Life's Big Mysteries Explained

What happens when the money supply expands faster than the economy? The new money devalues the existing money, which causes prices to go up, which in turn causes – nothing good. The Mogambo explains…

As you are no doubt aware, I am constantly ready to expound at length about the egregiously, criminally bad way that the Federal Reserve is "managing" the economy, which is, in a nutshell, the continuous, excessive creation of money and credit to finance bubbles. With, I might add, the blessings and encouragement of government, because of the bankrupting expense of installing the wealth-transfer functions of socialism/communism throughout the many levels of government.

And why am I always so ready to get right in your face and scream about monetary policy until you are dizzy and disgusted with the way I hold you by the neck, how little specks of spittle keep hitting you in the face, and how the vein on my forehead is throbbing throbbing throbbing? Because history is nothing but one dreary lesson, over and over again. Namely, you cannot allow these things. You cannot allow the money supply to expand faster than the economy, because all that new money devalues all the existing money, which causes prices to go up, which puts people into a fund and it destroys the economy. Nor can you have a fiat currency, because there are no natural limits to how much money and credit a government can create, which devalues the money, which causes prices to go up, which puts people into a funk and it destroys the economy.

Nor can you allow excessive degrees of fractional banking, as there are no natural limits as to how many times a bank can multiply each dollar of deposits, which causes the value of money to go down due to its excessive creation, which causes prices to go up, which puts people into a real funk and it destroys the economy.

Of course, this brings to mind the French Revolution, which was caused by the government of France creating so much fiat currency that the currency was destroyed, and the people got, as if you had to be told again when I just told you this in the previous sentence, into a really, really, really, really bad mood, (RRRRBM), a concept which is central to the famous Mogambo Bizarro School Of Economics (MBSOE). And one of the principal identities of this school of economic thought is that "RRRRBM is equal to really, really, really, really bad news (RRRRBN)". So in your notes please write this important equation down:

RRRRBM = RRRRBN

And to prove it, this morning on the Morning Edition of PBS we learn that there have been 60 murders in Milwaukee so far this year, already equaling the number of murders in all of last year. A local official noted that (as I recall him saying) that people there are "frustrated and angry." Well, news flash to Milwaukee! Get used to it, dudes! This is what ALWAYS happens when the horrific inflationary results of an irresponsible inflationary monetary policy start hitting home. Misery and suffering and anger and crime are what always happens after the boom dies! People become poorer and poorer and angrier and angrier. Bummer.

Invest in Gold: Pounding the Table for Gold and Silver

And that is why I have been pounding the table for gold and silver. The ongoing devaluation of the dollar means ongoing appreciation in the price of gold, theoretically preserving the buying power of my wealth by offsetting the decline in the value of the dollar that is so bedeviling everyone else that they are robbing each other and beating each other up and killing each other. But all my table pounding was, of course, wasted on a non-receptive audience, as you have no doubt surmised if you have ever talked to anyone about buying gold, especially at dinner time, and your mom ends up yelling at you to shut the hell up about gold and eat your dinner before it gets cold, and your little brother pipes up that you are a creepy little goldbug creep, and you instantly shoot back that his creepy ignorance about monetary policy is what really creeps me out, if you want to know who is the biggest creep around here!

That is why I was astounded this morning when I opened up my email and found, among the usual hate mails and helpful suggestions (such as the popular "Go to hell, jerk!"), that the father of my buddy, Bob S., has apologized for poking fun at me all these years for being bullish on gold, and to let me know that he is now buying precious metals! Wow! Okay, now I’m walking around with my head in the clouds, as this is one time that The Mogambo was right! I am, as has now been proved, not always wrong about everything! Oh, my heart soars! Or, as Lewis Carroll so deliciously phrased it, oh frabjous day!

Then, a few hours later when I was in the newsstand buying a copy of Barron’s, Mike tells me the same thing! I was floored! What a coincidence!

Perhaps their change of heart is because they have listened to Rhona O’Connell of Mineweb.com, who writes that "The latest figures from the European Central Bank suggest that the total tonnage (of gold) sold to date in this, the first year of the second central bank Gold Agreement, has reached 506 tonnes, against a limit of 500t."

So not only have the central banks disgorged themselves of all the gold that they agreed to sell, but have actually exceeded it! Hahaha! And early, too!

But she cautions us to not get too overwrought about this, as "This of itself is of no great moment as the limits have been breached before, but it does suggest that if the spirit of the agreement is to be fully adhered to, then sales are going to have to drop right off or cease over the remaining six weeks of the current CBGA year, which is September 26th."

