The Mogambo Takes On Alex Trebek

The Daily Reckoning PRESENTS: Like many Americans, the Mogambo has envisioned himself staring up at a myriad of blue screens and triumphantly calling out: “I’ll take the Federal Reserve and Idiotic Monetary Policies for $500, Alex.” But, like most things for our masked economist, his stint on Jeopardy didn’t turn out quite as he imagined…


I was surprised to see that Total Fed Credit was not exploding last week. I was even more surprised to see that foreign holdings of U.S. debt held at the Fed was actually down by $8 billion last week, too.

Even the banks were not making fools of themselves, as is their wont, by gobbling up huge fistfuls of government debt. It was, in one word, quiet. In the movies, when somebody remarks about how quiet it is, the hero usually says, “A little too quiet!” and the next thing you know, there are arrows and/or bullets flying all over the place.

So, I nervously remark that it is, indeed, the proverbial “too quiet,” because I know that there are enemies out there. For one thing, crude oil prices are up to around $66 a barrel, although to think that oil exporters would not factor in an increasing devaluation of the dollar into the price of oil – in the face of enormous American trade deficits, monstrous American budget deficits, stupefying rises in American business and household debt levels – is to insult their intelligence. In that regard, I will note (with a Snide Mogambo Sneer (SMS)) that they were smart enough to grab the global real estate that had most of the oil, while we took the part that is next to Mexico and South America – places so corrupt and stupid that economic refugees are flooding into the United States to get away from there!

And for another thing, bonds are rising in yield, meaning that bonds are falling in price. This means that all those billions of people around the world who own U.S. bonds lost some money and are getting ready to lose some more as interest rates keep rising. Beyond that, two other noteworthy things have happened in the last couple of weeks: The Federal Reserve has now officially stopped reporting M-3, the broadest measure of the money supply, and we have the new U.S. Treasury Statutory Debt Limit of $8.965 trillion, up by the $781 billion by Congress at the last minute. Potent stuff!

I hear a rustling in the bushes off to my right, and my trigger finger spasms. This is the economic enemy of loans/leases at the banks increasing to a record $5,569 billion, and savings deposits are also soaring to a record of $5,238 billion, yet required reserves in the banks fell to a microscopic $40 billion. Hahaha! The record low was in 2001, when required reserves sank to $38 billion, which was the “insurance” against losses in their much, much, much smaller books of loans/leases and deposits. You wanted fractional-reserve banking carried to ludicrous extremes? Well, brother, you’ve got it now!

Off to my left, I see figures furtively sneaking around, and it is the action in the U.S. Treasury Department. These guys have borrowed, in the first 24 days of March alone, almost $100 billion dollars! In three weeks! My eyes have a glassy look in them, and I am gurgling incoherently as my Puny Little Mogambo Brain (PLMB) refuses to accept the fact that the government is borrowing money at a rate that equals, on an annual basis, 10% of GDP! Gaahhh!

All of this ties in with Ben Bernanke, the new chairman of the Federal Reserve, the evil place from which Too Much Money (TMM) is magically created, which pushes prices up. This destroys economies and countries, which is the Iron-Clad Lesson Of History (ICLOH). But, this is not about how the Federal Reserve has destroyed America by creating so much money and credit – it’s about Ben Bernanke. On, I read where Ben Bernanke said the “global saving glut helps to explain both the increase in the U.S. current account deficit and the relatively low level of long-term real interest rates in the world today.”

I see reporters suddenly bolting for the doors and cowering under the seats, because they all think that The Mogambo is going to go Crazy Mogambo Ballistic (CMB) over this “savings glut” remark by Ben Bernanke. But, you will be surprised to learn, I am not one of those pooh-poohing this “savings glut” thing, as he is exactly right; there actually is a “savings glut!” And, it is responsible for the “relatively low level of long-term interest rates in the world today.” Parsimonious foreigners are saving their money instead of spending it all like their insane American and British counterparts.

But heck, in comparison to America, even The Mogambo has a “savings glut” just because they threw me out before I could spend my last dime buying another round of tequila shooters for me and my hoodlum friends at the Hot Mama Jamma Bar, whose charming motto is: “Cheap women, cheap thrills and cheap liquor for cheap scumbags like you! No cover charge!”

