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Richard Daughty (Mogambo Guru) is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the writer/publisher of the Mogambo…

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Pressure Cooker of Inflationary Food Prices

"The whole freaking world could turn to 100% biofuels tomorrow, and demand for food could keep rising...while the supply of food could actually go down, but that does NOT mean that prices MUST be higher for you personally."

The dollar index seems to be dropping towards that psychologically-important level of 80 as the dollar's buying power falls and falls because the Federal Reserve is creating so damned many of them. One day, soon enough, it will fall to the psychologically-important level of 70 and then the psychologically-important level of 60 on its way to that psychologically-important level of a big, fat zero, which has always been the fate of fiat currencies.

This "psychologically-important" phrase keeps popping up because, surprisingly, the dollar index is also one-for-one with an index of the effectiveness of my medications in controlling my panic and outrage at the destruction of the dollar and the American economy. At a dollar index of 80, I am able to control 80% of my panic at the monetary and fiscal stupidities that are going to eat us alive. At a dollar index of 70, pills are but 70% effective. You can see where I am going with this. The bad news is that it gets really ugly and weird from there on down.

And helping that along, of course, is that the Federal Reserve is still constantly creating excess amounts of money and credit, and last week boosted Total Fed Credit (the fount of truly "money out of thin air" of story and song) by a whopping $9.7 billion. Admittedly, this only takes us to $857.3 billion TFC, which is actually lower than it was at the beginning of the year, but still within the dismal, long-standing up-trend since 1997.

All that creation of excess money and credit will show up as price inflation for two reasons. The first is that all imports (like oil) will cost more, thanks to the depreciated dollar, unless foreign exporters accept less buying power (but the same number of dollars) as payment for their exports, and the second is that price inflation always follows monetary inflation, and in rough degree to the degree of the accumulated excessive creation of money and credit. Always.

This brings up the latest Bernanke speech, which was not about inflation (as advertised), but about "determinants and effects of inflation expectations." Hahaha! He doesn't talk about inflation, but about how he worries about "anchoring inflation expectations" and how this, in turn, affects inflation! Hahaha! Pure academic crap at its finest!

For an example of more academic crap, he said that the Fed uses the "sacrifice ratio" in policy deliberations, which is an academic concept that the Federal Reserve uses to justify never raising interest rates. Essentially, the sacrifice ratio (according to investopedia.com) is "An economic ratio that measures the costs associated with slowing down economic output to change inflationary trends. The ratio is calculated by taking the cost of lost production and dividing it by the percentage change in inflation." Hahaha!

The rationale is provided when we learn that, "If inflation is becoming a problem, central banks will try to cool economic growth in a bid to reduce inflationary pressures. However, this reduction in output costs the economy in the short term, and the sacrifice ratio tries to measure that cost." Hahaha! Attempting to measure pain, as if it is just a matter of using a few constants in a few equations! Hahaha!

The funny part - as in "I can't believe I am hearing this crap!" - was when he announced that the Phillip's Curve was dead, and then repeatedly used it to show how inflation would come down! Hahaha! Too, too much!

It was instructive when he said that the Fed does not pay any attention to the money supply because it is only interested in inflation in the short run. Well, if that is your temporal orientation, then okay, and for good reason; the relationship between money and inflation does not reliably operate over such a short time. So I grudgingly admit that he's right about that.

It was startling, then, when he subsequently admitted that there is a very, VERY strong relationship between inflation in the money supply and inflation in prices over the longer term! It was at the exact moment when he uttered those words that the skies darkened, lightning flashed and wailing zombies began to rise from their graves, thus providing the appropriate soundtrack to the chilling realization that explosive growth in the money supply has been raging for decades, and is even now growing at over 13% a year! And still rising!!!

You probably guessed by the look on my face that I was astonished! Here is the chairman of the Federal Reserve telling you, point-blank, that there is a strong relationship between growth in the money supply and inflation in prices!

