My pink pacifier's stopped soothing

Richard Daughty
...the angriest guy in economics
The Mogambo Guru
Archives
Aug 16, 2006

-- You probably know me for the real peach of a guy I really am. And in the few times per day when I am not, there is always a lot of anger about the mismanagement of the economy, replete with screaming and yelling, the sound of approaching sirens and, sometimes, a lot of spent bullet casings scattered on the ground. It merely adds up to the new psychiatric diagnosis, Mogambo Psychonomic Syndrome (MPS), as recently discovered by Dr. George Ure.

So when Total Fed Credit went down by $7.18 billion last week, I really lost it, MPS-wise. I'm running frantically around the living room, dressed in an adult-sized disposable diaper, desperately sucking on this ridiculous pink plastic pacifier that seems, suddenly, to have lost its power to soothe, and I'm snarling and mumbling something that sounds like "Mmfmn ngnngg gagunm mumm unh!"

My wife, barricading herself behind the couch, is frantically leafing through the Market Laboratory section of Barron's, hoping to find some good news to calm me down. I can barely hear her, as she is quietly muttering to herself "No, I better not tell him that the Gross National Debt is at a new record, up $8 billion from last week! And if I tell him that Consumer Installment Debt went up $11 billion in the month of June, he'll really lose it!"

There was a little rustling of paper, and I hear her whistle softly to herself "Wow! M2 money supply was down again!" By this time I am clenching my fists, trying to control my mounting rage. Ripping that stupid little pacifier out of my mouth and throwing it to the ground, I bellow, "What the hell did you say?"

Nervously, quickly, she stammers, and then calls out the first thing her eyes light upon in the newspaper. "Well," she hesitantly says, "ummm, uh, well, foreign holdings of U.S. debt held at the Federal Reserve went up by $8.7 billion. So that's good news, right?"

Initially, my heart was partially melted by the charming little hint of desperate, almost child-like, hopefulness in her voice. But it was, alas, to no avail. I patiently and politely explain, for what seems like the thousandth damned time in a row, "What? What in the hell are you talking about, you silly, stupid Earth woman? The enormity of it all is the ugly, ugly fact that foreigners now get a bigger chunk of America's money and wealth!"

Obviously working myself into a hissy-fit, I am yelling "And beyond the Mogambo Paranoia And Xenophobic Hostility (MPAXH) inherent in that basic fact, the worse news is that the money to finance all that this spending and new debt and new credit will be created, literally from thin air, by the damned Federal Reserve! Do I have to tell you, again, about what horrors await those who allow banks to create excessive amounts of money at their whim? Do I?" I screech. Nobody says anything. There is nothing but total silence, as the universe itself bates its breath, awaiting my next move. Birds stop singing. Dogs stop barking. Babies stop crying.

Satisfied, I continue ominously "And you think that giving a bigger portion of that money to support some rich guys and governments in Europe, or Japan, or China, or someplace, is some stupid good news or something?"

Still, there was not a sound! Instinctively, my hand slowly started inching towards the bazooka I keep in my shoulder holster, which I admit is not only very heavy and unwieldy, but stupid, too, although it is somehow very comforting in a "raw firepower" kind of way. My fingers close around the cold steel of the trigger as I say "Do you comprehend, even remotely, the staggering enormity of America being looted by the Federal Reserve, which is just a private bank owned by a shadowy, semi-anonymous group of people that includes a lot of foreigners, all for the obscenely profitable benefit of these selfsame mysterious foreign strangers? Do you?" I viciously snarl.

Suddenly, from behind the curio cabinet, my daughter springs out, puts her little fists on her hips, and with a booming voice says "I, the one known as Daughter-Possessed-By-Demons, know!" I watch, dumbfounded, as she bellows "This means that we will soon be taxing ourselves more, and imposing roaring inflation on ourselves (which is, actually, just another gigantic tax, in effect) by letting the Federal Reserve create the money to finance the government's increasing deficit-spending, which is supposed to 'offset' the government's increasing debt without resorting to the alternative of levying taxes. And this increased inflation in the money supply will be followed by horrific inflation in prices. Ain't that right, mighty magnificent Mogambo moron (MMMM)?"

