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Hubble-bubble, Toil & Trouble!Richard Daughty Besides, the Europeans have a lot of other things to think about here lately, mostly in the vein of how they could have been so stupid as to be talked into a systemic stupidity of trying to have an economic system where there is a EU-wide monetary policy and currency, but each country has their individual national fiscal policies. And in each of those little dirtbag countries are little dirtbag politicians trying to create a free lunch for some of their dirtbag friends and electorate, fashioned out of those selfsame individual tax-and-spend policies. And in each of these dirtbag countries with the dirtbag politicians we have dirtbag greedy people, each grasping and clawing at the politicians, all desperately trying to get a free lunch for themselves and their friends. And speaking of dirtbags, of course, we would be completely remiss of we did not include the U.S. Treasury itself, which is constantly being forced by the Congress to loot us taxpayers. Taking a look at the amount of selling of new Treasury debt, they are surprisingly constant, as far as putting us farther and farther into the hole is concerned, by consistently burying us under about $53 billion in new debt per month. It's almost a spooky linear thing. Now, I don't include graphs in the MoGu because some people will have computers or software that can't display or print the graphs, and so they write me to complain, and then somebody comes and wakes me up out of my usual drooling stupor and says some guy wants to know if I can spend the rest of my life trying to send, and re-send, and re-re-send this stupid graph that did not come through to him, and I try and try, and the next thing you know I have missed my prescribed Medication Time (MT), and we all know that soon things will be spiraling out of control. So, no graphs. Doctor's orders. But this astonishing growth in national debt has got me drawing the shades and turning off the lights and shouting "Nobody is at home!" whenever there is a knock at the door, because it is very unnerving, which shows you how scared and upset I am, because I am not sure that I have EVER used the word "unnerving," especially since the phrase "freaked out of my freaking mind, have we all gone freaking loony-tunes here because this is freaking crazy!" seems so much more accurate. And speaking of debt, Consumer Installment Debt is another interesting bit of hard evidence, which is, if you have ever seen any courtroom dramas on TV, especially starring Raymond Burr as Perry Mason, the best kind of evidence if you are assembling an airtight case, to prove that we Americans are the biggest clot of jerks on the planet. Since the day that the Pilgrims landed on Plymouth Rock and discovered that the natives had no convenience stores, ATM machines or even a lousy Starbucks, which probably explains why they were so backward, the amount of Installment Debt took until 1995 to reach the one trillion dollar level. Then it took only another nine years, to early 2004, to reach the TWO trillion dollar level. In March it went to $2.022 trillion, which can also be noted as $2,022 billion, or as the unwieldy $2,022,000 million, or as the lengthy $2,022,000,000 thousand, or even as the completely correct $2,022,000,000,000. Marshall Auerback, who spends his time at the Prudent Bear website thinking about the economic nightmare that we are in and randomly making sure that the door is locked so that the MoGu can't get inside and get his cooties all over the place, found that he still had enough time left over to write his latest essay entitled "Inflation Remains The Least Bad Option For The US." The first thing we notice is that he does not see any GOOD options for us. "For all of the talk of 'rising inflationary pressures', the real story of the 21st century thus far has been the vast explosion of debt on the heels of a historically unprecedented credit bubble. The efforts of U.S. policy makers to avoid a full unwinding of the 1990's stock market bubble through the encouragement of a credit bubble and a housing bubble has, despite something of a recovery, made both conditions worse, so there is no guarantee that an embrace of inflation, even if on the quiet, will achieve anything better than a 1970s style stagflationary outcome." Steve Puetz of the Steve Puetz Letter is obviously thinking along the same lines, only he is not as sanguine, when he writes "Recognizing the formation of a bubble, central banks usually burst a bubble before it gets completely out of control. But the Fed has proved to be the exception. The Fed has let the multitude of bubbles form with complete indifference. The damage from a bubble is always in future years. Given the magnitude of the current bubbles, the damage will likely translate into a total collapse of the US financial system. In short, any economy based on ever-expanding credit is doomed in the long-term. The size of the bubble dictates the following pain. Judging by the current bubbles, the coming