The actual statistics are that "Annual gold fabrication plus bar hoarding demand in 2004 was 3,410 tonnes against physical supplies from the mining sector (net of dehedging) and scrap of 2,850 tonnes (GFMS Ltd. figures). This produced a shortfall of 560 tonnes or 10.8 tonnes per week, much of which was met by net official sector sales."

For gold to go up in price in the face of all of this adding to world supplies tells me that there is one hell of a lot of interest in buying gold. And without any more of these central bank expansions of supply, the current level of demand should, in theory, cause the price of gold to rise. And it is a rising price means that something that you bought has gone up in price! And it is this delicious rise in price that produces profits! So, Mogambo Investment Tip O’ The Day For The Zillionth Day In A Row (MITOTDFTZDIAR): Buy gold.

Invest in Gold: How Can You Protect Yourself

But the Gold Anti-Trust Action group, popularly known as GATA, have re-circulated a series of letters with the government, wherein we learn that while there are no actual plans for the government to again confiscate gold from us proletariat trash, like that filthy, commie bastard FDR did, they reserve the right to do it anytime they want. Several people have written and asked what in the hell they can invest in that the government can’t, or won’t, confiscate. How can they keep their money safe?

The room is suddenly hushed except for the sharp intake of breath, as each atom in each molecule of each person in the room was instantly galvanized to rapt attention, attending to my every move and gesture. The air crackles with electric tension, as at any moment I am going to answer one of Life’s Big Mysteries (LBM). I look out over the crowd, and I see their innocent, trusting faces uplifted to meet my benevolent gaze, and I see the light of hope flicker in their eyes. That is why it breaks my heart to tell you that the sorry answer is that there is nothing that you can do with your money that the damned government cannot come and take, any time they want to.

I smile in serene indulgence. The Mogambo reaches out his hand as if to gently stroke your head. But instead I rap your thick skull with my bony Mogambo knuckles (BMK), and you shout "Hey! That hurt! Why did you do that, you horrible old man?" My face is a study in kind benevolence as I reply, "As you must grow older and wiser, you are now both older and wiser than you were a few minutes ago, my darling young grasshopper!"

And I think to myself "One day you will gain sufficient insight, and you will sit up with a start and declare ‘The Mogambo was right! We’re freaking doomed!’ "

But getting back to the original question, which was how you can protect yourself from the government coming and taking all your stuff, I add that you can’t even escape to another country, as the United States is the only country in the world that reserves the right to own you, which gives them the right to track you down anywhere you go in the whole world, and take anything they want, at any time. Welcome to the "land of the free and the home of the brave."

All of this means that this is another valuable Mogambo lesson (AVML), where we learn that it is important for you to pay attention to how you vote, as each of these grubby government thefts was created by horrible elected officials that we voted for, and all the grubby government thefts in the future will be created by horrible people we will have voted for, too. Makes you think. I hope.

Regards,

The Mogambo Guru
for The Daily Reckoning

August 29, 2005

The Mogambo Sez: It seems to me that when the Gold Lease Rates (found at the Kitco.com site) trend down, then the price of gold trends down, too. And when the Lease Rates trend up, the price of gold trends up, too. Nothing scientific, but it looks very interesting to me!

Right now, gold lease rates have bottomed and are trending up. Looks like a good time to buy precious metals. But then again, anytime is a good time to buy precious metals these days!

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.

Well, that’s it. It’s now official. The bubble in real estate is almost at its end.

How do we know? Alan Greenspan says so.

"Greenspan says housing boom is nearly over," explains a headline in the NY Times.

"Experts warn debt may threaten economy," adds the Washington Post.

My, my…officialdom is becoming rather gloomy.

"Whenever the government tells you to do something," says our friend Pierre, "It’s generally a good idea to do the opposite."

Now, the government and the experts are telling us to be careful. Does that mean it’s time to be reckless?

Having brought the cauldron to a bubbly boil, officials come out like missionaries at a cannibal picnic. They toss in an ice cube or two, hoping to drop the temperature a bit before they are thrown into the pot.

"History has not dealt kindly with the aftermath of protracted periods of low risk premiums,” Greenspan said last week. "Such an increase in market value is too often viewed by market participants as structural and permanent."

He was referring to house prices. Investors dance around the fire, convinced that high house-prices are not only here to stay, but that further price appreciation is practically guaranteed.

Our old friend, Scott Burns, tells us that house price gains have added $4 trillion to the nation’s "wealth" since 2002. We put the word, wealth, in quotation marks because we wish to remind readers that house price gains add nothing – not a penny – to the nation’s real wealth. Still, on the balance sheets of American households $4 trillion was added during the last three years.

