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June 13, 2007

The High Price of Low Intelligence
by The Mogambo Guru

"The leadership the Chinese economy is in the hands of people just as stupid and corrupt as the ones in charge of all the other economies, and there will be a huge price to be paid for acting that way."

I was drunk, as usual, when I saw that Federal Reserve Credit, as usual, expanded by the usual $4.1 billion last week, taking it to $858 billion. Like a caboose being pulled by a train, my bleary, bloodshot eyes see Bank Credit dutifully coming down the track, which bumped up $34 billion, taking us to a record $8.575 trillion.

The big news that originally got me into my cups was the news that the long, bizarre era of insanely-low interest rates, generated by enormous creation of money by the central banks of the world, is now over: Bonds are dramatically falling in price and rising in yield. This is Big, Big, Bad, Bad, Big Bad News (BBBBBBN).

And the reason that the bond boom is over is because the easily-predictable inflation in consumer prices that comes from constant inflation in the money supply - which the Austrian school of economics warns us about - is here big time, and the price inflation is finally being grudgingly recognized, although not fully reflected in official government statistics.

As Alan Abelson, in his Up & Down Wall Street column in Barron's, cleverly notes with a deliciously dry and dark humor, "the specter of inflation is not exactly a brand-new apparition. It has, for the most part, been dismissed with a knowing smirk and reassuring reference to a conceit called 'core inflation,' which can register everything about inflation except price rises."

And since the dollar has been un-Constitutionally severed from any relationship with gold, and is now just another fiat currency that depends on the integrity of the central bank, you learn everything you need to know about the integrity of the chairman of the Federal Reserve, and the Federal Reserve itself, by a blurb in the Wall Street Journal, Wednesday, 6th of June, front page, left column, at the top, where, "Bernanke said he remains worried about a pickup in inflation, but suggested it is unlikely the Fed will change rates in coming months."

Inflation is rising, but he will not change rates! Hahaha! And you think the dollar and the economy will prosper in a non-inflationary world with that kind of integrity? Hahahaha!

Lest you think that all central bankers are despicable liars, from Bloomberg we learn that New Zealand Reserve Bank Governor Alan Bollard actually blurted out the cure for inflation in prices; raise interest rates so high that nobody can afford to borrow any money to buy anything, or invest in anything, and thus prices will fall as demand withers away, and people are laid off, and lots of businesses and people go bankrupt, and taxes payable to revenue-starved governments will collapse, and there is rioting in the streets as we fall into a dreary, post-Apocalyptic nightmare of economic misery and suffering that will not end until after you are dead, dead, dead.

Well, I admit that he didn't actually say that in so many words, but he did say "A sustained period of slower growth in domestic activity will be required to alleviate inflation pressures."

For those of us even passingly familiar with fiat currencies, fractional-reserve banking, the unbelievable levels of distortions and mal-adaptations of the government and the economy that they engender, and the staggering pandemic of corruption in government and in business that is always present at the end of a long boom, one can only say, "In your dreams, loser! That's the way it used to be, alright, but those days are loonnnnNNNnnnngg over! Since all money is created by debt nowadays, and interest is due on all that money, you have to keep expanding the money supply at faster and faster rates just to achieve an economic standstill, and even more to offset inflation in prices, you witless jerk!"

Well, in what I assume is a slap in the face for The Mogambo at this crude insult, this raising of interest rates to cool down inflation is actually being manifested when "New Zealand's central bank unexpectedly raised its benchmark interest rate a quarter point to a record 8%, saying housing demand and consumer spending are fanning inflation."

In actuality, the central bank of New Zealand is a bunch of lying scumbags, too, as the double-digit growth in the New Zealand money supply is what is fanning inflation in prices there.

Then I think I am an idiot for believing any of this silly central bank crap, as Gary Dorsch says that in Australia, right next door to New Zealand, "The Australian bank's cash rate of 6.25% might sound high compared to other countries, but in reality, the RBA is pursuing a super-easy money policy, allowing its M3 money supply to expand at an explosive 13.7% annualized rate", which is (I add with a supercilious snarl and sneer) about the same rate of money growth that we idiot Americans have!

