and credit are going to work out well for the nation, when it has never, ever, in the whole course of human history, worked out, and in fact it always resulted in catastrophe and ruination. And usually at lower levels of disadvantage than those of today! And what is going to happen to us? I am sure you are curious about this, as I gather from the way you are furiously grabbing me by my lapels and pleading, begging me to tell you "What is going to happen to us? Tell us, Mister Mogambo! Please! Please tell us!" Well, being the Mogambo, of course, my first instinct is to tell you to get your stinking paws off me, you dirty little ape, which is a line I obviously stole from a guy named Charleton Heston in "Planet of the Apes," who was the main man of the NRA, and I strongly suggest that if you are NOT in favor of "keeping and bearing arms," then I know for a fact that you did very, very poorly in history class in school. Because if you HAD paid attention in history class in school, you would be mightily impressed with the overwhelming evidence that, and you might want to write this down because it is THE lesson to be distilled from history, God favors those who are more heavily-armed. In a nutshell, hopefully figuratively and not literally, we are going to be economically killed, and we are going to be killed because we are stupid, and we deserve to die. History is very cruel to stupid countries full of stupid people doing stupid things. As a prime example of stupidity, let me tell you one of the new "everybody knows" catch-phrases that seems to be showing up more and more. It is the phrase "services are 80% of the economy." If this is true, and I have little doubt that it probably is, then it should cause people, and by "people" I mean you and me and every sentient being on the face of the Earth, to go into apoplexy and rise up as a maddened, mindless mob and travel en masse to Washington DC and storm the Federal Reserve, and drag those preening weenies out into the street and slap them silly, and angrily poke at them with sticks, and taunt them mercilessly until they admit that they are brain-damaged losers following the wrong theory of economics, and agree to leave town and shut the hell up for the rest of their nasty little lives. And when they whine and want to know who sent them, the crowd will rise as one and shout "The Mogambo sent us!" And I hope you like that phrase "preening weenies" as much as I do, because it sounds so, oh, I dunno, poetic or something, and at the same time so marvelously descriptive. So, you get poetic AND descriptive at the same time, which is just another example of my awesome talent for productivity, and you should be on your knees worshipping me like a god for that alone. And this Mogambo-Maddened Mindless Mob will cause the corrupt simpletons who infest the Congress to immediately resign and leave town, too, never to be heard from again, as they are truly a dimwitted and cowardly bunch, without a doubt the most witless and corrupt bunch that have ever soiled the halls of Congress, and who are also a bunch of preening weenies, a phrase I again use because it delights me so much and, again, is so marvelously descriptive and richly pejorative in a pathetic attempt to be witty. I say, over and over and over again, so much so that you would think I would get tired of hearing myself say it, but I don't, oddly enough, but I clamber up to stand upon the Altar of Truth, in the Tabernacle of Justice, in the Temple of the American Way, and I raise my voice, verily as to that of thunder, to declare that you cannot HAVE an economy based on services! Nobody can. It is impossible. I say this with all the conviction that I can muster, and you can tell by the way my cute little face is all scrunched up, and I am stamping my feet on the ground in my frustration, and my hands are balled up into little fists, and I am screaming at the top of my lungs, and jumping up and down like a malfunctioning Jack-in-the-box, that I am the very embodiment of calm, solemn sincerity. To repeat repeat repeat myself, you cannot have an economy based on services, and anybody who thinks you can is a first-class idiot. And the proof is simplicity itself: If you COULD make an economy out of services, everybody would do it. But nobody does. Nobody ever has. You can only make an economy by producing things that people want and are willing to buy, but who cannot, or will not, produce for themselves, and then selling those demanded products to them, at a profit. And then using those profits to invest in MORE business, to produce MORE things, to sell to MORE guys. THAT, and that alone, is how you make an economy. The guys over at the Daily Reckoning website think so too, and I quote from a recent interview, wherein they are explaining to perplexed foreigners what is up with us Americans. "Over 5 decades, my countrymen switched from making things to buying things, from saving money to spending it, and from lending money to the rest of the world to borrowing from it. The economy gradually changed from production to consumption, from manufacturing to retailing, from GM to Wal-Mart. And Wall Street mutated, too...from investing in industries, to investing in speculative finance." To which I say, "Bravo! Bravo! Author! Author!" The Chinese are discovering that the sad result of rapidly expanding the money supply, a lot of which was used to soak up all those American dollars that are flooding the world, is that it causes price inflation. And