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Richard Daughty
...the angriest guy in economics
The Mogambo Guru
Archives
August 17, 2005

- I remember that I was still trying to shake a killer hangover when I read that Total Fed Credit abruptly fell by $7.4 billion last week, taking the total back down to $792 billion. The next thing I knew, I was in the emergency room and doctors were trying to re-start my heart while trying to restrain my wife, who is screaming "Let him die! He wants to die with dignity!"

But it wasn't my heart causing the initial distress. It was my brain, which interpreted this fall in Total Fed Credit as meaning one of two things; either the Fed is finally trying to curtail the decades-long explosion of money and credit, or there are not as many people wanting to borrow money, and so they don't need to expand money and credit to accommodate them. Either way, this is what we in the Mogambo Economics Biz (MEB) officially call The Big Freaking Bell Going Clang Clang Clang (TBFBGCCC).

Ours is a country that does nothing but spend every dime it makes, and which continuously borrows more money besides. Historically, this is a recipe for disaster. Nobody wants to hear this, especially my family, who think that money grows on trees, and I keep telling them that money does not go to all the hassle of growing on trees, which involves fertilizing and pruning and weeding and applying pesticides and picking, and then some drunken, stoned-out illegal alien migrant worker falls out of a tree and sues the hell out of you, and then they find out how you have been stealing them blind and selling them substandard food at premium prices, and you don't have a prayer in court and you know it. Brrrrr. Gives me chills just to think about it!

But this is not about how Mogambo International Exploitative Enterprises (MIEE) is screwing over the poor wretches, just as the government and the Fed are screwing the poor by destroying the purchasing power of the little bit of money they get per month. It's just that MIEE, as a prototypical capitalist-pig company with no scruples or ethics in my mindless quest to secure profits, demeans the people directly, and they suffer because they get less. The government does it indirectly, making them get less by destroying the purchasing power their money. But my whole case rests on the fact that, in the end, we both make life miserable for lots and lots of people because they must pay more and get less.

And the only reason that we have anything going for us at all is because we spend every dime, which makes and economy go, to indulge in an orgasmic orgy of glorious, greedy, gluttonous over-consumption, and simultaneously grow the size, the grasp, and the bankrupting expense of a huge, suffocating, inter-locking structure of governments that has, to use a phrase used in the Declaration of Independence "erected a large multitude of new offices, and sent hither swarms of officers to harass our people, and eat out their substance" by which they mean, in Mogambo-ese, "The government sucking you dry through your wallet to give total strangers money and services for the rest of their lives."

The joke goes, "I spent my entire million-dollar inheritance. Most of it I spent on women, fast cars, booze and drugs. The rest I spent foolishly." In our case, the rest we spent foolishly to party party party (PPP).

Recognizing that this sudden slowdown in the growth of money and credit would mean the total collapse of the USA, you will, I hope, forgive me for jumping up, running in panic, pushing my wife and children out of my way as I run, as fast as I could, to try and lock myself inside the heavily-fortified Mogambo bunker (HFMB), which would, theoretically, protect me from the hordes of scared, angry and desperate people whose lives are being destroyed as the economy is being destroyed, including my family, who were already scared and angry about being related to me in the first place because I seemingly will never die.

And this slowdown may be showing up in the way that inventories are sort of building. I would assume that inventories are increasing because people are not buying as much, which would explain why they are not borrowing as much, although the producers and retailers are still stocking as much. Trying to be as philosophical as I can (and you can tell I am being philosophical by the way I wipe the drool off of my chin and try to act dignified for a change), this had to happen sooner or later, as every schoolchild knows that you cannot continually go farther and farther into debt forever. I, personally, learned this valuable Mogambo lesson (VML) rather early in life, and I remember it like it was yesterday, when I went to my dad and asked to have another advance on my allowance, and how he laughed, and with acid in his voice asked "Do you think you can perpetually bring forward future consumption into today?" and how he spit in my face, and remarked about how he would never forgive me for being born. Maybe it was HOW he said it, but I never forgot the lesson about over-consumption via debt, and I hope you don't either.

