You'll know when you get enough
Richard Daughty
...the angriest guy in economics
The
Mogambo Guru
April 7, 2004
For the first time in a long time, two things happened at the
same time. First, I wasn't lashing out at a cruel world when
I woke up, and the second thing is that Foreign Custody Holdings
at the Fed decreased last week. In fact, it went down by a whopping
$16.8 billion. I will pause a minute while you rub your eyes
in disbelief at both of these revelations, as I think I speak
for us all when I say that we are all dumbfounded that the Mogambo
even HAS any mood other than "bad" or that foreign
central banks would not want to continue to fund the appetites
of a consumption-addled bunch of financial and economic dimwits
like us Americans. What in the hell could they have been thinking?
The banks, since we are speaking of a real dimwitted bunch of
losers, soaked up $18.2 billion of government debt in the same
week, taking their holdings of that toxic asset to a new, all-time
record, which indicates that their supply of smarts has hit a
new all-time low, in a kind of symmetrical yin-yang banking thing.
But then again, I am sure that you remember that the whole history
of macroeconomic crises is always the result of banks acting
like greedy morons, and that this sordid history lesson goes
all the way back to caveman days, when the First National Bank
of Og financed the Great Depression of the Thirteenth Year of
the Rule of King Ga the Merciless, and I am sure that I do not
have to recount for you the terrible aftermath, wherein all the
mastodons, well, why go into that unpleasantness all over again?
A case in point is provided by Zbigniew Piekarski at the Warsaw
Business Journal writes about "How
Banks Balance Their Books." He says "Lenders continue
to develop programs with ever easier terms, including low down-payment
interest-only mortgages and 'self-certification,' in which you
do not have to provide proof of your ability to service the debt."
So it looks like the banks will allow you to say "Hey! Trust
me! I'm good for it!" although I have found that in real
life anybody who said that to me could NOT be trusted and they
were likewise NOT good for the money. "The last time such
easy loans were prevalent was in the late 1920s, leading up to
the Great Depression when, during the fourth year, 1933, roughly
half of all mortgage debt was in default and house prices collapsed
by roughly 80 percent."
And, for reasons that will probably become clear very soon, and
as soon as it does please let me know what it means because you
know how-thickheaded I am, and I will need to have it explained
me over and over about a dozen times or so, but the banks have
suddenly increased their reserves! Of course, I see this as proof,
from the perspective of the paranoid whacko, that they, too,
are seeing the light at the end of the tunnel, and it is the
headlight of speeding train that is barreling down upon us at
full speed, and we poor schnooks are tied to the tracks, and
pretty soon now that train is going to get here, and there aren't
any Canadian Mounties within miles, and it is only the Mogambo
who is watching this happening, and he screaming and yelling,
and making what are supposed to be merely threatening phone calls,
but which always end up as long strings of obscenities being
screamed into the phone at the top of my lungs, and then they
always just rudely hang up and report the Mogambo to the authorities,
and then those dour sourpusses come knocking on my door, flashing
their little badges and waving their court orders, and then I
have to deal with THEM, too, as if I didn't have enough hassle
in my life already! I mean, where is the justice?
And since we are speaking of dimwitted losers, it certainly behooves
us to include the Treasury Department, which kept on chugging
down the road to bankruptcy and ruination, and who is actually
rumored to be one of the engineers on the train that is about
to run us over, spent their week issuing another big clot of
debt, to yet-- need I say it? --another new record of $1.132
trillion! Another, as I said, new record! This is to fund the
raft of idiocies that the government loves rolling around in.
But remember that doing that is what government does, and when
the government gets to be this big, here at the end of the massive
boom, the sheer size, scope and cost of government is the biggest
since, and I throw this out as my candidate for the worst year
in the history of America, 1913. Why 1913? The Fed was established
in 1913, Woodrow Wilson was elected in 1913, and the Sixteenth
Amendment was passed in 1913, and the seventeenth, too, and it
has a 13 in it, which has that sinister feel to it, and if you
don't think so, then go rent "Friday the 13th" and
see how much fun THAT was!
