THE VICIOUS CYCLE
by The Mogambo Guru
Last week was pretty weird everywhere I looked.
The Fed was not called upon to issue any credit, and they
only dabbled in monetizing existing Treasury debt, the
usual $202 million or so, which is literally turning
government debt into money by printing up the money to buy
the debt, and then throwing the debt into the shredder.
Which is such a blatant fraud that I am embarrassed by the
ineptitude of the media who, although they like to run
their mouths about everything, cannot recognize a blatant
fraud when it is happening right in front of their eyes.
Uh-oh! It looks like I am ranting! Sorry.
But the big action was in the banks, as almost all line
items changed pretty dramatically. I was especially
enthralled by the revelation that they sucked up, like a
huge, demented vacuum cleaner, a $20 billion wad of
government and agency debt. The Treasury Department itself
only issued another $6 billion in new debt last week,
taking us, once again, to another new record, although I
have been reporting this "new record" thing for so long
that I am beginning to sound like a broken record broken
record broken record.
"The banks have buried themselves in government debt
certificates," explains Gary North. "They have bought
government bonds. They have bought what economist Franz
Pick called 'certificates of guaranteed confiscation.'
Eventually, the debt will be repudiated. There is a
universal long-run law of all government debt: creditors
eventually get skinned."
And, as far as the Treasury acting like profligate children
goes, it is not their most egregious effort by a long shot.
And speaking of egregious efforts, as I write this the
national debt has bumped up to $7.043 trillion, which is up
another $29 billion, and the week is just getting started.
"2003 will enter the financial history books," wrote Marc
Faber in the Daily Reckoning last week, "as the year in
which all asset classes - including equities in developed
as well as emerging markets, government as well as any kind
of corporate bonds, industrial commodities, precious
metals, real estate, and art - increased in value."
To be fair, although he used the term "value," nothing
actually increased in intrinsic value as far as I am
concerned, because assigning value to something involves
individual judgment about "worth." And then when people
hear we are talking about "worth," then that inevitably
brings up how worthless I am as a human being, and I get so
tired of hearing that over and over, day after day. But I
gotta admit that all those things he mentions certainly
increased in price. But if that is how you measure value,
then, okay, they all increased in value according to Mr.
Faber, and increased in price according to me.
And isn't the popular definition of inflation, and I am
asking you instead of actually looking it up in the
dictionary, something about how prices go, umm, up? And so
how come this blistering inflation in prices was not enough
to get the Fed to increase interest rates? How come the
year-after-year double-digit increases in house prices, or
stock prices, or the prices of oil, or commodities, or the
rapidly rising prices of anything, is not enough to get the
Fed to try and cool down the white-hot asset sector?
The answer is obvious, once you remember that this Fed is
the most inept, corrupt, ridiculously pompous and smugly
arrogant bunch of clueless weenies in U.S. history. They
are worried about deflation, which is now defined as when
something, even things that are already so grossly
overpriced, goes down in price. Like stocks. And bonds. And
houses. You know: Everything that that is currently
waaayyyyy overpriced.
And why do they want to prevent this deflation in
preposterously overpriced things? Wouldn't the U.S.
consumer, namely you and me, be better off if things were
cheaper? Wouldn't it be a big benefit to us pathetic bozos
out here in the real world when our paltry incomes buy a
bigger basket of things on payday? Without waiting for your
answer, I answer my own question and say, "Yes, it
certainly would be a benefit!" But Greenspan does not WANT
us to be better off. Why? Because the whole U.S. economy is
now totally dependent on things NOT going down in price. In
fact, the whole U.S. economy is now dependent on overpriced
things being more and more and MORE overpriced!
Namely, stocks, bonds and real estate. Weird, huh?
Dr. Steve Sjuggerud, also writing in the Daily Reckoning,
pointed out that because of these price rises, there is a
dearth of places to put money where there was a good
possibility of making some profit, instead of having a good
probability of losing your shirt and ending up in the
gutter begging money to buy stale bread or another shirt.
Sjuggerud quotes Jeremy Grantham: "Today we have
substantially the worst prospects for long-term global
investment returns of my 35-year career when all asset
classes are considered, particularly for U.S.-centric
investors." This is because things are all so overpriced,
and this should not come as a surprise to you if you had
been paying the least bit of attention to me, and don't
feel bad if you have not, since nobody else does, either.
And when things are overpriced, there is usually not a good
chance that they will get MORE overpriced, which is where
your profit should come in.
But how and why did they all increase in price? Because the
Fed increased the amount of dollars in the system, and the
Congress borrowed and spent those dollars. And so the
system was flooded with more dollars, but the amount of
goods and services did not increase. Ergo - and don't you
just love it when I use the word "ergo?" - the value of
each dollar went down.
And don't worry if you do not understand this concept right
away. The Federal Reserve has never understood it either,
and they think they are smarter than all of us put
together. They are not. In fact they are much more stupid
than we are, QED. They just think that they are smarter.
Anyway, that flood of dollars sped hither and yon through
the economy, and ended up in somebody's pockets, who spent
the dollars on imports, which flooded foreign economies
with dollars. But those foreign exporters did not want
dollars, but instead they want their own currency, because
their wives want to spend money, and the places where they
shop do not want to go through the hassle of converting
U.S. dollars into their own currencies. So the exporters
were prone to dumping those dollars to get their own
currencies with which to fill up the pocketbooks of their
wives, and then the banks ended up with all the dollars.
