The Mogambu Guru On The Predecessor Of Deflation >> Inflation

Wednesday, December 21, 2005

Maybe you have not noticed it, but Santa Claus has arived early this year. First he brought us gold prices at a 24 3/4-year high, and now, just right in time for you to get a last minute present for your loved ones he presented us with gold prices below $500 an ounce. Don't miss out. This could be the last opportunity to pick up gold that cheap - and it won't come much cheaper than that. Looking at all the problems the Mogambo Guru shines a light on in this week's column I am quite confident that Santa Claus will not be able to bring gold that cheap again in one year from now.
No Deflation Without Inflation
by The Mogambo Guru
In case you didn't see the news item and accompanying photo in your local newspaper, my mouth was hanging open in stunned disbelief and my eyes had this glassy, distant look as the police were jamming me into the backseat of a police squad car. The reason for their rudeness was that things are getting so weird in the world of economics that The Mogambo had one of his "spells" of Mogambo outrage (SOMO), and there was an unfortunate "incident", and the police thought that maybe some mental-health professionals could help me, but I'm screaming at them "They are destroying your money, you idiot fascist bastards! And you think that some head-shrinking quack is going to change THAT inescapable fact, you dimwit Gestapo morons?"
I am not sure what it was, specifically, that set me off, but for one thing, the trade deficit goes up to a new record, yet the stock market goes up! Weird! How about that the Federal Reserve raises the Fed Funds rate by the 13th consecutive quarter-point, and yet the stock market goes up! Weird AND weird! Hell, even more bizarrely, the bond market goes up, too! Weird weird WEIRD! Meanwhile, back at the ranch, the dollar is rolling over while interest rates are being raised by the central bank, and yet some knucklehead foreign bozos are increasing their demand for US bonds, thus driving price up and the imputed yield down? And then they get hit with an additional whack from the fall in the value of the dollar? And yet they keep on buying US debt? This is now totally beyond weird! This is spooky!
Flat Yield Curve
And how about the 2-year T-note yielding a quarter-point above Fed Funds rate? This is insane! The 10-year T-bond is yielding almost the same? This is insane, too! The yield on the 10-year bond is less than the freaking Discount Rate, which is the rate the banks themselves pay to borrow money from the Fed! I shake my head in disbelief, and my ears comically go flappa-flapp-flappa as they slap against my head.
These are the kinds of crazy things that makes a guy go "I gotta get gold and get away from this insanity! And get away from my wife and kids, too, now that I think about it!" And then as you are packing your bags you get rattled further when you see that the action in gold is getting really weird, too! And the lease rates for gold! Maybe it's just me, but the way I figure it is that since I am the suspicious and distrustful type, which comes at the end of a long life (which is, in itself, just a long series of being screwed over by hucksters, crooks and liars), my sensitive Mogambo weirdness sense (SMWS) is highly attuned to things that are the least bit weird, and right now loud alarm bells from the Mogambo Weird-O-Meter (MWOM) are clanging and clanging and clanging.
You can take it from me and the whole rest of human history, that when things get really weird like this, something bad happens that you are not going to like. For example, all last week my family was real nice to me. Naturally, I am suspicious. Then, sure enough, on Thursday, I accidentally bumped the rearview mirror on my car and it broke off!
Today Debt To GDP Ratio Is 350%
But things will continue to get weird, as Puru Saxena at The Daily Reckoning answers that age-old question "How much debt qualifies for the use of the term 'ridiculous' "? Well, Mr. Saxena figures "The total American debt is roughly US$40 trillion whereas the size of its economy is around US$11 trillion. So, the debt to GDP ratio is over 350%!"
In 1929 It Was 260%
And I will note, for the record, that the debt-to-GDP ratio at the top of the stock market in 1929 was "merely" 260% of GDP, which was, until today, America's worst example of rampant financial stupidity. But we stupid Baby Boomers and our grubby, mutant children have set a whole new world record in financial stupidity and insanity.