"Compared with the median values of the last 50 years, these are big shifts. Viewed statistically, values are at extremes. The median value of houses as a percent of net worth was 26.8 percent. That’s 2.6 standard deviations from the current 36.3 percent value….

"The bottom line: Collectively, we’re heavily mortgaged in a period of extreme prices."

Mr. Greenspan is probably a little embarrassed… and worried. The party has gotten disgracefully out of control. And the invitations all bear the Fed chairman’s name! What’s worse, if things don’t work out the way the savages hope, they’re likely to turn on the Fed chief himself.

Markets make opinions, not economists. The Fed chairman’s below-market lending rates helped create the hot property bubble. His obscure and chilly words are not likely to lower temperatures among the savages. For that, it will take the cold shock of a real bear market.

More news, from our currency counselor:

————–

Chuck Butler, reporting from the EverBank trading desk in St. Louis…

"And now, just like the stock market bubble, when margin percentages weren’t reigned in, the bubble has grown like a big monster…and when it’s over and you’ll say, ‘Hey…I warned you!’"

————–

Bill Bonner, with more views:

*** Things are looking pretty bad for the citizens of New Orleans – or for anyone who was counting on a drop in crude oil prices any time soon.

Even though Hurricane Katrina was downgraded from a Category 5 to a Category 2 hurricane, the Big Easy is still in danger. In its noon report, the National Hurricane Center said storm swells will be "near the tops" of the city’s protective levee system.

"The smashing impact down there is yet to be determined, the big rigs seem to have been spared, but if Port Fourchon, which is located right outside of New Orleans, (where one-sixth of the nations oil supply comes through) is hit, the prices of oil and natural gas could go through the roof," says our resident commodities expert, Kevin Kerr.

Gas futures spiked 10%, and oil traded near $70 a barrel – and many experts believe the prices could go even higher still.

"The disruption in general seems to have reminded the refineries of their vulnerability and the power of Mother Nature. Gasoline production is destined to be affected, and at the end of the day, the production impact for natural gas and oil will be significant," Kerr told us.

As of today, about 1 million barrels of daily refinery capacity has been shut down by the storm.

*** There’s something brewing in Baltimore this morning. The details are a bit foggy right now. But here’s what I know…

For the last 15 months, Addison and a group of market analysts have met in private every fourth Thursday in Baltimore to discuss gold, oil, technology, the U. S dollar, small-cap stocks, real-estate, ETFs, value opportunities, etc. You’ve heard from many of them over the years…Kevin Kerr, Chris Mayer, Byron King, Justice Litle, Eric Fry and many others.

These closed-door meetings have been totally off limits to everyone in the public. I didn’t even know about them until I met with Addison in Vancouver.

But starting this Friday, this insiders club will be open to the public – albeit for a very short time only. From Sept. 2 to Oct. 1, Addison is going to invite a select group of fellow Daily Reckoning readers to join him and his band of merry analysts.

I don’t know all the details now. But as I learn more, I will pass any and all information on to you. Look for more tomorrow…

*** No, history does not deal kindly with the aftermath of protracted periods of low-risk premiums.

To put it another way, risk perceptions run in cycles…inverse to actual market conditions. The farther down prices have fallen, the greater the perceived risk. Investors want a lot of return on their money to make up for the chance of suffering further decline. But even an economist could see that the further a market has declined, the less decline it has left in it. That is to say, the more investors have lost, the less they have to lose. [This is not true of individual investors, who can still lose 100% of their remaining money.]

On the other hand, when a market has run up – such as the U.S. property market… or the U.S. stock market, for that matter – investors begin to feel that risk is negligible. ‘House prices always go up,’ they say to themselves. The smart ones recognize the expression as a warning. Intellectually, they see that the risk is actually multiplied by the "protracted period of low-risk premiums." That is, seeing little risk, investors pay too much for property…thus putting themselves in a riskier position. But emotionally, even the smart investors are unable to fight the pull of their own feelings. "I know its crazy," [to buy a house at that price] they tell friends and neighbors, "but I think I’ll be alright in THIS neighborhood." Yes, the market has gone nuts…but someone else will be the greater fool, not me!

*** We are enjoying these last few days of our fin de bubble summer in tranquility. The nieces, nephews, bro-in-laws, sister-in laws, friends, distant relations, and unknown passers-by have all left us. Even the trees seem to be taking their rest. No leaf stirs. It is still, sunny, and warm…like a Florida graveyard.