* * * * * * * * * * * * REMINDER * * * * * * * * * * * * *
On the days that I don't publish, like today, you will
receive Bill Bonner's DAILY RECKONING. This will help you
to keep pace with the changes in the markets. Bonner and
I agree on most things in the field of economics, so the
two letters will reinforce each other.
* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
Banks And Buttheads
The Daily Reckoning
Paris, France
Monday, October 11, 2004
---------------------
*** Stuff happens... Greenspan and Bush work dreadful
miracles... Mr. Market has his own agenda...
*** Oil price continues to climb... Americans hope for a
warm winter...
*** Terror-stricken Paris... the deconstruction of a
philosopher... underestimating the power of liars... and
more!
---------------------
Is stuff happening yet?
Maybe.
Friday's employment number - that is, the number of new
jobs created in the month of September - was a
disappointment. Either the statistics or the statisticians
didn't cooperate with the Bush administration. For the
number seems to show that the epithet "jobless recovery" is
only half right. There are still many fewer new jobs than
there ought to be. But this is no real recovery.
Five years after the bear market began - in January 2000 -
the Dow is still slouching towards 10,000. There, it is not
likely to be born, but more likely to die. "It will
probably fall below 3,000," says Richard Russell, "before a
new bull market can begin.
What will it take to make people so beaten down and
desperate that they will sell stocks down below Dow 3,000?
We don't know, but stuff will have to happen... and stuff
always seems to come along just when you need it.
Our guess: The next dreadful chapter of stuff has already
been written for us by George Bush and Alan Greenspan. Bush
found a way to bankrupt the U.S. government and fritter
away its military advantage. Alan Greenspan worked the same
miracle on the U.S. economy. USA TODAY reports that the
average household has $84,454 in personal debt. Plus, its
share of the federal debt is $473,456. In other words, the
average household is bankrupt; the most recent report we
saw showed assets not even half that amount.
It is just a matter of time before the lumpen realize
they've been had. Their incomes are no higher than they
were five years ago, but they've got two to three times the
debt!
Of course, the Bush and Greenspan duo are desperately
trying to keep the cash and credit flowing - especially
until the election. But it's not as easy as it looks. Mr.
Market has plans of his own. And sometimes stuff happens
when you don't want it to.
Greenspan's low rates lured consumers to buy bigger houses
and bigger cars. Now they're paying nearly $2 for
gasoline... and hoping the winter is not too cold.
China's bidding up prices on commodities - including oil.
But China uses the raw materials to make things, presumably
at a profit. It can pass along the cost - again, presumably
- to American consumers, who are stuck with them.
Gold shot up to $424 an ounce. But bonds rose too. Oil is
holding over $50, and the Dow and the dollar look weak.
The last time gold and bonds rose at the same time was
during the 1930's Depression. Despite the best efforts of
politicians and central bankers, the economy went into
credit contraction mode. People borrowed less, spent less.
"Consumers Cut Back Borrowing in August," was a headline on
Friday. "Bankruptcies Sinking Pension Agency," was
another.
Stuff happens. [Ed. Note: With all their skills at
statistical manipulation, they still can't make the payroll
numbers look any good. That's because they can't gain any
traction. Dr. Richeb�cher has researched the numbers in
his usual pedantic manner. Check out his discovery...
The Bubble That No One Notices
http://www.agora-inc.com/reports/RCH/broke904
And now... more news, from Eric Fry in Manhattan:
---------------------
"... a bet on Brazilian stocks is not merely a backdoor
play on the oil sector; it is also a backdoor play on
Chinese economic growth. Brazilian exports to China have
nearly doubled over the last three years, and the Asian
juggernaut will likely overtake Argentina this year as
Brazil's number two trading partner, remaining only behind
the United States... "
Want to read more? Check out The Rude Awakening...
http://www.dailyreckoning.com/home.cfmloc=/body_headline.cfm
&qs=id=4164
---------------------
Bill Bonner, back in Paris...
*** Terrorists struck in Paris on Friday. A bomb blew up in
the 16th Arrondissement, nor far from our home. Our
neighbors said they heard the 5 a.m. blast - aimed at a
nearby embassy - but we slept through it.
*** Jacques Derrida died. Derrida appeared at a conference
in Baltimore in 1966 and announced a new fashion in
philosophy. The structuralism of Claude Levi-Strauss was
"passe," said the young French intellectual. The new thing
was "deconstructionism." The point of it was that the
surface meaning of literature, philosophy and history was
neither permanent, nor particularly important. Instead, the
texts needed to be deconstructed in order to reveal hidden,
contextual or new meanings. Many philosophers tried to
deconstruct Derrida's own writings. He wrote 40 books. Few
people could make any sense out of any of them, perhaps not
even the author himself.
