The $85 Billion Non-Event

The Mogambo makes no bones about his sincere hatred for inflation and anything related to it. And with inflation continuing to wreak havoc on our economy, it’s no wonder he called Ripley’s to report the $85 billion reduction of Total Fed Credit last week. Unfortunately, they didn’t believe it either.

If you want a real-world example of how inflation in consumer prices follows an increase in the money supply AND how an increase in anti-social, war-like behavior follows increases in prices, then a report from Bloomberg.com is just what you are looking for. It says, “Iran’s annual inflation may accelerate to 50% if a plan to introduce cash payments for the poor is implemented, Sarmayeh reported, citing a parliamentary deputy.”

So, if they introduce cash payments by increasing the money supply, prices will soon go up, and people will begin starving because prices are so high, making people riot. But if the government does not introduce cash payments for the poor, then the people will riot right now because they are starving since prices are already high! Hahahaha! An interesting choice!

I started out with a gallows humor laugh like that because I am sure that we all need a good laugh, as Federal Reserve Credit, which Barron’s calls Total Fed Credit, was down a massive $85 billion last week, which is a simply staggering sum, although it is a long, long way from the $10 billion per month that Alan Greenspan was jamming into the banks since 1997 that created all the inflations and bubbles and weird economic distortions that we have.

But yet this huge reduction of $85 billion in a week is, somehow, a non-event, especially considering that the Fed has doubled the stock of fabled High Powered Money to over $2 trillion in just the last couple of months! Beyond astonishing! Unbelievable but true, although you won’t find it at the “Ripley’s Believe It or Not” exhibit because they all said, “We don’t believe it!”

It’s actually beyond unbelievable, too, and is instead more flabbergasting, and I am quite sure that if more than a trillion dollars of new credit added to the banks and an equal amount of new Treasury debt added in a couple of months won’t gast your flabber, nothing will.

As you would expect, the monetary base went up to $1.476 trillion, which has now almost doubled in the last 3 months, too! Doubled! Yikes!

You can probably tell by the way my eyes are rolling back in my head and my breath is coming in ragged gasps, or by the way I am clutching at my chest and gobbling nitroglycerine pills while screaming, “We’re freaking doomed!”, that this “doubling of the money supply” is Serious, Serious Stuff (SSS), mostly because inflation in prices follows an inflation in the money supply, and inflation in criminal behavior by desperate people follows an increase in prices, and economies do not thrive when everyone is afraid and starving because they can’t afford food, which will then encourage the government to try to bail everyone out by even more deficit-spending, which will be again accommodated by the Federal Reserve creating, again “out of thin air”, the necessary amount of credit in the banks so that it can be borrowed and used to buy the new government debt, which will add even more money to the money supply, making more inflation in prices and more catastrophic distortions in the economy worse and worse until (my voice rising to a crescendo) the Whole Freaking Thing (WFT) falls down in a Big Stinking Heap (BSH)!

Normally, this is the point where I would launch into a Long And Tiresome Mogambo Harangue (LATMH) about how gold always goes up in response to such rampant debasement of a currency and the ruination of an economy, but instead, now I just want to know, “Where is all of this new money ending up?”

Well, the money is not showing up in MY pocket, that’s for sure, as even my wife and kids can attest, as they are always rifling through my unguarded wallet and pockets when I am in the shower, and I can hear them whining back and forth that I don’t have any money for them to take, which makes me chuckle to myself (“Haha!”) that it only shows how stupid they are that they did not check inside the spare tire of my car to see if I had cleverly stashed some cash there to keep from being financially killed by my greedy family of blood-sucking parasites draining me dry of every bit of cash and assets with their incessant, whining demands for “heat”, “food” and “medicine.”

But perhaps a clue as to where some of these trillions of dollars of new money goes can be found in Doug Noland’s Credit Bubble Bulletin at PrudentBear.com, where we are informed that Total Money Market Fund assets increased to $3.714 trillion, and “have posted a one-year increase of $641bn (20.9%).”

And since inflation in prices follows inflation in the money supply, and since the inflation in the price of gold follows inflation in prices, then you can see where I am going with this and thus there is nothing more to be said! Whee! Buy gold! This investing stuff is easy!

Until next time,

The Mogambo Guru
for The Daily Reckoning
December 08, 2008

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.

“I used to have a 401(k)…now I’ve got a 201(k)…”

“What kind of retraining do they give to former Wall Street employees? Teach them to say: ‘Do you want fries with that?”

And this from AP:

“Record numbers of homeowners are falling behind on mortgage payments and the U.S. economy is losing jobs at an alarming rate with companies big and small slashing their work force.

