Numberically Precise, Hysterically Rabid

Mogambo keeps one eye on Fed debt creation and another on the cardiac resuscitation unit…

The Fed has been unusually reserved of late, considering that it has taken a back seat to the alarming activities of the Treasury, which has been issuing, to use the numerically precise term, ‘scads’ of debt. This debt issuance is running towards $600 billion per, and by ‘per’ I mean not just an ordinary ‘per year,’ but an hysterically rabid "per freaking year, dude!"

This number is technically far outside the range of ‘scads’ for those of you who are not conversant in the subtle nuances of higher math, but it will have to do for the nonce, since nobody had ever coined a word to describe that much colossal issuance of debt, since historically it was always deemed to be impossible that any government would be so embarrassingly profligate and economically illiterate as to actually do something like that.

But now, tired of taking a back seat to the Treasury, which is having all the fun, the Fed has jumped back into the fray. Last week, Total Fed Credit jumped by – and I hope you are sitting down for this, because I was not and now I have a big bump on the back of my head where I hit it when I passed out from the shock of reading such a number – $14 billion. The dollar sign in the front indicates that those are, yes, dollars. And the 14 billion tells you how many dollars. So, yes, putting it all together and summing up, it truly is $14 billion United States dollars, and it is not some optical illusion.

Fed Credit Jump: $1.4 Trillion in One Week

Now I know that this doesn’t seem like a lot, as those of you who have had the misfortune of requiring medical attention of any kind realize is only about a three-day stay in any hospital, but remember that this is the original high-powered money, which is the starting place for that fractional-reserve multiplier, and so you need to multiply that $14 billion by almost a hundred to get the new multiplied total. When you do that, and I did, which explains why my eyes are comically rolling back in my head and trained attendants are applying the paddles from a cardiac resuscitation machine to my chest and shouting "Clear!" in my ear so loud that I am having trouble listening for the pizza delivery guy to ring the bell, it is $1.4 trillion.

Trillion! In one freaking week! "Clear!" Zzzzttt!

If that wasn’t bad enough, the surprising jump of $14 billion was so high (cue audience happily shouting in unison, "How high, Mogambo?") that it may set a new world record, at least for us Americans! I’m not sure about anybody else. But to repeat; maybe a new world record!

So what I decided I’d do, see, is just try and find out if this is indeed a new record, and maybe put to rest some of those ugly rumors that I am so lazy that I am actually in some catatonic state or other, but anyway take the easiest path possible to find out if it is even true, and not a typo for crying out loud. But then I decided I didn’t need to do that, and for two perfectly good reasons.

Reason Number One, I am the Mogambo and I don’t need no steenking facts, and Reason Number Two is that I can easily, and it is the ‘easily’ part that really swung the deal, look at the MONTHLY level of Fed credit, because I have it all graphed out. But not weekly data, unfortunately. So I was feeling kind of glum about this lack of proof, and then I remembered Reason Number One, and then I felt better.

Fed Credit Jump: Never in One Month

So, anyway, while I am fumbling around in the rat’s nest that I call my desk and files to try and locate these graphs, I come across a lot of interesting stuff, like a collection of letters from readers asking, "Are you some kind of lunatic mutant or something?" (answer: yes), and some random death threats from government agencies and agents themselves, although their vile threats are cleverly encoded into what appear to be ordinary advertisements for toothpaste and stuff. It is a code that only I understand, and the government knows that, and that’s why you can’t read these coded messages, but they’re there, all right, and it proves they’re out to get me! Trust me on that!

But you will be happy to know, or maybe not, depending on your perspective, that, after I located said graphs, as far as I can tell from this cursory and wildly incompetent search of the data, there has never been a freaking MONTH, let alone a freaking week, when Total Fed Credit jumped by $14 freaking billions of dollars.

So now, are you happy to know that or not?

I must assume that the reason for the explosion in credit is to produce, out of thin air, the money with which to buy all of that new debt that the Treasury and corporations and GSE’s are issuing. I mean, somebody has to buy it, don’t they? And don’t look at me, for as much as I love America, I just don’t happen to have a spare $600 billion sitting around. And even if I did, I am not sure that I would have ANOTHER $600 billion next year, or the year after that, or the year after that, because even the official projections forecast deficits in that range for the next, oh, few thousand years or so.

Fed Credit Jump: Since When Does the Government Tell the Truth

And don’t be fooled by that line of crap that the budget deficit is some piddly $400 billion or so. Just remember, nobody can remember the last time the government told the truth about anything, so why in the hell would you believe them about the level of deficits, when they admit that there are things that are ‘on-budget’ and things that are conveniently ‘off-budget,’ as if such a stupid thing could even exist in reality?

But I know that you won’t take my word for it, even though I am trying desperately to say it with the most sincere look on my face that I can muster, so I have quoted the’s Jeffrey Tucker, who says: "Once you cut out all the fancy counting methods, and think of the budget deficit as the annual change in the government’s debt (the old- fashioned definition), we can see that the $500 billion mark has been reached and passed in the first 10 months of FY 2003." So there you have it; the only true way to assess the deficit is the way Jeff and I do it; look at the total level of indebtedness. And it is running at, conservatively, $600 billion.