And speaking of money supplies expanding - which means that price inflation is coming to gobble people up - the Russian central bank is inflating its money supply at an astounding 57% annualized rate! 57%!!

Enrico Orlandini of dowtheoryanalysis.com actually hears my brain exploding at this astounding revelation, and instead of calling 911 and maybe saving my life, the little bastard sticks a dagger in my heart by saying that it is even worse than that, as "Currently there is no major economic power whose money supply is increasing at less than 10% per year and the US's money supply is now increasing at a greater than 14%/year clip." Owwww!

And why are all the banks creating so damned much money and credit? Bill Bonner at DailyReckoning.com explains. "To make a long story short," he says, "the titanic stimulus given by the U.S. economy has had a worldwide effect. The American - along with many of his cousins in the rest of the English-speaking world - went on a spending spree. Dollars flowed out of the United States…and into foreign countries, where central banks 'sopped them up' by printing more of their own currencies. No nation wanted its own money to go down faster than the U.S. brand, because it would put them at a commercial disadvantage. Result - a huge competition to inflate paper currencies."

And a global race to stoke inflation, too, as all this money goes into prices - as we are seeing - which makes them need to print up even more money!

So it is the dollar that is, at the root, the real stinker amongst currencies, and thus it is no surprise to read from Bloomberg that "The United Arab Emirates may be the next Middle Eastern country to stop pegging its exchange rate to the U.S. dollar."

How does he know this interesting fact? He said that he it is obvious "according to trading in currency forwards."

And why are they doing this de-linking to the dollar thing? He explains that it is because the currency is losing so much buying power that the price of corn tortillas to make yummy tacos is rising, and people are upset and angry, and are shouting "Mogambo! Save us, Mogambo!" Oops! Sorry! That's Mexico!

But the problem is exactly the same in the Middle East; prices that people have to pay are rising, as "Middle East currencies have been dragged lower by declines in the dollar, pushing up the cost of imports from Europe and Asia", and people don't like it.

And these guys ain't minor players, either, as we learn from Jody Clark of MoneyWeek.com, who writes that the Gulf Cooperation Council is "an economic bloc made up of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. As a group they have the world's largest current account surplus." Wow!

In fact, all this oil money has made them so rich that "Combined they already have the world's 16th largest economy and by 2015 they should find themselves in the top ten. Their current account surplus is a massive $207 billion - that's up from $52 billion in 2000 when the oil price was hanging below $30 a barrel. And with global oil demand set to continue this year, the GCC's coffers should be ringing for some time to come."

And if oil goes to $100 a barrel? Yikes!

The glowing stories of China becoming the world's next economic powerhouse and blah blah blah is one thing, but let's not forget that the government of China is still full of the same stinking commie trash as it always was, as proved by Bloomberg reporting that Wu Xiaoling, the deputy central bank governor, said, "China should expand local companies' fundraising options by letting commercial banks invest in the country's private-equity funds, and that 'Banks are institutions that manage risks anyway so they should be in the best position to judge the risks in these instruments.'" Hahaha!

The reason for this idiotic central bank intervention stuff is that, he says, businesses are trying to get more money than investors can pony up, but instead of optimally using bank deposits to fund loans by letting interest rates rise to the point where borrowing equals savings, these Chinese-variety moron central bankers will engineer abnormally-low interest rates, creating massive amounts of money and credit, distorting the economy and causing price inflation. Hahaha! Morons!! Hahaha!

In short, the leadership the Chinese economy is in the hands of people just as stupid and corrupt as the ones in charge of all the other economies, and there will be a huge price to be paid for acting that way.

And that "price" is horrific inflation in prices, plus the fact that you have to cringe when you listen to your central bankers saying really stupid things, as evidenced by a very interesting article by Gary Dorsch of sirchartsalot.com and posted at SafeHaven.com, titled "Dangerous Divergences in the Global Bond and Stock Markets."

