Things are not as bad as they seem . . . They are Worse, Much Worse

The latest news from the Fed is that they decreased Total Fed Credit by nine billion bucks. The reason, I can only assume, is that the banks are gagging and spitting up blood from the indigestion caused by December's astonishing $38 billion forced feeding.

A most surprising development is a gigantic drop in bank lending. Nobody is borrowing from banks to finance investment, and in fact total credit is where it was in September. And the ballyhooed increased savings that Americans were supposed to be doing, according to some anecdotal quotes, sure isn't showing up in bank statistics, as savings is exactly where it was in August. Oops. This gives lie to those who detect some increase in savings, it would seem to me, reporting as I do from the armchair loudmouth fringe.

For your notes, and this will be on the final exam, there is a big difference between saving and investing, in case you ain't heard. Saving is when you put money into a coffee can, or under a mattress, or in a bank. The classical way is to put it into the bank, which intermediates between you and a borrower, charges him a lot and pays you a little interest. You know that when you go back, months or years later, all the money is still there. Risk-free.

Investing is hoping for higher returns that the piddly savings account or CD interest, with the implied risk that when you go back months or years later, there may be nothing left at all.

So, the statistics show that they are not saving money in any stinking banks. They are, as hinted at by the drop in consumer debt, actually paying down some debt, and that is a kind of saving, too. So, are Americans saving more? Yes and no, and no and yes.

But they must be putting it back into investments, accepting the increased and substantial risk. And looking at the stock market activity lately it seems to be exactly that.

So what does the term "risk" imply in the current environment? It means, as far as I can tell, that risk is currently defined as willing to suffer a temporary drop in wealth because in "the long run," they will always go up to much, much higher prices and we will all be millionaires.

The drop in the dollar is big news, but I don't see anyone getting particularly interested in the story. In the last month, the dollar has devalued by, after looking at the JP Morgan index of nineteen currencies, about 5% in the last month, 8% for the year.

In a related vein, what's the story with oil? OPEC says it is willing to increase production to get the price down? And they are accepting new, devalued dollars at the same rate as the old, more-valuable dollars?

Remember, a dollar is just a unit of buying power. A variable unit. And the sweethearts at OPEC are willing to produce more oil, to lower the price, AND lower their profits, AND they will also take units of decreased buying power in payment to further erode their real profits? Wow! THESE are they guys who are our real friends!

I mean "money illusion" is no secret. So, in all of the countries of OPEC, there must be at least one guy who has read Economics 101 about "money illusion." So the inescapable conclusion is that OPEC loves us so much that they are willing to sacrifice and suffer for us. And if you check with our government, I'll bet you will find that nobody even sent so much as a "thank you" card.

Oh, lots of back-alley deals, conspiracies to save political bacon from the fire, slimy corruptions, payoffs, frauds, lies and transfers of money, but no card.

That there will be a huge inflation from the free lunch proposed by the Republican stimulus plan and the Democrat stimulus plan is a given. That is the way that the lunch is paid for. That every final consumer will suffer the pangs of inflation along the way and that the poor will end up paying the entire cost of the inflation at the end, as those on the higher economic rungs continually increase their incomes in response, is also a given. That's the way inflation is paid for.

And as for stimulus, what's new except the magnitude? The American economy has been constantly stimulated since the Sixties, for crying out loud. How do you think we got $6.4 trillion in public debt? How do you think it was possible for $32 trillion of debt to be accumulated? How is it possible that the combined cost of government is now about a third of the entire economy? Constant stimulation by over-the-top monetary and fiscal policy, that's how.

Leaping to my feet to indicate the sudden onset of another manic phase, I loudly exclaim that even during that short period of time when every clueless numbskull in town, with a shrill tone of complete contempt on the word "numbskull," was waxing ecstatic about budget surpluses, it turned out it was just lies and mirages. The proof is simplicity itself; you are not showing a surplus when total debt is increasing, and there has not been a single time in the last, oh, jillion months when total public debt was not increasing. Oh, sometimes it slowed to a crawl, but it never went down.

