-- Posted Wednesday, 14 May 2003 | Digg This Article

"...So let me get this straight...even as we speak, interest rates are now pounded down to lows not seen in 40-plus years, and the Fed is actually trying to ignite inflation, in direct opposition to the entire history of the world, the entire history of the Fed, the entire corpus of economics as a science and even common sense? And at the same time as price inflation is already rising, monetary inflation is blazing, Congressional budget-deficits are growing, the dollar is falling, the current-account is exploding, and yet the Treasury-buying crowd sees nothing but reduction in rates, so that yields will fall at the exact same time as inflation is rising? Wow wow wow wow!..."

The Mogambo Guru

 -      Starting off with the usual jaundiced look at the Fed's activities, we see that Total Fed Credit actually declined by $7 billion, keeping with their usual battle plan of delivering two punches to the solar plexus of the dollar and people who loan or save money, then a cocking of the arm for another blow.

Moseying over to the banks themselves, they soaked up another incredible $30 billion in government debt for the week. This is probably because the Treasury does not yet have the authority to breach the $6.4 trillion debt limit, and as they must somehow sell a new one-week record of $58 billion in T-notes, they, like little children who have been told that they cannot have a poisonous snake as a pet, have gotten their little friends to keep it for them at THEIR house. But in doing so, the chart of the amount of government debt being soaked up by banks is truly astonishing to look at.

-      The dollar hit a new low, as the Greenspan Fed continues to forcefully pound it to utter worthlessness, as they simultaneously pound down interest rate yields to try and ameliorate their egregious policy failures for the last decade or so. Now you would think that when your own government declares, in so many words, that they are sticking you with yields that are less than inflation, and explicitly promising to make them more so, that there would be people in Full Panic Mode. Like me. But, surprisingly, no.

And you would think that foreigners would be leery of loaning valuable current-dollars for the privilege of receiving a piddly stream of ever-cheaper dollars, but again, surprisingly, no.

-          Doug Noland, who writes from David W. Tice and Associates at PrudentBear.com reports, well, I will not report the statistics he reports, and you can just go there and read them for yourself, if you have the guts. Or, if you are like me, if you have the guts AND a big loading-dose of tranquilizers, with trained mental-health professionals standing by. And once you do decide to peruse his column, suffice it to say that screaming hysterically in horror will not change anything, as I spent the entire morning doing just that, and sure enough, nothing changed. Oh, the usual banging on the door by police and predictably upset neighbors throwing rocks and the occasional lawn chair at my house, of course, but the numbers remained constant.

But I will note with satisfaction that he superbly contrasts the behavior of Wim Duisenberg and the European Central Bank with that of his contemporaries, the monstrously inept Alan Greenspan and the Fed. I will also note that Alan Greenspan has been made a Knight by the British, who does not deserve it, but Mr. Duisenberg, who does deserve it, has not, which may only go to underscore part of the reason that the Germans nicknamed the British "island monkeys."

-          One interesting thing is that sales of new debt issued by state and local governments for the first four months of the year soared to $113.5 billion, which is the first time that any 4-month period that new debt breached the $100 billion level. If the number $113 billion seems oddly familiar, it is because 113 million is roughly the number of working people in the country who are not employed by a government. So, in a nice, rounded way, the states, in four months, have gone into debt by another $1,000 for every worker in the whole country. Fabulous. Absolutely freaking fabulous.

-      Last Tuesday the Fed had one of their famous meetings, and after they were finished playing with their crayons, trading anti-depressants pills by the handful and swapping jokes ("How many economists does it take to screw in a light bulb? I don't know. How many? Just one with big boobs! Hahahahaha!") and had their naps, they issued their, umm, deliberations. The Bloomberg headline was, "Fed Keeps Rates Unchanged, Calls Slow Growth a Bigger Risk Than Inflation." Now, I like to disregard all the nay-sayers and perversely think I am a pretty clued-in guy, and most of the little children on the whole block agree that I am quite knowledgeable about economics, but this floors me. Literally. Lying there on the floor, looking up at the ceiling in stunned disbelief, my pea-sized brain a-whirling around and around, my life is flashing before my eyes. I see Gilligan, the Skipper, too, the Millionaire and his wiiiiiife. No, wait! Sorry.

I really see an ocean of mostly economics books, all their pages turning in a gentle fanning motion, and I can see that all the pages are blank! This is a metaphor for not ever having ever read in any book such a thing as slow growth being more dangerous than inflation. In every book on economic theory and practice, as I recall in my half-witted reverie because I am too damn lazy to get up and walk over to the bookcase and try to do a little research, the whole point of it all was that inflation was a Very Bad Thing (VBT). Nobody ever suggested that slow growth was a VBT.

