Posted on 02/19/2003 4:39:19 PM PST by arete
"...Cue the ominous background music. The camera pans in through the mists of the deepening gloom. Wolves howl in the distance, off-camera, "wooooOOOOoooo." In a voiceover by some guy with a deep and ominous voice, like Vincent Price maybe, we hear, 'Only the banks have the power of (pause for dramatic effect) fractional banking, which can be an evil in itself. (Please pronounce this as "eee-vil") But when you compound that potential evil ("eee-vil") with the even bigger potential evil (ditto pronunciation directive) of the power to create money at will, then you have surely sown the seeds for your own (another pause for effect) destruction.' At this point I suggest a hideous, sinister and quite mirthless laugh, not quite a cackle if you catch my drift, and a fade to black..."
The Mogambo Guru
- Greenspan's Fed has been relatively muted here lately. This is mostly because others are doing the heavy lifting of dollar debasement. The banks, Greenspan's Handmaidens From Hell, sucked up a cool $30 billion of US debt in the last week, $202 billion in the last year. Our own Treasury has now reached their new limit on how much debt they can issue, $6.4 trillion. They accidentally went a mere $100 million over their limit, but how can you quibble about a measly $100 million, eh? What's that, about thirty-five cents for every man, woman and child in the USA?So, let's add up a year's worth of shameless governmental idiocy, shall we? To start with, we note that the Treasury admits that it issued $406 billion of new debt in the last twelve months. Disposing of that humongous pile of debt was the job of the banks, which took on $202 billion of it, and foreign central bank co-conspirators absorbed another $138 billion. And the Fed itself bought up $67 billion. That adds up to $407 billion right there. You might find it instructive to note that not one dime of any of that debt came within hailing distance of anybody in the private sector. Government issued the debt, and government-controlled banks bought the debt, and government printed up the money to buy the debt.
So, at the end of the day, what are we left with? A huge and expensive government that has been allowed to pay it's bills one more time, and a bigger money supply.
- Last Tuesday, just as I was sending out the old Mogambo Guru, the question was posed by CNBC, "Is Greenspan to blame?"
That CNBC would ask such a dorky question is not surprising to me. The thing that keeps preying on my mind, however, is that they trotted out, among others, Lyle Gramley, former Fed governor and supposed economics hotshot, who unequivocally says "no." The undertone of the message is that not only is Greenspan not to blame, but that other things, like Iraq for instance, are to blame, and that the circumstances leading us to where we are today were so surprising that even God was so taken completely unawares that he spilled a double mocha latte all over himself in surprise.
Well, something autonomic way down there in the spinal cord bolted me upright in my chair - boing! - and I instantly felt a single thought drift slowly into my perpetually confused little mind, which was, as usual, "huh?" I note, for your edification, that this passes for brilliant with me, as I usually am not even aware that a question has been asked.
But after thinking about it for a bit, the novelty of which immediately gave me a pounding headache, this proves to me, beyond any shadow of a doubt, that Fed people are liars or idiots, or both. Since they all seem to hew to the ridiculous neo-classical theory that the only thing that matters in the whole universe is interest rates, I am naturally inclined to lump them all in the "idiots" category.
So the next time you see old Mr. Gramley, ask him, "Hey, Mr. Gramley, old bean, old top! If Greenspan is NOT to blame, where did the damn money come from?" So where in the hell did the money come from that produced these gross over-valuations and this Everest of debt? It sure as hell didn't come from the savings of Mister and Missus Investor, which for the whole USA totaled, let me check the figures again, about twelve bucks last year. So where did all the money come from? Where? Huh? Where?
I mean, it's one thing to propose to borrow a billion jillion dollars to build a computer-oriented whiz-bang Internet thingamabob, but if nobody has that kind of spare money laying around to loan you, then you ain't a-gonna build no damn thingamabob.