But the banks do not want the dollars either. So then the
foreign central banks printed up some big wads of their own
currencies, and bought up the U.S. dollars from the banks,
who do not want, as we have seen, dollars. And then the
boss of the central bank comes to work one day and wants to
know who in the hell has been piling up all these dollars
in the lobby and making such a big mess, and issues an
order to get them out of here and get this placed cleaned
up! So all those dollars, those lovely mountains of dollars
that in the aggregate add up to more than a half a trillion
dollars a year, were used to buy U.S. debt.
Which the U.S. government spent, continuing the viciousness
of the cycle. And then they went into people buying things,
like stocks, and bonds, and houses, and imports. And prices
went up. And then, the next year, they went up some more.
And then, the next year, they went up some more. And then
the next year, they, but this is getting real boring, so to
save time, we will hop into Professor Peabody's Time
Machine and fast forward a decade or so, and when we step
out of that time transporter we notice that I am still
intoning, "And then the next year, they went up some more."
Then we are all happy that we are back in the present, and
have finally stopped that "and then next year... " crap.
And sure enough, there is Jeremy Grantham saying that
"today we have substantially the worst prospects for long-
term global investment returns of my 35-year career when
all asset classes are considered, particularly for U.S.-
centric investors," which gives me an eerie feeling of
déjà-vu, but is quickly explained by the fact that I just
cut-and-pasted his original quote, but that doesn't change
the facts.
And it is a truism that the mechanism of inflation is that
the beneficiaries of excess creation of money and credit
will be those guys who are first to get in line for it, and
who buy the things that will soon go up in price. And it is
another truism that after this initial bunch of winners
will come another bunch, who will get in the parade and do
the same thing, and prices will go up some more. And it is
another truism that more and more people will take notice
of the profits being made, and then they will get into the
swing of things, too, and then, finally, at the end of the
parade, come the guys who think that they can arrive late
at the party, and they will be buying those assets that are
so high in price that there is nobody left to take the bag
from them, and so they will be left holding the bag.
The big question (BQ) is: is anybody holding the bag yet?
Yes. Lots of them. In fact, the whole American economy is
now composed of people holding bags. Big bags (BB). Big,
BIG bags (BBB). And the Other Big Question (OBQ) is: Is
there another bunch of people who are willing to pay money
to take the bag? Ahhhh. That's the REAL question (RQ)!
And the way to entice people into buying something that is
ludicrously overpriced is to, and here we see the beauty of
Modern Fiscal Policy, give everybody their money back! Yes!
That's right! And how do we do that? Through the Tax Credit
section of the 1040! The government will pay you back if
you spend your money the Government Approved Way (GAW)!
Regards,
The Mogambo Guru,
for The Daily Reckoning
P.S. In a related vein, the IMF, given that they are as
brain-dead as our own Fed, which is understandable since
the Fed is the biggest of the creditors of the IMF, decided
to give Argentina some more loans. I left off the
exclamation point there, although normally that would rate
at least one exclamation point. But I am cleverly setting
you up for the punch line, to show you that the Mogambo has
a humorous side, which I call the Mirthful Mogambo, with
which to offset his dangerously angry and trigger-happy
side.
The IMF gave them more money even though Argentina is
pretty honest and blunt about saying that they are in
pretty bad shape, and they are going to keep defaulting on
loan payments! I put that last exclamation point in there
to indicate the fact that this is the punch line, and now
you should laugh heartily - Ho ho ho! - and say, wiping the
tears of laughter from your eyes, "No! Really? No! What is
the joke, oh Mighty Mogambo?"
The joke, and you are going to love this for all its cosmic
ramifications, is that it is no joke. That is what really,
really happened.
Now, anybody who knows me immediately deduces, correctly,
that all of this is just too, too spooky for me, and I am
grinding my teeth so hard that the friction is sending out
a radio signal that is jamming radios and government
communications for blocks around. I know this from looking
outside my window and watching the government's Super
Secret Agents spying on me as they try to talk to each
other on their cell phones over the loud static I am
producing, and I sneer at them "Chumps! This is one of
those 'unintended consequences' from your reign of terror
against me, the Magnificent Mogambo!" And, to give the
government agent credit, he was fast on his feet when he
replied, "Huh? Look, Mister, I'm just here to read the
water meter! Honest!"
Well, I think that is what he said, but my Super Duper
Central Computer System was activating a Perimeter Defense,
Repel Boarders-type action, and what with all those machine
guns cocking, and shells being loaded, and sirens blaring,
it was pretty loud, and the super-powerful Klieg lights
were illuminating the Fire Control Zone with a blistering
glare and neighborhood kids were falling to their knees
crying "My eyes! My eyes!" and he was in a hurry to leave.
But he was one of them, all right. Trust me on that one.
Mogambo Sez: I wish I weren't so lazy, and then I would
take the time to go back through precious issues of the
MoGu and identify the guy who said that buying gold was an
investment that was obvious, riskless, and a bunch of other
swell things, all of which added up to suggesting, in the
strongest of terms, that you ought to take a break from
downloading pornography off the Internet, and go out and
buy gold.
I shall merely paraphrase, and you must look deep into my
eyes to discern my utter seriousness, when I tell you to
quit trying to download pornography off the Internet and go
out and buy gold right now. If not sooner. You'll thank me
later when the investment pays off in spades, and you can
hire somebody else, who did NOT look deep into my twinkling
blue eyes and who did NOT buy gold as per my suggestion, to
do the downloading for you, and then project it onto the
giant plasma screen TV on the wall of your lovely beachside
villa.
Editor's note: Richard Daughty is general partner and
C.O.O. for Smith Consultant Group, serving the financial
and medical communities, and the editor 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. If you're
inclined to read more, you'll find the whole Mogambo here: |
