Our Mighty Masked Economist (MME) is confused…why are Americans so simple-minded and trusting that they are willing to let the banks create money out of thin air – without worrying about the consequences? Never fear, he’ll do all the worrying for you…
China’s government is, so I read, mulling plans to prop up their fallen stock market by buying shares, which is such a bad idea that I am surprised that they are even thinking of something so stupid.
Now, there are a lot of people in the United States, namely me, who are so naturally distrustful and paranoid that they believe the worst in everybody. And we, mostly me, is are am absolutely convinced that the Fed would happily create tons and tons of money to buy stocks, bonds, houses, raw land, real estate on the moon, perpetual motion machines, Elvis collectibles, and anything else you can name in their desperation to get more money pumped into the economy. And the reason that we, meaning I, is are am so convinced is that the Fed is already on record as saying that they are not only willing to do any of those very things, anytime that they want, but they have literally given themselves that option! In effect, the banks will create money and buy up everything for themselves!
I used to think that we Americans are a real stupid bunch of people, but for us to allow this blatant ripoff and fraud really takes the cake for me.
So your term paper assignment is to research the entire economic and financial history of all the countries in the world, and all the countries that ever existed in the world, and find an example of where the banking industry could, for free, buy up the assets of the country, and keep them for themselves, and thus the banks get richer and richer and richer, until, one day, they will own everything. Your task will be difficult, young grasshopper, because I have never heard of a nation so stupid that they would allow the banks (and the stockholders who own them), to do such a thing.
If my eyeballs are bugging out and I am running gracefully berserk through town wearing this adorable pink tutu and snazzy matching handgun and holster set, you gotta remember that if we simply allow the banks to just take stuff for free, then nothing makes sense anymore! So of course I look insane! But I am obviously not insane, as I prove by being upset as hell about this!
Fiat Currency: The Words of Thomas Jefferson
This, of course, brings to mind the words of Thomas Jefferson, one of the most remarkable men America has ever produced (and who is, parenthetically, my entry as "The Greatest American"), who was ALSO not insane. He said, "If the American people ever allow private banks to control the issue of currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers conquered." And where will their homes be? Owned by the banks, along with everything else!
So that is what China is getting ready to do, and I suspect that that is what our central bank, the Fed, is already doing, too. We are so trusting and simple-minded that we are letting the banks create money out of thin air to buy stocks and bonds, thus transferring assets into their own hands? Yow! Banks are getting our stuff for free? Double-yow!
The ugly reality is that all that additional money flooding into the economy will make inflation soar. But, and this is the crucial "but," if you do not care about inflation, then everything is okay! If you don’t mind seeing millions of people suffering from the ravages of inflation, then you are going to love this! Stocks will go up, making people who own stocks richer! Bonds will go up, making people who own bonds richer! Houses will go up, making people who own houses richer! The people who do not own any of these things will be poorer. Lots poorer. Lots and lots poorer.
And given the depths of moral and intellectual depravity that is the norm these days, that is why I am getting more and more cautious about predicting the eminent doom of stocks and bonds and houses. The Fed, which has spent the last eight years doing this silly expansionist crap, may just be getting warmed up! So stocks and bonds and houses may continue to go up for a long, long time. Weird. And scary
But there is nothing to stop them, since the Congress is a spineless bunch of socialist, Big Government buttheads (SBGB), and especially now that our money has been ruined by the Supreme Court, which means it is time to again bring up the fact that the Supreme Court is directly responsible for the huge, suicidal error of allowing a fiat currency in America. With this one monstrous, colossal blunder, our money can literally be the one thing that money was not ever, ever, EVER supposed to be! Namely, a damned fiat currency! Money made out of nothing but printed paper and electronic digits!
But don’t get me started on the lying hypocrites that have comprised our Supreme Courts since the infamous traitorous commie bastard FDR extorted their compliance with his un-Constitutional scam of confiscating gold and the rest of that un-Constitutional crap, because it usually ends up with me going ballistic and then waking up weeks from now in a straitjacket, screaming, "Oh, noooooo! Not again!"
Fiat Currency: The Price of Rising Prices
But creating more money will make prices rise. But people don’t like paying higher prices, and it causes anger. And so I am telling Bettie, according to her name tag, that I am personally outraged at being charged $1.27 for a single damn tomato that is smaller than a baseball, and she is telling me to take a hike, and walk my nasty little butt back to the end of the long line of other customers complaining about the prices.
So (and I am sure that you will agree with me here), my quality of life is falling, as I have to pay higher prices for things AND the quality of my "shopping experience" is adversely impacted, too! So the question springs to mind, "Is that decline in the value of my shopping experience adequately reflected in the Consumer Price Index?" Hahahaha! I doubt it very much! Rising prices is extracting a price from me in more ways than one! And a high price at that, dammit!