I am stunned! She's exactly right! I naturally suspect a trick of some kind. So, cautiously, I test her by leaning forward, looking her right in the eye, and open-endedly asking, "And...?" She immediately answers "To support rich foreigners who can't even speak English without some thick, stupid accent, who drive foreign cars, who marry other foreigners, and who actually live in foreign countries, too! And then, while they are living it up, having a wonderful time spending our American money and eating weird, exotic foods like, oh, I dunno, filet of marmot earlobes or something, we Americans will suffer from crippling inflation in prices as the dollar is devalued to accommodate them in their gluttony!"

For some reason, the shock of hearing my own kid saying this, and all this talk about devaluing the dollar, makes me suddenly recall the essay entitled "Vox Populi, Vox Suckers" by Gary North of LewRockwell.com, who writes "The history of the demise of the dollar is the history of the replacement of a gold coin standard with the Federal Reserve System. The decline began in 1914." I remember thinking to myself, "Huh? Why am I remembering this, and why right now?" Then I see the wisdom of it when I further remembered that he went on to write "But it has come in waves of depreciation. We are on the cusp of the dollar's next great decline."

I am kind of freaking out here about what the kid and Dr. North are saying about this coming decline in the dollar, and so I was overpowered when she, again correctly, says "And don't even get me started on Robert 'Elliott Wave' Prechter and that whole Socionomics thing, Pops, where society mirrors the economy, which both break down into a post-Apocalyptic nightmare when the buying power of the currency is destroyed!" Suddenly, the room was silent. I looked at her. She looked at me. Then she said, softly, "We're freaking doomed!"

Incredulous at these words, I look at her with wide-eyed in wonder, and ask, "Did you say 'We're freaking doomed'?" and she says "Yes!" Delighted beyond words, I excitedly cry out "Daughter!" as she excitedly says "Father!" Spontaneously, we rush together, and fall into an embrace of joy, elated at our reunion!

Overwhelmed at the tenderness of this unexpected "father-daughter reunion moment", I spontaneously blurt out "I love you! Loan me $20!" Immediately, out of the blue, she says "I love you! Loan me $50!" The actual evidence for what happened next is sketchy, but everyone agrees that I called her a greedy, hateful little snot, some bad words were spoken, and for some reason she abruptly stormed out, shouting "I hate you! I hate you! I hate you!" None of this is surprising to me, as that is how most conversations usually progress around here, usually ending with the old lady starting up with me about my "attitude."

But this is not about the heartbreaking story of how a loving father and devoted husband was cruelly mistreated, but about inflation, and from Market Watch we tremble in our boots to learn that "Prices of goods imported into the U.S. rose 0.9% in July on the back of high oil prices, the Labor Department said Friday."

I know what you are thinking. You are thinking to yourself "I don't care that prices rose for some stupid imported big-screen TVs, or some of those really nice DVD player/recorders, because I know a guy, who knows a guy, who knows a guy who can get me a stolen one for ten cents on the Manufacturers Suggested Retail Price dollar!"

I leap up and shout, "Not so fast there, my little buckaroo darling (LBD)! Man does not live by black market entertainment centers alone!" Then, wordlessly, I extend the long, bony Mogambo finger (LBMF) to point to the next item. As the camera pans in for a close-up, we can begin to make out the words "Imported-petroleum prices rose 4.7% in the month, and are up 29.6% year-on-year." Yow! A 30% increase in price in 12 months? And if that's not inflation, then what in the hell IS it? And as the price of oil affects everything, this means that everything will soon be more expensive! Yow! Yow! Yow!

Instead of bolting in fear to the nearest Mogambo Inflation Shelter (MIS), I decide to heroically be calm and quiet, lest I alarm the children and women-folk. Then, having shut my fat mouth for about three seconds, I can keep my silence no longer. So I leap up and say, with an arrogant sneer in my voice, "Oh, yeah? You want annualized inflation? Is that what you want, you little punk? How's about my taking that monthly 0.9% inflation in imported goods and annualizing THAT?"