And the sorry fact is that all of it was used to bid up to preposterous levels the values of houses, stocks, bonds and literal junk. For example, old catcher's mitts and chipped saucers are worth thousands. The most egregious use of the money was to install a ridiculous, bankrupting, worthless Big Government Economy, resulting in the astonishing result that one out of six workers in America is employed by a government. One egregious result was that, inevitably, literally every thing either animal, vegetable, or mineral in the nation, was subjected to an incomprehensibly massive collection of ridiculous, even self-contradictory laws, the sheer mass of which is so voluminous that no single man can even lift it off of the ground. Okay, maybe Superman can lift it, but not you or me. Okay, okay, maybe you can, what with your bulging biceps, but not me.

On Friday we were treated to a speech by Dick Cheney about how wonderful the President's stimulus package is. Nothing new. Blah blah blah, same old government cheerleading, with the implied and expressed benefits that everything will be all sunbeams and roses from here on out now that We Have A Plan.

But then he could not resist stooping to transparent idiocy when he announced that rising deficits do not have any effect on interest rates. In fact, he thinks he explained that the evidence shows that deficits have no effect on interest rates. Since he has stooped that far, I was surprised that he did not come out and declare that deficits cause interest rates to actually decline!

So let me see if I get this straight, Dick; if the government borrows all of the available money in the USA, leaving none for anybody else to borrow, there will be no effect on interest rates. Banks and private lenders will happily loan out that very last dime at the same interest rate as the first dime loaned. Amazing! I had never heard that before! Never! I like to think that I am a pretty well-read guy, and so you can take it from me that this is priceless stuff! This is a fabled Gem of Wisdom that you will not find in any dorky economics textbook anywhere, but is provided - free of charge! - by elected officials with an authentic tone of somber certainty.

Of course, what he did not dare mention, because it would have proved him to be just another government blowhard toeing the party line, is that the Fed has provided the money and took steps to pound interest rates artificially down. And the Fed can print up as much as it wants, and regularly does. Ergo, interest rates are held down, and Dick Cheney can happily get out spiffy graphs and point to a nifty comparison between deficit growth and interest rates.

So the lesson is really that the government cannot really even borrow all of the available money in the USA, even if it wanted to, because the Fed will simply print up as much as needed to replace the borrowed money, and therefore it has no effect on interest rates since the stock of money did not change. How special.

Unfortunately, all of that newly-printed money will certainly have a deleterious effect on inflation. All that money chasing the same amount of goods will raise the aggregate price level. It always does. And that is the bugaboo that used to restrain governments in the past, back when politicians were elected on their smarts and not their toothy smiles.

And too bad for Mr. Cheney that interest rates are affected by inflation. And this is the sorry result that will accrue from the Bush stimulus plan. Or the Democrat plan. Or whatever asinine stimulus plan that eventually evolves.

On Tuesday, a column appeared in the WSJ by a guy named Rik Hafer, who is both a university economics professor and a big muckety-muck at a policy center. This guy also believes that deficits have no effect on interest rates. He pens an entire article about the seeming miracle and not once, not one single time, did he mention the Federal Reserve or it's role in all of this. This only underscores my loudmouth contention that the field of economics is populated with dimwits.

So, to get with the program, let me postulate that you can water your lawn all summer with the water from your pool, and it will have no effect on the level of water in the pool. The pool will always stay full, no matter how much water you spray on the lawn. Of, course, I studiously fail to mention the guy behind the bushes with a hose, who is busily putting more water into the pool the entire time. Now, now that I have demonstrated my own genius in the exact same way, where do I sign up to be a university professor?

The famous dictum of George Soros was to "Identify the trend whose premise is false, and then bet against it." Well, two current trends whose premise is false are surely the bidding up of bonds and houses.

Now, houses as a bubble is a rough call. There is obviously a point at where the US dollar is so cheap that foreigners will be able to convert a few of their strong currencies into lots and lots of dollars. After the currency swap, houses in the US could be cheap to foreign investors, and that could attract a lot of money into the US to buy houses at such bargains. Then foreigners would own the houses and rent them to us.

