I had promised that I would be calm

Richard Daughty
...the angriest guy in economics
The Mogambo Guru
Archives
Aug 9, 2006

-- I had promised that I would be calm, no matter how big or small the change Total Fed Credit last week. All the firearms were locked away, and my wife had the only key, as far as she knew, and you can bet I wasn't going to tell her any different.

So, prepped and prepared, when TFC was up by another $7 billion last week, I heroically controlled my impulses of Justifiable Mogambo Homicidal Outrage (JMHO), which I would count as "good progress this week!" But try and get a little GOOD news into your permanent clinical record for a change. It's impossible!

So I was cruising along pretty good when I got to the part where the Treasury Gross National Debt hit, as it usually does, another new record last week, too, taking us up to $8.448 trillion. And yet I was still ostensibly calm and cool, although by this time, beads of sweat were breaking out on my forehead and my hands were visibly shaking.

It helps that I was amused by Barb at 321gold.com, who denoted the event with the nine little talking red heads, whose animated little mouths are clearly intoning "Mo-gam-bo! Klg kirrft!" which, as I understand it, is urban Klingon patois for "Mogambo! The primitive Earth creatures are glgg, and justly so!"

This is especially instructive, in that "glgg" is both, according to the Mogambo Book Of Intergalactic Idioms (MBOII), "1) The excrement of a creature that eats excrement, including its own, making it particularly pungent and poisonous, and 2) a Klingon High Command slang euphemism for 'a planet whose predominant life form is so bizarrely mentally-mutated that it repeatedly allows the use of a fiat currency and/or giving the banking system the ability to create infinite amounts of money and debt, all based on literally zero fractional reserves, despite the fact that every time any stupid government tried it, it always ended disastrously, which is equally as bad as real clgg.' "

That is why I was doubly shocked when I first came across an essay by Aaron Krowne entitled "What (Really) Happened in 1995?" at iTulip.com. At first I was horrified, as I thought, just for a fleeting moment, that he was talking about, well, you know, that embarrassing 1995 mix-up with that traveling troupe of nymphomaniac Hungarian ballerinas, but who turned out to be guys, and, in my defense, they sure looked like it, too, especially the cute one, Sergei.

So imagine my immense relief when the article is immediately, instead, neatly encapsulated in the subhead "How the Greenspan Fed Screwed Up in the Mid-90s and set the stage for the Greatest Financial Bubble in the History of the World."

So what happened? If you are talking about Sergei, he sent a few scraggly flowers, called a couple of times to call me a "twisted pervert", and then nothing! As far as I'm concerned, he's history. And as for the point of the article, what happened in 1995 is that the money started expanding like crazy! In fact, he shows a nice graph of M3 from 1969-2005. He notes "As the historical picture of M3 spanning 1995 shows, M3 expanded like mad starting in 1995."

Why did this happen? He explains "The key event that happened around 1995 is that the fractional reserve ratio was not only lowered, it was effectively eliminated entirely. You read that right. The net result of changes during that period is that banks are not required to back assets which largely correspond to M3 or 'broad money' with cash reserves. As a consequence, banks can effectively create money without limitation."

There! See! It's like I've been telling you! And yet banks being allowed to create "money without limitation" is the very antithesis, 180 degrees wrong, the exact polar opposite from the effect intended by the Constitutional requirement that money be only of silver and gold. And that's why we are seeing inflation rising up! Thank you Supreme Court, you despicable bunch of traitorous buttheads, for allowing the government to do this!

But since I don't want to get myself worked into a frenzy of name-calling at the low-life losers on the Supreme Court, I keep it light. Jumping up and innocently playing the devil's advocate, I remark, helpfully, "That seems hard to believe!" He replies "I know that sounds hard to believe, but let's look at the facts."

I was secretly peeved that he did not say "Good point, Mogambo!" or "Thank you, Mogambo!," but he did not. So I sat down, sulking, and was intending to glower at him and, by way of exacting my petty revenge, stare daggers into his eyes until he got a migraine headache, but I forgot all about that when he went on to say "Imagine that this change in banks' ability to create loans coincided with new and exotic forms of money being invented via the securitization of debt and extended to entirely new asset classes." I gulp. Suddenly, in my mind, I hear, off in the distance, a very loud "bang!" Quite "boom-like" in nature, actually.