And because inflation was a VBT, then it was the purpose and duty of every elected or appointed official in the land, and I mean everybody from the President and Federal Reserve Chairman on down through all their minions and acolytes, to keep inflation at a minimum, namely zero, so that price stability can lead to confident and accurate business decisions. I use the term "acolytes" as meaning an un-thinking, mindless, stupid, drooling, zombie-like Unholy Army of the Night. You know, like the Democrat Party.

Anyway, now we note that on that metaphorical vast ocean of books with blank pages there seem to be eddying pools of magazines containing pictures of what appear to be beautiful naked ladies, some of them engaged in some very naughty acts, and this is to continue the metaphor, in my pathetically-transparent attempt to be clever, as I am able to see the contents of these salacious magazines because I HAVE actually seen beautiful naked ladies in my time.

And so it occurs to me, as I lay there prostrate on the floor, that I haven't bought any magazines featuring beautiful naked ladies in a long time, and it also occurs to me that in all the economics stuff I have ever read, reduced by the huge, overwhelming percentage that I did not really understand in the first place and quickly forgot all about as soon as I turned the page, that in all that time I have never heard of such a thing as slow growth being more risky than inflation. Never! Usually, the One Big Thing That Everybody Is Sure About is that NOTHING is more dangerous than price inflation.

You would think that, at least once, somewhere in all that dense verbiage, maybe in a footnote or something, there would be one lousy reference about how some jackass country was brought to ruination by slow growth, but noooOOOooo! There ARE, however, an apparently infinite number of references to the fact that the monster of inflation always destroyed economies and countries and everybody who lived in them, or lived next to them, or loaned money to them. Fortunately, you can still READ about them without catching "inflation cooties," but those of us in-the-know always handled those pages with tongs, just to be safe.

But, as hard as I try, I can't even imagine someone saying that slow growth was more dangerous than inflation. It even SOUNDS stupid, for crying out loud!

However, I am fully able to imagine being at a party in a psychiatric ward where all the, ummm, clientele are consuming powerful psycho-active drugs that one of them stole from the nursing station, and one of the more pompous and obviously-disturbed individuals was drawing multi-variant graphs in the air with his finger and explaining, with a fake, thick German accent, that modern economic theory dictates that growth IS more important than controlling inflation, because growth helps the capital-owning class. Admittedly, and I can hear him now, adjusting the invisible monocle in his eye and saying, "Inflation may kill der workers, ja, but we have too many fuhrschlugginer workers now, what mit der six-percent unemployment already. And it ain't der working-class proletariat geschmutzenheimers that feeds der Doberman, if you catch my gedriften!"

So why is there so little outrage? The answer is, like economics itself, a human action. Most economists have families and mortgages and bills and all the aggravating stuff that vex you, and much more besides that hungry Doberman, because they have to keep up appearances, and after awhile all the exciting luxuries and sumptuous-living in pursuit of keeping-up-with-the-economist-next-door-Joneses gets to be baseline and old-hat, and then she starts whining that she wants a new Porsche convertible and a lodge in Aspen, and she doesn't even ski, for crying out loud, and can't the woman comprehend how much those things cost, and I'm still paying on that damn cabin in the mountains that she "just had to have" and only went there one damn time and she hated it and spent the entire time complaining yammer yammer yammer, and does she think I have some kind of damned money tree growing in the backyard or something? And so to lose a phony-baloney job over principle, namely standing up and saying that slow growth is NOT a bigger risk than inflation, is to stand up for integrity and the obligations of intelligence, and that is always a pretty high price to pay for acting honorably. Especially when all the bosses, who sign paychecks, are NOT willing to lose their cushy jobs for it. So, for these people, there is NEVER a good time to get frisky, career-wise.

And this is especially true for government workers, because one of the inbred corruptions that has developed in government, over lo these many years, is a frightening and vengeful, blackballing, back-stabbing, armed-and-armored Terminator mentality. Sort of like the last days of an insane Hitler, or Janet Reno, which is probably a lot more accurate than I want to contemplate right now.

And so it is not just losing THIS dorky and stultifying job, but ruining their whole freaking lives! And so when Alan Greenspan and the other nitwits at the Federal Reserve say that slow growth is a higher risk than inflation, everybody smiles knowingly and keeps their damned mouths shut. But don't you believe it. It's not. But it is not about slow growth or inflation. It's about the Doberman getting fed. And what they are getting ready to feed that damn dog is you.

