The "Two Trill In Cash" Plan

The Daily Reckoning PRESENTS: Total Fed Credit actually went down by $6.7 billion, last week. The Mogambo isn’t quite sure what to make of this, but he thinks that for a debt-soaked economy so twisted, so misshapen, so malignant and so absurd as ours this is Bad News In Spades (BNIS)…


There also a flurry of excitement last week, when a rumor that the U.S. Federal Reserve had printed up, suddenly, $2 trillion in cash. My initial reaction was, of course, to laugh: “Hahahaha!” My reasoning is thus: why would they go through the hassle? They can make electronic money with the wave of a finger, so why go through the messy rigmarole of dealing with ink and paper and all the problems of transporting it? Let’s not forget counting it and storing it and blah, blah, blah!

This whole “two trillion in cash” scenario has some, umm, merit, especially if you are thinking that foreigners dumping American securities would instantly be reflected in instantaneous losses in bonds and meteoric rises in interest rates and the entire global economic machine would melt down. Bummer.

So, maybe this could explain the “two trill in cash” plan: With this amount of cash, see, the American government can pretty much buy all the government securities that any foreigners want to sell, but the inflationary effects of creating so much money won’t be felt in prices for awhile! Hahaha! They think this is clever!

Besides, thousands of jobs will be created just to make, handle, account for, transport and store all this new money! Hahaha! Maybe the new currency could have those RFID tags to depreciate the value of idle cash, forcing everyone to spend all their money as soon as they get it! Surprised? Don’t be, because it is just the kind of financial and economic insanity that you see at the end of long booms fueled by excess money and credit. The amount of corruption is, as they say, “off the charts!”

And with corruption comes fear, and now here we have John Rubino, on, talking about the “Fear Index” that was created by Gold Money’s James Turk back in the 1980s. The reason I am bringing this up is that Mr. Rubino says that as a market-timing device, Mr. Turk’s Fear Index has, and I quote, “been nearly flawless.” Now, when it comes to market-timing techniques, the Holy Grail of techniques is one that is “flawless,” and so, I scoot my chair up a little closer to make sure I don’t miss a single word. He goes on to say, “The Fear Index measures the relative importance of gold within the U.S. monetary system, and is calculated by multiplying the U.S. gold reserve (i.e., the weight of gold reportedly under the Treasury’s ‘control’) by gold’s exchange rate to get its total market value, and dividing this result by M3, the broadest measure of money supply.”

All of this sounds like a lot of math to me. I’m a guy who has had his share of the shame of remedial math and people saying to me: “This is a five! Can you say five?” Needless to say, I am quickly getting pretty bored. I mean, all I’m trying to do these days is to make some money – hopefully a lot of money, with little or no work – by investing the few lousy pennies I can sneak out of my wife’s purse. Naturally, with all this math flying around, I figure I am in the wrong classroom, and as I am starting to gather up my books and get away from Mister Math Wizard, he continues, “Assuming M3 grows at 8% a year over the next three years, and the Fear Index rises to 10%, implying that we’re worried as in the 1970s, the Fear Index yields a target gold price of $4,961 per ounce.”

I stop leaving in mid-stride. Abruptly, I sit back down. My brain is doing flip-flops! While my face is a study in drooling blankness, mentally I am living it up and having a wonderful time! Why? Well, check this out: Over the next three years, this “nearly flawless” predictor says that gold will go to $4,961 per ounce. In three years! At a uniform rate of gain, this means that gold will more than double in price every year – for three years running! Wow! Hahaha!

In case you were wondering, Mr. Turk’s Fear Index is now 1.23, which is still a very, very low number, although it has been climbing over the past few years. But who cares? We now know all we Mindless, Greedy Mogambo Money-Sucking Machines (MGMMSMs) need to know, namely that a flawless predictor has spoken! And if you are like me, you really, really, really like the sound of the word “flawless” when it comes to predictors, especially financial predictors. So, you rush home and call up all your friends and family again, and beg them for the zillionth time that they have got to, please, please, please, finally get up off of their stupid, fat butts and get some gold – and get their IRAs and 401(k)s into gold, too! But do they? No! Instead, they say hurtful, cruel things, like: “Who the heck are you?” and “I want my chainsaw back, you thieving bastard!”