So why in the hell didn't bonds sell off at that moment? I dunno. It's just one more weird, weird thing in a whole freaking constellation of weird, weird things these days.

Predictably, the lead-in story at Mogambo Interstellar News Broadcast Service (MINBS) was, "Bernanke announces The Mogambo was right! The Federal Reserve has just admitted that we are freaking doomed because inflation is going to kill us all, and the growth in the money supply proves it!"

And sure enough, here comes Doug Noland of PrudentBear.com reporting that last week "August crude rose $2.13 to a 10-month high $72.81. For the week, the CRB index increased 1.6% (up 4.4% y-t-d), and the Goldman Sachs Commodities Index (GSCI) jumped 2.4% (up 15.4% y-t-d)."

Even the Dollar Index in the back of the Economist magazine shows the category of "Food" increasing at 20.8%.

The most amazing thing to me was how Total Reserves in the banks jumped up to over $44 billion last week, which is so far out of the range of its usual channel that I am instantly scared at this strange occurrence, as banks are infamous for loathing to hold reserves as a cushion against loans going bad or the depositors demanding their money back. To the contrary, the banks always, always, always want to loan out every freaking penny that they can get their grubby little hands on so that they make as much money as they can.

My voice trembles as I say to myself, "So why are the banks now, and suddenly with a trend-reversing vengeance, so dramatically increasing their reserves? What evil does this portend?"

Maybe it has something to do with inflation, or maybe with a new joint report by some U.N. and OECD weenies forecasting that, over the next ten years, food prices will rise between 20-50% more than they usually do. The reason? They say that the main reasons are that the world is turning to making energy out of plant materials (biofuels), and that there is a surging demand for more and better food by a lot of foreign people who are suddenly making a lot more money and can now afford to chow down on some good eats.

This baleful news about a horrifying inflation in food prices, however true, will not be uniformly true for everybody. The whole freaking world could turn to 100% biofuels tomorrow, and demand for food could keep rising and rising forever while the supply of food could actually go down, but that does NOT mean that prices MUST be higher for you personally. If your currency got stronger, and thus its buying power increased, then imported food prices could actually go DOWN in price for you!

Okay, okay; I admit that that is not going to happen to us idiot Americans, but that's how it essentially worked the whole time we were abusing the "reserve currency" status of the dollar for decades! So it CAN work!

And if China is truly going to grow to dominate the world (and there is no reason to think that they will not), then all you have to do to prove this to yourself is keep watching how import prices for Chinese people stay low as the yuan gets stronger, and thus inflation in prices for Chinese consumers will be lower, even though prices will be going through the roof for over-indebted, over-governed, monetary morons and fiscal idiots (like us Americans) whose currencies are falling in purchasing power.

And The Wall Street Journal had an interesting article about inflation by David Ranson and Penny Russell titled "Money Meltdown." In it, they note that constant inflation in prices is a relatively recent phenomenon, which I say stands to reason, in that constant inflation in the money supply is also a relatively new phenomenon, because countries idiotic enough to use a fiat currency and insane levels of fractional-reserve banking are a relatively new phenomenon, inasmuch as that fatal lesson was learned hundreds of years ago, and all the idiot countries since then who used either of the them collapsed in brutal, bankrupting war and ugliness while learning the lesson the hard, hard way.

And to prove it, when gold was money (and money was gold!) in the United States, thus insuring a relatively static money supply, "cumulative consumer-price inflation was zero from 1820 to 1913." And the same wonderful picture was everywhere else, too, as, "In the United Kingdom, consumer prices were lower at the beginning of World War II than they had been in 1800." 139 years of gloriously stable prices!

The most incredible statistic was that "In England, the prices of consumables rose at an average annual rate of less than 0.4% over the centuries-long run between 1210 and 1940." This is an astounding 730 years of essentially stable prices and the glorious rising standards of living that the free market guarantees when you have a stable money supply!

