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Economic Caveat From a Galaxy Far, Far Away

By: Richard Daughty, The Mogambo Guru - The Daily Reckoning

-- Posted Wednesday, 23 May 2007 | Digg This ArticleDigg It!

I nervously take another long pull from the bottle of bourbon to steady my rattled nerves when I read that Total Fed Credit was down another $5.6 billion last week, taking us down to $847.8 billion. Trying not to slur my words, I say to the bartender, "If credit isn't being created by the Fed, where in the hell is all the money coming from that keeps making stock and bond markets keep climbing and climbing?"

My bloodshot eyes sweep around the bar, looking for a scapegoat that 1) appeals to my general xenophobic nature, and 2) is too small to put up a fight if it gets to that. Over in the corner I see these two old (and little!) Oriental-looking guys, and so I snort, "It's foreigners! Especially the Chinese, I guess, as the world is all agog that a million Chinese people are opening up new brokerage accounts every week, all propelled by the powerful choice of either getting a crappy, less-than-inflation yield on their savings accounts in the stupid bank (the Chinese banking system pays 2% on deposits when true inflation is around 6%), or the stupendous, fabulous gains being reaped by speculators in the stock market."

The two guys see me talking about them, get up from their booth in the back and leave, obviously going out to buy stocks, I figure, to which I remark "See? Knowing this, everybody else in the greedy, desperate-for-gains world wants to get on board, too, which adds to the general buying frenzy!"

With an audible sigh at seeing two customers leaving, the bartender looks at me and starts moving towards that baseball bat he keeps behind the bar. So I decide to just shut up for a change, but I am thinking to myself, "If the recent rise in stock prices was related to good economic fundamentals, then the latest reading of the Leading Economic Indicator would not have dropped, but it did!" In fact, it dropped a huge 0.7 as the indicator fell to 137.3, down from a revised 138.0 last month. The future looks grim indeed!

Thankfully, I was temporarily cheered to learn that the Coincident Economic Indicator managed to actually gain 0.2 as it went from 123.8, up from last month's revised 123.6. So this means that things aren't too bad (looking at my watch to get the correct time) right now, which reminds one of that short, short, all-too-short period between when you withdrew that cash from the bank (to go on a little, you know, spree with your hoodlum friends) and the time when your spouse looks at the bank statement and starts getting all quizzical, like "Hey! Hey, you! Wake up! What in the hell is this 500 dollars for, you thieving little creep (TLC)?"

But it was the Lagging Economic Indicator that stole the show for me, as it is this selfsame Lagging Indicator that always commands my attention, since it is loaded with portents of the inflation that is coming. "So how bad was the jump in the Lagging Economic Indicator?" you ask. It jumped the most of the three with a monthly change of 0.3, rising to 128.1 from an also-revised 127.8 the month before.

As you probably surmised from observing my typical overreaction to this one measly statistic and how it leads to the Loud Mogambo Conclusion (LMC) that we're all freaking doomed, this is Bad, Bad News (BBN) indeed.

My thankless job, being sent here from a planet far, far away in another galaxy, is to deliver the message to humankind that if there is one thing that is a Screaming Mogambo Constant (SMC) in the economic history of Earth and all across the entire universe, it is that inflation in prices destroys economies as it makes prices too high for people to pay.

For example, John Mauldin on reports, "Retail sales were decidedly punk in April. On Thursday Wal-Mart reported a 3.5% drop in sales in April at US stores open at least a year, the largest decline since the world's largest retailer began reporting same-store sales results in 1979. Target reports that sales at stores open at least a year fell 6.1%. Chain store sales fell 2.4% in April, the first decline since March 2003 and the largest on record back to 1970. Total retail sales fell 0.2% in April."

And from Agora Financial's 5-Minute Forecast we get the news that, "gas prices reached their highest level in American history. The national average was estimated as high as $3.19. In 1981, the price of gas reached $1.35, which, adjusted for inflation, would be $3.15 today."