Beyond the horror inherent in the phrase "dangerous divergences" in the title, the most horrifying part is when Mr. Dorsch reported that Fed chairman Ben Bernanke reported to the Senate Banking Committee that he is not worried about China dumping a jillion dollar's worth of U.S. bonds.

In fact, he actually said, "I think the cost to them of doing this would be greater than the cost to us. A substantial move on their part would be disruptive in the market in the short term, but in the longer term, the dollar and Treasury yields would largely recover." Hahaha! Over what time frame, moron? A thousand years?

Mr. Bernanke, of course, ignores me, and then rubs my face in it when, on March 26th, in a letter to Sen. Richard Shelby, he followed that up with "I do not believe China's substantial accumulation of reserves (recycled into U.S. bonds) in itself represents a problem for the United States or for U.S. monetary policy. Because foreign holdings of U.S. Treasury securities represent only a small part of total U.S. credit market debt outstanding, U.S. credit markets should be able to absorb without great difficulty any shift of foreign allocations." Hahaha!

This is too, too rich! He thinks he can create almost a trillion new dollars to buy up this debt without causing "great difficulty"? And the USA can still exist without foreigners constantly funding, every year for the foreseeable future, a few trillion dollar's worth of all of our public and private deficits? Hahaha! We put this guy in charge of our central bank? Hahaha! We're idiots!

Mr. Bernanke goes on, "And even if such a shift were to put undesired upward pressure on U.S. interest rates" - which it will! - "the Federal Reserve has the capacity to operate in domestic money markets to maintain interest rates at a level consistent with our economic goals." My mouth drops open in mute testimony to the fact that I can't believe I am reading this crap!

At my rude laugher of derision and contempt, Mr. Dorsch (playing the straight man) asks, "Would Bernanke speed up the printing presses to buy bonds from Beijing?"

I figure he is talking to me, so I quickly answer "Well, where else is he going to get all the money to buy all those bonds? Hahaha!" I thought this witty and jolly rejoinder would stimulate Mr. Dorsch into saying something like, "This, of course, brings up the interesting question: Does Bernanke think that creating tons and tons more money and credit is going to keep interest rates down in response to inflation in prices, when in reality the monetary inflation of creating tons and tons more money and credit is what makes price inflation go up in the first place, which in turn makes interest rates go up?" to which I would have added, as a fitting and memorable coda, the crazed laugh of the damned, "We're freaking doomed! Hahahahahaha!"

But alas, my little bit of theatre was not to be, and everyone just went home, and now I don't have anything to do. So I turn to the email and find that this weird central bank crap is infesting Britain, too, as we learn from Junior Mogambo Ranger (JMR) Patrick M., who wrote to the Bank of England and asked, "Dear Sir, How can confidence in fiat money be maintained when money supply is raging at 10% compound interest per year?"

He swears that the unbelievable email he forwarded to me was the actual reply he got from Di Davies of the Public Information & Enquiries Group at the Bank of England. I assume that she was assigned to the duties of answering questions from the public because she was new, but has received training in Official Central Bank Economics.

If so, I am surprised to read incomprehensible, laughable things, such as the indecipherable, "Higher or lower money growth will be reflected in inflation if it alters the pressure of demand (spending) on available supply." Huh? What? Huh?

And it gets better! Then she says, "But money is an asset as well as a medium of exchange. If households and firms choose to hold higher money balances which will not be spent, this will increase the rate of money growth without increasing inflation." What? Huh? What?

I desperately try to think back, back, back to when I actually had to learn the definitions of terms like "money balances", and then I realize that most everything in my past is a big blank, except for the indelible memory of all the people who were ever mean to me in any way whatsoever, and I perfectly remember all of their nasty little faces, and I recall in exacting, minute detail what I had planned to do to them in revenge one of these days when they least expect it and their back is turned to me so that they can't hit me back before I take off running.

Heroically trying to stifle a sudden bloodlust rising up in me, I instead make myself look up the term "money balances" in the MIT Dictionary of Modern Economics, and it says, "The amount of money held on average by individuals in the form of fiat money or bank deposits." In other words - savings.