pain will be unprecedented. The Great Depression of the 1930s will be mild in comparison." Robert McHugh of Safe Haven has seen us talking about this, and he has something to say about the flood of money that is being produced by the Fed. "Let me just say from the outset that the Federal Reserve has confirmed our Stock Market Crash forecast by raising the Money Supply (M-3) by crisis proportions, up another 46.8 billion this past week. What awful calamity do they see? Something is up. This is unprecedented, unheard-of pre-catastrophe M-3 expansion. M-3 is up an amount that we've never seen before without a crisis $155 billion over the past 4 weeks, a $2.0 trillion annualized pace, a 22.2 percent annualized rate of growth!!! There must be a crisis of historic proportions coming, and the Federal Reserve Bank of the United States is making sure that there is enough liquidity in place to protect our nation's fragile financial system. The amazing thing is, the Fed's actions mean they know what is about to happen. They are aware of a terrible, horrific imminent event. What could it be?" At the same time, Dave Ramsden is a guy whose background is to develop models of large fluid systems. He has taken a look at these unholy goings-on as concerns money, and writes on FinancialSense.com site that the monetary aggregates are displaying some unusual traits: "First, just before the models would go unstable, they would usually start exhibiting unreal behaviour. Timeseries of financial instruments are starting to look a lot like a model about to go unstable." Unstable? Is that the word he used? It is only when you consider that every spendthrift government in the history of spendthrift governments, and that includes all of them back and forth through history, including the little twits whose economies were mainly involved in sustaining themselves by eating berries and dead rodents that dinosaurs stepped on, monetary-excesses destroyed their horrid little countries before they even had a chance to invent writing and thus preserve some evidence that they even existed in the first place, that you slowly realize with a growing sense of panic that every one of them tried to buy its way out of the monetary-excess mess it created, and every one of them failed. Richard Maybury writes that the national debt going up is just a predictable result of Congress spending so damn much money. "In the mid-1990s, the possibility of $400 billion annual budget deficit was considered a catastrophe. Books were written about it. The financial industry was transfixed by it. Well, the deficit for March alone this year came in a $72.7 billion, which works out to an annual deficit of $872 billion." Richard Russell of Dow Theory Letters has also noticed that the money supply of the USA is suddenly exploding. "Hey, it's all I can do to try to figure out what the US is coming to. Here's what I'm thinking. Over the last two weeks the Fed has added a whopping $104 billion to M-3, the broad money supply. At this rate, M-3 will be up $2.7 trillion (annualized) in a year, or up at a 30% rate. What's going on? All I do know is that I can't pull myself up by my belt, and the US can't pull itself out of danger by creating more and more credit while at the same time manipulating interest rates. It will work for a while -but ONLY for a while." In the same vein, Ken Gerbino says "Starting in 2000, the U.S. has created $1.5 trillion new dollars (M2), and has a cumulative trade deficit of $1.6 trillion. This totals $3.1 trillion on the negative side of the dollar equation. To say the least, this is bad monetary karma and will lead toward a very strong gold price." He goes on to say "From 1973 to 1981 the inflation rate in the U.S. averaged 9.2% per year! The Fed raising interest rates during this time, on balance, did nothing! Why? Because the money increases from prior years were already in the systemthe horses were out of the barn." So looking at the monstrous monetary horses that are out of the barn again, to use Mr. Gerbino's metaphor, we are looking at roaring inflation, again. He continues, "Here is a reality check on the above mentioned $1.5 trillion created from the year 2000. First, I will refer to the U.S. money supply (M2) in 1980. It was $1.5 trillion. All the tangible wealth in the United States, every bridge, office building, home, car, television, plane, everything was created over 200 years with a money supply that ended up at $1.5 trillion. 