But bonds is a slam-dunk. The official rate of inflation is at 2.5%, and there are some people, mostly those whose custodians only allow them access to crayons and blunted scissors, who even believe that lowball figure. Not me, personally, you understand, but others do. Just between you and me, so don't let this get around, but behind their backs I laugh and make jokes about them. Tee hee! Anyway, combined with in the in-your-face evidence of rampant money and credit-creation, in unbelievable amounts, record-setting amounts, amounts so large that I have to wave my arms like a scarecrow in a tornado to convey even faintly appropriate emphasis, there is no way that inflation will not rise. It is madness, then, to be buying debt at such a low premium over inflation, when you know that inflation will soon overwhelm such low yields. ESPECIALLY when you know that inflation will soon overwhelm such low yields, and you are incomprehensibly locking in yields that are the lowest in forty freaking years, because it will prove that you are either dangerously incompetent or truly insane. So pick one. They are your only two choices if you are buying debt in these weird days.

And when yields rise to at least match inflation, then the price of bonds, let me check that economics book again, falls. This is where the capital loss comes in. And if there is one thing that I am pretty danged sure of, it is that normal people with money to loan are naturally averse to capital losses. In fact, most of them seem quite phobic about it.

So how does one explain the fact that I can look in the paper and read that debt is being bought every day, probably even right now for all we know, right out in broad daylight so that even innocent children can see, in order to lock in these yields?

Dan Denning, too damn good-looking for his own damn good, and you'll note that I used the word "damn" twice as a literary device to signify my envy and seething jealousy, commenting about why the economic future will be modest, writes, "It all makes sense except the crucial element, pent-up demand. American consumers are at the tail end of the longest, most enormous - nay gluttonous - consumption binge in modern financial history. They already have two of everything they want. And no amount of financial easing can make consumers buy things they neither want nor need."

Marc Faber, of whom I know nothing but suspect that he is another one of those damn tall and good-looking fellas too, has the opinion that as China continues to grow, Chinese resource requirements will escalate, and that oil, coffee, copper and grains are a few commodities that are looking at booms ahead.

Maybe by agreeing with these two hotshots I will enjoy some proximity effect, and will end up taller and better looking, and then again maybe not, but in any event I still agree with them. And you should, too, because the logic is inescapable.

As a clue to magnitude, Richard Marbury notes that "During the Second World War, raw materials soared 482%." If the War was four years long, then that means commodities almost doubling every year. That's the kind of return I look for! How about you?

To make some money on this means that we should start moving some moolah into futures. And while it is almost a part of the lore of commodity trading, it appears true that commodity traders seem to always have a big boom or big bust periods. And when the demand is growing, and when the money supply of the globe is being expanded by central banks, then the dollar price of commodities should skyrocket, by virtue of the devaluation of the currencies. Well, maybe not skyrocket, but you get the idea.

Well, let's mosey over to the DJ-AIG Index as sorta get the bird's-eye view, and sure enough we see that index has risen, oh, 28% in the last twelve months. Damn! Let's now perambulate over to the JOC-ECRI Industrial Price Index, and we see that it, too, is up a hefty 16% in a year. Double damn! Well, for a little solace, let's pin our hopes for low inflation on the Bridge-CRB Index. But when we take a peek, we note with dismay that it is also up about 27% y/y. Triple damn!

And the fall in the dollar is making US agricultural products cheaper for foreigners who have currencies that are appreciating relative to ours. This leads, according to theory, to an increased demand for American agricultural products. Increased demand translates, in the short run, into higher prices. This potential for higher profits results in more planting, increasing supply, blah blah blah.

Yet, not an hour goes by without some pinhead in a suit announcing that price inflation is tame, non-existent, benign, or merely low, and will remain low until the sun finally burns out in, oh, a million jillion years.

So, how to account for the disparity between rapidly increasing prices in the above-referenced indexes, and the low CPI? Easy one; for various reasons.

For instance, because the government adjusts it downward to adjust for quality improvement.

Also because they adjust it downward by dragging the anchor of past, weighted, low-inflation-era prices, and then all the higher prices today and the lower prices of the past are averaged together. Thus, rising prices are always understated.

