New Jobs for the Smuggling Industry

New Jobs for the Smuggling Industry
by The Mogambo Guru
The Daily Reckoning
Monday, August 7, 2006

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• Humbug for Everyone: Hilary set to run for president of the great state of absurdity…

• Breaking News: There is a war in Lebanon - kind of…The English pound seems to be headed to the $2 barrier…Bill recalls the lively tones of a dead language…

• Anecdotal evidence of a 'literary economist'…A chattel of comportment: A Bonner lamentation on the a priori joy of social events…and more!

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"A lot of Americans can't work any harder, borrow any more, or save any less," says the sage senator from the great state of New York, Hilary Clinton. She is running for president of the United States of America, so far unannounced, on a "Humbug for Everyone" platform, betting that she can tap into the alienated middle-class vote. It's the "American Dream," she offered in last week's stump speech in Colorado. But what she is really offering the United States is the idle daydream that it can improve its standards of living with more claptrap and swindles. She promises a "fair wage, access to college, home ownership, and a path out of poverty into the middle class."

And there we have to stop. Our sides hurt too much from laughing. This is, after all, summer, and in the spirit of it, we permit ourselves to relax, dress down, ramble irrelevantly, and have a guffaw.

How will Senator Clinton provide all these fine things? How will she raise wages in the face of two billion Asian competitors? How will she provide greater access to college? How could she possibly increase home ownership, when homes are already in the hands of millions of people who can't afford them? What road out of poverty still lies undiscovered? Every one we have ever heard of is clogged with traffic…going in the opposite direction. From the middle class back…to destitution.

We will give you a little soupcon of how the Hilary program works. In 2005, the federal government, of which after all she is an important part, spent $318 billion more than it took in - providing bread and circuses to the voters. That number was only according to the press releases. The government's own auditors, meanwhile, sticking with standard accounting principles, put the loss at $760 billion. And if the true measure of the deficit were taken - including Social Security and Medicare - it would total about $3.5 trillion.

This same government - now declaiming in the hectoring accents of the Senator from New York - proposes another "American Dream." Each child born in America will get a "baby bond" worth $500. Alas, the poor baby's share of the total federal debt is far closer to $500,000 than to $500. Baby bond? Compared to the debt they have laid on, it is not even a spermatozoon of a bond. And the new dream is so hollow, it is closer to a nightmare.

The "American Dream" was that anyone could come to the New World, enjoy the privilege of being left alone, and make what he could of himself. Hilary Clinton's offer does not restore the dream, but takes out the last scrap of heart in it. Now, we are all being harnessed to debt from the "baby bond" to the grave.

Yes, dear reader, it is the new American nightmare, haunted by bamboozles, bribes, and boondoggles. The getting…the spending…the borrowing…the empty money…the decaying institutions…the threadbare habits…the corrupted thoughts…

Oh, what a delight! It is summertime…and we are a boy with a stone in his hand…living in a glass town!

More news from our friends at EverBank…

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Chris Gaffney, reporting from St. Louis:

"We will see if Bernanke and the boys will pause or give us one more rate increase. Many traders now feel the data shows that Bernanke may have waited too long to pause, while others believe we will get one more increase before the end of rate hikes."

For the full story, read today's issue of The Daily Pfennig:

Waiting on the FOMC

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And more views…

*** Here is something interesting. There's a war in Lebanon - at least, a kind of war…with conventional forces on one side, and a non-state organization on the other.

You'd think the dollar would rise; it's the world's reserve currency. People used to flee to it in times of trouble. This time, the dollar is going down. People are walking away from it, but so far, sedately.

The English pound seems to be headed to the $2 barrier, says the Financial Times. And the euro is back over $1.29. We remember when the pound traded at scarcely more than one buck. England was a bargain in the early '80s. If you had dollars, London was a marvelous place for a vacation or an investment.

The house we lived in last year, a modest place in South Kensington, could have been bought in the early '80s for less than $100,000. Now, two decades and a serious renovation later, it rents for $120,000 a year.

And now the pound is worth almost twice as much. What is pushing up the pound now is that Bank of England's latest move to a 4.75% lending rate…and the expectation of more to come.

But what is pushing up the euro?

The euro is the Esperanto Currency. Do you remember Esperanto, dear reader? It was a language invented to help cure the world of its ailments. And its inventor thought what ailed the globe was linguistic division. So, in 1887, Ledger Ludwik Zamenhof decided that we should all speak the same lingo. Since it wouldn't be fair for some people to have to learn some other peoples' language, he decided also that we should all have to learn a completely new one, which he called Esperanto.