But we were speaking of debt, which we were talking about before
I digressed into another of my ranting hissy-fits-- as I am doing
again right! --which should PROVE that I am very disabled in
a weird, mental way, but that is STILL not enough to get a lousy
handicapped-parking sticker for my car. But anyway, the morons
of the world, and you can tell who they are by noting who is
buying long-term debt to garner yields that are actually less
than inflation, knowing that bond prices will fall one day, handing
them a big ol' loss that will easily swamp the paltry yields
that they are getting on the bonds, which were, if you have been
paying attention, already returning a real, after-inflation yield
of less than zero! And sure enough, the morons got a whack to
the head as bond prices sank Friday. The "worst showing
in eight years," which I put in quotes although I am quoting
from memory, according to Bloomberg, which I am also citing from
memory. In the long run, this group of bond-buying bozos will
get many, many more whacks to the head before this is all over.
It's called "Getting what they richly deserve."
Many commentators have noticed the strange coincidence between
the price of silver surging to over $8.20 an ounce and the massive
letter-writing campaign to the regulatory powers-that-be, mostly
Eliot Spitzer, orchestrated by Theodore Butler, who all demanded
to know why it is that eight individuals, none of whom is the
Mogambo I am sorry to say, have sold short more silver on the
COMEX than exists in the whole world, and by a long, long shot,
as measured in "years of world production." It looked
like a manipulation, it smelled like a manipulation, and now
that enough people have made a stink about it, suddenly the price
of silver catapulted out of its doldrums and zoomed to over $8
per ounce. How coincidental, eh? - A nifty essay entitled "War
Socialism at Work" by Sean Corrigan, who is one of those
big-brained guys who demonstrates his smarts by 1) writing incisive
essays that the world's intellectuals delight in discussing among
themselves, and 2) ducking the phone calls from the Mogambo.
He writes "50 years ago, there were two manufacturing production
workers for every government drone in the Land of the Free.....
since then the trend has been to an inexorable deterioration.
If we had only stuck to the 1954-1999 trend-- bad as it was--
there would now be 'only' 178 Tax Eaters per 100 manufacturing
Tax Payers; instead we stand slightly in excess of 215:100, which
is more than one-fifth worse than we might have expected in just
over four short years."
Since I am far too stupid to have an original thought, I fill
up my days by lying to court-ordered mental-health professionals
("No, I never hear voices in my head!") and following
the lead of people like Mr. Corrigan and scooping up what he
says. So, let me 1) say that no, I never hear voices in my head
and 2) this is only DIRECT employment, and does not count the
millions of people who work for private businesses that are paid
by government, as some ostensibly money-saving out-sourcing thing.
In short, and I find that I never tire of saying it because it
is so true, and on my tombstone I want engraved "He never
seemed to tire of beating a dead horse for some reason,"
the government, local, state and federal, literally IS the US
economy. And history is very cruel to those idiot economies that
adopt a philosophy of such a thing.
And if these legions of government employees were the best and
brightest, then perhaps I would not be as gloomy. But they are
not. A case in point is the home buying experience of the new
city manager of Ventura, California. The guy could not afford
to buy a home because prices were so high. So the city pitched
in to provide a $325,000 down payment for a house which he wanted,
for which was paid $675,000. Cole predicted that "this house
is going to be a good investment for the city. I think it's going
to outperform the city's investment portfolio." The article
did not list his salary, but you can bet it is astronomical,
as all government people are paid far more than they are worth,
far more than the average non-government worker. And for people
in the rarified air of Overpaid Executive Bozos in which Mr.
Cole operates, namely one in which your buddies and you get to
decide how high to raise taxes to pay ourselves whatever we can
get away with in salary and the people's only option is to vote
him out next election cycle, his salary and benefits package
doubtlessly exceeds his worth by dozens of times. But this huge
paycheck, so huge that he probably has to enlist the aid of several
burly city employees to help him carry the thing to his car on
payday, was STILL not enough to buy a house!
This example demonstrates the complete vacuity of people employed
by government. This overpaid blowhard, and I hope he does not
take this personally but I have a visceral loathing of how the
attitude of government employees has changed over the years and
so I have nothing but intense, raw disgust for all government
employees everywhere including him, could not afford a house
because prices were so damned high, and yet he figures that houses
will continue to escalate in price! Wow! How much do are they
paying this guy?
Perhaps, as city manager, he is going to have the city of Ventura
loan everybody a third of a million bucks as down payment for
houses or something. And with such assistance, house prices will
continue to escalate as a function of government assistance.
And given the experience with Fannie Mae and Freddie Mac, and
the far-Leftist Californian system of government in general,
I wouldn't be surprised.