Also because the until-recently strong and rising dollar meant falling import prices, since foreigners were willing to not raise the price of their products denominated in their own currency, and thus it simply took fewer strong dollars to buy the import.

Because most contracts lock in prices for months and perhaps years into the future, and higher current prices cannot be passed along. As an aside, this explains the rise in derivative contracts. But as surely as the future will one day arrive, because it always does, you can be just as sure that the end of price restraints will also pull up in front of your house, honk the horn and shout "We're here, and we're moving in for a little while!"

And also, finally, because of the ultimate Big Brother reason, or actually more like the ultimate Big Mommy and Big Daddy reason, namely "Because I said so."

And it reminds me of that joke about the farmer who literally carried his pig to market in his arms, miles and miles and miles away, and when the butcher placed the pig on the scale, the farmer said, "Oh, wait! Don't weight him now. Wait about five minutes, and he will start getting heavier and heavier."

The only thing you really need to know about inflation is: when you go to the store, do things cost more? How about at the gas pump? How about those insurance premiums, are they taking away spending-power dollars? How about those taxes, are they taking spending power away? They are and they do? Then you have price inflation, Bub, regardless of what biased government announcements may say. Or saccharine guys in suits. Or anybody else.

But getting back to the point, as I recall it was something about commodities, there is no escaping the fact that the last twenty years or so was a bust for commodities. And commodities typically go through cycles of boom and bust, like everything else. And now, according to lore, we should have a boom to level out the yin-yang karma of it all. Let's take another look at that DJ-AIG Index. Looks like the start of a boom to me!

Gold continues to do well, since it, too, is lumped in with commodities. Speaking of gold, I saw some little graph somewhere that showed that gold, for the last ten years, has not done all that well in comparison to all these other investments. What the chart includes is gold bullion, but which doesn't include shares of gold-mining companies, which are up 150% in two years.

And in comparison with equities over the same period, a 67% gain in gold combined with a 30% loss in equities gives you a differential of 97%. So has anybody actually done a dollar-cost averaging with gold mining shares? Speaking only anecdotally, it has worked wonders for me, and I can only idly wonder how well I would have done if I had either the smarts or the initiative to anything other than to arbitrarily accumulate various precious-metals mutual funds.

And in case anybody accuses me of being a wishy-washy, profane, dim-witted, foul-smelling, babbling, ugly, illiterate, boorish, lazy, mentally ill and ill-tempered bonehead, I say, hey! I am NOT wishy-washy! About gold, anyway, and you tell them that I said, in print, right here, knowing that in the future you are probably going to be called as a witness by my team of crackerjack lawyers who will prove that I deserve a Nobel Prize for the "Best Investment Advice Of The Last Thousand Years Or So Which Was To Buy Gold and Shares of Gold Mining Companies at These Bargain Prices," so pay attention, and mentally note that I distinctly and in no uncertain terms said that you should be buying gold mining shares and gold bullion with every dime you have at your disposal, and should mortgage the farm to get money buy more gold, and should shake down your children, relatives and neighbors for money to buy more gold, and even beg spare change from complete strangers to get money to buy more gold.

On the other hand, the Elliott Wave people are on record as saying that they think that the little bull market in gold is nearing the end, and that they have a long-term target for gold at less than $200 per ounce. Hmmm, let me think about that for a second. Nope, I've thought it over and I must say that I have to disagree. In fact, not only do I disagree, but I will jump a few steps of incremental denial of that statement, and say this: to predict that gold will fall to levels anywhere near that price is laughably ludicrous to us lunatic crackpot gold bugs out here.

Way back when, when the dollar was more or less a real dollar, with a dollar's worth of buying power, meaning it could buy a nice, hefty little pile of stuff, gold was forcibly held down to $35 an ounce. How big is the pile of stuff that you can buy with one of today's' dollars? Ah ha! That look of sudden, Instant Enlightenment on your face makes being your humble teacher worthwhile for me, Grasshopper. You have crossed over, and now have obtained a glimpse of True Economic Wisdom.

