The Biggest Fraud in History

Much to the Mogambo’s complete and utter surprise, total Fed credit went down…but without all this "money from thin air," the money supply in America has hit a wall. Looks like an economic slowdown looms in the distance…

I made a solemn vow to sober up, and this time I really mean it, when I read that Total Fed Credit did NOT, again, climb, it did NOT, again, remain constant, but last week it went down by $3.2 billion! Naturally, I assumed that my bloodshot eyes are deceiving me, or that I have finally killed the few remaining neurons in my brain that still work. Can this slowdown in Fed credit be true, and I can get back to a life of drunken dissolution with a clear conscience? Time will tell.

And what is the significance of Fed Credit? Because this is the magical and fabled Money From Thin Air, which is distributed to the banks by the Fed merely pushing a button, which uses it to make loans, and when the bank makes a loan, real money is thus created, not from thin air, but from the increase in their reserves, which came from the increase in Total Fed Credit, which you realize DID, if you have been paying attention, come from thin air. So, without all this new money from thin air, the money supply has, umm, stagnated.

Mark Lundeen, a guy who literally drips data, sent me a graph showing the growth of Fed Credit since 1938. Back then, even after that arch-communist FDR was installing the socialist state in America, it was about $10 billion or so, and it was gradually rising and rising, faster and faster. Somewhere in the middle 70’s, it finally grew to $100 billion, but it kept on increasing, faster and faster. Then, coinciding with the horrid Alan Greenspan being appointed as the chairman of the Federal Reserve, it really got going. Now it is at $783 billion.

The New Hampshire Sound Money Bill: The Money Supply Drops

Sure enough, when we take a look at the money supply, as measured by the M’s, we notice that they all fell, too, although for reasons completely different than why The Mogambo fell down, which was because I was going to unsteadily go over and finish off that bottle of tequila so that I would not be tempted to drink it later. But the money supply probably fell because of a lot of reasons, mostly because more people were paying off their loans than were taking on new ones. But it was nothing to write home about, but it does merit the kind of attention that one pays to small clouds on the horizon, knowing that small clouds can grow to big clouds, and then suddenly you get pelted by wind and rain and your new portable radio gets all wet and is ruined, and nobody wants THAT! So it pays to keep an eye on these damn clouds.

Even Randall W. Forsyth, taking over for Alan Abelson in writing the "Up and Down Wall Street" column in Barron’s, remarked, "The money supply (which is hardly ever mentioned in polite company anymore) has hit the wall, and while we’re not high-church monetarists, a collapse in money growth always has presaged an economic slowdown and a punk market."

Now, let’s analyze the last phrase of that sentence. "[A] collapse in money growth," which probably has nouns and verbs all over the place, but who cares, is when money is no longer being created. And since it can only be created by people borrowing money (because that is how a fiat/paper money system works), this has "presaged", probably meaning something like meaning to "leading to" or "providing advanced warning about" or something in that vein, "an economic slowdown" which hardly needs any explanation because everyone knows what an economic slowdown is, and if you do NOT know what an economic slowdown is, then I know you are very young, and you are now going to get an education as to why your parents are probably the way they are, mostly yelling at me to stop watching that damn TV and get some work done, a task that has now fallen to my wife, who is even less successful at it.

Cliff Droke, editor of the Gold Strategies Review newsletter, notes that MZM (money of zero maturity) has not been growing, and concludes that this "makes an economic slowdown a near-certainty in the months ahead."

Just as alarmingly as people wanting me to do actual work, the Treasury has apparently stopped selling new debt, which makes you wonder how in the hell they are going to finance their megalomaniacal visions of empire.

The New Hampshire Sound Money Bill: Frauds Come Undone

But this is not about how the federal government and their willing little whore, the Federal Reserve, have apparently gotten tired of the Mogambo screaming bloody murder about this monetary insanity stuff, and have stopped this silly crap long enough to take a nice nap or something. It’s about how frauds (and our current monetary policy is the biggest fraud in history) always come undone and leaves everybody weeping, and then I get blamed for everything.

For one, GATA, the Gold Anti-Trust Action committee, is back with Eric Hommelberg leading the charge, who has even more strident denunciations of the manipulation of the gold market. That the gold market is manipulated is beyond doubt, but then so are all the other markets, too. One current example is the precious metals markets, and Ted Butler remarks, "[T]he tech funds have never booked a real profit in gold or silver due to their buy-high, sell-low approach." An interesting detail is, "the dealers have never booked a loss." He notes that there are some who suspect some type of collusion between the dealers and the techs, me included, but then I always suspect collusions and betrayal, as that is all I have ever experienced.

But there is good news in this, as Mr. Butler explains. "It has been the remarkably predictable trading pattern of the tech funds that has made the analysis of the COT (Commitment of Traders) so reliable. It is the predictability of the tech funds’ behavior that has enabled me to consistently identify low and high risk points in the silver market for the past few years."