the poor people, and there are lots and lots of Chinese people who are poor and almost-poor, and who get really irritated when they have to pay higher prices for things. In this particular case, it is the price of rice that is causing distress. The price of rice, which is referred to as a "staple," is up around 40% from this time last year. While all foodstuffs are rising mightily, it is rice that is garnering the lion's share of the publicity, as it is the predominant staple I guess. And all other prices are rising, too, in case you were wondering, which only goes to show you that inflation seeps into the prices of everything. To show you that government idiocy is pandemic in the world, the Chinese response is to "increase supply" by increasing farmer subsidies by $1.2 billion to encourage them to grow more rice. "Supply-side China" is a phrase that ought to send chills up your spine. Apparently they are unaware that the $1.2 billion is money, too, and they are just making the problem worse by giving them more money, and they will necessarily reap not only a little more rice, but also the mal-investment of artificially jiggering the economy. Which will, if you are up to date on your mal-investment jiggering theory (MJT), create more mal-investments. Here in America, home of The Brain-Dead Economists, we are treated daily to the notion that inflation is "no problem," which you hear at the exact same time as the newscaster wailing and keening about how the price of gasoline is, to use their word, "soaring," and how healthcare is likewise "soaring, and how all kinds of things like the CRB are "soaring," and I notice that in my personal life things are "soaring" whenever I pay bills, which are all rising, rising, rising, along with the anger of the Mogambo, which is also rising, rising, rising. Or, if you prefer, soaring, soaring, soaring. Peter Spina at goldseek.com has also been looking at these kinds of things, and wondering about those things, too, like, for instance, wondering what in the hell I am doing rooting around in the dumpster behind his office at this time of the night, but especially about the strange delay in producing the latest government inflation figures. "We are now about 2 weeks over the release date for the PPI index. It is amazing to see that we have yet to get these numbers produced by the government and makes me suspicious that the major inflationary pressures are showing up in a huge way and the government knows it - why will they not (truthfully) release it?" Well, my explanation, of course, is that the government is a bunch of lying corrupt weenies who are all out to get me, and, by logical extension, you, too. I can almost see Mr. Spina just shaking his head at me and dismissing my argument and motioning to security guards to quietly remove me from the building when he says "You can leave it up to suspicions and interesting conspiracy theories, but just take a look at the CRB index to show you what is occurring!" And a lot of other things are soaring in price that are not even IN the CRB index! And if one takes his advice and looks at the chart of the CRB, which he handily provided, one can't help but be bowled over by the meteoric rise in prices of commodities, and the way the 200-day moving average line was not only violated on the upside, but left in the dust. Which, as the chartists believe, indicates an extended period of similarly rising prices, aka a bull market. And one's heart skips a beat or two, or three or four, at this bad news, economy-wise, because rising prices always means a Bad Day at Black Rock. Alan Greenspan, the horrible head of the Federal Reserve, keeps on saying what he must realize is really, really stupid things, and I assume that it is only a matter of time before people wake up, like me, and say, again like me, "Huh? Is it morning already?" One new stupidity that came out of his mouth is when he said that it will be five or ten years before anyone can conclude the Fed was correct not to prick the stock market bubble of the 90's. Wrong-o! If you are the impatient type, and you don't want to wait ten years for the verdict, I can tell you right now: he was wrong to have allowed the bubble to start in the first place, he was wrong, very, wrong, not to have pricked the bubble at the first hint that there WAS a bubble, and in fact he has been consistently wrong, very, very wrong, about everything his whole life, as far as I can tell, which explains why it was that his disastrous attempts to make a living in the world of private economic advice-giving ended up as a total, miserable failure, with zero clients, zero income, and zero reputation. Which is why he ended up as just another lackluster government employee who spends his life inflicting his abysmal incompetence as a burden on everybody else. Let's sum up, shall we? The stock market bubble, financed by this dangerously incompetent clueless twit, resulted in the loss of trillions of dollars of private wealth. It created disastrous, bankrupting mal-investments from coast to coast. It fostered cancerous growth of gigantic, suffocating governments at every level, so that the overwhelming majority of states now have crippling budget problems and the private economy is saddled with huge bills to support this governmental megalith. He destroyed the income of people who save money by pounding down interest rates to ameliorate the disastrous popping of the bubble that he created. He has now financed Bubble II, and added