And even if somebody HAD that kind of money laying around, they would have been pretty dumb not to check up once in awhile, to sort of keep an eye on their investment, so that you, and they, don't lose, what was that AOL figure again, $100- billion in ONE FREAKING YEAR?
So all the money had to spring, as it must, from Fount of the Fed, which it did. Every dime, of all the money, for all of everything, came from the money that came from the Federal Reserve System. And that money came, not spouting from some crack in a sacred mountain, but out of thin air.
Where else could it have come from, Mr. Gramley? I mean, if I have a thousand dollars to lend, how could I possibly arrange things so that measly thousand dollars turned, magically, into a hundred-thousand dollars of loaned funds? Man, how sweet that would be! I loan a thousand dollars, but I collect the interest on a hundred-thousand dollars! Which, at even a lousy two-percent interest, yields me two grand a year! Twice the amount I had in the first place! Wow!
The sorry fact is that you can't. I can't. My mother can't. Your mother can't. Nobody can.
Except banks. Cue the ominous background music. The camera pans in through the mists of the deepening gloom. Wolves howl in the distance, off-camera, "wooooOOOOoooo." In a voiceover by some guy with a deep and ominous voice, like Vincent Price maybe, we hear, "Only the banks have the power of (pause for dramatic effect) fractional banking, which can be an evil in itself. (Please pronounce this as "eee-vil") But when you compound that potential evil ("eee-vil") with the even bigger potential evil (ditto pronunciation directive) of the power to create money at will, then you have surely sown the seeds for your own (another pause for effect) destruction." At this point I suggest a hideous, sinister and quite mirthless laugh, not quite a cackle if you catch my drift, and a fade to black.
So we are doomed to destruction unless, and this is the crucial point, so pay close attention right here, unless you wear cloves of garlic around your neck everywhere you go. Oh, wait. That's if you want to be guaranteed not to be bitten by a vampire. Sorry. To prevent economic destruction, on the other hand, this can only be guaranteed if the Federal Reserve won't misuse the power to create excessive amounts of money.
And that is the secular purpose behind blowhard liars/idiots like Lyle Gramley; he is supposed to help us proletariat trash out here, people like me busily grubbing around in our filthy rags all day long trying to scratch up a few dollars, keep Greenspan and the rest of the Federal Reserve System under a highly critical microscope ("Peek-a-boo! I see you!") so that we, as in the editorial "we," can get rid of them when they prove to be unfit for the job, like Greenspan. Or when they started messing around with some untried, asinine economic theory, like now, what with "Bozo Boy" Bernanke and his printing press promising to crank out unlimited dollars to "prevent deflation."
The Founding Fathers, when they wrote the Constitution in the few off-moments when they weren't busy advancing genocide against the Indians and randomly abusing slaves, couldn't think of a way to insure that the Gramley's of the world, who are the position to know, would snitch on their nasty little friends. That is why they mandated that our money shall only be of silver and gold. History showed that relying on the Gramley's of the world was not an optimal system, and that the strictures of forcing the use of a scarce, limited commodity as the medium of exchange would provide the instant feedback loop. False economic policies would soon be signaled with a rise or fall in the price of gold, which would lead to imports or exports of gold, and the change in the relative prices of imports and exports would blah blah blah.
So, to answer CNBC's question, "Is Alan Greenspan to blame?" the answer is, "Yes, Alan Greenspan is to blame. But so are the Lyle Gramley's of the world, who knew better, who had the position and authority to make their voices heard, and yet failed to act like decent, responsible human beings, and thus produced needless suffering for everyone."
- Osama is back in the news, exhorting the faithful to murder the Great Satan, which is, oddly enough, you and me. I never actually felt particularly satanic, but I always had a sneaking suspicion about my wife's family, but don't tell them I said so, because you know how they get. Probably put a spell on me or something.
But killing us? How old-fashioned! If he really wanted some modern action, he would get all the faithful to buy put options on every American security they own, then sell every security they own, have the money from the sales deposited into American banks, close out the in-the-money put options (which rose when the massive sales collapsed asset prices), and then have the faithful go to the banks and demand it all in a huge, glorious cash withdrawal.