Without waiting for an answer, I spin around, grab the calculator and multiply 0.9 times 12, and with a flourish, I hold it up for everybody to see. The evidence is plain; that 0.9% monthly inflation comes out to, annualized, 10.8% inflation per year! And it is worse than that, because the increases in prices are continuous over the year, so there is a compounding effect, too! Even compounded monthly, instead of every damned day like it is in the real world, this works out to 11.4% inflation per year!

And were you asking "Yo! Hey! Mogambo! How do we make a profit on this inflation thing?" My answer is always the same: Invest in commodities, my Darling Mogambo Cherubs (DMCs)! And in that regard, reader Kevin K wants to do a little horse trading, and he offers, as his part of the deal, the invaluable information that "Ozark spelled backwards is Krazo", which explains a whole lot of things. So, thanks, Kevin!

He offers this priceless nugget of information in exchange for worthless Powerful Mogambo Know-How (PMKH) of how one actually invests in commodities, as I constantly recommend that everyone be doing. Like oil, for instance, which I am even MORE constantly recommending!

The answer is that, unless you are a trader, to invest in commodities you are pretty much limited to, somehow, buying the stocks of the companies that are connected with the commodity that you are interested in (either buying individual shares directly, or with a mutual fund sector portfolio, etc), or buying shares of the Exchange Traded Fund (ETF) that deals in them. Then it is "sit back and relax time."

For those who want to actively trade with the charming idea of making a lot of money fast (LOMM) in the options and futures markets, good freaking luck, dude. What nobody seems to realize, except by bitter, bitter experience, is that these are priced according to the Black-Scholes equation, which calculates the fair price for an option (given the variables of, among other things, interest rates, volatility, time), which means that, in a manner of speaking, you have a 50-50 chance of winning if you are making the bet.

But then everybody down the line takes this "fair price" and adds expenses and fees and costs and commissions, and a little bit to the price, too, so that they can all make a little guaranteed profit, at your expense, for simply being greedy middlemen. Thus, it is guaranteed that by the time the future or the option comes to you, tax-tag-and-title, you will, on average, in the long run, lose money because it was grossly overpriced to start with.

And you are such a little fish that you will not pursue arbitration when you realize you have been eaten by the sharks, which you agreed to do when you signed up for the brokerage account, much less sue, because the cost and sheer hassle of arbitration is more than what is at stake, and by a long shot, too. And everybody knows it, too, and that is why you are even MORE guaranteed to get screwed by all those guys.

But this is not about my fervent belief that the commodities markets are rigged and crooked, but about investing in owning oil directly, and how this is, apparently, a bad idea, as I gather when I, an ordinary, law-abiding citizen, go down to City Hall to get the zoning variances and permits necessary to erect an oil storage facility in my backyard, they treat me like I am crazy!

But, I cleverly counter, "If I am really crazy, then I am handicapped, right? And if I am handicapped, then why I can't I park in the handicapped-only parking spaces? So screw you, bozo! Give me my oil storage facility!" So, we go back and forth like this for awhile, and I end up yelling at them to "Look at the dollar, you low-life blockheads! The price of oil is going to climb and climb as the dollar falls and falls in purchasing power, because the government is deficit-spending, and the Federal Reserve is creating the necessary excesses of money and credit to finance that increasing debt, which is the very damned, damned, damned definition of monetary inflation, you halfwit municipal turkeys! All this monetary inflation means that a resultant roaring price inflation is guaranteed, which can be actually defined as a yet weaker dollar, and so oil will go up and up and up in price! Up, jerks! Up!"

Inspired, I gracefully bound atop a chair, and with a theatrical flourish, I shout out "NOW who's crazy when he wants to build an oil storage facility in his backyard, you dim-bulb public employee trash? Or do you want me to jump over this stupid little counter of yours and give you a little Outraged Mogambo Citizen (OMC) to further convince you?" which was, apparently, the wrong thing to say, as I did NOT get my zoning variance or the permits. And they made me clean my footprints off of the seat of the chair, too.

I never even got to the point where I was planning to yell in anger and stunned stupefaction that government employees ("them") now earn twice as much money and benefits as us ordinary American workers ("we"), per an editorial in Tuesday's Wall Street Journal entitled "Welcome to Club Fed." In it, we discover that the average federal government job now pays $106,579 per year, which is almost exactly twice as much as the $53,289 in money and benefits earned by the "typical private worker" per year. And, although the article does not mention them, state and municipal workers are right up there with them.

