Sorta Optimistically Pessimistic
for 2005
Richard Daughty
The Daily
Reckoning
...the angriest guy in economics
The Mogambo
Guru
Archives
December 30, 2004
- The national debt run up
by the government, otherwise known as Official Public Debt, now
stands at $7.528 trillion, up almost by $600 billion in the last
year.
- Ted Butler, renowned silver analyst, says that the amount of
above-ground gold in the world is four times MORE than
the amount of silver, making silver, surprisingly, more rare
than gold. And the big paradox is that gold is selling at historic multiples of silver,
which is the exact opposite of what you would expect on the basis
of sheer rarity. Mogambo Tip O' The Day (MTOTD): buy silver.
- Franklin Raines, disgraced former head of Fannie Mae, proves
that perfidy and failure is worth a retirement package measured
in tons of money and benefits. Fannie Mae was originally set
up to help poor people buy houses. Remember the phrase "poor
people" because it is important. Instead, Fannie Mae has
grown like the government cancer that it truly is, and is now
so big that it is now one of the top two or three biggest corporations
in the whole freaking country!
And not only that, but it is an absolute, total, colossal freaking
failure at its mission. Their job was, to refresh your memory,
to help a few poor people buy some cheap house, probably something
out near where I live, as I seem to depress property values wherever
I go and only very poor, very desperate people with literally
no place else to go would even think of living near me. Homeownership
was supposed to give these poor people a cuddly feeling of security,
but which evaporated as soon as they learned that they had to
fix anything that broke, and they couldn't just call up the landlord
and yell at him to fix things anymore.
Instead, and I say this with that look on my face that means
"I can't believe my freaking ears when I hear it or my eyes
when I read it", Fannie Mae has actually driven up the price
of housing to the point where not only can the POOR not qualify
for a loan to buy a house anymore, but in some places not even
the freaking middle class can afford to buy a house anymore,
either! And why can't these people afford to buy a house? Because
housing prices have been going up in price at double-digit inflation
rates for years now, thanks to Fannie Mae. And now houses just
cost too damn much, and that, and I stretch out my arm to
point at THAT, is the horror of inflation, which is, if you are
up-to-speed on The List Of Things That Make The Mogambo Go Out
Of His Freaking Mind In Fear (TLOTTMTMGOOHFMIF), Number One on
the list.
But this is not about me, although I love talking about me, and
having people wait on me hand and foot, and cater to my every
whim, and if I can't have that, is it too much to ask to be able
to go ten lousy minutes without somebody throwing a roll of flaming
toilet paper at me? I mean, I'm trying to get some work done
here! But we were talking about Fannie Mae on the horrid Franklin
Raines and that whole horrid Fannie Mae bunch and how they have
not only failed at what they were supposed to do, but they actually
made the situation much, much worse! And it is worse for many,
many more people! Talk about your typical government program,
eh?
And yet, here these guys are, getting fired and receiving these
enormous retirement packages.
But we were talking about houses and the prices of those houses.
And why do they cost too much? Because Franklin Raines and his
stinking, grubby friends (which is, of course, Congress, the
courts, the banks, and the powerful friends of either one) at
Fannie Mae provided seemingly unlimited funding to buy mortgages.
And where did they get all this funding? From investors. And
where did the investors get all that the money? From the Federal
Reserve, which created it out of thin freaking air and loaned
it to the investors. And all this new money increased the money
supply as it increased debt loads.
And here is where we take a short journey down a pleasant path
that I hope will impress you. It is with great pleasure that
I present a Mogambo Axiom Of Economics (MAOE) that has a lot
of mathematical mumbo-jumbo that I can make up on the spot, mostly
long and complicated formulas with all these cool mathematical
symbols everywhere, and that rigorously proves that "All
money must go somewhere." I hope is more profound that it
looks, because it looks like nothing on the page. I originally
thought of it at a recent Christmas party, and I admit that I
was pretty blasted, and to tell you the truth I am amazed that
I remembered it at all because I have apparently forgotten most
of everything else that happened at the party, judging by my
wife suddenly referring to me as Satan and how she is always
making the sign of a cross when she looks at me, which is weird,
since she is not Catholic, and a lot of policemen are suddenly
asking me some very embarrassing questions. So, do me a favor
here: Give it awhile to sort of sit in your brain, and then perhaps
you will leap to your feet and say, "The Mogambo is not
as stupid as we thought! In fact, it's brilliant! Because if
a lot of money flows into one area of the economy, then prices
in that area will increase. And then other capitalist entrepreneurs
will start moving into that area, attracted, like moths to a
flame, to all that lovely, lovely money flowing in, because they
also have wives and children and mortgages, and they are also
up to their eyeballs in debt, and things aren't going so hot
here the last couple of years, and at this point I am pretty
much willing to do anything for money, especially try and flip
a few houses. And the increase in tax collections is like manna
from heaven to stretched local, state and federal governments."
