The Root of All Evil

It is often said that money is the root of all evil – but The Mogambo disagrees with that thinking. He likes money; it’s our monetary system that gives him the willies…

There are some guys who go beyond the problems with our monetary systems, and one of them is Dr. Edwin Vieira, Jr., Ph.D., J.D, whose essay on poses a question right in the title: "Will the Coming Monetary Crisis Provide Opportunity For Reform?" I think he answers his own question when he replies, "No! We’re scroomed!!"

And since a currency crisis is inevitable, then what happens next? Well, this is where Dr. Vieira comes in, who reminds us that it is not just the economic problems that will bedevil us; as history has shown us the depths of corruption to which legislators will stoop when their own spending/philosophical stupidities inevitably backfire on them. He says, "Even the most abusive precedents established under Roosevelt, however, will not define the outermost reaches of the ’emergency’ powers contemporary public officeholders will seize in the event of a new monetary and banking crisis. Rather, they will employ whatever police-state tactics they deem necessary to deter and punish violations of their ‘regulations, limitations and restrictions’ – from fines and forfeitures of property to incarceration in prison cells, internment in prison camps, and interment in graves…As O’Brien told Winston Smith in Orwell’s 1984, if one wants a picture of the future, imagine a boot stomping on a human face – forever." Or, as Edwin Clarence Riegel may have put it, "Not money, but a false money system is the root of all evil."

The Trouble with the US Monetary System: Writing off South Koreans’ Debt

To show you an example of the depth to which governments must sink when these Ponzi schemes get out of hand, the South Korean government, to quote the last Thursday’s Wall Street Journal, "Made a last-ditch effort to tackle the country’s household debt problem by announcing a package for Koreans with little or no income that practically writes off their debt."

The idiocy is that those who are on welfare are not obligated to repay their debts, and, as a bonus, are also relived of being stigmatized as "credit delinquents," so that they can continue to borrow more money from unsuspecting lenders, which they never have to repay, either!

If you are on welfare in that country, you don’t have to repay the principal or even pay interest on your debt as long as you remain on welfare, which brings up the point about who in their right mind would ever get OFF welfare with a sweet deal like that?

The problem is that Korea is in recession, see, and the whole country has been, like the United States, gorging at an orgy of credit. Which brings up a nice quote from the Elliott Wave International people, who were researching the history of major depressions in the United States from 1830 on. They say they were "impressed" that, "All were set off by a deflation of excess credit. This was the one factor in common." Exactly! It’s the Austrian Business Cycle Theory, over and over and over again!

But what is NOT answered in the little sidebar was what happens to the Korean lenders, the people who are owed the interest payments, which they are not going to get, or the original money that they expect to get back, which they are ALSO not going to get. Hahahaha! Chumps! It is exactly what they deserve, the morons! I mean, how stupid do you have to be to loan large amounts of money to people on welfare? Welfare pays so much in Korea that the recipients have so much money that they can afford to not only buy things, but also pay the high interest charges? My God! And they though this could last? Hahahaha!

It embarrasses me to mention it, I happen to be, uniquely, one of the most stupid people on the planet, and yet this even sounds stupid to me! But what is going to happen is that the creditors are just going to raise prices and interest charges on the people who DO pay, and that will be an "unexpected" consequence. And then when these people see how they are being screwed, and what a sweet deal this is for people on welfare, they are going to want a little of this gravy, too! And then people will run for office on a platform of "no payments, no interest loans for the little guy!" And that will be another "unexpected" consequence.

The Trouble with the US Monetary System: "Gold: The Forgotten Asset Class"

In Richard Greene’s March 25 essay, "Gold – The Forgotten Asset Class," he notes, "It has been over two decades since gold was widely referred to as an asset class by Wall Street and the media. It would probably be generous to say that even 1% of American investors have an adequate understanding of why at least a 10% portion of their assets should be safeguarded in gold and silver, primarily in bullion. An even smaller percentage understands that they must have physical possession or a custodian that can prove that they are holding their purchased gold in a segregated account. Unfortunately, we have found that the vast majority that has moved to protect their portfolios with investments in the precious metal sector are foreigners."

Foreigners have been buying gold? Is that why the price is over $400 per ounce? Well, who are these people, since it is not us hotshot Americans? He answers, "The really sad part is investors from China, Japan, the Middle East, and India are taking advantage of any pullback to keep adding to their gold and silver holdings." So what does one do? I start to get to my feet to offer my suggestion, which is, of course, to buy gold. But he sees me stirring, and quickly adds, "The fundamentals for gold get better every single day as money expansion continues. Use declines in the prices of metals and the stocks to build a position as part of your portfolio. Speaking of gold, I notice that the gold lease rates have collapsed, which brought out a lot of leasing, which they turned around and sold, which could explain why the price of gold dropped last week." Most of us figure that gold is being manipulated down by the fabled Gold Cartel, the one that GATA and the people are always yelling about.

