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-- Posted Tuesday, 30 May 2006 | Digg This Article
London, England Monday, May 29, 2006 --------------------- *** Showing support for our favorite home team: the federal government...connecting the dots can sometimes take you further than you thought... *** Taking strides toward self-destruction - and dragging the defective leg of prudence behind...bankers aren't robots? *** Incremental degradation...taxation with representation turned out to be worse than the other kind...and more! --------------------- The flags were out in London yesterday. Cars went by streaming flags from the windows. People wore them on their hats...on their shirts...on their front porches. For a while, London looked like an American city. Americans are fond of displaying the flag too. But whereas here in London, the flags fly in support of sports teams, in the United States, flags are put out to show support for everybody's favorite home team - the federal government. The British diversion seems to us more innocuous...healthier...and more civilized. People do seem to need to divert themselves from their own lives. If not sports, then movies, books, theatre, politics, celebrity magazines, newspapers, the stock market...there are almost an infinite number of ways the modern world supplies to interest yourself in someone else's affairs. Fans cheer their favorite players; when their hero scores a goal they feel almost as if they had done it themselves. That is why people watch TV shows in which their champions argue about politics too; every time the bigmouth scores a point, they feel smarter. But in spite of the flags out today and the trains running here in London, the city is still as dead as public decency. Today is a "bank holiday," a "spring holiday" in the Economist's diary. In America it is "Memorial Day." But, holiday or no holiday, we are hard at work, dear reader - on your behalf. We are connecting dots. And today, we hope to connect enough dots to make it worth your while to have tuned in on a holiday. You deserve something special. We have something. Every once in a while, dot-connection comes with an insight. We have one for you today. As far as we know, no one has ever thought of it. But in our minds it is equal to the Law of Competitive Advantage... or the Law of Unintended Consequences...or at the very least a minor state law. We call it the Law of Limp. It describes the process of incremental degradation that eventually destroys an economy, a nation or a currency. The Law of Limp tells us that when giant strides are taken towards self-destruction...it is the defective leg of prudence that is dragged along behind. And since this is a money-oriented service, today we look at how the law works in the area of currency. We demonstrate to you why it guarantees that the dollar will become worthless. As we have mentioned many a time, a central bank can only directly control the quantity of the money it emits. If it limits the quantity, it controls and protects the quality of the stuff. But as any system matures, it develops the familiar aches and scleroses of age. Sooner or later, people find ways to "game the system" for their own advantage. And the advantage that can be gotten from a central bank is the simplest of all; it "creates" money. What could be more natural than that people should favor more money rather than less? Bankers, after all, are not robots. They have flesh and blood, brains and hallucinations just like everyone else. "We are not Gods," we recall Peter Mullen saying his Sunday sermon a week ago. "We are human beings. And as human beings, we are prone to make mistakes. We look for temptation so that we may give into it. That is why we say in our prayers to 'deliver us from temptation,' because we know we have a hard time resisting." Central bankers resist temptation for a while...and then give in to it. In Friday's essay we noted that this was the 'Way of all Cash." But bankers give in to their lust for lucre in unequal steps. First, they are asked to "stimulate" the slumping economy, for which they must take large steps. Then, as consumer prices rise and they realize that they are putting the quality of the nation's money in jeopardy, they must un-stimulate it. Thus they lower rates to stir things up and then raise them to soothe them down. But they do so unevenly...in a lurch. When a crisis comes up, they rush to lower rates as if they were Jesse Owens in the 100-yard dash. But when the crisis is over, they become gimpy legged. They hesitate. They want to make sure the trouble is well and truly over. All their friends tell them not to be too hasty. After all, who wants tighter money? So, they drag their feet. We have only to look back a few months for evidence. The Greenspan Fed responded quickly to the slump of 2001 with rapid rate cuts. The recession was over after three quarters, but the cuts continued until the Fed was lending money for just 1% interest - or not even half the rate of consumer price inflation. This low rate lasted much longer than the emergency that provoked it. Three years later, the Fed was still lending money at 1%...and then began raising rates in tiny, "baby steps," of 25 basis points, so that it took another two years to get them back to normal. Meanwhile, again in Washington, yet another form of incremental degradation has become routine. The theory lawmakers inherited from John Maynard Keynes was that government should counteract the business cycle by running deficits when the private economy was in a slump and surpluses when it was growing too fast. It was an idea that promised great benefits - people believed it would eliminate the booms and busts that plague free