Conceivably, such a run on the banks could crash the banking system and destroy us all without firing a shot. Of course, Bush would merely sic John Ashcroft on them, who would happily kill them all and slap a little asset forfeiture action on them, so maybe the plan isn't such a hot one after all.
- The Bush tax plan is being assailed as a sop to the rich. The idea is that the rich would not use this extra after-tax money to do anything that will benefit America. So I guess the rich ARE different from the rest of us: they get to keep more of their money but they don't do anything with it! They probably don't even cash the check! The money, I guess, will just stay in a desk drawer or under the mattresses of the rich. Wow! I never knew this! I mean, I see on TV the houses and lifestyles of the rich and famous, but I never even DREAMED that they do not spend money! Even when it is handed to them!
On the other hand, so the theory goes, the poor would take that tax-cut money and buy stuff, and this consumption would benefit America. And what, exactly, would the poor buy? Stuff imported from foreign places that actually make stuff, adding to the trade deficit? The extension of this scenario is that the foreigners who make the stuff that the poor would buy would take the money and do something that would benefit America. Assuming that they aren't rich, I suppose, for as we just learned, the rich do not spend or invest money.
That the poor could actually make use of some money can be instantly deduced from the notion that they are poor, and they are poor because they have no money, and if they had some money then they would not be poor anymore. Unless they spent the money to buy stuff. And then they would be poor again. And the rich, who own the means of production and the productive assets that produce the stuff that the poor buy, would end up with the money. And because we now know that the rich do not spend the money they get, how will any of this benefit America?
And the poor will not only be poor again, but poorer still, as the tax-cuts financed by deficits, which are in turn financed by the execrable Fed creating money out of the proverbial thin air, automatically reduces the buying power of the few dollars that the poor can manage to scrape up. So, at the end of the day, and then every day for the rest of their lives, the poor are poorer, because from that moment on they will pay higher and higher prices for the few things that they can still buy, because all of that monetary inflation HAS to filter through to final prices.
And the Democrats champion themselves as the benefactors of the poor? Hahahaha! They are the ones who are destroying the poor!
- Much is being made of the new savings plans that may replace the traditional 401(k)/IRA plans. The new idea is that you would NOT get a tax deduction for contributions to your retirement plan, and would therefore have to fund the savings plans with after-tax money. But you would be able to withdraw any gains, if any, tax-free when you retire.
I am convulsed with laughter at the transparent money-grab. Note the important point: that you pay taxes on your money now, and only THEN you can decide what to do with the remaining money. It all comes down to, as it always does, to paying taxes now.
Another salient point is that, unless the investments go up and the dysfunctional, mal-invested, near-death, stupid-to-the-max US economy somehow produces profits, there will not be any tax to pay anyway. Note that there is no provision to deduct losses in case these savings lose money. Which they almost certainly will. How sweet for the government; you sustain losses that cannot be deducted from future tax returns.
The last, more philosophical, point is that since when was any government promise kept? Trust me when I say that there is no way in hell that the government is going to let you keep so much as a thin dime of untaxed gains, neither now nor in some distant fantastic future, what with new Congresspeople attempting to address new "needs." I am not sure that there has ever been, in the last fifty or so years anyway, ANY gain on ANYTHING that has not been taxed. And I am sure that there will not be a time in the NEXT fifty or so years when any gain will not be taxed. Maybe after we are all dead and buried, like after maybe a million years of additional human evolution, there may actually be a time when you can earn a dime that isn't taxed. But definitely not now. Or tomorrow. Or any tomorrow that you will live to see.