Back in the '60s and '70s, there were hopeful and earnest Esperanto-phones all over the world. People wrote to each other in Esperanto. They exchanged visits and sat around the dinner table imagining what a wonderful world it would be if the lambs of Southern Lebanon, for example, would only lie down with the lions of Israel, murmuring to each of in the dulcet tones of Zamenhof's ersatz language.

Jean Monnet and others had the same idea about money. What Europe needed was its own currency. Not only would the new euro-currency rival the dollar (a thought that appealed to many Europeans), it would provide something Europe's variegated peoples could actually share.

Monnet probably dreamed how much more peaceful and prosperous Europe would be if the huns and frogs would only get along. It turned out his dream was realized only a few years ago, amid widespread skepticism. Whoever heard of a currency backed by a committee? After all, we know who backs the dollar. The U.S. Treasury and the Federal Reserve (and ultimately, the entire government of the United States of America) stand resolutely behind the greenback. If anyone destroys the U.S. dollar, it will be them!

But who stands behind the euro? In a crisis, will Denmark, France, Ireland, or Luxembourg trip over themselves to defend it? Will they risk bankruptcy to protect an Esperanto currency? Or, will they renounce it and revert to the French franc and the Irish punt? Nobody knows.

Actually, one of the great overlooked strengths of Europe is that it is very hard to get Europeans to agree to anything at all. In a pinch, even if they aren't able to agree on saving the euro, they will be just as unable to agree to destroy it. In short, while the dollar is helpless to fend off the feds, the euro is ensconced in relative security.

Cursed is the race saddled with hectoring leaders, for they are forever tackling problems…and making them worse. Blessed, on the other hand, are the people with spineless leaders, for they shall be left alone.

*** Spending the summer in the middle of France is a little like spending it in Iowa or Indiana. But here, people take the summer social season much more seriously than in the American heartland. We are not French. Nor are we related by marriage or blood to a single soul in the whole department. Still, hardly a day goes by without an invitation - dinner, a wedding, a cocktail. In Maryland, where we know everyone (and where we have many cousins and distant relations), social functions are relatively rare. Here, they happen every day.

Yesterday, we drove over to a friend's house for a concert on the lawn.

"Oh, you write books," said a graceful woman with gray hair. She was clearly over the age of 60, but still very attractive, with sharp blue eyes and a coquettish smile. "What kind of books do you write?"

"Economics…finance…investment…" we began.

"Oh, I'm afraid I wouldn't be able to understand them. I don't know anything about economics," she replied.

"Well, neither do I. The books I write are not really about economics, but about philosophy, using the world of money for illustration. I am what other economists call, pejoratively, a 'literary economist'," was our response.

"That sounds a lot more interesting than finance," she said.

"I was hoping it would," we said.

While the lady was disappointed to find we wrote about investments…a gentleman was disappointed to discover that we didn't.

"Since I've been retired, I have focused on investments," he began. "I don't believe in any of the theories I read. They're worthless, in my opinion. I'm a stock-picker. That's the only way to do it. And you have to do it yourself. You can't trust what you read in the paper. I used to study U.S. companies, but now I look only at French firms.

"I've made a lot of money at it. It's not that difficult really. The secret is to find companies that make things. You find a company that makes a profit by making things that people want; you're not going to go too far wrong.

"And right now, I'm concentrating on one sector that I am sure is going to make a lot of money: railroads. It's obvious. Fuel is so expensive. The trucking firms have to increase prices. And the roads are clogged up anyway. But the railroads have completely different economics. The real cost is the capital it takes to build the things. Then, after the first investors go broke, they're very good businesses. And getting better all the time. Once you've paid off the capital costs and reached a certain level of volume…everything else goes right to the bottom line.

"Of course, in France you can't buy the railroads; they're owned by the government. But there are a couple of railroad suppliers - companies that make parts for the trains - that are very profitable."

*** "Why do we have to go to all these events?" we asked Elizabeth on Saturday.

We have no quarrel with socializing; we are just badly adapted to it. We do not like small talk; we cannot stand in one place for very long, even with a strong drink in our hand; nor can we stay awake after midnight.

"We have to go…because it is fun," came the reply. "And if we don't go, we won't be invited again."

"Wouldn't that be a good thing?" we asked.

We were on our way to celebrate the marriage of people we had never met. We are only vaguely acquainted with the parents. Still, we got an invitation from the Comtesse of something-or-other, summoning us to the Chateau Gere le Puy for the reception. Tout Aquitaine would be there.

"Stop being such a curmudgeon," said Elizabeth. "You know you never want to go to any social event."

