Reguarding the Resurgent Ruble

The Daily Reckoning PRESENTS:For many years, the U.S. dollar has been the king of the world currencies. But as China continues to purchase U.S. debt and the demand for oil increases, the Russian ruble might just be the currency to upset the dollar from its throne. From his bunker, the Mogambo Guru has more on this…


I keep looking in wonder at the action in precious metals, and I wonder to myself: “I wonder what in the world is going on?”

If I was the head honcho in China, then I could tell you what I, Emperor Mogambo, would be doing that could explain it. I would be accumulating gold (and lots and lots of it), because my clever Asian reasoning ran along these lines. “Confucius say; ‘Do you honestly think that foreign investors are interested in long-term investments in China, when Chinese history is one long and sad tale of xenophobic, confiscation-loving, imperialist, repressive government, just like all the rest of the world’s governments, only this time we are communists, too? Why in the world would anyone trust China or Chinese money?'”

To answer the question, I would cleverly review American history, especially that part where America rose from nothing to be an economic superstar and dictatorial overlord of the world. In doing so, I would discover (“All hail Emperor Mogambo for his discovery!”) that it was done by gold being money.

Then perhaps, as the new Chinese leader, I would take a few grudging minutes away from auditioning pretty dancing girls for my new Fabulous Mogambo All-Girl Review (FMAGR) to read the Sandra Ward interview of James Turk, founder of Gold, in Barron’s magazine. It is entitled “Yes, $8,000 An Ounce,” which is a real nice way to get my attention. And it did. She writes that Mr. Turk, speaking about Ben Bernanke, says, “he seems to be focused on the deflation in the 1930s, and this is quite alarming. What we don’t need today is a greater supply of dollars. What we need is a greater demand for dollars. The way you improve demand for dollars is to take those steps that will give people confidence in the dollar and its purchasing power for a long, long period of time.”

With typical Chinese logical precision, I merely come to the conclusion that since we Chinese own so many dollars and dollar-denominated assets, and since gold is cheap, cheap, cheap by any metric, then the optimal strategy would be to accumulate all the world’s gold, starting with the biggest hoarder of gold, the U.S. Federal Reserve.

And as the All Powerful Mogambo (APM), glorious new emperor of China, I would instruct my ministers to tell that little pipsqueak Bush that I want him to pack up all the gold and ship it to me, collect, or I’ll sell his stupid bonds and stocks so fast that he will probably make a mess in his Occidental pants as he re-discovers exactly who is actually the boss in the creditor/debtor relationship.

And, to make matters worse for the dollar, there are also indications of an Asian Currency Unit forming, mostly consisting of China and Japan, to trade goods and services their currencies, too.

It is not just the Chinese setting up shop, or the Iranians, or the South Americans – now we also see that the Russians have decided they want to open an exchange to trade in oil, gas, and other goods. They desire that it all be paid for with rubles.

Another big reason, aside from the prestige, is that the velocity of money will, necessarily, increase as it comes pouring through the many intermediaries in the Russian marketplace. No doubt Mr. Putin was looking at the past century, where gigantic money flows in the American oil market produced American-made fortunes, as each American intermediary raked off another few bucks as the money went boinka, boinka, boinka through the system, and then, multiplied by the Required Reserve Multiplier, into the economy as “growth.” And that is good for profits, higher local real estate values, wages, economy, standard of living and a feeling of prosperity that makes for easy-pickings in the corruption department.

How soon will all of this happen? Well, Julian Phillips of the reports that Putin said, “work on making the national currency fully convertible should be completed by July 1, almost six months ahead of the original January 1, 2007 deadline.” July first! Of this year!

So, are foreigners ganging up on us? Yeah, I figure they are. And for good reason: We Americans treat every treaty like the ones we made with the American Indians. Without exception (as far as I can tell), we Americans gave them the short end of the stick. From there, we lied, broke every treaty, stole everything they had, and then killed most of them if we ever had the slightest reason – no matter how slight or temporary, to do so.