But this is not about my cruel life of pain and anguish that I mostly brought on myself for acting like such a jerk all the time, but about money and the spending thereof and how rising prices are no fun. Like gasoline prices. And with gasoline rising dangerously in price, people do not have as much money to spend on the rest of the silly crap that we love to indulge in, making things worse.

The proof of this is demonstrated by the fact that people are going to the movies less, and all kinds of businesses that depended on the flow of all this frivolous discretionary spending are finding that sales are down dramatically. This is another Mogambo Sign That Things Are Not As Good As They Say (MSTTANAGATS) that highly-trained market technicians use to chart the markets.

For you who believe that "the trend is your friend", I will note that the Fed has had this mindless expansion of credit going gangbusters since 1997. So, all this sudden and surprising absence of growth in money and credit is, in a word, ominous. But you probably already gathered that from the spooky soundtrack, which is all low, wailing horns in ugly disharmonies that sound like banshees wailing. Or, if you are deaf, then you can also figure it out from the graph of Total Fed Credit, which has being growing like a huge, malignant cancer since 1997, pausing only in early 2000, whereupon the stock market fell like a stone, which put the Fed back in credit-expansion mode ever since. Until the last couple of months. Listen to the soundtrack, which is telling all that you need to know. OooooOOOooooo!

You're going to love the way I end this! Slowly fade in from black, see? An indistinct, fuzzy form appears out of the gloom. What could it be? Soon, it looks like a- what is that? A hand? -yes, it's a hand holding something. As the lighting continues to come up, we see that it is indeed a hand, a hand holding a revolver, and it is pointing right (pause) at (pause) you. Slowly, the thumb reaches up and cocks the gun, and you can hear it going "click click click" as the hammer is drawn back. Then the clicking stops. The thumb returns to its place on the butt of the gun. The forefinger moves to the trigger. And as the camera pans in closer and closer and closer, we plainly see that the finger is beginning to flatten as it begins to pull on the trigger. Of the gun. That is pointed right (pause) between (pause) your (pause) eyes.

One of the reasons that I use this gun metaphor is that the latest reports shows that inflation is running at 0.5% for July, and when you multiply that by twelve months in a year, you come up with (and you can check me on this) 6%. Inflation, even after all the massaging and tweaking by the government to make things look good, is running at 6%! This is terrible, terrible, terrible news! It was within living memory that Nixon (as I recall) seized dictatorial power and imposed wage and price controls on the entire economy because inflation was at an intolerable 4%! So this 6% thing is terrible, terrible, terrible news! And it demonstrates, one more time, the utter, utter failure of the Federal Reserve.

- Of course, the Treasury somehow found the time last week to print up, literally, $1.4 billion in new cash. In the last year, they have increased the stock of actual folding money by $29 billion, which works out to a new $100 bill for every man, woman and child in America. So, for a family of four, if you check your wallets, you are supposed to have another $400 in actual cash MORE than you usually have. If you have more than this, please send the excess to me, as I sure as hell don't have my share, and my wife is still complaining that she still doesn't have any money, so I know she doesn't have her $100 bill, either. That's' two hundred you owe me right there.

Foreign central banks are really stepping up to the plate and buying US debt, and the hoard that they are stashing at the Fed alone expanded by $6.1 billion last week, bringing their increase in US government debt that they own up to a princely $1.416 trillion! As staggering as that is, it is up $205 billion in the last twelve months alone! And an eye-popping one-seventh of this enormous pile of government debt was accumulated in one, repeat, one, stinking year! One!

With only 120 million people with non-government jobs in this country, this means that each one of us proletariat working stiffs is responsible for paying some foreigners, some stinking foreigners, some stinking foreigners with the bad manners who rudely point out that we are a nation of fat and stupid buttheads, back their $11,800, plus interest! Hahaha!

