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Caught Red Handed Killing the Dollar

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

-- Posted Wednesday, 7 November 2007 | Digg This ArticleDigg It! | Source:

JMR Daniel D. sent a link to, where we read Mubarak Zeb Khan reporting from Islamabad, which I assume is in Pakistan, but these days, who the hell knows where anything is?

Anyway, he said, "Food inflation surged by 13 per cent in September over the same month last year." Yow! In fact, "Food prices rose at an average of 10.1 per cent and contributed 55 per cent to overall inflation in Asia ex-Japan. The upward trend in food prices is most evident in China (18.2 per cent), India (8.4 per cent), Indonesia (13 per cent) and Pakistan (13 per cent)."

Mr. Khan reports that, "A finance ministry report said the highest ever increase in food inflation in any month of the fiscal year 2007-08 was due to an extraordinary surge in demand." Well, finally a finance ministry that comprehends supply and demand! How refreshing!

Then, just after I lauded people for their smarts, we get the amazing "A sharp rise was also witnessed in wheat and flour prices, driven by extra-market forces." I leap up and yell, "Wrong, dude! The price went up because the demand stayed up as the price went up, and not because of some hypothesized 'extra-market forces'!"

I instantly knew that when I called him "dude" that he would get personally offended, and so I was prepared that he would not follow-up by saying to me, "That's an interesting point, Mogambo! Please explain it to me and the rest of the audience, in case they are as confused as I!", and I would not get a chance to explain how there is no such thing as an "extra-market force".

But if he had, I would have said, "Hell, even if the government were to, in the ultimate expression of an 'extra market force', slap a 100,000% tariff on wheat and flour. Suddenly, bread would cost $50,000 per loaf, demand would fall to zero, and then the price would fall to zero, too. But it was the lack of demand that caused the price to fall!"

Well, he doesn't want to get into a fuss with me, probably (judging by his name) because he comes from a culture that has learned that arguing with a crazy man is foolhardy and stupid, so he attempts to steer us back on track by saying that staggering inflation in prices is nothing new to these people, and that, "According to the report, food inflation increased slightly to 10 per cent in the first quarter (July-Sept) of the current fiscal year as against 9.9 per cent in the same period last year."

And most of the rise in prices is supposed to be caused by, he says, the religious time of year, and "The Ramazan-Eid effect was expected to wear off in November and food inflation was likely to show declining trend thereafter." Likely? Why in the hell would it be likely when food prices are rising all around the world? Or is this just another government weenie telling us what we want to hear?

In a grotesquely similar light, in this week's "Really Weird Stuff (RWS)" category, Reuters reports, "Federal Reserve Board Governor Frederic Mishkin said that monetary policy is not responsible for creating financial crises."

Huh? I am stunned! Then what does cause a financial crisis? He doesn't actually say, as he tellingly refused to take questions about monetary policy from the audience, but he is insistent that "These crises that develop have nothing to do with 'monetary policy', but rather with financial innovation where markets sometimes make 'mistakes'."

I am so angry that I cannot type with my fingers, as my hands have clenched themselves into fists, and I am forced to hold a pencil between my teeth to hit the little keys. My reason is that he is both right and wrong. He is wrong about the Fed not being responsible for creating financial crises, as there would never be a financial crisis (the bust) without the banks first creating the money to create the boom.

So Mr. Mishkin joins Alan Greenspan, running around saying, "It's not my fault! It's not my fault!", when the whole world spent all that time watching him and the Fed bludgeoning the dollar, then standing over the prostrate, bloody body of the dollar, holding the murder weapon in his hands! Not his fault? There is nobody else whose fault it could be!

But he is right, as loath as I am to admit it, that mistakes are made. And in fact, this very point is in a post at, which is a letter from Bettina Bien Greaves, who was Ludwig von Mises' personal assistant, and who recently sent this "letter to the editor."

"It was in 1912," she writes, "in his first book on monetary theory that Ludwig von Mises laid the groundwork for the Austrian Theory of the Business Cycle. He pointed out then that the monetary boom/bust cycle stemmed from the encouragement given by central banks to expand credit."

She then proves the point by quoting Mr. Mises, "If the banks discount at a lower, rather than at a higher, interest rate, then more loans are made. Enterprises which are unprofitable at 5%, and hence are not undertaken, may be profitable at 4%. Therefore, by lowering the interest rate they charge, banks can intensify the demand for credit. Then, by satisfying this demand, they can increase the quantity of fiduciary media in circulation."

This is where the entrepreneurs make their mistake; they thought that all of this new money, bidding up the prices of everything and making the economy boom, was real demand! And real demand means that people have lots of money, and they are spending the money, and thus the rise in house prices meant that the demand for houses was high, and real demand because people wanted to buy, buy, buy houses, and had the money to do it! The economy was, ostensibly, booming! Just look at all the money!

"Once the Fed started trying to create a 'flexible' money supply," continued Mr. Mises, "it found itself between a rock and a hard place. Of course its founders didn't then realize this. But the Fed faced a dilemma: to expand and to keep on expanding the quantity of money would lead to a catastrophic boom and runaway inflation. But when and if it stopped expanding it would cause an economic crisis. Sooner or later, the crisis must inevitably break out as the result of a change in the conduct of the banks."

Here is where Mr. Mises agrees with Mr. Mishkin; "The later the crack-up comes, the longer the period in which the calculation of the entrepreneur is misguided by the issue of additional fiduciary media."

And actually it is all relatively moot at this point, as it is too late, there is nothing that can be done, and it will last for a long time, as I gather from history and where Mr. Mises went on "The crisis, with its unique characteristics, is followed by stagnation."

Why stagnation, and why do we have stagnation in our future? He explains, "The misguided enterprises and businesses of the boom period are already liquidated. Bankruptcy and adjustment have cleared up the situation. The banks have become cautious. They fight shy of expanding circulation credit. They are not inclined to give an ear to credit applications from schemers and promoters. Not only is the artificial stimulus to business, through the expansion of circulation credit, lacking, but even businesses which would be feasible, considering the capital goods available, are not attempted because the general feeling of discouragement makes every innovation appear doubtful."

And it will be made worse, as apparently we will soon be going through a lot of the Marxist stupidities of "taxing the rich" or "middleclass tax cut" and blah blah blah, but the ugly, inescapable fact is that things will be made worse by Congress trying to "do something", which will be to do more of the same things that caused the problem in the first place!

And it won't be the rich who pay, as Ludwig von Mises himself said "whatever system of financing may be adopted, whether taxation, borrowing, or inflation, the full incidence of the government's expenditures must fall upon the public", and by "the public" he means those at the bottom who cannot take steps to pass their increased costs onto someone else in the form of higher prices or higher taxes. You and me. Mostly me. Or anyway, that's the way it seems to me. Ugh.

Mogambo sez: Ahh! A little pullback in gold, silver and oil, and indeed all commodities! This can only mean one thing; you are truly beloved of the gods, and you have been given another chance to buy gold, silver and oil at these low, low, bargain prices before the Big, Big Move (BBM), and all the other BBMs after that, and who could ask for more?

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. To read all of The Mighty Mogambo's musings from this week, click here.

-- Posted Wednesday, 7 November 2007 | Digg This Article | Source:

Visit The Daily Reckoning's website.


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