“A half-million American jobs disappeared month, the worst mass layoffs in more than three decades, as the nation spiraled downward in what could be the hardest hard times since the Great Depression.”

“The economy ‘is in free fall,’ said one analyst.”

Hey…this is no laughing matter. But wait, the worst is still to come.

Yes, dear reader…we think…we hope…that we will enjoy a classic post-bubble bounce. If we’re lucky, it will last for 3-6 months…and give everyone a chance to catch his breath.

Mr. Market is like a cat. He plays with his prey before he finally eats it.

And he’s perfectly capable of giving the whole world the impression that crisis of 21st century capitalism is over.

Friday, stocks rose again – this time the Dow climbed 259 points.

Oil sank even further…falling to just $40. And gold lost $9.80 to settle at $755.

What next? Stocks could rise above 10,000 on the Dow…house prices could stabilize…commodities could rise along with bond yields.

If this happens…you know what to do, dear reader. Sell!

One thing that makes us think there will be a substantial rally is that there’s something phony about the ‘gloom and doom’ you read about in the paper. You can’t exterminate a bubble mentality with a single whack. Instead, it takes a long Guantanamo stay…with several false hopes of release…followed by more torture.

For now, people have lost money…but they are still fascinated by it. They still talk about it. They joke about it. They practically wallow in their losses.

“I’m down 40%,” says one. “You think that’s something…the guys over at XYZ Fund just got wiped out…”

Asked what it was like to work on Wall Street, our contact at Goldman had a one-word reply: “Armageddon.” Another contact at CitiGroup said the bank had become a “zombie” – dead, but still alive.

It’s true all over the world…and in practically every industry. Gloom and doom is the fashion. Apocalypse is the style. Hemlines are set for the end of the world.

But who really believes it? Who really feels that the end is nigh? Don’t we all still hope that Obama will pull off a really big save? Even if we think the bubble has burst…we still feel as though somehow, everything will turn out all right.

People are fascinated by the bust…they look upon it as though it was a horror movie. They see the pretty girl going down in the basement…and they know they’re not going down there. They won’t make that mistake…she might get cut up into little pieces…but not them!

But when the real doom and gloom sets in…they’ll feel as though they are already in the basement. Then, the last thing they want to do then is talk about the horror around them. Instead, they want to forget about it. They won’t want to hear about stocks…or commodity prices…or bankruptcies and bailouts. They’ll be sick to death of the whole thing.

We have a long way to go, dear reader. We will have a rally…then another, worse, drop. People will not suddenly give up hope; it will have to be crushed out of them. And then, instead of enjoying the spectacle of the mighty captains of industry and masters of the universe humbled…the show will take on a tragic theme…with ordinary people hung up on the hooks of debt…stretched out on the rack of joblessness…beaten by losses on their houses, their 401(k)s, and their

Then, the jokes will stop.

*** Colleague Byron King has been following the decline of a great empire – the United States of America.

He sends this from Spengler at the Asia Times…

“America outspends China on defense by a margin of more than six to one, the Pentagon estimates. In another strategic dimension, though, China already holds a six-to-one advantage over the United States. Thirty-six million Chinese children study piano today, compared to only 6 million in the United States. The numbers understate the difference, for musical study in China is more demanding.

“It must be a conspiracy. Chinese parents are selling plasma-screen TVs to America, and saving their wages to buy their kids pianos – making American kids stupider and Chinese kids smarter. Watch out, Americans – a generation from now, your kid is going to fetch coffee for a Chinese boss. That is a bit of an exaggeration, of course – some of the bosses will be Indian. Americans really, really don’t have a clue what is coming down the pike. The present shift in intellectual capital in favor of the East has no precedent in world history.

“The world’s largest country is well along the way to forming an intellectual elite on a scale that the world has never seen, and against which nothing in today’s world – surely not the inbred products of the Ivy League puppy mills – can compete. Few of its piano students will earn a living at the keyboard, to be sure, but many of the 36 million will become much better scientists, engineers, physicians, businessmen and military officers.”

Byron offers this comment:

“One well-traveled, high-caste Indian doctor of my acquaintance says, ‘Americans think that all Indians or Chinese are very smart and well-educated with great personal drive to succeed. That’s because they deal almost exclusively with the Indian and Chinese emigrant cadre. These are people with the desire to move to a different continent, learn a different language, and adapt to prosper in a different culture. It does not matter if you are dealing with somebody with a PhD in electrical engineering, or the guy who manages the 7-11 or Days Inn down the road. There is a common factor of adaptability and work ethic. So of course you might think that all Indians or Chinese are smart, and make good businessmen. But the truth is that we’ve left a lot of dullards back home in the old country. I assure you that many people back where I come from are as dumb as a box of rocks. And a good proportion of these dummies even go into politics and the government bureaucracy, just like in America.’