And so, follow my reasoning here, if my quality of life is a price I pay, and then if I pay more money but get less value, then it should be included as a rise in the Consumer Price Index. But it is not! So inflation is understated! And so inflation is again proved by The Mogambo to be actually higher – a lot higher! – than what the government tells us it is! The bastards!
But Mr. Puplava of FinancialSense.com is not interested in my tomato problems, but instead harks back to my earlier remarks about fiat currencies, and notes wryly, "Ironically, it was the abuse of the gold standard, the Fed’s credit-creating habits of the 1920s, and its subsequent mischief in the 1930s, that not only gave us the Great Depression, but also prolonged it. When the government can replicate the monetary unit at will without regard to cost, whether it’s paper currency or a computer entry, it’s morally identical to the counterfeiter who illegally prints currency. Both ways, it’s fraud."
And how does this all fit into my screeching denunciation of the banks? Easy! As I get ready to launch into one of my famous Mogambo diatribes, Mr. Puplava sees what is happening, and frantically jumps in and takes over for me. He says, "A fiat monetary system allows power and influence to fall into the hands of those who control the creation of new money, and to those who get to use the money or credit early in its circulation."
Well, the obvious question is, "If power, influence and money accrue to those who create fiat money (the banks), who pays the cost?" I threw myself that softball question so that I can get a few words in, but before I can answer that question, Mr. Puplava again beats me to the punch with the answer, "The insidious and eventual cost falls on unidentified victims who are usually oblivious to the cause of their plight. An actual transfer of wealth goes from the poor and the middle class to those in privileged financial positions."
And if you think that Greenspan and his horrible, dimwitted cronies at the Federal Reserve are so much smarter than all the other countries in all of history who have tried this crap and failed, then guess again. Mr. Puplava reports, "In many societies the middle class has actually been wiped out by monetary inflation, which always accompanies fiat money."
Well, if this is true, why doesn’t anybody try and stop it? Again, he has an answer ready. "In the early stages of inflation, the business class actually benefits from the easy credit. An astute stock investor or home builder can make millions in the boom phase of the business cycle." That is why they call it a boom. And to make sure that you understand the ramifications of this insidious inflation, he adds, "The poor and those dependent on fixed incomes can’t keep up with the rising cost of living."
Well, perhaps this explains why the use of credit cards to buy fast food is gaining so much ground. According to CardWeb.com, in the first quarter of the calendar year, Americans charged $6.6 billion in fast-food restaurants. For the full year, they project that consumers will charge more than $30 billion on fast food. This enormous sum of money, representing an even more enormous load of delicious, fat-filled calories, equals about 21 percent of annual sales at these restaurants!
The Mogambo Guru
for The Daily Reckoning
June 27, 2005
Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter, an avocational exercise 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.
Over the weekend, again, we had another "fin de bubble" feeling. The absurdities seem to be building up pressure, like a major steam pipe under the sidewalk; we thought it might burst up through the sidewalk at any moment.
What set us off was the rush of comment on China’s $19.5 billion bid for Unocal.
The whole premise of America’s system of empire finance is that an American should be able to get what he yearns for, rather than what he actually earns. This desire is, of course, universal. It is like the desire to eat a lot without getting fat…or to take a trip to Las Vegas with your pretty secretary without upsetting your wife. But when you are the world’s Alpha Nation, getting something for nothing seems not only possible, but ordinary. It comes as a shock to realize that you may not be able to get away with it.
It was a "rough week," said Reuters.
What made it rough was that both stocks and the dollar fell. Gasoline, meanwhile, rose to a record high early this morning and then came China with an offer to buy one of America’s leading oil companies. China is good for the money. It makes more than $100 billion from its trade with the United States each year. And China has a strong motive to buy; its economy is growing rapidly.
The rough part is that the Chinese offer comes as a blow to Americans’ amour propre. They have wanted to believe that they were getting rich…that they are on top of the world…and that they have the world’s most dynamic and productive economy. And then along come the Chinese with billions of dollars in their hands, and a plan in their heads to take away a substantial part of America’s vital energy industry.
We read the papers everyday. Hardly a day goes by without a comment on outsourcing, globalization, or America’s global trade imbalance. But we doubt we have read more than one or two remarks that were not completely moronic. We checked again this weekend; the spell of imbecility continues.
First, our favorite columnist, Thomas L. Friedman, can’t understand why politicians are opposed to Cafta, the Central American Free Trade Agreement. He even turns to the consulting firm that advised Enron – McKinsey – to make his point: "Early movers in offshoring improve their cost position and boost their market share." He goes on to say that it is better to compete with the Latin Americans than the Chinese, because when "a shirt that says ‘Made in Honduras’ might contain 60% U.S. content, while a similar shirt that says ‘Made in China’ most likely would have none."