And (fast-forwarding to today) like the dirty, deal-breaking, little back-stabbing crooks that we now are, we have also allowed Alan Greenspan and the Federal Reserve to renege on the international deal whereby every country gave up pegging their currencies to gold and instead, pegged their currencies to the dollar, while we, (aka “Great White Father in Washington”) would promise to faithfully hold the dollar constant, in terms of buying power, thus achieving the stability of the gold standard without all those inconvenient gold-standard duties (not to mention the restrictions on government spending and bank revenue).

Although nobody literally said, “We smoke-um peace pipe. Make mark on white man’s treaty paper,” the result was exactly the same. And now these foreigners are angry and simply want their money back. Or at least get the heck out of the system.

One result is how Jim Willie CB, of, sums it up when he writes, “World finance ministers have lost confidence in the U.S. dollar. The G7 Meeting communiqué, announcements by Japanese leaders, statements from European bankers, warnings out of Beijing, outcries from South Korea, criticisms from Russia, agreements in Asia, even statements by the IMF, they all add up to a global banker revolt. U.S. imbalances are not being rectified. The Russian finance minister Kudrin openly questions the U.S. dollar as worthy, given substantial and chronically dangerous deficits.”

Alert reader John P. is walking by, and I shout out, “Hey! John! What’s happening, dude?” He says, laconically, “the world is sending loud signals that that support is about to end…and badly.”

And what happens next? Mr. Willie says, “Expect a rocky several months to contain turbulence, minor panics, and some derivative accidents (likely in bonds).”

And let’s remember that derivatives are merely big, big, big bets used, theoretically, as insurance against movements in interest rates or currency exchange rates for contracts that contain fixed notional amounts of money. How big is this market? I thought you would never ask! Estimates put it somewhere around, oh, say $300 trillion to maybe $450 trillion dollars, which is 10 times or 1,000% bigger, than the entire global GDP of every person and every company in every country on the face of the planet added together!

Julian Phillips says that this Russian ruble thing is “the second most significant step in removing the U.S.$ from the throne of sole global reserve and trading currency! Should any more oil producers take this step, it will precede a U.S.$ crisis and create massive potential instability in the globe’s foreign exchanges.” He goes on to say that this is “important to gold.”

I raise my hand and ask, “Why is the ruble trading in the markets ‘important to gold?'” Mr. Phillips immediately realizes that I am the “slow one” in the class, and wouldn’t understand the answer even if he explained it to me a dozen times. So, he answers by merely repeating, “Needless to say, these moves are very, very positive for gold.” And it worked! Now, I am fixated on the use of the phrase “very, very” as a modifier to the subsequent phrase “positive for gold.” My Grubby Mogambo Greed Antenna (GMGA) actually tingled! OooOOOoooh!

Then he asks, I assume rhetorically, “If Putin keeps his word on the gold front, we should expect Russia to enter the gold market as a buyer soon, too?”

I almost broke an arm, waving it in the air, excitedly crying out, “Yes, it does! It means exactly that! They had better be accumulating gold! And the reason that I think so is simplicity itself:  Would you trust the Russians, the Chinese, or anybody to maintain exchange stability, using a fiat currency, so that you could invest long-term with confidence? You would? Hahahaha! Why in the world would you do that?”

I notice that my laughter rings hollow in the empty room. They have all gone. Nevertheless, I provide, as a coda, “You can ask all the experts you want, but not one of them can name one instance where, long-term, people who trusted governments came out ahead. Go ahead! Name just one! Hahaha! They can’t! Hahahaha!”

Until next week,

The Mogambo Guru
For The Daily Reckoning
June 5, 2006

Mogambo sez: If you are not buying gold, silver and oil stocks now, then you are either a) not as bright as you look, or b) already up to your eyebrows in gold and silver. There are no other permissible excuses.

Editor’s Note: We did some research on Wikipedia. The word “ruble” is derived from the Russian verb ??????, rubit, or “to chop.” Historically, “ruble” was a piece of a certain weight chopped off a silver ingot (grivna), hence the name. The way things are looking, we may see silver return to its glory days as a currency-backing metal.

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.

Every great public spectacle begins with a lie, develops into a farce, and often ends up a tragedy. We read the newspapers and wonder where the war in Iraq stands in the sequence. Certainly, the lies are behind it. The Bush administration told the lies it needed to tell to get the war underway. Now, no more lies are needed. But, does that mean we are in the farce stage? Or have we already moved to tragedy?