Mises.com, and if you are serious about economics then you are
already an Austrian School economist, and you have already been
to Mises.com and have already read the article by Bob Hoye entitled
"How a Currency Can Fight the Fed." To refresh your
memory, he says, "Quite simply, soaring asset prices permit
an equivalent credit expansion and, with the exhaustion of speculative
abilities, prices turn down, which forces a credit contraction."
"Exhaustion of speculative abilities." Man! I love
that phrase! I would have used the more prosaic phraseology "You
are an idiot about money, and you are up waaayyyy over your damn
head in debt and nobody in town is stupid enough to loan you
another dime, which you already know because everybody has already
turned you down, and now the Mogambo, who is the stupidest man
in town, has also refused to loan you a stinking dime, and therefore
you are completely unable to buy another share of overpriced
stock, or another overpriced bond, or another ridiculously priced
house." Ignoring my editing suggestion, he continues "First
of all, the 1990s' bubble recorded the greatest recklessness
by the senior central bank since the first one in 1720 when the
Bank of England was quite naïve about market furies. History's
record is that no matter how responsible the senior bank has
been, 'New Financial Eras' have not run shorter than nine years.
Going the other way, no matter how accommodative, the party has
never extended beyond nine years. For example, the duration of
the 1990s' example was 116 months, which compares with the 116-month
duration for the mania that ended in September, 1929."
Now, I find the nine years thing a little spooky. Sometimes even
more than spooky, depending on my blood-sugar levels.
He continues, "As with more recent times, the collapse of
speculation is followed by a contraction in business and tax
revenues so the return of sobriety changes the mood from borrowing
as much 'low-cost' money as possible to a compulsion to pay it
down. In particular, this becomes very acute in the liquidity
vacuum that is the consequence of any big speculative boom."
This is all part of the set-up, and he hits up between the eyes
with "The world has experienced the biggest financial boom
in history and this has included the biggest debt issuance in
recorded history."
He concludes with "The recurring pattern starts with the
euphoria of issuance, then doubt and consternation follows, and
finally, with seemingly insurmountable debt and foreign exchange
problems, a revulsion for debt develops." And why a revulsion
for debt? You'll know soon enough, my darling little grasshopper,
so be patient and enjoy the sunny days; soon enough the newspapers
will be filled with stories about what crushing debt does.
A site called, as far as I can make out, Propaganda Matrix, posted
an article entitled "Footprints of new 9/11 Seen in Markets."
A guy named Jim Sinclair says that he "has spotted suspicious
trading in gold and the dollar." The 9/11 reference was
that there was apparently some suspicious trading in airline
stocks just before 9/11, as someone or a group of someones looked
to profit from advance knowledge of the coming carnage. This
time, the suspicious activity is to profit from driving up both
the dollar and gold, the beneficiaries of another terrorist
event that he figures will happen in the Middle East or Europe.
The resultant flight or fright would be into dollars and gold.
All of this is a variant of my admonition that "something
will happen," because it has to. And it has to because that
is the inescapable result of massive and long-term mal-investments
brought about by massive and long-term excessive creation of
money and credit, just like the Austrian economists say, and
it will be ugly.
But it was the last sentence of the article that really caught
my eye. "The picture his analysis paints, leaves Sinclair
scared to death." So there are two guys out here who are
scared to death. And now you, too, probably. So that makes, running
that new count through the computer, three of us. Three of us
scared to death.
Bloomberg reports that "The U.S. economy added 308,000 jobs
in March." Under normal circumstances, I would take come
small comfort in this. Nowadays, though, any statistic that comes
from anywhere remotely connected with the government is almost
surely a blatant lie. And if there is one thing I have learned,
and I have scars all over my head where it was repeatedly drummed
into my thick skull, it is that basing investment decisions,
especially involving your own money, on blatant lies and transparently
bogus facts and figures is NOT a good idea, profit-wise. For
me, anyway. It may work out good for you. I dunno. But for me,
no. It has always, on the other hand, worked out as a good thing
by the guys who are telling me the lies, especially the ones
who get my money.
First off, we are treated to the fact that "Employment in
service-producing industries, which include retailers, banks
and government agencies, rose 230,000 last month." Take
a look at that list. It's all services jobs, none of which actually
adds value, namely the taking of some raw materials and making
something out of it, and then selling it at a profit, which you
use to sustain yourself and your family and pay taxes.
Now, keeping that in mind, take a quick look at the trade and
current-account deficits, which is the sum total of what we spend
with guys who DO take raw materials and make something out of
it, and then selling it at a profit with which to sustain their
families.
