-- Posted Thursday, 3 May 2007 | Digg This Article
Sirens are blaring from the Big Mogambo Bunker (BMB), alerting me to economic danger and driving everyone absolutely crrrrrazy. Instead of turning them off, I am fearfully curled up in the fetal position in the back of the hall closet, under some coats, with the door closed, locked from the inside, the lights off, whimpering like the little crybaby coward that I am; all the while, clutching an AK-47 assault rifle in a death grip - ready to spray wild, expensive fusillades of hot lead at anything that moves or even looks suspicious, because brother, let me tell you, I am suddenly scared, scared, scared.
Total Fed Credit was down another $1.2 billion last week, and that means that insane amounts of money still ain't being created like they have been for the last couple of decades; and it is a long, long, LONG way from all the money that must be created if we are to keep this bizarre system of sheer economic lunacy going for much longer.
And foreign central banks only bought another piddly $2.1 billion of U.S. government and agency debt last week to add to the huge, enormous gobs of it in their accounts at the Fed, now totaling a whopping $1.92 trillion.
Almost predictably - since new credit is not being created, and since new credit is how new debt is created, and since new debt is how money is created - the latest figures for M2 show that the money supply is predictably declining, and is down a little, to about $7.2 trillion.
The most telling sign that something is seriously amiss, is that the banks financed about $60 billion in repurchase agreements last week! Annualized, that would come to over $3 trillion a year! A quarter of GDP! Who in the hell needs to borrow $60 billion for a few days, and why?
And $60 billion MUST to be some kind of record, judging by both the number of dollars involved and the number of tranquilizers it took to get me out from under my desk, although I never did stop muttering "We're freaking doomed!" under my breath.
And things are getting weird with required reserves in the banks, too, which have dropped back to a measly $39.6 billion! This ludicrously low number is almost down to the record low set in March 2001, when required reserves were slightly under $38 billion.
Hell, in 1994, 13 years ago, bank deposits were less than half of what they are now (and ditto their loan book), but required reserves were $60 billion, for crying out loud!
And why did I pick 1994 as a representative year? Easy: I meant to pick 1995, but missed by one. Anyway, it was supposed to neatly segue to the essay by Aaron Krowne titled "What (Really) Happened in 1995?" with the delicious subtitle, "How the Greenspan Fed Screwed Up in the Mid-90s and set the stage for the Greatest Financial Bubble in the History of the World".
He quotes the Fed as explaining that, back in 1980, "reserve requirements were not adjusted for policy purposes for a decade. In December 1990, the required reserve ratio on nonpersonal time deposits was pared from 3 percent to 0 percent, and in April 1992 the 12 percent ratio on transaction deposits was trimmed to 10 percent."
The best part is that this startling admission was followed by, "These actions were partly motivated by evidence suggesting that some lenders had adopted a more cautious approach to extending credit, which was increasing the cost and restricting the availability of credit to some types of borrowers."
Mr. Krowne's dour assessment of this last astonishing sentence is, "Apparently banks taking care in extending credit was a scourge that had to be eliminated, and the Fed stepped right in to 'fix' the problem by opening the spigots of liquidity."
The Mogambo's assessment is even more dour, and runs to whole pages of testimony, mostly loud obscenities, as it turns out; but the executive summary is, "The banks didn't want to lend, and were charging higher interest rates to compensate themselves for their perceived higher risk, but the stinking Fed changed the rules, eliminated the banks' requirement to hold reserves, and suddenly the banks had all this freed-up reserve money just sloshing around in their books and making the bank manager look like an idiot for not 'putting money to work'! Of course they had to lend it! And fast!"
Now we are reaping the predictable misery of the aftermath of the insane (literally) Greenspan years, which began in 1987, where he continuously committed all kinds of subtle-yet-egregious economic sins like this, and worse. And then much, much, incredibly much worse starting in 1997, and continuing unabated to today. No wonder I scream in my sleep!