But this is not about how America's "government servants" (one out of every six workers) now make more than us private-citizen, tax-payers who are, by default, their "employers", or even about how these same arrogant, overpaid weenies say I can't build an oil storage facility in my own backyard, but about inflation. And it is not just oil where inflation will hit, as it will hit in interest rates and the prices of, literally, everything.

For instance, we learn from Rob Peebles' Random Walk column at PrudentBear.com that "one out of three Americans worries that rising monthly payments will force them to sell their home and buy a less expensive one. One-third!"

Even worse, he adds that inflation is everywhere, and that "surprisingly, these skittish homeowners aren't worried so much about escalating mortgage rates as are they are about rising property taxes and energy costs. The survey reports that state and local property taxes were up 13.8% in fiscal 2004. Likewise, the cost of electricity was 12% higher year-over-year in February 2006 with natural gas prices up 28%. As a professional consumer economist would say, 'Yikes!' "

Well, I am thankful to finally learn what a "professional consumer economist" would say, as when I try to attend their precious little meetings, they slam and lock the door in my face! And because I can only hear a few muffled things through the closed and locked door before the security guards haul me away, I never got the chance to hear them actually say "Yikes!" But it is, I will agree, a good word for it, especially when I add in the higher costs for homeowners and liability insurance policies, too. Yikes!

-- In light of the fact that economic crises usually result from problems in the banks occasioned by their acting like the greedy, grubby, lying gangsters that they are, and from whence the destructiveness of excessive money and credit originate, it is with horror that we read in MoneyWeek.com (getting the British view of things), that "Although banks have been reporting record profits, bad debts are also mounting fast. Barclays this morning has reported that 'impairment charges' rose a whopping 50% in the first six months of this year, to £1.06bn. The lion's share was due to UK Barclaycard customers having more trouble paying their debts."

Even more alarming, they add that The Mogambo was right when he said that inflation means we are all freaking doomed! Well, they did not actually say that in so many words, but they hinted at it when they did go on to add "According to the British Retail Consortium, prices in shops rose 0.69% in July, the largest rise seen since July 2004, when prices rose 1.18%. Once shops start to raise prices in reaction to rising costs, consumers may start to notice just how expensive life is becoming and ask for higher wages. That would mean higher inflation which would in turn lead to more interest rate hikes." Like I said; we're freaking doomed!

In bearing this out, we need only remember that unit labor costs here in America are rising at a 4.2% annual rate. And it is a truism that when costs rise, other prices are right behind them. And, lamentably, rises in production costs are everywhere, too. For instance, Russ Winter, in his Winter Watch newsletter at Xanga.com, reported that last month in Guangdong, which is China's main exporting province, the government has "ordered a 17.8 percent increase in minimum wages", which means that inflation in prices will be there shortly, too.

And even Enrico Orlandini, of the Dow Theory Analysis newsletter, reports, in his market essay entitled "Playing With Fire!", that the chart of the CRB Index (the index of commodity prices) since 1987 "is impressive and extremely important at the same time. From an intellectual point of view, you can't look at this chart and not see inflation. As a matter of fact, it screams inflation! The bonds smell this and will, sooner or later, plumb the depths in terms of price."

Horrified, I run to the Dow Jones Corporate Bond Index, and with my throat suddenly constricting, I read that the index fell 0.59 on the week, dropping to 187.17. Half a point down in a week!

So he's right! Bondholders are losing money as the bonds fall in price! And I'm right, too, when I say that bondholders are idiots, as they keep buying the damned things by the literal ton, locking up their money to get the lowest yields in decades, and for decades to come! Hahaha! Idiots! Hahaha!

Since I am laughing so much, it must be time for The Mogambo Biggest Belly Laugh Of the Week (TMBBLOTW), which comes to us from the recent FOMC meeting, where their press release reads, in part, "Inflation pressures seem likely to moderate over time, reflecting contained inflation expectations and the cumulative effects of monetary policy actions and other factors restraining aggregate demand." Hahahaha!