Nothing Has Risen Forever
And, in keeping with that level of ignorance and mental illness, we now have Ben Bernanke as the new head of the Federal Reserve, who actually thinks that he can engineer (in "cooperation" with the Congress, I suppose) a permanent prosperity based upon constantly-rising asset valuations? Hahahaha! I can hardly believe that we Americans, who think that we are so smart and so educated and so sophisticated, could possibly believe that such a thing was even possible! Hahaha! Buy stocks and they will always rise? Buy bonds and they will always rise? Buy houses and they will always rise? Hahaha! But my charming and mirthful Mogambo ways (CAMMW) are suddenly silenced. A look of cold, dead seriousness gleams from my blue steel Mogambo eyes (BSME) and you wonder to yourself "My goodness! What has happened to The Mogambo?" What has happened to The Mogambo is that he has remembered what happened in all the rest of the history when some idiot country tried that inflation crap (and they all did); it did not work then, and the result was catastrophe. And it will not work now, and the result will be a bigger catastrophe.
I had planned to use this space for another official Mogambo rant of outrage (OMROO), about, you know, the Federal Reserve and Congress, and how they are murdering our money, and, by extension, us. And, by further extension, everybody else, too. But then I would get all worked up, angrier and angrier, more and more, finally escalating into senseless, mindless, gratuitous use of childish, gutter profanities at high-decibel volumes. And nobody wants that, especially little kindergarten children who, it turns out, get REALLY freaked out by it, and there's suddenly a lot of screaming and crying and pooping in one's pants, and it's a real ugly mess, and then the children start screaming and crying and pooping in their pants, too. So instead, I think to myself, "Perhaps young grasshoppers would be better instructed by a genteel and refined approach!" Always willing to take the easy way out, I graciously turn today's lesson over to Robert Blumen on LewRockwell, and his essay entitled "Bernankeism: Fraud or Menace?"
For The Time Being, Buy Commodities
I admit that I almost didn't read it because I already knew the answer; Ben Bernanke is menace. And I assume that you, likewise, skipped over it, too, after seeing the trick question posed in the title, and thinking to yourself, of course, "Bah! Any child can see that the man will destroy our money with his insane theories! But knowing that, I can personally prosper, making plenty big money (PBM), by buying gold, and buying silver, and buying oil, and buying damned near any commodity that you can name! And then I will be rich, rich, rich! And you shall be poor, poor, poor, and then The Mogambo and I will look out through the bullet-proof windows of our lovely mansions and watch you, in your filthy misery and squalor, rooting around in the dirt for bugs to eat, and we will laugh at you, and bellow 'Welcome to fiat money hell, you morons!'"
The class is suddenly silenced by my outburst. I am embarrassed, and take my seat as Mr. Blumen calmly goes on to say "The first principle of Bernankeism is that it is better to prevent deflation than to attempt a cure after the disease has set in." Hahaha! What a chump! Not only do they now teach this idiocy in our schools, but Ben Bernanke was the chairman of the damned economics department at Princeton! My hollow laughter drips with contempt, which is not as easy as it sounds.
Deflation Only Comes After Inflation Has Killed Our Savings
If Mr. Bernanke truly DID understand economics, then he would have known that the REAL "first principle" of economics is that it is best to prevent the inflation that LEADS to the deflation!! And note the use of the rare "double exclamation point" to denote particular emphasis, as befits its importance in economics.
Likewise, commenting on other areas where I also have no competence whatsoever, it is likewise NOT true that the First Law of Holes is "When you find yourself in one, stop digging." The REAL "First Law of Holes" is "If you don't want a hole, don't dig one."
But this is not about holes, unless you think Mr. Bernanke is a real first-class hole, if you get my drift, and if you don't, then you soon will, as Mr. Blumen goes on to write, "Governor Bernanke and his accomplices are obsessed with something known as 'the zero bound problem.' " I interrupt to explain, in case you ain't heard, that one of the new buzzes in the lucrative profession of "economics masquerading as a science" is the obvious notion that you can't loan money at less than zero percent interest. This is, and always has been, obvious: There is nothing cheaper beyond "free." This, then, is the "zero-bound problem." For some reason, this is now a big freaking deal (BFD) in central bank circles.