200 years of blood, sweat and tears to create all the tangible wealth in the U.S. Our country in a bit more than four years has created the same amount of money! $1.5 trillion! This new money has not created anything near the tangible wealth of the first 200 year's $1.5 trillion. This is currency depreciation on a grand scale." Mr. Russell was looking at M3, and Gerbino is looking M2, and says "Looking at M2 just since 2000 it is up 32%. Since 1995, up 73%. This means plenty of inflation in the next 5-10 years, and although hard to imagine, the bond market could lose 30-40% of it's value. Raising interest rates couldn't stop inflation from 1973 to 1981 and it won't stop it now." Sitting there in your chair, bathed in a cold sweat, you grasp why Mr. Auerback titled his essay "Inflation Remains The Least Bad Option For The US." To get by with ONLY inflation is to count our blessings. To even assume that you can correct the problems of the over-issuance of money and credit by providing even MORE money and credit makes you realize why the Islamic terrorists are probably trying to kill us: we are congenital idiots who are polluting the gene pool of the world. Speaking of congenital idiots, Bloomberg reports that "Alstom SA, the French builder of power stations that generate a fifth of the world's electricity, plans to increase equity by as much as 2.5 billion euros ($3 billion) in a bailout that will make the government the biggest shareholder." One only has to note that this is France we are talking about, and so it seems only natural for them to slide down the proverbial nasty slippery slope of socialist/ fascist stupidity, because that is what they do. Nobody knows why. Well, the other thing they do is to sniff in that condescending French way, and to complain "Why do zee peoples tink vee are the world's biggesthow you say? -bozos?" Listen up, Frenchy, because I got two good reasons why we think you are the world's biggest bozos. 1) Because your preposterous socialist/ communist/ fascist system has dragged you down for most of the last century, and the fact that the Soviet Union tried the same idiocy and ruined itself, and China has finally begun throwing off its shackles of that same stupidity because it ruined them, and your overarching stupidity has resulted in you being forced to scrap the EU Growth and Stability Pact that required you to run budget deficits of less than 3%, but you can't seem to manage it even one damn time, and yet, in spite of your own egregious, half-witted failures that are so obvious that even newborn babies cry about it and make messes in their diapers as an editorial comment, and the fact that there is not one single example in the history of the world where anybody ever made a successful economy out of such moronic behavior, you persist in doing the same stupid thing time after time after time, and 2) we Americans are obviously trying to be the world's biggest jackasses ourselves, and certainly don't appreciate your fighting us over the honor. To underscore that point, Capital-insight.com, in an essay entitled "Guns and Butter", writes "Dubya and his Military Keynesian entourage have run up more debt in just the one past year than ALL their predecessors cumulatively managed in the first two hundred after the Declaration of Independence." So obviously you frogs had better give it up, because our American world-class gold-medal monetary stupidity is going to be hard to beat. Elliott Wave's "Market Watch" that extols the wit and wisdom of Robert Prechter has now seemingly contradicted itself. The whole Elliott Wave theory is that there are wave patterns, which obviously means that events predict subsequent events. But you would not know this from the blurb on the site advertising their newsletter, as they immodestly proclaim" You will never read a brief set of facts more devastating to the notion that you can extrapolate past trends to consistently predict future trends in human affairs." Perhaps the "consistently" thing is the caveat. So which is it? Are there wave patterns or aren't there? Mike Hartman on Market Wrap-up on FinancialSense.com has taken a look at how durable goods orders dropped precipitously in April, and how new home sales seem to have collapsed. This may have something to do with the weather, as some have said, which kept people from buying houses. But I suspect, because that is the kind of suspicious distrustful little jerk I am, that it is the reluctance of bankers to finance new mortgages knowing that soon, very soon perhaps, rates will rise, making those mortgages that they issued less profitable for them, and for years and years afterward they are going to be carrying these mortgages around on the books, and all the new guys will look at those books and say "Hey! Who's the bozo who loaned out all this money at the exact bottom in interest rates? What a maroon!" and they will have to think about how their careers went nowhere ever since, and it is a damn parade of new guys through here, who all quickly move out and up into the banking hierarchy, while we are stuck here at the bottom, and how they find their thoughts dwelling on the guys in the Post Office who went "postal" and how they probably wonder if it would be called "going bankal" if the same murderous shooting-spree thing happened in a bank, any bank, maybe like this bank here, for instance. He says, "I suspect the economy will weaken unless we can get further stimulus from increased government spending, new tax rebates, and more monetary stimulus from the Federal Reserve." I suspect that what he suspects is right. Outrageous levels of raw stimulation is the only reason why the economy is doing as