"At least we're consistent," we replied. "And, we don't discriminate."

Whether it is a high-society to-do…or a low-life shindig, we never regret when our invitation is lost in the mail. But once there, we stop grouching and always enjoy ourselves. There is so much to see. So many people to talk to. We are all eyes, ears…and even hands.

"What a lovely wedding," we said, imitating the 200 guests ahead of us in the receiving line. "And such a nice-looking young couple. And you couldn't have better weather."

The weather was beautiful. The chateau was magnificent. It was a 19th century chateau, with beautiful large windows looking out over a vast park of English design. Everywhere we looked were signs of recent labor. The windows were freshly painted. The terrace stones were freshly laid down. The garden was carefully tended. Only the old stables were a bit neglected…the inside full of old auto and tractor parts.

The bride's parents must have worked like dogs for months in preparation. Taking their hands in ours to salute them, we noticed they were hard as nails.

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The Daily Reckoning PRESENTS: Well, apparently the Mogambo is wielding a loaded, large-caliber handgun, and screaming about inflation and the minimum wage. Perhaps you should read on before things get out of hand…

NEW JOBS FOR THE SMUGGLING INDUSTRY
by The Mogambo Guru

It is inflation that I am yelling about! Perhaps you will find it particularly instructive if you watch my lips when I tell you that it is inflation in prices that causes societal misery, as people listening to their children crying in hunger usually starts to wear on your nerves after a very short while. And that is why the Founding Fathers were careful to write into the Constitution that money shall be ONLY of silver and gold. To prevent inflation!

But the Founding Fathers were just a bunch of old, dead white men, while I am an old, live white man carelessly toying with a loaded, large-caliber handgun. So, perhaps you should listen to me, and I, too, say you can only prevent price inflation by preventing monetary inflation, which you get when you let banks create excess money and credit out of paper and electronic digits. But since nobody can create gold out of thin air, you automatically prevent price inflation by preventing monetary inflation!

The first time I ever heard of this idea of benefits theoretically derived from constantly increasing the money supply, by constantly increasing debt, I made an Almost Fatal Mogambo Mistake Of Analogy (AFMMOA); I figured, using this terrific logic, that the more weight I gained, financed by increasing debt, the more my family would love me! I admit that I was, at the time, desperate for even a flicker of a chance of getting any love from that crew of twisted, hateful boneheads, and was willing to try anything if it would shut them up for five lousy minutes.

To make a long story short, I learned that getting to be really, really obese is, alas, not a way to make your family love you. And, I further discovered that when they threw objects at me, they apparently couldn't miss a target that big.

My hands tremble slightly as I remember all of this, but that is normal. Then, my gaze swept across a table in Barron's, and my fear turned to that old familiar anger, as I saw that the banks belonging to the Federal Reserve system (nearly all of them), sucked up $15.5 billion in U.S. government securities last week! This takes their total to $1.217 trillion, which is back to the historical high point, first achieved about this time in 2004, and then again in 2005.

So, with a sigh, I direct your attention to a chart of government securities owned by the banks that shows that it has, overall, mostly hit a plateau in 2004. Varying a little bit up and down, we are now, for the third time, at the upper end of that range.

Reserves in the banks have not changed (which even today are only $41.5 billion, and actually below the average since 1997). In fact, to show you how precise I am, I'll tell you that total reserves in the banks have been bouncing along like this since hitting the lows of under $39 billion in early 2001.

Then I groaned aloud when I noticed that the money supply (as measured by M2) is apparently falling, too, which is completely predictable, as there has been a widely reported slowdown in the expansion of credit for mortgages and business investment.

All of this stuff is whirling, whirling, whirling around in my head as I pretend to listen to my stupid wife and nasty, bratty children telling me how wonderful it had been all week, and how they discovered, while I was away, that they enjoyed life after all. I think they were implying that they want me to go away again, or die, or both, when they said, "Why don't you go away again, or die, or both?"

But this is reduced to mere background noise when I read that the "movement" to increase the minimum wage is heating up. And this time, it is not just the stupid, brain-dead Democrats that are leading the Big Parade Of Loudmouth People Who Are So Completely Ignorant Of The Rudiments Of Economics That Something Must Be Seriously Wrong With Them. Standing so close beside them that they are getting each other's cooties are the now-loathsome Republicans, demonstrating either A: things economic are now so completely desperate that they are willing to do, or say, anything to temporarily forestall us from drowning in the ocean of disgusting drool and slobber that comes from being a nation of economic and Constitutional imbeciles, or B: Republicans are now actually as stupid as Democrats, which, given the astonishing dumbing-down of the American school system over the last 50 years, is probably (Occam's Razor-like) the simplest and best explanation.