But like I keep writing in my reports to my hateful boss at Trans-Galactic Headquarters in the Nebulon galaxy, people here on Earth already know that inflation destroys economies! I am not needed here! Let me come home! The girls on this stupid planet don't even have tentacles, for crying out loud!

As an example, Phil S. sent an article by Jacqueline Thorpe at the Financial Post, who does not have any sensuous tentacles, but who reported on a conference arranged by the Committee for Monetary Research & Education, which had the theme "A Time of Financial Fragility and Latent Instability."

One of the speakers was Forrest Capie, who is the "Official historian of the Bank of England", but was "speaking in his own capacity" when he reminded the audience of the immortal truth that "History has shown that when asset-backed money is abandoned for fiat-based money, inflation invariably follows."

I take it from Paul Kasriel of Northern Trust that the ridiculous Federal Reserve is the only central bank that is not interested in keeping its nation's economy from being destroyed by inflation. "In case you missed it," he writes, "the Bank of England raised its monetary policy interest rate last week, the European Central Bank will raise its policy rate next month, the Bank of Japan has hinted that it will raise its policy rate again in the not-too-distant future and the People's Bank of China has been busy raising the reserve requirements of its constituent banks."

At first I was outraged that Ben Bernanke, the current desperate, creepy chairman of the Federal Reserve, says that we don't need no stinking rules, and all he wants is things to be guided by principles! Hahaha! No rules! Principles! I love this!

In fact, I used this very argument just recently as I was clocked going 90 miles per hour in a school zone while that stupid little yellow light was flashing, requiring a speed limit of only 15 miles per hour. But it was a holiday, and so there were no children going to, or getting out from, school, and, well, you know, I'm thinking, "Why have 300 romping, stomping horsepower under the hood if you ain't never gonna use 'em?"

Immediately I see a red light flashing in my rearview mirror and hear the wail of the police car's siren. Usually, the prospect of being pulled over by the cops would have me thinking "Oh, no! They are going to take my license away this time!"

Now, to my delight, I am so emboldened with this new Ben Bernanke "principle, not rules" precedent that I told that stupid little cop right to his stupid little face just exactly what he could do with his stupid little ticket, because rules don't matter anymore! In fact, his own official surveillance tape records me politely informing him "Ain't you heard, jerk? Rules don't matter anymore! All that matters is principle! And since the principle is that children must be prevented from being hit by speeding traffic in a school zone, the principle is met! There were no kids! Today's a holiday! What in the hell is the matter with you stupid cops? Don't you ever read a newspaper or look at a lousy calendar, moron?"

Well, the situation deteriorated pretty fast after that, I don't know why. Politics, probably. But the point is that I am sure that "principles, not rules" will work equally well in real-life economics as it does in debating the finer points of "principles, not rules" to vicious, uniformed Gestapo goons and their Taser stun guns, which hurt like hell, and their stupid tickets, which hurt like hell, too, but in a different way.

Especially when Bernanke could have just as easily said "Rules? I don't have to abide by any stinking rules! Screw your rules! And screw The Mogambo, too!" I say this because in Texas, the headline at Times Select was "Auditing Rule Is Put at Risk by Texas Bill". It seems that Texas "lawmakers are on the verge of rejecting a requirement that state and local governments disclose the cost of the health care they have promised to retired employees" that was suggested by the Governmental Accounting Standards Board.

One reason why they are ignoring this good suggestion is because, as the article revealed, "'Politicians don't want to deal with the problem,' said Michael H. Granof, an accounting professor at the University of Texas. He said state lawmakers were betting that by the time rising health care costs became unmanageable, they would no longer be in office and could not be held accountable."

Well, here's a fresh Mogambo Minute Memo (MMM) to Texans; make them accountable! The French Revolution provides PLENTY of examples of how to do it!

Gerard Carney, of the Governmental Accounting Standards Board, probably agrees with me deep down in his heart, but apparently is not interested in cutting off people's heads at this point, and merely said "This is a disturbing reminder of what can happen when politicians interfere with an independent system that was designed to protect financial reporting from politics and other self-interests."

