Currencies Battle for Dirtbag Supremacy

The only saving grace for the dollar recently has been that it’s performed relatively well against a few other currencies. But, as the Mighty Mogambo points out, that’s really just like being the nicest smelling cow pie in a field full of fertilizer. In the end, you’re sill just a piece of crap.

Bill Bonner notes that “Here at The Daily Reckoning…we stand back…aghast…agog…paralyzed by the whole spectacle…from the lunatic assumptions of the credit bubble…to the solemn farce now taking place in the U.S. Congress.”

I can’t actually verify this “aghast and agog” thing, although I could hear them in there, hiding in his office with the door closed and locked, and while I never heard anyone actually say the words “aghast” or “agog”, I did hear several people say, “Shhh! Don’t open the door! He’s still out there!”

But I am pretty aghast and agog, too, now that the despicable Congress has passed a staggering $850 billion emergency spending bill, and so I felt a certain kinship with Mr. Bonner and The Daily Reckoning people who were, as he said, aghast and agog. As I stood there in the hallway listening to them furtively whispering, “Is he gone yet?” I felt alone, comforted only by the companionship of my imaginary friends, as we were drawn together by our shared abilities to mentally intercept coded messages from outer space directing us to eat char-broiled steaks, various entrees containing yummy pork products and to rail loudly against the whole stupid concept of letting the Federal Reserve expand a fiat currency by creating excess money and credit, unlimited fractional-reserve banking, unlimited debt, off-balance-sheet accounting, and the economic suicide of huge collectivist governments growing like a cancer, made possible only by the excessive creation of money, credit and credit, and only sustainable by the continued exponential creation of more excess money and credit, and we are tightly bonded together by our mortal dread of the terrifying inflation in consumer prices as all of this new money and credit diffuses through the economy.

I could hear them whispering to each other behind that closed and locked door, and they were saying, in shocked tones, that “The Fed, on its own initiative, began passing out the cash. $49 billion last Wednesday alone went to the banks. That same day, the Fed lent $146 billion to investment firms. By the time people went home for the weekend, $410 billion had passed from the Fed to private firms. The money was lent, says the Bloomberg report, at about 2.25% interest.”

As a point of reference, I got an email where Oliver Garret of Casey Research by way of The Daily Reckoning which said, “To put this amount into perspective: if you had spent one million dollars a day, from the birth of Christ until today, you would have only spent about 732 billion dollars.”

This is, indeed, a lot of money, and I know two things about it: 1.) I will not get any of it, and 2.) All of this new monetary inflation will cause more inflation in prices, which will be felt as a loss of buying power of the dollar.

And speaking of that, I have the uncanny ability to never be at a loss of words when I can cruelly mock people who are smarter than me, better looking than me, taller than me, richer than me and/or any other petty envy that strikes my childish fancy at the time.

It’s a gift, I guess, which unfortunately does not make up for the woeful lack of gifts in all other areas, cruelly dashing any dreams of being a great ballerina (“You’re a man, for God’s sake!”), or an artist pouring out his pain on canvas (“That painting really sucks!”), or a great musician/composer (“Your music sucks worse than your painting!”), or being anything (“You suck at everything!”).

So it is with great relish that this week, my Gratuitous Mogambo Attack (GMA) is the “Economic Focus” column in The Economist magazine, this one titled “The Resilient Dollar”, which I thought would be interesting, in that not only is the dollar strangely going up against other currencies, but still going down against inflation, as are all the other countries in the world that are showing positive rates of inflation, which is, oddly enough, ALL the other countries in the world! Hahaha!

Equally weird is that gold is also paradoxically going down in price, even though the dollar is going down in buying power because inflation is higher than the yields the dollars can buy, and the only strength of the dirtbag dollar is that it is appreciating against other currencies, but it is only because those other currencies are a worse bunch of dirtbags!

The article starts off with a question about what to use as “store of value” in these uncertain and unsettling times, and before I could jump into the conversation and say how everybody else in the whole history of the freaking world scrambled to get their wealth into gold and out of a depreciating currency, they cut me off by noting that “Gold is for the really scared”. What’s more, the evidence is that there are plenty of scared people, as the price of gold “has risen by about one-fifth in the space of three weeks”, and those who produce gold bars “are struggling to keep up with demand.”