*** "How do you think the election will come out?" We are
asked the question at nearly every social gathering. They
pose the question hopefully, eager for news that Bush is
falling in the polls and that there is still a chance of a
new direction in American foreign policy.
"Bush will probably win," we say.
They almost cannot believe it.
"I don't understand how Americans can vote for someone who
lied to them and got them in such an awful war. You
Americans can't be that dumb," said a friend on Friday
night, smiling.
"Sir, as the president himself would say, you
misunderestimate us," we replied. "Besides, there is
Monsieur Kerry on the other side."
"Yes, Monsieur Kerry is a cousin of one of our politicians
here in France."
"Yes, but in America, he doesn't mention it."
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---------------------
The Daily Reckoning PRESENTS: Attention! The Mogambo Guru
has activated his Mogambo Distress Emergency Signaling
Device to warn us of the evil plans the Federal Reserve has
in store for unsuspecting Americans. To save yourself, read
on...
BANKS AND BUTTHEADS
by the Mogambo Guru
A new published study by two current and clueless Federal
Reserve buttheads (Bernanke, Reinhart) and one previous one
(Sack) has shown - surprise - that they are doing a
wonderful, fabulous job, that everything is just peachy,
that they are all much more handsome and smart than
everybody else and that we are all stupid.
Well, maybe not you and your gigantic brain, but they say
that they are smarter than the Mogambo, although they do
not mention me by name, but you can tell that is what they
are thinking.
In particular, the thrust of their precious little
self-aggrandizing study shows that when the Federal Reserve
threatens to act like profligate, inflation-stoking morons,
the threat of deflation goes away! Well, duh!
John Mauldin is a guy that not only puts out Thoughts From
the Frontline, an economic newsletter, but takes his
responsibilities so seriously that he actually reads things
like this Fed paper. He's not like me, sitting around
getting really drunk all the time, watching Cartoon Network
and whining about how I never can seem to get ahead in life
no matter how hard I try. As soon as I sober up a little
bit, I am going to call him up and thank him, because he
provides a quote that explains, in totality, the entire
idea behind Modern Economic Theory As Practiced by The
Moronic Federal Reserve and All the Other Little Dirtbag
Central Banks Around the World Who Are Equally Moronic.
First off, the authors provide a little economic
background, and they say, "Central banks usually implement
monetary policy by setting the short-term nominal rate,
such as the federal funds rate, in the United States."
So right off the bat, they are letting us know that the
supply/demand dynamic in the banking business, the same one
that has served American businesses so well that we came to
dominate the whole freaking world for most of a century,
has no bearing on rates anymore, mostly because we carbon
blobs out here in the real world are not as smart as
Federal Reserve people, and we can't be trusted to make
decisions about how much interest we are willing to pay or
at what rate we insist on being paid for the use of our
money.
To show you how wonderful they are, they continue,
"However, the success over the years in reducing inflation
and, consequently, the average level of nominal rates has
increased the likelihood that the nominal policy rate may
become constrained by the zero lower bound on rates."
Well, they have their opinion that they have had "success"
in reducing inflation (by rejiggering how they measure
inflation, known to us out here in the real world as
blatant lying), and I have my opinion (by actually looking
at prices) that they did no such thing and in fact have
caused persistent, grinding inflation, which is the exact
opposite of what they are supposed to be doing.
But beyond that, notice that they say that (and you gotta
pay close attention here) they deliberately pound money
into the banking system to force rates down, and somehow
this genius at monetary policy has resulted in lower rates!
Wow! Amazing!
But they do not want to get into a discussion about that.
They just want us to concentrate on the fact that they are
the banks, and they have the power to create so much money
that rates and the economic fate of the United States are
just playthings to them.
But the Mogambo is not able to calmly educate you right at
the moment about how stupid this is as my loud,
obscenity-laced angry denunciation of this whole Bernanke
thing is (so they say) a violation of my parole or
something. And as they are dragging me away kicking and
screaming, I whip out my Mogambo Emergency Distress
Signaling Device (MEDSD) and - beep beep beep - summon
Ludwig von Mises, whom we Austrian economists revere as the
Father of Economics, to step in for me. Even though he is
now deceased, he is likewise so angry that he opines,
literally from beyond the grave, that this is nothing new:
"Credit expansion is the governments' foremost tool in
their struggle against the market economy. In their hands,
it is the magic wand designed to conjure away the scarcity
of capital goods, to lower the rate of interest or to
abolish it altogether, to finance lavish government
spending, to expropriate the capitalists, to contrive
everlasting booms and to make everybody prosperous."
But as wonderful as this sounds, von Mises makes sure that
we do not miss the important point that there is still no
free lunch, and that this Fed program is just something
that creates the rope with which we will be hung by the
neck until we are dead. He says, "There is no means of
avoiding the final collapse of a boom brought about by
credit expansion."