Alas, part of this rampant buying by foreigners is explained by the fact that the trade deficit hit another new record high, which means that more tons and tons of dollars went overseas to pay for all of these imports, and those foreign manufacturers got into their cars and went down to the bank and traded in their dollars for local currency. Then the banks say something that sounds like "Ha no hiwa yama yama" and which means "What in the hell are we going to do with all of these damn dollars"" and then somebody says "Wan jo ha no!" which means "Call the damned central bank and exchange these damned dollars for real money that we can use to buy whatever in the hell it is that we Chinese people buy!" by which I would interpret as meaning "stuff that contains commodities and uses energy", but that is another story for another time.

But the point is that their central banks are awash in dollars, and there are so many dollars flooding into their banking system that they are all spilling out onto the floor and making it hard to get around and already there are reports of people being crushed under the piles of dollars. But if they go to the foreign exchange market, then the demand for their currency would push up the price, making their currency stronger. And they don't want that, because they are an exporting nation competing against other exporting nations, and so they want a weak currency. Ergo, they attempt to get rid of some of the damned things by buying US debt, which just delays the inevitable, and also makes the problem slightly worse, as all those interest payments we are giving them are also in dollars! Hahaha! What a world!

- Jim Pulava interviewed Matthew R. Simmons, who is the president of Simmons & Company International, who says that oil is cheap even at $60 per barrel! He calculates that crude oil is "18 cents a pint." How did he get this figure? Well, if you divide $60 per barrel by 42 gallons per barrel, you get $1.43 per gallon. Since there are eight pints in a gallon, if you divide $1.43 by 8, you get 18 cents per pint!

- Kurt Richebacher, everybody's favorite economist, says that the bursting of a housing bubble is bad news, from both a theoretical angle and from "Evidence of sharply slowing economic growth" that is "accumulating by the week for Britain and Australia, both belonging to the Anglo-Saxon family of housing bubble economies. Flattened house prices in both countries have drastically curbed home equity withdrawal, essentially with prompt, drastic adverse effects on retail sales." And now everyone is looking at us Americans, because we, too, are one of these selfsame Anglo-Saxon countries that is in the midst (or end) of a gigantic housing bubble that even Alan Greenspan can see (he calls it "froth"), and he is on record as declaring that neither he or any of his friends can ever even SEE a bubble until after it bursts! So this housing bubble must be huge if even Greenspan can see one!

Mike "Mish" Shedlock at the WhiskeyAndGunpowder.com site have taken a look into the future, and they turn to me with ashen faces and expression of shock and say "Massive amounts of announced layoffs in the banking and telecom industries will start kicking in the second half of the year. Eventually, this will spill over and affect housing just as it has in the United Kingdom and Australia. The United Kingdom has just about finished year one of a housing bust, and Australia is well into year two." And China is trying to cool down a housing bubble there, too, which means that they will have a bust.

And the housing bust may be starting here, too. As one piece of evidence, in the newsletter View From Silicon Valley, they write that published reports show that in the local market "y-o-y volume declining faster than y-o-y prices are rising." Oops!

And it is not like we are in for some refreshing little breather from blazing economic growth. Dr. Richebacher calculates that "the U.S. economy's performance was by far its weakest of the whole postwar period. Measured by employment and wage and salary income, it was a disaster. In real terms, average gross weekly earnings are barely higher than in 2000."

And it's not like there is some glorious demand for labor, as Mark Faber can attest. "According to a research paper by the Federal Reserve bank of Boston," he writes, "unemployment is far higher (around 8%) than what the US government's statistics show." And he underscores the type of jobs being created lately by saying, "High paying jobs are being lost while low paying jobs are added."

So, if I understand him correctly (and there is very little chance of that, so cut me some slack), Americans have not had any increase in their aggregate standard of living attributable to income growth. But before I can really launch into this interesting point with my usual rambling and shrieking style where I loudly denounce the Federal Reserve and Congress and us Americans as colossally stupid bozos for allowing it, and who deserve to have their heads handed to them, Dr. Richebacher steals my thunder by saying "Given minimal employment growth, it turns out that for the American public there never was an economic recovery over the past few years. To increase the family's living standard, higher borrowing was generally required, which was done with abandon." Hahaha! I love that! "Done with abandon"! Hahaha! The next time my wife yells at me to "Stop acting like a selfish, mentally-ill child!", I will say "I'm not acting like a selfish, mentally-ill child! I'm acting with abandon!" Hahahaha! And then I will say "So shut the hell up!" But she won't.