a bizarre, bankrupting housing bubble into the mix. He has presided over the ruination of the dollar in trying to "fix" his own mistakes. Price inflation is rising ominously. And this is only the start of the problems that we face, and will face, as the coming decades hopefully work off the stench and misery of his criminally-inept ministrations. And this stunning butt-covering idea, that only in retrospect by distant generations can we know the worth of his actions, is preposterous on its face. The reason is, and you are welcome to do the research on your own if you don't believe me, that nowhere in all of economic history has there ever been a successful example of unrestrained money and credit expansion that did NOT end up as a world-shattering failure, attended by heart-breaking misery and suffering for the people who had the profound misfortune to have someone as horrible as Alan Greenspan deliberately destroying them. And the fact that this asinine idea was delivered to The Economic Club of New York, whom I assume sat there mindlessly applauding and picking their noses instead of laughing at him-hahaha! --and throwing pieces of leftover food at him until he died of shame on the spot, only proves two things, namely 1) that American economists are every bit as ignorant and clueless as he is, and as such deserve no respect whatsoever, and 2) economists from New York are the worst of the lot, as evidenced by Greenspan's daring to say these stupid things to a whole roomful of them, who should be the very ones who could recognize the facile glibness, without any fear of contradiction! Marc Faber, writing on Ameinfo.com, write an interesting essay entitled "Correction Or Resumption Of A Downtrend?" Well, knowing Marc Faber as I do, which is by reputation only, because when I call him on the phone to try and arrange a meeting so that we can get acquainted and maybe I can, you know, borrow a few bucks to get me through the weekend, he hangs up the phone. How rude! But I am pretty sure I know which way he is leaning, and sure enough, right off the bat he says "The equity markets may be forming a more significant top between now and April, which may not easily be exceeded for quite some time." Well, since this is March, the entire time before now and April is, checking my calendar, "right freaking now." And although he does not say what he means by "for quite some time," I have done some research in this area, and my preliminary, back-of-the-envelope calculations indicate that it means, with a 99.9% probability, "until a date long after you are dead and buried and completely forgotten and your unkempt grave has been paved over to make way for a WalMart parking lot." He goes on to say, "With respect to the strength in the bond market, I suspect that declining interest rates are an indication that the consumer has very little spending power left. Employment gains are minimal and real incomes are declining as prices are rising far more than what the government 's statistician are publishing." So let me see if I have this straight: real, inflation-adjusted incomes are falling, which means I have less purchasing power to start with? Next, prices are rising, meaning that the few measly drags of purchasing power I have left will not buy as much? And government statisticians are lying to me? Fabulous. Absolutely fabulous. Putting this and other evidence together, he goes on to write, "I am sure that the cost of living is presently rising at a far higher rate than incomes." Not just "higher" but "far higher." To show you the depth of the depravity of government, he quotes Bill King, the author of the King Report, who "recently also took the CPI figures published by the Bureau of Labor Statistics apart and concluded that they grossly understate the rise in prices in the US. Among others, he cites a Henry J. Kaiser Family Foundation study, which shows that health-care costs premiums have surged 42% over the last three years for employees and families. Hewitt Associates is projecting a further 15% hike for 2004. But the government's Bureau of Labor Statistics shows that health care costs only increased by 3.6% in 2003." So let's see: health care premiums have surged by 43% in three years, and are projected to rise another 15% this year, and yet the government figures that healthcare costs have only increased 3.6% last year? Hahahaha! And you want to know why I don't trust the government? Hahahaha! Mr. Faber goes on to say, "We continue, however, to recommend that our readers increase their exposure to oil companies with significant reserves (Chinese oil companies don't have large reserves) and to oil servicing companies, as the fundamentals of the oil industry are compelling." And when he says "we recommend," please note that the Mogambo, your source for old, second-hand news, snotty investment opinion, and paralyzing paranoid hysteria, has been recommending that same thing for a long, long time, too. Hans F. Sennholz, in an article entitled "Inflation or Deflation?" looks at the current sorry state of the economy, and also takes a look at the Depression of the '30s to see if there are any parallels. He writes, "Most American economists misjudge the very causes of the Great Depression, which may mislead them in their analysis of the present situation. Many fault the Federal Reserve for not expanding its credits in the fall of 1931 and the winter of 1932. Others lay the blame for the Depression on the credit bubble of the 1920s and the 