This is not about how funny I looked as the bouncers tossed me into the parking lot, or how everybody laughed when they called me a “stinking pervert,” but about how The Big Crazy Question (TBCQ) is, “Where did these foreigners get all this glut of money to save?” Instantly, the Lightning Reflexes Of The Mogambo (LROTM) spring into action, and I hit the answer button!

The buzzer sounds, and I triumphantly shout out the answer: “Ultimately, from the Federal Reserve, Alex! Hahaha! The Federal Reserve has created so much money and credit over the last couple of decades, that it spawned a huge stock market boom, plus a gigantic bond market boom, plus an explosive size-of-government boom, and a monstrous housing boom! All this money piled up overseas, thanks to the trade deficit! And, since we are talking about the horrible things that the Federal Reserve has done by creating so much money, it also created the ‘savings glut’!”

Out of the corner of my eye I can see the cameraman trying not to laugh, and Alex Trebek sneers at me and says, “Wrong! Sorry, Mogambo, but Jeopardy rules require that your answer must be in the form of a question,” and the sound-effects guy makes a rude “awwwk!” sound. And then, the whole Jeopardy audience and the other two contestants are laughing at me. My face is stinging with shame, as their hooting derision rings in my ears.

I am thinking to myself, “Go ahead and laugh, you stupid bastards! Just wait until this whole Federal Reserve/fiat money economic piece of crap explodes, and gold, silver and commodities soar! I’ll be so rich that Mister Big Shot Alex ‘Jeopardy’ Trebek himself will be begging me, on bended knee, for some gold or silver. I’ll Laugh With Scorn (LWS) and say, “Wrong! Sorry, Alex, but the Mogambo rules say that your plea must be in the form of beautiful naked ladies!” And then, I’ll bend down until my nose is almost touching his and I’ll scream that horrible sound at him, “Awwwk!” Finally, I will laugh – Hahaha! – and slam the door in his face!

But this is not about how I was cruelly cheated out of my chance to make some big money on Jeopardy because Alex Trebek acted like a real butthead about his precious “rules,” but, rather, about the glut of savings in foreign hands. In that regard, my answer was perfect: Thanks to Alan Greenspan’s 18 years at the Federal Reserve, money has been pouring out of the Federal Reserve and out of the government’s checkbook into (mostly) the economy of the United States.

By virtue of the trade deficit, the money pours right back out and into foreign countries, and into the hands of people who make the stuff we are buying with that trade deficit. They then save the money. Thus, the Federal Reserve created the “savings glut!” Hahaha!

Until next week,

The Mogambo Guru
for The Daily Reckoning
April 3, 2006

Mogambo Sez: The unusual action of silver and gold here lately is the result of lots and lots of guys, businesses and banks on the hook for billions and billions of dollars in short sales, year after year after year. The rise in the prices of gold and silver means financial death for them, so buy silver and gold with confidence – perhaps even with a little malice against those creeps, as they can’t keep it up for much longer. The prices of gold and silver will shoot to the moon when they finally give up.

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.

Last week, we dropped ideas like breadcrumbs:

– Jimmy Carter seems to have done “good” in Africa.
– Poor Professor Stephen Walt doesn’t seem to realize that certain subjects are taboo.
– Institutions, societies, bull markets. Everything degrades and degenerates.
– And history? There would be no history without degeneration, without aging, and without death.
– Big old trees, parasites, and the news media.

Today, we pick up the trail and see where it leads.

We begin with Jimmy Carter. According to the press reports, the former president has been successfully leading an effort to exterminate the “Guinea worm.” The worm is a parasite that – like many others – takes control of its host for its own purposes. The worm enters the body, bores its way toward the skin, and then lays its eggs under the skin. Along with the eggs, if we understood the biology of it, it sends out toxins that burn so painfully that the person rushes into the river to soothe them. At this moment, the larval worms burst through the skin, are released into the water, where then can then get picked up and imbibed by another person – so the cycle continues.

