The Daily Reckoning Monday, November 8, 2004
The Daily Reckoning PRESENTS: We have found The Mighty Mogambo's kryptonite: inflation. It's not just inflation, but also the massaging of the inflation statistics by the Federal Reserve that scares the beejeesus out of him. Read on...
THE JOKE'S ON US by The Mogambo Guru
Asia Times presented Henry C K Liu, who is chairman of the New York-based Liu Investment Group, who has written a very good article that explains the problem, the dilemma, and the looming disaster with China, entitled "Part 1: Follies of Fiddling with the Yuan". After tracing the history of Chinese exchange rate policy, he notes, "In China, eight reductions over a period of eight years since 1994 halved the benchmark yuan one-year lending rate to 5.31%. The yuan one-year deposit rate is now 1.98%. China's consumer price index rose 5.3% in the year through July, meaning that borrowers now enjoy near interest-free loans after adjusting for inflation."
Interest-free loans! Just like here! And you think China's growth is going to slow? Hahahaha! Liu goes on to say, "Industrial prices climbed 14% in the first seven months of 2004, making real interest rates negative by a wide margin in industrial sectors." Negative interest rates! Yow! "Yuan bank deposits at 1.98% now suffer erosion of principle to inflation at the rate of 3.32% a year, which then as bank loans goes to support a built-in 8.69% annual profit for those who borrow at 5.31% to speculate in the industrial sectors with 14% inflation."
Just like here, where the banks are screwing over us little dirt bag depositors! If you listen carefully you can hear them laughing and spitting on us lowlife depositor trash, and with my Super Mogambo Hearing (SMH) I can actually hear them saying, "Depositors? Hahaha! I spit on the lowly depositors!" which confirms your earlier reports of laughing and spitting.
"International money flow is closely linked to interest rate differentials between economies, in the direction of the higher rate. Speculative hot money poured into China for the past two years as the Fed cut (the Fed Funds Rate) to 1%." So, here in America, the Fed cut rates, and the money poured into China! Hahaha! The joke's on us, huh? Old folks with their Certificates of Deposit paying squat, and bank depositors getting squat for their savings, all got screwed, so that money could flow into China! Liu continues: "Ample liquidity triggered an investment boom in China that exacerbated inflation. The resulting negative real interest rate amplified investment demand and caused a speculative bubble."
If you want to argue that China's economy can't grow, you can quote Mr. Liu when he says that China, "Despite spectacularly rapid growth, still accounts for only an insignificant 3.5% of the global GDP, a pathetic figure for a nation with one fifth of the world's population. Yet China now accounts for 60% of the growth in world trade."
Then he touches on "recent calls from U.S. officials for China to simultaneously raise both the yuan exchange rate to the dollar, and yuan interest rates further above dollar interest rates are ill advised. Such moves will cause an upward spiral of interest rates and inflation in the United States, China, Asia and the rest of the world." The Mogambo Inflation Detector (MID) is clicking like crazy!
Apparently this Liu guy is unaware that the reason that I am on the floor, twitching and gagging in fear, is this inflation thing. Then, without warning, as if to kick me in the guts, he gets into this issue of the Fed hedonic massaging of inflation statistics so as to disguise it. "As this measuring technique is being extended to a growing number of goods, it has become a most important factor in reducing the United States inflation rate, and intrinsically raises nominal GDP growth while the real GDP may actually decline.
"All this suggests two important things: first, that the reported new paradigm increases in real GDP and productivity growth have been exaggerated by a statistical illusion; and second, that real interest rates have been far too low in relation to real inflation, which also explains the most rampant money and credit creation that the United States has ever seen in recent history."
He then quotes the heroic Bill Gross of PIMCO, who wrote: "The CPI inaccurately calculates Americans' cost of living. Since social security and pension benefits as well as the level of wage hikes are predicated upon the specific number and/or the perception of annual increases, Americans are being in effect conned by their government and falling behind the inflationary eight-ball year after year."
Mr. Liu continues: "With every passing day, more market watchers are joining the ranks of those predicting looming financial crisis in U.S. markets from excessive debt, particularly external debt." Unfortunately, he says, "This danger cannot possibly be defused by China, regardless of what monetary policy it adopts.
"But the longer the Fed takes to bring (the Fed Funds rate) back to neutral or restraining levels," he says "the bloodier will be the crash of the bond market when it happens. And it will happen. Reality does not stop merely because some short-sellers lost money. Borrowing short-term to finance long-term bets is a deadly game that cannot be made safe by hedging, no matter how sophisticated the strategy. Hedging does not eliminate risk; it only transmits unit risk onto systemic risk."
And no truer words were ever spoken, even though neither the Federal Reserve, nor the banks sucking money, vampire-like, out of the system, nor the SEC, or Wall Street, nor the government, nor the armies of clueless university economics professor morons, nor any of the stock touts on TV believe a word of it. To the contrary, they all believe, for reasons that they cannot enunciate, that financial derivatives in quantities that swamp global GDP will prove to be some bizarre economic savior or another. But one day, when the whole derivative mess collapses in a huge stinking heap, they will rise as one and say, "The Mogambo was right! We are all a bunch of idiots! All hail The Mogambo!"
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:
Spiraling Out of Control http://www.dailyreckoning.com/body_headline.cfm?id=4247
