And I thought I was a doom & gloomer ...
dailyreckoning.com
A Corrupt, Manipulated, Bizarre System
The Mogambo Guru
- The Fed took a little breather this week. The Treasury has other ways to finance the spendthrift Congress, since Congress has perversely prevented it from just going out and sopping up any old amount they want, by not passing an increase in the debt limit. The limit is $5,950 billion, and they stopped borrowing at $6,019 billion, making a mockery of the limit. They have intercepted government employee retirement monies, among other sources of money. And, apparently, the banks, as they continue to plow money into government debt. Last week's total was a surprising $15 billion.
- As an asset, banks are sitting on a collective $890 billion of government debt. This is 88% of the total that they have in commercial/industrial loans outstanding, which used to be the purpose of banks, and 49% of real estate loans on their books. In fact, government debt is 22% of ALL assets that the banks have accumulated. If this is not incontrovertible evidence of an incestuous, market-rigging and despicable conspiracy between the banks, the Fed and the government, nothing is.
- Since the beginning of 1998, about four years, total credit market borrowings have increased $8.625 trillion, or 40%, says Doug Nolan. If that amount is forty percent of the total, that means that total credit market borrowings are $22 trillion, more than half of the $40 trillion net worth supposed to be extant in the USA.
- Greenspan is careful to speak with that patented cautious optimism of his, and reiterated that the economy is still slowly chug-chug-chugging along, with fresh green shoots of rosebuds blooming here and there. But tax revenues to the IRS last year were down by a ninth, and even more so this fiscal year. And state revenues are down about ten percent, too. These tax revenues all spring from economic activity. So how can economic activity be dramatically slower with an economy that keeps "growing?" The answer: it all depends on how you measure it. The political analogy was Clinton's highly educational testimony on how you define "is."
And there are probably, let me just total them up here, 6, 49, plus 3, carry the 1, about a jillion ways to show "growth" in an economy.
For instance, if your son's lemonade stand suffers from declining sales, his income will go down, and his little economy will go into a recession. Awww. Unless you, as the loving father, reach into your wallet and give him money. In the parlance, a "government transfer." If you do, then his economy, when measured by income, "grew!"
Your son can easily pour glasses of lemonade, store them in the garage, and chalk it up as "inventory." The economy, as measured by production (glasses of lemonade poured) would thus "grow." If he hired his younger sister to tote them into the garage, the economy would "grow" if measured by employment.
Or you can just buy glasses of your son's lemonade and pour them down the drain. The economy thus "grew" again, by virtue of higher sales. Take it back out of his allowance (taxes).
But note that not one sale was actually made that benefited anybody by satisfying a want or need. Yet, the economy "grew."
- The Daily Reckoning website offered the intriguing argument that gold would be going for around $6,000 today, adjusting for inflation from the day it hit $850 back in 1980. Actually, that was just the blowoff-top, "spike" price. In more leisurely terms, it spent the next two years pretty much around the $500/oz mark. Still, that would make the current price of gold worth an impressive theoretical value of $2,300 per ounce.
That statistic from DR also implies that average inflation has been compounding at roughly 9%. The Dow was around 900 then. So inflation in the Dow has been compounding at roughly 11% compared to where it is today. In light of that, then, gold would seem to still have price appreciation potential even at $6,000 per ounce.
And probably in a much shorter period of time, too. How long does it take for gold to make up for thirty years or more of calculated, arrogant, market-manipulating, central bank-created disrespect as they attempt to invalidate Gresham's Law? This is the verified notion that "bad" money pushes out "good" money. The good money is hoarded and not used in commerce, while bad money is never hoarded and is used.
Or, in particular, bad fiat money pushed out good gold money, the linchpin of 3,000 years of economics. The banks and governments colluded to hoard gold or outlaw citizens owning gold (both, in effect, driving out gold, the good money) and substituted credit-created fiat currency. The "pretty paper" kind of money we all know and love.
And there is no mention in any economics books anywhere I have ever read that goes on to explain how bad money ends up being anything other than catastrophic. That's why it is called "bad money." What was that alarming statistic I alluded to above? The dollar has lost 95% of it's value since the advent of the Fed and their fiat money? And isn't losing value the very danged-blang definition of "bad money?" Look up "bad money" in the dictionary, and you'll see a picture of the US dollar. What? It doesn't? Well, it should.
The awe-inspiring part of our story is that the machinations of this scheme, this, this, what do the British call it, a "wheeze?", was to try out their Grand Unified-Field Economic Theory. This addresses the complaints of the neo-Keynesians and their loathsome fellow-travelers, in that it was not forced down the throats of everybody. People could still go someplace in the world to escape bad money, and they did. So, the experiment to devise and maintain a global Big Government Economy goes like this: all major countries of the world go to an activist central bank format, with everybody using fiat currencies, with lots of international scheming and hatching secret plots to make it work. And lots of police power to enforce it all. How charming.