economies. But they failed to reckon with the Law of Limp. Politicians were Herculean in their efforts to offset the 2001 slump, dizzily spending $750 billion - in only 18 months. But when the crisis was over, where were the surpluses? They are yet to appear. The poor withered leg never catches up. The government's last real surplus came when Archie Bunker was still a TV hero. Now, measured honestly, the feds are running deficits over $800 billion every year. You'd think we were at war or something. Tomorrow, more on how the Law of Limp helps explain the war on terror...and dooms the dollar... In the meantime...is there any news? -------------- Sean Corrigan, trying to decipher the high price of gold... "For gold to do well, market psychology must be wholly negative, that fear alone is what drives gold higher." For the rest of this story, see the DR site: What Does the High Price of Gold Mean? http://dailyreckoning.com/Featured/Corrigan052606.html
-------------- Bill Bonner with more thoughts... *** The Dow and the dollar are both in recovery. Or so it appears. But they are both bound for trouble. If not now, when? Chris Mayer recently sent this note: "Since the end of the Bretton Woods agreement in 1971, the dollar has been an irredeemable currency, no longer defined or measured in terms of gold. Nonetheless, in an ironic twist, it has become the world's dominant currency and the core reserve asset of central banks all over the world. It has replaced gold as an international currency. The transformation has not happened without consequences. One of these is that the discipline imposed by the gold standard is no longer operative. Another consequence, related to the first, is the profound effect this has had on international trade." "Gold is the best money, because for centuries, as a result of countless individual choices, it has evolved as such," Mayer reasons. Resource Trader Alert's Kevin Kerr is inclined to agree. "Gold may seem antiquated and a relic of days gone by; an impractical alternative - but it's far from that," he wrote in his weekly column for MarketWatch. "Central banks are adding to their reserves -- and so are individuals. Remember, gold has been around for millennia while the mighty U.S. dollar has only managed to survive a couple of hundred years - a rough couple of hundred years at that. "Gold may not be on a perfectly straight road to higher prices as evidenced by the volatility of late, but one thing is clear, gold is the best alternative to the current fiat fiasco of fiscal policy. "The U.S. dollar is on trial in the world financial markets and I for one am not waiting for the verdict. I am hedging the outcome with gold now while it's still very cheap." [Ed. Note: Still want more from Chris and Kevin? They - along with the rest of you favorite Agora Financial columnists - will be speaking at the Agora Financial Wealth Symposium at the beautiful Fairmont Hotel in Vancouver, B.C. The conference is July 25-28, 2006, but if you buy your tickets before May 30, you can take advantage of the early bird special. Click here for all the details: Agora Financial Wealth Symposium, July 25-28, Vancouver, B.C. http://www1.youreletters.com/t/368672/4459110/788458/0/*** Massachusetts. Is there anyone who knows how to spell that word? Not in this office. Not on a bank holiday. But you know which state we refer to. It is the one that burned witches in the 17th century. In the 18th century, it led the colonies in treason against the crown. "No taxation without representation," its banners demanded. What were they thinking? The British imposed a few tariffs and taxes, but taking them altogether they were probably less than 5% of income. Most residents of the colony rarely or ever had any contact with the government of King George, which mostly let them alone. Today, the average person cannot get away from government. Everything is subject to license, regulation, taxation, restriction, certification, verification, and permit. Now it is the native government whose swarm of agents harass the people and eat out their substance like locusts. The tax burden per citizen of the New England states is nearly eight times higher since colonial days. Taxation with representation turned out to be worse than the other kind. In the 19th century, Massachusetts led the push for war with the South. It was volunteers from the New England state who stirred up the mobs in Baltimore at the beginning of the war...and then fired on unarmed civilians. Here again, what were the Yankees thinking? The involuntary servitude of blacks needed to stop...but the involuntary servitude of whites to the state was not much of an improvement. In New York, the draft made Irish immigrants riot. The Yankees had to call in troops to put down their own people...before returning to their murderous campaigns against the South. Meanwhile, the rest of the world threw off slavery with hardly a fight. There must be something in the water up there. In the 20th century, Massachusetts led the entire nation towards more and more taxes, regulation, debt, and destruction. It was the "best and brightest" from Harvard, who took the nation into the disastrous Vietnam War...and another Harvard grad who led the nation into Iraq. We only mention Massachusetts because it is now the scene of a glut of unsold housing. Sales dropped 15% last month. --- Advertisement --- Revealed: The Investment Secret With the Potential to Turn Traders into Millionaires - in Five Years or Less "Compressed Investing" could help you ring in the New Year with an extra $150,000 to $200,000 in your trading portfolio. And that’s only the beginning! In five years you could be up $1.05 million or even more… Don’t wait - (as link) discover how