- An outfit in Toronto called Bullion Marketing Services commissioned a report by Ibbotson Associates on the "significance of 7 major asset classes on the returns of conservative, moderate and aggressive investment portfolios." They back-tested different things "covering a 33 year period from 1971 to 2004." They chose that time period as being both more recent, but also so that "during the relevant time span, all asset classes 'had their turn' or 'their moment in the sun', so to speak, in terms of being in or out of favor."

This study by Ibbottson Associates was reviewed by Rob Kirby on FreeMarketNews.com, and they found "that precious metals performed best when they were needed the most by providing positive returns during the years that traditional asset classes had negative returns." Ahhh! Waxing poetic, I drop to one knee, raise my arm in a noble gesture, and with a voice dripping with honeyed, dulcet tones, sing the praises of gold thusly, "A golden friend who never lets you down! A yellow metal buddy who won't stab you in the back, unlike some people's hateful little wives who are always sneaking around putting something in my food when she thinks I'm not looking and shooting at me because she thinks I was a burglar. But, I mean, every damned night?"

I see we got off the track. Sorry. Anyway, Mr. Kirby reports that "Ibbotson determined that investors can potentially improve the risk-to-reward ratio in conservative, moderate and aggressive portfolios by including precious metals bullion with allocations of 7.1%, 12.5% and 15.7% respectively."

To sum up, in the words of Mr. Kirby himself, it was "clearly demonstrating that all portfolios on the risk spectrum benefit from the inclusion of precious metals over time."

I bring this up because not only are gold and silver at bargain levels given the state of the global economy, but if even 10% of the world's portfolios heeded this advice, then the demand would swamp the global supply of gold, including central bank gold, more than three times over. And since your keen economic and investing skills are honed and sharp, you no doubt related the phrase "swamp the global supply" to the notion that higher demand competing for a limited supply means prices go up. And that, in a nutshell, is how profits are made. Buy gold. Lots of it. And silver. And oil.

- Barry Downs and Bill Matlack have taken a look at the Baltic Dry Index, which is composed by a company named Baltic, which asks shippers around the world "the rate to book various cargoes of raw materials on various shipping routes." The answers are then used to construct the BDI. As such, "The BDI provides an assessment of the price to move the world's major raw materials by sea and insight into the global shipping market. It is an accurate barometer of the volume of global trade."

Okay, now that we have the theory out of the way, what in the hell is the point? Well, they write that "the BDI chart seems to be predicting a significant slowdown in global economic activity which, for the world's stock markets, would mean the end of the cyclical bull market and a return of the secular bear market, and probably with a vengeance. Unless the BDI has suddenly become skewed by something which is not apparent, like an undocumented large supply of new bulk shipping tonnage, the collapse of the index since April is predicting a drop in global economic activity and trouble ahead for investors."

And we might not even need the BDI as an indicator, because they go on to say they are seeing declines already. "We already know that the European economy has slowed down appreciably. Britain alone has just reported the slowest economic growth in 12 years and the German economy is terribly anemic. Also, in Asia the Chinese economy has become overheated, and there is concern for the banking industry and possible negative impact on the Chinese economy."

- Paul Craig Roberts, is a former Associate Editor of the Wall Street Journal, former Contributing Editor of National Review, and former Assistant Secretary of the Treasury during the Reagan administration, and so you figure that knows something about economics, and he has taken a look at the employment numbers put out by the Bureau of Labor Statistics. Out of 207,000 new jobs that the report said were created, 26,000 of them were government jobs. The rest were in the "domestic service sector" which are food servers, bartenders, health care workers, social services workers, real estate agents, credit intermediation, transportation workers, retail clerks and wholesale trade. He also wryly notes that "There were 7,000 construction jobs, most of which were filled by Mexicans." But Americans exploiting the hell out of people is what we do best, so at least some things never change.