So, everyone all merrily toes the party line, which is that there is never going to be another time in all of history where the stock market, the bond market, the housing market, the debt market, the mortgage market, or anything or anybody in the whole freaking world will ever again suffer the slings and arrows of outrageous fortune, to quote Shakespeare both badly and probably incorrectly, because- and here is where you insert a sound track of trumpets tooting "ta ta tataaaaaaaa"! -take cheer! The Federal Reserve Is On The Job!

The darkened theater is lit as the screen fills with a long camera shot of the Federal Reserve building brightly shining in the sunlight. In the foreground are cherry-blossom trees in bloom, and the leaves are swaying gently in the sweet breezes of a warm and sunny day, and in the voice-over our announcer says, in an excited and happy way, "That's right, Mister and Missus America! When you leave the theater and go home tonight, you can sleep soundly, because (pause for dramatic effect), The Federal Reserve Is On The Job! Day and night these tireless and dedicated workers work their fingers to the bone pulling levers, changing regulations, changing priorities, scheming things with foreign central banks and influential friends, and printing up stacks and stacks (zoom in on pallets of money being taken out by a forklift) of glorious money! That's right! Real money! All for you! And remember (with voice lowered to approximate sincerity); you are perfect in every way. There is no price that is too high. There is no debt you cannot manage. There is no tax you cannot pay. You have not made any bonehead decisions about money in your life, and neither has the Federal Reserve. Nor Congress. Nor the President. Nor the Supreme Court. And (continuing on in a brighter and brighter voice ) if anybody DID make a teensy mistake, probably promulgated by nasty and brutish foreigners who need baths and cannot even speak English, then no problem-o! Because we have (cue fireworks display) the Federal Reserve, which is On The Job!" Yaaayyyyyyyy!

Well, the next day, Wednesday, after a long night tossing and turning and sobbing uncontrollably into my pillow, the front page of the Wall Street Journal had, of course, a big article on it, because this is Big Time Stuff. The lead paragraph contained this observation, "But in a profound shift from half a century of pre-occupation with fighting inflation, the central bank signaled that it may cut interest rates later to ward off even the possibility of deflation." Later, in the same article, the WSJ noted, "Since the end of World War II, Fed officials' primary goal has always been avoiding inflation or reinforcing it, since inflation interferes with the smooth working of the economy and undermines confidence in the government." Exactly!

So we are blessed to have the Fed now pursuing a policy that "interferes with the smooth working of the economy." Perfect. Just absolutely freaking perfect!

Still later in the same article we have Fed governor Ben Bernanke, whom I now regard as the most rabidly-clueless and dangerously-incompetent mental-midget yahoo in the whole history of the Federal Reserve, who is "an advocate of adopting an explicit inflation target, told a German newspaper last week that a range of about 1% to 2.5% would be appropriate." An inflation rate of 1% to 2.5% is appropriate for what? Appropriate for destroying everything we hold near and dear? In re-reading this paragraph, checking for blatant linguistic and grammatical errors, I note with smug satisfaction that I referred to Mr. Bernanke as a "rabidly-clueless and dangerously-incompetent mental-midget yahoo," so I am not going to spend any more time belaboring that particular point, since it is hopefully made.

So let me get this straight, as I am desperate to understand what in the hell is going on and am more scared and paranoid than ever, and if you really knew me you would instantly realize that being more paranoid than ever means that I am even past the point of regarding the face in the mirror as a paid assassin who is out to get me, but even as we speak, interest rates are now pounded down to lows not seen in 40-plus years, and the Fed is actually trying to ignite inflation, in direct opposition to the entire history of the world, the entire history of the Fed, the entire corpus of economics as a science and even common sense? And at the same time as price inflation is already rising waaayyyy outside of Bernanke's preposterously-stupid range of inflation targets, where monetary inflation is blazing, Congressional budget-deficits are growing so high that it takes trained professionals with high-powered telescopes to even see the top of the Everest-sized pile, the dollar is falling, the current-account is exploding, and yet the Treasury-buying crowd sees nothing but reduction in rates, so that yields will fall at the exact same time as inflation is rising? Wow wow wow wow!

When witnesses are called to testify at my involuntary-institutionalization hearing, I want all of you to jump into your cars and tell them WHY I was running down the street screaming insanely at the top of my lungs. The part about being stark naked except for bandoleers of ammo-belts and crazily shooting sub-machineguns at imaginary Fed officials behind every bush was just part of a heavy symbolism thing that didn't work out like I had planned. I don't know why, either. When the idea came to me, I remember that I was laying on the floor looking at the ceiling, and there was Gilligan, the Skipper, too...