But, fear indexes mean nothing to these people! Perhaps it is because fear indexes are not new, and even the little community I live in, Pinellas Park, has maintained its own “Mogambo Fear Index” since 1997, which is easily calculated from police logs. Simply take the number of complaints about The Mogambo screaming that the dollar is being killed by the U.S. Federal Reserve (indicating raw fear and panic), and divide that by the number of complaints from pretty women who are disgusted by my accosting them with crude, slavering invitations to “Mambo down with The Mogambo” (indicating laughable optimism). And, since you are keeping score, right now the Mogambo Fear Index is zooming without precedent, indicating something (being as understated as I can manage) very ugly.

The U.S. Treasury is still selling bonds like money is going out of style, which it actually is! Hahaha! Well, perhaps this is not the most Clever Mogambo Bon Mot (CMBM) in history, but it is nonetheless apropos because the entire rest of history has shown that currencies depreciating from over-issue are seldom “in style,” and sometimes, (after a government/central bank creates way too much money and credit, like now) they go so far out of style that they are never heard from again! I bring this up partly because this is, sadly, the ultimate fate of the U.S. dollar. This is always the fate of the currency of any country, world, or planetary system that is so ignorant, so stupid, or so impossibly corrupt that it would try to buy national prosperity by creating a wildly inflating fiat money and credit to buy it with! Hahaha! And, I sheepishly admit, I also bring it up partly because that is just the kind of hateful, gloomy and miserable little twerp I am: always seeing the dark side of sheer economic stupidity.

I mean, if this could work…if this could possibly work…if this could – in anyone’s wildest dreams – conceivably work…it would be truly fabulous! Not only would poverty and universal wealth be painlessly achieved, but (even better!) the Mogambo Logical Next Step (MLNS) would be that it is possible for me to buy my youth back! I can literally be young again! Gloriously, wonderfully young, young, young! And, I can achieve this miracle by merely dating young girls, which is the whole point of being young! And now, thanks to the Federal Reserve proving it, we know that all we need is more money!

So, the next time they catch me hanging around the junior college, acting (as they allege in court documents) “suspiciously and furtively, rat-like in nature,” I can proudly say, “Hey! Take these handcuffs off of me, you fascist pig-cops! I’m just buying my youth back – just like the Federal Reserve is trying to buy prosperity by creating money and credit, you stupid Gestapo goons!” They will have to politely say, “Oh! Of course! Well, OK then! Why didn’t you say so earlier? Sorry to have bothered you, sir!”

But not everyone is a gullible as campus police, and the yields on bonds are rising, which means that, lately, people are buying bonds and immediately losing money on them! But they keep on doing it! Buy bonds; lose money. Buy more bonds; lose more money! Hahaha! It is so ludicrous that I state, with that rare Mogambo Degree Of Absolute Certitude (MDOAC), that this is a trend that will not last very long! Hahaha!

When people stop buying bonds, the traditional textbook response is that the price of bonds will drop (making the yield rise) until they become attractive again. That’s the way markets are supposed to work.

If you are raising your hand to ask, “When bonds will become attractive?” let me tell you a little story that ties all of this together. Once upon a time, there was a rich, but ugly, troll who scored big-time with the chicks. The troll got that way only by living more luxuriantly than he could afford, and when the debts finally got too high, he lost all his money. Then, he lost all the chicks, too. He wondered, “When will I be attractive again?” He thought he would come over to my house and borrow some money to tide him over while he, patiently, waited to be attractive again.

But, there was an unfortunate “accident” with an Uzi, and the police didn’t even come over to look at the dead ugly troll. It lay out there for almost a week until one of the neighbor’s dogs grabbed it and took it back home with him. A little while later, I could faintly hear Mrs. Kravitz screaming, “Oh, my God! What in the world is that?” Moral of the story: Nobody loves you when you are down and out.

