Menace to Society

The highlight of every holiday season for us here at The Daily Reckoning is the annual Christmas card from our friend, The Mighty Mogambo. And in this holiday spirit, while can’t give you a holiday pop-up card, we give you…The Mogambo’s Monday Essay (TMME)…

I had planned to use this space for another official Mogambo rant of outrage (OMROO), about, you know, the Federal Reserve and Congress, and how they are murdering our money, and, by extension, us. And, by further extension, everybody else, too.

But then I would get all worked up, angrier and angrier, more and more, finally escalating into senseless, mindless, gratuitous use of childish, gutter profanities at high-decibel volumes. And nobody wants that, especially little kindergarten children who, it turns out, get REALLY freaked out by it, and there’s suddenly a lot of screaming and crying and pooping in one’s pants, and it’s a real ugly mess, and then the children start screaming and crying and pooping in their pants, too. So instead, I think to myself, "Perhaps young grasshoppers would be better instructed by a genteel and refined approach!" Always willing to take the easy way out, I graciously turn today’s lesson over to Robert Blumen on, and his essay entitled "Bernankeism: Fraud or Menace?"

I admit that I almost didn’t read it because I already knew the answer; Ben Bernanke is menace. And I assume that you, likewise, skipped over it, too, after seeing the trick question posed in the title, and thinking to yourself, of course, "Bah! Any child can see that the man will destroy our money with his insane theories! But knowing that, I can personally prosper, making plenty big money (PBM), by buying gold, and buying silver, and buying oil, and buying damned near any commodity that you can name! And then I will be rich, rich, rich! And you shall be poor, poor, poor, and then The Mogambo and I will look out through the bullet-proof windows of our lovely mansions and watch you, in your filthy misery and squalor, rooting around in the dirt for bugs to eat, and we will laugh at you, and bellow ‘Welcome to fiat money hell, you morons!’ "

Robert Blumen: The First Principle of Bernankeism

The class is suddenly silenced by my outburst. I am embarrassed, and take my seat as Mr. Blumen calmly goes on to say, "The first principle of Bernankeism is that it is better to prevent deflation than to attempt a cure after the disease has set in." Hahaha! What a chump! Not only do they now teach this idiocy in our schools, but Ben Bernanke was the chairman of the damned economics department at Princeton! My hollow laughter drips with contempt, which is not as easy as it sounds.

If Mr. Bernanke truly DID understand economics, then he would have known that the REAL "first principle" of economics is that it is best to prevent the inflation that LEADS to the deflation!! And note the use of the rare "double exclamation point" to denote particular emphasis, as befits its importance in economics.

Likewise, commenting on other areas where I also have no competence whatsoever, it is likewise NOT true that the First Law of Holes is "When you find yourself in one, stop digging." The REAL "First Law of Holes" is "If you don’t want a hole, don’t dig one."

But this is not about holes, unless you think Mr. Bernanke is a real first-class hole, if you get my drift, and if you don’t, then you soon will, as Mr. Blumen goes on to write, "Governor Bernanke and his accomplices are obsessed with something known as ‘the zero bound problem.’ " I interrupt to explain, in case you ain’t heard, that one of the new buzzes in the lucrative profession of "economics masquerading as a science" is the obvious notion that you can’t loan money at less than zero percent interest. This is, and always has been, obvious: There is nothing cheaper beyond "free." This, then, is the "zero-bound problem." For some reason, this is now a big freaking deal (BFD) in central bank circles.

Robert Blumen: A Constant State of Pleasant and Benign Inflation

Proving my point, he goes on to say, "Eight of the fourteen papers and speeches that I examined deal with this problem either as their main point or in passing. Bernankeism advises the central bank to avoid the zero-bound problem by creating a constant state of pleasant and benign inflation of around 2-3%." As I read that last sentence, all I could hear was a sizzling sound as my few remaining brain neurons overloaded. So I am not sure about this next part, as the phrase "pleasant and benign inflation of around 2-3%" sort of made my brain freeze up ("urrrkk!") as my puny little Mogambo mind (PLMM) cannot accept the idea that anyone, ANYONE, in their right mind would even think, much less say, much, much less to say in from of witnesses, much, much, MUCH, MUCH less to declare it to be monetary policy, that a constant amount of price inflation, OF ANY AMOUNT, is even benign, must less pleasant!

