Debt-Addled Coconuts on Gilligan's Island

I was halfway through a pitcher of cheap beer when I began to have visions. I thought that a pretty girl at the end of the bar was flirting with me, but that turned out to be wrong when I heard her tell the bartender that she thought I was “creepy.”

I should have known I was hallucinating, as I have no idea what women want, except that I discovered that they don’t like it when I salaciously leer at them and lick my lips.

On the other hand, hallucinations or not, I know exactly what an economy needs, which is a stable currency and zero inflation, but, again, no lascivious leering and lip licking.

My head suddenly cleared, and that is when I knew that my nightmare visions of the proposed “aggregator bank” were correct, in that it is stupid and disastrous because it will expand the money supply by unknown trillions of dollars.

This “aggregator bank”, in case you were wondering, is where taxpayers will be forced to pony up the Treasury capital for a new bank that will buy worthless securities from other banks, and is being pushed as some kind of bizarre “savior” of the economy, which is now predictably suffering from the outrageous stupidities of Alan Greenspan, former chairman of the despicable Federal Reserve.

This reminds me of Junior Mogambo Ranger (JMR) David K., who sent a quote from Ludwig von Mises that I had not seen before, which is “Economic history is a long record of government policies that failed because they were designed with a bold disregard for the laws of economics.”

Of course, I have plenty of charts and graphs that show this, but perhaps I will let Ken Gerbino of Kenneth J. Gerbino & Company summarize… “The laws of economics are very real and the mumbo jumbo from the Fed and Washington and the well known economists will mean nothing when once again a logical cause creates a logical effect”.

And what is this effect? Inflation! He explains, “An island that produces 10 coconuts and has $10 in circulation will see each coconut valued at $1. That’s the way it works. Someone showing up with a motor boat and a printing press and creating another $10 on the island won’t make any more coconuts, but will certainly make the price of coconuts go to $2.”

Now, the scene changes, and the island is in an age of fractional-reserve banking. There are still 10 coconuts, but only $1 in cash is needed, and the bank creates $10 to loan to people who want to buy coconuts, and out of necessity everybody bought coconuts on credit. Still, there are only 10 coconuts and 10 bucks.

Now, fast forward a few years as Gilligan and the crew of the Minnow run up enormous debts to buy coconuts, which must be ample because we find that a coconut diet has allowed the captain to be a fat lard-butt, but now the islanders can’t pay the interest on all the money the owe, their retirement accounts are wiped out, and everybody is broke because they borrowed so much money to buy coconuts on credit that they can’t now borrow more.

Pretty soon, they start looking at the horizon and anticipating the arrival of the boat bringing more money, and then they remember that they sent The Mogambo to get it with an all-girl crew and an Internet uplink to download cheap pornography, so they soon realize there will not be a boat returning with more money.

That is when they turn to Plan B, which is the stupid idea to create an “aggregator bank” to buy up all of the debt extant, so that those who bought coconuts on credit, and whose loans for them have suddenly gone bust since they can’t pay any longer. The island bank merely created ten more dollars, buys up everybody’s debt, the former debtors will have a brand new dollar, which they will use to bid for coconuts, driving the price up!

Usually, this is where I start screaming that people with any sense at all should see that this is insanity, and we should all be scrambling to buy gold, silver and oil, because the Fed is creating not only Big Freaking Money And Credit (BFMAC), but now they are expanding them also using an “aggregator bank” to bail out their filthy banker buddies and vastly expand the money supply!

Perhaps this is why Adam Hamilton of writes “Big Inflation Coming”, where he reports the startling statistic that “Starting in October 2007…year-over-year MZM growth was running 11.9%. This soared to 16.4% YoY growth by March 2008. The growth rate then slowed considerably in Q3 ’08 to 9.0% at worst, and then accelerated again during the panic to 12.6% in late December.”

Instinctively, I knew that this was a big increase in the money supply, but so many numbers always make my head hurt and I need to go lie down for awhile, maybe drinking a beer and looking for Gillian Island reruns on TV.

Perhaps noticing my eyelids drooping, Mr. Hamilton quickly sums it up as, “Overall, average annual MZM growth since the stock slide started measured 13.1%!”

My eyes flew open as I thought to myself, “Whew! When all that money starts seeping into the economy, we are going to have some Serious, Serious Inflation (SSI)! I need more gold, silver and oil!”

But before I could dial the phone to place my order, he continues that it is even worse than that, as “M0 has gone parabolic! Year-over-year in December 2008, it was up 98.9%! This is so shocking it defies belief. In late September as the stock panic started, it had grown by 9.9% over the past year. By October, this rate ballooned to an all-time high of 36.7%. In November, it rocketed again to 73.0%. And in December, it surged up to the staggering 98.9% you can see above. Ben Bernanke’s Fed has doubled the monetary base in a single year!”

I was mulling over deducting a few points from Mr. Hamilton’s grade for correctly using exclamation points in his introductory sentences, but only one exclamation point there at the end when such horrific news as doubling the monetary base in one year obviously calls for at least two! Maybe three!

But feeling magnanimous, I decide that maybe it was a typographical error, and was on the verge of not deducting any points at all when he said, and I quote, “Holy cow.” Note the complete lack of exclamation points!

Immediately, I got my red editing pencil out and I am slashing at the essay, deducting points and grievously lowering his grade to such an extent that he will think, “Wow! I will never make that mistake again!”

He then provides a summary, which is that “inflation and deflation are and always have been purely monetary in nature. Supply and demand can drive prices all over the place, but it is only a changing money supply that can truly spawn inflation or deflation. And the money-supply data is crystal clear. The Fed is growing the fiat-dollar supply by frightening rates, all the way from double-digit broad-money growth down to a scary doubling of the monetary base!”

Actually, it is more than double, as the Monetary Base has risen to $1.741 trillion, up from $820 billion last year, meaning that the monetary base is up 112% in One Freaking Year (OFY)!!!

With a note of satisfaction, I note that concluding my sentence with three exclamation points should be instructive to Mr. Hamilton, but he is exactly right that a doubling of the monetary base in one year means “big inflation is coming; it’s already baked into the pipeline.”

And if there is one thing that makes the prices of gold, silver and oil go up, it is inflation in prices! Whee! This investing stuff is easy!

The Daily Reckoning