-- Posted Friday, 20 July 2007 | Digg This Article
Total Fed Credit, where the glorious miracle of "money from thin air" originates at the Federal Reserve - thanks to the use of a fiat money and multiplied by insane levels of fractional reserve banking - actually declined by $3 billion last week. Oops!
Foreign holdings of U.S. and agency debt deposited at the Fed went up another $6.8 billion last week, taking their stash to a hefty $1.988 trillion, getting a little closer to the dark symbolism of the looming "$2 trillion" mark.
With relatively so little happening on the monetary or inflationary front, I had time to actually do my job of reading the entries in this week's "I Can't Believe My Freaking Eyes" contest, presented as part of the popular Mogambo News On Parade (MNOP) series. It resulted in a tie between two equally good items.
The first contestant is, of course, the weird stuff happening as a result of the latest bankrupting boondoggle born of the buttheaded banks, namely the CDO/subprime mortgage debt debacle. The actual entry was the Bloomberg.com report that "The U.S. is urging China's central bank to buy more mortgage-backed securities after a surge in defaults by risky borrowers in the world's largest economy eroded demand for such instruments." Hahaha!
Nobody wants these securities, as they are so default-prone that they are known in the industry itself as "toxic waste", and now we are reduced to begging the Chinese to buy them, to bail out the market, to bail out investors, to bail out the American banks who created the mess, and to bail out the U.S. government, which is watching in horror as trillions and trillions of dollars in losses seem destined to be deducted from taxable incomes! Hahaha!
The official story is that U.S. Department of Housing and Urban Development Secretary Alphonso Jackson is "in Beijing to persuade the Chinese central bank to buy more mortgage securities from Ginnie Mae, a mortgage association under the Housing Department."
For various reasons, I suppose, the article then adds, "Its securities are guaranteed by the U.S. Government National Mortgage Association."
But the cold reality is that an arrogant, bullying United States is not there to "persuade" the Chinese to do anything, but we are there instead to cram these crappy bonds down their throats, as Mr. Jackson himself said, "It's not a matter whether they're going to do more business in mortgage-backed securities, it's who they're going to do business with."
The other serious contender in the "I Can't Believe My Freaking Eyes" contest this week was a really good one, too, as I have read some stupid things in my life, and have actually written a lot of them.
Even so, I was not prepared for what Junior Mogambo Ranger (JMR) Sean sent me, which was an essay from Ellen Hodgson Brown at an outfit called globalresearch.ca titled "Spiraling U.S. Federal Debt Triggers Decline of Dollar: A Non-Inflationary Solution to the Federal Debt Crisis". She is also known as "Ellen Brown, J.D." at webofdebt.com.
I have never met Ms. Brown, but I sense that she is the type of person who believes in things like Al Gore's famous "lockbox for Social Security", which is the bizarre theory that taking money out of a lockbox and leaving an IOU in the lockbox is the same as having money in the lockbox! Hahaha!
Well, to be fair, she doesn't mention lockboxes or Al Gore, but essentially writes that a government's debt is of no consequence whatsoever, as she asks, "why can't the government buy back the bonds with its own newly-printed dollars, debt-free?"
Huh? Why can't the government simply create money to buy up its own debt? Wow! An easy one! Naturally, I leap to my feet and loudly exclaim, "Because all that money would create a firestorm of inflation in prices, you ignorant little twit, and we would all die of the effects of such monetary inflation like all the other morons in history that let their government create so much money! And that is why we don't do it, and that is why nobody does it, you insufferable lowlife halfwit lawyer moron!"
I suddenly sensed that perhaps I had said something upsetting, although I can't think of what it could possibly be, as my Sensitive Mogambo Senses (SMS) detected the faint, subtle nuance of more fire in her voice when she continued, "The inflation argument long used to block that solution simply won't hold up anymore. To the contrary, it can be argued that for the government to buy back the bonds and take them out of circulation would actually avoid the dangerous inflation that is occurring now."