The problem? The problem is, as he says "Not a single one of these jobs produces a tradable good or service that can be exported or serve as an import substitute to help reduce the massive and growing US trade deficit. The US economy is employing people to sell things, to move people around, and to serve them fast food and alcoholic beverages." That's us, alright! And we sometimes dress the younger, cuter ones in tiny little short-shorts and tank tops to serve us Buffalo wings, too! What a great country!

- I saw a reprised Financial Intelligence Report on NewsMax.com, the one with Sir John Templeton, who founded the Templeton Funds, when he "first warned of these interest rate hikes and the coming housing bust. Templeton, considered to be one of the world's greatest investors, believes real estate prices in some U.S. markets could fall by an astounding 50 percent." Half! And that was a few of years ago!

- To show you how intellectually barren the modern "science" of economics is, it is only necessary to read what Glenn D. Rudebusch, who is Senior Vice President and Associate Director of Research at the Federal Reserve Bank of San Francisco, wrote in his essay entitled "Monetary Policy and Asset Price Bubbles". Not once in the entire report does he make mention of the fact that asset bubbles are the result of excessive creation of excess money and credit by the Federal Reserve, which provided the financing for the damn bubble, and without the financing there would be no bubble in the first damned place. Although he never postulates a possible mechanism of how bubbles arise, you are left with the impression that bubbles somehow, I suppose, spontaneously erupt from, umm, mutant spores from outer space or something. Once past that sticky point, however, it is an easy segue to a delightful discussion of how difficult bubbles are, and even our brave heroes at the Fed have problems dealing with bubbles, because they want to merely painlessly deflate the bubbles, so as to not cause a drag on the rest of economic activity. Meaning a recession, or depression, or worse.

To this I say, with the Famous Mogambo Laugh Of Contempt (FMLOC) that echoes eerily off the mountains and across the flats and strikes terror in the hearts of small animals, mostly rodents, "Hahahahaha!" This is the damned dream of every government in the history of the world! Painlessly expand money and credit, and reap nothing but benefits! Hahahaha! That is why they all tried to do it, and this is why they all failed, too.

But he ignores me, and without even acknowledging my presence, goes on to write that "As yet, there is no bottom line on the appropriate policy response to asset price bubbles." Well, duh! That's because there ARE no ways to painlessly deflate bubbles, dunce! If there were, every government on the face of the damned planet would be actively creating bubbles with both hands, you freaking moron! Any idiot government can easily inflate the prices of things, and thus incomes to producers, and thus to the laborers, and then to prices! And it is this rise in prices that causes the problems, you blithering idiot! Notice how he doesn't even look at me, even though I am screaming at him at the top of my voice. Like, these guys are so smart that with some miraculous waving of some central bank monetary magic wand or something, they will stop the bubbles from getting bigger, but still keeping all the increases in profits and wages without inflation? Wow! It would be magic!

I want to track this Rudebusch guy down so that I can grasp him by his lapels, pull him up close to my face so he can smell my stinking Mogambo breath (SMB) when I say "It cannot be done, you dumb butthead! If it could be done, IF IT COULD BE DONE, somebody in all of history would have done it by now!"

But, since we cannot seem to learn, then we have to pay. Fortunes will be lost and lives will be ruined. That is how bubbles deflate. And it is ugly, and it has profound and lasting consequences. And you knew that sooner or later I was going to get around to another long and pointless diatribe about how the Founding Fathers took the wise precaution of actually writing into the Constitution the literal requirement that money "shall only be of silver and gold", and the reason they did that was because the banks cannot create silver and gold out of thin air, and thus the financing of bubbles becomes difficult, if not impossible. With gold as money, and no fractional-reserve banking, the banks and the government are prevented from creating excess money and credit. No matter how smart they are, no matter how creative they are, no matter how corrupt they are, no matter how evil they are, they still cannot create gold or silver! And thus the money is not destroyed by over-creation of it, and thus the economy is not destroyed, and thus America is not destroyed, and everybody is happy, and the economy is strong, and inflation is zero or less, and people are smiling and happy, and cute little puppies frolic in the sun, and darling little children laugh and clap their hands in glee and delight.