So, continuing with my relentless and shrill harangue, to think that gold will fall to less than $200 an ounce, when the dollar is now worth waayyy less than 10% of that old dollar, would mean that gold will fall, in constant-dollar/buying power terms, to it's lowest real value in American AND world history. What are the chances of that, eh? Hahahaha! Hey! I'm cracking up here! Hahahaha! Anyway, trying desperately to compose myself, and after wiping the tears of laughter from my eyes I somehow manage to snort with undisguised disdain and derision. And if you could only see me now, rapidly regaining composure with typical superhuman effort - what a guy! - one eyebrow is arched in wry bemusement, trying to look very Buddha-like, but with a certain, subtle touch of Paul Newman. What a transformation! I tells ya, I dunno how I do it. I just can!

Foreign central banks are also trying desperately to keep interest rates low, and their holdings of US debt at the Fed has ballooned over $132 billion in the last twelve months. Our own Fed, in contrast, is a real piker, having only scarfed up $73 billion in the last year. The difference is, theoretically, foreigners paid real dollars for the debt they bought. The Fed, which starts with an "f" like "fraud," blithely prints it up, thus subsidizing bubbles and stoking the fires of monetary inflation, which eventually stokes the fires of price inflation. Sorry, but I couldn't help throwing in that gratuitous disrespect at the Fed.

Now, note that I said "theoretically," in the above paragraph, but please write in your notes that I consider the probability of it happening to be about the same as, oh, rounding off to the nearest thousand decimal places, approximately, zero. Or, perhaps more appropriately, ze-freaking-ro.

The latest issue of The Economist magazine notes that, "Foreign investors have also woken up to the fact that corporate America is less profitable than they thought." Well, The Economist is a foreign, British publication, and so I guess they should know. The important part to glean from that is the notion that when something is less profitable than thought, then it doesn't tend to attract a whole lot of money. This is not the best news I've had all day, because we need, as a nation, to attract, or otherwise come up with, $460 billion a year, just to balance the trade deficit alone. Add to that another $100 billion-plus for another stimulus program, and another couple of hundred billion to finance a war with Iraq or North Korea or somebody, and pretty soon you are talking about some serious money, huh?

The January 13 issue of Barron's had another Roundtable, but I will not spend much time on it. Any discussion of the economy and stock market that includes Abby Joseph Cohen, a shallow stock tout, seems destined not to be taken too seriously.

But there were two notable exceptions to the general lackluster roster of participants, as judged by their abysmal performance the last few years. In the preamble, Lauren Rublin notes that these two, Marc Faber and Felix Zulauf "...don't ride with the bulls, but deride them as dangerously naïve." Noting the performance of the two guys who are bucking the crowd, they have done relatively well.

Anyway, I like that term "dangerously naïve." That these two guys make money and the rest lose money, maybe they are saying something we should listen to. They seem to say to short bonds and buy commodities, including gold. It's what I have been saying. You should, too.

Perhaps you should read it for yourself. And when you are done, get a black pen and draw some glasses and a mustache on the photo of Ms. Cohen. It made me feel better when I did it. Oddly cathartic, in fact.

And, getting out my little bugle and marching around the room like some ridiculous cartoon character, the fact that old Mogambo kicked all their investment butts, including the estimable Messrs. Faber and Zulauf, for the last several years in a row is a tip for you to pay attention to me, too. So naturally, one would think that Barron's must be preparing to interview me, the Number One Investment Hotshot in All the Land for the last three years in a row. So when Barron's finally gets around to calling you and asking for a quote from you, as a loyal reader of Mogambo Guru, to kind of spice up the interview, you know, sorta the "satisfied customer" angle, try and think of something clever to say. Or at least mention how my eyes seem to twinkle with a light of their own. You know. Something like that.

The American government has subsidized Poland buying 48 F-16 fighters from Lockheed. The terms are a low-interest loan for $3.8 billion and, and this is where we find out that selling fighter aircraft is the same as selling cars, the contract allows for interest-only, no-principal payments until 2011! So Poland gets 48 factory-fresh, still in the carton aircraft for a measly, what? $70 million a year? No wonder the European fighter manufacturers are testy!