In the ultimate irony, they report, “Even central banks now seem less keen to swap gold for paper currencies”! Hmmm!

Anyway, they note, “Gold tends to do well when the dollar struggles. And there are good reasons to be anxious about the dollar”, which is a pretty flimsy code, telling you to “go out and buy some gold, because it is going to go up in terms of how many dollars (which increasingly nobody wants) it takes to buy one ounce of gold, which every body wants.”

Anyway, I loved the line, “Bailouts and state guarantees to shore up the system may help, but they also strain public finances and raise concerns that the government may be tempted to inflate away its debts by printing money.” Hahaha!

Now we get to the part where I am rude and scornful. “Tempted?” Did they say that the government “may be tempted to inflate away its debt by printing money”, when at the beginning of the article they acknowledge the existence of a wildly expensive, historically unprecedented “rescue package”? Hahahaha!

Let me get this straight; a sudden injection of (now) more than $850 billion into the economy to buy up bad debt and bail out the hapless owners of all that bad debt so that they can spend this new money on other things to drive their prices up, and they still think that the government is NOT trying to “inflate away its debts by printing money”? Hahaha!

I have got to get a job as an editor of The Economist, hopefully with a huge salary, fabulous benefits package and a nervous, wimpy boss who can be intimidated by finding, for example, voodoo dolls on his desk, because they need my help to screen for the use of the word “may” in describing the motives of a corrupt, spendthrift, economically-ignorant, socialist government in trying to save itself by creating more money, which everybody agrees will gradually, faster and faster, destroy the currency until each dollar buys so little stuff that it takes heaps of dollars to buy anything at all!

Like gold, silver and oil, all three of which will make a mockery of Ben Bernanke, Congress and the financial services hustlers and con men! Whee! Investing is easy!

Until next time,

The Mogambo Guru
for The Daily Reckoning
October 13, 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.

“Something funny is happening down at the bank…”
– Jimmy Stewart in It’s a Wonderful Life

Panic! That’s our advice…

This week we’re preparing a Special Emergency Report. With the help of old friends – such as Lord Rees-Mogg, who actually remembers what it was like in the Great Depression – we’re putting together a report on what we think caused this crisis…where it is likely to lead…and what you should do to protect yourself…

There IS something funny going on. But it’s not just at the banks.

Friday was a good day on Wall Street. The Dow fell only 127 points. And gold fell $36.

The feds closed a couple banks in Illinois and Michigan. The big banks are not going to close; they’re going to be “recapitalized” – and partially taken over by the government. This process is already underway in Britain. Europe’s leaders got together and said they’d do the same thing.

“Europe agrees to banking rescue,” is today’s front-page headline at the International Herald Tribune.

America’s financial authorities are planning the same move. Where in the U.S. Constitution does it authorize the federal government to go into the banking business? Don’t ask…

But there’s nothing very odd about this. The banks did dumb things. Now, the politicians are doing dumb things. Just what you’d expect. The ‘funny’ part is still ahead…

“IMF warns of financial meltdown,” is another major headline. Scanning the rest of the press we see the same sentiment. To hear the press tell it, fear is running wild in the streets.

“Anatomy of Fear,” shouts a Newsweek header. “Can the G7 save the world?” asks TIME.

And all over the world, people are tallying their losses and beginning to sweat.

We don’t have the figures, but it looked to us as though last week must have wiped out more ‘wealth’ than any week in history. Stocks fell on Monday and didn’t stop falling until the rang the bell on Friday. When people dared to open their portfolios on Saturday, they found trillions of dollars missing.

Well, it was just ‘paper profits,’ you might say. Maybe. But it was wealth that people depended on – for retirement, for vacations, for new cars and…even healthcare. And now, it’s gone – poof! What now?

“I’m thinking about going back to work,” says one retiree to the New York Times. Another says he will not be able to retire when he had planned.

But these fellows have only just begun to sweat. Jobs were plentiful in the boom years – so easy to get that people assumed they could always find work. That, too, could be changing fast. Unemployment is rising. And after last week, every company executive in America must be considering a freeze on new hiring plans…and cutting unnecessary workers as fast as he can. The typical business spends more on labor than anything else. And in a downturn, labor is the one cost employers can control. So, the marginal worker could soon find himself with no money…no credit…and no job. Go back to work? Where?