Working myself into a Mogambo frenzy of outrage (MFOO), I throw the window up, lean out, and shout, "Stop the presses, America! I, The Mogambo, declare that anyone who would proclaim such an asinine thing is a dangerous lunatic!" By this time I am screaming like a wounded banshee in my rage, and neighbors were soon crashing loudly into the room to wrestle me to the floor and stuff smelly rags into my mouth, trying to get me to stop screaming, but which only made me scream louder! Arrgghhh!

And another thing that I was screaming about is how Congress, the biggest bastion of butthead bozos in the history of the USA and an embarrassment to themselves, their families and all of us, just sits there as this horrid little man is telling them that we are going to have constant, simmering inflation, the kind where, little by little, month by month, prices creep creep creep upward, but your income does not. And every month you have to borrow more money, or give up something else, or cut back on something else, or reduce your consumption of something else, and after awhile it starts adding up and up, and then one day you get down to rationing basic necessities, and you get angry and scared, and then angrier and scareder.

But we are not here to talk about how I am an angry coward, as I am tired of hearing it. And while we are talking about it, I am also tired of hearing how I am an ugly idiot and I stink, too. So I quickly veer back to the subject and say that Ravi Batra, who is an economics professor at Southern Methodist University and author of terrific doom-and-gloom books with terrific titles, goes beyond the anger and cowardice thing in his new book entitled "Greenspan’s Fraud." Anyway, he ties this all in with what he calls the Wage Gap, which is the difference between the rise in wages versus the rise in productivity.

Here Mr. Batra takes it up and says, "According to this theory, the rising wage gap creates exponential growth in debt, which in turn generates an exponential rise in profits, leading to the share price bubble. Eventually, debt growth slows, so the demand-supply gap, thus far hidden by the debt mountain, comes to the surface; profits plummet and stock markets collapse."

And you can tie that in with Bill Bonner of the when he correctly notes that borrowing for consumption is the equivalent of a free lunch to businesses, as everybody gets to sell stuff to people without first having to pay wages to those people as workers! Money and sales come out of nowhere! False profits!

Robert Blumen: Make a Lot of Money Available

But none of this is in keeping with the current theory of economics, which is preposterous through and through. So what is this bizarre new economic theory that allows ever-increasing asset values? Mr. Blumen explains, "Dr. Bernanke accepts Milton Friedman’s theory of the Great Depression. In the Friedman view, a contraction of the money supply brought about by loan defaults and then bank failures turned what would have been an ordinary recession into the Great Depression. This catastrophe could have been avoided had Fed inflated sufficiently."

Wow! See how easy this stuff is? All the government has to do, see, is make so much money available, see, at such low interest rates, that (are you following me so far?) people can’t stop themselves from borrowing the money and goosing the economy by producing and/or distributing the goods and services being bought by the government itself! There is, literally, no upper limit on the amount of debt that people can, or will, carry!

I am laughing! Hahaha! I laugh because, and this is the important part, this is freaking insane! How can anyone possibly think, even for a minute, even for a second, even for a teensy weensy micro-second, that an economy that has grown because of government spending and accumulation of massive public and private debts is going to, one day, magically, be transformed into one that does NOT depend on government spending and ever-higher debt loads? Hahahaha! Then where is the money going to come from, moron? Hahaha! I am laughing my big fat Mogambo butt (BFMB) off here! Hahaha! Stop! Stop! My sides are hurting from all the laughing! Hahahaha!

But, wiping the tears from my eyes, I get suddenly very serious and note that Ben Bernanke, the next chairman of the Federal Reserve, actually believes this, this, this (pause for dramatic effect) stupidity! He actually does! And he is the next a chairman of the Federal Reserve! I keep repeating this because my mind refuses to accept the fact that we Americans, who like to pride ourselves on how smart we are and how wonderful we are, would do something so, so, so, so (pause for another dramatic effect) incredibly so, so, so (a crescendo of a pause) stoooOOOOooopid! The mind screams "Noooooooo!"

Mr. Blumen doesn’t want to answer my question, but instead goes on to send me screaming from the room by explaining "The third principle of Bernankeism is the necessity of ‘unconventional measures.’ The reader of the Fed’s papers and speeches will find a series of increasingly exotic plans for the dollar. From beginning to end, these methods range from the merely unsound to the bizarre and terrifying." Now, I don’t know about you, but being a real coward and crybaby little wuss, I don’t like things that are classified as either bizarre or terrifying. So with real dread in my voice, I timidly ask, "Like what, dude?" Well, how about, for example, "money rains", whereby the Fed would "give money away either through directly disbursing currency to the public or by disbursing it through the banking system." By this time I am sure your heart is beating like a trip-hammer, boom boom boom at the very thought of such monetary sinfulness! Nobody ever needs to work, because the government will give everybody money to s end!