And am I supposed to think that in 2011, eight long years from now, the Poles are going to gladly pony up the $3.8 billion in principal for some old, used airplanes? Now, as I remember from my grade-school joke days, these are the guys who are supposed to have installed a screen door on a submarine, but in real life they are going to be buying airplanes at some multiple of what they are worth, bluebook-wise? Hahahaha! And my government is going to make them pay up? Hahahaha! Oh, stop it! My sides are hurting from all this laughing! Hahahaha!

Just got Martin Weiss' latest, and it contains his forecasts for 2003. Old Mogambo Guru and Martin, if I may lapse into the familiar, say very disturbing, and eerily similar, things. Only he somehow manages to say them without hysterical hyperventilating and getting flecks of outraged spittle all over everything, or even calling people "morons." But then he is probably a very nice person with a lot of class, and I am probably not, even though I think I am, but then again I am so wrong about so many things. I mean, I don't track down and hunt the neighbors for sport, so what do you want from me, anyway?

But getting back to his predictions, he says that the economic recovery will fizzle. Oil prices will surge and gold will soar. The dollar will plunge. Deflation will run rampant in the U.S. Many more U.S. companies will go bankrupt. The real estate bubble will pop.

To continue in this discourse in dry recitation and take up where he left off, in order to put that over-the-top spin on things which I seem to derive some sick pleasure in doing, I will add that everything will get worse. And then it will get even worse. Then one day you will die.

The new 1040 arrived, and of course I was more than merely curious. One interesting thing is a new Line 49, way back there in the tax credits section, that reads "Retirement savings contributions credit. Attach Form 8880." Now, unfortunately, there is only a blurb in the booklet about it, but it looks very, very interesting! Imagine if it IS what it implies! Namely deducting from your taxes, NOT from your stinking income, your IRA contribution! Wow! This could be sweet!

Of course, when I hustled down to the local IRS office, swerving like a madman in and out of traffic the whole way, an office that serves my whole county I might add, I find that there is now - "New for 2003!" - only a bored woman, at a desk, with a phone, who tells me that they do not have any forms anymore, and that I have to order them from the IRS. Perfect. Just freaking perfect.

In a more pedantic vein, let's take a look at what taxes there would be if the government had stayed strictly with what it was supposed to do, and did not evolve into the socialist/communist/fascist behemoth that it has become today. And for that we have some interesting visual aids, specifically pie charts, and they are provided free of charge on page two of the new 1040 booklet. So, get your out your charts follow along, whining and complaining like you always do, with me.

In the pie chart labeled Outlays, let's consider each of the pie wedges, and decide whether we would be spending that money if the government was limited to the few functions that the Constitutionally allowed and mandated. And why not? The Constitution was passed in the 18th Century, and from the word "go" nobody complained that the government was doing too little in the way of "feeling people's pain," and for well over a hundred years the country did not meddle in any of that touchy-feely stuff, and we prospered until we became The Superpower, hear us roar! Then the government started growing. And now we are a, well, let's just continue, shall we?

How about the pie wedge of 2% for law enforcement and general government? OK, that's mandated in the Constitution. How about the 6% wedge for surplus (hahaha!) to pay down the debt? No, since the government would not need any money to pay down any debt, as there would almost certainly be no debt. How about the 36% pie wedge for Social Security, Medicare and other retirement? No, since the government is not supposed to be in that business. How about the 18% for national defense, veterans and foreign affairs? Yes, national defense is mandated in the Constitution. How about the 10% for net interest on the debt? No, since we would not have any debt. How about the 10% for physical, human, and community development? No, since government is not supposed to be in that business. How about the 18% for social programs? No, since the government is not supposed to be in that business.

Now, let's get out those calculators and add 2% and 18% for the two measly things the government legitimately is supposed to do, and by eventually hitting the correct button on the calculator we see that it adds up to only 20% of total outlays.