Proving my point, he goes on to say "Eight of the fourteen papers and speeches that I examined deal with this problem either as their main point or in passing. Bernankeism advises the central bank to avoid the zero-bound problem by creating a constant state of pleasant and benign inflation of around 2-3%." As I read that last sentence, all I could hear was a sizzling sound as my few remaining brain neurons overloaded. So I am not sure about this next part, as the phrase "pleasant and benign inflation of around 2-3%" sort of made my brain freeze up ("urrrkk!") as my puny little Mogambo mind (PLMM) cannot accept the idea that anyone, ANYONE, in their right mind would even think, much less say, much, much less to say in from of witnesses, much, much, MUCH, MUCH less to declare it to be monetary policy, that a constant amount of price inflation, OF ANY AMOUNT, is even benign, must less pleasant!
Working myself into a Mogambo frenzy of outrage (MFOO), I throw the window up, lean out, and shout "Stop the presses, America! I, The Mogambo, declare that anyone who would proclaim such an asinine thing is a dangerous lunatic!" By this time I am screaming like a wounded banshee in my rage, and neighbors were soon crashing loudly into the room to wrestle me to the floor and stuff smelly rags into my mouth, trying to get me to stop screaming, but which only made me scream louder! Arrgghhh!
And another thing that I was screaming about is how Congress, the biggest bastion of butthead bozos in the history of the USA and an embarrassment to themselves, their families and all of us, just sits there as this horrid little man is telling them that we are going to have constant, simmering inflation, the kind where, little by little, month by month, prices creep creep creep upward, but your income does not. And every month you have to borrow more money, or give up something else, or cut back on something else, or reduce your consumption of something else, and after awhile it starts adding up and up, and then one day you get down to rationing basic necessities, and you get angry and scared, and then angrier and scareder.
Wage Gap Leads To Profit Bubbles
But we are not here to talk about how I am an angry coward, as I am tired of hearing it. And while we are talking about it, I am also tired of hearing how I am an ugly idiot and I stink, too. So I quickly veer back to the subject and say that Ravi Batra, who is an economics professor at Southern Methodist University and author of terrific doom-and-gloom books with terrific titles, goes beyond the anger and cowardice thing in his new book entitled "Greenspan's Fraud." Anyway, he ties this all in with what he calls the Wage Gap, which is the difference between the rise in wages versus the rise in productivity. Here Mr. Batra takes it up and says "According to this theory, the rising wage gap creates exponential growth in debt, which in turn generates an exponential rise in profits, leading to the share price bubble. Eventually, debt growth slows, so the demand-supply gap, thus far hidden by the debt mountain, comes to the surface; profits plummet and stock markets collapse."
And you can tie that in with Bill Bonner of the DailyReckoning when he correctly notes that borrowing for consumption is the equivalent of a free lunch to businesses, as everybody gets to sell stuff to people without first having to pay wages to those people as workers! Money and sales come out of nowhere! False profits!
Printing More Money Has Never Helped Out Of Problems
But none of this is in keeping with the current theory of economics, which is preposterous through and through. So what is this bizarre new economic theory that allows ever-increasing asset values? Mr. Blumen explains, "Dr. Bernanke accepts Milton Friedman’s theory of the Great Depression. In the Friedman view, a contraction of the money supply brought about by loan defaults and then bank failures turned what would have been an ordinary recession into the Great Depression. This catastrophe could have been avoided had Fed inflated sufficiently."
Wow! See how easy this stuff is? All the government has to do, see, is make so much money available, see, at such low interest rates, that (are you following me so far?) people can't stop themselves from borrowing the money and goosing the economy by producing and/or distributing the goods and services being bought by the government itself! There is, literally, no upper limit on the amount of debt that people can, or will, carry!
The Hard Part Will Be To Reduce Government Spending
I am laughing! Hahaha! I laugh because, and this is the important part, this is freaking insane! How can anyone possibly think, even for a minute, even for a second, even for a teensy weensy micro-second, that an economy that has grown because of government spending and accumulation of massive public and private debts is going to, one day, magically, be transformed into one that does NOT depend on government spending and ever-higher debt loads? Hahahaha! Then where is the money going to come from, moron? Hahaha! I am laughing my big fat Mogambo butt (BFMB) off here! Hahaha! Stop! Stop! My sides are hurting from all the laughing! Hahahaha!