Then, with this wicked little grin on his face, Mr. Blumen goes on to say that another scam is "to make money pay a negative nominal interest rate, by imposing some type of ‘carry tax’ on currency and deposits. A tax or fee on Reserve deposits of 1 percent per month, for example, would mean that those deposits, in effect, pay a nominal interest rate of roughly minus 12 percent." What?!? And note the use of two different punctuation marks, where I was trying to be clever and failing miserably, to indicate a mixture of anger, shock, disbelief, anger, fear, anger, terror, confusion, some more anger, and the vague, tentative beginnings of what appears to be jock itch.

But the idea is that you would spend all your money in a fit of consumption, rather than saving it, because you would be paying a 12% tax on it if you did! My heart is slamming into my ribs at the very thought that anyone would actually advance such a terrifying idea, much less the next chairman of the Federal Reserve.So, is it any wonder that I strongly advise you to buy gold? And is it any wonder that gold is doing so well? And is it any wonder that gold will CONTINUE to go up in the face of this Bernanke thing?

Until next time,

The Mogambo Guru
for The Daily Reckoning

Decemeber 26, 2005

Mogambo Sez: No news is good news, and there is nothing new in the Mogambo Retirement Portfolio To Amazing Wealth (MRPTAW); keep accumulating oil, gold and silver, and things related to them. The recent declines in prices is just a benevolent Lady Luck being very nice to you, so that you can leisurely walk over and pick some of these things up at bargain prices. Don’t be a chump. Do it!

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, and a vocational 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.

There were plenty of presents under America’s Christmas trees this year. If you go by appearances, the whole nation is richer and getting richer. House prices are still going up. So are stock prices. Shoppers are still spending money. So far, our worries seem pointless.

America is evolving into a new, post-industrial economy, say economists. This new economy can handle far higher debt loads. People can live in bigger houses with bigger mortgages (see below). And the trade deficit really doesn’t matter.

We don’t doubt that some companies, and some investors, can flourish in this new economy. They will come up with new and better products…and outsource the making of them to lower-cost parts of the world. What we doubt is that the economy as a whole can prosper when most of its citizens have to go further and further into debt to make ends meet.

When people spend money they’ve borrowed – as opposed to money they’ve earned – it has effects that are almost too wonderful. Companies can sell more products domestically without an offsetting labor cost; so they become more profitable (temporarily). And more people go to work in the retail sector (and in housing) helping each other spend their money.

On the surface, it sure looks like the society is richer…more profits…more spending…more sales…more people working…more PSPs under the Christmas trees. But whence the source of this wealth? Is it real?

Incomes per hour are not going up – they’re going down. And the average man…as we recall the data…has no more real spending power per hour worked than he did 30 years ago. Is he richer? Hmmm…his house went up in price. His wife went to work. Interest rates went down…finance companies invented new ways to lend him money…so he can spend more. But what is it that brings him the extra spending power? Is he really benefiting from this new, post-industrial economy? Does he get a share of the profits from selling iPods? Does he get royalties on Disney movies? Not likely.

And why should he? Inherently, an hour of his time is no more valuable than that of a Chinese person. Why should he earn more? Why should he be richer? Whence cometh the extra loot? In the past, the answer was simple. The factories – representing huge, fixed capital outlays – were in his backyard, not in China’s. Now what’s in his backyard that makes his labor so much pricier? The new post-industrial ‘platform’ companies are freer to move about. He cannot get a grip on them. He cannot force higher wages out of them. Nor is he in a better position to own their shares than an investor from Paris or Manila.

He had a huge advantage when America was an industrial country – the factory could not escape. He and other workers could unionize and exploit the capitalists. No more. Where is his advantage? Is he better educated than the Chinese? Has he more oil in his backyard? Has he more skills? Even if the platform, creative, genius companies were more profitable than the factories…why would they give this fellow a piece of the profits?

Not that we’re getting misty eyed over the fate of the poor lumpen. He’s had it good for a very long time. If it ain’t so good in the future, well, that is just the way things work. But he really has no way to increase his purchasing power — faced with billions of competitors in the East — how will the U.S. domestic market grow? How will he pay back all the money he borrowed? How will he keep up with payments…with spending…with life’s little setbacks…when the credit flows less like Kool-Aid and more like tar?