With current total outlays at $2.2 trillion, twenty percent comes to a paltry $440 billion. That leaves a stimulus, if you really wanted one, of about $1.8 trillion per year at current tax levels! By just getting the government out of that socialist/communist/fascist feel-good idiocy that seems to consume all of the precious time of Congress, who revel in promoting ever-more of this bankrupting stuff, total government outlays would be a mere $440 billion dollars a year, leaving a nice, tidy $1.8 trillion, note I said trillion, in the pockets of citizens to spend on sex, drugs and rock-and-roll. This is Economic Stimulus writ large, not only in the metaphorical sense but also in the literal sense as I cleverly hit the "Caps Lock" button and write ONE POINT EIGHT TRILLION DOLLARS PER YEAR!

But nooOOOoo! What we have instead is the government proposing to continue spending every dime on all these programs, and even giving them a nice cost-of-living boost, and then printing up money to pay you some stimulus-program tax rebates! The mind goes boggle boggle boggle, which sounds very comical when you say it real fast. Okay, in actuality the government itself is not printing up the money, but is selling debt to get the money. But then the Fed prints up some fresh money and buys the bond back, so the end result is the exact same.

The ultimate, inescapable result is that the government reaches a point at which it constitutes such a large percentage of the economy that it cannot dare stop or even slow down. If it does, the economy must also shrink, because the government IS the economy. We are, I figure, waaaayyyyy past that point.

This is why we must now listen to pompous pinheads breathlessly propose more stimulus programs. But donn't you even wonder why we must have these things now, in January of 2003, even though the GDP is "growing?" Even though unemployment is only a measly 6%? Even when interest rates are a 40-year lows? Even when housing is in the midst of a boom? Even when every lackluster economist in town is proclaiming how some wonderful recovery is in progress, or will start very soon? Even when a few companies are announcing growth? Even though every smarmy tout on TV is trumpeting how their towering intellects have detected a bottom, and thus the stock market will soar and make everyone wealthy any day now? So why now? Why?

Because this is the very thing, let me capitalize that phrase so as to indicate emphasis, The Very Thing, that the Constitution was so carefully crafted to prevent: the growth of a cancerous level of government spending. And the reason is simplicity itself: the entire history of the world is the story of how various countries developed governments that got bigger and bigger and bigger, and then their currencies and economies collapsed because of it. The Founding Fathers knew it. The Austrian economists still know it. And now you know it. Of course, the Other Big Very Thing is that our money is not gold, or even within shouting distance of gold, but that is another tirade that I, somehow, never tire of waxing alternatively philosophic, pedantic and insanely hysterical about, often to the point past where I obviously need some kind of professional mental health-type help. But I am calm now. Very calm. Verrrrryyyyyy caaaaaaalllllmmmmmmmmm.

And the collapse of economies is always caused by mass public unrest or plain government bankruptcy, which then caused civil unrest. If there was no civil unrest, with everybody just going about their dreary lives, there would be no societal collapse to start with. And civil unrest was caused by either such persistent inflation that the people were eventually priced out of everything, and/or by sudden inflation. When commodities explode in price, the lightening of the family purse means less is left over for buying anything else, all of which are also rising in price. And then you get the collapse of competing equities valuations and tax revenues from the lost sales and blah blah blah. And then, in some cases, one day even food got to be too expensive.

And what causes inflation, boys and girls? The government producing excessive amounts of money. Inflation ensues. Incomes cannot keep pace. People have less buying power to consume things. Just like now. Uh-oh. Listen to that deep, bass note in the soundtrack of your life. Ominous. Deep and ominous. You just KNOW something bad or scary is going to happen any second.

Anyway, things get more expensive, and the poor do not have incomes that keep pace with inflation. That is why we say that the poor pay the full cost of inflation.

Why else do you think there is an Earned Income Credit in the 1040? Why else do you think there is a tax credit for child care expenses? Tax credits for the elderly and disabled? An education tax credit? Child tax credit? These are direct transfers of money, whereby all taxpayers make up for the impoverishment of low-income people who are being financially killed by inflation, by literally giving them money via the income tax system. This is the very embodiment of the communist catch-phrase, "From each according to his ability and to each according to his needs."

