THE DOG THAT DIDN'T BARK
by the Mogambo Guru
The Fed has screwed up, massively. And the result is, the
United States is headed down the path to economic
ruination.
If you want a good explanation why, then look no further
than the Wayne Angell article in the Wall Street Journal
last Thursday, entitled "The Rubin Recession." This Angell
character was a member of the Fed Board of Governors from
1986 to 1994. So you would think that he would have a
pretty good idea what he was talking about when he is
talking about economics. But then you'd be wrong, sort of.
The first sentence of the article sets the tone, as Angell
blames the recession that started in "the third quarter of
2001" on - and hold onto your hat because it is going to
comically jump up off of your head when you hear this -
"the Clinton administration's attempt to pay down the
federal debt."
This is the first I've heard of that! And if you have been
paying attention to the accumulation of government debt,
then this will no doubt be a surprise for you, too!
So I know that this where I have to do a little research,
because I'm sure that you are not going to take my word for
it, as Angell is a former Fed governor and a big shot,
writing in the Wall Street Journal and advising important
rich people, and I am just an angry, crazy man writing with
a crayon on the wall and begging for spare change from
people going into the mall, even though I am pleading,
"Please take my word for it! Please!"
So I grudgingly get up off of my big, fat butt with a lot
of whining and complaining, and I trudge over to where I
keep some graphs, still whining and complaining, and I dig
around in there awhile, and then I get tired and after
awhile I forget why I am there. Then I come back and sit
down and read what I wrote, and then I remember why I went
over there in the first place, and then I do a little
swearing and then, with a little more whining and
complaining, go back, and finally, finally, I locate the
graph of Treasury debt. I blow the dust off of it and hold
it up to the light.
Okay, admittedly from about 2000 until the third quarter of
2001 the accumulated debt does not go up that much. But it
did not go down, and only slightly trended up for a few
months, but that is a long way from the glib
characterization that anybody was paying down anything. And
Angell should know that.
Furthermore, this lack of borrowing was due, in the greater
part, to the fact that the government was taking in bigger,
more gigantic loads of money via the expedient of higher
taxes, especially the Social Security/Medicare tax, which
was tragically boosted to a mind-shattering 15.3% of gross
income, where it sits today.
But that "third quarter of 2001" is infamous for other
things. That is the exact moment when two things
simultaneously happened, 1) the debt really started to
explode, going from $5.8 trillion to today's $7.1 trillion
and 2) something else. And for all I know, there was a
third thing that happened, too, because these kinds of
things do not happen in isolation.
Then Angell goes on to castigate former Treasury Secretary
Robert Rubin et al, declaring that they did "not understand
the first principle of macroeconomics." I can tell by the
way your head snapped around that you are as curious as I
am about this fabulous "first principle." I love this
"first principle" thing, as it makes me think of Sir Isaac
Newton, or "Izzy" as I call him, because his Principles of
Physics are easy to comprehend, and there is never anybody
saying things like, "Well, before we can get started we
need a quick little review of the topographical hexadecimal
mathematical system in N-space."
This First Principle According To Wayne Angell is, and I
know you are going to love this as much as I did, "Output
growth is not sustainable without a growth of total credit
and debt." I say "huh?" I gotta tell ya that I have read a
lot of things in my life, although lately it is mostly
letters from collection agencies demanding that I send them
some money real fast or they will take stronger action, but
I have never, ever heard anybody tell me that "Output
growth is not sustainable without a growth of total credit
and debt." And especially never has anybody told me that it
was some basic principle! Because I am here to tell you
that if you want a Basic Principle that you can really take
to the bank, output growth can be sustained by profits
alone! And it usually was, all the way through the history
of mankind! And at the beginning of production, output
growth it can be started with savings alone! As it usually
was, similarly all the way through the history of mankind.
But it gets better, as we now see where the current Fed
idea of massive and irresponsible increases in Fed credit
comes from, as Angell concludes that since the private
sector has loaded up on debt, "this household debt burden
continues to require both low interest rates and rising
household wealth from real estate and the stock market to
avoid deflationary pressures." In other words, the private
sector has now gotten itself so loaded up on consumer debt,
real estate debt and total reliance on the stock market,
that it is now necessary to continue to force interest
rates down, and down, and down, down down down, downdy down
down de down down, so that the idiots who got themselves
into that kind of bankrupting mess can be saved from their
own folly. And not only that, but everybody thinks it will
work! Hahahaha!
But the really troubling thing about the mess the Fed has
gotten us into is that its chairman, the honorable Sir
Alan, knows better. I had lunch the other day with two guys
who are also scribblers about economics, Bob Wood and Steve
Heller. Over our meals, we all wondered aloud why it is
that Greenspan, an erstwhile gold-bug/sound money/Austrian-
type dude, and therefore recognizably one of the more
intelligent of our species, has apparently given up the
faith. Why is this Greenspan guy, who not only knows
better, but has actually proved that he knows better by
writing one of the better defenses of gold and the utter
refutation of fiat money, doing this to us? Why?
Steve Heller thinks he is doing it on purpose. For
Greenspan so loves mankind that he is deliberately proving
to the people of the planet that you MUST have gold as
money, and proving the profound wisdom of the Founding
Fathers, who were so careful to write into the Constitution
- the very Constitution itself! - that money shall only be
silver and gold. And he is teaching this Grand Lesson to us
via the brilliantly simple expedient of doing literally
everything that a central bank can do, to every excess,
when unencumbered by the strictures of gold, to ensure a
boom. Including enlisting, through the global financial
system, the cooperation of almost all foreign central banks
on the globe, to do the same things! Gaaaahhhhh! Uh-oh! I
feel one of my "spells" coming on.
The purpose of this deliberate boom-bust cycle, with the
emphasis on "bust," is to prove to the primitive savages,
namely you and me, once and for all that when the
inevitable bust comes, so that there will be nooooOOOooo
doubt in anyone's mind, that you cannot have a monetary
system that uses a fiat currency, especially one in which
you have fractional reserve banking, and DOUBLY especially
when you allow such leverage inside the banking system on
such an absolutely massive scale, and TRIPLY especially
when the expansion is accompanied by bigger government and
an economy receiving huge money transfers, which is the
government literally handing out money.
You don't need a big brain to see what is coming. All you
need to do is stop drinking heavily, lay off those
prescription medications that have a mind-altering
component, and take a look at some of the other times in
history when people did what we, and I am talking about us
Earth creatures again, are doing. And the one thing that
you would notice, if you were paying close attention with
your magnifying glass, snooping around looking for clues as
to what is going on around you, is what you did NOT see. It
is another famous case of the Dog That Didn't Bark.
Specifically, you never read about a time when people used
a fiat currency to expand government and its spending,
multiplied by a massive fractional reserve system of
banking, where everybody ended up rich and fat and happy.
Instead, what you always read, and lots of times there are
really neat pictures and photos with captions to make it a
more interesting read, is how all the fiat-currency people
went broke and died of starvation in utter poverty at the
end of the boom-bust cycle, usually involved in some
disastrously expensive and destructive war.
I shiver at the thought.
Regards,
The Mogambo Guru,
for The Daily Reckoning |