-      Ted Butler is a silver analyst-guy who I have quoted in the past, and he is convinced that silver will probably be THE money-maker in the future. How much in the future you never can tell, because you never know what kind of pressures from, and on, friends in high places are being brought to bear so as to perpetuate a hugely-successful fraud, which he implies is happening in the silver market. Other guys say manipulation is happening in the stock market and the bond market, the gold market, the currency market, and damn near any other market you can name, so what's new, eh? But he has been reporting and studying the silver market for a long, long time, apparently since about the time that they first discovered silver, so one would be foolish to dismiss him out of hand. And when I read that he is now reporting that, and I quote, "There has been a seismic shift over the past two months in the composition of the market structure on the COMEX," my ears pricked up with an audible "bink!" The shift he refers to is the transfer of massive short positions in silver to other, weaker hands.

Now I don't know about you, but something so big-sigma that it is characterized as "seismic" almost always gets my attention.

-      Ty Andros at Traderview has been monitoring what he thinks is a big ol' Elliott Wave third-of-a-third for over a year, and he has all of these chart indicators and head-and-shoulder stuff that convinces him that we are very close to the end, and it will have something to with the weakness of the dollar. He was astonished at how the dollar fell in immediate response to the Fed announcement about rates. Now he is jumping up and down that, with the yen at 85 cents, it will soon go to parity with dollar. Things are, in his term, "coiled." If the yen/dollar breaches 86.80, he figures, then you can bank on it going to parity in a big breakout. And fast. "The run on the dollar has started."

Now, the fact that not even once did he mention the surreptitious involvement of ANY sinister alien life-forms almost put me off completely. But then I remembered what Ted Butler said about a seismic shift in silver, combined it with the Ty's "coiled" nature of dollar weakness, and things clicked into place. With these two seemingly-unrelated facts, my brain sprang into heightened alert, probably from the sheer novelty of having a coherent thought for a change, and I was instantly energized! I suddenly knew, beyond a shadow of a doubt, that since my wife is away at some dorky conference in Reno, probably getting one of those quickie divorces and from now on I will be required to always refer to her as "plaintiff," that I could maybe take a little cruise-o-roonie down to the store and pick up something in the chocolate donut family, and pay for it all with enormous profits in silver and yen. Well, as you probably figured out, after I got the chocolate-covered donuts and ate them by stuffing them all into my mouth at once so that my cheeks were puffed out like Dizzy Gillespie blowing an ear-splitting B-flat on his trumpet in the range that only dogs can hear, then I got real sleepy, and when I awoke from my nap all I could think about was going and getting some more chocolate donuts, and maybe a taco, and I never did get around to getting more silver. But don't you make that same rookie mistake!

-          Ian Campbell on the UPI site writes, "What is deflation and why is it bad? Deflation means that price indices are falling, so that not just the prices of a car or a computer are falling, which most of us would find a good thing, but the overall consumer price index. That puts generalized strain on company profits and pushes companies to want to reduce one of their key prices, the price of labor."

Okay, now we take our cameras and microphones in hand and go down to the factory floor, where we interview someone we will call Bill Brown, which is not his real name, which we have changed to protect his privacy. Our intrepid and handsome interviewer begins, "Well, it says here on my clipboard that your name is Bill Brown, but your nametag says that your name is James Clopp. Which one is it?" he asks. "Either one," says Bill/James. "Am I gonna get any money for you asking me questions, 'cause I could really use a few extra bucks right now."

"Nope, sorry," says our brilliant young darling of an interviewer. "But let me ask you, if management wants to lay you off to cut costs, would that be a bad thing for you?" To which the line-worker nervously asks, "Why are you asking me that question? Am I gonna get laid off? Why in the hell are you asking me if I would like to get laid off? How would YOU like to get my fist laid off upside your head?"

"Okay! Okay! You're not laid off! But that would mean that the prices you pay for things goes up. Would THAT be a bad thing?" Our factory-floor denizen scratches his head and allows that, "Yeah, maybe. I dunno." Obviously perplexed, our flustered reporter presses gamely on, "Okay, now suppose that bread goes to a thousand dollars a loaf, but you are not making any more money than you are right now. Would THAT be bad?" The camera flawlessly records an immediate reaction, and we notice that this has stirred something inside the head of our brave machine-jockey. "You mean, a loaf of bread costs a thousand dollars? Well, umm, then each slice would be worth, what, fifty bucks, right? Hey! I got a tuna-fish sandwich in my lunchbox right now! That two slices! That's a hundred bucks! And I got practically a whole loaf more at home right now! Ha ha! I'm rich! Rich! This is great news! Thanks, dude!"