Now, you are ready for the essay section of the SAT. Essay Question
Number One: Compare and contrast those two systems.
It may help if you also know that "Manufacturing employment
held steady last month. The manufacturing workweek fell to 40.9
from 41 hours in February." So total employment in manufacturing
is unchanged, and slipping into Capitalist Pig mode, I cruelly
remark "So, all the floor monkeys took home slightly smaller
paychecks. Fabulous! Perhaps they will work all the harder tomorrow!"
But it is not just manufacturing employment that is taking home
smaller paychecks, as we also read that "Average weekly
hours worked for all employees fell to 33.7 hours in March from
33.8 the prior month."
But there was, thankfully, an offset to these smaller paychecks.
"Workers' average hourly earnings rose 0.1 percent, or 2
cents." What was NOT mentioned was the average hourly debt
payments rose by MORE than 2 cents, as the dimwitted graduates
of American public schools, some of the world's worst, continued
to go farther and farther into unpayable debt.
Of course, all this good news, if you want to spin it that way,
was at odds with "A separate survey of households showed
that unemployment rose by 182,000 for the month, pushing the
unemployment rate higher." This was attributed to the fact
that some unemployed people are suddenly getting back into the
job market, and still can't find jobs. But perhaps we Americans
have the excuse that we are as stupid in handling our careers
as we are in our handling of our finances. So naturally we need
some government action to remedy this.
Mises, William H. Peterson, "The Power to Destroy."
"For here in fiscal 2004, which began last October 1st Commerce
Department data show that transfer payments to citizens (in such
forms as Social Security and Medicare) in the 3rd quarter of
calendar 2003 came to $1000.4 billion, annualized, while transfers
via 'grants-in-aid' to states and localities amounted to $341.6
billion. Add to those totals, $51.9 billion for subsidies to
farmers and others and you find that Uncle Sam is spending more
than three-fifths of the federal budget, then at $2.2 trillion,
in welfare 'transfers'-or in "legal plunder," as Frederic
Bastiat more honestly put it in his book, The Law, in 1848."
He says that Marx and Engels in their Communist Manifesto "pushed
a heavily progressive income tax as one of ten key ways to undermine
the market order and advance the march toward socialism."
He notes that the phrase "The power to tax involves the
power to destroy" is attributable to Chief Justice John
Marshall in McCulloch v. Maryland in 1819. He says two guys named
Frank Chodorov and Sheldon Richman "Both come up with a
lasting-and perhaps the only-fiscal solution: Repeal the Sixteenth
Amendment."
No problem, dudes! All you gotta do is figure out some OTHER
way for the government to be able to spend a third of GDP, because
the entire country is totally dependent on those government checks
of one kind or another. - I admit that I missed the new Al Franken
Leftist whine-fest, which is supposed to offset the huge popularity
of the Right on talk radio by polluting the airwaves with more
Big Government "Save the Children" idiocy. Why they
are doing this escapes me, as it is obvious that everybody knows
exactly what their position is, as it is the same malignant vision
of all government-loving creeps, including not only the government
itself, but also the media, the schools, most of the religions,
the entire Democrat Party, and every other conclave of "social
action" dimwits living either above or under rocks, and
so making a big production of the thing is a huge waste of time
and money. In short, in case you just got here from Mars and
are therefore clueless as to what I am talking about, their big
Leftist hearts bleed for groups of somebodies, and their tiny
little Leftist brains came up with the only solution they ever
come up with, which is for the government to spend money, and
raising taxes if necessary, to fund some entitlement programs
to take care of them and their children, and their children's
children, and their children's children's children, verily unto
all generations of these pitiful afflicted people. In short,
communism writ large via wealth-redistribution.
In saying this, I recommend that you subpoena Paul Mladjenovic
as an expert witness, as he is the guy who wrote "Protect
and Grow Your Wealth: 7 Financial and Economic Predictions for
2004-2006" He says "Politicians (both Republican and
Democrats) are great at politicking but are generally terrible
at economics. Whether they know it or not, they have done far,
far more economic pain and suffering than they have ever alleviated."
And I jump to my feet and spill my Big Gulp drink all over the
floor in my excitement and people all around me are cursing the
Mogambo and spitting at me, as I enthusiastically and loudly
shout "Bravo! Bravo Mladjenovic! Bravo!" at the top
of my lungs, although the name came out sounding like "Mablapnic"
and then Mr. Mladjenovic gets all insulted and leaves in a huff.
