Bill Gross is a very smart cookie and is on his upcycle in this deflationary environment; and he’s really good at assessing where his government friends are going to draw the line in failures of GSEs. He made billions by buying GSE (FNM and FRE) debt, while avoiding shares, and lo! he looks like Soros against Sterling. Shareholders got nuked. (He doesn’t know anyone like Paulson, does he?)

And I couldn’t disagree more with the stimulus measures (although a few are warranted) because they simply put our children in debt for the hereafter, and also let the scumbuckets who got us into this mess (you’re not one of them, George, right?) continue to do business when they should actually have their heads put on a Schumpeterian pike, letting rational and fiscally sound companies replace them. Wiping out their shareholders. But that’s creative destruction, and it is being blocked by the U.S.A. purchase of toxic assets from the idiots who created the problems. Much much better to guarantee depositors and up to a certain level of creditworthiness of the toxicity (CLOCOTT) on their books, then seize the banks that can’t make it and offer expansion to smaller but more responsible competitors. George, if you loan capital to a bank that is straight, with no significant toxic waste on the books, you can bet it will lend. If you put capital into Citi or the likes, it simply drops into a black hole and goes Poof!

It is so obvious that we are currently deflationary, and it is such an obvious consequence of the antecedent egregiously poor judgement and wagering by legions of different financial vectors. (Vector rhymes with Spector.) This deflation will ebb as reality returns to our financial system. The government’s job is to guarantee responsible investing that has been Madoffed (remember the French verb, Bobbiter?), not to prolong our agony by supporting rotten banks, as happened in Japan in the 1990s to the present.

If anyone thinks we are going to get out of this deflationary mess via stimulus, I have a wonderful bridge to sell. If anyone thinks we are getting out of this mess without a lot of pain, I have a second bridge to sell.

Your multiplier of 20:1 is a major reason we are in this black hole. That is wagering, and that is irresponsible. An American who opens a margin brokerage account has a max of 2:1. The banking multiplier has to come down. The high multipliers (even higher for investment banks) were great for bank profits when the wind was at their backs, and it was a disaster when the housing and credit bubbles popped. So the profits were privatized, and now you are supporting a virtuous public underwriting of the losses. Not my cup of tea.

About the money supply…. Do we really think it’s a bad idea for someone to pay down credit card debt or loans? That decreases the cash in circulation, and thereby the money supply. George, that is healthy. The government simply has to guarantee debt, including checking and money market accounts, so that Americans are not afraid to deposit paychecks in banks. Let the bad banks fail. Let the good banks rise to fill their shoes.

Remaining a strong Mogambo fan, and standing by both of your sides on gold purchases,

Sincerely,

Francis M. Weld
New York City
sponsor of nothing, author of nothing

I will take up your challenge on behalf of all right-thinking, honorable, and noble deflationists everywhere.

First let me paraphrase Bill Gross this week, co-CEO of that little-bitty bond fund known as PIMCO. “As long as Congress is arguing over mere hundreds of billions of dollars in stimulus, we are headed for a mini-depression. Congress needs to start writing stimulus checks to the tune of multiple trillions of dollars.”

And now the reason why: The multiplier effect works in reverse. If a bank takes in a loan payment of $1,000 and is too scared to recycle that payment into a new loan, $20,000 gets sucked out of the U.S. money supply (20:1 multiplier).

Read my lips, you Mogambo Mumbo Jumbo guy, the U.S. money supply is in the process of contracting like a Black Star. Any new money created by the Fed is almost immediately sucked up out of the money supply as loan payments on $20+ trillion in debts owed by American consumers, U.S. companies, states, cities, and the Federal government.

You’re wrong, Mugambo … but I’m still buying gold.

George Blackburne, III, Esq.
Mortgage Fund Sponsor
Author – The Reverse Multiplier Effect – When Crushing Deflation Destroys America