Suddenly, a loud clap of thunder shatters our idyllic scene. But, as the first of a long line of communist dullard Democrat bastards, Franklin Delano Roosevelt gutted this crucial provision of the Constitution. With a stroke of his pen, he eliminated the use of gold as money, and extorted compliance from a gutless Supreme Court when this corrupt, lawless act was naturally challenged in court by outraged Americans.

But this is not about FDR killed America and how all thinking Americans hate his guts. This is about the San Francisco Fed bank and the things they write. Composing myself with a mighty effort, I note that the site itself has a primer on monetary policy. It should send shivers up your spine and make you want to run out and buy all the gold that you can, because it starts off with actually declaring that they are a collectivist/statist central-planning horror when they admit "The object of monetary policy is to influence the performance of the economy as reflected in such factors as inflation, economic output, and employment. It works by affecting demand across the economy-that is, people's and firms' willingness to spend on goods and services."

This is the same central-planning idiocy that doomed the Soviet Union and all the other collectivist jackass countries that tried this stupidity. Where in the hell is the free enterprise, the workings of the free market? Where in the hell are savings? They are all, alas, dead. The Federal Reserve has killed our money (having lost almost 98% of its value since 1913 and about 25% in the last four years alone), and they have killed the free market. How were they killed? They were killed by the Fed continually "affecting demand" and encouraging everyone to go into back-breaking levels of debt! Hahahaha! This is what passes for Economics As Science, as practiced in America! And now the world! Hahahaha!

The essay goes on, "While most people are familiar with the fiscal policy tools that affect demand-such as taxes and government spending-many are less familiar with monetary policy and its tools. Monetary policy is conducted by the Federal Reserve System, the nation's central bank, and it influences demand mainly by raising and lowering short-term interest rates."

So this is it! They lower interest rates to entice you to go into more debt, or they raise interest rates so that 1) you won't go farther into debt and 2) cause the debt you just took on to become more expensive to carry! Hahahahaha! This, this, THIS, THIIIIIIIIIIIIS is the brain-dead abomination that the economic system of the United States, and the world, has become!

Why would the banks do this? To make money! The total stock of actual cash is only $765 billion dollars. The government, by giving the damned banks the power of unrestrained fractional banking (which is a horror in itself), this piddly $765 billion dollars grew to a money supply (as measured by M3) of $9,754 billion! Every dollar of actual money has been multiplied by 12.7 times! And whose money is this? The banks'! The government merely got some ink and some paper and printed up a dollar bill, and when the money found its way to the banks, the banks multiplied it by 12.7, and then loaned it all out! And they keep all the interest! What a racket!

And let's not forget that the damned Federal Reserve, which is a private bank and is NOT part of the government, also has all the country's gold, and this private bank has not been audited by the government since the 50's! Like I said, what a racket!

Adam Hamilton of Zeal Intelligence notes that "Since there are no controls whatsoever on the Fed's printing presses and Washington's voracious appetite to spend money that it doesn't have, the supply of dollars is destined to grow until it is eventually inflated into oblivion. But against this ever-growing supply backdrop, demand is waning around the world. Foreign institutions and investors are growing tired of seeing their dollar holdings lose value year after year so they are diversifying out of dollars. With a growing supply and withering demand, dollar prices must fall to reestablish equilibrium again."

Dr Richard Appel of Financial Insights says that this will be bad news for the chumps who have been buying all those bonds for the last few years. "Given the fact that the dollar has lost well over 85% of its purchasing power during the past seven decades, it is reasonable to assume that purchasers of the new Treasury Bonds will suffer a similar fate as have earlier bondholders. In effect, when the investors redeem their bonds the proceeds will purchase far less than the money would have when they bought them." He is exactly right. He is wrong, however, when he says "This will accrue to the benefit of our government and nation, as this debt will be repaid in cheaper dollars." I got news for you, dude. Money that does not buy as much is NOT a benefit that will "accrue" to the nation or the government, as all it does is make a lot of people poorer.