But before you jump up out of your seat to delve into this revelation and make a few bucks for yourself by following the behavior of the tech funds, here is the interesting part: Things are suddenly different! In fact, he says so himself, as he writes, "The numbers are different than anything we’ve seen in the past." And he surmises that it may be time to "throw the old COT guidelines out the window" because a lot of other big-money dudes have noticed this weird relationship, and are moving in to cash in on it, too.

The New Hampshire Sound Money Bill: The Illegal Fiat Monetary System

So what to do with gold and silver if you buy it? Well, James Turk, who writes The Freemarket Gold and Money Report, writes, "Last year, State representative Henry McElroy introduced HB 1342, which has been dubbed the New Hampshire Sound Money Bill. This bill enables people to use gold and silver in their transactions with the state of New Hampshire."

If this passes, then New Hampshire will finally be free of the inflationary shackles of the illegal fiat monetary system that has been pounded down our throats since Wilson allowed the establishment of the Federal Reserve, and (as he has been called by Vin Suprynowicz) Franklin Delano Mussolini, who used it to destroy freedom from government in America and put us all in the thrall of the government and the banks, which was a big, big mistake, as you can see by just looking around you.

But Mr. Hommelberg is addressing gold when he says, "Knowing that the price of gold was managed paved the road for the ‘in the know’ bullion banks to accelerate their profitable gold carry trade (selling gold being lend by the Central Banks). A declining gold price was win-win situation for many." How was this a win-win situation? Well, for one thing, the banks lent the gold and got a higher price for it, and they still had the damned gold on their books, if not actually in the vault! The guys who leased the gold sold it, and now they can repay the borrowed gold by buying it cheaper on the open market! Not only that, but Mr. Hommelberg notes, "The U.S. government welcomed a lower gold price since it lowered inflation expectations and strengthened the dollar." Now, the failure of the price of gold to rise did not, of course, prevent inflation. It just made it LOOK like there was no inflation, since people were not scrambling to trade in their depreciating money for gold.

He goes on to write, "This effort [by the Federal Reserve, Bank of England and BIS to turn back the gold price] was later described by Edward A. J. George, Governor of the Bank of England and a director of the BIS, to Nicholas J. Morrell, Chief Executive of Lonmin Plc ‘We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake. Therefore at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded. The U.S. Fed was very active in getting the gold price down. So was the U.K.’"

In a related note, Switzerland has finished, as of March 30, with its sales of roughly 1300 tonnes of gold that it started in 1999. The odd thing is that even as they were selling, the prices of gold went up almost from the very day that they started selling it!


The Mogambo Guru
for The Daily Reckoning

May 23, 2005

P.S. The Mogambo Sez: The lease rates for gold on the site show that the rates are rising a lot. This should cut down on the current push to crush the price of gold. Theoretically.

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.

Mundus est omnis divisa in partes tres.

One part is the best part to live in. Another is the best place to make money. And the third is the best place to lose it.

One part is this Old World where we have our Daily Reckoning office – Europe. It is like a museum, friends say. It is rigid, say economists. It is politically and militarily irrelevant, say the neo-conservatives. It refuses to change, the world-improvers complain. But that is what we like about it; Europe has few of the virtues we detest and many of the vices we esteem. "The French are cynical scofflaws," say critics. "The French are cynical scofflaws," we agree, admiringly. The Old World is the best part of the world to live in. The food is good. There are few policemen. You can still smoke. You can drive fast. Avoiding taxes is not a crime. Women are pretty. The towns are charming. The scenery is attractive. And you don’t have to take your shoes off in order to get on an airplane.

There’s a time and a place for everything. The best place to lose money is the New World. Stocks still trade at historical high multiples of earnings. Whenever they are so expensive, there is little likelihood that investors will make money…and a high likelihood that they will lose it. Houses are expensive, too. There is a real estate bubble on both coasts. In California, applications for real estate licenses rose 200% in the last two years. In Washington, housing is rising twice as fast as the national average…and the real estate speculators are so young that they have no idea what they are doing; they were still in high school when tech stocks blew up. Even Alan Greenspan says he is concerned about "froth" in the housing market.

The best place to make money, on the other hand, is in the Far East. While America’s empire is probably peaking out…the next one is rising quickly. Shanghai is putting up the world’s tallest buildings, the world’s biggest airport, and the fastest monorail (268 mph). The economy is growing at 13% annually – nearly four times as fast as America. And it’s real growth – not merely an increase in consumption. Shanghai is enjoying a real estate bubble too, according to a report from Bloomberg. Prices are soaring, up 19% in the first quarter alone. The Chinese property market is likely to blow up – just as America’s will.

But there’s a difference. Shanghai has a population of 17 million already – with millions more moving in from the countryside. It is like New York during its great growth spurt at the end of the 19th century. And, in some ways, China is not unlike America…when the country was young and robust…when people still built factories…before it assumed the burdens, delusions and conceits of empire. In China, people still think they need to work, save and invest to get rich.