In this respect, the Guinea worm is little different from the common cold virus, which makes its host sneeze and cough on the subway so that it can spread to the other passengers as well.

As systems, organizations and institutions age, they become home to more and more parasites. Sometimes the opportunists are benign, like the tickbird hopping a ride on the back of the rhinoceros or a squirrel nesting in an old tree. Other times, they subvert the host or eat away at it.

After World War I, a Congressional hearing was called to try to understand how the United States got involved in such a pointless and disastrous conflict. Americans had no dog in that fight, but they went to war anyway. And inquiring minds wanted to know: why?

Because the republic had been subverted, came the answer. While the United States had nothing at stake in Europe’s war, the big banks did. They had lent millions to England and France. From their point of view, it was vital that the United States enter the war on the side of the English and French, which it did in 1917.

Now cometh another war and another question: Why would the United States want to get involved in a war against nobody, for no apparent reason? Weapons of Mass Destruction! Democracy! Terrorism! But, the slippery explanations dried up just after daylight for those looking for more practical explanations: Oil!

But – in the Middle East, at least – it is cheaper to buy oil than it is to steal it. Cheaper, that is, for the American consumers, which have to bear the costs. Whereupon, a Harvard professor, Stephen Walt, traipses in with another: Israel’s powerful Washington lobby redirected American foreign policy for its own interests.

We don’t know whether there is much truth to it, but it seems at least plausible enough to warrant investigation.

Everything degenerates, degrades, and ages, dear reader. We aren’t the first to notice. As institutions mature, more and more “parasites” find ways to game the system. They worm themselves into positions of power to protect their privileges. They nestle into cozy nests and comfy sinecures in the niches and crannies of the big, old oak. Of course, the press, the politicians, and the universities also attract parasites with their own agendas – their own axes to grind and necks to chop.

Poor Professor Walt! He didn’t seem to understand, until his own neck was stretched out upon the block. And where were the politicians? Where were the journalists? Here was a story bigger than Watergate. Was no one interested in getting to the bottom of it? Did no one fly to the professor’s aid? Were all hacks and the pols in on it? We looked in the International Herald Tribune again today. No mention of it. We checked twice – no Congressional hearings either.

And so, history rumbles on – eating away and subverting the institutions that were supposed to bring it to an end. A modern, open democracy was supposed to be “transparent.” The voters were supposed to be able to see how important decisions are made. The press would make sure of it. Congress would insist upon it. And then, the enlightened voters would go to the polls and do their duty – righting wrongs, correcting errors, and keeping the great ship moving ahead in the right direction. There would be no more upheavals, no revolutions, no convulsions. Never again would she run aground.

Falling rocks ahead!

More news from our currency counselor…


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

“Gold has finally started its next move upward toward $600. The move for gold has been fueled by a few things: The weaker dollar last week; the nervousness surrounding Iran and their threat to cut oil production.”

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


Back to Bill Bonner with more miscellaneous and gratuitous comments…

*** More from Mondo Condo. An article by MSN’s Melinda Fulmer:

“After several years of gung-ho development in south Florida, San Diego, Las Vegas and other major markets, the once-hot condo market is headed for a slump.

“The national median price for existing condos rang in at $228,200 in the fourth quarter of 2005 – a healthy 12.3% increase from a year ago, according to the National Association of Realtors. But in some of the most robust markets, where prices had soared in the past few years, appreciation slowed to a trickle:

“Condos in Atlanta went up just 3.7% year over year in the fourth quarter of 2005.

Prices in San Diego bumped up just 1.7%. And in seven markets studied by NAR, such as Virginia Beach, Va. and Toledo, Ohio, prices actually dipped, mirroring the rest of the housing market.

“Agents and economists say they expect to see further erosion this year, as the housing market continues to cool. ‘There is reason to be concerned about the condo market right now,’ said Susan Wachter, professor of real estate and finance at the University of Pennsylvania’s Wharton School. ‘There is an all-time high of inventory right now and it is disproportional to condo markets,’ she said.

