The Federal Reserve and the Nebulon Five Galaxy

The Daily Reckoning PRESENTS: The Mogambo is grumpy… really, really grumpy. While we all know that’s nothing new, this time he has a valid reason – and, you guessed it – it has to do with (among other things) Bernanke and Total Fed Credit. Read on…


The next time you hear anyone say something like: “Ben Bernanke, the new chairman of the Federal Reserve, wants to be known as an inflation fighter,” you have my permission to walk up to them, flash your Mogambo Junior Ranger badge (demonstrating your authority), slap their face hard, and say, with a voice dripping with caustic, contemptuous tones, “Ha! In the name of The Mogambo, I officially laugh at you and punish your stupidity, sir or madam!”

The reason for such drastic measures is, one that I am really grumpy, and, two, Mr. Bernanke has never actually said that he has any interest in being known as someone who controlled inflation. Thus, your victim’s remark comes at the same time as official inflation (thus, manipulated into a soothing lie) hits 4%, at the same time as the global money supply is surging at 300-400% of the growth in GDP. It is also at the same time houses are appreciating at 12%, year after year and at the same time as the national debt is at $8.27 trillion dollars!

I know what you are thinking. You roll your eyes and think, “What does this idiot Mogambo think this old history stuff has to do with anything?” In response, I swallow my rage and immediately go on to note that more recently (last week) we have Bernanke himself goosing Total Fed Credit another $4.95 billion. This is the famous “money out of thin air” that we have all heard about. That was last week alone. So, are you happy now? Huh? Are you? Is that recent enough for you, punk? Is it? Look at me when I am yelling at you! Good. I’m glad we got that cleared up. See? I told you I was grumpy.

Anyway, to make matters worse, the Fed bought up, for itself, $2.2 billion in government debt. Hahaha! What a scam! The Fed snaps its fingers and creates $2.2 billion, and then uses it to buy $2.2 billion in government debt! Hahaha! What can you do but laugh at the sheer audacity! Somehow, a government creating more and more money and spending it is not, for the first time in history, going to turn out to be a bad thing? And especially one where the money is just paper and computer blips that they can create on a whim? Hahaha!

Of course, I sigh wearily as I note that the banks themselves are in on the scam, and they bought up another $13 billion in government debt last week, too. And foreign central banks continue to soak up government debt. They swallowed another $7.6 billion last week, too.

But, all that economic fraud is getting to be old hat by this time. What is tragically new is that if you are familiar with the George Orwell novel “1984,” then you are familiar with concepts such as NewSpeak and NewThink, which are twisted lies and frauds with the authority of law. Along those same lines comes, except in real life and not in some terrifying novel of a fascist government gone berserk, NewBank.

Alert reader Joe S. sent notice of a NY Times article that read: “A bank created to provide emergency backup for the Treasury market will be ready to operate in the next 18 months, a bond industry group is set to announce today.” The so-called NewBank exists largely on paper, but like a superhero on standby, it can spring into action to stabilize the government securities market if a legal or financial disaster strikes.

“It will be set up as a limited-purpose trust company under the New York state banking laws and will also be regulated by the Federal Reserve.” Anyone familiar with my extensive clinical record is not surprised that I had a “spell” when I read that, and I was soon holed up, cowering like a frightened (and raving) paranoid lunatic. I mean, this just gets weirder and weirder!

And it’s all in the “I Can’t Freaking Believe I Am Seeing This (ICFBIAST)” category, because this is monetary corruption at its absolute worst! The government sells debt to get money to spend on their deficits, and the bank creates the money to buy the debt. Debt and money supply both expand, and it expands to create a bigger and more expensive government and higher prices! This is economic suicide!

Now, I am not coming out of my Little Mogambo Rat Hole In The Backyard (LMRHITB), and they can’t just come out of their precious little Federal Reserve offices and say, with a serious, deadpan expression, “The Mogambo is right. This really is economic suicide!” They have to come up with something better than that! And they did. The article goes on to say, “The bank is a result of a five-year effort by government and banking officials to draw up plans in the unlikely event that either J. P. Morgan Chase or the Bank of New York, the only existing clearing banks in the Treasury market, are suddenly unable to operate. The two clearing banks play an obscure but crucial role in the government securities market, processing more than $1.9 trillion of very short-term trades each day.”

Hahaha! I think there was a line in a Monty Python sketch where the guy, incredulous at being told something preposterous, sticks out his leg and says, “Go on! Pull the other one!”

But this is the Federal Reserve we are talking about, and so, nothing is beneath their dignity, especially now that they are getting very, very, very, very desperate. Joe relates this new, umm, government debt banker’s bank of last resort to the incredible announcement that the Federal Reserve would mysteriously (and some say sinisterly) stop reporting the M3 money supply figure this month. M3, if you remember, is the most inclusive of all the measurements of money, and it also includes the figures in the banks’ repurchase agreement (repo) market, where the action really is.