I will admit that people needing higher wages because prices are higher is a valid point, but that is not the issue, as sad a tale as it is. The real issue is why the prices are higher in the first place, making erstwhile perfectly satisfactory wages suddenly inadequate. So, I casually ask the class the innocent rhetorical question, "Why do people need higher wages?"

Well, the place exploded in a simultaneous shout: "Because things cost more, you stupid Mogambo moron (SMM)!" and then they all joined together to laugh at me!

My eyes stinging with tears, I took out my Mogambo Educator's Daily Logbook (MEDL) and made a quick note to myself: "Seek revenge: Fail everybody and torment their parents for bribes!" Then, I fired back, my voice cold and heartless, "This is the effect popularly called 'inflation.' And why do things cost so much more?" Instantly, all their hands flew up, as they all know the answer by now: Price inflation follows inflation in the money supply, and the hateful, stupid Congress allowed the hateful, stupid Federal Reserve to act completely irresponsible in that regard since the 1960's.

But I ignored them, and go on: "And when inflation in prices gets so bad that you are forced to buy less stuff, then that is popularly called…" and before I could even finish the sentence the entire class again yelled out: "A fall in the standard of living!" And then, they all high-fived each other and laughed some more. I sensed that my lectures had become somewhat predictable, so I pulled down my zipper so everybody could see my Spiderman underwear. I laughed as I thought to myself: "Predict that, you little punks!"

Over the sounds of disgust (mostly "ewww!" and gagging up vomit), I blithely continued, as if I did not hear them, "A fall in the standard of living." I don't tell them that a reduction in the standard of living results in a constant clash of cultures (The family: "We're starving and dressed in rags! And we need medicine, too!" Me: "Your point being what?").

And a fall in the standard of living is, in effect, inflation. It's a horror. In fact, inflation is such an economic horror that it is the only economic variable that the Founding Fathers tried to control in the Constitution! They tried to prevent inflation by preventing the government's ability to create excess money. Why? Because inflation should be, now and always, zero.

And if the U.S. economy were operating perfectly, inflation would be less than zero! Prices would always be slowly dropping, year after year, as the promise of productivity and competition paid off in more goods and services, resulting in higher employment, but also with lower prices! A huge rise in the national standard of living!

But since the filthy, traitorous Supreme Court keeps on allowing the money of the United States to be mere paper and promises, instead of gold and silver as literally required by the Constitution, and as long as the filthy, traitorous Congress allows the Federal Reserve (an un-audited private bank, partially owned by foreigners!) to create excess money and credit (that they own!), we will suffer from inflation, wailing and crying the whole time, or at least listening to The Mogambo wailing and crying the whole time, interspersed, as it usually is, with obscenities and vague death threats.

The minimum-wage worker can't make ends meet now because things cost too much to be able to afford them. So (and here is where The Mogambo Laughs And Laughs And Laughs (LALAL) at the sheer stupidly of mandating higher wages), businesses are now required, as a result of paying higher labor costs, to charge their customers higher prices to make up for it! Hahaha! A higher price, caused by requiring higher wages, is the solution to higher prices? Hahahaha!

This is the genius of the electorate? Instead of stopping inflation by reining in the Federal Reserve, we are going to make the inflation situation worse by mandating higher wages? Hahahaha! What suicidal idiocy! It makes you wonder why anyone has any respect for democracy at all! Hahahahaha!

And there are a lot of people who do not have jobs, and therefore do not have the ability to get higher wages, who are going to suffer. One of these groups is the criminal class. When prices go up, organized crime's net profit falls, and you don't have to see many movies starring Al Pacino before you realize that those guys don't take that kind of news lightly.

Therefore, as my new Mogambo Conspiracy Theory Of The Week (MCTOTW), the reason that California is so hot to raise taxes on cigarettes to about $7 a pack is that there will be a boom in smuggling, as Canada has found out, which has contributed to a drop in the sales of legal smokes by almost 9% in the last year since they instituted such a tax.

So the proposed enormous tax on cigarettes is really just a "New Jobs for the Smuggling Industry" government program, giving the unemployed-and-desperate something to do to get some cash, as dealing in drugs and prostitution won't even make ends meet anymore.

Until next week,

The Mogambo Guru
for The Daily Reckoning

Mogambo sez: Gold, silver and oil have been a winner for the last three years, and they will surely be a winner for the next three, too. And almost certainly more. So, keep loading up with them. One day you will be Very, Very Glad (VVG) you did.

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 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:

The Mogambo Economic Game Show

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