Perhaps it was the way my eyes were bugging out in stunned disbelief at what I was hearing, but for some reason she attempts to explain it by saying, "Contrary to popular belief, paying off the federal debt with new U.S. Notes would not be dangerously inflationary, because government securities are already included in the widest measure of the money supply. The dollars would just replace the bonds, leaving the total unchanged."
At that, I was sure that she was kidding me! She even starts to admit it when she says, "When the Federal Reserve and commercial banks buy government bonds with money created out of thin air, they don't void out the bonds. Two sets of securities - the bonds and the cash - are created where before there was only one." Exactly!
But then Ms. Brown mysteriously says, "This inflationary duplication could be avoided by allowing the government to redeem the bonds itself and then removing them from the money supply." Huh? Inflationary duplication?
At the risk of repeating myself, huh? Bonds are money? And bonds are included in the money supply? Huh? What? Huh? Huh?
Well, apparently so, as she says, "Federal securities are already money. They have been money ever since Alexander Hamilton made them the basis of the national money supply in the late eighteenth century."
My brain went into spasm trying to make sense of this startling assertion, as I am not an expert on Alexander Hamilton (but I do know that he lived a long time ago, for one thing, and he is one of the guys whose face appears on our money for another thing, for a total of two things), nor could I even begin to comprehend the logical, economic argument of it all. I ended up just standing there, stupefied with my mouth hanging open, my eyes blankly glazed over as I randomly babble incoherently.
Then, fortunately, she provided an example! That's what I need! An example! The example that is supposed to prove this apparent stupidity goes like this: "You have $20,000 that you want to save for a rainy day. You deposit the money in an account with your broker, who recommends putting $10,000 into the stock market and $10,000 into corporate bonds, and you agree. How much money do you have in the account? $20,000."
I raise my hand and blurt out, "No you don't! You have some stocks for which you paid $10,000 and some bonds for which you paid $10,000, but you ain't got no money, honey! The government has half of your money and some seller of stock has the other half!"
Ignoring me like everybody else, she goes on, "A short time later, your broker notifies you that your bonds have been unexpectedly called, or turned into cash. You check your account on the Internet and see that where before it contained $10,000 in corporate bonds, it now contains $10,000 in cash. How much money do you have in the account? $20,000."
Again I blurt out, "No! You have $10,000 in cash, $10,000 worth of stocks, and the government still has your original $10,000!" Again pointedly ignoring me, it gets weirder, as she says, "Paying off the bonds did not give you an additional $10,000, making you feel richer than before, prompting you to rush out to buy shoes or real estate you did not think you could afford before, increasing demand and driving up prices." Hahaha! You are just going to sit on all that cash, and not buy anything or even re-invest it! Hahaha!
No matter how many times I run this thing through my Tiny Little Mogambo Brain (TLMB), it always comes up with the same answer: The investor originally had $20,000 in cash, and now he still has the original $10,000 in stock he bought with half the money, he has $10,000 in cash, and the government still has the original $10,000 cash he used to buy the bond in the first place, too! That's a total of $30,000, up from the original $20,000! And she says that it would not be inflationary! Hahahaha!
Hell, the money supply is up by 50% at a stroke! Not inflationary? Hahaha! This is too, too much! Hahaha!
But while Ms. Brown has accidentally made a stupid rookie error and will be embarrassed all the rest of her life for proposing something so childishly preposterous as a result, the reality is that money supplies ARE rising at double-digit rates all over the world! In the U.S.A. alone it's rising at about 13% a year!
-- Peter Schiff of Euro Pacific Capital writes, "In current theory, the excess cash piling up around the world is like manna from heaven. Don't believe the hype. Liquidity is merely a euphemism for inflation. Asset prices, including stocks, are simply rising to reflect the diminished value of the currencies in which they are traded. Wealth is not being created, merely re-priced."
Well, I don't know where Mr. Schiff lives, but around here, it's not wealth that is being re-priced, but poverty. As the inflation in the prices of everything continues to outstrip "income after taxes and deductions", standards of living are being eroded because people can't buy as much stuff as they used to; their relatively static stream of discretionary income has lost buying power against rapidly rising prices.
