To Infinity - And Beyond!

According to the Mogambo, America is in a bad, bad way (BBW)…doomed to a slow and painful economic death. What would Mogambo do (WWMD)? Buy an asset whose value, in dollars, will go up forever…

Antal Fekete, in his "Goldbug Variations V" essay on the, talks about the decision by Nixon in 1971 to take the dollar off the gold standard, essentially defaulting in the worth of the U.S. dollar. "We must remember that the financial annals do not record a single case in which a default has not been followed by a progressive increase in the discount on the paper of the defaulting banker, until it reached 100 percent – possibly several years or even decades later."

Mogambo Instant Translation (MIT): the purchasing power of the currency went to squat, which makes everything cost more. "Obviously, the defaulting banker would try to slow down the process by hook or crook. However, ultimately economic law was to prevail and the remaining value of the dishonored paper would be wiped out."

Now, because you are reading this, I know that there is something wrong with you, as only people who have something seriously wrong with them would stoop to reading the Mogambo Guru, and so you are saying to yourself, "What in the hell does this have to do with me making some money and amassing incredible power through the sheer bulk of my money, so that I can stride as a colossus across the financial and social landscape, and all will tremble at the sound of my name?" Well, I was getting to that, in my peculiar Mogambo way (PMW), but first the grasshopper must learn to place his consciousness in a garden of serenity whereby one can grasp the transcendent wisdom about to befall him. But now I am not in the mood anymore, thanks to someone interrupting my train of thought.

Antal Fekete: The World Will Be Affected in a Bad, Bad Way

So, instead, we will hear from Mr. Fekete himself, as he declares, "There is no reason to believe that the dollar default will end differently." Then he sits back down. Bounding up, (Just like that damned neighbor’s kid who accidentally backed into the electric-fence section of the Mogambo Bunker Perimeter Security System last week. You should have seen the look on his face! Hahahaha!) I go on to fill the sudden silence by asking "When the value of the dollar falls, as it is a money backed by nothing, and therefore, can be created out of nothing, until so damn much money has been created through the creation of debt, will the country and the world are going to be affected, and in a bad, bad way (BBW)? Hahahaha!"

Mogambo scholars immediately run to their dog-eared copies of the Mogambo Dictionary (MD), and look up BBW. The entry is: "BBW. Acronym for Bad Bad Way. Indicative of worsening pain and suffering of one kind or another, and if it is used in conjunction with economic or financial subject matter, it implies the certitude of ruination and starvation and misery on a grand scale, and then one bad thing will lead to another bad thing, and after awhile people will get tired of ruination and starvation and misery, and they will rise up in the street, crying out, ‘Save us, Mogambo! Save us!’ But I will be too busy counting my wealth because I had seen it all coming, plain as day, and bought gold, but I will ultimately be convinced to seize the reins of power by shallow flattery and cheap bribes of one kind or another, which will lead to a deepening sewer of depravity and corruption, a period known to historians as ‘The Mogambo Reign of Terror.’"

Seeing that The Mogambo is getting all the attention with this ridiculous fantasy about ruling the world and how if I do, there are going to be some BIG changes made, Mr. Ankete gets up, walks over to the podium, and stands right beside me. I am pretty sure that he crossed his eyes and graphically indicated that I am crazy by making little circles with his finger alongside his head. But I can’t get mad at him, as it is such a good impersonation of me. I step aside, and he immediately steps to the microphone and says, "As the discount on the dollar approaches 100 percent, the dollar price of gold will approach infinity. To assert that the dollar is going to escape this fate is tantamount to asserting that the laws of economics and logic have been turned upside down, and the penalty for default has been replaced by reward in perpetuity."

If the dollar falls in value, then the "dollar price of gold will approach infinity"? Wow!

Antal Fekete: An Infinite Amount of Dollars

For those of you who want me to give you tips on what the "small investor" should do, here is a tip: Buy an asset whose value, in dollars, will go to infinity. If you are not familiar with the subtleties of an infinite amount of dollars, it is more than a jillion dollars, it is more than a gazillion dollars, it is more than a trillion, zillion, bazillion flabgobble splendillion dollars and, as such, represents one hell of a large chunk of money, and I cannot imagine the size of a wallet needed to carry that much money, so don’t get me started thinking about it.

And the good thing is that it is also worth a lot of money all over the world! Perfect safety! Huge gains! All at $435 per ounce! What more could you ask for in an investment? And at the same price as the large investor would pay, too!