“The big-name universities have junked themselves up to get the federal grant money. But that is true for state schools as well as Ivies. Big-name researchers at the U of Michigan, or Penn State, or you-name-it, are all in thrall to Uncle Sam, just like the top tier researchers at Harvard or Cornell.

“So your child can receive just as distant and remote an education at some football factory like the U of Texas or Florida State, let alone East Carolina or Arkansas A&T, as at a snooty locale in Cambridge, Mass. The big ‘personal’ interaction will be with some 25-year old graduate student, or maybe a 30-year old post-Doc.

“That’s not always true though. At Harvard, for example, the Earth Sciences Dept (a.k.a. Geology) is small enough that you almost always deal with a real professor, and by definition a world-class researcher in whatever field you pursue. Same with numerous other departments, from various languages, to classics, to certain realms of the history dept, etc. You have to pick and choose. Rub elbows with care.

“Actually, James Kunstler has it right for the long term. Many of these big schools have grown so big due to cheap money and cheap energy. Now they have to pay for the upkeep in an era of long-term rising costs for energy. Just heating the physical plant at Michigan State of the U of Minnesota at Duluth will eventually become a prohibitive expense. How about salaries for profs who teach just about any course in a field with the word “-Studies” as part of the name? Can you define the concept of “uselessness” in the era that’s coming? At some point, it’s just welfare for PhDs with no other visible means of support. And what will the US economy do with all of the “marketing” majors when the whole concept of globalization begins to crumble. Market what, pray tell? And to whom?

“Everybody is looking at Wall Street and commenting on the great ‘deleveraging’ of our economy. Sure, those Wall Street dudes are a bunch of greedy scum who wrecked the world. Right? And now they deserve their layoffs, and to lose their million dollar office cubicles. Right? No more villas at the Hamptons, or taking the Net-Jet plane down to Wilmington for a weekend at Bald Head. Right? Yeah, all 300,000 of those jerks in and around New York and Connecticut – they ought to suffer. Right? No skin off my nose. Right? I don’t work there. Right? None of my business. Right?

“But as Captain Kirk once said to the Klingons, ‘Hey, excuse me.’ Ummm….it’s the broader society that’s deleveraging as well. It’s not just Wall Street. A lot of things that held U.S. society together – common values and ethics – are now starting to erode with the decline of leverage. Eroding, to include – oh, for a wild example – the idea of the ‘easy life’ in America, the ‘streets paved with gold’ urban myth. As a nation, we’ve spent 75 years spending money we don’t have and will not earn until a couple of generations down the line. But as of September 2008 that modus operandi (for all the classics majors out there) became inoperative. Somebody ought to tell the new economic team of the Obama Administration. (‘If you guys are so smart, how come you ain’t rich any more?’)

“Life in these United States is just are not as pretty and cozy as it used to be. The future is cloudy. And back to the topic, that deleveraging-thing extends down into the classrooms and football stadiums of America as well. When it’s all going down the tubes, it never has an impact on just one segment. Everything is connected to everything else. Right?

“At least the Chinese have some clue about where they want their culture to go. In the U.S., we’re a nation of cultural arsonists. Except its our own house that we’re burning to the ground.”

Still craving more insights from the incomparable Mr. King? Lucky for you, he heads up two newsletters: Outstanding Investments and Energy & Scarcity Investor. Even luckier for you…you can now get both of these newsletters, along with all nine (with three more to come soon) of Agora Financial’s other investment and research services…for life.

*** We are traveling around the world…trying to get a better idea of what is going on.

This weekend was spent in Bombay…or Mumbai, as it is known today. Security is tight…at least for those who aren’t planning on blowing anything up. They search us each time we go into our hotel…just down the street from the Oberoi. Armed police wander the streets…desperately in need of a course on gun safety.

You will hardly believe this, but last night our Indian colleagues invited us to go to see a concert starring Jethro Tull concert…with Anouschka Shankar playing the sitar.

“Is Jethro Tull still alive?” we wondered.

“Yes, the band is celebrating its 40th anniversary. And Anouschka is Ravi’s daughter…very pretty…very talented…with a very California accent (the Beatles made Ravi famous and he moved to LA).”

The Jethro Tull group was amazing…guys over 60…but very dynamic…and very clever musically. You might remember their classic – “Aqualung” – from 1969. The lead riff sticks in your mind long after you wish it would leave.

Until tomorrow,

Bill Bonner
The Daily Reckoning