All of this will turn into inflation in prices, as that is what excess money and credit does, as that is all it can do. And since we are speaking of inflation, I almost had a stroke when I saw that the new Gross Domestic Product Deflator (used to wring the price effects of price inflation out of the GDP number) for the first quarter of 2007 is now a hefty 4.0%!!!
To glean the significance of this, carefully note the dramatic use of three exclamation points. But if you are not impressed with mere punctuation as "proof", last quarter the Deflator was 1.7%, and last year at this time it was 3.3%. So (and here is where you say "Aha!" upon discovering why I used three exclamation points) inflation has more than doubled from the quarter before! And if that is not enough, inflation is 21% higher than it was a year ago! Gaaah!
And here comes Doug Noland to prove that when you talk about inflation it never rains - it pours. He reports, "For the week, the CRB index added 0.7% (up 2.3% y-t-d), and the Goldman Sachs Commodities Index (GSCI) jumped 2.3% (up 10.1% y-t-d)."
And since I am so good at randomly annualizing things through simply multiplying, the prices of both of these indexes are inflating at about 7% a year! 7% inflation! Yikes! This is terrifying news!
And the latest news from the Commerce Department was that inflation, as measured by a very narrowly-defined subset of inflation statistics called Core Personal Consumption Expenditures, rose 0.4% for the month (again, 4.8% non-compounded annualized).
The year-over-year inflation in this "core PCE" statistic was still 2.1 percent, which is a ridiculously low estimate of inflation (as compared to the soaring CRB and GSCI), and is one big, BIG reason why the Fed loves this particular peculiar statistic!
And this huge inflation in consumer and business prices and costs, when compared to the diddlysquat yield on American bonds, means that bond buyers are certified morons, and even lower on the intellectual pecking order than The Mogambo, who is (according to many, many unsolicited anecdotal reports), "the lowest of the low on any number of measures."
So this exciting new development means that I am no longer the lowest form of intellectual humanoid life on the planet; I am now NEXT to the lowest! Thanks, bond buyers!
It also proves that currency traders are smarter than both of us, as this astonishing divergence between inflation and bond yields is certainly not having such a salutary effect on the dollar. Bloomberg.com reports that "The Federal Reserve's trade-weighted dollar index fell to the lowest since its inception in 1971."
This fall in the dollar is certainly not news to Martin Weiss, of MoneyandMarkets.com, who recently made a trip to Venice, Italy, and found that "Money changers here are charging us $1.50 for each euro, close to double the official rate of six years ago. Meanwhile, prices in euros have also doubled. So between the two, our hotel bill is going to be 2 x 2, or about four times higher."
That's 400% inflation in six years! That's 26% a year, compounded! We're freaking doomed, I'm tellin' ya!
And yet, American bonds are paradoxically selling at bizarrely high prices, producing Less Than Squat (LTS) for yield! I mean, how stupid do you have to be to not immediately see that American government bonds yields are such crap that they pay less than the rate of inflation? You're losing money the whole time!
And that embarrassing, incompetent, horrible investing result, as unbelievably bad as it is, is what you get BEFORE you deduct any expenses or taxes, which makes it all doubly worse! Hahaha!
And if you are a foreigner investing in American bonds, then you are also getting a whack to the wallet from the fall in the dollar, too! Hahaha! Even bigger morons!
Junior Mogambo Ranger (JMR) Roxane P. sent "Remarks before the Equipment Leasing and Finance Association Financial Institutions Conference" made by Richard W. Fisher, who is the President and CEO of the Federal Reserve Bank of Dallas. "Bad fiscal policy," he said, "creates pressure for bad monetary policy. When fiscal policy gets out of whack, monetary authorities face pressure to monetize the debt, a cardinal sin in my mind." Exactly!
Deep inside my chest I can feel a laugh rising up at the irony of this Fisher guy. As directly responsible as he is for the massive creation of excess money and credit to fund massive government deficits that are bedeviling us now, he is also saying that what he did is a "cardinal sin." Hahaha! Burn in hell for your sins, Fisher! Hahaha!