This doomsday scenario dovetailed nicely when he went on to say, "And made available to a far larger range of people that previously did not qualify for loans." As a guy who is such a loser that I cannot possibly qualify for a loan, I understand what a deadbeat I am, and my mind is overwhelmed by the enormity of it all, as I could plainly see a large, terrifying mushroom cloud rising into the air! I don't know if he was reading my mind or what, but he summarized it perfectly when he said "This essentially describes our system today."

He adds, perhaps hoping to make me feel better "If this sounds like a bad idea to you, even if you are not an expert in banking and finance, you can give yourself a gold star for having a good intuition, because this arrangement is not only bad, it is catastrophically bad." As the Klingons would say, "Quite clgg-like!"

He notes that this is all carefully explained by the Federal Reserve, as he reports them as reassuring us wimpy scaredy-pants little girlie-men by soothingly saying "Although reserve requirement ratios have not been changed since the early 1990s, the level of reserve requirements and required reserve balances has fallen considerably since then because of the widespread implementation of retail sweep programs by depository institutions. Under such a program, a depository institution sweeps amounts above a predetermined level from a depositor's checking account into a special-purpose money market deposit account created for the depositor. In this way, the depository institution shifts funds from an account that is subject to reserve requirements to one that is not and therefore reduces its reserve requirement. With no change in its vault cash holdings, the depository institution can lower its required reserve balance, on which it earns no interest, and invest the funds formerly held at the Federal Reserve in interest-earning assets."

In short, "We gave your money to someone else to hold, so it's not our problem!" Hahaha!

He finishes up with "The Fed's behavior has been a crime visited upon the general citizenry, and the impact of the resulting asset bubbles and inflation will eventually be recognized as harming the most vulnerable the most severely."

And that last phrase about "harming the most vulnerable most severely" is poignantly portrayed in Waveney Ann Moore's article "Lean Times" in the St. Petersburg Times newspaper, where she chronicles a sudden flood of appeals to local charities and agencies and governments for assistance in paying rents, utilities and buying food. This is the initial symptom of the price inflation that follows monetary inflation.

And, of course, there is the desperate need for a raise in the minimum wage, in that $5.15 an hour is the lowest real (inflation-adjusted) wage in fifty years.

Nevertheless, I was happy to see that Congress engineered a close defeat of the increase in the minimum wage. With the cost of things rising (thanks to the price of energy rising, thanks to the dollar falling in purchasing power, thanks to the idiotic Congress constantly deficit-spending, and ultimately thanks to the horrid Federal Reserve creating the money to create some debt to buy the debt), a raise in the minimum wage by 40% in three years would be too, too, too much. Think "Smoot-Hawley", which was a tariff widely accepted as a prime cause of the Great Depression. This mandated raising of wages, and thus mandated higher prices is, in effect, just another tariff! And damned big one, too!

Especially since the working people with more seniority, who are now making 40% more than minimum wage thanks to their years of service, are going to get real testy that they didn't get proportionally higher raises, too, as now they are only making minimum wage again! As we working-class slobs in the dregs of the labor pool say when this happens "We get the same coolie wages as a rookie new hires!", although it is just me who says "And as a guy who has to clean the Executive Washroom, I say that you guys are slobs!"

And then griping and complaining about raises, coupled with the price inflation that is already being felt, concessions will be made, and higher and higher wages will go bouncy, bouncy, bouncy through the economy, always soon reflected in higher prices, and then more higher prices, and more and more higher prices, and then government needs more money to pay both the costs of bigger assistance programs to help both the increasing number of "the needy", and the need of huge existing programs for more money to pay higher expenses, and higher wages to themselves, too!

And then the minimum wage people will have to start screaming for yet another raise in the minimum wage, and it's all going around and around and around, prices going higher and higher, spiraling, spiraling, spiraling up and up, until the economy is in a shambles, and I am crying in fear for America, and my family and neighbors are crying because I won't give them any money, and my wife is crying "Please give them some money! Inflation is killing them!" and then pretty soon we are all sobbing and crying and blubbering about the horrors of inflation, until I get tired of their whining crap because I told them to buy gold, but they didn't listen, and so I let loose with a couple of blasts of a 12-gauge shotgun as my clever, non-verbal way of saying "And who's laughing last, losers?", and then their bitter tears turn to screams of fear and they scurry to get the hell out of my house, which is all I wanted in the first place.