Kurt Richebacher shows where all this money comes from and
where it goes. "Asset price bubbles arise when money and
credit expand well in excess of economic activity. The
excess money winds up in the financial markets, propelling
asset prices to unjustified and unsustainable levels
completely out of proportion to the general price level. In
this way, U.S. stock valuations over the last year went
from ridiculous to insane." And not only that, but houses
are now so expensive that only a minority of people can
afford one.
But this execrable paper is revelatory, in that they reveal
their entire theory of economics, and in just a second, if
you keep reading, you will realize why I used the term
"revelatory" to describe it. If you lower rates, then
aggregate demand will always be stimulated! It's their
whole cockamamy idea in a nutshell! They actually believe,
without a single, tiny shred of evidence to support it,
that aggregate demand will always be stimulated by lower
rates! Always!
They actually believe, which shows just how insane they
are, that there is no set of conditions in the known
universe where you will NOT consume and keep consuming with
both hands, if rates are lowered! You could be up to your
ears in debt, frantically filling our bankruptcy papers and
fending off creditors who are beating down the door
demanding payment with one hand and with the other hand,
theoretically, calling a 1-800 number to order a jeweled
water bowl for your dog or something! Hahahaha! I am here
to tell you - and you might want to write this down because
this is another Fabulous Gem of Economic Wisdom That Spews
>From the Mouth of the Mogambo (FGOEWTSFTMOTM) - that this
is one gigantic load of crap.
And not only that, but we are treated to the awesome
stupidity (and I am shaking my head in disbelief,
resembling a wet dog that has crawled up out of the water
and my ears are comically going flappa-flappa-flappa) that
they think that inflation is the inverse of money creation!
The more money you create, the lower inflation gets!
Hahahahaha! Their arrogance is so unbounded that they are
not the least deterred by the evidence that this has never
happened in history and that it is directly contrary to
long-established fact.
These buttheads (and notice that Bernanke and butthead both
start with the letter "B") say that the entire 5,000
previous years of the history of economics is wrong and
just because rates and inflation always eventually went up
after all the other central banks created so much money,
that was just an anomaly! They are saying that now, for the
first time ever, their theory is finally being proved!
Hahahaha!
But they don't want to talk about that, as when I call them
up and demand, "Put that jackass Bernanke on the phone
immediately because I am going to straighten his little
butt out about a few damned things!" they put me on hold,
and then after awhile, they come back and tell me that he
is not in the office, but that they will be happy to take a
message and that he will call me back. But he never does!
Never! See what I mean? They don't want to talk about it!
No, what they want to talk about is what happens when,
after they have been dropping rates and dropping rates and
dropping rates and nothing happens, they decide to drop
rates to near zero. Oh, not the GOOD things that happen,
like when you are able to buy more stuff because prices are
lower. They don't mention that part. They say that there
are BAD things that will happen, and this is where they
reveal the idiotic underpinnings of their whole stupid
theory of economics, which I will obviously call Their
Whole Stupid Theory of Economics.
They write, and here they admit that the crucial assumption
underlying their whole theory of economics is, actually,
wrong: "When that happens, a central bank can no longer
stimulate aggregate demand by further rate reductions and
must rely instead on 'nonstandard' policy alternatives."
There! They admit that lowering rates will not promise
stimulation of the economy! After they just told us that it
would! They first postulate that aggregate demand can
always be stimulated by lower rates, and that gives them
the "right" to do it at their whim when the economy needs
to be rescued, again, from their utter failures at managing
the economy. And then they turn right around and in the
same breath say, no, sometimes, even money available at 0%
will not "stimulate aggregate demand." Even though their
whole bag of tricks is that one trick, namely that lowering
rates, will always stimulate demand! Now you see why I have
zero respect for the Federal Reserve!
And if that is not bad enough, the real horror is that they
are giving themselves the option, which they are calling,
"'nonstandard' policy alternatives," to do any damn thing
they want to, whether or not it conforms with the law,
reason, intellect, convention or common sense!
They even dress it up in with the neutral-sounding word
"nonstandard," when the more accurate, though lengthy,
synonym would be "Outright fraud, intellectual bankruptcy
and legalized corruption by a fascist government that has
no idea what in the hell it is doing, the kind of behavior
that sends the Mogambo off the edge, and the next thing you
know, local television stations are breaking into their own
broadcasts to breathlessly announce that a heavily armed
raving lunatic is creating a disturbance downtown and that
traffic is snarled for miles."
Regards,
The Mogambo Guru
for The Daily Reckoning
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 the better 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. If you're
inclined to read more, you'll find the whole Mogambo here:
A Tazer Stun Gun in Each Hand
http://www.dailyreckoning.com/body_headline.cfm?id=4127
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