to put this simple strategy to work TODAY http://www1.youreletters.com/t/368672/4459110/788682/0/ --------------------- The Daily Reckoning PRESENTS: Wonders never cease...the ever-cryptic former Fed chief recently said something easily understand by the average person. Find out what Greenspan said that has the Mogambo in such a tizzy, below... AS AMERICAN AS HOUSING AND HEALTH CARE by The Mogambo Guru I am in Mogambo Security Lock-Down Mode (MSLDM) at Security Level Three here at the bunker, and I am busily reviewing Mogambo Procedure Manual (MPM), trying to fix it in my mind, fix it in my mind, fix it in my mind that it is "Ask Questions first, then shoot." Not the other way around. Yet. The reason for the heightened level of frightened paranoia probably has something to do with Total Fed Credit increasing by only $1million last week, which means that the banks ain't creating more credit with which borrowers make more money. And it certainly has a lot to do with how Alan Greenspan, former chairman of the U.S. Federal Reserve for 18 years, announced (trumpets blaring "taa-daaa!") that the housing market is heading to the bust stage of the "boom and bust" cycle! A bust is coming! A bust! This is the very same U.S. Federal Reserve chairman who has repeatedly, and loudly, said that there is no bubble in housing, even as he was creating the money that paid for the housing bubble! Now, out of nowhere, he has now done a complete turnaround and (again, to make sure you get the point) out of nowhere he announces that the bubble that never existed has burst! An invisible bubble has burst! I jump to my feet and announce, "Your honor, I would like to have this entered into evidence in my case that Alan Greenspan is the worst central banker in U.S. history, and is also probably the worst government financier/lackey in all of history!" This will not be just any old ordinary bust! No, sir! This bust will be one that involves untold trillions of dollars and will directly affect the value of every house in America, because if you think that your charming house will retain its over-inflated value while, all around you, house prices are falling and people are crying and wailing, "The Mogambo was right! We're freaking doomed!" Well, then you obviously do not understand the first thing about economics or real estate and I feel sorry for you. Mr. Greenspan's exact words, in case you were wondering because he is renowned for being obscure, were: "The boom is over, and you can say that with a fairly strong degree of confidence." Wow! Such clarity! This, according to my wife, is where I yelled "Yikes!" And then, jumped to my feet, hit the Mogambo Family Emergency Alarm (MFEA) button, and ran, as fast as I could, to the famed Mogambo Bunker Of Surly Intransigence (MBOSI) with a cacophony of warning bells ringing in my ears. Anyway, I was saddened to include in the official report that none of the family made it to the bunker in time, like it is so important that they keep blabbing on the phone with their worthless, idiot friends: yammer, yammer, yammer. Or, they were not here, because they were off gleefully gallivanting at "school" or "work," like that's my problem or something. You will instantly stop caring about the fate of my sluggish wife and kids when you comprehend the meaning of his message, which should not take long, as it is brief and chillingly clear. For once in his life, Greenspan was understandable. This unexpected "No Mo' Boom" (NMB) means that prices for houses will not continue to go up, and if I understand the concept of "boom-bust cycle," housing prices will now go down. A lot. That's why they call it a "bust." What's the worst news? Well, it all depends on your perspective, my Inquisitive Mogambo Larvae (IML). If you are the government, for instance, which relies on the receipt of property taxes, sales taxes, taxes on gains, and all the documentary stamps and endless, expensive rigmarole involved with buying (and then again when selling) property (not to mention the income of realtors and title companies and lawyers and banks and mortgage companies and on and on and on), then that is the bad news. If, on the other hand, NMB also means less borrowing against the increased equity in your house, because there is not going to be any more appreciation in the value of your house. This means aggregate, economy-wide spending of borrowed money will decrease, and the American economy will slow. By how much? Well, last year, GDP was boosted by something like $600 billion or so of additional spending, thanks to people increasing their mortgage debt. Hahahaha! This means that particular stupid, childish, immediate-gratification insanity will soon stop, too. So, if you are a person whose standard of living depends on constantly extracting equity from the apparent appreciation in the "value" of your house during a seemingly endless inflation in prices, then oops! Hahaha! The cruel joke's on you! This is how Father Nature takes care of the business side of life. Mother Nature, his wife, takes care of all that gardening, environmental, and touchy-feely "love and caring" stuff. It is up to the stern dad to hand out the, as we say in the South, "whuppin'" as the required punishment for acting so irresponsible and stupid. And even if you aren't that kind of person, your business will be affected as they stop spending. Equity withdrawal is, in bare essence, nothing more than increasing the absolute level of your mortgage debt and negating the entire gain in your equity. Hahaha! They ought to give the Anti-Nobel Prize for Sheer Economic Stupidity for these people, but there isn't one. So, to remedy this oversight, I have officially founded the Mogambo Monument Of Economic Stupidity (MMOES), which has the names of really stupid people and some particularly nasty commentary (by me) about why there names are there. The idea came to me as I was curled up behind the couch, pretending that I don't hear the police pounding on the door, demanding that I stop screaming and cursing so loud. It all started when I had the TV on. With my wife out of town, see, I get to watch whatever I want on TV, instead of watching what she wants, which is "Divorce Court," where she takes lots of notes and always urges the judge to give the wife everything and sentence the husband to death. So, Wednesday afternoon I caught the CNBC show "Kudlow and Cramer." There is, apparently, a regular feature where Robert Reich, former Labor Secretary or something under Clinton, and here, representing the Democrat perspective, debates a Republican about issues of the day or something. First off, I admit that there is something about Mr. Reich that I cannot stand. I don't know why. I just hate his face. I hate his voice. I hate the way he dresses, which all probably stems from the fact that I get physically ill that he parades his stupefying ignorance with such smarmy, oily and unctuous arrogance, like he is the only adult in the room, and he is patiently explaining "how things work" to us little children or something. It is blindingly obvious that he has no idea what in the world he is talking about. As for a little insight into Mr. Reich: he thinks, for one thing, that the government should stop paying billions and billions of dollars in "corporate welfare" to pharmaceutical companies. Fair enough. He does not say why the government gives them all that money. And the reason is that the greedy American electorate wants more new drugs, new medical devices and new techniques that will cure or ameliorate whatever afflicts them, their parents, their children, their relatives and their friends. And, they want it all served up on a platter (not of silver, but made of paper currency!) and all for free! The idiotic federal government, democratically elected by the moron-voters to do that very thing, tries to give it to them by paying the pharmaceutical companies to invent these new drugs, devices and techniques! Giving out free lunches is all that government does anymore! And in that regard, reader Felix R. writes, "When Milton Friedman was in Jerusalem, the reporters asked him if he could tell them the whole Torah of economics while standing on one foot (an allusion to a famous Talmudic story). He told them that there is no such thing as a free lunch, and all the rest is merely an explanation." Perfectly correct, profound, and humorously put, all at once! Fabulous! I can almost envision Jackie Mason reciting the line in one of his comedy acts! Hahaha! Or Krusty the Clown! Anyway, it is not as funny to hear Mr. Reich yammering away in his usual gibberish, mixing real economic concepts and theory with wild jumps to the world of Economic Bizarro Land. He wants, as do we all, to have cheaper medicines and drugs. His idea for accomplishing this worthy goal is to have the government, somehow, persuade the drug companies to lower their prices for their pills. A laudable goal. So, there he was, railing against the pharmaceutical companies for their high prices and high profits, and explaining that if they dare refuse to lower their prices, he suggests passing legislation requiring them to do it! Hahaha! More regulating and taxing, which is the entire Democrat philosophy toward everything! Hahaha! The Republican in the discussion, to his credit, did not jump over the dais and grab Reich by the neck in contempt and attempt to slap some sense into him, although you can bet that The Mogambo was cheering loudly for him to do that very thing. Let me ask one question: Who owns the pharmaceutical companies? Answer: The shareholders of the pharmaceutical companies. And who are these shareholders? You! Us! We! Take a look at the retirement plans of American workers and see what assets are in there. And so, taking money away from the drug companies is, literally, taking money away from our own retirement plans! Hahahaha! But this is just standard "government in action" stupidity, especially Democrat government in action stupidity, so he does not get the award simply for that. He earned the distinction of inclusion on the Mogambo Monument Of Economic Stupidity when he uttered the one perfect, idiotic Leftist phrase that deserved immortalization. He said, (and I am, unfortunately, quoting from memory), that it was time we "unleashed the free market by getting government involved!" Hahahaha! "Unleash the free market by getting the government involved!" Hahaha! I can't stop laughing! Until next week, The Mogambo Guru for The Daily Reckoning Mogambo sez: Money supplies around the world are rising alarmingly, as each country tries to prevent deflation, which is defined in your Mogambo Junior Economist Handbook (MJEH) as "money supply falling and asset prices falling." They are doing this by creating inflation in new credit (monetary policy) to create inflation in prices. Hahaha! So, my Sweet Mogambo Cuties (SMCs), keep buying gold and silver, as they will rise in price for years and years and years to come. You can do it right here: An Epic Metals Boom! http://www1.youreletters.com/t/368672/4459110/786208/0/Editor's Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter - an avocational exercise 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. If you're inclined to read more, you'll find the whole Mogambo here: Permaflation http://dailyreckoning.com/Writers/Mogambo/DREssays/MG052607.html
-- Posted Tuesday, 30 May 2006 | Digg This Article
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