Pretty Rocks as Money

The Mogambo used to rely heavily on the Chinese…for egg rolls, cheap high tech products, and especially for the "giggly Geisha girls." Lately though, he’s becoming quite wary of our foreign friends from the Far East…well, maybe not the Geisha girls.

As I understood it, the deal was that those Chinese guys would remain content with their peasant status, work like slaves for pennies a day in horrible working conditions, and then we Americans, for our part, would sit around in our air-conditioned offices, waiting until the boss isn’t looking, then go online to go shopping to buy those cheap Chinese products, and download entertaining pornography to pass the time while we wait for delivery! And use money borrowed from the Chinese to pay for it all! Isn’t that the way you understood the arrangement? Me, too!

But, according to XFN, "China is beginning to have an impact on U.S. technology industries formerly thought to have been insulated from low-wage overseas competition, according to a report prepared by a U.S. Congress-mandated commission. China’s exports of electronics, computers, and communications equipment…are growing much faster than its exports of low-value, labor-intensive items."

Hey! I know what you are thinking! This isn’t fair! This proves that you can’t trust the damned Chinese!

Chinese Economic Growth: Growth, the Deficit, and Inflation

Chinese economic growth has been averaging 9.7% a year from 1990 to 2003. Partly as a result, the People’s Bank of China said that China’s foreign exchange reserves rose 51% last year to $610 billion, a new record. (But as John Mauldin reports, suddenly, the overwhelming bulk of that increase in reserves was NOT in dollars!) And China’s M2 money supply growth expanded 14.6 percent from a year earlier. M2 in China is now up to 25.3 trillion yuan, which apparently works out to $3.06 trillion, which is, for comparison, roughly equal to half of our M2 money supply. So, like the budding little capitalist swine that they are, and we are, and we all are, the nefarious Chinese now want to invest in producing high-value items, taking the bread out of our mouths! As one of the bright dudes at The Daily Reckoning website notes, also looking at the trade deficit, "Over the last 12 months, exports of ‘high tech products’ actually FELL 21%." How much longer before they start producing some nuclear weapons, like us? And then they can strut around the world, randomly kicking butt, like us! And won’t that be nice? But life is all eggs rolls and Geisha girls who are all giggly and happy, until they find out I have no money, and the inflationary impact of such unrestrained money/ credit/ production excesses is showing up as higher and higher consumer prices, which is why the Chinese are trying to cool off their economy, even though the official Chinese consumer price inflation is only 2.8%. On the other hand, America’s official inflation rate is higher at 3.5%, and instead of trying to cool the economy in the face of such high inflation; the Bush idiots are trying to stoke inflation even higher! And then people wonder why The Mogambo has locked himself in the Mogambo Fortress Of Solitude (MFOS) and is writing terse, incomprehensible letters to George W. Bush (e.g. "Dear Butthead President: Arrrggghhhh! Signed, Angry in Florida (AIF)"). And speaking of China, one of the most Profound Moments In History According To The Mogambo (PMIHATTM) is that Mises.org reports that the Taiwanese have published, in Chinese, a reprint of Murray Rothbard’s famous book, What Has Government Done to Our Money? This miraculous little book (62 pages), which is actually more of a booklet, contains all you need to know about money, credit and economies, and the disastrous results of fiat currencies, fractional banking, government deficits and all the rest of the stuff that keeps The Mogambo screaming long into the night until the police come and make me shut the hell up by putting handcuffs on my wrists and tape over my mouth, which tastes like crap, in case you were wondering, and then the rest of the night all I can muster is muffled cries of rage ("Mmmffhhh mmmummfffmmmm!").

And now that the book is translated into Chinese, that singular effort will doom us if they take it to heart and base their money on gold. Our only hope is that the politicians of China are as corrupt and stupid as our own, and opt to go with a profligate central bank creating and un-backed paper currency in a banking system rife with fractional banking excesses, too.

Let’s not count the Russians out! Agent 007 ("The name is Bond. James Bond") has had his share of run-ins with those guys, now their central bank reports that their foreign currency and gold reserves rose to a record of $124.6 billion. Note that they are including gold in their report, which we do not, and they are accumulating gold, which we do not, either, mostly because our government and central bank figure that Americans are too stupid to know the significance of that. The only good news is that Rothbard’s book has not been translated into Russian, as far as I know, although the fact that they are accumulating gold shows that it probably has. Now we have the Russians AND the Chinese to worry about! Fabulous. Just freaking fabulous.

Chinese Economic Growth: The Dollar’s Questionable Future

People often ask, "Mogambo, how come you never amounted to anything and are, according to recent data, actually a big failure in everything?" Well, to be fair, they usually only asked me that question one time, and then forever after they carry bad memories and/or actual scars to remind them not to ask me THAT damn question again!