Now, substitute “dollar” for “troll” and “everybody else, especially foreign investors” for “Mrs. Kravitz,” and write a fifty-word essay on the topic: “Why we should capture and sterilize people who are so stupid that they hear that particular Timeless Mogambo Economic Parable (TMEP) and yet they do not run out to start dumping dollars and start buying silver and gold and oil with both hands.”

Until next week,

The Mogambo Guru
for The Daily Reckoning
April 10, 2006

Mogambo sez: I particularly like the way that the quarter ended, with the Lipper Mutual Fund Performance Indexes showing that gold funds came out in first place (gold got the “gold medal!” Get it? Gold wins a gold medal? Hahaha!) for the first quarter of 2006, up 22.5%! Whew! And gold-oriented funds also garnered a nice first place finish for the last twelve months, too, up 68%! Hahaha! This investing stuff is easy!

And the best news is that it gets better and better from here!

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.

“Home is where the fraud is,” reads a recent headline on CNNMoney. Everything in nature matures, ages, degrades, degenerates, and deflates – even a real estate bubble. Near the end, the parasites, swindlers, and scammers are in the news. When the tech bubble blew up, for example, the papers were full of stories about dot.coms without even a Web site. No assets, no business plan, no customers, no staff, no clue…not a prayer. Yet, they raised millions of dollars from hopeful investors, just before they unraveled like a cheap suit.

Thus, we keep a close watch on this house of ours. We keep our eyes wide open at all hours…

Because when America’s houses go down, so goes the U.S. consumer economy with it.

Not that it is a goner, although a report from the Financial Times tells us that the New York City property market is “cooling.” But, now we’re reading about property swindles, such as the one we mentioned in our lead.

“Fraudsters will find novice real-estate investors and convince them to sell their good name and credit record. In return, scammers promise to arrange a loan on an investment property, find tenants, make mortgage payments and sell the property for huge profits once it appreciates,” reports CNN MONEY.

“Instead, the fraudsters use the borrower’s name on loan documents – and then walk away with hundreds of thousands of dollars in loan proceeds.

“‘No tenants are found, no rental payments are collected, no mortgage payments are made, the house goes into default, turns out it’s not worth anything, and the borrower is left holding the bag and their credit is destroyed,’ said Rachel Dollar, an attorney in Santa Rosa, Calif., who represents lenders in mortgage-fraud cases.”

Last year, this kind of fraud cost about $1 billion – twice as much as the year before, and nearly seven times as much as 2000.

Parasites, swindlers, scammers, hustlers – have we nothing good to say about anyone or anything? Yes, dear reader, as we promised, we bring you good news – below. But, it is a funny kind of good news. It turns out that the bad news is not so bad after all. Or, to put it another way: eventually, everything is such a swindle that even the swindles are phony. From the report on property fraud, for example, comes a gem: until recently, the fraudsters were rarely caught, because prices tended to rise so quickly that their phony appraisals were exceeded by actual market prices! The swindlers had to work overtime to keep up with imaginations run wild.

But now comes another case:

“Health care is top financial concern for the rich,” says an AP headline. Well, the rich can stop sweating; they may be better off without it anyway, as you will see later in this column.

In the meantime, we note that the Exodus of power and money from West to East continues without interruption. Wages in China rose 12% annually from 1999 to 2002. In 2003, the laboring classes in the middle kingdom earned 13% more than the year before, and by 2004 and 2005, wages were rising at a 14% clip. Yes, they are rising from a low base; they have a lot of rising to do. But, why shouldn’t they eventually rise to meet wage levels in Minnesota or Manchester? Productivity in China is rising at 20% per year, and the Chinese are graduating 550,000 scientists and engineers every year. India is turning out even more: 700,000 per year. Together, the labor pool of very skilled professionals, in those two countries alone, is growing three times faster than the United States.

And yesterday, dear reader, we got a first hand look at globalization…about which, more below, after the news from our currency counselor…

[Ed. Note: Fraud seems to be running rampant in the real estate sector… and the same financial manipulations that enable people to buy “twice the house for the same payment” are about to go into reverse. When home prices crash, it’s going to hit every homeowner in this country like a punch in the gut.