1929 crash which finally burst it." Professor Sennholz says it was none of these things particularly, but rather that the Great Depression " ...was the tragic handiwork of the Hoover-Roosevelt New Deals. In June 1930 the Republican Congress passed the Smoot-Hawley Tariff Act which practically closed U.S. borders to foreign goods and led to foreign borders being closed to American goods. Rapidly growing trade restrictions, including tariffs, quotas, foreign trade controls, and other devices, soon generated a world-wide depression. Moreover, in the dark hours of 1932, the Hoover administration struck another blow - it doubled the income tax. The Revenue Act ordered the sharpest increase in American history." Then Congress and the states went on, month after month, year after year, to pass more and higher taxes and other economy-killing protectionist and inflationary devices. "The American economy just would not rise from the depths of depression into which it was cast by the Hoover and Roosevelt Deals." Then we come to Ben Bernanke, who thinks he is smarter than everybody. This arrogance comes from, to be as insulting as I can manage, the fact that he was the top dog in the economics department of, as I recall, Princeton, and who was instrumental in picking out his coterie of lackeys, hangers-on and yes-men. Continuing in my highly-insulting mode, he was molded by years of him being able to run his fat mouth without anybody having the guts to tell him that he was full of crap, perhaps because he took the wise precaution of assembling his department out of guys who were 1) so stupid that they could not figure out that he was full of crap, or 2) so gutless that they wouldn't tell him, or 3) some of both, or 4) something else. And, after a while of this, schmoozing his way around the system, he actually thinks he is NOT full of crap. Although, I say, and a lot louder than necessary, that he is! Full of crap, that is. As that he proves it every time he opens his mouth. And I cast these rude aspersions on him because, and put down your drink because you are going to bust out laughing when I tell you this, and you will probably be rolling on the floor in uncontrollable laughter and pretty soon you are going to be gasping for air with tears running down your cheeks and you will probably end up spilling your drink all over the floor and then you are going to have to clean it up because your wife is going to say "Hey! Laughing Boy! When you are finished, grab a mop, because I'm not cleaning that up!" But this guy, this Bernanke person, actually thinks that the Depression of 1930's was the result of having a gold standard! Hahaha! This guy is too much! The Depression was caused by the gold standard! Hahaha! But first, let's let Mr. Bernanke set the scene in Bernanke-world. "Some argued, for example, that overinvestment and overbuilding had taken place during the ebullient 1920s, leading to a crash when the returns on those investments proved to be less than expected." You can tell by the way he says this that he does not believe that overinvestment and overbuilding are even possible. And when you look at the data, sure enough, there was a lot of rampant speculation and borrowing all through the '20's, all facilitated by the Federal Reserve acting like the morons that they are and providing the money with which to engage in that kind of activity. But the Fed, even today, almost eighty years later, does not believe that there is such a thing as overbuilding or overinvestment, although they DO recognize that there is excess productive capacity everywhere, which is, according to them, NOT overbuilding or overinvestment, but is something else entirely, although they won't say what it is. And where did all this productive over-capacity come from? Same as today! From the Fed and the miracle of fiat currencies in a fractional banking system run amok! Then Bernanke goes on to announce, in that "I'm so smart and you're so stupid" way people have when they belabor the obvious, "Another once-popular theory was that a chronic problem of 'under-consumption'--the inability of households to purchase enough goods and services to utilize the economy's productive capacity--had precipitated the slump." So we are right back to the same ridiculous Fed-speak: the economy is suffering because people aren't buying enough stuff! They look at you right in the eye, and say "Yes, that's the man, Officer! And for your information, Mogambo or whatever your name is, the economy is NOT a circle of money going round and round, see? The whole economy has a starting point, and it is people buying things!" Photographic evidence later proved that I was straining to break free of my restraints and wring his little neck. And why didn't people buy stuff? Hey! Easy one! I figure that this is my big chance to show off how smart I am, so without waiting to be called upon, I happily jump to my feet and announce "For the same reason that ALL people don't buy things they want: They didn't have the money!" Let's let that sink into our brains. They didn't have the money. Hmmmm. So Americans before, and during, the Great Depression did not buy enough SUV's and things because they didn't, and correct me if I am wrong here because I really want to understand this, have the money? In other words, if you don't have any money, you don't buy things? Well, it certainly seems possible to me! I mean, I wish I had a nickel for every time my mother for half my life, or my wife for more than