This timeless truth is, however, starkly at odds with the idiotic new philosophy of "targeting inflation" to be at 2% a year, as famously championed by none other than Ben Bernanke, who is simultaneously the laughable chairman of the Federal Reserve, a hopeless academic wonk who has no idea how things economic really work, and the everlasting shame of Princeton University, where he was the head of the economics department.

And it is the same manipulative thing at the Treasury, too, as we learn from "Global Exodus from the US Dollar in Motion", by Gary Dorsch of Global Money Trends newsletter. He writes, "US Treasury chief Henry Paulson, and former chairman of Goldman Sachs, 'monitors the financial markets closely,' and has reinvigorated the infamous 'Plunge Protection Team,' which comes to the rescue of the US stock market whenever nasty revelations come to the surface."

So what is the "big idea" now? Mr. Dorsch writes, "At the moment, Paulson's grand strategy is to offset losses in the US housing sector with big gains in the stock market, to prevent the US economy from sliding into recession", while the Federal Reserve provides the financing, in that "The Bernanke Fed is preventing borrowing rates from rising at a time of explosive loan demand for US corporate mergers and takeovers, by rapidly increasing the US money supply."

Hahaha! One manipulation after another, one monetary bubble after another, one bust after another, and then start the whole thing over again, apparently expecting a different result in this cycle! Hahaha! What morons!

And since the echoes of me laughing too loudly and too long about the frightening growth in the money supply are still reverberating around the neighborhood, it is not surprising that he reminds us "Since the Bernanke Fed discontinued the decades-old reporting of the broad M3 money supply in March of 2006, the growth rate of M3 has accelerated from an 8% rate to a sizzling 13.7% clip, its fastest in more than three decades."

-- Jim Willie CB of the Hat Trick Letter calculates that Americans have suffered roughly a 50% erosion in the buying power of incomes since 2000, based on the fact that "For the last six years, the actual consumer price inflation rate has varied between 7% and 11%", which works out to about half of your buying power disappearing.

"We love compound interest in returns," he says, "but overlook compound attrition arithmetic when whittling away our wealth or purchasing power."

Well, I am here to tell Mr. Willie that not everybody will "overlook compound attrition" in the purchasing power of their money, but the truth is that no matter how loudly you yell, nor how stridently you accuse your family of stealing your buying power, nor how carefully you search their rooms and possessions to find that lost buying power, nor how even taking one of them as a hostage to extort the others to talk about where my damned money has gone, it's gone.

And why does Mr. Willie only go back to the year 2000 to document the loss of buying power of incomes? He answers, "The numbers are far too alarming and depressing on lost income through inflation since 1980. Let's not go there."

-- "$5 Trillion in Housing Wealth gone: The Impact of the Housing Bubble Bursting" by a guy named Dr. Housing Bubble, which is such a weird name that one can only shake one's head in wonder at what in the hell his parents were thinking when they named him!

But unusual moniker aside, he figures that the Fed and the banks providing unlimited amounts of money to create the real estate bubble (which I sarcastically note was created by the Fed and Congress to bail out the busted stock market bubble in 2000, which the Fed also provided the financing for) has created $5 trillion in "bubble wealth."

The significance of this is that "$5 trillion in bubble wealth has created an extra $250 billion in consumption that would not be present if it were not for the housing bubble. This works out to be 2 percent of our GDP; in other words, without that wealth we would already be in a recession."

And now it's gone. You do the math.

And speaking of houses, in Barron's this week we learn that Macro Mavens estimates that "based on the share of ARMs in some state of negative equity at the end of last year and the decline in home prices so far in 2007, a stunning $693 billion in mortgage loans are already in the red." Wow!

And even worse, "Assuming lenders are able to recover 70% of those assets - which seems optimistic given the massive amount of housing inventory yet to be unwound - that means mortgage lenders are already grappling with $210 billion in outright losses."

And worse - much, much worse - is that based on the insanely risky degree of leverage that is so pandemic these days, "the total financial exposure to these claims is many multiples of that."