For example, from the Financial Times we read that inflation is finally affecting food, and that Hovis bread said it was "preparing to raise bread prices for the second time in six months. The pending increase - which the company attributed to rising wheat costs - is merely the latest in a series of price increases food and drink companies have been trying to pass on to consumers this year. The series has seen costs of making bread, beer, yoghurt and chocolate as well as dozens of others packaged food products become increasingly expensive."
I know what you are thinking. You are thinking, "Who cares about bread? I don't need no stinkin' bread! I can eat pizza!", which is wrong, whereas you would have been correct if you had instead thought "I don't need no stinkin' bread! I can eat the bodies of dead animals that I find alongside the highway!"
And indeed you could, as the current market price of road kill is still a very economical zero, which may explain why it is not included in the Lehman Brothers' ingredients cost index, which "covers cocoa, coffee, oats, tea, soyabeans and milk, among other commodities and which is based on spot rates." This index, in case you were wondering, "rose 14.9% in the first half of the year", which "follows a 16.5% increase in the second half of 2006." Yikes! Prices of foodstuffs are up over 30% in twelve months? Yow!
And what is the biggest gainer? "The biggest increase has occurred in powdered milk prices. These have nearly doubled compared with the same period a year ago. Barley prices have also shot up 53%, while corn prices are up 68%."
So it is no wonder that people are complaining about prices! And you may be interested to learn the surprising fact that these afflicted people are, paradoxically, not the least bit interested in, or appreciative of, being educated that their inflation problems are all self-inflicted, as they are the same drooling morons that elected the Congressional morons that have spent us into the Hell Of Crushing Debt (HOCD) and allowed the Federal Reserve to create wildly excessive amounts of money and credit to make that grotesque orgy of spending possible!
To prove it to yourself, the next time somebody says that prices are going up and that they are having a hard time making ends meet, carefully observe their reaction when you politely and respectfully go up to them and, by way of education for their benefit, say, "Shut your damned stupid mouth, you ugly little troll! Your problems are all self-inflicted, as you are the same drooling 'I Love Big Government Creating Perpetual Entitlements' moron that elected the Congressional morons that have spent us into the Hell Of Crushing Debt (HOCD) and who conveniently looked the other way while the damnable Federal Reserve created the money and credit to make that stupid, bankrupting spending possible! It's your own fault, you ignorant little commie creep! You committed economic suicide, and in doing so have economically murdered the rest of us, you filthy piece of stupid, greedy, Leftist crap!"
And it is going to get worse as more people get more desperate, and things get more weird, like John Stepek at MoneyWeek.com mysteriously using the exact same words as were used in a copyrighted report from a Mogambo Economic Truth And News Service (METANS) broadcast, which bravely reported, "The Mogambo Economic Forecast Institute (MEFI) reckons that the world will face a dollar supply overload within the next five years that could send prices soaring, and coupled with an oil demand overload against an oil supply deficit, the price of oil will soar, and the prices of all other things will soar right along with it, and especially all things imported, and doubly-especially the aforementioned imported oil, in case you weren't paying attention the first time I said it."
The report ended with, "And with oil being a prime ingredient of making and/or moving damned near everything these days, if you don't think that paying a couple of hundred bucks for a lousy barrel of oil is going to have a hugely inflationary effect on all prices, then congratulations, as you have passed the test! You are officially stupid enough to send $50,000 in cash to me, addressed to 'Occupant', in return for which I will pray that your children do not end up being as stupid as you are. And remember; cash only!"
So is it mere coincidence that Mr. Stepak similarly wrote, "The International Energy Agency reckons that the world will face an oil supply crunch within the next five years that could send prices soaring"? Hmmm!
And please notice how he doesn't even pretend to defend himself, and just goes on to supply the statistics of the oil supply/demand imbalance. "With global economic growth of 4.5% a year forecast," he writes, "the IEA estimates that oil demand will hit 95.8m barrels a day by 2012, from 81.6m barrels a day this year. But at the same time, oil cartel Opec's production is expected to fall 2m barrels a day by 2009, while non-Opec supply will be down 800,000."
The Financial Times reports that Goldman Sachs figures demand for oil is 1 million barrels higher and supply is 1 million barrels lower than last summer, and "prices could surge to $95 a barrel within six months without increased production" from OPEC.