well as it is, and it is to laughhahaha! --to think that you could take that enormous stimulus away and the economy would NOT suffer! And of course that brings up a predictable Mogambo rant, "What the hell kind of a bizarre Idiot's-Delight Economy (IDE) do we have when the economy is dependent on increased government spending, tax rebates and monetary stimulus from the Federal Reserve, and to accumulate more debt when even THAT proves insufficient? This is too ridiculous for words!" But as far as increased government spending is concerned, you may rest easy on that one. This is a President that has not vetoed a single spending bill in the entire time he has been in office, and in fact, he and the Congress are the most mindless, profligate spenders in the history of American Presidents and Congresses. The front page of the Wall Street Journal last Thursday had a story about the town of Aliquippa, Pa. The article was entitled "A Steel Town Finds Lost Jobs Hard to Replace." It was a sad tale of 14% unemployment and city father's wringing their hands over the loss of J&L Steel, as the steel industry left town and took with it all the jobs. I know what you are thinking. How many times have we heard how the USA is a "service economy" now? So, and I can hear the wheels turning in your head, why don't these guys just start some service jobs? But before you can answer, I rudely interrupt by slamming my fist on the table so hard that sleepy reporters are startled, and to curl back my lip in a snarl to tell you that the preposterous idea of having an economy based on services is a gigantic load of crap, and that it is impossible to have an economy based on services, and the proof is, as I have said many, many times before, simplicity itself: If you COULD make an economy out of services, then everyone would do it. But they don't! And in fact, nobody ever does! And this includes Aliquippa, Pa., which is finding out that The Mogambo was right when he said that profound bit of Mogambo Enlightenment! But, and here is where I lose all respect for Aliquippa, if you take a drive down any street in town you will not find one statue of The Mogambo anywhere! And none of the buildings are named The Mogambo Building, and zero percent of the malls for miles around Aliquippa are named the Mogambo Mall, although it is nicely alliterative and so it seems such a natural that I am shocked that it did not occur to anybody before this. Idiots! Reuters reports that the European Commission said that "World oil trade should be switched to a basket of currencies, including the euro, rather than be priced in dollars only." Why they would say this is beyond me, because the price is the price, and all we are talking about is which currency to use, and whichever one you choose will have no effect on the price. Some other dude named Palacio told the news conference that "Speculation, not a real shortage of oil on the market, was fuelling high prices." I'm not sure what planet this guy is from, but those supertankers of petroleum heading to China look like demand to me, and if there is any speculation involved, it is the Chinese speculating that the price will be higher in the future, and that is why they are buying it all right now. Caroline Baum of Bloomberg got a lot of heat from readers when she argued that higher prices for gasoline is not like a tax. Her opinion is that higher demand raises prices for oil, and that will drive more production for oil, but a higher price due to tax add-ons will NOT drive producers toward higher production. She writes "Substantive reader challenges to my thesis fall into two basic categories. The first is that higher gasoline and heating oil prices act like a tax in that consumers have to allocate a higher proportion of their household income to them. That leaves less discretionary income to spend on other goods and services, reducing demand for the latter." And yes, you could put me in that camp, since it is obviously true, as once you spend all your money on a tank of gasoline, there is no money left for this month's issue of "Second Amendment Babes," which is our nation's sole source of photos of naked women hand-loading armor-piercing bullets in a basement bunker. She even admits "That's an entirely reasonable assumption if income is constant: more money for gas means less money for Wal-Mart." But she cautions that "Prices of those other goods would presumably fall in response, enabling consumers to purchase the same quantity of goods as they did before." Huh? Producers of these other goods have such big margins that they can lower their prices? And the workers at those factories would not be getting any raises, and so the higher fuel prices hurt even more? And this is different from a new tax? And because even with the lower prices people still have less income, thanks to paying higher gas prices and not getting any raises in pay, things will still be okay one day? "Yes!" says Caroline Baum, this is all okay, since somebody made some money, and therefore all the money was recycled. You are broke from