Considering other government monetary atrocities committed during the week, it is surprising that my brain did not burst into flames. The tables in this week’s Barron’s were full of them. The banks are suddenly sitting on huge, eye- popping increases in free reserves. The foreign holdings at the Fed increased another $6.4 billion.

And the Gross Public Debt ballooned by $29.4 billion! This may be part and parcel of trying to soak up the $44 billion in government debt that the banks dumped.

Warm regards,

The Mogambo Guru,
for The Daily Reckoning

September 01, 2003

P.S. Mogambo sez: Internal statistical things that I look at are all whirling around. Things are blowing up without making a sound, but that doesn’t mean you are safe from shrapnel. Take the family and your gold to the storm cellar and put on a brave face for the sake of the children.

Richard Daughty is general partner and C.O.O. for Smith Consultant Group, serving the financial and medical communities, and the editor of the Mogambo Guru economic newsletter, an avocational exercise the better 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.

"Markets did not react" to Greenspan’s important speech last week, says a Reuters report. Most likely, they had no idea what he was talking about. Had they known, the headlines might have been different. "Chairman’s speech triggers sell-off of dollar assets," the papers might have reported. "Investors abandon overpriced stocks," they might have said.

Alan Greenspan was defending himself at the annual get- together in Jackson Hole organized by the Kansas City federal reserve bank. Critics have argued that the Fed chief should have stopped the bubble on Wall Street before it got too big three years ago…and that he over-reacted to deflation fears this year. They suggest that the world’s most powerful central banker ought to rely more on specific targets and specific formulae, rather than his own intuition.

You will recall, dear reader, last September we also commented on Greenspan’s speech. Our best-known economist was defending himself last year, too – explaining that he couldn’t spot a bubble until it blew up in his face. Even then, he’d had to check the mirror for bruise marks to be sure.

A bubble is the most exaggerated and dramatic event in the market…the equivalent in politics is war…in romance, it is falling head over heels in love. If it cannot be detected until after it is over, what can? And yet, the Fed chief says that while he was blind to the bubble, he now sees a recovery coming, clearly. What is it about his glasses that makes it possible to see positive developments when they may still be far in the future, but not negative ones when they are right in front of his nose?

If people really understood the deep context of Greenspan’s speech, they would have panicked long ago. Because they would have known that the Fed chairman is nothing more than the mumbling mouthpiece for the greatest bamboozle in world financial history. Here we are, at the beginning of the 21st century, and the entire global economy rests on a compound fraud: that American consumers can continue to take up the world’s excess production, forever…and that Mr. Greenspan can see when the economy is headed for trouble and take swift action to lead it to prosperity.

If people really understood what was going on, they would be spooked and appalled. Mr. Greenspan just ‘makes it up as he goes along,’ guided by theories that are mostly disproven, relying on numbers that are dangerously misleading and advisors who are recklessly lunkheaded.

"This speech puts the nail in the coffin of econometrics and its promise of exactitude in economics," notes a more accommodative John Mauldin. "What Greenspan is asserting is that the Fed models are simply not powerful or robust enough to be able to predict anything with a real degree of certainty, no matter how much economists would assure us they do. He opens up a brave new world of uncertainty, and for that candid admission, I say, Bravo!"

If people really understood how Greenspan and the Dollar Standard work…they would sell their dollars immediately and buy gold.

Gold, we note, rose $12 last week. Gold stocks were up 7.2%.

Over to you, Eric:


Eric Fry, back on the job in Manhattan…

– Your New York editor just returned from a five-day junket to Southern California with his three children. Day number three of the itinerary featured the obligatory visit to Disneyland – a.k.a. "The Happiest Place on Earth." But, truth be told, your editor was much happier watching his kids surf at Doheny Beach than he was dodging obese American tourists at Disneyland.

– Walt Disney’s world-famous theme park is certainly an enjoyable destination for kids, but "The Happiest Place on Earth" it is not. That moniker rightfully belongs to Wall Street. What location could possibly produce greater happiness than the New York Stock Exchange? And what activity could possibly produce a more sublime joy than buying overpriced stocks and watching them go up every day? Wall Street is the ‘E-ticket’ of greed satisfaction.

– What’s more, investors needn’t select a specific destination within this mega-monetary theme park; it is Fantasyland, Adventureland, Frontierland and Tomorrowland all rolled into one. Indeed, on Wall Street, Tomorrowland IS Fantasyland. If Wall Street analysts did not encourage the lumpeninvestoriat to fantasize about tomorrow, who would dare to buy stocks selling for 35 times earnings?

– But the lumps are buying and buying and buying, as if stocks were DVD players or microwave ovens or Mickey Mouse caps. The difference, of course, is that DVD players don’t increase in value, but stocks ALWAYS do. Last week, stock values increased once again as the Dow rose 66 points to 9,415 and the Nasdaq jumped 2.5%, to 1,810 – its highest level in 16 months.