All the huffing and puffing aside, I think the real problem is not only the embarrassment of revealing the cost of the government's insanity in growing so large and in creating so many bankrupting entitlements to so many people (neither of which is news to anybody), but that "The Governmental Accounting Standards Board has been working on a standard for measuring performance."

Ahhh! Now we have it! Not only do the Texas politicians not want anyone to know the true costs of governmental stupidity, but they also do not want anyone to find out that the damned programs are ineffective! And I am sure that if you look at the facts, we would discover that government programs actually make the problem worse, as they always do! How doubly embarrassing!

The bill to hide the facts, incredibly, "has already passed the Texas House 142 to 0 and is awaiting a vote in the state Senate."

Predictably, the government's own "finance officers' group" has "strenuous objections" to all of this, and they sniff condescendingly and say that "assessing program effectiveness is not an accounting issue." Hahaha!

That kind of "don't look at the financials" crap didn't work for me at my last Annual Departmental Evaluation, where my supervisors gleefully recounted how I run an expensive and totally ineffectual program, but it will work in Texas, apparently! I just work in the wrong state!

Lately, I get a lot of emails like "Dear Mogambo Butt-Face Moron (MBFM), I am distraught because I listened to you and bought silver and gold like you said to do, and they ain't done squat since then. By this time, I had planned to be so freaking rich from buying gold and silver, and then watching it run to astronomical heights, that I could leave my stupid husband forever and be far, far away from here, sitting on a warm beach somewhere, sipping a cold Pina Colada brought to me by a handsome cabana boy named Raoul and having him rub soothing oils and scented emollients all over my tingling body until I am writhing and moaning with pleasure."

I thought to myself, "Hey! This was starting to get good!" and was hoping to pick up some pointers from this lucky Raoul character! So, imagine my disappointment when the writer goes on, "So, since gold and silver did not produce the spectacular returns I had so eagerly anticipated, I am stuck here, I am very angry about it, and my husband is pretty disgruntled, too, since I am now even MORE of a shrill, hateful harpy whose only pleasure in life is trying to make him miserable enough to commit suicide just to get the hell away from me. And don't get me started about Raoul, you Disgusting Mogambo Puke Bag (DMPB)!"

Now, as soon as she called me a DMPB, I instantly recognized the writer as my own wife! Ahhh! Pieces of the puzzle fall into place at last!

Too clever to let her know that I am on to her and her little game, I casually reply "Dear Cheating Little Scumbag Whore (CLSW), The New York Times writes that 'Representative Ron Paul of Texas, a libertarian-minded Republican who often warns that excessive government threatens the economy, has put his pessimism into his portfolio. If the dollar collapses, Mr. Paul will be ready: his favorite investments are real estate, silver and gold.'"

Then I closed my reply with "And Raoul says that you are a big, fat cow." Hahaha!

And although the spiteful content of the email was all too distressingly familiar, the concern is a widely-held one; why isn't gold going to the moon in light of all of this inflationary insanity all around the world so that we can get the hell out of here, away from our whining, suffocating families and maybe find one lousy moment of happiness before we die?

Well, one explanation for the sorry performance of gold comes from a report that "Over the past two months the Banco de España has sold off 80 tonnes of gold, flooding the world market with enough bullion to dampen the usual spring rally."

Plus, some other European banks sold some gold, too, and the gold ETF had to sell some gold because some speculators bailed out.

In case you were wondering, this is all part of a desperation move by Spain to get some money, as their "foreign reserves have plummeted to wafer-thin levels, leaving the country exposed to a possible banking crisis if the property market swings from boom to bust."

The Telegraph goes on "The Banco de España refused to comment on the sales, leaving it unclear why reserves have fallen so low, or where the money has gone", although "It appears the bank has been draining the reserves to help finance the current account deficit, which has ballooned to 9.5pc of GDP, reaching ?8.6bn in January alone."