Eric Fry of The Rude Awakening newsletter looks at these IEA estimates and remarks, without actually laughing out loud, "It's one thing to say the world will need 95 million barrels of oil a day in five years. It's another thing altogether to find out if the world can actually produce 95 million barrels a day."
I know that you are asking yourself, "How does one do the impossible? Is teaching mankind to unravel this paradox the real reason why The Mogambo was sent to this planet by some omniscient and benevolent supernatural consciousness?" The answer to the latter question is, alas, no.
I was sent here to chronicle the evolution of the collapse of the Earth economy, as that is what always happens when a species accepts a fiat currency as money, allows a fractional-reserve banking system to multiply the money supply by astonishing degrees of leverage, and thus allowing governments to pursue unrestricted growth, spending and debt issuance, which they will do every damn time they get a chance.
I don't mention that I am also overdue to file another stupid report to Valkgallaaggk the Venomous, High Overlord of this quadrant of the galaxy, who doesn't read them, as he is grumpy at the "career death" of being stationed at this little backwards "wrong side of the tracks" sector of the galaxy, what with ridiculous little Earth stupidities about money stinking up the place and all.
The other question, "How does one do the impossible?" by actually producing the 95 million barrels of oil per day that the world will need is easily resolved when you correctly substitute the word "want" for "need". To illustrate by example, the kids do not "need", but "want", a bunch of frills and luxuries like nice clothes and a lot of expensive dental work, whereas I do not "want", but "need", a new "Straighter! More forgiving! More power! Guaranteed!" driver, as knocking that damned golf ball a possible three or four more yards down the fairway is exactly what I "need" in order to be in a better mood around here to help me cope with the constant irritation of everybody all the time whining and crying about how their stupid teeth hurt, wah wah wah, and if anyone is using their brains correctly around here, they will agree with me. And they all nod their heads, so that proves I'm right.
Mr. Stepek, although visibly shocked, wisely refrains from commenting on what a terrible, selfish parent I am, for which I am grateful, as I hear that plenty enough as it is, thank you very much. Instead, he quickly steers the conversation to a quote from Lawrence Eagles, head of the IEA's oil industry and markets unit, as he told The Telegraph, "The results of our analysis are quite strong. Either we need to have more supplies coming on stream or we need to have lower demand growth."
And if you can't increase supply, how do you lower the growth of demand for something that is now a seeming necessity in a growing world? Easy! Use the supply-demand dynamic! It will always work like a freaking charm to reduce demand by merely making oil so damned expensive that people can't afford it, and so they don't buy it! Voila! Demand is lowered! Hahaha! No problem! Hahaha!
Nobody likes my little joke, and even worse, "Among the IEA's many worries is 'energy nationalism'. Governments such as Russia and Venezuela are effectively confiscating assets from private companies and handing them over to nationalized ones."
And it is about more than just stolen assets and money, as, "Regardless of where you stand politically on the rights and wrongs of this, the simple truth is that a nationalized oil company is not as good at getting oil out of the ground as a private operator", and therefore, "The more oil fields that fall into national hands, the less efficient the global oil infrastructure will become. And that inefficiency will bring the day that oil (production) peaks ever closer."
-- Why are the stock markets and bond markets rising? For the only reason that there is: Because there are more buyers than sellers! Hahahaha!
Okay, I am sorry about laughing, but if I may be so bold as to make a suggestion, perhaps your question would have been better phrased as, "Where are the buyers getting the money to buy all of this stock and bond madness and act like a bunch of morons?"
If that had been your question, I could have saved us both a lot of time by merely sending you to Online.wsj.com, which reports that, "'Margin Debt' Hits Record $353 Billion on NYSE", which means that, "Investors are borrowing record sums of money to finance trades on the New York Stock Exchange."
How much money? The Journal continues, "So-called margin debt, a broad measure of leverage, jumped 11% to $353 billion at the NYSE in May, up from nearly $318 billion in April."