Oh, I am sure that workers need higher wages, as prices have risen a lot in the last few years. And yet, while your TV was ablaze with breathless reports that 80% of Americans support a higher minimum wage, none of the precious news media carried the exciting video footage of the recent Mogambo press conference about the same subject, where he issued a Memorable Mogambo Memo Moment (MMMM) that read, in its entirety, "To minimum wage workers and everybody else, hear my voice! Suffering from inflation is what you are getting because it is what you deserve, you stupid halfwit morons! Because when you elect morons to spend and expand the government like this, and you let a central bank empower itself to create monstrously excessive amounts of money and credit like this, by enabling the creation of excessive amounts of debt, more and more, year after year, then how can you be so stupid, so incredibly stupid, so impossibly stupid, so arrogantly stupid as to think that for once in all of history it would NOT lead to the horrors of inflation in prices? Hahaha! I laugh at you in contempt, and all my little buddies in this whole sector of the universe laugh at you! And with any luck, some Disgusting Mogambo Spittle (DMS) will fly from my lips while I yell at you, and it will land on your shoe, which will add that extra, unexpected little bit of gross unpleasantness that defines the Whole Mogambo Experience (WME)!"

So I am under control up to this point, but cracks appeared in my brave, stoic visage when I saw that, due to the incredible mismanagement by the Federal Reserve and criminally incompetent Congressional oversight, the dollar seems to be rolling back over, and now my country's currency is falling, falling, falling in purchasing value vis-à-vis other currencies. And it is doubly worse, in that the other currencies in the world are losing buying power, too, by committing the same inflationary sins of excessive creation of money and credit, using a fiat currency and a ludicrously-low fractional reserve ratio! So while all major currencies are falling in buying power, the dollar is merely suffering the most!

And none of this was helped by the Fed not raising interest rates on Tuesday.

All of this means that anything imported is going to rise, rise, rise in price as the dollar falls, falls, falls in value. Like oil. As soon as I remembered that unsettling little factoid, that's when I lost it completely! The next thing I know, I am on the floor, desperately wrestling with my twisting, screaming, kicking, scratching, biting wife as I am trying to pry that damned key to the arms locker out of her hand, and I am crying out, "I feel an urge for Mogambo Vengeance Of Outrage (MVOO), vexatious woman!" The next thing I know, she's all over me like some groin-kicking Amazon from hell, only with more man-hating fury ("Born of revenge!", as she likes to put it).

So, my whole Mogambo groin area (WMGA) was hurting and throbbing, and I temporarily lost interest in weaponry, as my life was swimming in front of my eyes. But thanks to my unnatural fixation on inflation, all I could see was something recently sent to me from alert reader Bill W., who describes inflation perfectly by saying, "If someone gave you a $100 dollar bill in August 1971, and you put it in a book and forgot about it, only to find it today, you could only buy what cost $20 in 1971."

My immediate reaction was "Book? What book? We have a book around here someplace that has a hundred bucks in it? Great!" and then, energized, I jumped up, and the whole rest of the day was spent frantically-but-fruitlessly searching in books for my hundred bucks, but never finding it, and then having to confront my family about how they (a bunch of ungrateful, thieving parasites who are bleeding me dry as it is), stole my hundred bucks! Of course they denied it, the liars. See what I have to put up with around here?

But this is not about how the long-suffering Mogambo (LSM) was cheated out of another hundred bucks, but about inflation and how Bill is running around showing off his hundred clams like he's such hot stuff. Waving his precious little hundred-dollar bill in my face, which makes my loss hurt even more, he says "Put another way, in order to buy something that would have cost $100 in 1971, you now need $500."

On the other hand, he cheerfully notes that "If that $100 bill had kept its value, you could have purchased 165 gallons of gas ($500/3.03 for regular unleaded)." My eyes grow misty as I contemplate the concept of filling up my gas tank ten times for a hundred bucks, and I mentally calculate how far, far away I could drive to finally get away from my family and responsibilities with ten tanks of gas! But my fantasy went "poof!" when he burst my little bubble by going on to say "Because of the silent tax (inflation), you are only able to buy 33 gallons ($100/3.03 for regular unleaded)."

This is how inflation is the economy-killer; money loses its buying power. And the horrendous over-creation of money and credit by the Federal Reserve all these decades has resulted in the dollar losing about 80% of its buying power since 1971, the year that the dollar's last tiny, tentative, tenuous connection to gold was severed by Nixon, another Republican scumbag.

So with the dollar turning to crap and economic crises are at hand, then gold will, if it behaves as it always has in the history of mankind, go up and up and up in price, approaching infinity as the dollar approaches zero. I know what you are thinking: You are thinking "How high can gold go?"