Already, the poor (and increasingly the middle class) are completely priced out of homes, cars, car insurance, and health insurance. Nowadays, of course, a sizable fraction of this penniless, growing cohort still have them, only they have run up crippling, ultimately un-payable debts in order to acquire them. And the worst part is that the inflation that was caused by the previous decades of monetary and fiscal abuse is now going to be made worse by a huge, multi-year stimulus program from Congress, as they joyously ram money into the economy and the Fed makes the money appear out of thin air to pay for it.

Congress. Pinheads. You say to-may-toe. I say to-mah-toe. That the Democrats are the undisputed champions of this insane economic theory that causes real impoverishment of the poor, and that the poor routinely vote as a monolithic bloc for Democrats for the express purpose of creating more economic gibberish, is tragically ironic.

And, to be fair, the Republicans are, sadly, the same way in many regards, except for a sanctimonious, pious fervor that scares me to the bone.

Alert readers the world around took a depressing amount of glee in pointing out that, thanks to my charming, eccentric-old-man kind of way habit of sloppy writing, abysmal attention to details, poor proofreading skills and a general incompetence in everything I say or do, that I seemed to have mixed up the First Amendment and Second Amendment of the Constitution in the last issue of the Mogambo Guru. In re-reading that referenced section, I am saddened to report that they are right. As is my way of showing proper humility and gratitude for them writing to point out the error, I am sorry, and I promise to do better in the future. I am letting myself off with a verbal warning, the kind that does not get put in my permanent personnel file.

And this also fits in perfectly with my theory that the Far-Left Conspiracy is beaming some kind of disorienting, mind-control rays into my brain from some government satellite, the kind that are so powerful that they penetrate even my aluminum-foil hat. So, rather than resolve this mystery, let's just "move on," shall we?

Gary North, who seems to have a real grasp of how things really work, announces his Law of Bureaucracy as, "There is no government regulation, no matter how plausible it initially appears, that will not eventually be applied by some bureaucrat in a way that defies common sense." Ugh.

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.

When the rumblings start about changing the international medium of exchange from the dollar to some other currency (I have no idea what it'll be), that'll be the big signal that we're toast... That the US government is finally in the bucket so far that the rest of the world believes we're "officially" bankrupt.

Like the USSR was... only in slow motion.

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If I may say so, none of this is Bush's fault. He has inherited a horrific mess, which Greenspan and Rubin compounded. Now it may finally be starting to unwind.

And even if it isn't true, and Greenspan manages to keep all the balls in the air, it's a wonderful rant.

there is no way that inflation will not rise.

There had to be a guy who would stand up and say this out loud, taking credit for a prediction about as risky as saying that the Sun will come up tomorrow. We have had declining prices in a lot of sectors for some time now; in fact several articles have been discussing the heartbreak of deflation, which is currently wracking Japan and may be taking root here.

When things are near-zero, predicting that they will go up is not really that adventurous, or clever.

>>...Gary North, who seems to have a real grasp of how things really work...<<

Wasn't he the guy that predicted massive problems with Y2K???

Yep. North, Ed Yourdon, and Yardini(sp?) were preparing us for "The End of Life as We Know It". I guess I missed it.

I had to stop reading a this statement, which I consider to be WAY out in left field. The very definition of inflation is that prices go up - including the amount YOU and I charge for our services. And, correspondingly, the value of all the money in Bill Gates' accounts (not to mention Bill Clinton's offshore accounts) drops.

In fact, inflation forces the wealthy to risk that wealth by starting new enterprise - it literally scares money out of the bank vaults.

In years gone by, when I was foolish, I allowed inflation to kill my bank account. However, this time around I'll take 10%-12% inflation and be grateful.

If I may say so, none of this is Bush's fault. He has inherited a horrific mess, which Greenspan and Rubin compounded. Now it may finally be starting to unwind.

"No Veto, New Tone in Washington" Bush does deserve a good chunk of the blame, but Greenspan, Clinton, and Rubin did get the ball rolling.

And even if it isn't true, and Greenspan manages to keep all the balls in the air, it's a wonderful rant.

Greenspan has stepped into the shadows making sure he gets none of the blame. He's already stated that he's powerless to help the economy -- the same man who soaked up all the credit when the economy was doing well.

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