And while Mr. Fekete does not come right out and say it, I am sure that he is thinking it, and instead of trying to coax it out of him, or wheedle it out of him, or demanding that he tell me, or threatening to beat it out of him and if he knows what it good for him he had better start talking, I will tell you myself. Buy gold and/or silver.

Besides the bad news that we are doomed, and how we are all going to die a horrible, painful economic death, he also notes, "A reliable measure of destruction is the so-called ‘notional’ size of the derivatives market trading interest-rate futures, options, and swaps. It now stands at a quarter of a quadrillion dollars and is increasing at an accelerating pace." Now this, in American terms, is $250 trillion, which is about nine times the value of global GDP, which means it is ten times as big as all the goods and services produced by everybody and every company on the face of the earth.

This is not news to John Mackenzie, who wrote the essay entitled "M2- Debt and the Delusionals," as he has been looking at the most current Settlements Data on Derivatives, assembled by the Bank of International (BIS).

He notes that the BIS figures that Exchange Traded Derivatives now total $279 trillion, and OTC derivatives now total $220 trillion, which add up to, and I am going to take his word for this, as I cannot reliably add $279 plus $220, almost $500 trillion, which is almost HALF a quadrillion!

The good news, if there is any, is that the banks also figure that not all of that $499 Trillion in combined derivatives is at risk. Whew! The banks decided that only somewhere between $25 trillion and $35 trillion of that total amount of derivatives are, as they say, "at risk." Hey! Now I feel a LOT better! The amount "at risk" is only the total value of all the freaking goods and services produced in the whole freaking world in an entire freaking year! I feel MUCH better now!

This is where I was supposed to get up and make some stupid comment about how these are big, BIG numbers, but I could not handle the stress, and the mere mention of those mountains of big bets (MOBB) caused my brain to seize up in a spasm. Always the trooper, Mr. Mackenzie bounded up out of his seat, grabbed the microphone out of my lifeless hands, and said, "These figures are simply staggering." A faint smile crosses my face, and with a Herculean effort I manage to waggle my little finger to indicate that I agree with him. And it is probably a lot worse than that, as he goes on to say, "It is important to note that although Exchange Traded Derivatives are regulated, OTC derivatives are not and in fact many OTC derivatives can go unreported. Essentially, the $220 Trillion figure in the BIS release does not account for non-reporting, and is therefore low."


The Mogambo Guru
for The Daily Reckoning

May 16, 2005

P.S. The Mogambo Sez: This looks like the beginning of the end (TBOTE) to me. But relax, as I am scared enough for the both of us.

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.

Markets are deflating. Everything is going down. Steel, oil, gold, – natural resources of all sorts. Copper is often called "Dr. Copper," because it is said to have a Ph.D. in economics. When it goes down, it means the economy is going down. Copper is used in everything – from huge machinery to shopping centers to consumer electronics. Copper is plummeting.

Stocks are falling too, but not seriously – yet.

Even the price of money is falling. Bonds are rising, meaning you can borrow money at lower rates.

About the only thing that is not falling is housing. But housing, too, is beginning to look vulnerable. Developers have over-built. Investors have over-bought. Households have over-spent.

In Miami, 60,000 new high-rise condos are coming on the market. That’s equivalent to one new condo for every 6.5 current residents of the city. They’re selling well – buyers pitch tents in front of developers’ offices in order to be first in line to buy them. One developer, Leon Cohen, has proposed the tallest residential building in the world – 110 stories of condos. We hope he goes forward; it should give us something to gawk and laugh at for many years.

"South Florida will always be an excellent real estate market in the long term," said a man who should know better. Typical of the last phase of a bubble, people are setting up "vulture" funds to take advantage of what they believe will be a very temporary lull in prices. Smart operators can see that the market has run ahead of itself. They know from experience, as well as theory, that there are limits…corrections…busts…slip-ups…crashes. But they, too, are so caught up in the bubble spirit that they can’t imagine that there could be any fundamental change of direction in the market. When the dot-coms first cracked, smart operators rushed in to take advantage of the bargains. In some cases, they made money; but most of the companies they tried to get cheap ended up being worth nothing.