the other half, won't let me buy some cookies or comic books or another flame thrower or something that I really, really want, simply because we "didn't have the money." And then Bernanke also laments that they didn't buy things on credit, either. Which the Fed is urging people to do right now, which translates into those old-timers not going into debt when they didn't have any money, but us new-timers ARE going into debt when we don't have any money? And the lesson is, and notice how I am all scrunched up over my little desk, pencil poised, ready to write down the pearl of wisdom that is about to be dropped into my lap, that if they had borrowed the money, see, just like they are nowadays, then the Great Depression would have been, and notice by the way my voice quivers in anxious anticipation, avoided completely? I swallow-gulp! -and can only manage to say "Wow!" You mean that a big-shot at the Federal Reserve is saying that it IS possible to achieve prosperity, and get out of an impending depression, by going into ever-more debt? My eyes bug out in disbelief! I am running around the room, galvanized at this startling revelation! You can have lotsa neat stuff, in a real nice house, with a big 'ol wad of equity in the stock market, and a bulging 401(k), and jet-skis, and a second home, and fancy cars, and even eat at fine restaurants and actually have enough money to leave a tip, which they never deserve because I don't like their attitude, like when he asked "May I take your order, Sir?" with that almost-imperceptible little sneer there at the end, like he is such hot stuff, and I am just a piece of garbage stinking up his little restaurant or something, and I am pretty sure that he and his nasty little friends back in the kitchen did something unsanitary to my food before they brought it out to me, but he knows I can't prove anything. But anyway, I can have all this wonderful stuff, and more, if I keep borrowing until I die? You never have to pay money back? Well, it wasn't until I got back from visiting the graves of my parents that I knew something was amiss. I drove there and dug their damn bodies up and screamed at them "You evil monsters! I hate you! Why didn't you tell me about this debt thing? Why? How come I have to work all the damn time, every day, getting up early and traveling to a distant workplace so I can spend my time working like a slave, my fingers reduced to raw cartilage, and having to be around people, horrible, horrible people, almost half my waking life? And have I told you about my back? It's killing me! And why? Because you worthless excuses for parents, parental crapola with a capital "crap" if you want to know how I really feel about it, did not bother to tell me, your own son, that I did not have to work! You never told me that I could have had a wonderful and happy and fulfilling life, living on an expanding credit line! Let me tell you that I will never, and I mean NEVER forgive either one of you! Thanks for nothing, creeps!" Sadly, upon my return I discovered that this is not what they meant, and now I feel terrible. But it is what they said! But it is not, they insist, what they meant. And I said "But that's what you said!" And then they said "It's not what we meant, and you know it!" And I said "But it's what you said!" And then they said "You want us to call up Janet Reno and have HER come over there, armed, angry and blood-thirsty as ever, and explain it to you, probably with a tank smashing through your front door? Is that what you want, punk? Huh? Is it?" And then I said "No." And then they said "Okay, then." And then I sat down and shut up, but was real grumpy the whole rest of the day to show my petulant defiance. Returning to our topic, which is Ben Bernanke and how he is a mutant species of evil humanoid-like creatures from a distant planet who are here to conquer us and make us their slaves, and how I have real photographic proof, although I admit that it looks like a guy passed out on the lawn holding a bottle of beer and wearing a Jack-o'-lantern on his head, but it's him all right, you can take my word on that. But he doesn't go on to tell you WHY they were not buying SUV's in the late 20's and all the '30's. But I, the MoGu, will give you three, count' em three, very good reasons why people did not go into crushing debt to buy SUV's in the late 20's and all the 1930's: They didn't buy them because 1) they didn't have the money, and 2) SUV's weren't invented yet, but even if they HAD been invented, they STILL wouldn't have had the money to buy them, and 3), they were smarter than we were, and everybody knew that you can't have an economy that was predicated on everybody and everything going farther and farther into debt. The whole idea seemed ludicrous. And it is. Then Bernanke drops what he thinks is some big bombshell or something. "However, in 1963, Milton Friedman and Anna J. Schwartz transformed the debate about the Great Depression. That year saw the publication of their now-classic book, A Monetary History of the United States, 1867-1960. Friedman and Schwartz argued that 'the [economic] contraction is in fact a tragic testimonial to the importance of monetary forces' (Friedman and Schwartz, 1963, p. 300)." This ignores the fact that Friedman himself has subsequently admitted the errors in his strictly monetarist theory. But this does not deter Bernanke one iota. Maybe he ain't heard the news, or something. So if you personally know Milton Friedman, tell him to