At that, my eyes bug out and I stand back and look at you in
absolute awe! I had no idea that you were that educated in economics!
And then I remember that, like Buddhism, macroeconomics only
takes a few minutes to learn, but a long time to acquire wisdom.
I humbly bow to your achievement!
Now, what I want as my reward for coming up with this brilliant
new economic verity is to be the new head of Fannie Mae. If all
it takes to get fired and received a multi-million dollar annual
retirement package is to spend a few years growing into a malignant
cancer and be worse than a total failure, then THAT is the job
I want! If there is one thing that I am good at, it is failure.
I'm a natural! So now, everywhere you go, I want to hear it loud
and clear, "Mogambo for Fannie Mae! Mogambo for Fannie Mae!"
And in a similar vein, Bob and Barb at 321gold.com have a pithy
quote from Henry Ford on their site that shows that old Henry
knew about more things than cars and assembly lines, and I want
to get it into my own stupid newsletter because I take my hat
off to old Henry, which is what I call him because he is dead
and there is nothing he can do to make me stop calling him by
his first name, and in this way maybe somebody will think "Hey!
That Mogambo is quite a fellow! He knows lots of important, famous
guys!" But Henry said, "It is well that the people
of the nation do not understand our banking and monetary system,
for if they did, I believe there would be a revolution before
tomorrow morning."
So here is Fannie Mae providing these selfsame "people of
the nation" with a glaring example of the misery of how
our government, banking and monetary systems have run amok, and
not only is there no freaking revolution, but the guy responsible
is going to retire rich as a reward for being a complete failure!
Not only that, but Fannie Mae has a $2.306 trillion Book of Business,
but only $29 billion in capital. That comes out to a leverage
of 80:1! This is the range of leverage that caused Long Term
Management to go belly up!
Wasn't it H.L. Mencken who said something like "The people
in a democracy decide the kind of government they want, and they
ought to get it good and hard"? Well, we are about to "get
it good and hard."
- Chris Gaffney of the Daily Pfenning newsletter writes, "First
I expect interest rates to continue to rise globally and therefore,
interest rate spreads will pretty much remain stable. Take advantage
of any short-term dollar rally in these thinly traded markets
to get currencies on the cheap."
This advice, namely to capitalize on short-term rises in the
dollar by using that temporary strength to buy foreign currencies,
applies also to precious metals and other commodities, especially
oil. OPEC is apparently being pressured into reducing the price
to keep the idiotic economic mess we have created from collapsing
before December 31. It can't last and it won't. In November,
oil imports into China rose 46 percent, to 11.12 million metric
tons from a year earlier. In October, their oil imports were
34 percent higher than a year earlier. Does exploding demand
sound like a scenario for lower oil prices in the long term?
Hahahaha! It does? Hahahaha! You must work for the government!
- Peter Schiff of EuroPacific Capital quotes Chris Dialynas,
who is a managing director at PIMCO, who has written an essay
entitled "Trouble Ahead, Trouble Behind." To quote
Mr. Schiff, "In deadly serious terms, the paper argues that
America's Asian creditors should forgive a portion of the debts
owed to them by the U.S. government in exchange for the U.S.
government imposing what amounts to a broad based austerity program,
resulting in a substantial decline in American living standards.
The paper further proposes that America's creditors would agree
to this restructuring because in its absence, their eventual
losses would be far greater, as the U.S. government would have
no choice but to default on its sovereign debt.
"This raises the obvious question of what credit rating
PIMCO believes U.S. government debt actually deserves? A triple
A rating basically implies a zero probability of default. Since
this paper argues that default is all but inevitable, it would
imply that not only should U.S. sovereign debt not be AAA rated,
but that it should fall into the category of junk."
Congratulations, Alan Greenspan! You took an America we were
all proud of, and turned us into a bankrupt nation where our
bonds are so worthless that they are junk bonds on the verge
of default. And congratulations, Congress, which said or did
nothing to stop, or even slow down, the idiocy. And congratulations,
news media, who were so ignorant and stupid that they did not
raise the alarm, as was their damn function. And congratulations,
school system, which teaches that this is all correct, and special
congratulations, universities, who actually make it their business
to teach this ridiculous economic theory to the virtual exclusion
of Austrian economics! It is a sad story of failure, failure,
failure all around.