To prove it, I received some more old German Reichmark money from a reader who sympathizes with me about the horror of money debasement. One bill is a million-Reichmark note. There was a time, just a few years earlier, when a mark was worth about a dollar. So a million marks was a big freaking potload of money. Then, in less than a decade, a million-mark note became, literally, worthless. And those stupid Americans, oops, I mean Germans, who had their wealth in money lost all their dollars, I mean, marks. This is the indelible lesson of what happens when you create excess money and credit. Just like the Germans, oops, I mean us Americans, are doing, and have been doing for half a freaking century! And then you wonder why I am armed to the freaking teeth, screaming in fear and panic, and define "warning shot" as "fusillade"!

- Addison Wiggin of the Daily Reckoning has written a new book, "The Demise of the Dollar", and if it is anything like the other books he has had a hand in, it will give you nightmares, and then tell you how to make plenty big bucks on exploiting the fallout from the collapse of the dollar, which will be just another in the long history of the thousands and thousands of fiat currencies that became worthless.

- The Treasury got up in front of the cameras and announced that the U.S. federal budget deficit totaled $52.79 billion in July, and that the deficit for the past 10 months totaled only $302.6 billion, and how that is some good news because that means that the budget deficit is down by, so they say, 23.6% from the same period in 2004. Which was the worst on record. Whoopee. And which was made possible by extracting more taxes out of the economy, which helped offset soaring spending.

Of course, this blatant lie can only come from a budget that has been so foully corrupted by off-budget accounting and strange definitions. To get a real idea of how things are going, just take a look at the level of national debt. It is up by $575 billion over the same period!

Ergo, the budget shows an $18 billion improvement (mostly because of higher tax collections), but our total national debt has increased by $575 billion over the last year! Hahahaha! Things are getting better? Hahahaha!

If I tell my wife that I took the lunch money of some schoolchildren and thus increased my income by ten dollars, but I neglect to tell her that we are $30 more in debt because I took all my hoodlum friends out for pizza and beer, will the media tell the story of how this ungrateful murdering harpy killed her darling husband because he worked harder and made more money? Hahahaha!

- The amazing rise in the price of commodities is not surprising to Martin Weiss, and he extrapolates that "We see nothing on the horizon that can overturn the growing imbalance between demand and supply. Nor is the growing demand just a passing phase: We are smack in the middle of one of the most dramatic population explosions this planet has seen since the agricultural revolution in the early days of civilization." But prices and sales cannot rise forever. So when will we see an end to this huge growth spurt in the world population? "Probably not before the middle of this century." And connecting this with the demand for commodities, he says "So if you're waiting for the population-driven demand for commodities to ease, you'd better be both patient and young. Because it could take at least another 45 years."

- There was a 1.8% increase in July retail sales, although the bulk of the gain was from a 6.7% jump in auto sales as the desperate automakers launched their now-famous deeply-discounted "employee prices." And let's not forget the back-to-school tax holidays on notebooks and pencils and clothes and shoes and protractors and compasses for the tykes returning to classrooms. Subtracting all of this, sales on all the rest of the stuff we are making an economy out of were down.

- The August 13 issue of the Economist magazine exhumed the rotting, stinking corpse of the old IS-LM model of the economy in the "Economic Focus" column, this week entitled "A Working Model". This silly piece of economic nonsense has, as even the Economist recognizes, "gone out of fashion." And rightfully so.

One of the weird things about it is that it has failed to adapt to the real world, especially when the authors say "By definition, global savings must equal global investment." Wrong, dudes! In the past, this identity was not only true, but necessarily so, because somebody had to save money before someone could walk into the bank and borrow the money for investment. Ergo, savings equal investment!

Nowadays, however, that is no longer true. Money is created every damn day of the week by the banks of this world, and without anyone saving anything. And when people DO save something, the banks use that to multiply the amount of money lent out! So, obviously, savings does NOT have to equal investment, and in fact investment routinely takes place despite NO savings whatsoever these days!

