Celsius 9/11

They said he was a big fat stupid white man. They said he was a traitor. They called him obscene. Now he’s got a movie.

Celsius 9/11

The Treasury cranked out $6.9 billion in actual, hot-off-the-presses cash last week, which is probably a record of some kind, and not the good kind of record – the kind where you get to shake your bootie and party down on the dance floor.

In the same week, Foreign Holdings at the Fed leapt by another $10 billion, which is that magical place where all those central banks soak up and store their U.S. debt before it gets recycled back to the U.S. It represents an estimate of foreign holdings of U.S. dollars.

Now, not only does the system have to manage this flood of ‘fiscal policy money’ and ‘trade deficit dollars’ that is being poured into the world’s economy by the Bush administration and the Congressional boneheads in the U.S.A., but also the other gigantic wad of money being created by the idiotic Europeans who are as intellectually corrupt as we are.

I say this because European bureaucrats continue to ignore the fact that Germany, France and Italy – which together make up about 90% of the whole freaking Euroland economy –are running deficits that exceed 3% of GDP…or what isalso known as ‘puke point’, the level that they all agreedwas the farthest limits that rational, sane people, who hadthe benefits of a good education, could allow.

And let’s not forget the Japanese, who are bogged down in abudget deficit equal to 7% of their GDP.

Fractional Banking System: Placing Blame

So now you know why Jean-Claude Trichet, a guy who is known for exactly this kind of stupidity, was put in charge ofthe EU central bank, and why we have Alan Greenspan, alsowell known for this kind of stupidity, in charge of theAmerican central bank.

Since the need to identify a scapegoat is arriving, it istime to start casting a little blame. Rising to theoccasion, the Mogambo strides up to the microphone atCannes and announces that his Mogambo Movie Company has started production of its new release: “Celsius 9/11.”

This fabulous documentary explains that the banking systemis the one to blame, just like it always is. Usingnewsreels, tapes, congressional testimony, candidphotographs, gossip and rumors, vicious innuendo, bogus interviews, outright lies and fabricated evidence, itcaptures, wonderfully, how all throughout history, in every country, in every time and space, economic crises arealways caused by bankers.

There is simply no other agency that is able to perform such miraculous magical acts of alchemy, which, nowadays,we call ‘creating money out of thin air.’ Money, beautifulmoney!

The process starts when somebody takes on a debt. It’s thenaccelerated through the fractional banking system, whichmagnifies and leverages the debt, ‘making’ more moneyavailable for more people to borrow, and helping them goeven further into debt! It’s a self-reinforcingprocess…creation leads to borrowing which leads to morecreation, and more borrowing that causes more money to becreated. To be borrowed. Which causes more money to be, well, you get the idea.

Fractional Banking System: The System Implodes

Or as Bob Moriarty explains in an essay entitled “Battle ofthe Titans” on 321gold.com, “The cause is simple. In a fractional reserve system, even a gold fractional reservesystem, all money is created by loaning money intoexistence. And the more loans you make, the more profit youcan make. It is a perpetual motion machine. Just as long asyou keep expanding the money supply (inflation) everythingworks. Or until people borrow far more money than they canafford to pay back. At that point the system implodes anddeflation sets in as the money supply collapses.”

Kenneth Gerbino is one of those guys who really has ahandle on how these things work, and says “The United States at this time, since the 1930s, has made tremendousprogress and advancements in all areas…science, technology, medicine, arts, etc., but the truth of thematter is that, in the field of economics, the opposite has occurred. An incredible regression has developed. Economicpolicies today are much, much worse than in 1929. The fiveeconomic evils are all alive and well in modern America:big wasteful government, high taxes, paper money,government debt and budget deficits. But the worst practiceis the creation of money out of thin air, which always brings on inflation, higher interest rates and disrupts thenormal free market economy.”

All that money, all that glorious, fabulous money, turnsinto, first, debt to finance economic expansion, and then, only later, the decline and deflation. The eventual andinevitable decline is caused by prices going up, pushed up by all the money. And then people stop buying as muchstuff, and economic decline sets in.