- Kurt Richebächer writes, "Just consider that the
dollar has 'only' fallen 8.3% the past year, but it translates
into a $124 billion loss for foreign stockholders! (And that's
regardless of whether their stocks are up or down!). How long
will foreign investors stand losses like that? How long would
you? If the dollar keeps slipping, foreigners will start dumping
their U.S. investments - selling for any price they can get.
The flood of unwanted shares will utterly destroy stock prices.
The major indexes will hit lows not seen in decades! And the
money people have in stocks or bonds will vanish."
So how long can this go on? Well, Mr. Richebächer has looked at the evidence, has looked at the
historical precedents, and after running the data through his
gigantic brain and his years of experience, figures that "If
history is any guide, this dollar crisis could last seven to
nine years." And I think so too, and probably much longer
than that, much as I never regained by teenage glory, which was
a hell of a lot longer ago than some stinking seven to nine years,
and Rome has never regained her glory after 1,600 years.
- "The Specter of Deflation" an essay on the LewRockwell.com
site, by John Calverly, has this timeless observation: "Deflation
is a new and troubling threat for all of us, brought up in an
era of continuous inflation. Almost nobody alive today, even
the venerable Mr. Greenspan, was an active market participant
or policy-maker in the 1930s, the last time the United States
suffered deflation. Yet, during the 19th century and right up
to the 1930s, deflation was common, indeed even normal, while
inflation was usually only seen at the height of economic booms
and in wartime."
This is because up until the current historical period, business
was left alone, and gold was money, and fiat currencies were
still only in nightmares and the historical record that documented
the unstoppable destruction that results from any economy so
suicidal as to use one. And it is Adam Smith's Invisible Hand
of the marketplace that pits one producer against another, each
one trying to produce things that are better and cheaper and
newer. And all that money thus freed up was available to be spent
on other things, new things, exciting things, and thus increasing
the standard of living for everybody.
Then, and you can tell by the way the soundtrack has gone all
moody and somber, we now live in an historical period where idiots,
with new and idiotic economic theories, have installed a cartel
of central banks around the world. Nowadays, thanks to these
corrupt bastards and the ignorant morons that constitute America's
general population, we NEVER have prices that gently go down,
we NEVER free up money to be spent on other things, thus we NEVER
increase everyone's standards of living. Now, all we get are
constantly higher prices, a bigger and more repressive system
of governments, a currency that grows more and more worthless
every day, and a constantly falling standard of living. And as
bad as this sounds, it is only PART of the egregious result of
having a central bank and a fiat currency that is spiraling out
of control.
As an example, world dairy prices have almost doubled since 2002.
Doubled. In two lousy years.
- For those of you concerned that the unequal tax treatment of
your gold holdings, and judging by my email
there are a lot of you, J. Kent Willis has reported that "Joint
legislation from Nevada Senators Reid and Ensign aka 'Fair Treatment
For Precious Metals Act' passed the US Senate in 2004 with a
vote of 92-5. The House has not approved it yet, but will soon."
The bill will treat gold bullion investments as it does other
equities, with short and long term tax rates of 20% and15%, instead
of continuing to treat gold as
a collectible, and thus taxable at the 28% rate.
For those of you who are impatient, he goes on to say that "There
are legal ways around it now anyway, including but not limited
to, holding bullion in an approved self-directed IRA, provided
you withdraw it properly so it is treated as ordinary IRA income."
- Barry Down and Bill Matlack are stockbrokers who have written
an interesting paper entitled "With Paper Money- Confidence
is Suspicion Asleep", which is a quotation from Disraeli,
who was once the Prime Minister of Great Britain.
They write, "From its peak in 1985, the dollar dropped by
a third, but the US current account deficit is much larger now
than it was in the 1980s. Conclusion: over time the dollar has
a long way to drop, perhaps destined to lose over 30% of its
current value, thus pushing the euro exchange rate to over $1.80."
These two guys are stockbrokers who "specialize in gold and mining equities", so maybe they are
a teensy bit biased in their judgment. But I rise to my feet
and shout "Huzzah! Huzzah!" when they say, "But
make no mistake about it, irreversible damage to confidence will
be inflicted on the world's paper currency system and the stage
will be set for the inevitable repudiation of all unbacked paper
currencies. Eventually, a new system of currencies centered around
gold will be initiated, and confidence
will then be restored and suspicion will be asleep, at least
until some other future generation also tries to substitute paper
for gold."