trying to fill up the tank on your car, but she advises you to relax and get with the program, since on some distant day in the future all this money will filter back around to you, thanks to the higher global growth, and your wages will be increased, and everything will be fine. Now, of course this immediately sent me in paroxysms of rage, and the next thing I know I am being roughly held down while priests mumble Latin prayers while sprinkling Holy water on me and I am screaming "It burns! It burns!" and panicky Emergency Room people are trying to insert an IV needle into my arm and my wife is in the corner yelling "Pull the plug on him! Pull the plug!" So I am kind of busy right now, and unable to directly respond and thus denounce the utter vacuity of this argument. So, as an alternative we turn to an article by Rick Alm in the Kansas City Star entitled "Ten Years Ago Today Missouri Rolled the Dice." This refers to when Missouri allowed gambling. Everybody agrees that money has come rolling in and it pumped up state and local government treasuries, as the gambling revenue replaced all the tax revenues NOT being spent on other things. So far, Ms. Baum's analysis is proving correct; the money DOES eventually come back around. But the state still finds itself coping with annual budget shortfalls, and, according to one interviewee, "In 10 years, all we've shown is that there's an illness side to this experiment with gambling embezzlement, bankruptcy and the breakup of families." You are broke from spending all your spare time in front of a slot machine, or trying to fill an inside-straight poker hand, but I am sure that Caroline Baum will soon appear on the scene, advising you to relax and get with the program, since on some distant day in the future all this money will filter back around to you, and your wages will be increased, and everything will be fine. So Ms. Baum's immortal advice is to take 1) a deep breath and 2) relax, because on some distant day in the future all this money will filter back around to you, and your wages will be increased, and everything will be fine. Apparently when you and I spend our money on things OTHER than gasoline or gambling, like yummy cookies, the money does NOT come back around, and it somehow disappears. The fact remains that all money is recycled somewhere, which is a fact that is somehow lost on most people, especially people like Martin Dyckman, who is the Associate Editor of my little Leftist hometown rag, the St. Petersburg Times, and who last Sunday published his latest laughable Leftist lunacy, entitled "Floridians Can't Afford to Fall for this Homestead Initiative Scam." What is this scam, and should you be alarmed? Well, the deal is that some people, me, for instance, want to raise the homestead exemption, now at $25,000 to $50,000. With this exemption, the homeowner is not assessed ad valorem taxes on the first $25,000 of assessed value of his house, and the exemption has remained unchanged for decades, although the houses have all, at least, doubled in price. This exemption obviously helps out the poor and low income people, since it represents about $500 per household per year. And I don't know about you, but there are lots of years that go by without me getting an extra five hundred bucks. But this helping of the poor people, and the old people, and the sick people, and the lame people, and little puppies and helpless little kittens mewing pitifully, will rejoice in an estimated $2 billion a year in taxes that they will not pay next year if this ballot initiative passes. A Robin Hood has returned the money that the evil tax collector has taken from us! Hooray! But back in Nottingham Castle, the soundtrack is dark and moody low notes, disquietingly inharmonious, as Martin Dyckman is bending low to whisper in the ear of the evil King John, "It is also $2 billion a year of income for the government, your majesty! The dirty and smelly common people will take $2 billion right out of your pocket! Out of your (he pokes the King in the vest pocket) pocket, your royal highness, and the pockets of our little government friends. The people's rebellion must be crushed, and they be taught to heel!" What this Dyckman fool forgets is that the $2 billion will be spent, one way or the other. Either government takes it, via ad valorem taxes, and spends it on what it wants, or the taxpaying people take it and spend it on things THEY want. Either way, it is spent. Now us idiot commoners spend most of it for taxable things, some of it for investment things, all of which provide jobs, and the damn government will end up with a nice chunk of change anyway, accomplished by its usual habit of pecking the living guts out of anything that moves, and the consumption of consumer things might even involve making some things that we can sell to foreigners, thereby reducing the trade deficit, which is now over $560 billion a year and growing. But if the government spends it, all you get is bigger government and more calls for higher taxes by clueless editorial writers at Leftist