But, wiping the tears from my eyes, I get suddenly very serious and note that Ben Bernanke, the next chairman of the Federal Reserve, actually believes this, this, this (pause for dramatic effect) stupidity! He actually does! And he is the next a chairman of the Federal Reserve! I keep repeating this because my mind refuses to accept the fact that we Americans, who like to pride ourselves on how smart we are and how wonderful we are, would do something so, so, so, so (pause for another dramatic effect) incredibly so, so, so (a crescendo of a pause) stoooOOOOooopid! The mind screams "Noooooooo!"
Unconventional Measures? Like Printing More Money?
Mr. Blumen doesn't want to answer my question, but instead goes on to send me screaming from the room by explaining "The third principle of Bernankeism is the necessity of 'unconventional measures.' The reader of the Fed's papers and speeches will find a series of increasingly exotic plans for the dollar. From beginning to end, these methods range from the merely unsound to the bizarre and terrifying." Now, I don't know about you, but being a real coward and crybaby little wuss, I don't like things that are classified as either bizarre or terrifying. So with real dread in my voice, I timidly ask "Like what, dude?" Well, how about, for example, "money rains", whereby the Fed would "give money away either through directly disbursing currency to the public or by disbursing it through the banking system." By this time I am sure your heart is beating like a trip-hammer, boom boom boom at the very thought of such monetary sinfulness! Nobody ever needs to work, because the government will give everybody money to spend!
Never Stop Consuming And Don't Even Think About Saving In Order To Save The System
Then, with this wicked little grin on his face, Mr. Blumen goes on to say that another scam is "to make money pay a negative nominal interest rate, by imposing some type of 'carry tax' on currency and deposits. A tax or fee on Reserve deposits of 1 percent per month, for example, would mean that those deposits, in effect, pay a nominal interest rate of roughly minus 12 percent." What?!? And note the use of two different punctuation marks, where I was trying to be clever and failing miserably, to indicate a mixture of anger, shock, disbelief, anger, fear, anger, terror, confusion, some more anger, and the vague, tentative beginnings of what appears to be jock itch.
But the idea is that you would spend all your money in a fit of consumption, rather than saving it, because you would be paying a 12% tax on it if you did! My heart is slamming into my ribs at the very thought that anyone would actually advance such a terrifying idea, much less the next chairman of the Federal Reserve.
Bernanke Will Do Wonders To The Gold Price
So, is it any wonder that I strongly advise you to buy gold? And is it any wonder that gold is doing so well? And is it any wonder that gold will CONTINUE to go up in the face of this Bernanke thing?
And it is not just us! It is everybody! Hell (and you can tell from the plaintive cry in my voice that this is horrifying), damned near every country in the world is creating lots and lots of excess money and credit, too! Dan Denning of Strategic Investments newsletter hears me screaming about this, steps out into the hall and shuts me up by saying "Gold is rising because of the fundamental mismanagement of the dollar by Alan Greenspan. And to be fair, in the club of central bankers who destroy the purchasing power of their currency, Alan Greenspan has a lot of company. Their respective tactics and strategies might differ, but the result is the same: decreased confidence in paper money and an increased appetite for gold."
And that is why commodities are rising in price and will continue to rise in price for a long, long time.
So, in light of all of this, it is a given that things are being manipulated by the government, and you can bet on it. So much money is in real danger of being lost, so much money that the entire economy of the world would implode, with bankruptcy and ruination up and down the line, that you can bet your sweet patootie that Congress and the Federal Reserve are pulling every string and are twisting every arm. To expect otherwise is to make The Mogambo laugh at your naiveté, which is a French word that implies ignorance, sort of like how Mogambo is a word that implies "loudmouth know-nothing lunatic stinking pig." Perhaps Paul Hein on LewRockwell.com said it best when he said "To bemoan the manipulation of fiat currencies is to bemoan the fact that north is opposite of south. How could it be otherwise?" And it just ain't currencies and interest rates, dude! It's also stocks! And bonds! And gold! And houses! Everything, dude! Everything!