I am not sure whose "inflation expectations" are "contained," but it sure ain't anybody I know! And as for inflation to fall because of the "cumulative effects of monetary policy actions," hahahaha! In other words, they are saying that the roaring inflation in prices we are seeing, which was caused by the decades of Federal Reserve expansion of money and credit, is "likely to moderate" even though nothing has changed, and they are still increasing money and credit with customary abandon! Hahahaha! Stop! Stop! My sides are hurting from the laughing!

My laughter turns to chilling fear when we consider the rest of the sentence, which is that inflation will also be kept low because of unnamed "other factors restraining aggregate demand," which I interpret to mean "Prices are so high that I can't afford to buy as much stuff", and thus demand "moderates" because I am out of money, out of credit, and up to my ears in debt.

But aggregate price pressures, despite the laughable opinions of the idiotic Federal Reserve, do not solely derive from aggregate demand, and the biggest driver of price inflation is actually the damned Federal Reserve itself (and all the rest of the world's central banks) creating so damned much money and credit!

Capturing second place for MBBLOTW is an article in Monday's Wall Street Journal entitled "Key Inflation Index May Get Greater Precision", which has some guy named Elliott Williams, of the Bureau of Labor Standards, ludicrously arguing that you will get a more accurate measure of inflation if you measure it with a precision of one hundredth of one percent! Measuring the change in consumer prices out to three decimal places! Hahahaha!

This is equivalent to asking me how much older I am since January 1, and I tell you that this morning I was 1.133% older, but this afternoon I am 1.134% older, like it makes that much of a difference! Hahahaha!

According to the article by Greg Ip, because of rounding errors, figures for inflation can be (hold onto your hats!) misleading. Oooooh! No kidding? Hahaha!

"How misleading?" you ask. Well, decide for yourself when he writes "For example, an increase of 0.249% would be rounded down to 0.2%, while an increase of 0.251% would be rounded up to 0.3%." Hahaha! Talk about nitpicking! That's what government employees do, nowadays!

Mr. Williams is apparently unaware that he is also revealing that he has far, far too much time on his hands and his job should be terminated, as (even worse for Mr. Williams) Mr. Ip finishes up his piece by acknowledging that it doesn't mean squat, as "Over time, rounding errors tend to offset each other and thus are less of a factor in annual inflation rates than monthly inflation rates." Hahahaha!

-- Doug Hornig, writing his column the Daily Resource, at Kitco.com, says of the recent decision to raise interest rates "The decision was nearly unanimous, with 9 of the 10 members voting for the pause. Jeffrey Lacker, president of the Richmond Reserve Bank, was the only one to break ranks and vote for a rate increase." Good for Jeffrey Lacker!

But such reports are, I am happy to say, wrong when they say that only Jeffrey Lacker dissented, because if you listen carefully to the tape of the meeting, you can clearly hear me screaming my vote through the closed doors, and although muffled, I can clearly be heard voting to "Raise rates, you stupid blockheads! Inflation is roaring, thanks to your own incompetence and the utter failure of your stupid theories! Don't make me come in there and start kicking some Fed butt, because I'm just the guy to do it!" Then there was the sound of a scuffle, and my screaming "Your and your insane neo-Keynesian/econometric economic theories are doomed! Doomed! Mises and the Austrian Business Cycle Theory school of economics will destroy you!" Soon, my voice grows slowly more distant and fainter, ever fainter, until there was, at last, silence.

So I never got the chance to say that they can stop inflation, and forever prevent inflation (which is their damned job, for crying out loud!), if the Federal Reserve keeps the money supply constant and funded only with adequate bank deposits! It's as simple as that!

But we don't. And that is why we are suffering. And that is why we are all doomed.

Ugh.

****Mogambo sez: The lease rates for gold have widened to eye-popping spreads, and so the New Stupid Mogambo Gold Lease-Rate Theory (NSMGLRT) says that gold should be in for a significant rally from around in here someplace.

And whether or not this stupid theory is mine is correct or not, today is the perfect day to buy more gold and, especially, silver.

Aug 15 , 2006
Richard Daughty

email: RichardSmithGroup@verizon.net
Daughty Archives
Provided as a courtesy of Agora Publishing and The Daily Reckoning

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.