The news that margin debt increased 11% in one month, to a new record, so surprised and alarmed me that I accidentally swallowed my tongue in horror! But, thankfully, it turned out to be okay, since it was soon forced back up by my reflexively puking up blood at the sheer horror of so much speculative debt.
And broker-dealers suddenly find themselves with more money, too, as from Jim Grant's Interest Rate Observer we learn that thanks to the new regulatory system for broker-dealers called Consolidated Supervised Entity, "the broker-dealers (in voluntary fashion) are implementing the risk-based capital rules known in the trade as Basel II.
"The liberating feature of Basel II", he continues, "is that the financial institutions to which it applies may hold more assets per dollar of equity capital than they previously could - provided that a ratings agency judges the assets to be top-flight."
By this time I am so bored by one more story of one more bunch of sleazy operators in cahoots with corrupt regulatory supervision that I am thinking "Yadda yadda yadda" and trying to stick my pencil in the ceiling just to keep from nodding off. I was yanked back to cruel reality when Mr. Grant said. "Specifically, under Basel II, a broker-dealer must set aside just 56 cents in capital to hold US$100 of triple-A-rated securitizations." Yow! Fifty-six lousy cents?
Shocked, I am too, too, too nonplussed to comment, so I turn to Junior Mogambo Ranger (JMR) Phil S., who says that only putting up 56 cents to hold $100 in assets seems a bit much, as "That is 1/18th of the 10% stock margin equity required in 1929"!! Hahaha! The exclamation points were added by me, utilizing my awesome editing powers ("If there is nobody here to stop me by force, I can do whatever I want") to add that essential Mogambo Stylistic Flourish (MSF) to give it the dramatic emphasis that it truly deserves.
And the stock market may be going up because there is a huge, towering overhang of short interest, and if there is one trick that the sharks of Wall Street reliably pull to eat their fill when short interest expands like this, it is by suddenly running the market sharply up and squeezing the shorts, who buy in a panic to cover their enormous short positions and to keep from losing more money if the stock price continues to rise, making prices go up even more, spooking more shorts, who then buy to cover, making prices go up some more, spooking more shorts.
And a lot of buying is resulting from lots of foreign investment money coming here, too, as an FT.com article quotes Alan Ruskin, chief international strategist at RBD Greenwich Capital as saying "One reason why the dollar has responded in such a negative fashion is that corporate bond inflows have made up half of the current account financing in the past year."
In fact, he says that "In the 12 months to April, the US received $509bn in corporate bond investment inflows that helped finance the current account deficit." Half a trillion a year!
And the market is also going up because the Plunge Protection Team and the entire rest of the governments, banks and financial services industry are busily intervening in the marketplace, desperately trying to keep stock, bond and housing prices up and rising.
And they can intervene with good effect at those times when prices have been recently down, and the charts of the market price start hitting the lower bound of their up-trend channels, making technical traders get nervous that prices will fall some more to penetrate the lower channel, meaning that lower prices lie ahead and now is a good time to sell!
But nowadays (just in time, every time!), the markets suddenly turn around, bounce off of the lower bound of the channel, which is a bullish signal, and the technical traders launch into "buy mode"! Mission accomplished!
But the real reason that markets are going so bizarrely up is because excess money and credit are constantly being created around the world, by central banks around the world, and thus money supplies around the world are expanding at double digit rates around the world, and all this new money has to go somewhere, or why would anyone borrow it in the first place?
And it is going into stock markets, and bond markets, and housing markets and commodities markets around the world, driving up (by bidding up) the prices of everything. How far away from "price stability" can you get before you just say "Ugh!"?
Mogambo sez: There will NOT be a Mogambo Guru newsletter next week. I am not "getting out of the country" as some have suggested, although everyone agrees it is a "good riddance" kind of thing.
The fact of the matter is that due to a hugely comical mix up by a clerical worker, I will be appearing at the famous Agora Financial Investment Symposium in Vancouver next week.
I suggest that you take the time to buy some gold bullion, silver bullion and some oil stocks, and when I get back you can tell me all about how much money you made, and all the silly, selfish crap you want to buy with the gains, which always seems to put people in a really, really good mood!
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 Friday, 20 July 2007 | Digg This Article