Now, we go back to the original sentence and substitute the definition and see if it reads any better. It doesn't. Now it reads, "If households and firms choose to hold higher amounts of money in the form of fiat money or bank deposits which will not be spent, this will increase the rate of money growth without increasing inflation." What? What in the hell is that supposed to mean? Now I am more confused than ever!

"Finally," she writes, "you question the merits of using fiat money over a currency backed by gold, silver or other such commodities. There are, of course, arguments for and against the use of such currency. I should point out that the prices of many commodities have fluctuated wildly over the short term, often affected by shocks and events around the world. In many countries which do not have a developed monetary policy structure such physical backing of a currency may be necessary. However, in the U.K. and most other countries it has been possible to maintain confidence in the value of the fiduciary issue."

Well, apparently she has not read an article by Ned W. Schmidt, of Gold Thoughts newsletter, titled "The Agri-Food Value View: Fundamental Demand Determines Price", where he reports that "The Base Food Index has performed better than U.S. stocks" when evaluated according to the "ratio of mean return to the standard deviation of return." In short, he says, "The Base Food Index gives far superior return per unit of risk than U.S. equities."

So compared to the return of the dollar (losing 97% of its value in 94 years, and a third of its value in the last four years), gold and all the other commodities would have been a better choice for a money than a fiat currency in the hands of a central bank!

Anyway, we also learn that not only does the BOE think that money somehow springs unbidden into existence and may or may not get spent (hahaha!), but that it is this very spending that causes inflation in prices! I know you are saying, "That idiot Mogambo! What kind of chump does he take me for to think that I would believe that the Bank of England would actually say such a preposterous thing?"

Well, to shut you up once and for all, here is the sentence itself: "I can assure you that money growth is one of the factors that the MPC considers very carefully when discussing the level of the interest rate because it reflects the amount of money in the economy which is likely to influence spending, which in turn, influences the rate of inflation." Hahaha!

And just when you think that it could not get any weirder, we get this laughable bit of economic quackery; "However, the value of money is not eroded by the growth of money in itself - it is inflation which affects the value of money." Hahaha! I am speechless! Prices go up, which makes the purchasing power of the money go down? Hahaha! I am splitting a gut here! Hahahaha! I can't believe what I am reading! You can see why I was dubious that this was a real BOE email!

The best is saved for last, as she writes, "The Governor has said in the past that rapid growth in broad money and credit will lead in the end to higher asset prices and inflation," which is so true that I started to calm down, figuring that I had simply misunderstood what she had written earlier, and how this means that now, or tomorrow, or soon, or one day in the future like next month or next year, I would have to make another sincere promise to myself to, you know, sober up before I try to read things that I don't understand in the first place.

So just when I was relaxing and reaching for a bottle of single-malt scotch to take a little drinkie-poo to celebrate my new sobriety regimen, she continued "unless it is accommodated in changes in the velocity of money, which do not have implications for inflation." At this, out of nowhere, comes a Big Mogambo Laugh (BML) exploding up out of my chest, and I ended up spewing a mouthful of perfectly good hooch, dropping the bottle onto my desk, which spilled onto my keyboard, which shorted out with a big explosion of sparks, blowing the circuit breaker, and now everybody is mad at me.

In my own defense, I explain "Hey! It wasn't me! It was the Bank of England!", which made it kind of okay with everybody, as I think they were kind of glad that for one damned time that there was one damned thing that was not the fault of the damned Federal Reserve, the government, Supreme Court, or the CIA shooting mind-control rays into my brain through my computer.

But can anyone actually control their autonomic reflexes upon learning that the Bank of England thinks it can measure and control changes in velocity, which is just the number of different transactions in which a unit of currency is used in a year? Hahaha!

Hell, velocity is the plug factor to make Fisher's Quantity Theory of Money equation (MV=PQ) work out, for crying out loud! Hahaha! This is crazy! If this is an example of the caliber of thinking at the BOE, then Britain is freaking doomed!