call Ben at the Fed, as he is seriously behind in his reading, and would probably appreciate being brought up to date. Obviously nobody at his old alma mater is going to tell him. He does go on to admit that taxes were raised, but like all good collectivist yahoos, the doesn't think that high taxes have any deleterious effect of economies, so he doesn't linger there. He goes on to say that the reason things went downhill is that the Fed raised interest rates. He asks "Why then did the Federal Reserve raise interest rates in 1928? The principal reason was the Fed's ongoing concern about speculation on Wall Street. Fed policymakers drew a sharp distinction between 'productive' (that is, good) and 'speculative' (bad) uses of credit, and they were concerned that bank lending to brokers and investors was fueling a speculative wave in the stock market. When the Fed's attempts to persuade banks not to lend for speculative purposes proved ineffective, Fed officials decided to dissuade lending directly by raising the policy interest rate." Ergo, the current Greenspan-Fed rationale for not trying to prick an asset bubble, but merely dealing with the aftermath. Doug Noland, who is as incredulous as I am about this whole Greenspan credit thing, has also read this Bernanke speech, and, like me, was astonished to read what he had the nerve to say, and Doug actually commented on this particular section, also. His take is that the Fed was absolutely correct in trying to stop the bubble of silly speculation. He says "Their mistake was not that they moved to rein in destabilizing and unsustainable excess, but only that they waited too long as financial systems became only more fragile. As we are witnessing, such problems don't magically abate. Rather, they mushroom to more dangerous extremes and become increasingly unwieldy." Now we start getting into the really weird stuff. He admits "The gold standard appeared to be highly successful from about 1870 to the beginning of World War I in 1914. During the so-called 'classical' gold standard period, international trade and capital flows expanded markedly, and central banks experienced relatively few problems ensuring that their currencies retained their legal value." So it worked well! So something happened, he says, between 1914 and the Depression. He does not admit, however, that the newly-formed Federal Reserve system, in operation for fifteen short years, had anything to do with subsequent calamitous economic events. The simultaneous appearance of these two things were, I suppose, merely a, you know, huge coincidence or something. He extrapolates to announce "Perhaps the most fascinating discovery arising from researchers' broader international focus is that the extent to which a country adhered to the gold standard and the severity of its depression were closely linked. In particular, the longer that a country remained committed to gold, the deeper its depression and the later its recovery." I agree that this is probably true. Economic distress is the downside of the requirements that gold places on an economy; that dictate that you NOT get into an economic mess to start with, because there is no way out. And a gold standard prevents you from doing the excessive monetary expansion thing to get inflation cooking, which is supposed to bail out the debtors. In that regard, thank God for America being on the gold standard, or the Great Depression would have been much worse than it was! But, and I guess that this is the lesson to be learned, according to Bernanke, that countries wherein you could just fire up the printing presses went on to achieve lasting prosperity, like the Weimar Republic in Germany or something. Hahahaha! Then he asks the Big Question, "What caused the Depression?" Well, he figures that it is deflation, which is confusing cause and effect. "Deflation, like inflation, tends to be closely linked to changes in the national money supply While the fact that money, prices, and output all declined rapidly in the early years of the Depression is undeniable, the interpretation of that fact has been the subject of much controversy." Not to me, it hasn't. Now he gets back to the discredited monetarist approach. "Friedman and Schwartz emphasized at least four major errors by U.S. monetary policymakers. The Fed's first grave mistake, in their view, was the tightening of monetary policy that began in the spring of 1928 and continued until the stock market crash of October 1929 (see Hamilton, 1987, or Bernanke, 2002a, for further discussion)." Note how he uses himself as a reference! "The gist of the Friedman and Schwartz argument is that, for a variety of reasons, monetary policy was unnecessarily tight, both before the Depression began and during its most dramatic downward phase. Friedman and Schwartz concluded therefore that they had found the smoking gun, evidence that much of the severity of the Great Depression could be attributed to monetary forces." This flies in the face of an article by Frank Shostak entitled, "Does a Falling Money Stock Cause Economic Depression?" who writes, "However, a close examination of the historical data shows that contrary to Friedman, the Fed was extremely loose and pumped reserves into the system in its attempt to revive the economy (on this see Murray Rothbard's 'America's Great Depression'). The extent of monetary injections is depicted by changes in the Fed's holdings of U.S. government securities. Thus on January 1930 these holdings stood at $485 million. By December 1933 they had jumped to $2,432 million-an increase of 401% (see chart). Moreover, the average yearly rate of monetary injections by the Fed during this period stood at 98%." So the Fed was NOT stingy in pumping up the money stock, as alleged by Bernanke. Mr. Shostak goes on to say, as I go on to say, as all thinking people go on to say, that earlier Fed excesses were, in fact, responsible for the Great Depression. "In addition to this, at some stages monetary injections were massive. For instance, the yearly rate of growth of government securities holdings by the Fed jumped from 19.7% in April 1924 to 608% by November 1924." In half a year! This bit of evidence garners support for the brilliant Austrian school of economics insight that, as Mr. Shostak puts it, "Contrary to popular thinking, depressions are not caused by tight monetary policies, but are rather the result of previous loose monetary policies." In this case, the damnable Fed had spent the entire 20's goosing up money and credit at a breathtaking pace that was unheralded in American history. A fact ignored by Mr. Bernanke, who wants us to focus on the RESPONSE to the crash and depression, NOT what caused it. And why is he so myopic about that? Because that is what he is doing right now! He goosing up money and credit, just like in the 20's! This very minute! Bernanke, however, goes on to give us more evidence of his profound ignorance "The finding that leaving the gold standard was the key to recovery from the Great Depression was certainly confirmed by the U.S. experience. One of the first actions of President Roosevelt was to eliminate the constraint on U.S. monetary policy created by the gold standard, first by allowing the dollar to float and then by resetting its value at a significantly lower level." In other words, he says devaluing the currency, hopefully not to worthlessness, but just this side of worthlessness, is a "good" thing! And notice by the way my eyeballs are bugging out in my comical characterization of "stunned disbelief." So Robert Rubin and all the other Treasury Secretaries up to now were wrong when they professed a desire for a strong dollar, that was supposed to be "in the best interests of America?" Get Rubin on the phone! I'll bet he wants to hear this! This might have been true in 1930, but we did not have a current account balance that is today, even as we speak, over $541 billion a year! 5% of GDP! A devalued currency is NEVER a good thing to a nation that imports things. It is a BAD thing to have a devalued currency if you are a nation that imports things. We import a lot of things. By this time Japan, which has been following this ridiculous Bernanke policy prescription for fourteen years in a row, should be roaring. It is not. He does not explain why. And, in a similar vein, the United States economy should be roaring along, too, given the record-setting levels of monetary and fiscal stimulus that have been pounded into the economy, especially for the last three years. Three years! Likewise, the US economy is not roaring at all, but is sinking farther and farther into the stinking swamp that is shown on your maps as the area with the skull-and-crossbones, labeled "Kiss your debt-besotted butts goodbye." An article in the Wall Street Journal reports that big mutual funds are advising people to get some money into managed commodity futures accounts. This is because there is a massive inflation that is coming soon, guaranteed to consume us, thanks to the Fed's unholy expansion of money and credit, and commodities is where the big money is going to be made in the future. You have been warned, and given an opportunity to make big money for a long, long time, if ye would but listen and heed. Last week I put out my pathetic diatribe into the way the government measures inflation. At the exact same time, Doug French, of the Nevada Policy Research Institute, had an article posted on goldseek.com, originally on LewRockwell.com, about the same thing. Always ready to beat a dead horse, I am going to quote what they wrote, as they are more inclusive and much better written than the pathetic junk I put out. He writes of "The Three Stooges of Inflation" whom he names as Poole, Bernanke and Alan Greenspan. "So, why hasn't CPI - what the BLS calls 'the most widely used measure of inflation' - risen as fast as the mountain of money the Fed has created? The government doesn't want it to. As the BLS website explains; 'The index affects the income of almost 80 million people as a result of statutory action: 47.8 million Social Security beneficiaries, about 4.1 million military and Federal Civil Service retirees and survivors, and about 22.4 million food stamp recipients.'" I personally did not realize that there were four biases identified by Boskin, so I am happy to pass along that particular bit of economic knowledge. They explain that "In a 1996 report prepared by a panel of experts chaired by Michael Boskin, four biases were identified that supposedly served to overstate inflation by 1.1 percentage points per year. Substitution bias doesn't 'capture the savings that households enjoy when they change their spending in response to relative price changes of goods and services.' Outlet bias doesn't reflect the savings consumers receive when shopping at discount stores. New Quality bias occurred, according to Boskin, because the CPI didn't take into account quality increases, and New Product bias occurs because new products don't appear in the index until they are commonplace items." They got a laugh out of me when they wrote, "Boskin went as far as telling the Wall Street Journal that a person who substitutes chicken for high-priced beef is lowering the cost of feeding the family. 