Mike Larson at Money and Markets hears me absently babbling incoherently at this shocking revelation, and adds to my misery by saying, "The Mortgage Bankers Association says 0.58% of ALL mortgages entered foreclosure in the first three months of this year. That's the highest level in U.S. history!"

Grabbing a calculator instead of an Uzi (as is my usual response to stark terror), I find that this means that about 1-in-200 homes in America are in foreclosure! Yikes!

But Mr. Larson is not impressed with my impressive math skills, and ignoring me completely goes on to say, "A whopping 14.51% of a specific group of subprime mortgages made in the second half of 2006 are already either being paid late, in foreclosure, or in a position where the underlying property has been seized. That's simply amazing considering these loans are less than a year old!"

And it gets worse when he reports that loans made in the first half of 2006 are performing even worse, and "Almost 18% of them are failing."

I was going to ask, "What about the ones made in 2005?", but I sensed that I would discover that I would rather not know, so I kept my mouth shut for once in my life.

And the news that "foreclosed properties are popping up all over the place" is made worse because, "They typically aren't as well-maintained as inhabited homes or even 'regular' homes for sale. Some have even been stripped of all their fixtures, wiring, and piping."

So how does a gutted, derelict eyesore affect surrounding property prices? Ask my neighbors and find out! They never seem to tire of telling me how my ratty little house has ruined the values of the whole neighborhood and how gun barrels sticking out of the windows aren't helping, either, and all this aside from the fact that I am hateful and dangerous and blah blah blah.

So, attempting to be a good neighbor, I helpfully and politely try to convince them to just pack their crap, move out and go someplace else, which I do by thoughtfully throwing my garbage on their lawns all the time. But then - get this! - they get all bent out of shape about that, too! I mean, I'm damned if I do, and damned if I don't! You can't please those jerks!

But this is not about how my neighbors are all a bunch of whiners who can't mind their own business, but about money and mortgages, and if people don't have the money to pay their mortgages, then that may explain why consumer credit rose at an annual rate of 6.4% in May.

The stunning statistic was that the majority of the additional borrowing was by people using their credit cards, and their "total debt and death by plastic" increased at an annual rate of 9.8%! Yikes!

And what were they buying? Well, I hear that an estimated 700,000 of Apple's new iPhones were sold on the first day they were put on sale. And most iPhone buyers opted for the more expensive eight-gigabyte model, too, which retailed for $599!

-- "The Rails Return" by Chris Mayer, writing at DailyReckoning.com, is extremely interesting in that "All around the world," he says, "it's becoming clear: The rails are back."

This is good news, as I like riding trains because when the train crosses a road, all the cars have to stop at the railroad crossing and wait until I go by. And if you are looking out of the window of the train and see somebody you don't like waiting in one of the cars, you can make as many rude, insulting gestures as you want at them, and they can't do anything about it! Hahaha!

Mr. Mayer writes that this is not why trains are becoming popular all of a sudden, but that "High oil costs hit trucking much harder than they hit railroads, which are three times more oil efficient", although one wonders how much efficiency there really is since they exist on huge government subsidies and "Much of the expense is shouldered by taxpayers."

But the advantage is now swinging to trains, as beyond the rising fuel bills, additionally, "Trucking companies have difficulty finding long-haul drivers and face high insurance premiums", and "Increasing gridlock in most cities makes delivery a little less reliable."

Another reason for the sudden popularity of trains is that "The rails appease the green crowd, too", because "Air travel is a big polluter." In fact, they report, "Flying results in twice as much air pollution as traveling by rail."

Even the Economist magazine is climbing aboard, if you will forgive the pun, and they say, "Europe is in the grip of a high-speed rail revolution. Four new lines are opening this year and next, with trains running up to 320kph".

Whoa! While I admit that finally reviving and expanding the rail and mass-transit systems of America is the smart thing to do, I also say that this last point about speed will doom high-speed rail. There may be a lot of money made in creating and delivering new trains and tracks to prepare for this "rail revival", but it would take a pretty dull terrorist or psychopath not to know that rolling a heavy obstacle in front of a train going almost 300 mph ain't going to be able to stop, the train will be totally destroyed and literally everyone on the train will be killed. What in the hell did you THINK was going to happen at those speeds?