Junior Mogambo Ranger (JMR) Paul P. sent a headline from Chicago Sun-Times that read "GROCERY PRICES SOAR. OUCH!" Paul, as befitting his JMR status, writes, "Please note the use of the single exclamation point. It would appear that even the popular press is beginning to pick up on this."

The subtitle was, "$1.79 for a dozen eggs? 81% increase from last year's price of 99 cents." Also included was the fact that the U.S. average increase in grocery prices in the past year is 3.9%, but it is 23.6% since 1997.

I know that you are thinking "23.6% inflation in food prices since 1997? What used to cost $1.00 now costs $1.24? Yow! This is intolerable!" Well, Americans spend about $1.3 trillion on food (eat in, take out, delivery, at home, snack machines, ice cream vendors, door-to-door burrito salesmen, Girl Scout cookies, etc.) which works out to an average of about $4,300 per man, woman and child per year, or $17,200 to feed a family of four. If prices rise 23.6% over the next 10 years, then that family of four will need $21,259 a year to buy the same amount of food! Yow!

Well, would it make you feel any better if I told you that 23.6% inflation in 10 years is only 2.14% a year? It doesn't? Then I have some very bad news (VBN) for you, in that Ben Bernanke, the chairman of the Federal Reserve, along with all the rest of the worthless Fed governors, says that he is "comfortable" with 2% inflation!

And he has already proved to easily tolerate 3% inflation - and higher! - and is actually on record as saying that he actually wants to target inflation to constantly run at between 1% and 2% a year! Can you believe that? Hahaha! We're freaking doomed!

Outstanding consumer credit only grew by $2.6 billion in April, which works out to an annual rate of increase of 1.3%, as total outstanding debt climbed to $2.42 trillion in April.

Credit card (revolving debt) actually declined a little, which may explain why retail sales posted their first decline since September.

Still reeling from the bad economic news that spending is down (as in "The consumer is 70% of the economy!"), from another Bloomberg report we read that "Federal Reserve Bank of Richmond President Jeffrey Lacker reiterated his view that growth will rebound this year to its long-run average because of 'healthy' consumer spending and an end to the housing slump." Hahaha! Housing is down and spending is down, and yet he says this with a straight face? Hahaha! Talk about clueless!

And notice that nobody is even talking about how Mortgage Equity Withdrawal was over $650 billion a year at its peak a couple of years ago, and now MEW is down to around $150 billion, meaning that almost $500 billion a year in consumer spending has disappeared from the economy. Spooky. Very, Very Spooky (VVS)!

You say you don't know why the Chinese currency (CNY) is known both as the renminbi and as the yuan - two names! - and you are confused as to when it is appropriate to use one or the other? Me, too! In fact, this very topic was brought into sharp focus when I recently went to this Chinese restaurant and told the cute little waitress "Be nice to me, my darling little China doll, and perhaps there will be a few extra renminbi in your tip, if you get my drift!" while making goo-goo eyes at her and salaciously licking my slobbery lips ("the language of love!") in case she didn't, you know, speak English.

Well, the disgusted way she acted and the way she kept spitting at me made me realize that I had made a serious faux pas, and that I should have said I would put "extra yuan in your tip" instead of "extra renminbi in your tip"!

So, to keep you from making this same embarrassing mistake, I present Adam Hamilton of ZealLLC.com, who writes that Chinese money "is formally known as the renminbi ('people's currency') but more commonly in the West as the yuan, its principal unit. Yuan is a one-syllable Chinese word that literally means 'round', a reference to the round coins from China's history that went by the same name. So renminbi and yuan are interchangeable in the vernacular today."

Except with snotty little waitresses in Chinese restaurants, to whom there seems to be a BIG difference! Ugh.

Mogambo sez: Gold, silver and oil. If you ain't buyin', you ain't even tryin', because there has never been a bigger investment lead-pipe cinch than any of these, and to pass them up says that there is something very, very wrong with you.

P.S. To get The Daily Reckoning sent directly to your inbox, sign up for our free email newsletter, or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.

Richard Daughty, the angriest guy in economics
The Mogambo Guru

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.

Copyright © 2005-2008 Richard Daughty

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