Our stalwart reporter turns, stares directly into the camera, and signs off with, "In short, it seems that Alan Greenspan is right. Preventing deflation IS more important than inflation. And we will all end up very, very rich."

-          Bill Fleckenstein, president of Fleckenstein Capital and one of those guys who is young, and handsome, and brilliant, and has all of that glorious hair, and whom you just want to hate out of sheer, raw jealousy, or at least I do, writes, "The dollar is on borrowed time. I believe that, in a social democracy with a fiat currency (like ours), all roads ultimately lead to inflation. And in fact, that is the story of all paper currency regimes. They all collapse."

Not content to lucidly elucidate dry historical fact, he extrapolates, "The biggest bubble in the history of the world that we recently experienced was powered by the most incompetent and irresponsible Fed in history." Yeah! Get 'em Bill! "However dangerous you may think the Fed has been historically, the Greenspan Fed takes that to an entirely different dimension."

After stating that the economy will continue to sour and the dollar will fall and the stock market will fall dramatically, he says, "Now, I don't say any of this because I want it to happen. I say this because to me, it was preordained by the policies that precipitated the bubble and the policies that have gone on since the bubble." Preordained. As in hard-wired. As in Laws of Economics. Make that Iron Laws of Economics.

Summing up he says, "We face a weakening dollar and, more importantly, a sea change in attitudes, as folks finally realize...that there really is no magic Fed wand to get us out of them. When confidence shatters, stocks will sink -- and precious metals will soar."

I am particularly attuned to magic wands here lately, as two bright readers have written to solicit my opinion of this new Fed policy, in the magic wand vein. Let me be blunt. We are doomed.

Bill Fleckenstein is exactly right when he says that there are no magic wands. There are no successful monetary-policy prescriptions. There are no effective levels of interest rates. There are no viable fiscal policies. There is literally nothing that can be done, except temporarily delay the inevitable, and that only makes the final collapse that much worse. And the proof is simplicity itself; if it could be done, then surely in all of history one damned country would have achieved it. But none ever has. And none has ever even come close. And every single one of those countries ended up right where we are right now, because they ended up doing what we have done since that filthy commie/fascist bastard FDR sat his big fat butt in the Oval Office in 1933.

And if we have ended up where they ended up, then doesn't it seem logical that we are headed for where they headed? Yep. Only worse. Much, much worse. "And where is that dreadful place?" you nervously ask in that charming little way that is just so damned cute that it makes me want to pinch your rosy little cheek. Well, imagine you are a little kid again, sitting around a campfire in the spooky dark woods, late at night, next to a cemetery, down the road from an institution for the criminally insane, where spaceships are rumored to have landed and mutilated some cows, on top of a toxic-waste dump, with ravenous wolves howling in the distance, a lightning storm is flashing out on the horizon, being chaperoned by a guy who used to be a priest but now is now the scout-leader. How many Things That Go Bump In The Night do you think you would come up with before dawn? That many, huh? Well, imagine that they all come true. THAT, my little darling cherub, is a rough approximation of where we are heading. But probably worse.

-          Chad Hudson writes, that since March 2001, "While the private sector has been eliminating workers, the government sector has actually added almost 600,000 workers over the same time period. Local governments have been the source for most of governmental job creation, adding 446,000 jobs or about 3.4% growth. State governments have also been active in adding employees, adding 104,000 since March 2001, which is 2.2% higher than two years ago. The Federal government has lagged a bit, increasing its payrolls by 1.4% by adding 20,000 workers."

This is exactly the wrong thing to do, and this is a major, major, MAJOR part of the very thing that has gotten us into the mess we are in, and this is the thing, let me re-phrase that, this is THE thing, that will prevent the USA from ever again attaining any kind of glorious future. More government workers means more taxes have to be raised, and there are fewer workers in the labor pool available for any business to hire to actually make goods and services for sale at a profit, which pay the taxes, which pay the government workers.

Government employment is, by definition, a net drag on an economy. Everybody knows that. And a bigger level of government employment is a bigger net drag on the economy. Steve Dasbach, writing from the American Liberty Foundation, says, "...government spending and regulation consumes 56% of the nation's income -- $16,195 for every man, woman, and child."

So it would seem patently obvious to everyone, except Democrats who are apparently congenitally-incapable of noticing anything including the obvious, that if everybody worked for the government, then there would not BE any goods or services for sale. Continuing, if everybody in the USA worked for the government except for one guy, there would still not be enough goods and services produced, or taxes paid, by that one guy. Ditto two guys. Ditto three guys. Ditto four guys.