*** We’re working up to a big thought…

It begins with this item – barely reported in the mainstream press:

A Morgan Stanley economist says the U.S. federal deficit for 2009 could go as high as $2 trillion.

Let’s see…there are the on-going wars in Iraq and Afghanistan…a $700 billion bailout plan…this year’s $500 billion deficit…falling tax receipts…more bank ‘recapitalizations’…

…and a simple, but irresistible humbug of modern political economy: if consumers can’t spend…and businesses don’t spend…and banks won’t lend…it’s all up to the government.

Every economist trained during the last 50 years believes it is government’s responsibility to ‘save’ an economy…to give it the juice it needs to keep operating…and to provide the demand necessary to keep it expanding.

It is a theory that goes something like this: usually markets of private businessmen, consumers and investors are all-knowing; sometimes they are just dopes.

Now is one of the dopey times – at least, that’s the theory. Investors, consumers, and businesses – they’re all running scared. But there stands The Government…immoveable in its wisdom…unshakeable in its determination…and unflappable in a crisis. And now the feds must step in…checkbook in hand…truth and justice underfoot….bankruptcy ahead.

The feds must save the day. Everyone is counting on them. But what can they do – other than throw money around? And whence cometh this ‘money’? They can borrow it. But here’s the funny part. If they borrow money, they do not increase the world’s supply of money by a single dime. They are merely taking it from one place – where, presumably, it performed some useful function – and transferring it elsewhere. Where? A banker’s vault perhaps. An insurance company’s reserves, maybe. Today’s news, for example, tells us that giant insurer AIG is back. After getting an $85 billion loan from the feds, AIG is looking for $38 billion more.

In effect, the feds put the U.S. government’s full faith and credit on the line so they can borrow in order to lend…or spend. And the more they borrow…lend…and spend, the less the faith lenders should have in its credit. As faith declines, interest rates should rise. And rising rates will further depress the economy.

Borrowing – in a macro-economic sense – doesn’t really help anyway. It merely moves money around. What the world really needs is more purchasing power. More inflation, in other words. That is the ‘funny’ part that lies ahead. The ‘funny money’ part, to be more precise.

*** You will recall, dear reader, that an old Louie lost his head after the debt of France’s monarch topped 80% of France’s GDP. Seymour Durst put up a ‘debt clock’ in New York to keep track of the U.S. debt. When he put it up, the U.S. national debt was only $2.7 trillion. That was in 1989. Not even 20 years later and the debt has topped $10 trillion – forcing the owners of the debt scoreboard to add another digit. U.S. gross domestic output is about $13 trillion – and falling. This puts the national debt at 77% of GDP…and rising fast.

Whose head will roll this time?

*** Yes, dear reader, Shareholder Nation took it on the chin last week.

And now, many are wondering whether America will be able to get up from the mat…

“Debt saps U.S. power,” says David Leonhardt in the New York Times. In effect, the U.S. has spent money it hasn’t yet earned. Now, it must avoid spending so as to repay what it has already spent. This puts the nation at a huge competitive disadvantage, since it lacks the resources to fund new projects.

Our favorite columnist, Thomas L. Friedman, calls this the “post-binge world.” We read Friedman to get insights: not as to what is really going on; Friedman has no idea. But Friedman gives voice to popular prejudices; he tells us what the unthinking masses are yearning for.

And here it is:

“This workout promises to be painful, complicated and protracted,” he explains. No cause for panic, in other words. It will all be worked out. Then, he offers more reassurance, quoting the calming words of the world’s richest man:

“I have no idea what the stock market is going to do next month or six months from now,” said Warren Buffett on Friday. “I do know that the American economy, over a period of time, will do very well, and people who own a piece of it will do well.”

The Sage of the Plains did not reveal how he knows these things. Maybe he is right; maybe he isn’t. But here at The Daily Reckoning we’ve urged readers to panic out of U.S. assets for a long time. And now, readers are advised to stay in panic mode…and sell into the coming rally.

Until tomorrow,

Bill Bonner
The Daily Reckoning