Want more proof than the idiotic Mogambo standing in the middle of the road haranguing people as they drive by that gold is being manipulated and that this represents a golden buying opportunity, if they will excuse the pun, which they never do? Well then, maybe you will listen to the Charleston Voice when they say, "It is now becoming widely accepted that the world’s central banks have shorted (sold) as much as 15,000 tons of their gold reserves in a concerted effort to suppress gold’s price as measured in paper currencies."

And it is not just the gold and silver markets that are being rigged, but all the other markets, too, as chronicled in "The Invisible Hand (of the U.S. Government) in Financial Markets," written by C. Robert Bell and posted on His summary is "The U.S. government is manipulating all major U.S. financial markets-stocks, Treasuries, currencies." The rest of the highly informative article "shows how it is possible and how it is done, why it is done, who specifically is doing it, when they do it, and where they get the money to do it."

Even George Ure at reported that an article has appeared that indicates that The Mogambo was right when he said that that monetary policy, now operating for most of the last decade with all the taps open full, will prove ultimately to be a failure, even though the government is freely manipulating the markets via fiscal policy to keep it from failing. To wit: "Tax money was sent to the Office of Special Brokerage Services (OSBS), to which management of the reconstruction funds was assigned. The OSBS, quietly through third parties, purchased approximately $5 billion in stock in February 2004. Another $9.2 billion was invested the following month. More than $14 billion earmarked for reconstruction was actually invested on Wall Street. The memo’s author and date are unknown. This portion of the apparently classified document – marked ‘page 3’ – was mistakenly sent to Mid-America Seed Savers, a nonprofit organization in Lawrence, Kansas whose members had filed a Freedom of Information Act request for documents related to the Army’s alleged distribution of genetically engineered wheat seed to farmers in Iraq," according to Stan Cox, who is a plant breeder and writer in Salina, Kansas.

It is all part of a gift to the Iraqis, they say, "The OSBS has assigned portions of the fund’s assets to individual citizens, based on voting rolls from the January election. Although he or she is not yet aware of it, each and every Iraqi voter now owns a Personal Reconstruction Account (PRA)." Until the unrest settle down, they figure that the accounts that will "continue to grow in value, safely, until violence in Iraq subsides and normal economic activity can resume. At that point, Iraqi citizens will be able to draw on their PRAs as needed, putting that money to work in their economy and stimulating private-sector solutions to the problem of reconstruction." Hahahaha! This is what passes for economic and financial management! Of course, the U.S. markets going up will have wonderful domestic effects, too, and that is the whole point of it, because if we really, really, really cared about Iraqis we would have given them the money before we killed a couple of hundred thousand of them.

Everybody assumes that this is a hoax, especially since it came out on April Fool’s Day. But after seeing the lies and frauds being committed every day by our own government, I am not so sure.


The Mogambo Guru
for The Daily Reckoning

April 11, 2005

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.

Every man can be a real estate magnate.

Half the new jobs created in California in the last two years are connected to residential real estate. Now, 10% of all private sector jobs in the state are connected to the house price bubble.

See what has happened, dear reader? Alan Greenspan’s credit bubble has worked its way into the muscle and bone of the U.S. economy -and turned it into fat. When this next bubble bursts, it will be mess.

Since 2001, the property bubble has raised house prices in California by $1.7 trillion. That is equivalent to 35% of personal income. Now, the whole economy not only enjoys a rising real estate market, it depends on it.

Coast to coast, people buy big houses they can’t really afford. They expect to "fix them up" and sell them to someone else for more than they paid for them. What they are not expecting to do is to pay for them. How could they?

This past weekend, we went down to Grenoble near the Alps. It rained all day Saturday. But Sunday morning the sun came out. We decided to take advantage of the good weather by hiking up the little mountain next to town to the fortress than once dominated the place – La Bastille. After an hour or so of heavy breathing, we arrived at the ramparts and looked out. There, spread out in the valley before us, was all of Grenoble – including the suburbs and agglomerated villages. But something was missing. There were no housing developments. There were plenty of houses (the area has about 400,000 residents). We could see the old city, with its tile roves…and buildings that might have been put up in the 17th or 18th century.

There were new buildings too – apartment houses and offices – that looked like they were built in the 1960’s, ’70s, or ’80s. Grenoble hosted the winter Olympics not too long ago. Those buildings remain too…along with a vast university and atomic research center, including a huge cyclotron next to the river. But where was the housing sprawl? Where were the subdivisions? Where was even one patch of dirt on which someone was building a house? We saw nothing.