I bring this up because I am trying to get Joe S. into “Ripley’s Believe It Or Not,” and maybe we can both make a couple of bucks if I can get him into a freak show, as this guy has actually comprehended the enormity of the horrific ramifications of creating so much money. I can document the exact moment in time when it destroyed his brain. It was the next sentence he wrote: “They create it/then they but it?”

This is insane! I cannot wait to inform the Intergalactic Economic Council as to how this works out, as they are constantly asking me, “Has the Earth economy collapsed yet?” Every month I report back, “No, but it is getting closer!”

And for you intergalactic fans, as an example of how economics influences popular culture, our own Federal Reserve has become popularly immortalized in the Nebulon Five galaxy, as the vulgar phrase “act Fed” has replaced the long-time favorite expression, “He’s got his grumkin up his gorfhole.”

Until next week,

The Mogambo Guru
for The Daily Reckoning
March 13, 2006

Mogambo Sez: I cannot believe that gold is not soaring, and all I can conclude is that Lady Fate is waiting for somebody out there in Mogambo-land to load up on gold and silver before she lets it rip. That person will be famous as “The person who bought precious metals the day before the price soared!” Maybe that is you! And if not you, then send your money to me so that I can buy some gold and silver, because I would love for it to be me…or if you don’t trust me – you could send your money to these guys – they seem to know what they’re doing:

EverBank’s Metals Select

Editor’s Note: 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 head of Canada’s central bank, David Dodge, says the world risks an “outright recession.” And, Claude Trichet, who is the president of the European Central bank, believes the world economy will have to “pay a price.”

Both men point their fingers at the same problem – the U.S. trade deficit. And, both men are scheduled to exercise their fingers again soon, this time at Ben Bernanke – when he shows up at the G-10 meeting this week.

The U.S. trade deficit is running at an annual rate of about $800 billion. In rough terms, it means that Americans spend that much more each year, on the world market, than they earn. You could talk to a plumber or a haberdasher and get a sensible opinion on the subject: “I guess the U.S. should stop spending so much,” he would likely say. The matter is really pretty simple. When you spend money you haven’t got on things you don’t need, you’re bound to run into trouble. Even the aforementioned central bankers can see that.

But, if you asked a top U.S. economist – say, Ben Bernanke himself – what you’re likely to get is a confused and preposterous answer.

The deficit is really pretty simple. It takes years of expensive formal education to not understand it. Ben Bernanke, along with most of the economists who work for Wall Street or the federal government, believes the trade deficit poses no problem. To the contrary, it represents a very felicitous and even flattering situation: They make; we take. They sweat; we think. They save; we spend. The ‘they’ includes many millions of people overseas, but the most prominent among them are the Chinese. While we Americans operate an economy that is 71% consumer spending, the Chinese only spend 50% of their GDP. The rest is saved – an amount equal to $1.1 trillion dollars.

Taken as a whole – including business, government and private households – Americans also save, but only 13% of GDP, or about $1.6 trillion. And at the household level, the difference becomes even more pronounced between ‘they’ and ‘we.’ They save 30% of what they earn. We save less than nothing…with a household savings rate of minus 0.4% last year. The last time we saw such a low rate was during the darkest years of the Great Depression, when families had no choice but to draw down their savings in order to pay their bills.

Ben Bernanke sees nothing to not to like in these numbers. The Chinese are lucky we spend so much, he is likely to remark. What else would they do with their savings, if they could not lend them to us? He might add: what else would they do with all that junk they’re producing if we weren’t prepared to go into debt to buy it?

“They’re both mad,” said a colleague yesterday. One spends money it hasn’t got. The other sells to people who cannot pay. Maybe China and the U.S. represent equal and opposite delusions: One over-spends. The other over-saves. But while the delusions are opposite, they are not equal. There is a great Exodus of power and money from West to East. There is a big difference between being on the prospering end of that passage as opposed to the losing end. China’s working class is getting richer; America’s is not. China’s treasury piles up credits; America’s piles up debits. China’s consumers have savings that they could spend, if they wanted to. America’s consumers have only credit…made available to them at present rates only so long as it accords with the whim of the market and the will of lenders. The Chinese are owners…Americans are becoming renters. The Chinese are free from debt; Americans are chained to it.

More news from our currency counselor…


Chuck Butler, reporting from the EverBank world currency trading desk:

“The Jobs Jamboree on Friday saw job creation jump to 243,000, with last month’s 193,000 revised down to 170,000 and the unemployment rate tick back up to 4.8%. But, the dollar bulls basked in the sun anyway!”