What Friedman does not understand, among many other things, is that a man always desires to be richer than his neighbors. He desires free trade only when it offers to widen the gap in his favor. Cafta will almost certainly make everyone a little richer; but it will probably do more for the Latin Americans than it will for the Norte Americanos. Relatively speaking, the yanqui will get poorer while the Latino gets richer. If the trend continues long enough, people in Great Falls will send their boys to Mexico City, not to manage hedges, but to trim them. (More on this below…)
More news from our currency counselor…
Chuck Butler, reporting from the EverBank trading desk in St. Louis:
"I don’t think Big Al will give us any direction whatsoever! And as long as the ‘measured’ wording remains in his statement, the dollar will continue to hold the hammer. When the Fed will slowdown is anybody’s guess at this point."
Bill Bonner, with more opinions, notes and gratuitous reflections…
*** The International Herald Tribune makes Friedman’s point in its weekend editorial: "The United States needs open, accessible markets." In this, it is completely mistaken. The empire’s commercial peak has already crested. In open markets, it loses out to the faster-moving, lower- cost competitors – in Latin America as well as in Asia. This does not mean that it is really worse off because of globalization. Everyone is better off when people are free to work and trade as they please. But the empire suffers. It loses money. It loses good-paying jobs. Its absurdities are exposed. Its hallucinations…its delusions…its preposterous yearnings and conceits — all come to look a little passé and pathetic.
The IHT is particularly concerned about the Unocal deal. America imports 60% of its oil. Already, the oil price has risen over $50 a barrel and looks like it will stay there. Gasoline is getting more expensive. And now China is competing for U.S. supplies directly – in the homeland itself.
The IHT’s solution to this ‘problem’ is for the U.S. to use less oil. What a good idea! When the Chinese buy our grain and food companies, we suppose the paper will advise us to eat less, too. But while we laughed at the suggestion, the IHT came up with another solution that practically made our sides split: to raise taxes.
Not that there isn’t a certain logic to both suggestions. But it is the same kind of logic that led to the problem in the first place; rather than let nature take her course; we will make the situation worse. Chinese growth will mean higher oil prices. Higher prices will mean that Americans will be able to afford less of the stuff; they will use less. The IHT recommendation, that we use less oil, is no help. The other proposal – that taxes be raised – is similarly useless and unappealing. If you are afraid that Chinese competition will reduce Americans’ purchasing power, taking it away immediately – by taxation – doesn’t seem like much of a solution.
*** Oil breaks the record high and creeps closer to $61 a barrel…
Over the weekend, Iran chose a highly conservative president, Mahmoud Ahmadinejad, which leads to concerns that already strained Iran-U.S. relations could worsen.
"’The Iranian election was just enough to get the market over the $60 hump,’ said Phil Flynn, a senior analyst at Alaron Trading in Chicago, referring to Ahmadinejad as a ‘hardliner’ whose election may ‘raise tension in the region.’"
The demand for oil is not waning in the United States, and Marketwatch.com asked Resource Trader Alert’s Kevin Kerr what he thinks about the refinery capacity state of affairs:
"The situation is grim, with refinery capacity and the condition of those refineries left in question," said Kevin Kerr, president of Kerr Trading International.
"Bottom line is that these facilities have been running full tilt for months, and the [chances] of a repair problem or major outage or even a catastrophe are not only likely but highly probable," he said.
Added to that, "if this week’s inventory levels show dramatic declines, we could be looking at $63-$65 crude oil," he said.
*** "My girlfriend in China informs me that the Shanghai residential property market is dropping like a stone. I rubbed my eyes when she emailed me that it has recently dropped 50%," writes a faithful DR reader.
"It appears that many new developments remain empty, having been built on the back of a speculative market, and I surmise that oversupply is significant and visible now that demand is dropping.
"It made me recall for some bizarre reason a visit to the Forbidden City in Beijing. Many of the buildings on the inner courts of the City’s Palace complex are closed to visitors, and the buildings interiors can only be viewed through their windows. On my visit I was busy looking through one particular building window at some artifact of Imperial decadence, when I heard an excited commotion yards away from me in front of another window to the very same building.
"A growing crowd of about twenty people were bustling each other in a friendly but slightly manic way, to look through this one window, despite the fact that several other windows were adjacent affording a view of the same room. This window in question had the best view of the artifacts, but clearly any view was obtained by people at the expense of being bumped off by yet another person from behind trying to get through. The people at the back of the queue were steadily being joined by more people anxious to push through and find what they were missing out on.
"I looked on at an increasingly comic scene whilst more people attracted to the commotion pushed and shoved to get a view through this one window. This knot of good-humoured, but fevered human beings, boiled and surged in a self sustaining thrash of human curiosity, despite the fact that the courtyard to the building was relatively empty and at least two other windows afforded an alternative view.
"It made me smile, and love the Chinese a bit more for being so silly, but it also seemed like a living metaphor for a bubble mentality. Needless to say, half an hour later you could gaze through the same window in perfect peace."