So, at what point ARE enough guys NOT employed by the government to at least sustain an economy? We shall soon see, as the private sector is firing people and the government is hiring them. So, don't touch that remote control, and stay tuned, because we are going to find out very soon!

-          Richard Russell, of the Dow Theory Letters, which he has been writing for forty-five years, which indicates that he probably knows something worth knowing and that is why people keep subscribing to his newsletter, believes that the philosophy of the Fed is now "inflate or die." This is precisely what the Fed has been saying, in so many words, too. As I simply cannot resist putting in my two cents, especially when in doing so I have the chance to vicariously associate myself with someone of the intellectual-caliber as Mr. Russell and maybe this little added cachet to my sterling local reputation will convince the waitress at the local donut shop not to spit in my coffee when she thinks I'm not looking, but let me leap to say that I am willing to spend as much time as it takes to smash you over the head with a two-by-four repeatedly- whack whack whack -until you comprehend that the program that always follows AFTER a program of "inflate or die" is, simply, "die." Bummer, huh? That's why fighting and preventing inflation used to be such a big thing. Back in the olden days. Like, oh, for the past zillion years or so in a row. Of course, this was during the time, or era, or epoch, or whatever, that historians call "Ever And Always, Every Moment Of Every Day, Up Until Right Freaking Now."

That notwithstanding, the purpose of this new and novel Federal Reserve kamikaze-imperative is to keep real interest rates, namely the nominal, posted rate, tidily adjusted for the rate of inflation, in big ol' negative territory, since positive real rates, which is the usual modus operandi in the activity of borrowing and lending, would scare away borrowers at this stage of the game. For example, if inflation is actually zero or less than zero, and there are lots of terms being used to describe a negative inflation rate, then this would be what was once called "stability" and it used to be the stated goal of all bankers, all economists, and all governments for the past, let me check my watch here, 5,000 years in a row. But an interest rate that is GREATER than the inflation rate would constitute a high, positive real interest rate. This is the usual deal you are used to when you borrow money, because lenders are supposed to be real chary about loaning funds at money-losing rates, namely those where the contracted rate is less than inflation, much less with an after-tax reduction, much less with an new implied risk-premium of zero.

I see you scratching your head in puzzlement, as you are obviously fixated on the good part that affects you, namely the price stability part. But it has to do with the purchasing power of the dollars that are being blithely bandied about here. Let me put it another way. In other words, borrowing in an environment of negative inflation would mean you are borrowing in cheap dollars today and being expected to pay back the loan in more valuable dollars tomorrow. Or, in still other words, you borrow a stale cheese sandwich from me today and promise to pay me back with a delicious 5-pound pot roast and red potatoes, swimming in a glorious au jus, a huge and delicious salad, a choice of dressings of course, and with a yummy chocolate dessert that has so much calories and fat that I gain weight and my arteries clog just by smelling it. And, although I risk unrelenting criticism for belaboring the obvious, you don't need a PhD in Economics or Finance to immediately comprehend that this is not the best deal in town. Perhaps that is why so few people borrow stale cheese sandwiches at such rates.

What the Fed wants is to change things so that you borrow the pot roast and pay back with a stale cheese sandwich tomorrow.

That simple scratching of your head proves that you are not Alan Greenspan, or that you work at the Fed, or that you are not a Congressperson, because if you WERE Alan Greenspan or you DID work at the Fed, or you WERE a Congressperson, then you would know why negative inflation is bad; it impacts on your ability to play silly games, and have emergency conference calls with your hoodlum friends, and get to parade around looking pompous and important as you tackle Big Economic Problems, hold redundant hearings, fly off to pointless conferences, and ride white horses to the rescue and maybe get to save a few damsels in distress. Maybe loan them a 5-pound pot roast.

Imagine how boring it would be to sit all day in a Fed office with nothing to do, the boring economy boringly plodding along, with all the boring people going to their boring jobs with boring stable interest rates, the money supply boringly inching upward and the boring people and boring businesses boringly expanding and going about their boring business of boring buying and their boring selling, day after day after boring-as-hell day. The phone never rings and there is nothing to do until quitting time, except download more pornography off the Internet and play endless games of Solitaire until the really big files finally download, which would tie up the phone lines and maybe that is why the phone never rings, but then nobody ever says they were trying to call and couldn't get through, so who cares? So, the Fed's horror of negative interest rates, predicated on their horror of falling inflation, would keep them from doing any of that fun stuff that they love to do.

Well, they MUST love to do it, because for the last umpty-ump years in a row they have been doing it at a feverish pace. Which is, if you are even barely literate in economics, the precise cause of the problems we are having right now.