At least I think it was him, but every time I approached him
at the party he would scream in horror and shove a crucifix in
my face until I turned around and left. So I never actually met
the guy.
He goes on to say "This is a very important piece of reality
for investors. Therefore, if you want to make yourself a more
proficient and profitable investor, the following observation
is indeed one of the greatest principles of successful investing:
Count on government stupidity. It has created more massive economic
and social problems than any other man-made entity in the history
of the world. Understand this, you gain. Misunderstand this,
you lose." The little propeller on my Mogambo beanie is
spinning in a joyous whirl, and I am going insane with my happiness
that here, standing before us, is a guy who can see that not
only does the Emperor have no clothes, but is pointing out that
the little Royal Weenie (LRW) is diseased and covered in pus-filled
cankers (PFC) from the screw job that the government jerks have
been dishing out to the people (meaning you and everyone you
love, including me, which you probably do not love). "Government
power comes into being in the form of taxes, regulations, war,
currency mismanagement and so on. An economy that is overburdened
by government eventually results in collapse." See? Didn't
I just tell you the same thing? But then again, Mladjenovic and
Mogambo both begin with the letter M, don't they?
Jim Cook of Investment Rarities says it about as well as any
when he writes "Envy and ignorance of how free market capitalism
works account for both the Leninists of yesterday and the liberals
of today. Their animosity towards profit-making has saddled business
with a host of regulations and social requirements that competitors
in other parts of the world don't have to deal with." This
how they destroy free enterprise. "Liberals love government
and its multiple cures for every social ailment. They fail to
realize that public social programs exhaust the resources of
the nation and corrupt the citizenry." He also demonstrates
the total ignorance of the Left by noting that the two best examples
of the destructive power of large governments, the Roman Empire
and the Soviet Union. But neither of these examples so much as
fazes the Al Frankens of this world.
With that in mind, perhaps we should hope that Al Franken quickly
fails, as Mr. Cook predicts that "Their continued success
means the death knell of order and prosperity."
Then Mr. Mladjenovic shows what a nice guy he is and actually
provides a little education for the benefit of Ben Bernanke,
the halfwit who masquerades as an economist and who has weaseled
his way into the Federal Reserve Board of Governors, who admits
that he does not comprehend what caused the Great Depression.
Mr. M. explains, "Excessive government size, scope and intervention
have been the root cause of the Great Depression. Excessive government
is in fact the real problem in poverty-stricken and strife-torn
countries across the globe and throughout history. Every recession
and every depression is the result of excessive government intervention."
For you multi-tasking New Age Americans out there who are too
busy to read an entire paragraph because one of your many cell
phones is ringing, I will search through the thing and see if
I can pick out that one short phrase that sums it all up as an
Executive Summary for you. Hmmm. Let's see. Okay, here is the
perfect one, "An economy that is overburdened by government
eventually results in collapse."
But bloviating on the supreme stupidity of allowing a Big Government
is not the crux of Mr. Mladjenovic's essay, even though that
is precisely what I spend the greater part of my day standing
on the corner waving my little placard and screeching about,
and I can see the drivers all gritting their teeth and staring
at the traffic signal and saying "Come on, turn green! Come
on, turn green."
What he wants to do is to take you to the logical extension of
that, and using that knowledge. let you make a some money. Or,
are we say in the South, a "big ol' pile o' money."
He confidently forecasts, and I print his list verbatim:
1. The Dow will go below 6,000.
2. The dollar will drop at least another 25%
3. Gold will hit $1,000 an ounce.
4. Silver will hit $50 an ounce
5. The real estate/ mortgage bubble will pop
6. We will have a severe recession
7. We will surpass 2 million bankruptcies and foreclosures
Paul McCulley, portfolio manager at PIMCO, in an essay he calls
"Doctor, My Eyes," we see another example of Henry
Hazlitt's observation that, slightly paraphrased by me because
I am too lazy to get off my fat keester and look up the exact
quote, "The arguments of inflationists are always the same:
Inflation is to be the 'short road to prosperity.' " In
this case, Paul "Inflationist" McCulley writes "I
have zero problems with what the Fed has been doing. The world
desperately needs reflation and the Fed is reflating, openly
and forcefully, with a falling dollar transmitting the reflationary
impulse to the rest of the world. Bravo!"
Richard Russell of the Dow Theory Letters is not so sanguine.