We don’t know. But we wouldn’t want to hold his mortgage. And we suspect that the marvelous performance of the U.S. economy over the last few years is a trap and a swindle. It was caused not by a dynamic new economic model, but an old-fashioned credit binge.

More news…if there is any…


Kate and Addison, reporting from an empty office in Baltimore:

Not too much to report today, as everyone is recovering from the holiday festivities. We’re sure most people are going to take it easy this week, but there is one thing you should do before the New Year: check out the Agora Financial Reserve.

This is the best offer of 2005…if you subscribe now, you can get every service Agora Financial has to offer – for life. And as an aside, one of these services, Outstanding Investments, was named the number one financial newsletters by Hulbert Financial Digest. But you have to hurry…the doors of the Reserve will close on January 1, 2006.


Bill Bonner, back in Nicaragua…

*** This is certainly the time of year for countdowns…top songs of 2005, top movies…and top financial newsletters. While Dick Clark will surely not be counting these down, the Hulbert Financial Digest took the time to list the top ten financial newsletters of 2005.

And the number one financial newsletter of 2005 is…Justice Litle’s Outstanding Investments!

MarketWatch reports: "By Hulbert Financial Digest count, Outstanding Investment’s portfolios are up 47.8% over the 12 months through Nov. 30, vs. 6% for the dividend-reinvested Dow Jones (INDU) (and 9.9% for the dividend reinvested Dow Jones Wilshire 5000 (DWC))."

*** A note from Steve Sjuggerud:

"Hang with me…[Look at] a chart of…the median price of a new U.S. home, per square foot, adjusted for inflation.

"The results are surprising… The price of a new home per square foot adjusted for inflation is consistent, and appears relatively flat since 1970.

"The 35-year average, neatly, has been $100 a foot. It’s amazing how consistent it’s been… roughly between $90 and $110 for over 30+ years.

"New homes have steadily risen in price, so they say. That statement is correct, but it’s missing this important truth. It appears that the size of a new home has roughly increased at the same rate as the price of a home, after inflation (roughly 0.1% compounded per month). So saying it another way, the gains in median home prices over the last 35 years can significantly be accounted for by inflation and by the increase in square footage."

*** Christmas comes to the tropics just as it does to the rest of the world. We have a tree…with lights…and under it, we stacked presents for the Bonner clan.

But there is a big difference between Christmas as celebrated by a typical American family and the Christmas that many Nicaraguans know.

"Most of these people are so poor they can’t afford to buy Christmas presents," a friend explained. "That’s not true around here. We employ so many people [at Rancho Santana] that people have some money and can buy there own presents. But if you go a few miles in any direction, you will find people who have almost no money at all,"

We were already struggling with superiority. Compared to the local people, we are fabulously rich. We come to Nicaragua carrying our presents and expecting to celebrate as we north of the Rio Grande. It is not especially lavish, compared to the standards of New York or San Francisco, but here it must seem to the indigenes that we are like Saudi princes or Silicon Valley moguls.

A man struggles to feel superior to his fellows. But when he feels too superior…and knows down deep in his heart that he has done nothing to deserve it…it chaffs him like a pair of tight underpants. He just doesn’t feel comfortable. For he feels he has an unfair advantage…that the playing field was tilted in his direction. So he can’t enjoy his superior position.

We cannot change the world. But we do what we can to make our own little corner of it as agreeable as possible. The jefes at Rancho Santana decided to play Santa Claus. They bought a thousand toys to be handed out to the local children. On Christmas Eve, we gathered the toys at the health clinic and sent a truck with a loudspeaker through town telling people that Santa had come to town. If we have been selling lottery tickets or mortgages, we would have gotten rich. The children and their parents began lining up…Elizabeth attempted to peer into each little boy’s heart to determine whether he would prefer a set of toy trucks or a plastic helicopter. After the present was handed over, the child’s hand was marked with ink. But that was not enough. Soon a black market rose up behind the clinic…with little boys and girls buying and selling each other’s toys.

"Hey, wait," said Antonio to one little boy who looked both familiar and guilty. "Weren’t you just in this line? Didn’t you already get a present?"

The boy held out a freshly washed hand. "No, that must have been my brother."

The little town of Limon ran out of children before we ran out of presents. The rest were loaded on a pickup truck and taken to a different town.

At least Santa put in an appearance.

The Daily Reckoning