Now, to you and me out here in the alley, dressed in our filthy rags and sorting through the trash cans and dumpsters looking for something to either eat or hopefully sell for a few bucks because we are poor, we realize we are poor because we made the HUGE mistake of actually saving our money like our stupid parents taught us, and now the banks are paying us some diddly-squat interest on that saved money, because Alan Greenspan and the Fed are having fun economically-murdering us loser weenies by pounding down interest rates to less than half the rate of inflation, which puts real interest rates into the range of "inconsequential" to borrowers. And, of course, even more so to lenders and people like you and me who save their money. As we pathetically root around in the garbage, we commiserate among ourselves that what we really SHOULD have been doing all along is to have gone gigantically into debt.

Because if we HAD gone gigantically into debt like we should have, then we would at least be able to sleep soundly at night, knowing that Alan Greenspan and all the rest of the crew are working feverishly to make sure that we can have access to really, really, really cheap money, so we can borrow more and more money to pay the monthly payment on the more and more-gigantic debts we already have, and even have a few dollars left over at the end of the day, and then we could be sumptuously dining on half a pot roast today because I think I know where there is a half of a cheese sandwich in a Hefty bag on the curb over on Ninth Street that we can pick up tomorrow.

-          Alan Greenspan and Warren Buffett have differing opinions on derivatives. Warren thinks they are the spawn of hell, and Alan thinks they are peachy. Oddly enough, they are both kind of right.

Derivatives spread risk to everybody, and so any problems with any asset corresponds to everybody taking a small, pro-rata hit, instead of one guy taking the whole hit. So instead of one guy being wiped out with a fifty-dollar loss, everybody in the derivative-pool gets clipped for a nickel.

Everything is just peachy, just as Alan Greenspan says. But if that nickel drives me under because I am living on the razor-edge of leverage, this will produce another fifty-dollar loss, then everybody in the derivative-pool loses another nickel. And if that cumulative dime of losses drives somebody else under, producing another fifty-dollar loss, then everybody gets another nickel whack. And this is the spawn of hell that Buffett was talking about.

Which one will ultimately be proven right? I gotta go with Warren, especially since Alan has proved that he has no idea what in the hell he is doing and is just another blowhard charlatan practicing what amounts to voodoo economics, and why in the hell would I suppose that he is right about this derivatives thing when he has been so wrong about everything else?

-          Why am I always being reminded of the last days of Pompeii? The hotshots in charge, along with everyone else, had been noticing the rumblings and grumblings of earthquakes and tremors in Mt. Vesuvius, for days and days before it erupted. The price for not paying attentions was that everybody was killed.

And now, I announce my new movie script, "Pompeii Today," starring America playing the part of Pompeii, co-starring me as the handsome and wise Zeus, and what appear to be multitudes of gratuitiously-underdressed nubile young ladies in mini-togas parading around the agora in shameless pandering to the young-male market, which ought to at least double the opening-weekend gross. We open Act One, Scene One with scientists bending over strange and wonderful machines that are registering earthquakes in the mountain of debt that looms over Pompeii. Oops, I mean America. You can tell they are real scientists by the pocket-protectors and slide rules that they have in the breast-pockets of their togas, and they are scratching their chins in contemplation, which shows their deep concern. Their leader, Greespanicus, is also stirring a bubbling cauldron of bat's wings and eyeballs of newt labeled "monetary stimulus."

Their instruments at the Fedicus Reservicus have recorded rumblings in Vesuvius, and some grumblings too, for days and days now, as evidenced by the piles of very squiggly lines on long rolls of parchment paper all strewn on the floor. And now there are rumblings and grumblings from the scientists, too, which vexes their Exalted Leader and Expert Entrails-Examiner, Greenspanicus. There is a scroll-newspaper on the desk, where the headline is "Government actually producing artificial lava with Lava Printing Press to pour down upon us! In related news, Rumblings and Grumblings registering new 200-day moving-average highs!"

The details are sketchy, but it appears that a New Theory has emerged. In this new Neo-Lava Supply-Side Theory, if the government creates some lava with its new Lava-Printing Press, and pours the molten lava into the volcano and drips some on the town ("trickle-down lava"), then the volcano will not explode. They even have a new catchy slogan, "Making the volcano grow, so it will not blow!" Ain't dat nice?

There is, of course, the usual whining and death-rattles from the people who are being killed by having molten lava poured on them and their children, but Greenspanicus orders the program go on, and on, and on. "Some must die so the rest may live!"