But they are wrong when they say I have failed at everything, because you can ask anybody who works at the supermarket about monetary policy and they ALL know all about how the dollar is being destroyed by the Federal Reserve, and how they are literally creating this tsunami of credit and money, which is going to rise up destroy our money by lowering its buying power to, rounding off to three decimal places, squat. And if you have never actually tried to exist on money that has buying power that registers in the "squat" range, then gather up some attractive pebbles from the roadside and try and use those "pretty rocks" as money when you go to the store. If you try that silly crap around here, as soon as you use the phrase "pretty rocks" the manager will probably run off, tearing out his hair and screaming, "Noooooo!! Not the damned Mogambo and his damned ‘pretty rocks’ and his damned loud monetary policy lectures! Death, where is thy sting?"

But Hans Sennholz takes the calm, philosophical approach, as he demonstrates with his essay, The Dollar’s Questionable Future. He writes, "If the love of money is the root of all evil, the depreciation of money must be the mainspring of all shams and frauds. It works silently and covertly, impoverishes many while it enriches a few, and thereby inflicts great harm on social cooperation and international relations."

And what do you get when you, as he says, inflict "great harm on social cooperation and international relations"? You get strikes and riots, something like the recent outbreak in Moscow when they tried to trim a little off their bankrupting welfare payments, and countries like the U.S.A operating as terrorist nations that routinely invade other countries and kills whole swaths of people. Oops! But then again, nobody ever said that the downside of a fiat currency was pretty.

Regards,

The Mogambo Guru
for The Daily Reckoning

January 24, 2005 — Paris, France

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.

Monday, Monday…can’t trust that day…

It was reported last week that 70% of central bankers are increasing their reserves of euros. As to the world’s erstwhile and present reserve currency, the dollar, they seemed to have not growing reserves…but growing reservations.

We have reservations about the dollar as well. Whatever it is worth today or tomorrow, we’re sure it will be worth less eventually. That it is not regarded as worthless already is remarkable. The average dollar is such a bit of inconsequential nothingness; it must yearn to be trash. "In your dreams," say its pals. The average dollar is nothing more than electronic information. It "exists" thanks only to the ability of digital technology to keep track of it. Relatively few "dollars" ever make it to paper, and many of them end up in the pockets of Russian drug dealers and African politicians. Most "dollars" in most accounts are not even graced with the image of a dead president; when the end comes, they won’t even by useful for starting fires.

It is vanity that keeps the dollar in business, dear reader. And it is vanity that will make it worthless. Economists want money they can control. Central bankers want money they can debase. And politicians want money they might get their mug on.

And here…we begin a Daily Reckoning peregrination…and to give fair warning: we might wander.

Money is our beat, of course. But we try to understand the world of money by looking at the wider world in which it plays such a big role. The trouble with the big wide world is that it is never quite good enough for people. They keep trying to improve it. No harm in that; you should always try to make the world a better place. Wink at a homely girl, perhaps, or curse a bad driver. But the world improvers are rarely content to with private acts of kindness and philanthropy. Instead, they want vast changes – almost always brought about at the point of a gun.

Thus, it was with that, that the U.S. Federal Reserve was created in 1913 – and given the power to control your money. Left on our own, the dollar – backed by gold – went up and down. The new dollar, managed for us by the PhDs at the Fed, is more predictable. It almost always goes down.

Today’s newspaper oozes more world improvements. On the editorial page of the International Herald Tribune is "A Proposal to End Poverty." The proposal was made by famous world improver, Jeffrey Sachs, who urges rich nations to rob their own citizens so that the money might be turned over to poor nations.

"Giving money to poor people in France didn’t do them any favors," said an attractive woman at dinner Saturday night. "I work in Social Services. People used to be poor in France. But they’d have to get up and go to work. Now, with all the social assistance programs, they don’t have to get up at all. We see more and more teenagers who don’t go to school because the parents don’t get up in the morning. Nobody gets up. And the teenagers just stop going to school. When we get them, they can’t read or write."

If the world improvers want to give them own money away – more power to them. But what they want to give away is your money. And they want to do it not for reasons of charity, but for vanity.

While the IHT dreams of ending poverty, our favorite columnist, Thomas L. Friedman joins our president in wanting to "rid of the world of evil." We are not making this up; this was George W. Bush’s own line. He led America into Afghanistan, and then Iraq – while Friedman cheered. Now, the two men are hoping that the forced conversion of the Iraqis – to democracy – will squeeze out a little more evil from the planet. In the 17th century, Louis 14th – the Sun King – forced Protestants to convert to Catholicism…he must have thought that reduced evil.