newspapers. So what is the "scam" that this Dyckman chump refers to? He thinks that the savings figures touted by the proponents are too optimistic, and that the $500 per household may not be completely accurate! The shame! For that crime, the unspeakable crime of optimism and perhaps even slight exaggeration, the homestead exemption should not be granted to anybody! Off with their heads! And anyway, he helpfully explains, the government will merely raise other taxes to make up for it, and so we are right back where they were, but the "Families for Lower Property Taxes" people did not tell you that! So to Dyckman and his horrible halfwitted little friends, this is a "scam." If you want a REAL scam, take a look at where all the money went all these years. All that money was supposed to benefit us. Instead, it has allowed the government to grow into a huge cancer that is eating us alive. Nationally, one out of every six workers now works directly for a government. Here in my county, the ratio is somewhere around one government worker for every four or five workers. Yet this Dyckman putz is livid that "essential services" are going to be cut if their gravy train is slowed down. How in the hell can that even possibly be true? How can a government be spending a third of everybody's income, and employ almost quarter of the entire workforce, and STILL be providing only "essential services"? I'm happy to see Spitzer going after Dick Grasso, the disgraced little creep who was so incestuously cozy with the other little creeps, not the least of which was the horrid Madeleine Albright, on the board of the NYSE, which is itself a self-enriching bastion of despicable crooks, to grossly enrich himself to the tune of almost a half million dollars a day in salary. A day! Neither he, nor them, was worth it, as the seamless functioning of the exchange proves, and which is, when you get down to it, merely a system of accounting about who owns what stock. He didn't do a damn thing except make sure that 1) The Mogambo got gouged every time anything was changed in my retirement account and 2) parade around looking arrogant, sort of like the Mogambo, the difference being that I don't need any burly strongmen to carry my insanely-outsized paycheck to my car. It reminds me of the excesses of the aristocracy before the French Revolution, and we all know how that turned out. That Mr. Spitzer has political ambitions is beside the point. The point is, rather, that his predecessors were complicit in the scam by virtue of their willingness to condone it, sort of an "accessory after the fact." The Daily Reckoning notes that "Barclays Capital recently completed a study of how four real asset classes equities, property, commodities and index-linked government bonds have shielded investors against inflation over the long term. Some of its conclusions are startling: 'In all three distinctly different inflation periods of the past century deflation during the 1920s/30s, high inflation in the 1970s, low/stable inflation in recent years UK equities produced negative real returns.' " Mark Rostenko of the Sovereign Strategist raises his hand and adds, "The nasty truth of Wall Street is that MOST INVESTORS LOSE MONEY OVER THE LONG HAUL." Note how he used all capital letters to indicate emphasis. In a roughly similar thread, the Mises.com site artfully condenses an essay, and writes "Economist Kurt Richebächer's article A Grotesque Misnomer ridicules the idea that a central bank policy aiming at inflating asset prices constitutes a form of wealth creation." Now you and me think that wealth is what people use to buy fun things with, and Mr. Richebacher agrees. He says "Wealth ultimately is the ability to consume more goods, which can only be produced by more capital, which requires more savings." Note that he says that producing wealth requires "savings," by which I assume he means, and why I mean, and I assume that he assumes that is what I mean, that there is a big distinction between savings, which is money accumulated in a piggy bank or under a mattress, and investments, which is just a big bet where the odds are against you. And as a guy who has made bets where the odds were against me, you can subpoena me to be an expert witness on how this is NOT "wealth creation," unless you define "wealth creation" to mean "Selling my shoes to passersby to get enough money for a cup of coffee." In short, if your stock portfolio is up by double, but bread costs double, you haven't gotten anywhere, and no wealth was created. And that is the ugly truth that will soon be learned by the world's idiot "investors" who stupidly think that stock markets create wealth. The Mogambo is even more adamant about it, and says "If you think that the stock market will produce wealth for you over the long term, you have your head up your fat butt. It never has, it is not now, and it never will." Oh, some people will make money out of the stock market. Dick Grasso and his grubby, grasping NYSE buddies, to name a few. But you and I will not. We will lose. Thomas Friedman of the New