He writes, "In knocking rates down to 1% and holding them
there month after the month, what the Fed has done is created
a series of inflationary monsters. Today we call the monsters
by a different name -- we call them 'bubbles.' The Fed has created
a bubble in bonds, a bubble in stocks, and a bubble in real estate."
So while this may be wonderful for Paul "Increasing the
circulating medium" McCulley, who runs a bond fund, it is
not good news for anybody else, considering what the result will
be.
In a moment of rationality, Mr. "More monetary madness"
McCulley paradoxically quotes Fed Governor Kohn, "Some observers
argue that the Federal Reserve has already been too patient.
They are concerned that continued policy accommodation is distorting
interest rates and asset prices and encouraging a build-up of
debt, and thereby laying the groundwork for financial and economic
instability." And although he did not mention the Mogambo
explicitly, that is exactly what I have been saying, although
Mr. Kohn probably says it with a lot less screaming and hollering
and court-appointed psychiatrists pumping horse tranquilizers
into each of his arms in some desperate attempt keep me under
control. "Clearly, the low funds rate has held down long-term
interest rates and boosted asset prices. These movements are,
in fact, some of the key channels through which monetary policy
has stimulated demand. But I think the hurdle is high - and appropriately
so - for a central bank to tighten policy, and in the process
damp an expansion of economic activity in the short run, on the
suspicion that movements in asset prices and increases in debt
threaten economic stability over the longer run." On the
suspicion? Did he say "on the suspicion" that asset
prices soaring above any semblance of rational valuation, where
even lunatics stop howling at the moon to marvel at the surge
in prices for assets, and increases in debt loads that are un-payable
and clearly unsustainable somehow "threaten economic stability"?
The guy is a master of the understatement! No wonder he is a
Fed Governor!
Then Mr. "Make more money and make my day" McCulley
gets into philosophy and wades into the swamp of the modern foolishness
known as math-based economics, and writes "My essential
point is that money is different than capital. The Fed funds
rate is the return on money, which has zero default risk and
zero price risk. In contrast, the private sector credit carries
both default risk and price risk. Thus, I believe that the 'equilibrium'
real short rate should not be equal to Taylor's putative 2%,
but rather equal to: (the economy-wide marginal income tax) x
(the Fed's inflation target)." Didja note how the people
with money to loan and the people wanting to borrow that money
have no say in this new determination of market-clearing interest
rates? It is all done by smarty-pants eggheads playing with calculators,
so that other eggheads, whom I assume run bond funds, can play
one of their notorious carry-trade schemes.
He goes on to expand his vision of Utopia by remarking that "Money
should pay a sufficient interest rate to make holders of money
whole for two taxes: the explicit tax on nominal interest income
and the implicit tax of inflation." I agree! And the people
who hold money balances probably also agree. "But money
should not pay a real after-tax rate of return! In the long run,
the economy can 'afford' to a pay return only on capital that
is at risk." Now, where in the hell he got this cockamamie
idea is beyond me, as I have never heard of anyone telling anyone
else what an economy can "afford." And I notice that
he is not advocating that the Fed immediately increase short
rates so to "make whole" the savers who are, even as
we speak, getting clobbered by interest rates that pay less than
half the current rate of inflation.
No only that, but get a load of this; "In a world of 'price
stability,' investors must accept - and the Fed must enforce!
- the proposition that real returns can come only with the taking
of real risk." The guy is advocating the imposition of government
regulation on what interest rate savers must accept, and it will
be low, too!
My God! What is happening to us? For one thing, I have not noticed
any "price stability" for the last ninety years, as
the dollar has depreciated over 95% of its value in that time,
and here lately it has really gotten bad. And for another, here
is somebody who is telling us that the Fed must enforce the idea,
probably by having the bloodthirsty Janet Reno and a team of
armed thugs with uniforms and badges come to our houses and smash
down our doors and kill us in cold blood or something, that money
and capital are to be "managed " As, I suppose, all
things are supposed to be managed by the government. And that
1) people with money to lend are to be required to achieve only
a standstill against loss of purchasing power, and that 2) borrowers
are not to be allowed to overbid for money, and that 3) the Fed--
the Fed of all people! --should be empowered to enforce such
a foul philosophy! My mouth is filled with the taste of bile,
or maybe it is just a taco that has gone bad. But it looked good
and it didn't smell too bad. The taco, I mean. Not Mr. Sculley's
horrifying ideas, which both look AND smell foul.