Now, the vultures are soaring over South Beach and Greater Miami. They intend to swoop in at the first sign of weakness. They know a lot of buyers are merely speculating. They know a lot of people signed up for condos that will not be able to follow through and pay for them – especially if there is any rise in interest rates or further weakness in the economy. But what they do not know is that markets – even property markets – change direction for very long periods of time. Inner city Baltimore prices fell, in real terms, for seven decades, following a peak reached in the 1920s. From ancient Rome we have no precise figures, but we can guess that prices fell along with the empire – from a peak in the 2nd or 3rd century, prices probably fell for the next 1200 years – maybe longer. Even that was better than ancient Ctesiphon. The town, 20 miles from modern Baghdad, disappeared completely.

More news, from our currency counselor:


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

"Well, it all comes down to the fact that China will not keep this currency policy forever, and when they scrap it, they are going to demand a higher interest rate on their Treasuries, and then the inflation cow gets let out of the barn here in the U.S."


Bill Bonner, with more miscellanies:

*** Jonathan Kolber, with information on a revolutionary pharma-tech company:

"Unlike so many other small tech ventures, this company’s no flash in the pan with nothing but a few ideas and a good PR firm. No, these folks have excellent long-term ‘survivability.’ They’ve been in business since 1996 and have been steadily growing all the while.

"Right now, the company has 400 employees, and it’s currently sitting on over $200 million in working capital and assets – enough to sustain it for more than two years with no income at all and without curbing its research and product development one iota.

"It’s also sitting on one of the most impressive portfolios of patents I’ve ever seen in a tech company large or small: Its got 178 patents and patents pending that could be worth over a billion dollars. All saleable in a pinch, too.

"Believe me, it isn’t going anywhere but to the top of the most profitable business in the world…"

*** "How was it?" Maria wanted to know.

Your editor had attended a luncheon in the English countryside last week with a delightful assortment of genial half-wits…marginalized malcontents…and underclass dropouts. He felt right at home.

"Are you married?" asked a woman with a curious bell-like shape. It wasn’t that she was terribly fat; but the weight she had had settled on her in way that would only be pleasing to a statistician. Missing were the usual swells and undulation. In their place was a nearly perfect outline of consumer sentiment…or stock market prices…or a real estate bubble…or a great empire. At the beginning…down where things began, at ground level, were a pair of nearly normal feet. Then, gradually, things bulged out until they became, where a waist should have been, grotesque and unnatural.

From there, still moving up, the meat that might have been on the shoulders and chest slumped down towards the center of gravity…narrowing the upper body all the way to the neck, which was topped by a normal-looking head, which in turn was topped by ordinary hair of a yellow and gray mixture.

"The party was fun," we replied.

The fun came from the curious collection of homo sapiens that made up the group – farmers, truck drivers, ditch diggers, floozies and schoolteachers… people suffering from senile dementia…people suffering from delusions of normalcy – people suffering from the prodigious quantities of alcohol we were meant to drink. No people on earth drink as heartily as the English, unless it is the English in Australia. We did our best to keep up with them.

The English, of course, once had a great empire. We looked around at our companions and wondered. That the empire fell apart, we did not doubt; how they got it together in the first place was the mystery.

We have been thinking about empires. Like the English, we Americans never really set out to have an empire; we only recently realized that we have one. How we got it is as much a mystery to us as how the English got theirs.

But an empire is a living thing…like a bubble in the stock market…or a bubble in champagne. It won’t last forever…but it can be fun for a while when it goes to your head. Looking over a list of all the dozens of empires the world has seen is like taking a stroll through a graveyard. Each one was born; each one died. Only one – the American Empire – has a blank spot for the date of death. Born April 2, 1917…says the marker. Died…. Well, not yet, anyway. But there is the grave waiting for us.

By the end of our dinner, it was still daylight, but we could hardly walk. Fortunately, we had brought a car. Fortunately, too, we had only to drive a slow, short way down a country lane with neither lives nor property put in danger.

*** A reader writes:

"The May 11, 2005 DR makes reference to a reader’s comment about the Bush-led War in Iraq. I think Bush really has misled the world on the reason for our pre-emptive attack, but the reader’s assessment is puzzling. He said, ‘And all it would take to end that war is to bomb a few palaces in Iran and Syria – in other words, hit them at the top level where the big guys are. But for some stupid reason, Bush and his cohorts are playing some sort of political One World Game at the expense of our young men.’

"I don’t think there is enough appreciation for the complexity of finding the ‘big guys.’ We have been seeking the leaders in two countries without any success. If all it took was to ‘bomb the big guys’ even Bush would be able to do this. But the painful mess we have been led into is now much out of our control. The bed he has made for us is one of nails."

The Daily Reckoning