But this does deter the economics editor of the Economist, who persists in running us through that tired old crap, what with little graphs rigidly fixing economic output on the X-axis and interest rates on the Y-axis, and here is the IS (Investment/Saving) curve moving up and down, and the LM (Liquidity/Money) curve moving up and down, and there is some so-called "equilibrium" or something where these two lines cross, and you can read across to the axes of the graph and pinpoint exactly, EXACTLY, what the interest rate and the economic output of the nation will be! Hahahaha! What crap! No wonder it has "gone out of fashion!" (Everywhere but in the universities, however, will still tend to hew to this mechanistic nonsense).

- Phil Spicer saw the news that "On July 6, one ounce of gold purchased fewer than seven barrels of crude oil for the first time in recent history. July's monthly average ratio of 7.23 barrels per ounce was also a record, and showed a whopping one third decline from the recent monthly average high of 11.03bbl/oz set last November. July's monthly average ratio of 7.23 barrels per ounce was also a record, and showed a whopping one third decline from the recent monthly average high of 11.03bbl/oz set last November."

Actually, the report notes that "The all-time high in the ratio is 48.65bbl/oz recorded more than three decades ago in June 1973." So, to be fair, there is room for things to get worse, meaning that gold will remain cheap, which means that you can leisurely buy gold.

But maybe not, as the report goes on to say "Based on the long-term average ratio going back to January 1970, the implied price for gold is $1,161/oz and the price for oil is $25.56/bbl."

This has not escaped the attention of Big Hoye of InstitutionalInvestors.com, who writes "In June 2003, the gold/crude ratio was 11.7 and only a few months ago it reached 7.2, which was something like a 15-year low. As of yesterday (Aug 12) , it was at 6.72, which makes energy very expensive relative to gold. Going the other way, to get the big perspective for investors, gold is exceptionally cheap relative to crude."

Bill Murphy at LeMetropoleCafe.com sees us talking about this and smoking cigarettes and putting our feet on the table and having fun, and he joins in with, "The price of gold vis-à-vis its historic relationship to oil is hugely undervalued by more than two standard deviations. The logical play is to load up on gold at these cheap prices, especially with a number of the speakers at Gold Rush 21 predicting the price of gold to rocket far, far higher than $1,000 per ounce."

- At FreeMarketNews.com we get the depressing news that the Russians, who, not that long ago, were just a bunch of stupid communists, are throwing off that collectivist nightmare, and are now in a position to rightfully get on our case about the unbelievably expensive, pork-laden transportation bill that Congress just passed and Bush signed. As FMNN writes, "A recently published PravdaRU article calls the $286 billion U.S. transportation appropriations bill 'remarkable' and claims the staggering size can only be justified if U.S. leaders are fearful that the country is heading for a Great-Depression-type scenario and have decided to revert to good, old fashioned Keynsian 'pump priming' of the 1930's variety.

"PravdaRU explains it this way, 'When massive unemployment put the USA on the brink of survival during the Great Depression of the 30s, the government started funding the development of the transport infrastructure. Highways, on which the government spent billions and billions of dollars, rescued the entire nation. When Adolf Hitler came to power in 1933, he mobilized thousands of the unemployed to build autobahns, which Germany is proud of still. The road construction gave a very powerful impetus to the revival of the German industry.' "

The article, by guys who were dumb commies not that long ago so their criticism of us stings bitterly, "makes the point that the U.S. economy may be in much worse shape than the American mainstream media has reported, with higher inflation and much higher unemployment than the official figures recognize - 'stagflation' might be an apt description."

The article concludes that "The White House is desperately looking for measures to find employment for crowds of unemployed American citizens and hungry migrants."

- According to the Mail&Guardian, "The Japanese prime minister on Monday apologised for atrocities committed by his country during World War II, on the 60th anniversary of the end of the conflict." Hahahaha! Yeah, like THAT is going to appease the Chinese for what the Japanese did to them in WWII! Hahahaha!

Ugh.

***The Mogambo Sez: Repeat after me: Oil. Gold. Silver. Ommmm. This is the sound of cosmic salvation. Ommmmm.

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.

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