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

“Jobs created for the month of March were 211,000, which was 21,000 over the forecast. But, it was below the previous month’s revised down figure of 225,000 – up 20, down 20. There doesn’t seem to be any strong trend there to me.”

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, with thoughts on globalization, health and swindles:

*** “Yes, we could do that a lot cheaper. There are a lot of people in India who are good journalists. We could easily produce a lot of materials for you…whatever you want, in fact.”

Your editor was sitting in a London café on Sunday afternoon, speaking to an Indian woman about outsourcing. The woman was headed to Delhi. The subject of our conversation was an idea: setting up an office in India to produce financial research reports.

We had explained how much we spend in London on editorial work – researching, writing, editing. She looked shocked. “You could get a lot more for your money in Mumbai,” she explained.

Maybe. We don’t know. In our line of work quality is hard to determine. Ideas count, and who knows who has good ideas? But we presume we weren’t the only people in the world thinking about outsourcing, yesterday. The same conversation must be happening all over the world. Everywhere and always, businessmen seek to lower costs. They can do nothing about the price of oil or other raw materials, but they can reduce labor costs by replacing Western workers with Asians. Pity the workingman in the West.

*** Even the swindles are phony. Americans backs are to the wall, we are told. They can cut out the gadgets from Asia to reduce their living expenses, but the big expenses don’t come from Asia. The big ones are rising fast: health care, education and housing. Nothing can be done about them, right?

Wrong. Take health care, for example. It is said to be retirees’ biggest concern. Health care costs are soaring. People spend hundreds of dollars each month on health care insurance. Can’t do without it, right?

We don’t know, but we’re beginning to wonder. Maybe you’re better off not worrying about it.

We have on our desk a report from a group of doctors. They point out that health care may not be as effective or as safe as it is supposed to be. It may be a bit of a scam, in other words. Which is very good news to us; it means we don’t really need so much of it.

Who do you think is most likely to put you in the grave prematurely? A terrorist? A doctor? According to the estimates in this report, you’re about 10,000 times more likely to be done to death by a licensed medical professional than by a guy with a bomb on his chest. There are a number of different estimates:

– About 2.2 million people each year have adverse in-hospital drug reactions…
– About 20 million doses of antibiotics prescribed for viral infections, againt which they are useless.
– The number of medical and surgical procedures judged to be unnecessary is estimated at 7.5 million per year.
– About 8.9 million people go to the hospital unnecessarily- The number of people who die as a result of medical intervention is probably about a million a year.

“Death by Medicine” is the name of the report. It tells us what we always suspected: a large part of what your “health care” expenses actually pay for is quackery. Much of the rest is merely ineffective.

We’re not a doctor; we do not even pretend to be one on television. But, we know a good swindle when we see one. Modern medicine, like modern education, is probably one part useful, one part wishful, and one part scamola.

Why shouldn’t it be? Is not the health care industry like every other institution, society, organization or business that ever was? Isn’t it entitled to degenerate, to degrade, to get invaded by hustlers, to be subverted by special interests and suborned by special agendas, to be infested with parasites and incompetents? Why should health care be different from the Pentagon or the Teamsters Union?

And at this point, we brace ourselves for the onslaught of health professionals and insurance salesmen who will flood our mail here at The Daily Reckoning with the redundant information about how we don’t know what we’re talking about. Tell us something we don’t know!

We have no doubt that health care has its share of angels of tender mercy and geniuses of scientific enlightenment. No doubt, there are lucky patients ministered to by Florence Nightingales and Clara Barton, and honest Louis Pasteurs and Thomas Flemings coming up with new cures and treatments. Nor do we doubt that we will be glad they are there when we need them.

But, how much health care really pays off? Over the long run, none of us are good insurance risks. The final chapter of our little dramas was written long ago; it is not subject to emendation by the health care industry. We are all doomed; the best we can hope to do is to meet our fate with dignity and good humor.

No one doubts that health care can be useful from time to time. So can calories, universities, politicians, and televisions. On the evidence, Americans might now be better off with less of all of them.

The Daily Reckoning