This same current-account problem is affecting the dollar, being as it is "the idiotic currency of an idiotic economy being run into the ground by an idiotic Congress letting an idiotic banking system act despicably".

And the problems of the dollar will not be going away anytime soon, either, although it has been up a little here lately. As to that, Chuck Butler in his Daily Pfenning newsletter writes that the recent bounce in the dollar "is simply a technical correction" in "the weak dollar trend that began in February of 2002."

In case you were wondering how he knew that the downward trend of the dollar started in 2002, he says "The dollar entered the weak trend when its Current Account Deficit reached the historically telling number of 4.5% of GDP", as "fiat currencies always experienced a currency crisis any time their deficit to GDP percentage reached 4.5%"

The Current Account deficit is now well over 6% of GDP, in case you were wondering if things are getting any better. They obviously aren't.

And technical corrections aside, the reason that the dollar is headed down is that (as the Current Account proves), "An asset begins a weak or strong trend because of a fundamental reason, and the trend will not end until that fundamental reason is corrected."

And what is that reason? A big part of it is that individual Spaniards have acted just as stupidly as Americans, and "Spain's private sector has amassed $600bn (£300bn) in foreign debts. Corporate borrowing is 100pc of GDP. The overall stock of mortgages has increased sixfold in a decade. Household debt has reached 120pc of disposable income, largely on floating rates."

Oddly enough, this news hit my desk at the same time as a page from the CIA's World Fact Book, which lists Spain as having the second-worst current account deficit in the world, at $98.6 billion. Parenthetically, the United States has the world's worst deficit at a gigantic $862.3 billion.

In case you were wondering, "Who are the top five in trade and financial surpluses?" the answer is China ($179.1 billion), Japan ($174.4 billion), Germany ($134.8 billion), Russia ($105 billion) and Saudi Arabia ($103.8 billion).

If you are not completely sure that Congress is a sorry collection of misfits and idiots, then Stephen Roach of Morgan Stanley has some news for you. He appeared at the U.S. House of Representatives as it held, "what was billed as a tripartite hearing of three subcommittees on 'Currency Manipulation and Its Effects on US Businesses and Workers.'" Mr. Roach was called to appear as an "expert witness."

I will summarize his appearance for you by using a few of his own sentences. "It was an experience I will never forget", he writes. "My worst fears were realized. I didn't go to this hearing with the naïve expectation that I would be able to change any minds. And there was no surprise on that count."

And sure enough, "There was little sympathy on the part of the Congress for linking trade deficits to domestic saving shortfalls. The consensus of Congressman at the hearing was that China was the problem."

I will let Mr. Roach provide the chilling conclusion. He writes that "the bottom line here is very clear: The US Congress just doesn't do macro."

But protectionist legislation works by driving up the price of imports, and so while Congress "doesn't do macro", you and I will necessarily "do higher prices" as a result of the astounding stupidity of Congress.

Mish Shedlock of globaleconomicanalysis.blogspot also has some thoughts on the China-bashing protectionist legislation bandied about in Congress and on the rash of new state laws mandating higher wages, and he thinks that they are ironic. In fact, he actually said, "Look at the irony. We want tariffs to force import prices higher and living wage bills to keep wages up with prices. Talk about Nixon's wage and price controls in reverse! Is this insanity or what?"

He reminds us that on August 15, 1971, "President Nixon imposed wage and price controls. The 90 day freeze was unprecedented in peacetime, but such drastic measures were thought necessary. Inflation had been raging, exceeding 6% briefly in 1970 and persisting above 4% in 1971. By the prevailing historical standards, such inflation rates were thought to be completely intolerable."

And they were right!

The 90 days unfortunately "turned into nearly 1,000 days of measures known as Phases One, Two, Three, and Four" until finally being abandoned as another Total Government Failure (TGF), and that is why you don't hear much about it. In fact, just a few years later, Paul Volcker, as chairman of the Federal Reserve, had to take heroic steps to crush roaring inflation!