Regardless of the future of gold-backed
currencies, the drop in the dollar guarantees a 30% higher price
for gold as a result of a 30% drop in the dollar.
Unless, of course, the rest of the world suddenly stops believing
in gold and are willing to part with theirs
at lower and lower prices in their own currencies. And with the
economic upheaval that is bearing down on us, I don't see much
chance of that! And neither do they, as they keep buying more
and more and more gold at higher and higher prices.
- To demonstrate the economic lunacy of Gregory Mankiw, who is
the chairman of the President's Council of Economic Advisors,
I turn to his own textbook, "Principles of Economics"
and look up "debt" in the index. There are two, count
'em two, references to debt. One is "debt, government, 555"
and the other is "debt finance, 544." On page 544,
we read that, "The sale of stock to raise money is called
equity finance, whereas the sale of bonds is called debt finance."
Nothing much there about debt.
So we go to page 555 to find out about government debt. When
we get there, we find that the entire subject of government debt
is summed up in two sentences. "When the government spends
more than it receives in tax revenue, the shortfall if called
the budget deficit. The accumulation of past budget deficits
in called the government debt." This is the extent of the
problems of government debt, according to Mankiw.
Then he gets into the "crowding out" theory, which
is the hypothesized result of the government running huge budget
deficits, and coming into the credit markets and borrowing all
the money that is available to lend, thus keeping any other borrowers
from getting the financing they need. Mr. Mankiw, of course,
does not mention that the "crowding out" effect, which
is obviously true, has never actually been witnessed in real
life. The reason? The damn Federal Reserve is going to create
more money and credit at the first sign of any stinking "crowding
out" effect and the upward pressure on interest rates. Mr.
Mankiw does not mention this important fact, either because he
is ignorant of it, or because he has written a very poor textbook
on economics, or he is trying to conceal the inevitable rampant
fraud and corruption that stems from having a central bank and
a fiat currency. Especially when you have a judiciary that ignores
the Constitution whenever they sense what they think is a "good
justification" which is something left over from last week's
MoGu which has really stuck in my craw, for some reason. And
that reason for THAT being that it is this spreading corruption
and lying is how countries and societies and cultures are destroyed
from within.
It is not my place to figure out which of these he is. Parenthetically,
when I am in the mood for an argument, which is all the time,
I use that fact to prove that God does not exist, because if
a truly loving God existed, then surely He would have put The
Mogambo in charge of tracking these people down and charging
them with the crime of treason to the Constitution. But whatever
it is, the very fact that he thinks this bizarre way is reason
enough why this man should not have been appointed to the President's
Council of Economic Advisors, and especially why he should not
have been a Harvard professor of economics in the first place.
As a final dig at this Mankiw guy, listen to this thing he calls
"Keynes's Interest Rate Effect" on page 689. When prices
are falling, see, households need less money to meet their needs,
and they seek to invest their excess money in something to earn
a little interest. No problem so far. But here is where it gets
weird. "As households try to convert some of their money
into interest-bearing assets, they drive down interest rates.
Lower interest rates, in turn, encourage borrowing by firms that
want to invest in new plants and equipment and by households
who want to invest in new housing."Why in the hell firms
would want to invest in plants and equipment in the face of slack
demand in beyond me. But he doesn't listen to my complaints,
and goes on to say "Thus, a lower price level reduces
the interest rate, encourages greater spending on investment
goods, and thereby increases the quantity of goods and services
demanded." (Italics in the original). Notice the weird
way that originally there was no demand for goods and services,
and that is why there was all this excess money lying around
in people's accounts, ready to be loaned to somebody. But suddenly,
thanks to lower interest rates, there is all this new demand
for the same goods and services that people didn't want originally!
Weird, huh? And trust me when I say that the deeper you go into
this whole modern economics thing, the weirder it gets, and if
Buck Rogers was in a spaceship going someplace that was this
weird, he would turn that spaceship around, go home, and take
the beautiful Dale Arden out for a pizza.
- Doug Noland quotes Jennifer Hughes in the Financial Times as
saying "US high yield, or junk bond, issuance, has reached
record levels this year as companies have sought to take advantage
of investors' appetite for risk." Memo to Jennifer Hughes:
Nobody has an appetite for risk. They only have an appetite for
yield. And people are desperate for yield, as Alan Greenspan
has tried to correct his previous horrendous monetary policy
mistakes by pounding interest rates into the toilet for a couple
of freaking years. And with prices rising at rates higher than
interest rates the whole time, people are desperately searching
for something, anything, that will earn more money so that they
can at least try and break even.