We thought of Alexander the Great. The man must be a great hero to the world improvers – at least, that is how Oliver Stone presented him. In the memorable (because it was so bad) scene we recalled last week, Alexander turns his face to the sky and dreams of a better world…while his friend drops dead next to him. But like all world improvers ever since…the only better world he can see is the reflection of his own face! Alexander the Great wanted to remake Babylon into a Greek city. Now, George the Great wants to turn Baghdad into an American one. Whether it is his religion, his politics, or his material wealth – the world improver imagines nothing better than his own. And for all his guff about making things better, what he really takes up is a vain effort to make his neighbors more like himself.

More news, from our currency counselor…

————–

Chuck Butler, reporting from the Everbank trading desk:

"On the long side of the ledger, a recent survey by the Royal Bank of Scotland shows that almost 70% of 56 central banks surveyed have grown their holdings of euros, and reduced their share of dollar holdings. Most of them cited the fact that the United States has a funding problem that continues to grow as their reason for putting dollars on the chopping block."

————–

Bill Bonner, back in Paris…

*** "Oh, you’re American…I go to the United States regularly…usually to Chicago or Cleveland." One of the guests at Saturday’s dinner works for a large German company that makes brakes for heavy trucks. He finds selling them in America difficult.

"Our brakes are really much better than the brakes typically used in the U.S. But Americans are funny. They are not very technologically advanced or forward-looking. The quality of the trucks on the road in Europe, for example, is much higher – technologically – than in America. But in the U.S. they just want to keep things cheap. It’s a very short-term mentality. They want to show good profits at the end of the year. So they delay making investments in new equipment. You can see it everywhere.

"Did you notice when driving around Normandy how lots of the towns and villages look picture-perfect? Did you notice why? First, of course, the houses are generally well designed and well built. Nobody puts up mobile homes. There are no cheap houses. Everything is solid. Not as solid and modern as in Germany…but much better than in the United States. Also, did you see power lines? Well, there aren’t many, because they put the lines in the ground. It’s more expensive – but you get rid of all those ugly poles. And it might actually be cheaper in the long run. But it takes a lot of money upfront.

"Well, that’s kind of the way everything works. That’s why our trains are so much better – we’re willing to spend the money. And that’s why our brake systems are better. But they’re more expensive – which makes them hard to sell."

*** One of the biggest public spectacles of the year was last Thursday: George W.’s second Inauguration. Our intern, Sarah Finley, was there…and this is what she reports:

"Headed off to DC to protest the inauguration. I cannot stress how much this is not my thing. And if I hadn’t heard about Turn Your Back on Bush, I would never have bothered. But the protest I joined was a quiet sort, like myself. And like myself, our group went hugely unnoticed. There was no yelling, no posters. We were simply to turn around when Bush’s motorcade came by.

"However, the group was also overly nervous of missing the motorcade, so we were given instructions to turn around any time a similar group of cars came through. I am too much of a joiner to stand apart from their stupidity, so I dutifully followed orders, which meant we turned our backs on Clinton [one of the first motorcades to drive by]…

"When the event finally occurred, it was hard to miss, which was my point, given the announcer telling us he was coming, and the supposed five branches of the military proceeded him in symbolic welcome and announcement and the media trucks, apparently doing the same…"

Even in quiet protest, people sometimes do not get what they expect. Rather what they… well, we’ll let you fill in the rest, dear reader.

*** And news continues to hit the fan over at Fannie Mae – one of our favorite public spectacles…

Fannie Mae filed a report with the SEC on Friday, copping to the fact that they are eliminating 2004 performance bonuses for 43 of their top executives. They’re going to slash executive stock option payments too… at least until they have "consistent financial data" for 2001, 2002 and 2003.

The AP reports: "To increase the company’s capital reserves, Fannie Mae announced it was cutting its first-quarter dividend payment this year by half, to 26 cents per share. It was the first dividend cut for Fannie Mae in more than two decades…" Fannie was once believed to be above reproach and one of the safest investments on Wall Street.

And…poor Franklin Raines. It looks like, despite being allowed to retire early with his $1.3 million annual pension in tact, he and Timothy Howard, the firms erstwhile CFO, won’t receive their 2004 bonus packages.

*** We drove out to Normandy this weekend. There, the mayor of the small town where our new house is located greeted us.

"Welcome," he began. "You know, Americans are not very well liked in France. You must have heard that a lot. But it is not exactly true. There are still many people in France who appreciate you."

"We did not come here to be loved," we replied. "We just don’t want to be laughed at in public."