For the rest of this story, and for more insights into the world currency markets, see today’s issue of The Daily Pfennig


Bill Bonner, back in London with more views…

*** “More than $2 trillion of U.S. mortgage debt, or about a quarter of all mortgage loans outstanding, comes up for interest-rate resets in 2006 and 2007,” reports the WSJ this morning. “…some borrowers will have trouble meeting the higher payments and may be forced to sell their homes or could lose their homes to foreclosures.”

Hmmmn. Who could have seen that coming?

*** “China keeps buying the dollar to defend the yuan’s peg…There are many reasons for this, but one major consideration continues to be the perception of China’s dependence on an export driven economy. That may not be the case much longer,” writes Chris Hancock, a regular contributor to our editorial e-mail threads.

“There’s a good article in the FT today highlighting Long Yongtu, Chinese diplomat who worked on the WTO entry, and is comments that China’s economic development is driven more by domestic demand than many realize. That could either be diplomatic smoke blown at the US or a typical Chinese style warning that a policy change is on the horizon. Meaning, they might seriously consider stop buying the dollar.

“As of February ’05, Japan and China hold approximately a combined $900 billion, or 46 percent of foreign Treasury holdings.

“Something like a mere 20 percent increase in the value of the yuan against the dollar would reduce the value of China’s $710.973 billion by more than $140 billion – or roughly 9.7% of China’s 2004 GDP. I think China will start buying gold to help offset that loss.

“I was in Hong Kong last week and a friend that works for Reuters tells me that China hasn’t made any real progress cleaning up the NPL situation. It’s estimated that up to 80% of loans are still non-performing…Consequently, you won’t see major currency reform anytime soon.

“However, I think they’ll start slowly moving their dollar reserves into gold. China’s gold reserves are miniscule when compared to other industrialized nations. China’s first priority is and always will be stability. John Ing said, ‘To achieve a level of the Europeans at 15 percent of reserves (which is not too much), China would need to consume all of the gold produced in the next two years.’ And the chairman of the PBOC recently made a public statement encouraging citizens to invest in gold. Hong Kong is now considering a gold exchange much like Shanghai’s.

“China moves gradually, so I don’t think there will be any sudden impacts on the bond markets.”

*** History keeps dragging itself out of the sick bed Dr. Fukuyama put it in. It seems reluctant to die.

You remember, dear reader, that with the fall of the Berlin Wall, the American empire was the only superpower left standing. There was nothing stopping American democratic capitalism. It seemed a cinch that the whole world would doff its cap to the U.S. imperium.

There seemed to be no better way. For, the nice thing about capitalism and democracy – as we pointed out last week – is that they make history unnecessary. There is no more need for revolutions, wars, upheavals, mass murders and economic depressions. We have no further need of revolutionaries; we are able to put Che Guevara on T-shirts and sell him at a profit! Democracies value dissent and change while dictators suppress and stifle them. Free markets set prices with the guiding genius of the “invisible hand,” while centrally managed economies brush aside the “invisible hand” and set prices with the iron fist. Naturally, that leads to monumental mistakes, which can then only be undone by depression and revolution. That is what happened to the Soviet Union and that is what eventually destroyed Soviet socialism.

But, in our modern American-style system, everything evolves peacefully and productively – and always gets better. If people don’t like the direction their government is headed…well, they just elect a new one. If one business doesn’t produce profits, investors scout out a new one. History comes to an end; or it becomes so boring no one pays any attention to it.

That at least is the theory of it, and it sounds reasonable enough on the surface. But who could ever believe such a dreamy proposition? And if people don’t believe it, are they likely to go along with it?

The Iraqis, for instance, don’t seem to have gotten the message. With the help of American forces, a vote was staged in the country, but the Iraqis don’t seem to like the outcome. Instead of voting again, they seem to want to blow each other up.

And the same goes for are all those students in France who took over the venerable old Sorbonne to protest a proposed change in the law that would allow employers to fire new employees if they weren’t doing a good job. (Even our own son, Jules, product of the French school system, thought it was outrageous that capitalists could get away with such a thing: “Why should young people have to pay for the government’s mistakes? The problem is too much unemployment in France, but that’s not the fault of people graduating from college. Why should they get less protection than other workers?”)

Even if Jules had a point, why make a big fuss? Don’t these students know that they can just vote in a new administration?

And then, there is Iran. The present government was duly elected. The people spoke. But along comes the United States of America declaring itself hot and bothered about what they said. So, now the democrats in the U.S. are threatening the democrats in Iran. In politics, history has come back to life in a hurry. Will it soon revive in markets, too?

More tomorrow…

The Daily Reckoning