If you want to know how high gold will go, then you are asking the wrong guy. But perhaps my old buddy Phil S. can help, as he makes the interesting calculation of valuing the Fed's hoard of gold. He first multiplies the number of ounces of gold said to be in the vaults of the Federal Reserve (according to them) times the rough, going-price of gold. "260,000,000 oz X $650 = $162,500,000,000."

Then he adds the fact that the "2005 deficit, including accruals, was $3.5 trillion!!" Editorially, note the rare double exclamation point, the use of which becomes apparent when he divides this real, accrual-based deficit by the number of ounces of gold ($3,500,000,000,000 divided by 260,000,000 oz ) to derive the startling conclusion that "$13,462 per Treasury oz equals 1 year's deficit!!!", which brings us to a perfect example of the extremely rare triple exclamation point. And rightfully so! Perfectly done, Phil!

So the next time somebody asks you how high gold could go, since $13,462 is just the dollar value of the 2005 government budget deficit alone, anything up to $100,000 per ounce is not too unreasonable to suit me!

And since we are talking about making big money in gold, this is the perfect opportunity to renew my irritatingly loud demand that you get up off of your lazy butt and buy silver, as I think silver is the asset that is poised to soar higher than any other. In that regard, I direct your attention to the news sent by alert reader BM, who writes "I watch the warehouse of Comex silver stocks. Lately someone has been stealing the silver and now it is down to 98 million ozs."

Then he asks the intriguing question "How long before the hedge Fund Masters or one of a thousand billionaires start figuring out how cheap it will be to buy up the rest of the warehouse silver which will make the price of silver skyrocket like a moon shot?" Looking at my watch, I figure it will be any second now, which explains the sense of urgency in my voice, and the exclamation point at the end of this sentence, when I tell you to Buy Silver Now (BSN)!

-- According to the numbers, the total number of Americans actually categorized as "employed" fell by 34,000, but, oddly enough, "all non-farm payrolls" went up by 113,000 to 135.354 million.

George Ure at URbanSurvival.com also took a look at the Department of Labor unemployment report, especially Table 12, which is the U-6 rate, which he calls "unemployed plus PhD's flipping burgers." He notes that the U-6 rate "rose from 8.7% of the workforce in June, to 8.8% of the workforce in July."

He goes on to fill in the missing detail when he reports, "But those percents don't get across how many people are un- and under-employed. It's 13.33 million." And I will tell you that 13.33 million people is almost 10% of total payrolls!

Perhaps by the way my face is suddenly ashen and I am clutching at my heart, Mr. Ure quickly changes the subject, and goes on to say that, depending on your initial assumptions, "There's a strong case to be made that the most of the world's markets will collapse in the next two years or so, and with it, most of the companies in today's indices will likely go bankrupt. It's a startling enough conclusion. I am still a bit off-balance from the research. The conclusion is both startling and deeply troubling."

Well, I find it surprising that he thinks it is "startling and deeply troubling" when he has known, as I have known, as all thinking people have known, for as long as I have known him, (which is so long ago (audience shouts out "How long ago, Mogambo?"), that I had only two voices talking in my head), that this monstrous monetary madness of the Federal Reserve was going to end (**Note to soundman: turn on spooky echo machine) very, very badly badly, and we have both said so many, many times times, enough to make us both both, (as he terms it as he terms it) psychonomic psychonomic.

The only thing that could possibly be "startling and deeply troubling" to me is to find out that this stupid, insane Federal Reserve's idea, of constant, exponential expansion of debt and money, will work out in the long run! Hahaha! Every government that ever existed has always wanted to that exact thing! And they all, sooner or later, always spent too much money, and were forced into keeping on spending too much money. I fall dramatically to my knee, and in a voice so deeply sorrowful that it breaks your heart, say, "And it has always ended in (long pause for dramatic effect) utter disaster." Applause applause applause. Drop curtain. Take bow.

In light of that powerful, powerful performance, it would be "startling and deeply troubling" to find that, incredibly, everyone actually CAN achieve wealth and prosperity by constantly borrowing for consumables and services! Debt can rise to infinity!

And it would certainly be extremely "startling and deeply troubling" to suddenly discover that there is such thing as a free lunch, especially when there is no other example in the rest of Aristotelian, Newtonian or Einsteinian physics.

And think about me! I can't even imagine the difficulty of trying to explain to Klagnarg The Implacable, the Conceited Prime Overlord of this sector of the galaxy, that he was not aware that the brain-dead inhabitants of Earth (officially classified as an "undistinguished race of tentacle-impaired creatures" out in the (as we say) "wrong side" of this spiral nebula), are the only ones in the entire history of the universe, in all of time and space, to have actually figured out a way to make this seemingly insane economic theory work out in practice!