- When Greenspan continued his semi-annual testimony, this time to the House, as usual Ron Paul made my heart soar. He related to Greenspan the alarming rise in commodity indexes, and Greenspan opined that inflation has been under control, and almost nonexistent. What a jerk! Inflation is running around 3%, and the ECB thinks that a 3% level is the maximum cutoff of marginal acceptability. Yet Greenspan thinks that price inflation of 3% is nonexistent! Wow! Talk about your difference of opinion!
At a lousy three percent inflation, which Greenspan is so comfortable with, the cost of living will double in 24 years, go up by half in 14 years, and increase by a quarter in eight lousy years. Imagine that everything you buy will go up by 25% in eight years. How comfortable are you with that?
We'll see this Thursday when the new inflation figures come out. The consensus is that it will be 0.4% for the month. Taking my trusty calculator in hand, I multiply 0.4% times twelve months and I end up with around 5% inflation. Hey Mr. Greenspan! Yoo hoo! Is 5% inflation still non-existent? How about tame?
- Gold took a mighty whack to the head last week. There are all kinds of conspiracy theories flying around to explain it, and of course I figure that they are all true, especially if they involve alien invaders from outer space. But there has been, for years, dark whispered rumors that the massive forward-selling of gold leased from the central banks would hit a brick wall if gold got above $360 per ounce. And sure enough, gold got above $360 an ounce and there was a massive sell-off back below that figure. Coincidence? Not for a conspiracy buff like me! No sir!
But crackpot theories aside, the fundamentals are all still there, and those fundamentals include the fact the demand is, and has been for years, higher than supply, and that demand is increasing. And consulting my Economics 101 book, I look up what happens to prices when demand outstrips supply. Oooh! It's right there on page one. How interesting!
And I can't help but notice that ALL the big economies are expanding their money supplies. And they are expanding both narrow and broad definitions of money at rates that are greater than inflation AND growth in GDP put together! This means that when you total the volumes of all the world's currencies as the respective governments inflate their volumes of issued currency, there are, by simple arithmetic, more currency units per ounce of gold in the world. So gold is actually deflating in real price.
This is probably how Robert Prechter opines that gold will fall to less than $200 per ounce before soaring to new heights. It will fall in buying power until it will buy less than $200 of stuff at today's prices. It is just that it will take a lot more than two hundred of tomorrow's dollars to buy that same basket of stuff.
So gold is already cheaper in real terms, although it is seemingly paradoxically higher in dollar terms, because the dollar has lost 20% of it's value in the last year. And so, given a static world market-clearing price, gold should be, automatically, 20% more expensive. And it is. So any decline in nominal price makes gold even cheaper, in real terms, unless the dollar gets strong and stays that way. Which it won't. So, A Tip O' The Day That Makes You Say "Well, Duh!" When You Hear It: buying physical gold on dips would seem to be a good investment, since it is guaranteed to go up in price.
And, surprisingly, buying gold on dips is very good advice for everybody around the world, because all THEIR governments are expanding THEIR money supplies at the same time! We all have something in common! Ain't dat nice?
- The whole economic pie comes from profits. There is no place else where money can come from, outside of an outright gift of money.
And all the rest of the economic structure is the result of velocity of those profits careening around the rest of the economic landscape, producing other profits.
So if profits are up and velocity remains the same, the world keeps on chugging along. Or, if profits are down but velocity is up, then the world can keep on chugging along. But if profits are down AND velocity is down, then the world cannot keep on chugging along.
And profits ARE down. And, given that lenders are tightening up on standards, velocity must be down, too.
And, so if the whole economic pie comes from profits and velocity, then lack of profits and velocity must mean that there is no economic pie. And yet you are putting more money into the stock market? Hahahaha! You crack me up!
- The P/E on the SP500 is still at around 27, which is not only high by historical measures, but idiotically high. And earnings are falling. This makes the P/E go up to even MORE idiotically high levels.
The only way to get that P/E back down to some semblance of reality is if stock prices fall by, and you better sit down for this, by fifty percent or more. More likely in the range of "or more."
And to reprise a sentence from the paragraph above, "And yet you are putting more money into the stock market? Hahahaha! You crack me up!"