- From Bloomberg we get Wing-Gar Cheng, who writes, "China's
crude oil imports in November rose at the fastest pace in five
months as government measures to slow the economy failed to curb
fuel demand growth." Well, duh! The only way growth is curbed
is when profits disappear, usually due to the horrendous cost
of high interest rates that swamps the returns of the business
venture, and there is little to no chance of that happening any
time soon in China!
As if that wasn't enough to be bullish about commodities, the
China Daily reports that a "leading water official"
says that "China is likely to experience a 'catastrophic'
drought next year, threatening water supplies and grain production."
And with reduced supply of grains due to drought and increased
demand due to increased wealth from the growth, those two curves
will equilibrate at much higher prices. And it is a truism that
you make money by buying low now, and selling high in the future.
- According to the Office of the Comptroller of the Currency,
the latest Derivatives Report shows that Total U.S. Commercial
Bank Derivatives expanded to $84.18 trillion, which is up 26%
from one year ago. 26% of $84.18 trillion is $21.88 trillion.
So, the derivative positions in the banks increased by twice
the entire GDP of the USA! My head is spinning around like a
demented Christmas toy! The damn banks increased the money at
risk in derivative contracts by twice the total value of all
the goods and services created in the whole freaking country
in a whole year? My God! And you DON'T think we are headed to
disaster?
- Henry T. took exception to my phrase in the last MoGu, "You
own gold. Nothing can happen to you."
Like a lot of other people who are fearful of another confiscation
of gold by the government, like the commie
bastard FDR did in the 30's. He says "Wrong. Hoards will
be confiscated. None are more hated than those who foresaw disaster
and took proper steps to avoid it. Especially if we told them
so. Then we ants learn that grasshoppers are carnivores."
- I got this from somewhere that I forget where, but "Brokerages
and investment banks will award average bonuses of $100,400 per
employee to roughly 158,000 people, up from $99,700 a year ago."
And where did all this money come from? You and me. They might
have gotten commissions on our trading and retirement accounts,
so we paid. They might have "done a deal" where the
ultimate price will be paid by the customers, which is you and
me again. They might have gotten it from their own trading, which
came from, again, you and me.
Make no mistake: All the money that these guys got will have
to come from you and me, the final consumers, as there is no
other place that it CAN come from, and that means that the prices
we will pay will be higher than they otherwise would.
- John Crudele at the NY Post has taken a look at how the U.S.
Treasury posted, on its Web site, a financial statement for the
USA, but done in the same way that private sector companies are
required to keep their books. The reason that they did this was
that they had to, as "This method of accounting for the
government's finances, namely using Generally Accepted Accounting
Principles (or GAAP), is now required by law."
Mr. Crudele paraphrases to note that "In the fiscal year
2004, government revenues were $1.9 trillion . . . The net cost
of the government's operations was $2.5 trillion . . . Total
revenues less operating costs resulted in a net operating cost
of slightly more than $615 billion." In short, he say that
"the government ran a deficit of $615 billion," which
a little calculator work will convince you comes out to a cool
$5,802 for every worker in the country who has a non-government
job. And that is just the deficit!
When you get right down to it, that $2.5 trillion that the government
spent last year comes to $20,661 for every American worker in
a non-government job!
"Now, allow me to translate" he says. "Look at
the last line called Total Assets minus Total Liabilities &
Net Responsibilities. The liabilities grew to $45.9 trillion
at the end of 2004, compared with liabilities of $34.8 trillion
at the end of the previous year. In other words, what the accountants
call the net present cost of unfunded future obligations grew
by a massive $11.1 trillion in just the past year."
That $11.1 trillion figure ought to be familiar to you: it is
equal to the sum total of GDP in the United States. In one year,
we went on the hook for an amount equal to the total value of
all the goods and services produced in this country for an entire
year. We took on so much more debt, in one year, that the additional
obligation equals everything we made for the year.
Ugh.
*** The Mogambo Sez: It is the last Mogambo Guru of the
year, and I feel compelled, like so many others, to writing my
concluding optimistic remarks, and extending my best wishes for
a prosperous New Year. So let me say that I hope things do not
turn out to be as horrible as I think. But they will. But at
least I am optimistic about it!
 Dec 29, 2004
Richard Daughty
email: scgcjs@gte.net
Archives
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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