To sum it up, and this is the part that I was reading, according
to forensics experts, when my brain exploded, he writes "I
applaud the Fed for pursuing reflationary policies. More specifically,
I applaud the Fed for promoting unsustainably high asset prices
as a means to stimulate aggregate demand, thereby putting downward
pressure on unemployment. This is what the Fed is supposed to
do, when it has won a war against inflation and pursuing the
peace of price stability. Yes, such a strategy is a sure fire
way to produce rational bubbles in asset prices. But that is
a much less severe outcome than losing the peace on the deflationary
battle field."
He does admit that "By definition, however, once reflationary
policies beget reflationary consequences, it will be time for
the Fed to dilute the ink supply for its reflationary printing
press. Such a change will ineluctably involve bursting of asset
price bubbles, as those who have bet that the Fed would fail
in its reflationary efforts are compelled to reduce portfolio
risk and leverage." So huge leveraged losses, where people
lose huge wads of money from participating in an unwholesome
explosion of asset price inflation that subsequently go bust,
is some salutary paradigm? Now you see why my brain exploded,
and why I have zero respect for Mr. Paul "Inflation as savior"
McCulley.
In Barron's this week, the Editorial Commentary was entitled
"Stop the Dollar's Slide" by Jack White and Doug Ramsey.
They are rightly alarmed at the growing weakness of the US dollar,
as they clearly see that there are ugly things that accrue from
a depreciating currency. But that doesn't explain their "Panic
Scenario #1: OPEC oil producers decide to stop their pricing
their oil in dollars, and switch to a basket of currencies for
both the pricing and settlement of crude-oil transactions."
This is ridiculous. The fact is that nothing would change.
The mistake they made is that they stopped looking at things
at the instant that the transaction was completed. In the real
world, after OPEC has sold the oil for dollars, they are then
free to convert dollars into those other currencies to buy the
things they want to buy. So the selling of dollars for other
currencies goes on regardless of the currency they initially
got for their oil.
For example, if OPEC wants to buy something from Europe that
is priced in euros, all they have to do is sell some oil for
dollars, and then exchange dollars for euros, and then hop on
a plane to Europe and buy the damn thing. They do NOT need to
price oil in euros to get the euros.
So OPEC can, and does, get that exact same basket of currencies,
per barrel, after the oil sale through the expedient of merely
exchanging dollars for the other currencies. So how does changing
the currency-unit of the initial sale affect anything? It doesn't.
Bottom line: OPEC changing the medium of exchange for the initial
exchange will have no effect on the dollar. It is other things,
like lack of confidence, that have an effect on the dollar. -
But economic stupidities abound. I read where one guy, who usually
makes very cogent observations and therefore I assume that this
was just some strange aberration in his thinking as a result
of other things pressing on his mind, probably involving alcohol
("another alcohol related incident!") or drugs ("another
drug related incident!") or thought-controlling rays from
outer space ("another thought-controlling rays from outer
space related incident!") so I will not use his name, is
saying that higher tax rates reduce disposable income, and therefore
consumption will fall. Hahaha! I laugh! How stupid!
Let me be perfectly clear on this, although I will continue to
be purposely vague about where I was last Tuesday around four
o'clock: Higher taxes WILL reduce YOUR income, and therefore
YOUR ability to buy beer and pornography will fall, that is true.
But that money flows into somebody else's pocket, and therefore
it will INCREASE somebody ELSE'S income. So the aggregate consumption
will be, theoretically, unchanged. Ergo, higher taxes do not
cause a decrease in aggregate consumption.
The only difference is, and this is a crucial difference, that
in the macroeconomy changes in tax rates is merely a change in
WHO is spending the money, NOT the amount of money spent. And
when the government, let me change that to "the damned government,"
or better yet let me change that to "The damned government
that is bound and determined to destroy us and everything we
care about," increases its size and scope to monitor and
dispense this increase in money flowing through its hands, then
you get another burst of malignant growth in the cancerous tumor,
aka government, that ends up killing economies. Net result: those
in the private economy have less consumption, and those in the
government economy have more consumption.
Kevin Murtaugh, writing an article entitled "Hidden News
From The BLS.," takes a look at the Bureau of Labor Standards,
and finds that they are just another shameless bunch of corrupt
lying weasels. "Rather than get into the politics of US
employment and wages, let's just look at the numbers. According
to the OC Register (OCR), 'Average hourly earnings rose only
1.7 percent' through February, 2004. '(T)he wage and salary portion
of the Bureau of Labor Statistics' employment cost index, increased
2.9 percent last year, enough to keep workers a bit ahead of
inflation, though not by much."