- While idly perusing the news, I ran across something about some group of knotheads who want to raise the federal tax on cigarettes to over two bucks a pack. The reason, of course, is that they want everyone to be healthy, and how this would save millions of lives a year, and how everything will be so wonderful if we just raise some taxes and stopped people from smoking.
What crap. First off, everyone has to die. If they don't die this year from cigarettes, then they will die next year of something else, or the next year after that. The only thing it will do, as regards saving lives, is to raise the statistical average age-at-death. But, in the end, it will not save even one life, because you cannot keep people from eventually dying. It just makes them live longer.
The other immediate downsides are 1) that people living longer will create a big drain on Medicare and Social Security payments, as these now-living people will draw on those programs as they now live into their dotage, 2) an increase in cigarette smuggling and associated corruption and crime, 3) a reduction in the incomes of the millions of people and businesses that make their livings from tobacco, 4) a drain on purchasing power as nicotine-addicts are forced to use a larger fraction of their incomes to buy cigarettes, and 5) the inevitable unintended consequences, such as the governments who receive this windfall of cigarette taxes will spend it on new permanent programs and entitlements when the underlying revenue stream to pay for it all is withering.
One of the other unintended consequences may be having your own children say, "Well, thanks for nothing, jackass! Now WE have to pay higher taxes so WE can take care of literally oceans of you damned superannuated health nuts, living longer and longer, year after year, more and more and more of you, all whining "gimme gimme gimme" for more benefits, who didn't die of smoking a long time ago."
In short, the whole idea is just another case of arrogant jackasses at non-profit organizations, idiot-savants with college degrees who have no skills that are worth anything to any company making profits by producing something for sale in the free marketplace, demonstrating their deepest belief that their noble compassion and oversized hearts, in synergy with their worthless college degrees, will always trump their ignorance and stupidity, not to mention complete lack of common sense. A pox on all their houses. Remove their tax exemptions immediately, and tell them to get a real job, jackasses!
- Speaking of jackasses, the IMF and the World Bank are on their way to Argentina and Venezuela and Brazil and God-knows who all. But you can rest assured that they will have Meetings and Discussions and develop a Plan of some sort. And some more loans of some sort, which I figure comes from America and I am an American and so it is my money they are loaning to deadbeats who have not paid a dime on any loans yet. How brilliant is that? Remember what I just said in the hysterically screeching paragraph above? The part about idiot-savant jackasses with college degrees? Well, if that anti-smoking crap was Exhibit A, this is Exhibit B, with the "B" for "Bigger."
And you may go to sleep tonight secure in the knowledge that, despite all good intentions, it will not work this time, either.
How do I know that it will not work? I mean, besides that part where these deadbeats have never paid so much as a stinking dime on their debts, lo these many decades? I know it will not work because once a society gets slowly corrupted through the rivers of money flowing through a long boom, the system sort of grows evermore weird and evermore cemented into place. Any alteration of that system means less income to some guy who knows something about, oh, I dunno, let's say, you. And how anxious are you to have your petty corruptions exposed? How about your serious ones?
And all the mistresses and boy toys and hookers and accountants and bookies and drug suppliers and Mercedes dealerships and party caterers and body guards and "yes men" and armies of flunkeys have to make a living, too. They have families of their own!
And take that new villa you just bought for your girlfriend, for instance. You know. That cozy little place out of town as a little retreat from the fat old wife and the screaming brats. Well, do you think it paints itself? Huh? Do ya? Do you think that groceries magically appear in the kitchen, and the grass mows itself? All this stuff is expensive, and after a long boom the spidery webs of interconnections of this dysfunctional stuff literally BECOMES the economy. It CANNOT be simply displaced by some stinking IMF eggheads with their stinking gringo money and their stinking demands, "Do this and do that!" Ha! I laugh at our Yankee imperialist hegemony!