York Times, a laughable Loony Tune of Leftist losers, wants Americans to pay a new tax, which he helpfully calls a "Patriot Tax" of 50 cents-a-gallon on gasoline, to get "people to voluntarily sign onto our values." His asinine values are easy to discern: pay for a bigger government. There are a lot of people who think that Bill Bonner of the Daily Reckoning walks around all day sipping champagne and trying to parlay his good looks by breaking into the movies. But he does not. He also reads. It is from this that he notes "A report from the Federal Reserve shows the value of U.S. housing stock rising from about 60% of GDP in 1945 to nearly 140% today." Not content with that, Mr. Bonner goes on to say that "Mr. Greenspan hoped his E-Z credit would lead to a rise in hiring and wages. He knows as well as we do that only if consumers have more money to spend will a real boom get underway. He got the increases he was looking for but not where he was looking for them. The new factories were built in China, not America ...and Chinese workers gained the extra income. The average American worker earns 6%, in real terms, less than he did a quarter of a century ago. During the same time, the average Chinese salary increased 29 times." This shows you that the depreciation of the money caused by the Federal Reserve and that horrid hairball of halfwits has resulted in falling real, inflation-adjusted, incomes. And just in case you have grown accustomed to the Mogambo screaming his stupid little head off about it and are not paying attention anymore because that duct tape over my mouth makes it all muffled, the insane monetary mistakes that they are making every freaking moment of our lives guarantees that when some future Bill Bonner takes time out from sipping champagne and musing about real incomes and hanging up the phone on the future Mogambo who only wanted to borrow a few bucks to get through the weekend, the statistics he will produce then will be worse than these, which are bad enough as it is. Robert Blumen wrote a guest editorial on the Financial Sense website entitled "Inflation, Deflation and the Dollar Short'" which refers to the paper that is causing the big sensation here lately, by which I mean the George Paulos and Sol Paha paper, "A Day Late and Dollar Short." The Paulos and Paha paper says that, and this is the part that has caused all the confusion, debt is actually another name for a short of the dollar when the debt is used to buy an asset that you are betting will go up in value as a function of the fall in the dollar. What they figures happens is that this amassing a huge short position by buying debt leaves them open to a squeeze, as rising prices forces these shorts to buy to cover their short position at a loss, hoping to avoid having to buy later to cover an ever BIGGER loss, and this buying further drives up the prices, and thus increases the pain of the other shorts, who start buying to cover their losses, hoping to avoid having to buy to cover later at an even BIGGER loss (the dreaded EBL), and all of this frantic buying will means a frantic buying of dollars with which to buy to cover, and that means, according to the authors, that the dollar will go, seemingly paradoxically, UP in value! I admit under relentless questioning that 1) I don't recall where I was last Tuesday between 4 and 5 p.m. and anyway I never even met any girls named Wanda Sue, and 2) I have never bought into that whole argument about debt being a dollar-short paradigm. I don't know why, really. My voice drops to a whisper as I fall to my knees and grasp the cuffs of your pants and start groveling and begging for forgiveness, as I am forced to admit that I came to that conclusion not because of any deep theoretical insights. Rather, being a lazy sort of worthless loudmouth garbage, I naturally looked for a way to prove my point that involves a minimum of time and effort, mostly by making things up. But not trusting my own memory nor your continued gullibility, I respond by relying on, as I do for all things, either 1) the Magnificent Mogambo Megacomputer or 2) enough raw firepower to blast my way out. This looks like a job for the computer because all I really want to do is just look at all the other times in history when these huge debt things happened, and see if the currency got more valuable. So I put the rocket-propelled grenade launcher and the mini-gun back in the closet, and with the flick of a finger we flip the "on" switch of the computer. Suddenly, the powerful calculating machine clicks and whirrs, humming and putting out a whiff of burning insulation, searching and calculating, databases being hacked and accessed, confidential credit-card information and juicy porn being downloaded and then, suddenly, a bell goes "ding!" and out of the slot pops -a card! Stepping up to the microphone with the card in hand, the reporters, who assembled into a honking gaggle, are suddenly hushed, and they all lean forward in rapt attention. Mogambo clears his throat. More leaning forward. More throat clearing by the