And why don’t they buy as much stuff? I can’t speak foreverybody else in the world, but for me and everybody I know, it is because of the double-whammy that the Germansmight call der Dopplekopfwhackenmachen: a) my income is notrising enough to b) allow me to afford to buy things whose,c) prices are rising faster than my income.

Fractional Banking System: The Austrian School of Economics

And then comes, if you are at all adept at the Austrianschool of economics, the inevitable bust, which is one of the ingredients when you play in the sandbox of the Boom-Bust Cycle.

And if you are NOT familiar with the Austrian school ofeconomics, then I suggest that you make reading theMises.com website a part of your everyday online browsing,and after a year or so you will notice a large decrease inthe number of times that you scratch your head inbewilderment, and a HUGE increase of the number of times that 1) you agree with me that Austrian economics is theonly one that is logically correct, intuitively obvious, historically proven, and contains an intellectuallycompelling line of economic thought, 2) you agree with me that central bankers are the actual culprits who cause ourmiseries because they do NOT believe in the Austrian schoolof economics, and 3) you will stand shoulder to shoulderwith me to declare that what this world needs is a good low-calorie, low-carb, low-fat chocolate cookie that youcan eat by the bagful and never gain an ounce in weight.

Or, as Mr. Moriarty so clearly explains, “Here’s somethingyou have never read before. With the exception of wartimeperiods, between 1783 and 1913, inflation was zero.Essentially we had no inflation. But as soon as the FederalReserve system came along, here comes inflation. Using thegovernment’s own figures, we can soon see that to equal thepurchasing power of $100 in 1913, we would need $1,840today. All the product of the Federal Reserve system.”

In case you were wondering, that works out to an annualinflation of only 3.25%. The knotheads we call American economists call this “benign inflation” and “lowinflation.” It is not.

As if to provide a nice coda to my remarks, the dollar hasstarted back down, and it is falling faster now than it was when it was rising, which is in keeping with the generaltheory that things decline faster than they grow or are smashed quicker than they are built.


The Mogambo Guru
for The Daily Reckoning
July 19, 2004

—Mogambo Sez: I have been getting calls from desperate people wanting to, mostly, know what is going on with the decidedly lackluster performance detailed in the mutual fund statements that are showing up in their mailboxes like bricks, and quite a few inquiries about when I am going to return their BBQ grill or pay back some of the money I owe them.

To each of these topics I am at a loss to explain. I was real embarrassed about it, until I read that Marc Faber, yes THAT Marc Faber, he of Marc Faber Ltd headquartered in Hong Kong, who admitted, when you read between the lines of what he literally said, that perhaps the Mogambo is not as stupid as everyone says, and handily explains that my confusion is because “We live in the midst of the largest financial bubble the world has ever known. World bubble-isation is courtesy of a monetary phenomenon that lacks antecedents. Never before has any country printed as much money or extended as much credit without melting down the printing presses. The credit madness is difficult to comprehend. It is hard to understand in relation to past economic imbalances, because none exist.”

All I know, and all anyone knows, is that it will not work out. We just don’t know how, or when.

Editor’s note: Richard Daughty is general partner and C.O.O. for Smith Consultant Group, serving the financialand 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:

Celsius 9/11

Inflation was supposed to be a ‘sure thing.’ Turns out, it’s not so sure after all. The latest figures show the CPI barely moving. Meanwhile, the money supply is actually falling…stocks are slipping…and the dollar continues to give ground against the euro. Gold sits tight, comfortably above $400, and bonds are moving up!

Of course, it is the middle of the summer. And if anyone cares, he doesn’t work here at the Daily Reckoning. We are as footloose and carefree as a tramp.

Still, we can’t help but have guesses and opinions. Our guess is that it is not inflation that worries the Fed; it’s deflation. Businesses are not borrowing. Which means, in order to get money into the economy, the Fed has to rely on the government and the consumer. The government has already done all it can. And the consumer? Unlike business, which borrows to increase capital investment and employment, nearly every penny a consumer borrows is thrown away; he buys a hot tub for his back yard and ends up poorer and more vulnerable than before. Like it or not, sooner or later, he is forced to stop borrowing. That moment may not be close. But it is certainly closer.