“When you open up the strategy for victory, there is nothing inside,” said Representative John Murtha, Democrat from the great state of Pennsylvania. Murtha has seen this show before, in Vietnam. That, too, had to work its way through the three stages. The lies: that Americans should care what kind of misgovernment the Vietnamese had…and that if they “went communist,” the whole of Southeast Asia would fall “like dominoes.”

Then came the farce – in which hundreds of thousands of American boys were “sent to do the fighting that Asian boys should do,” in Lyndon Johnson’s words…sent off with an empty strategy and no real knowledge of whom they were fighting or what they were fighting for, other than slogans as empty as a George Bush speech. And finally, came the tragedy, not so much the American retreat, which was still in the bloody farce stage, but the victory of the reds, who were every bit as asinine and murderous as their enemies made them out to be. But finally, when Vietnam did “go communist,” the whole of Southeast Asia yawned. Nobody cared. The Vietcong had won. And the whole country suffered its victory, like a war wound, for the rest of the century.

There were no real winners in Vietnam. The president says he has a Plan for Victory in Iraq, but there will be no winners there either.

Who will be the biggest loser? We cannot know. It is not given to man to know his fate. All we can do is to try to peek around the corner.

The world was a much different place in 1966 than it is in 2006. Forty years ago, the United States was the world’s undisputed economic power, and still a growing power with a positive trade balance, a net creditor to the rest of the world, and a dollar still convertible into gold, albeit indirectly. Americans still paid off their mortgages. Credit cards were still in the future…along with reality TV and “neg am” mortgages. The generation in command still remembered the lessons of the Great Depression, and World Ware II. They made mistakes – big ones – but they still expected to pay their bills and balance their budgets. What’s more, their largest potential competitors – Russia, China, India – still hobbled themselves with Marxist claptrap that kept them out of world markets for much of the 20th century. In other words, America could still afford to make grandiose mistakes.

The United States is, of course, an imperial power. It is also the world’s largest debtor. Its role in the world is to maintain order. But it can only do so by borrowing money from its former and future enemies! And now, the empire wastes its military resources in a fight that can do it no good, and squanders its borrowed money trying to secure a part of the imperial periphery that can do it no harm; Russia is building up piles of dollars by exporting energy. China is building up mountains of dollars by exporting consumer-manufactured goods. India is coming on strong, too, by offering English-language information processing to the rest of the world.

At some time in the future, these lenders will surely want more for their money than 5%. Already, we read in last week’s paper that China’s key advisors are urging the government to take its dollars and buy oil and gold. At some point, they might want to suggest changes in the trade relationship, or changes in the décor of the White House…or changes in the U.S. Constitution itself. Who knows?

The dollar is, after all, a currency of no fixed value. Both lenders and borrowers are aware that it floats on the wind like odor from a public dump. And when the lenders decide the time is right, they will make a flap. Then, the borrower will find he or she is on the wrong side of the breeze.

Osama bin Laden wasn’t born yesterday. He, too, knows which way the wind blows. His publicly stated strategy is to bleed the empire dry – forcing it to spend $100,000 for every 50 cents his terrorists lay out. It is simple enough to understand the math, but who would have thought that the empire would be stupid enough to fall into the trap?

A “war on terror” is in many ways the perfect war for a bankrupt empire. Perfect for its enemies, too. It allows the homeland team to marshal resources it does not have for a war it cannot lose. Terrorists can only irritate the great empire; they cannot bring it down. No, the empire will have to bring itself down. And for that, we don’t need terrorists. We have Congress and the White House.

More news from our currency counselor…


Chuck Butler has the latest news from EverBank’s world-currency desk:

“The Fed’s Big Ben, the ECB’s Trichet, and the Bank of Japan’s Muto will speak side-by-side today in Washington, D.C. This has the currency traders all lathered up; they believe Big Ben will signal that the Fed is about to pause rate hikes.”

For more, read today’s Daily Pfennig.


And more views from Bill…

*** “Why do you keep attacking these executive salaries?” asked a dear reader. ” It’s a matter between shareholders and management. They can pay them as much as they want. It’s none of our business.”