Oops! That might not be a laugh that is rising in my chest; it might be my stomach rebelling against that old taco that I found in a drawer in my desk. Normally, I would not eat an old taco that I just, you know, found - particularly one that smelled as bad as that! I've fallen for that trick far too many times - but I ate it thinking I was fortunate to have found it, since I had forgotten to bring my lunch.
But conditioned to use Fed-approved hedonic adjustments (as invented wholesale by the infamous Boskin Commission and made even more infamous by the Greenspan Fed actually adopting the stupid things), it was but child's play to come up with an equation to "prove" that the disutility of having a putrid, pungent taste was easily outweighed by the overwhelming utility of great price (free!); and thus, on balance, everything was just peachy! The old taco is thus proved to be an economic good!
And speaking of my gastrointestinal problems ("blurrrp!"), they don't get any better from reading a Bloomberg.com report that "Federal Reserve Governor Frederic Mishkin said the central bank's current stance on interest rates is likely to slow price gains outside of food and fuel, though reducing inflation 'may take time.'" Hahaha!
He is actually admitting that food and fuel are showing big price gains. Why then, should continuing with "the central bank's current stance on interest rates" (which is, as far as I can tell, to loan money to anybody, for anything, at interest rates that are less than the rate of inflation, which produces inflation) be likely to "slow" the rate at which prices are rising? Hahaha!
Why doesn't he stop prices from rising at all, which is what he and his damned Federal Reserve are supposed to do, for crying out loud? That's their damned job! To hell with them all!
Well, as usual, I am too hasty in my blanket condemnation of the Federal Reserve in general (and of Mr. Mishkin in particular) and now I credit this amazing quote from Mr. Mishkin with inspiring me to create the new line of soon-to-be-famous dietary products - Mogambo Yummy Diet Food (MYDF)!
My business model is simplicity itself: I merely go to local fast-food restaurants and pick up lots and lots of leftover greasy burgers, pizzas, and whole buckets of fried chicken. I then freeze-dry the stuff, and sell the over-priced garbage to anybody stupid enough to fall for such an obvious scam.
Unfortunately, each individual delicious MYDF entree (e.g. three Double-Bacon Cheeseburgers or two Pizza Supremes) has more than 9,000 calories in it. So it takes the utter, contemptible shamelessness of an Alberto Gonzalez or a Mogambo to pawn this crap off as "diet food", which I have always been embarrassed to do.
But now things are wonderfully different! Now I can proudly show my face in polite company by pointing to Mr. Mishkin's groundbreaking analysis!
As Mr. Mishkin says, "Achieving further reductions in inflation may take time", likewise I say, "Achieving further reductions in weight may take time."
And where he was too embarrassed to continue, I proudly went on, "And just like the Federal Reserve says that they will reduce price inflation caused by the excessive creation of money and credit by simply creating more money and credit, the more delicious Mogambo Yummy Diet Food products you consume, the more weight you will lose!"
How's that saying go? "Scratch a liar and find a thief"? Yep! That's it exactly! I'm lying to you, and stealing your health and your money! The Federal Reserve is lying to us and stealing the purchasing power of our money!
And a perfect example of this can be found in the terrific essay "What Record High?" by Peter Schiff of Euro Pacific Capital. He writes, "As the Dow burst through the 13,000 milestone, few understood the hollowness of the achievement. Measured against the rising dollar-denominated prices of just about everything else on the planet, the Dow has actually lost value over the past seven years."
And how does he know this? He merely says, "Measured against the truest benchmark, the price of gold, the record high for the Dow was set back in January of 2000 when its price equaled approximately 43 ounces of gold. Today it is only worth about 19 ounces."
I clear my throat to indicate that we were talking about how inflation is robbing us of purchasing power - not the stock market or gold. Startled at my rude interruption, he nevertheless shows me what a chump I am by immediately going on to say, "To better appreciate just how much of stock gains can be attributed to inflation, consider that the record high for the Dow in 1929 of approximately 380 also equated to 19 ounces of gold. So despite all of the hoopla and a thirty-fold increase in stock prices, the Dow has actually gained no real value during the past eighty years." Wow! Go gold!