We pass the baton to Eric, somewhere along the Eastern


Eric Fry, reporting from Baseball’s birthplace…

– Today, your Manhattan-based editor finds himself in Cooperstown, New York – the fabled birthplace of “America’s pastime.” Cooperstown is tucked deep into the countryside of upstate New York, so distant from Manhattan that dairy cows easily outnumber Starbucks outlets…

– For the next few days, your editor’s son will play baseball here at the Cooperstown “Field of Dreams” Park, and for the next few days, in this idyllic hamlet, the game of baseball will seem every bit the national pastime of American folklore.

– But baseball hasn’t really been America’s pastime since early in the Hoover administration. The de facto national pastime is “speculation,” popularized at the Field of Dreams known as the New York Stock Exchange. Throughout the 1990s, the game’s popularity surged, as the entire nation embraced the notion that stocks always go up in the long run.

– Here in the short run, however, stocks are going down. The Nasdaq Composite is nursing a loss of more than 7% for the month of July alone. Last week, the tech-laden Nasdaq tumbled 3.2% to 1,883, while the Dow slipped 73 points to

– Now that the stock market has been drifting lower for three weeks, it is beginning to deliver some real pain – not the leather-clad, bullwhip-snapping variety, but the sort stealthy agony that results from falling asleep on the beach under a blistering sun. Slowly, almost imperceptibly, the Nasdaq Composite has scorched the epidermis of millions of investment portfolios.

– How did this happen? For weeks, the stock market has seemed as listless and harmless as a summer day. Yet, somehow, this seeming lethargy has produced some sizeable losses. Even so, the stock market seems not to favor any particular direction. It rises a bit, then falls a bit, then rises some more…but this annoyingly lifeless market has shown no clear preference for either a bull move or a bear move.

– “Never sell a dull market short,” say the seasoned traders on Wall Street. But we should not deduce, therefore, that dull markets are to be bought. Clearly, this dull market could rally sharply on a moment’s notice – just to inflict a measure of pain on the increasingly smug bears as well.

– But sustained upward progress must overcome a handful of adverse trends: interest rates are rising from 46-year lows, while crude oil flirts with record highs. These two trends are sufficiently grave to undermine even the most deserving of stocks.

– Meanwhile, bullish investor sentiment has been hovering near all-time highs, which is never a good sign, while the VIX Index of options volatility has been languishing at multi-year lows. Low volatility typically indicates investor complacency. A crowd of bullish, complacent investors is not what you typically find when stocks are cheap.

– Examined through the flawless prism of hindsight, we notice that the stock market’s advance topped out – more or less – at the precise moments that oil hit a record high and the Fed initiated what most investors believe will be a new cycle of rising interest rates. These adverse trends are with us still. Throw a large crowd of bullish investors in the mix and that Field of Dreams on Wall Street may soon resemble a “Field of Nightmares.”


Bill Bonner, back in Baltimore…

*** Does higher education really pay off?

‘Probably not’ is our answer. And Jeffrey Pfeffer, professor at the graduate business school in Stanford, seems to agree with us – at least with respect to MBAs. “There is little evidence,” says he, “that mastery of the knowledge acquired in business schools enhances people’s careers, or that attaining the MBA credential itself has much effect on graduates’ salaries or career attainment.”

In the late ’90s the job market was so competitive that some firms that normally hired only MBAs were forced to take people with only undergraduate degrees. Guess what? They did their jobs about as well as those who had MBAs.

Pfeffer points out that while a degree from a prestigious business school marks you out as someone who is smart and ambitious – and therefore someone who is likely to succeed – you will probably succeed just as well without the degree. It is being smart and ambitious that makes the success…not the B-school training.

*** More notes from the strangers in a strange land…

“Oh…if I had only been there…with my armies behind me…how I would have gotten revenge on the people who killed Jesus…”

– Clovis, King of the Franks – recently converted to Christianity – perhaps missing the point.

Received via email: “Become a fully ordained church minister within 48 hours.

“As a lawful minister, you will be authorized to perform the rites and ceremonies of the church!

“Perform Weddings, Funerals, Perform Baptisms, Forgiveness of Sins, Visit Correctional Facilities.