Mogambo. More leaning forward, and by now the reporters are all leaning at such an acute angle that an accident was inevitable, and sure enough, the whole pack of them falls over, collapsing into a confused heap! Seeing them lying defenseless on the ground like that, the Mogambo sees that they had fallen into his trap, and now the tables had turned! Haha! Now we shall see who's REALLY in charge around here! The Mogambo, who may soon be changing his name to Funkmaster M, but keep it under your hat because nothing is definite yet, springs off the stage into their midst! He began kicking at them and screaming "The answer is zero, you stupid twits! Zero! Zero times in history has any currency gotten stronger when something very, very bad happens to very, very big debt! You came all the way down here to ask me that?" Mr. Blumen sort of agrees with me, although if you ask him he will surely deny it, just like Elvis did when I asked if I was his love child and maybe he could slip me a few bucks to keep my mouth shut about it. "With respect to the foreign exchange value of the dollar, most of the borrowers of dollars do not resemble short sellers, in that they have not borrowed dollars and sold them for non-dollar denominated assets that they could sell to buy back dollars. US households, corporations, and governments are not 'short dollars' 'functionally', 'synthetically', or otherwise. They have borrowed the money from foreign central banks and 'sold' it for consumption goods of one form or another." Well, thus he makes short-shrift of that "dollar short" argument. Then he turns his attention to the idea that the currency involved will get stronger, and he comes to the same conclusion as the Mogambo Megacomputer. "For every other country that has had a banking crisis, it has been accompanied by a collapsing currency," because Mr. Blumen says that borrowing money at one bank increases the deposits at all the other banks as that money is spent and distributed, and thus they are all intertwined in every transaction. "The inter-relationship between bank assets and bank liabilities is the mechanism by which debt defaults in one banking sector to cascade through out the entire system. In a crisis, as more banks default, more inter-bank liabilities are defaulted and more credit money vanishes." Robert Blumen continues our education by saying "The 'dollar short' scenario of an increasing value of the dollar assumes that the supply of goods remains approximately unaffected by the liquidity crisis. But if both money and goods are contracting, the purchasing power of money can only increase if increase the money supply contracts faster than the supply of goods." But he notes that this doomsday scenario has not really happened. "An ironic feature of the international financial system in recent years is that a series of credit bubbles driven by the ever-expanding dollar system have resulted in a stronger dollar. US dollars held by foreign central banks serve as part of the monetary base upon which those countries can expand their domestic money supply, driving a boom-bust cycle. A series of crises in Mexico, Asia, Russia, Argentina resulted the accumulation of even more dollar reserves in a rush for the 'safe haven' currency. Whether this process has any limits will be a key to understanding the future of the dollar's exchange value." If he had asked the Mighty "Meathead" Mogambo, I would have told him that there obviously ARE limits to this kind of idiocy, and that is why it has always ends badly, and I will leave it for you to reach the appropriate conclusions as to how this will impact the dollar's exchange value. Richard Maybury, who writes the Early Warning Report, has offered up some interesting facts about this latest escalation of the War on Terror, a few of which I promptly give to you, as it saves me a whole lot of time and prevents me from having to do any real work. "Since the year 1500, there has hardly been any five-year period in which European troops have not been under arms on Muslim soil." "In Aril 1999, Defense News reported that Clinton had used up five year's production of Tomahawk cruise missiles in just three months. He bombed Serbs, Somalis, Albanians, Afghans, Iraqis and Sudanese. I think it was naïve, in the extreme, to think that the U.S. government could go around killing people and no one would get revenge." And he notes that wars are inherently inflationary. "Since the year 3600 BC, there have been more than 14,000 wars, and I have never heard of one that brought deflation." Ugh ---Mogambo Sez: Howard Ruff
famously said that inflation is not rising prices, it's falling
money. And so working backward through that invaluable truism,
the Fed is causing an unprecedented fall in the dollar by merely
issuing so many of them, and so that means we will get rising
prices, and finally, that means that we will have some huge inflation
staring us in the face. Given the inexcusable monetary excesses
that the horrible Alan Greenspan has engendered, it will be a
problem for the rest of our lives. ____________ |