The rallying cry was that it was time to show the world that Keynes himself was wrong! You CAN go farther into debt indefinitely, accumulating infinite amount of debt, to provide wonderful benefits to the people, without danger! It's time to prove the Austrian economists were wrong! Time to vanquish those pesky Quantity Theorists! And bury Gresham's Law once and for all, just for good measure! We HAVE conquered the business cycle through the magic of appropriately brilliant fiscal and monetary policy, and we dance on it's grave! We are GODS! GODS!!
But Nature has a way about her. She always sides with the hidden flaw. Even Keynes himself admitted that the debt incurred during the stimulus of deficit-spending MUST be all paid back as soon as times got good again. Keynes HIMSELF said that! The Moses of the Big Government Economy crowd, who brought the glorious Salvation Through Deficit-Spending down from the mountain to us!
There is no economic theory, then or now, anywhere in the world, ever, that postulates the profound idiocy of constantly increasing debt and not paying it back. And that is why this intellectually-bankrupt Grand Theory has never worked and never will.
But it so popular because it gives powerful government people a chance strut around flexing their muscles, extorting big money from constituents for "face time," impressing the locals back home and rewarding their greedy friends with the fortunes that can flow from such awesome powers. And making a few nickels for themselves, too.
Thus, we already have a six trillion dollar Federal debt. And what is the number of employed? 135 million, or a debt of about $44,750 per worker. What is the population? 275 million, or $21,818 per man, woman and child in the USA.
What is the interest on this debt? At a paltry 5%, it is $300 billion per year, or a nice $1,090 per man, woman and child. If you are married with two kids, you owe $4,360 in interest this year. Well, actually, the government will just take it through income taxes on you and every business. The businesses, in turn, will charge more for their output of goods and services (higher prices) to get it all back from you. And next year it will be more. This is how cost-push inflation gets institutionalized.
And that doesn't even count the trillions of debt in the Social Security boondoggle, huge mortgage debt, huge revolving debt, huge financial debt, etc. The people of America did not get to be the spendthrift, debt-o-holic jackasses they are by accident. It merely reflected the pattern-setting of four decades of Congress installing a Big Government Economy and a huge, global network of central bank arteries to constantly feed the cancer with money.
This is why The Previous Big Plan is not working now. It is the reason why it is not ever going to work, even in a future far, far away. Okay, maybe in a parallel universe it will work. But not here.
And that is why gold may go to six grand an ounce. Or maybe much, much more. But it will almost certainly not again go down for a long, long time.
- The increase in the limit on the nation's credit card is nearing passage. This dismal statistic notes the inadequacy of a paltry six trillion dollars of credit.
The good news is that the blatant fraud of a "budget surplus" has now revealed, once and for all, that there never was a surplus to begin with. It was all just more government lying and deceit. Wasn't it H.L. Mencken who mused about the voters deserving to get what they voted for "good and hard?"
- There was a huge, huge jump in SP500 open interest. In fact, open interest on that index right now is at an all-time record level. The NYSE members have been prodigious buyers of shares for months. And the specialists on the NYSE suddenly stopped shorting. Then, as if by some miracle, the market took off Monday, and paid off a bunch of those bets. How convenient. Hmmm.
- That things are starting to jump as a result of the secret meeting of the world's big central bankers is evident. The only thing that can save them is inflation. And lots of it. Did you think it was just a coincidence that the big developed economies of the world have been simultaneously inflating their money supplies at rates that are four times their reported inflation? Ah, grasshopper, you have so much to learn. Why else would central bankers even meet in secret, Binky?
Something BIG has got to happen. And it has to be inflation, taxes or war. Those are the only three choices governments have when they approach the bankruptcy that they so richly deserve, since they worked so hard to make sure it happened. "A fool and his money are soon parted" goes the refrain. And Americans and their governments and their Federal Reserve all acted like fools for decades.
Consider the deliberations of the central bankers. If they go with inflation, their reputations and careers are toast. But war was avoided. If they go with war, it is always destructive of wealth, but it gives them cover. "It was the war!" you can almost hear them say. "We had it all under control, and if it hadn't been for the damned war, the world would be Utopian right now!" If they go with Congress raising taxes, then Congress gets the black eye and none of them will be re-elected.
What will happen in reality is that we'll get a little of all three. Parenthetically, bankruptcy is merely a tax of 100% on chumps.
- But the governments of the world now are now so big, so pervasive, and so expensive as a result of overspending tax revenues generated. All of that economic activity got taxed and taxed and taxed. And program after program after program was started with the money, and existing programs always got more, too. The list of recipients, aka parasites, grew too. It got so bad that we are were counting the growth of government spending as "zero" if it didn't grow faster than inflation! Talk about Orwellian NewSpeak! Of course, we look back on those halcyon days with fondness, as we are now back to looking at deficits "as far as the eye can see" and spending increases as multiples of inflation.