“Want to open your own church? Press here…”

There you are, dear reader. Within 48 hours you can – if the advertisement is to be believed – forgive your own sins, and those of others. Whatever it costs, it is surely a bargain. With an ordination in your back pocket, you might even go out and commit more sins this afternoon…and forgive them before dinner.

In no other country we know of, is man’s relationship with the Almighty so convenient. So quick. So easy.

No wonder Americans are so keen on religion. In all of Christendom, no people go to church more often. De Toqueville noticed the connection between Americans’ freedom and Americans’ religion nearly two centuries ago. Without strong religion, he wondered what glue would hold the republic together. The fatal weakness of democracy was no secret; as soon as the masses realized they had the power to vote themselves into other peoples’ pockets there might be no stopping them. All that stood in the way was a sense of right and wrong. As long as America is good, said de Toqueville, it will be great.

We went over to Grace and St. Peter’s church yesterday. What a handsome church it is…and what a relief to find a service in a language we understand. We’re talking about the ‘old’ lingo of the Episcopal Church, the language of the King James version and the 1928 prayer book. The chants and creeds – the Apostle’s Creed, the Nicene Creed, the Confession, Sanctus, Benedictus – were imprinted on us back in the ’50s. We knew them by heart and recited them easily.

Then, in the late ’70s, a new prayer book decree went out upon all the land. Henceforth, ye shall speak the words of the prophets and the gospels as if they were born yesterday. The result has always sounded strange and foreign to us. Introducing the communion, for example, the priest used to say – “drink ye all of this.” It was changed to “drink this all of you.” In the gospel, where Jesus used to say, “I will make you fishers of men,” the new, diversity edition turns it into “I will make you fish for people,” which always makes us chuckle, since it sounds as if Christians are about to be pan-fried at any moment.

If religion is enjoying a boom in America, you could prove it at Grace & St. Peter’s. You could have packed all the attendees into a good-sized SUV and had room left over for luggage. Still, the church put on a good show – complete with ‘asperges,’ incense and a sung service. The priest said nothing memorable. But then, we’ve been going to church for more than half a century, and cannot remember a single Episcopal sermon worth hearing.

(By contrast, a brother-in-law – a Southern Baptist minister – always gives a good barnburner of a sermon…) Jesus of Nazareth never went to Harvard, but he had his eyes open. He noticed that life was not nearly as simple as a presidential candidate or stockbroker might lead you to believe. You don’t necessarily get by getting, he pointed out. You get by giving, said he. You don’t find real glory in great works…but in good ones. Nor do you enjoy freedom by casting off all your chains…but by willingly enslaving yourself to Christ. And if you want to live forever, you have to die.

Most people regard these paradoxes with suspicion, if not loathing. But they have so many parallels in nature – and in natural markets – that one suspects they must reflect some hidden architecture to life itself: investors make the most money by buying the most despised assets (those with the lowest prices per dollar of earnings). (The meek inherit the earth.) An investor faces his greatest risk of loss at the very moment when he becomes most sure of himself (pride goeth before a fall). And the most successful investments are those in which investors eventually lose the most money (the first shall be last).

Paradoxes are humbling. They flash like warning signs:
“Watch out,” they say, “because the exact opposite of what you think is probably also true.” We caught on to this trick here at the Daily Reckoning when we realized that the way to investment success was not by knowing more than the other guy, but by knowing less. Recognizing how little we really knew gave us an investment edge…humility became an advantage, a conceit. It made us feel superior!

The real genius of Christianity is its modesty. It keeps the world improvers from making too much of a mess of things. People – even Christians – are prone to delusion and self-aggrandizement. Too often, they begin to think that they know how to make things better, not just for themselves, but for everyone. They want to be engaged…they want to do something…they want to vote! They boss others around, take their money – calling it ‘fair taxation’ – or bomb the hell out of them. Before you know it, they are no longer good, but corrupt and pathetic.

“Do unto others as you would have them do unto you,” is not only a nice saying to put into needlepoint and hang on your wall, it is also a cautionary platitude. It reminds you that it is better to sweep your own doorstep than to try to change your neighbors’ bad habits. While there is plenty of evil in the world that might be cast out, generally, the best a man can do is to make sure he is not part of it.