Bet Against A Trend Based On False Premises
Can it last? In the original Spanish, "No freaking way, Jose!" So can you make money on this knowledge? Again, in Spanish, "Si!" How? As George Soros once so famously said, "Identify the trend whose premise is false, and bet against it."
And the trend away from gold and the gold standard was a trend whose premises were false, and those who bet against it made a lot of money so far, and are going to make a LOT of money in the near future. And the trend to have central banks constantly manipulate the markets to bail out its friends is ANOTHER trend whose premise is false, and again it leads directly to how gold, cold, hard gold in the hand, is the only friend you have.
A lot of people are suddenly somewhat distrustful of ETFs and other gold-storage deals since their investment in the gold stash may, or may not be, unallocated. In short, owning unallocated gold is when the investors do not own individual bars of gold, but the sponsor is the actual owner of the gold, and the investors own shares of the entire collected stash of gold. Therefore, the investors are not owners of gold, but are creditors.
Bill W. sent me a relevant paragraph from a description of gold EFTs, in particular, the Gold Trust. "The Gold Trust's gold will be stored at a variety of vault locations by the custodian and its sub-custodians, which creates some risk of fraud regarding the actual existence of identified bars of gold. This risk does not exist if an investor takes physical possession of gold, which is why the more paranoid gold bugs reject ETF gold as a true investment in gold. Anybody not willing to accept this risk should avoid Gold Trust units."
He did not mention me by name, for which I am thankful, but being the epitome of distrustful and paranoid, I naturally take a dim view of anything that requires me to have trust in someone. So, is an ETF or other gold custodianship deal a good place to put ALL your money? No. Some money? Sure! A little here, a little there is the essence of diversification.
Debt To Money In Circulation Ratio Is 600%
Did you ever wonder how much money-denominated debt there is compared to the amount of actual cash? Well, if you have, then Robert Prechter is the guy for you, as he says "Every bank account is an I.O.U. for cash, not cash itself. Needless to say, the $64.3 billion in cash in U.S. bank vaults and at the Fed is insufficient backing for the 38 trillion dollars worth of dollar-denominated credit outstanding, not to mention at least twice that amount in the implied promises of derivatives. The ratio is about 1 to 600. This ratio has grown exponentially under the easy-credit policies of the Fed and the banking system."
So, for every dollar of actual money, the banking system has multiplied it by 600? Hahaha! The things we let banks do! Hahaha! No wonder we are doomed!
On a slightly different topic, I note that Mr. Prechter agrees "Von Mises was exactly right: 'There is no means of avoiding the final collapse of a boom brought about by credit expansion.'"
America Is Exhausted
Lyndon LaRouche, interviewed in China's People's Daily, does not mention either Mr. Prechter or me, but obviously agrees with us, as he is otherwise quoted as saying "Today we Americans have been exhausted. Our infrastructure has not been replaced. We have not replaced our power stations. Our railroad system is dead. Our economy is dead, in whole parts. Our people don't have the skills they had 20 or 30 years ago.
"We are losing our water systems. We're losing our power systems. We're losing our transportation systems. We're losing our health-care systems. All these physical things on which the prosperity of the economy had depended are now worn out. They're gone. So we are disintegrating. Europe is disintegrating. We are a lost nation. We are a failure. Europe is a failure, in general. So the world economy has failed. We have a tremendous amount of financial debt that we can never pay. Our rate of production is collapsing. And therefore we are at a point where the system is going through a systemic collapse. This is the biggest collapse in modern history, it is now occurring. And the idiots just deny it. They just deny it."
How the hell did we get to this point? Well, I knew you were going to ask me that question, so I was going to launch into a long and boring discussion about the horrors unleashed by the Federal Reserve, but at the last minute you have been saved by Mr. LaRouche, who sums it all up perfectly when he said "It's collective insanity, mass insanity. It's cultural insanity." In case you are wondering how I would grade this, I would take off some serious points for not using an exclamation point. I mean, cultural insanity does NOT call for an exclamation point? Hell, even he goes on to say "It's how whole empires disappear. Suddenly it collapses." Again, no freaking exclamation point!