And where did all of this rampant, expensive corruption come from in the first place? From the flood of money. And where did the money come from? The IMF and World Bank. The same guys who are now arranging to give them more money. Hahahaha!
So, stamping out corruption and healing a sick society becomes a task of making all parties accept lower incomes. See how easy it is?
- Inventories are building, and this is where the industrial output has been going. It has, therefore, not been going into sales. How much longer do you think that businesses can keep merely building inventories that are not being sold?
Maybe longer than we thought. Ford Motor Company has said that, yes, the lose money on each car they sell, but those losses are less than the large losses that they would incur if they just stopped making cars. What a business model, eh?
- Martin Weiss says that the soaring federal deficits, which he posits as around $800 billion already, will cause interest rates to soar. Will they? We already see that the government issues debt, the banks buy the debt, and the Fed buys it from the banks with money it creates out of thin air, thus extinguishing the debt. How does this make interest rates soar? If anything, it should cause interest rates to fall, as there is so damned much contrived demand that the price of the debt soars, and thus makes the effective interest rate plummet. As they have been.
So interest rates should not be expected to soar until we start seeing the price inflation that always follows monetary inflation. And maybe not even then. Perhaps it is even possible for the Fed and the banks and the foreign central banks, working in some grand collusion, to keep this whole wheeze going, and at such levels that interest rates will forever remain low, even in the face of price hyperinflation! Who's gonna stop them? You? Hahahaha!
- About half the states are considering tax increases to ameliorate their dire financial condition. You know, the fate caused by their wanton profligacy during the whole last forty or fifty years, where they created more and more perpetual programs out of artificially-enhanced revenues. The temporarily elevated revenues that were caused by those selfsame decades of deficit-spending by Congress. Remember now?
So, to sum up, they are raising taxes to combat a secular economic downturn. Perfect. Just absolutely freaking perfect. I guess a shrinking government is another example of deflation that we just can't bear, because the pain is too, too high.
To the end of sucking more money out of your wallet, the states are moving toward taxing Internet sales. It was bound to happen sooner or later. It is probably just a coincidence that it is happening now, just in time to make the economic downturn worse.
This is how government spends it's considerable time. Arrogant and smug jackasses perpetually spending half their time coming up with some wonderful new ways to put money into the pockets of their little friends, and the other half coming up with new ways to get more tax money out of the hapless citizens.
- Greenspan noted in his appearances before Congress that investors in the GSE's perceive, erroneously he rightly points out, that the GSE's have an implicit guarantee of safety. Thus, the interest rate that they pay is correspondingly lower, thanks to the safety of a government guarantee.
This may be, in point of law, wrong, but who among us really believes that the government would NOT bail out the GSE's? Anybody? Raise your hand if you think that just because it says in the law that there is no government guarantee on, say, Fannie Mae debt, that bankruptcy of that entity would NOT elicit a bailout response from the government? Hmmm. I see from the show of hands that only the people who just fell off the bus from another planet are able to suppress the natural instinct to giggle at something so ridiculous. But even THEY don't believe it, either. Ugh.
--- Mogambo Sez: Blatant market manipulations like the ones we are seeing now can only be temporary. The stupid little charts and statistical irrelevancies that I compile show that the market will soon be heading down, and indeed should have gone down a long way a long time ago.
How does that pithy George Soros quote go, you know, the one about how to make a lot of money? Something like "Identify the trend whose premise is false and then bet against it."
The Mogambo Guru Lives!
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.
Let's see -- 50% of 8000 on the Dow would put it right at -- 4000!
Comments and opinions welcome.
Richard W.
Back in the late 80's I remember reading some stock analyst in a big financial magazine predicting the DOW would be at 4000 in 2000. Guess he missed by a few years.
BTW: People who hate our currency are free to convert every cent into gold. Go for it and stop whining already.
One out of two isn't bad. Not a word about helicopters. If you haven't read the GURU before, you're in for a treat.
Richard W.
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