"After all, the CPI excludes food (up 3.3% 12-months ending
February, 2004) and energy (up 3.8% y-o-y) and politicians then
claim with a straight face inflation is only up 1.2% (y-o-y)."
Yeah! Go get 'em, Kevin! "Now the BLS is poised to show
a reduced unemployment rate by flattening, the top-line population
number. This is really news!"
He relentlessly continues, "As employers push more of the
cost of healthcare onto employees, this deduction is NOT subtracted
from the BLS wages! Then wages can be counted as up, even as
increased healthcare costs push net wages down." I'm beside
myself with rage!
Like a big bully kicking the Mogambo when he is down on the ground,
writhing in pain from the agonies inflicted on him from the preceding
paragraphs, he metaphorically kicks me in the head with a hob-nailed
size-12 boot when he says "As a side note, the BLS CPI report
shows medical care was up 4.2% y-o-y but talks are under way
to 'adjust' this figure for 'quality' which would reduce (eliminate?)
its impact on the CPI."
There was an editorial in yesterday's Wall Street Journal entitled
"The Dangerfield Economy," which had the general thrust
that everything is so peachy, so why can't the "booming"
economy, like Rodney Dangerfield, get any respect? Well, perhaps
a better question was "Why can't the Wall Street Journal
get any respect?" The answer to that question is easy, as
they start off their essay with "Friday's report of roaring
job numbers for March, along with sharp upward revisions for
the previous two months, was good news that even the chattering
classes couldn't deny." Well, as one of the "chattering
classes," although admittedly one of the more stupid ones,
I am here to not only deny it, and I will start off my own little
retort with "Friday's report of less-than-roaring job numbers
for March, along with sharp upwards revisions for the previous
two months, was such a blatant blob of manipulated malefactions
that all but the most clueless halfwits should immediately take
offense that their intelligence was being so severely insulted."
"By any objective measure," they claim, "the US
economy is strong and getting stronger." They then cite
the absurdly low unemployment rate, which is preposterously low
because the government is actively modifying the calculation
of the numbers, and so it is certainly NOT "objective."
The WSJ then cites the inflation rate, which is also preposterously
low because the government is lying about it, and so this is
yet another measure that is not "objective." And from
this I can only assume that the editorial writers at the Journal
are the only guys on the planet who have not heard about hedonic
inflators and "adjusting for quality," or if they have,
then they are too dimwitted to comprehend what that means, or
they have some other reason for saying things that are obviously
not true. Or perhaps I should say, are "objectively not
true."
They then cite the laughable government statistic that the economy
is growing at an annual rate of 6.1%, which is true if you use
inflation in prices to measure growth, which they do. But after
subtracting inflation, the economy is NOT growing. An economy
that produces 100 widgets that sell for $2 each is NOT really
twice as big as an economy that produces 100 widgets at $1 each.
They go on to state that Americans are "richer than ever
before." Clueless chumps buy stocks that are vastly overpriced.
Then, if the stocks get MORE overpriced, then it DOES look like
they are "richer." And they WOULD be richer if they
sold right then. But they don't.
Then they note that real estate has risen, and made Americans
look like they are richer, too, although they again allow that
"not everyone is convinced that the real estate market will
hold up."
Then they make a mockery of themselves again by saying, "Nevertheless,
when a record 68.6% of household own their own homes, that should
at least create a feeling of security." I am here to tell
you, and the people at the WSJ, that merely living in a house
with a gigantic mortgage is NOT de facto evidence of owning anything,
since they do not really own anything. They are merely in the
process of buying it from the bank, which loaned them the money
to buy that damn thing. And owing a lot of money on a huge mortgage
for a long period of time is NOT something that creates a feeling
of- - what was that word they used? ---security. Ugh.
---Mogambo Sez: As Larry Edelson of The Real Wealth Report
puts it, "I'm more excited about gold
now than I have been in nearly three decades." So that is
the asset I recommend most highly, and now all we need to do
it determine a dollar figure top put into that asset that I,
you know, recommend most highly. Or, as Tom Webber, a loyal reader,
asks, "How much gold is enough gold?"
My answer is poetry itself when I reply "You'll know when
you get enough."
April 6, 2004
Richard Daughty
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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