Then he stopped, and pointedly looked right at me as if to make sure I knew that what he was going to say was for my benefit, because everyone else in the whole damned room immediately understood perfectly, and this is for the benefit of the really stupid people who are still clueless.
Then he said, "The entire rise from 360 to 13,000 has been an illusion made possible by the magic of inflation. So much for the concept of stocks being a 'can't lose' long term investment - unless you feel that eighty years is not quite a long enough time horizon!"
Everyone laughed like they were laughing at the joke, but I knew that they were really, secretly, laughing at me. I slowly raise my hand to my chin to ponder what kind of really vicious revenge I am going to visit on these people as their punishment for mocking me like that, whereupon Mr. Schiff immediately mistakes my sudden reverie of blood-lust for simple puzzlement, and tries again to explain by saying, "Despite its recent eclipse of 13,000, the Dow now buys 30% fewer euros than it did then back in 2000 when it was priced at approximately 11,500. It also buys 35% fewer gallons of milk, 40% fewer bushels of corn or wheat, 65% fewer ounces of silver, 70% fewer barrels of oil, 80% fewer pounds of copper, and 90% fewer pounds of uranium."
Stop! Stop! The pounding, pounding, pounding of relentless inflation makes my head swim, my guts tighten into a knot, and my hands reflexively clench into Mogambo Fists Of Outrage (MFOO). But Mr. Schiff is not impressed, and taunts me by challenging me to "Try figuring what the Dow will buy in terms of other necessities, such as housing, insurance, college tuition or hospitalization. Any way you measure it, the Dow is worth far less today then it was in January of 2000."
Junior Mogambo Ranger (JMR) Dan sent along an excerpt from Richard Maybury, of the famous Early Warning Report newsletter, where he reveals the timeless truth that "Since the year 3600 BC there have been more than 14,000 wars, and I have never heard of one that brought deflation." Instead, the historical record shows that war is associated with "Decades of inflation. It takes the breath away."
Lesson: We're in a War on Terror that will last for more generations, and ditto inflation. What to do? Without missing a beat, Mr. Maybury answers that question with another timeless truth: "precious metals have always been insurance against government bungling. During times of political and economic stability, they don't do much, but during times of great turmoil, they skyrocket."
Then he adds a little humor by remarking "So, if you are in precious metals, you have all the insanity of all the world's governments working to generate profits for you. In the realm of human affairs, that's as close to a sure thing as we are ever likely to get." Hahaha! Good one!
And if the profits in precious metals are even close to being proportional to the insanity of the governments times the length of the insanity, then owners of precious metals are surely going to be fabulously, fabulously wealthy!
Another reason that China is going to eat our lunch is that they won't have lots and lots of old people running about, gobbling up government-supplied services and creating a hell of a fiscal mess. To prove the point, from Bloomberg we learn, "Tobacco-related diseases may kill a third of middle-aged men by 2030 in China, where smoking habits resemble those of America in the 1950s, researchers found. Cigarette consumption in the world's most populous nation lags 40 years behind the U.S., where about 33 percent of adults aged 35 to 69 died of tobacco-related causes."
But the American advent of "anti-smoking" crusaders and other do-gooder zealots have produced the unintended consequence of making more people live longer and longer, by making them live healthier lifestyles. Although they eventually die anyway, it is only after living more years and consuming a further king's ransom in additional medical services, for which they paid zip, and thus made everyone else's medical services and taxes go up by a lot more than if they had simply smoked themselves to death a long time ago.
And we ain't talking chicken feed here, as "China has 350 million smokers," which is more than the number of people in the USA, counting babies, which is stupid since babies can't smoke because their little fingers are too short and stubby, and they always end up dropping the cigarette and burning holes in their little clothes and stuff.
So what to do with old people? Perhaps in direct response, Junior Mogambo Ranger (JMR) Tom W. writes that he expects to hear a government push to "get everyone in America who thinks that they are going to retire to keep working until they croak. We'll call it the 'DON'T BE A SLOB, DIE ON THE JOB' program."