“Ryan Higgins, for his part, was undeterred by declining condo prices. The 29-year-old broker and mortgage lender from Carlsbad, Calif., recently decided to buy a $585,000 three-bedroom condo in the chic La Costa area, despite seeing prices dip on many new projects. ‘Real estate is not a good short-term investment,’ he said. ‘Anyone could have made money in real estate in the last few years.’ Now, he said, you have to be patient, ‘buy in the right market and sustain some turbulence.’

Turbulence? We remind readers that real property prices in central Baltimore declined for 75 years, after peaking in the mid-’20s. Farmland in western Kansas peaked in the 1880s, and has never recovered. Looking ahead, we suspect that suburban property on both coasts is now reaching an epochal high. We may never see such high prices again in our lifetimes.

[Ed. Note: The boom is already stalling out. Nationwide, the median price of a new home is actually lower than a year ago. And many homeowners have come to realize that their house was overappraised by lenders eager to make loans, and real estate agents eager to close the deal.When this scandal comes apart, the defaults will stun the lenders, and the ripples will be felt throughout the economy.

*** A note from the DR HQ in Baltimore:

“From time to time, readers will drop by and offer to buy us a drink.

“In Paris, we’d take them to Le Paradis, a watering hole across from our office on rue de la Verrerie. Le Paradis is the café/bistro Bill was sitting at when he penned the legendary Daily Reckoning Classique: The Episcopalian’s Guide To Sex.

“In New York, we’d meet up with Eric Fry. He would no doubt suggest we’d meet at the Japanese-Brazilian hotspot Sugarcane before heading off for Smith & Wollensky’s for a steak and a good tussle. In London, the Cambridge Arms on Goodge Street comes highly recommended from Dan Denning, who frequented the place often before moving to Melbourne.

“If you drop by our Baltimore office, Mick O’Shea’s on Charles Street is the spot for a good lunch and some personal attention. Our favorite bartender, Trish, will have our drink orders on the table before we can get our blazers off and saddle up to the bar.”

*** Our old friend, Martin Spring, writes with some thoughts on pensions:

“In America, some large corporations face bankruptcy because of their pension fund liabilities – in the case of General Motors these are three times the value of its shares. Congress is currently hammering out a new law to force companies to fund their pension promises and pay more in premiums to the Pension Benefit Guaranty Corporation, which has a $23 billion deficit.

“In Britain, companies are being forced to divert cashflow to clear the deficits in their funds within 10 years – the Pensions Regulator has started to use his new power to veto dividend increases.

“But it’s a problem that has much wider repercussions. It’s starting to embrace all sectors of society and to trigger the first skirmishes in the coming pension wars.

“In the United States, New York City transit authority workers recently went on strike to block a move to increase compulsory pension contributions by new employees from two to six percent.

“In the United Kingdom, a million local government workers went on strike to protest against plans to stop early retirements on full pensions, and the government has been castigated for giving bad advice to 85,000 workers about how secure their pension funds would be – then refusing to compensate them when the funds went bust.

“The scale of the emerging pensions problem is frightening.

“In Europe, the Kok Report recently warned that by mid-century the ratio of pensioners to active workers will double. Broadly speaking, that means the burden on the working population of supporting those who have retired will also double.

“In Britain, 97 of the 100 biggest listed companies have deficits in their pension funds, while the liabilities of unfunded schemes for public-sector employees, if taken into account, would more than double the national debt.

“In America, the gap between the cost of Social Security pensions, Medicare and future tax revenues to pay for them has been estimated at $44 trillion, or four times GDP.

“At the heart of the worsening pensions funding problem in the developed world is refusal to face up to the facts. There won’t be a problem in future if it’s tackled now, but doing so requires making substantial sacrifices now and for years to come.

“Very few are willing to do that.”

No, Martin, few people are willing to do that…not as long as things are going so well.

*** From Addison:

“‘What do you think about gold?’ an attendee to the Grant’s conference last week asked Paul Volcker as he was retrieving his coat from the coat check. ‘You say the world is evolving toward a global currency. What are the chances it will be backed by gold?’

“‘The world’s a big place,’ replied Mr. Volcker. ‘And there’s not a lot of gold in it.’

“Hmmn… ‘supply and demand,’ anyone?”

More later…

The Daily Reckoning