But we are not attacking. We have no gripe, no complaint, and no remedy.

We only wish to point out that things don’t really work the way they’re s’posed to. What these outrageous salaries reveal is that the capitalistic system isn’t what people think. Or maybe it is past its prime…and been taken over by parasites. Corporate managers should be working for the owners. Instead, they are taking their naïve shareholders for a ride.

Bill Fleckenstein writes:

“‘Make money risk-free!’ That’s usually a costly come-on, as ordinary folks know. But corporate chieftains who sit on their stash of stock options have found a way to turn this unattainable fantasy into reality.

“To begin this week’s portrait of greed outdone by temerity, I’d like to reprise the following from my April 4, 2005, Contrarian, ‘Dear CEOs: Stop fudging your numbers:

“‘It used to be that highly respected corporate chieftains were focused on building their businesses with an eye toward the future, and weren’t overly concerned with the next 90 days’ results. However, since the stock-options era of the mid-1990s, what has often appeared to matter most to those in charge is the business of managing their companies’ stock price.”

“As if that loss of focus weren’t enough, we can now add a new one. To wit, regulators are investigating at least 22 companies regarding whether they may have improperly backdated stock-options grants.”

“As the story correctly noted, if you back date an option, you take the risk of the option out of the equation (and you get to make a whole lot more money). Therefore, you are not aligning the shareholders’ and the executives’ interest – that alignment of interest being the supposed raison d’être for utilizing options.”

*** “A young man was going to get married,” began Peter Mullen’s sermon yesterday. “He did not go to church regularly, and he was too young to know about the big changes that have taken place in the Anglican Church since the 1970s. So, when the vicar asked him whether he would prefer the new service or the old service, he merely answered that he would like the new service, thinking it must be an improvement over the old one.

“But on the way to the wedding, he had a flat tire. And while he was pulled over to the side of the road changing his tire, it began to rain hard. A real downpour. And pretty soon, his pants were getting soaked, so he rolled up the cuffs to his knees, finished the job and raced along to the church, forgetting to let his pants back down.

“Now, he was late to his own wedding…and his poor bride was already at the altar, weeping because she thought she had been deserted. And so, he ran up the aisle and took his place beside her.

“‘Young man,’ said the vicar, ‘pull your pants down.’

“Whereupon the man replied, ‘Well, if you don’t mind, I think we’d prefer the old fashioned service.'”

*** “Why do you want to tell Daily Reckoning readers about the sermon?” asked Jules, 18, who sat through it. “A lot of people have a lot of ideas about God. They all think they are right. Why don’t you include a Hindu…or a Rosicrucian?”

“We are not preaching religion, Jules,” we responded. “But we think the financial world works just like the rest of the world. As you sow, so do you reap. You get what you’ve got coming. We try to show how those principles work in the world of money. Mr. Mullen tries to show how they work in the rest of life.”

Jules is recently returned from his first year in college, full of confidence in his own brain. He went on to say, “But they don’t work. You say yourself that a lot of what you get from investments is a matter of luck. And you know that moral principles don’t really work in the real world either. People don’t get what they’ve got coming. If they did get what they had coming, little children wouldn’t be getting shot down in the streets of Baghdad, would they? I mean, the little children didn’t do anything to deserve death, did they?”

“No, you’re right…it’s not that simple,” was our reply. “But remember that passage from Ecclesiastes 9:11 that said, “The race is not to the swift or the battle to the strong, nor does food come to the wise or wealth to the brilliant or favor to the learned; but time and chance happen to them all.”

“Sounds like you’re saying that it most often comes out the way you expect,” said Jules.

“No, not necessarily,” Elizabeth came to our aid. “What we are saying is that these principles, laws, rules that you find in the Bible – I’m not saying that you can’t find them elsewhere – I don’t know, but these principles are there to help guide you in life. It doesn’t mean that if you follow them you’ll get what you want. And whether you get what you deserve or not, we can’t know that. That’s for God to decide. I think your father had a line in The Daily Reckoning once that was helpful. It was from George Washington, who said ‘you can’t guarantee success; but you can deserve it.'”