'This is pure sophistry,' Lew Rockwell points out, 'along the lines of claiming umbrellas not only keep you dry but also reduce the incidence of rain. Boskin has confused the response to the problem (using a cheaper substitute) with the problem itself (everything getting more expensive).'" And I suggest that you commit that Lew Rockwell bon mot to memory, because it is so witty and profound, and when you use it to impress the little cutie at the supermarket checkout counter with your smooth erudition and wit, you might score a few points! Comstock Partners wrote a nice article entitled "Is That All There Is?" They write, "Remember, it was just 4 years ago that the greatest financial mania in all of history burst. The bubble coincided with the longest economic expansion and the greatest capital spending boom of all time. It is hard for us to believe that this would be followed by the mildest recession in history and a bear market that never even reached valuation levels that would be considered the 'norm,' much less the undervaluation levels reached in prior bear markets." If this was on TV, the camera would pan over to Rod Serling standing in the corner, who is saying "Yes. It is hard to believe. It is was strange. Very strange. But things would change from strange to deadly, as we leave Wall Street and come here, to the Twilight Zone." Bill Gross at PIMCO, had a nifty article entitled "Takin' Care of Business (The Last Vigilante)." He explains the current Federal Reserve policy, in words that even the dimwitted Mogambo can understand, "You see, reflationary policies produce asset bubbles, which can continue to (1) inflate or - (2) POP!" I'll tell you the truth, I don't know why there aren't more economists: This stuff is so simple! In our "Great Minds Thinking Alike" segment of today's show, we present Frank Shostak, who has a new article out of the Mises.com website, "Who Made The Fannie And Freddie Threat?" Who? Hahaha! That Frank! What a card! Hahaha! In explaining who made Fannie and Freddie into threats that will destroy the United States and probably the world and most of the solar system, he has penned, in one line, the whole essence of how the Fed set us up to be killed, "Once loose monetary policy is activated it immediately sets in motion the process of a false economic boom, or financial bubble, which sooner or later must be liquidated because it is unsustainable." Kurt Richebächer, in an essay entitled "Pulling Out the Rug," takes a look at, among other things, other spooky things, other spooooOOOOooooky things, the trade deficit. "There is widespread hope that the falling dollar will go a long way to lower the U.S. trade deficit. It takes a lot of wishful thinking to believe that. Its persistent growth has various reasons. One of them is that the gap between exports and imports has simply become too big to be reversible. Last year, exports amounted to $1,018.6 billion and imports to $1,507.9 billion. Just to prevent a further rise of the deficit, exports would have to rise 50% faster than imports." Yikes! He's right! I never thought about it that way, but now that I am thinking of it that way, I discover that I liked it better when I didn't think about it that way. One more damn thing to be scared about. Ugh. ---Mogambo Sez: Although the taste of the unfolding bust will be bitter at the end of the long, large, and delicious boom, we baby-boomers still have our memories. Those highly literate dudes at the Daily Reckoning website have penned a phrase that, perhaps, sums up our good fortune. "The baby boomers were delivered into Eden itself. They had barely to stand on two legs and the low-hanging fruit fell into their mouths." How poetic. And how lucky for us boomers! We boomers can spend the rest of our lives in pleasant reverie, recalling our charmed lives. The young of today, however, will end their pathetic lives recalling days filled with increasing deprivation and unrelenting misery, at the risk of seeming too gloomy. March 10, 2004 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 "Financial Reckoning Day: Surviving the Soft Depression of the 21st Century" by Bill Bonner and Addison Wiggin. You can buy it online from Amazon. ____________ |
Teams
of highly-trained specialists attached wires and cardiac resuscitation
electrodes to my chest, and my wife tenderly adjusted my crash
helmet. With a final check of seat belts and miscellaneous restraining
devices, I was at last ready to peruse Doug Noland's weekly column
about the growth of debt. With trembling hand I turned on the
computer, and the rest of the crowd wisely took refuge behind
concrete barriers so as to shield themselves from the possible
blast of my head exploding. Logging onto the web, I selected
the Prudent Bear website, and when connected I could hear the
collective intake of breath from the cowering crowds behind me,
as I tentatively reached out with the mouse and clicked Doug
Noland's weekly Credit Bubble essay. Click! A few anxious seconds
passed as the essay downloaded, and as I recall, in that brief
moment my life flashed before my eyes in a kaleidoscope of swirling
colors, which was kind of a good thing, as I suddenly remembered
where I left my BB gun when I was twelve.