A property bust in China is likely to be followed by another boom. In America, a property bust may be followed by a long period of stagnation or decline. American wages are not increasing significantly; we see no reason why they should. In China, by contrast – wages are going up about 10% per year, with plenty of room left to rise.

More news, from our currency counselor…


Chuck Butler, reporting from the EverBank trading desk in St. Louis:

"You know how the ‘contrarians’ were telling you to sell euros because the market was too long? Well, I’m saying now to sell dollars because the market is too long!"


Bill Bonner, back in Paris…

*** The euro declined again on Friday – in anticipation that the French will vote "non" on this weekend’s referendum on the European Constitution.

"You’d have to be crazy to vote for it," says a friend. "It is incomprehensible. One page contradicts another. Do you know they even have a provision allowing bureaucrats to buy cars without paying the sales tax? It’s in the Constitution!"

But the French may still vote "oui." "What else can we do?" asks another friend. "It is either forward or backward."

The euro is down to $1.25. If you’re feeling lucky…you may want to buy it now.

If you’re not feeling lucky, buy gold. It is down to $417.

*** Chris Mayer, reporting from Gaithersburg, Maryland:

"Wilbur Ross, the billionaire industrialist and savvy investor, seems to have mastered the idea of buying value among the least-favored companies in the market. Ross bravely bought up bankrupt steel companies three years ago to create International Steel Group, which he recently sold for a cool $260 million profit.

"But what will be Ross’ next target? Some say auto parts manufacturers. He already owns Japan’s Nikko Electric and Ohizumi Manufacturing, which make alternators and generators. He has been outbid in his attempts to buy a few American auto parts makers this year, but the industry is highly fragmented, and there are many opportunities.

"One auto parts supplier I have been designs and manufactures cast and aluminum wheels. The stock has been pounded over the last two years. The company maintains a debt-free balance sheet with $111 million in cash, or more than $4 per share. It trades for less than book value and at a price-to-earnings ratio of 15, based on depressed earnings.

"The company has been aggressively buying back its own shares, and is authorized to buy back 3.2 million more. Moreover, the company’s president has openly discussed taking the company private (though I note that insiders have not been buying – at least not yet). Still, the stock falls…

"Granted, auto parts manufacturers are going to struggle, and troubles at General Motors, Delphi and others have dragged down just about anything associated with the automotive business. Competition is fierce.

"But at some point, a profitable, debt-free company with lots of cash becomes an attractive holding. Auto parts companies are obviously on Wilbur Ross’ watch list."

*** "France is a mess," said a friend at the annual school fair. "Nobody works. Well, few people work. And did you know, we now have the record for the most holidays? Thirty-six, I think they reported yesterday. Add in weekends; that’s about seven weeks of holiday."

"Yes, it is very different from America," we explained. "We feel lucky to get two weeks off. Americans now work more than anyone. But they don’t get anything done. It’s a consumer-led economy. People can spend their money day or night. So, sales clerks work long hours, and fast-food restaurants are open almost around-the-clock…and health salons…and so forth. None of this generates any real wealth. Per hour worked, the French are actually more productive."

"It is funny. I work for a large company with a big presence in the United States. The Americans will attack a problem with a huge force of workers…as if they were landing at Normandy. They like to have big meetings. And big projects. But when we studied what actually happened, we found that a small team of French workers got the same amount done in less time."

*** The fair was at Henry’s school, in the 16th arrondissement, not far from our apartment. It is a very conservative, very Catholic establishment, attended by students whose parents who worry excessively about their children’s education. Ask any one of them how the family is doing and you will hear a lament:

"Oh…it’s been a hard year for Thomas. He’s 5th in math, which is not bad [everyone knows his child’s exact rank in each subject], but he’s dropped badly in English. We got an extra tutor for him, but he complained about it so bitterly, we had to stick with just one hour a day. Honestly, he doesn’t seem motivated enough. I don’t know what will happen to him. He takes his ‘Bac’ [the big exam that largely determines where you go on to school after high school] next year. He’d better get on the ball."

School, grades, studies – the parents can’t seem to imagine that anything else matters. Napoleon created a centralized meritocracy. If you do well in high school, and get a good score on your "Bac," then you get into the French equivalent of the Ivy League. Then, you can get a good job in the government…or a large business. The road to mainstream success is well marked. There is little room for improvisation.

"Michel can’t continue where he is," began a particularly lugubrious comment. "He doesn’t have the grades. His rank has slipped to the bottom of the class. I have spent the last two weeks in interviews [schools typically want to interview both parents before excepting a child]…and it looks almost hopeless. I will have to send him to public school. But I don’t think he will pass the ‘Bac.’ He will have to get some technical degree. Of course, he hates it. He suffers in school. He is just not cut out for it. But he’s been suffering for the last 10 years. He might at least suffer through the last year. What else can we do?"

"Let him drop out," was our advice. "Get a job on an oil rig…or sheep farm."

The Daily Reckoning