-- Junior Mogambo Ranger (JMR) Les M. figures that the people will start making a fuss when things get worse by 15%. Why 15%? He explains, "The 15% comes from experiments in illumination. When your surrounding illumination drops by 15%, you notice that things are not as bright", although, "You do not notice a 10% reduction."

Along the same lines, a transcript of a Commodity Watch Radio show on Minesite.com, interviewing Marc Faber (he of the famous Gloom, Boom and Doom report), tells the now-familiar tale of how things always are at the end of long booms, when the level of in-bred corruption is at its despicable zenith. Mr. Faber is quoted as saying, "my view is the moment the Dow Jones goes down 10%, and the moment home prices are down 10%, and the moment the stock price of Goldman Sachs is down 20% from the peak, the Fed will ease, because all the partners of Goldman Sachs will be on the phone to the Treasury Secretary Mr. Hank Paulson, and to Mr. Bernanke, and telling him that he has to ease, because it's basically a big time Mafia; the establishment, the Wall Street establishment, and the government. And so they will, in my opinion, print money and eventually to lead, in my view, to kind of hyperinflation."

At this point, he was asked, "The cure for that is to hold gold and precious metals?"

Mr. Faber is quoted as saying, "Well I suppose so", although he expanded that to, "I would look rather at buying commodities than at buying equities, because in commodities you have a limited supply. There are some commodities where you can increase the supply meaningfully, but others not. And the ones where you can increase the supply meaningfully takes a long time and you have to find new mines and so forth."

I raise my hand to get him back to talking about gold and silver so that I could figure out how much money I am going to make when my pitiful little hoard of precious metals goes up enough so that I don't have to spend my damned time listening to this kind of investment and economics stuff, but will have enough money to do fun stuff all the time.

Mr. Faber sees me and, apparently well-acquainted with my mentally ill single-mindedness about this stuff, abruptly says, "In the case of gold and silver and platinum, you cannot increase the supply meaningfully; so Mr. Bernanke and the other central banks, his buddy buddies here in England, print money like water, and then there's more and more paper per unit of gold and silver and platinum."

Before I could ask, "Paper per unit? What in the hell is THAT supposed to mean, damn it?", two rude and huge security guards suddenly appeared out of nowhere and hustled me out and into the street. So I never found out, officially, but I think it means that gold and silver will go up. That's the way I figure it, anyway.

-- The winner of this week's Mogambo Economic Theatre Of The Absurd (METOTA) is from Bill Bonner at DailyReckoning.com. "And now we have a whole alphabet of derivative sausages", he writes, "all cross-insured, counter-partied, tranched and retranched...spliced and diced...and all desperately counting on some Cajun yahoo down on the bayou to pay more for his house than it is really worth." Bravo! What a surreal world! What a script! Bravo! Bravo!

Then, in the midst of the celebrations, I think of the terrible ramifications. It destroys the moment. The magic is lost. The world is gray. I go home. I eat a piece of cold pizza. It was crappy. I got the squirts. Ugh.

Mogambo sez: As the currency falls, gold, silver and oil rise. They always have when the economic situation got this bad, and they are now, too. "How much will they rise?", you ask. I dunno.

But maybe Rob McEwen of Sprott Asset Management knows, as he said, "by the end of 2010 I believe it will be between $2,000 and $5,000 U.S. an ounce."

A 750% return in three years? Wow! Sounds good to me! And I'll bet it sounds good to you, too!

Editor's Note: This year, the Mighty Mogambo is actually going to bravely exit his Big Mogambo Bunker (BMB) in order to speak at the Agora Financial Investment Symposium in Vancouver, British Columbia. Don't miss this opportunity to hear his rants live, on why "We are all Freaking Doomed!" Agora Financial Investment Symposium - July 24-27


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