If the government had paid back the money it borrowed in bad times, then the debt of the USA would now be zero. If the damnable Fed has not artificially pounded down interest rates, making possible the colossal mal-investments, savings would be sufficient to float a few stinking bonds.
But as we all know, no money was ever repaid. So floating more bonds will now just enlarge the interest payments expense of the Treasury, already almost a third of the budget, and enlarge government some more. And with higher interest expense and falling tax revenue (temporarily offset by the money borrowed), what is now going to happen to the tiny slice called "discretionary spending" in the budget?
- Congress is considering legislation that would make it illegal for firms to incorporate in a low-tax environment, such as Bermuda. So much for "free enterprise," eh? Since America is the only country that pursues it's citizens everywhere they go in the world and demands payment of taxes on any income, it seems only a logical extension that the commissars in charge would make it illegal to escape the toxic business environment that they created. The East Germans commissars erected a real wall out of concrete and steel to keep it's citizens captive. The American counterparts erect a wall to merely keep capital and money captive, so as to make it easily taxable and easily confiscated, but lets the citizens roam freely to make more money. So what is the difference between the East German socialist state and the American neo-socialist state? And with Ashcroft and Congress arranging for more and more secret police powers, the parallels become even more eerily similar. But more and more police powers is like the lid that keeps a frog from jumping out of the pot that is slowly starting to boil.
- One result of the lack of investment and the deluge of Fed money is that the banks are in no need of money. Thus, they have slashed the rates they pay depositors. Since the Fed has made it easier for banks to get all the money they want just by asking for it through the discount window, what need do they have for deposits anyway, eh? "We don't need no stinking deposits. We're Federal Reserve banks!"
- The anger level is rising, as more and more people are realizing that trusting a stock salesperson tout was a disaster, and are suing to get their lost money back. Putting the money under the mattress would have yielded better returns for the last four years running. And to compound the misery, they all stayed away from gold at the snotty, sneering advice of these selfsame touts. So, bottom line, for years they were steered away from an investment that made a lot of money and were steered into ones that lost money. Nice going. And they are still doing it! Hahahaha! "Money managers" is what they call themselves. Hahaha! "Money managers!"
- Retail sales were off a little last month, and the Michigan Consumer Confidence tally went a lot lower. The opinion-spinners cautioned that maybe, just maybe, the consumer is retrenching a little. Gosh, ya think so? You mean, now that the cumulative per capita debt is far, far beyond anything that has ever existed before, in a country that is more indebted than any country that has ever existed before, maybe the consumer is pulling back a little? Who'd a thunk it?
- So where is the next bull market going to happen? Someplace where there are lots of people with lots of available credit. Most Western-style economies, the US and Europe in particular, are burdened with citizens up to their collective necks in debt of every stripe, and thus have extremely limited buying power to consume any expanded output. That leaves Russia, China and their surrounding environs. South Korea started a craze of credit-cards, and look at them go!
- Steel has gone way up in price, as the protective tariffs of the Bush administration to protect American steel mills and their legions of voting retirees immediately translated into higher prices for steel. And as surely as night follows day, prices of durables must rise, since that factor of production went up so much in price.
Add in the nine percent hike in first-class postage, exploding insurance
premiums, higher taxes and fees, retirement plans that need vast amounts of money, etc., and pretty soon you are talking about huge cost-push price inflation.
But the inflation figures for the CPI came out Tuesday. The core rate is still perking along at about 3%. Government wonks are still calling this "tame." It is not. It is a continuing disaster. In three years, a "tame" three percent inflation will result in prices rising almost 10%. Tell the poor, whose incomes are stagnant, how three percent inflation per year, a ten percent decline in buying power in three short years, is so "tame." The definition of "decimated" is reduction by a tenth, and is a common euphemism for "catastrophe." But a decimation of purchasing power is "tame?"
- Of course, of all the frauds , the biggest is Social Security. Mark Nestmann, in an article on the Daily Reckoning website, says that the U.S. General Accounting Office has estimated that nearly tripling the combined Social Security-Medicare tax to 40% is the only way to avert bankruptcy.
He goes on to report that Alicia Munnell, an assistant U.S. Treasury Secretary during the horrid Clinton administration, is suggesting a 15 percent annual tax on pension fund contributions AND on the annual earnings of pension plans. Additionally, she wants an immediate 15 percent, one-time tax on all pension fund assets.
The Social Security boondoggle is such as it is because Congress likes to show how caring-yet-stupid it is, and spends its considerable time in coming up with new ways to take it away from the people who earn it and give it to people who do not. In the old days, this was basic Communism, with the large 'C.' Now it is just par for the course for the Big Government Economy. It dovetails precisely with the takeover of the schools by the execrable leftists, leading the gullible children in singing the Beatle's song of the ultimate in stupidity, "All you need is love." Ugh.
Mogambo Sez: The whole system is now so corrupt, so manipulated, so bizarre, that clandestine attempts to manipulate the market back up are not surprising. This is the perfect time to lay on some major shorts and buy more gold. |