These Earth nitwits! Somehow they have succeeded, when all others have failed, to use a fiat currency and a fractional reserve banking system to successfully merge the government and the economy, but with such genius that the currency does not crash, inflation does not destroy the wealth and the economy, no war is fought, millions of people do not die, and nobody will suffer the inconvenience of being reduced to only getting thin, no-cholesterol, imitation cheese ("Made from mucus, so you know it's pure!") on your stupid pizza because the tasty pepperoni and the juicy ham and the nitrate-enhanced sausage and artery-clogging bacon are too expensive.

-- That the world is full of idiots masquerading as economists is obvious. And the fact that some of them work at the Economist magazine is obvious too, in the editorial, "The Perils of Pausing", where we are treated to the same "the only thing that matters is low interest rates" lunacy that is the bedrock, starting assumption of all of modern (neo-Keynesian/econometric) economics. The anonymous author writes, "If Mr. Bernanke and his colleagues raise rates too far, they risk pushing a faltering economy into recession. But if they stop tightening too soon, inflation may get out of hand." Hahahaha! See what I mean? They think that the only thing that matters is interest rates! Hahaha!

But even the Economist is optimistic, and in the same little essay cheerfully concludes "The rest of the world is growing healthily." Hahaha! They have been growing because Americans were, and are, borrowing from the rest of the world in order to consume their economic output, and they are all expanding their money supplies at insane rates, too, so that their governments can deficit-spend. This is NOT "healthy", regardless of what somebody at the Economist writes.

But always ready to take a chance on new technology, I take this fabulous lesson in economics to the supermarket, where I soon get into a heated discussion with the doofus little manager about how extending perpetual credit to me, so that I could buy from him, is now considered "healthy growth" by the Economist magazine.

The tears in my eyes, and in the eyes of the store manager, are a mixture of those caused by laughing at such simple-minded absurdity, and those caused by laughing in contempt, as it is obscenely ludicrous to hear supposedly learned people, in powerful places at prestigious periodicals, saying such ridiculous things.

Such as the one that took Bob Wood, of KMA, aback. This gem, in USA Today, read ''The Bush administration opposes including Social Security and Medicare in the audited deficit. Its reason: Congress can cancel or cut the retirement programs at any time, so they should not be considered a government liability for accounting purposes''. Hahaha! If you want a good feel for your future Social Security benefits, here it is! They already know it's going to be slashed, and so they don't even have to account for it!

Pursuing perfect punctuation as befits the sentence, I am grabbing for my red editor's pencil when he beats me to the punch by immediately adding "Let me add a couple of enhanced !!! after that one", which is, angrily putting away, unused, my red editor's pencil, a little more like it, Bob!

Then he adds to my disappointment of not being able to criticize him mercilessly for his punctuation gaffe by showing off, by easily providing the perfect analogy, much better that I could do, by noting that since we are free to cancel our electricity, cable and health insurance at any time, we don't have to budget for them anymore! "Hey, this is great news," he said. "This new accounting stuff is great!"

-- Bankruptcy is completely avoidable if you have a fiat currency. Therefore, we don't have to be bankrupt, as a country, unless we want to. If we don't want to, then simply print up, say, a billion thousand-dollar bills for every trillion in debt we want to buy, and then use the newly-printed money to buy, and thus retire, the debt! Instantly, no national debt! Zero! No problem!

They just tried a variant of this trick in Zimbabwe, where they lopped three zeroes off the currency, and gave everybody a tight deadline to exchange old money for new (after which the old money would not be exchanged!) and, even so, subject to low limits on how much you could exchange at one time, which effectively confiscates all your money above the level of your similarly bankrupted peers. Welcome to fiat currency hell.

Ugh.

****Mogambo sez: Gold and silver are rising in terms of dollars because the U.S. dollar is the currency of a nation of vicious idiots, who are now forced to maintain the viability of their idiocy with more viciousness.

Gold and silver, on the other hand, are the currencies of the anti-idiots. The markets are showing us what they think of each. Stay with the winners, and buy more gold and silver every day.

And while you are out there guaranteeing your future happiness with your astute "buy gold and silver" investment strategy, pick up some commodities (especially oil), too. Soon you'll be pleasantly pleased that you did.

Aug 8 , 2006
Richard Daughty

email: RichardSmithGroup@verizon.net
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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.