Now Congress is trying the opposite approach, which will be an even BIGGER example of TGF, as they bizarrely think that throwing gasoline on a fire can put out a fire! "Jobless claims averaged 328,900 in April, up from 316,300 a month earlier", while noting that at the same time, the Labor Department says that "that initial jobless claims last week fell 5,000 last week to 293,000, a four-month low."

I can almost hear Jim Willie CB of snorting in derision at this as he writes, "The newest deceptions are with jobs and housing. Each is much worse than reported. The housing decline might be as much as 15% worse than reported, which leads to much bigger job loss than is reported."

So I hear this, and then I look at this Labor Department report that says initial jobless claims fell last week, and then I look at Mr. Willie, and then I look back at the Labor Department report, and then I look at Mr. Willie, and then I start to feel dizzy and woozy from all this looking back and forth.

Mr. Willie obviously senses my distress, and explains the disparity by saying, "Most of the home construction job loss is under the table, to people not on state jobless insurance programs, and to immigrant workers paid in cash." The significance of this is that "the official job loss data collected by the US Dept of Labor does not count those cash basis jobs" which have disappeared.

I, of course, take this as another example of Chaos Theory, which postulates (among other things) that all things are connected to all things, and any change in anything will affect all other things after just a few iterations of the system, as measured in seconds.

Well, Mr. Willie did not actually go so far as to proclaim a cosmic shift in the entire macro system of the world, but what he actually said was that there were "Ripple Effects", as job losses in the housing sector also "occur with those involved in carpets, light fixtures, faucets, landscaping, and so on", and that it even extends to worsening the economies of other countries, as these "lower or missing paychecks" of the immigrant workers in the USA, who are suddenly not working, "act like a contagion agent back home" as no money is being sent home to the workers' families.

I leap to my feet, saying "It's Chaos Theory! The American butterfly flaps its wings and it rains in Central and South American countries!"

And this sudden disappearance of jobs jibes with Larry Edelson of, who reports that "Based on the Help-Wanted Advertising Index, ads from employers seeking new job applicants plunged more than 18% in the last 12 months. The annual growth in the number of people on payrolls in the U.S. rose only 1.38%, the lowest rate of job growth in at least six years."

Even more spookily, "some measures show the broad supply of money and credit growing at a rate of nearly 13%" which "matches the growth rate we saw in late 1980, when inflation hit 14%."

There was a funny incident the other day, part of which was reported by Reuters as former New York Federal Reserve President Gerald Corrigan telling an audience that derivatives are so insanely complex that "Anyone who thinks they understand this stuff is living in La La Land."

Well, speaking of "La La Land", we get a dose of it when Federal Reserve Vice Chairman Donald Kohn is reported to have "advocated special fire-drills for the handful of big institutions who dominate this market, to prepare for what he called the inevitable financial shock." Huh? Fire drills? Hahaha! Did he say "fire drills"? Hahahaha! I am laughing so hard that I coughed up part of my lunch here! Or maybe a piece of lung, I dunno which. Chewy, though!

But a fire drill? A fire drill in hell, maybe! Hahaha!

The awful, ugly reality is that the phrase "fire drill" is apparently a new Federal Reserve euphemism for "getting to the exit first, and therefore getting away safe and sound with the most" because everybody else is going to suffer lots of pain, and most will actually be burned to death. "Fire drills". Ugh.

**** Mogambo sez: If the dollar goes down in purchasing power, but prices of gold, silver, oil do not change, then for the holders of foreign currencies, every import will be (thanks to arbitrageurs and the global marketplace) cheaper. Thus, the only way (if nothing else changes) that gold, silver and oil can go down in price is if these foreigners decide to lower their demand for these things in response to lower prices! Hahaha!

What will almost surely happen is that foreign demand for gold, silver and oil will increase as they take advantage of the temporary bargains, making their prices in devalued dollars go up.

The moral of the story? Buy them today, as they will be higher in price pretty soon!

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 Wednesday, 23 May 2007 | Digg This Article

Visit The Daily Reckoning's website.


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