For some reason, it surprised me to read a Bloomberg report that "M4, the broadest measure of U.K. money supply" was up "12.9% from a year earlier."
It was surprising for two reasons. For one, people should be rioting in the streets; and the people and the newspapers should be loudly demanding recall elections to "throw the bums out", but which is, surprisingly, not happening. And so when I am the only one running down the street with a flaming torch and a pitchfork, angrily screaming my guts out in righteous outrage, it looks more "weird" than "angry mob on a rampage of revolution against stupidity and corruption in the government sector."
The other VERY surprising and wonderful reason, was the significance of the fact that Bloomberg actually said, in print, for all the world to see, that there is a connection between the growth of the money supply and inflation in prices! And that The Mogambo was right when he said that we are all freaking doomed to be consumed by the fires of inflation in prices because the stupid Federal Reserve created too, too much money and too, too much credit for too, too long! Hooray for The Mogambo!
Well, okay, they didn't actually say that exactly, but what Bloomberg actually said was that the growth of M4 (and I quote), "accelerated in March, adding to evidence that inflationary pressures are building." Same thing! We're all freaking doomed!
"The Modern 1930's" is an essay at DailyReckoning.com by Tom Au. He demonstrates how the ugliness of economic problems can, and sometimes do, last for generations when he writes that part of our problem stems from the fact that the consumption standards of American consumers in "the mid-2000s were way out of whack with income levels that had reached only a mid-1980s trendline."
He then says, "To bring income and consumption back into balance, average Americans will have to fall back two decades in terms of standard of living", which he calculates "would still put them back at Western European levels of today."
He characterizes it as, "a pullback [that] would represent the modern 1930s." Now, before you get all freaked out about living through another Great Depression (only this time full of thin, snotty Europeans speaking indecipherable languages, eating animal entrails, smoking cigarettes, not bathing, driving like crazy and spewing socialist, nanny-state crap at every problem created by a socialist, nanny-state), the point was that the '30s "was a big comedown for an American public that had just experienced the 1920s, which gave a glimpse of a prosperity that would be experienced in the 1950s by their children, but not by themselves."
And here we are again, as he says lyrically, "Like the peers of Moses, who saw the Promised Land but never got to enter it, Americans will wander the desert for two generations until their children are ready to take the big step."
The price of corn has doubled in the past year, so it would be no surprise that supermarket prices for meat in the supermarket will rise, since corn is also a principal feedstock for various species of protein-on-the-hoof as they wend their ever-fattening, ever-juicier ways towards becoming Scrumptious Mogambo Chow (SMC).
And, combined with efforts of ranchers to shrink their herds over the last year because of the drought, it has been estimated that meat could go up by as much as 30 to 40% (or more!) by the end of the year!
As if that is not bad enough, Economist/activist Bill McKibben is quoted in the May/June issue of AARP magazine as saying, "If the Chinese ate meat the way we do, they'd consume two-thirds of the world's grain harvest by themselves."
So, if corn and other grains used to feed livestock continue to go up in price, too, as is guaranteed by combination of the dollar continuing to fall, increased global demand, and increasing demand for grains in this silly ethanol foolishness, then it could (and will!), get worse. Much worse. Much, much worse.
And then, like the Chaos Theory butterfly flapping its wings, disturbing everything because everything is connected to everything, soon lots of other things will get worse. And then worse and worse until the word loses all meaning. Ugh.
**** Mogambo sez: This recent pullback in the prices of gold, silver and oil is one of those rare times in history where opportunity is not actually knock, knock, knocking on your front door, but is actually sitting on your chest, pinning you down, slapping the hell out of your face while screaming, "Buy, you idiot! Buy! What in the hell is the matter with you that you don't buy?"
And as painful as that is, it is not nearly as painful as not buying, and then watching the prices go up and up and up, while you end up spending hours and hours kicking yourself about "how much money you lost" by not buying when you knew you should have.
Been there. Done that. Don't do it again.
P.S. To get The Daily Reckoning sent directly to your inbox, sign up for our free email newsletter, or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.
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.
-- Posted Thursday, 3 May 2007 | Digg This Article