Come to think of it, we’ve almost never seen anyone building a new house in Europe. Apartments are renovated. Houses are restored. But they build very few new ones. Nor have we ever heard of anyone making any money by buying and selling real estate…let alone "flipping" a property. It must happen, but we’ve never heard it discussed.

Part of the reason is that Europe’s population is barely growing. Also, Europeans tend to stay put; few people move from one house to another. Property itself is often used as an inter-generational asset. Parents will buy an extra apartment to give to their children. Young people will often inherit country houses – often more than one – from grandparents.

Meanwhile, back in the U.S.A., the whole nation seems to have gone gaga over property. Everyone’s a real estate magnate. The trick, we’ve been told, is to find a "fixer-upper," do a little cosmetic work on it, and put it right back on the market. So many people are looking for the fixer-upper that canny sellers should probably deliberately wreck their own houses – so prospective buyers could hallucinate about how much money they will make after they fix it up.

Apparently, few people actually intend to "buy" a house. They merely use them as places to stay, temporarily…and as speculative assets. At present prices, in many areas, few people could actually afford to buy a house. The California Association of Realtor reports that only one in five households in the state has enough money to buy the house that one in two of them live in. It is supposed to be an "ownership society," says George W. Bush. But few people own much of anything…and fewer and fewer people could buy a house if they wanted to.

Let’s say you want to buy a $1 million house – and pay for it. How could you afford it? You’d have to earn a million dollars, right? Well, yes…but you’d have to earn far more than that…you’d have to earn enough so that you could SAVE a million. Say you earn $200,000 a year. You might be stretching to buy a $1 million house – but people stretch a lot further. At 6%…you’d spend $60,000 a year, just on interest. With other living expenses (gasoline rose nine cents a gallon last week in Texas) you’d have little left over to use pay down the principal. Even if you saved like an Chinaman, you’d be lucky to able to pay down $20,000 in principal each year. At that rate, it would take you 50 years to pay off the house. If you saved at the current national savings rate – about 1% – you’d have to make payments for the next 500 years.

More news, from our currency counselor…


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

"It has become quite apparent that the market was long a boatload of dollars. So, like I said last week: This dollar rally looks to have run its course…especially against the offset currencies like euros and yen."


Bill Bonner, back in Paris…

*** "Rents sage, sales soar, can’t last," says a CNN/Money headline.

*** Oops…foreclosures rose in March, says the Associated Press.

[Ed. Note: Our guess: you ain’t seen nothing yet. Once mortgage rates really rise, monthly payments are going to soar, making it impossible for the subprime borrowers to pay their mortgages – at the same time that the value of their house is decreasing. But if you play it safe, this nightmare won’t even affect you – and you could even turn a profit from the crash of the real estate market.

*** Ooh la la, dear reader. We described the likely effects of globalization: wages in rich countries will probably fall, while wages in poor countries rise. With the same capital and technology available to him, there is no reason a man in Shanghai should earn less than a man in Des Moines. But – especially in Europe – it’s very hard to cut wages. Instead, unemployment rose; wage rates were just too high to create jobs. In America, real wage rates have been mostly stagnant. Employment has grown, but mainly in low-wage jobs, such as retail clerks and soda jerks.

But along come two Germans with an innovation that threatens to turn the labor market into real market. At a site called, you can go and bid for a job, almost as you would for an antique lamp. But the way to win is to bid low – as if you were an independent contractor, rather than an employee. This allows the employer to find the most desperate candidate – the one who is willing to do the job for the least amount of money, and the one most grateful to have it.

*** We ran into our old friend Issy Bacher in Jo’burg. We met Issy in 1983. He had developed a computer program that would predict gold price movements. We were about to offer it to some of our readers when Issy called:

"I don’t think we should make the offer to investors," said Issy. "Olby [his computer model] says the price of gold is going down. Nobody’s going to be interested in gold."

Olby was right. Gold was in a major bear market that lasted for almost 20 years.

We lost track of Issy. But by pure chance, he was sitting in a restaurant when our colleagues just happened to be discussing business. The business they were discussing was the business of trying to figure out which way prices were going…a subject that has fascinated Issy all his life. So he broke into the conversation. One thing led to another…that led to our getting together at the Palazzo hotel.

"I’ve been working on these programs for the last 20 years," Issy explained. "I teamed up with a real genius. We have a model that tells us when short-term cycles reach their tops and bottoms. I know it sounds crazy…but it’s right 80% of the time."

"What does it say now?" we wanted to know.

"Well, the Dow was at a short-term bottom a day or two ago. Remember, it’s short term…"

"What about gold?"

"I don’t know. It’s not very good at gold."

The Daily Reckoning