Then, as we build to the exciting climax, some guy stands up and say "I am Mogambocus! And I say no!" And then another guys stands up and says "No, I am Mogambocus! And I say no!" And then lots and lots of other guys stand up and insist, "I am Mogambocus! And I say no!"

The ending will be tragic and cinematically unforgettable, winning Oscars for everybody, with burning-hot lava bursting in brilliant reds and yellows against an inky-black sky and raining down on Pompeii. Oops, sorry, I mean America. The soundtrack is a raging cacophony, full of banging kettle drums, incessant horrible, misshapen chords of blaring brass instruments, people screaming and crying and government agents insanely bellowing, "Stimulus program! Stimulus program!"

As the camera pans away from this colorful and mesmerizing scene of flaming disaster and death, we note that the scene grows more peaceful in cool colors, all beautiful blues and greens, the sound track slips back into a graceful harmonious andante, and when the camera is pointed directly out to sea, and we see a flotilla of gold and silver boats sailing peacefully towards the sun, and every one is piloted by a guy who says his name is Mogambocus.

-          As Ted Roell was kind enough to send me an e-mail with the news, I report that gold sales last year were the highest in years and years. And why are people buying gold, when this deflation thing was supposed to be sweeping the land?

Well, perhaps an article in the WSJ on Thursday, May 8, entitled "What Deflation? Why Your Bills Are Rising," has something to do with it. In short, while deflation may be the popular plague du jour on asset prices, the prices of stuff you buy day-to-day are accelerating to the upside. Since you pay bills, I am sure that this is not news to you.

But in a quote from Pat Jackman, an economist at the Bureau of Labor Statistics that calculates the inflation rate that is considered to be "official," we read that even he acknowledges that the inflation number they crank out grossly understates the rising cost of life. Or, to be blunt, the low inflation they so proudly promulgate is a damned lie.

This jarring candor may be the last we ever hear from Mr. Jackman, and the next time you see his name in print will be when he reports the result of his new assignment, which is hand-weighing the hives of killer bees in Guatemala.

Diane Swonk, chief economist at Bank One in Chicago is quoted as saying, "It's not deflation I am worried about. The truth is, the Fed will have to start worrying about inflation sooner than it thinks."

So, price inflation is higher than the Fed says it is, which even at the false "benign" rates that they mouth in public, is the constant grinding-down of your purchasing power, and people are furiously buying gold to capitalize on that. And yet the Greenspan Fed is busily making it worse so as to, hopefully, keep the prices of ridiculously-overvalued assets from falling? I am reminded of Bill Fleckenstein's remark, above, about how the Fed is taking mindless profligacy and abject stupidity to another "entirely different dimension." And that dimension, I figure, is what lies at the bottom of black holes. And since nobody ever gets out of a black hole alive, and in fact not even light itself can get out of a black hole alive, I am pretty sure that we will not see Uncle Sam crawling out of that black hole alive, either, although in his panicked attempts to do so he is frantically climbing on the heads of you and your children. Ugh.

--- Mogambo Sez: Things always get really weird at this stage of the boom-bust cycle, and I suppose they are going to get a lot weirder in days to come, as hard as that is to conceive. I am particularly intrigued by the odd action in options.

One of the little charts I keep concerning the options market has been acting very, very weird all this quarter. Well, today finally my curiosity got the best of me, and so I went back through all of my charts back to 1993 and looked.

There were only two quarters that had a similar pattern. Now this is where it gets so very interesting. These two times were first quarter of 2000 and third quarter of 2000.

Okay, now my heart is really pounding with excitement now. I always had faith in this little indicator, and now it is really paying off. For you.

Because I am now declaring, with a foolhardy impetuousness and snotty arrogance that is probably going to get me into big, trouble, that my new Fabulous Mogambo Indicator mandates that not only IS the end near, but I am also now wearing a big sign around my neck that says, "The End Very, Very, Very Near" in my messianic-zeal to save your butt. Well, to be fair I have been saying that for a long time now.

But no matter how many times I have said it before, I have not, and pay attention here because I say NOT, ever been quite so strident with this new manic-level insistence, actually setting new Olympic world-records in hysterical over-reaction and pompous, preening self-confidence and conceit, that sometime within the next two months, tops, the Fabulous Mogambo Indicator will be not only be exactly proven right, but that cheering throngs of adoring and grateful people will be carrying me on their shoulders up and down the boulevards of the town, shouting huzzahs to me, "Mogambo! Mogambo!"

My whole career has been leading to this moment. And now it is here. How's THAT for momentous and portentous?

The Mogambo Guru Lives!

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.

-- Posted Wednesday, 14 May 2003 | Digg This Article

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