Retirees Are The Worst Off Victims Of Inflation
Since I am always on the lookout for examples of how inflation is a terrible thing, Gary North of Reality Check newsletter gives us a different way of looking at inflation, and writes that "the price tag for a new Rolls in 1958 was $13,550."
Hahaha! But this is not about the headaches of the rich, but about how inflation was such a killer-diller. He writes, "If I were going to do a book on the Federal Reserve System, I might consider this headline: 'At 5% inflation per year, the loudest noise in this fiat money system is the screaming of widows and orphans'." Not to mention retirees on fixed pensions, other annuitants, and the people who have NO income. Now all their plights are made worse by inflation.
Central Banks May Stop Selling Gold
And maybe it is not just us paranoid whackoid lunatics out here who are accumulating gold, because GoldWatch newsletter says that "we can now confirm the Germany’s government as well as its Bundesbank President does not wish to sell gold whatsoever! This has to influence other Central Banks, who were previously inclined to sell. The tide is turning!"
I had an interesting email from a guy who says that the drop in Consumer Installment Debt was due to write-offs at the banks, as all those overly-indebted people rushed to declare bankruptcy before the laws changed to make it harder to walk away from debts. And more expensive. An interesting tidbit, methinks.
Chris P. says "I saw a good bumper sticker yesterday. It read, 'Stupid SHOULD be painful'. " Hahaha! It usually is! But if you are talking about being stupid about economics, then trust me, Chris; it will be painful! Very! And for the guys who are the most stupid of all (we Americans) it will be the most painful of all! It's just that you can't get all of that on a bumper sticker.
S&P Is Overvalued
If you are starting to think that maybe the stock market is the least bit enticing, then listen to John Hussman of the Hussman Funds, who has taken a look at what happens to stock markets after periods of the Federal Reserve raising or lowering interest rates. He writes "when favorable valuation meets favorable market action (even if you restrict market action to Fed-controlled rates only), you get some amazingly strong outcomes." In this case, "favorable valuation" means a price-to-earnings multiple of less than 12. The P/E ratio for the SP500 is currently over 19.
"There is, of course," he goes on to say, "a flipside to that story. If you look at periods where the price/peak earnings multiple was 16 or higher on the S&P 500, the final rate hike of a tightening cycle was actually associated with losses on an annualized total return basis, averaging -7.18% over the following 6 months, -9.94% over the following 12 months, and -5.87% over the following 18 months." So where are we now, and should you be putting money into the stock market? "Given the current multiple of 19 times peak earnings on the S&P 500, this would be the relevant set of comparisons even if the latest rate hike was the final one." Which it won't be, which means that interest rates are still heading up, and so this whole discussion about what happen at the end of rate hikes is waaayyyy premature. But what is the essential Mogambo lesson (EML) to be learned? Buying stocks at these idiotic high prices is almost certainly, almost assuredly, almost definitely, almost guaranteed to be a bad, bad idea (BBI).
Buying Bonds is a BBI
And yet people buying bonds at these absurdly low yields is another BBI, because when rates rise, bond prices fall.
And if you want to share a recurring Mogambo nightmare (RMN), keep thinking about how everyone's retirement fund accounts are almost certainly buying common stocks and/or bonds with every tick of the clock. Ugh.
****Mogambo sez: No news is good news, and there is nothing new in the Mogambo Retirement Portfolio To Amazing Wealth (MRPTAW); keep accumulating oil, gold and silver, and things related to them. The recent declines in prices is just a benevolent Lady Luck being very nice to you, so that you can leisurely walk over and pick some of these things up at bargain prices. Don't be a chump. Do it!

The Mogambu Guru's straightforward writings are made possible by The Daily Reckoning.
Richard Daughty aka The Mogambo Guru is general partner and COO of the Smith Consultant Group and can be emailed at scgcjs@gte.net.

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