– The market has entered a delightful season – a time when the living is easy and the weather is mild. Stocks of all sorts are floating on the gentle breeze of bullish sentiment…and so are bonds and the dollar. Indeed, the entire suite of U.S. financial assets seems to be drifting higher. Even gold is gaining altitude. The yellow metal jumped $5.20 on Friday to $376.80 an ounce. For the week, gold gained more than 3 percent.

– Why is the gold price coming to life, even while most other U.S. financial assets are also rising? Does the Midas metal ‘know’ something that the other markets don’t? Or maybe all markets know the same thing…Maybe they know that the Fed’s anti-deflation campaign is causing a resultant INflation in the U.S. financial markets.

– "Although one of the two lowest-ranking governors of the Federal Reserve Board by seniority, Bernanke has become its thought leader," observes Jim Grant, editor of Grant’s Interest Rate Observer. "It was he who first sounded the anti-deflation alarm, unforgettably stating on Nov. 21 that the marginal cost of producing a dollar bill is zero…Bernanke is as plain-spoken a central banker as they come. Yet even he did not just come out and say, ‘Print money.’ But he actually said was, ‘I hope we can agree that a substantial fall in inflation at this stage has the potential to interfere with the ongoing U.S. recovery, and that in conceivable – though remote – circumstances, a serious deflation would do serious economic harm.’"

– Reading between the lines, the particular strain of deflation that Bernanke most fears is the sort that prevents inflation on Wall Street. When share prices are rising, all is well. Unfortunately, a little bit of inflation – like a little bit of pregnancy – is the sort of phenomenon that usually runs ‘full-term’ once it begins gestating. And already, our embryonic inflation is causing the gold price to stir…Keep your eyes on this baby.

– But inflation or no, the dollar, bonds and stocks are all overvalued, or so we believe, and they ought to be sinking like dinosaurs in a tar pit. Instead, they walk on water…Now that stocks have been rising for nearly one year, and the dollar has been rallying for a couple of months, investors are beginning to trust in American financial assets once again. Stocks, they believe, are a reliable long-term wealth generator, and the dollar is a reliable long-term store of value. We are dubious on both counts.

– Stocks are a reliable wealth generator, as long as they are going up. But when they are going down, they are a reliable – and very efficient – wealth destroyer. And we suspect that overvalued stocks are a much more reliable destroyer of wealth than generator of wealth…But maybe this is a new era.


Bill Bonner back in Paris:

*** $1 billion a week is the current cost of the Iraqi adventure. But even this is not enough for NYTimes columnist Thomas Friedman. We enjoy reading Friedman because his point of view is so refreshingly loony. He believes the U.S. is engaged in some sacred act in the middle east which he calls "nation building."

And he believes we should spend even more money doing it. Building a nation "on the cheap," says he, won’t work. How he knows what it costs to build a nation is anyone’s guess. We’ve never gotten a bid, nor ever even seen a nation successfully built by outsiders. We try to think of examples, but cannot find a single one. What did it cost to build China, or France, or Canada? In every case, the job was done by the people of the country themselves…stumbling towards it over the course of many, many years. Building a country for someone else seems like it is destined to be a thankless task. Besides, if the job were worth doing, shouldn’t there be a profit in it, instead of a loss?

*** Also in the NYTimes, another columnist, Paul Krugman, laments what he sees as "an expensive war" getting more expensive all the time. L. Paul Bremer, U.S. Proconsul for Mesopotamia, says he’ll need "several tens of billions" in extra aid next year in order to keep the desert tribes under control. And everybody except Donald Rumsfeld seems to think more troops will be needed.

"Even the government of a superpower," Krugman elaborates, "can’t simultaneously offer tax cuts equal to 15% of revenue, provide all its retirees with prescription drugs and single-handedly take on the world’s evil-doers – single-handedly because it has alienated its allies. In fact, given the size of the U.S. budget deficit, it’s not clear that America can afford to do even one of these things."

*** Tax cuts are putting more money in consumers’ pockets. But where did this money come from? Nobody – neither consumers nor government – had been saving any money. Before and after the tax cut, 100% of the available cash was being spent. But, what’s this? Despite cutting taxes (and revenue), government spending is actually going up. Somehow, and all of a sudden, everybody is spending more money than everybody ever had. We should ask Alan Greenspan for an explanation. Maybe he could trace it to the ‘productivity miracle.’

*** What is actually happening, of course, is that the U.S. is borrowing more and more of the world’s savings. America’s debt to foreigners increases by about 5% of GDP each year. At the present rate, they will own the equivalent of 60% of GDP in 2008, says Richard Duncan. God bless ’em.

*** A quarter of a billion people now have cell phones in China. They use them to check on the U.S. dollar investments.

*** In Japan, a major turnaround seems to be taking place. Bond yields have nearly tripled since May. They’re up to 1.47%. Consumer prices are still falling, but not as sharply. Stocks are up…it looks like the long-awaited recovery. Or, another phony one.

The Daily Reckoning