Interest Rate Insanity

"If you want a good lesson in inflation by creating excesses of money and credit, financing a whole lot of government corruption with a high degree of murderous viciousness, theft and criminal stupidity, then look no farther than Zimbabwe"

by The Mogambo Guru

Total Fed Credit was up only $1.5 billion last week. The big action was in the banks, which were busily creating enough credit for them to use, to choke down a whopping $42 billion in government debt…in one week! Loans and leases fell, but idiotic Americans, at the apparent top of the housing bubble, racked up another hefty $21 billion in real estate loans last week, and the people that already had houses gorged themselves on another $16 billion in home equity loans! All in one week!

I gulp in amazement. This was all helped, no doubt, by the foreign central banks adding to the madness by soaking up another $12 billion in government securities last week, too, after gobbling up $13 billion the week before that, and stashing them all at the Federal Reserve.

As if to compound their calumny, the damned Federal Reserve also printed up another $3.98 billion in actual cash - enough for every man, woman and child (now at exactly 300 million, and growing) in the United States of America to have another $13.27 in cash. Money is literally pouring out of government and Fed orifices.

My fingers were actually shaking in fear as I slammed shut the door of the famed Mogambo Bunker Of Ultimate Retreat (MBOUR). Locked and loaded, I relaxed just enough to notice that the Dow Jones Corporate Bond Index fell all week, and that the St. Louis Monetary Base fell by $7 billion (almost one percent). The rest of the afternoon was a blank, as my Mighty Mogambo Mind (MMM) refused to believe what it was seeing, and kind of seized up. Although I vaguely seem to remember getting telepathic messages from the microwave oven, telling me to "Burn everything! Kill them all! Eat donuts! Chocolate ones!"

Now that we have "dumbed-down" the schools, the society, the government, the Supreme Court, the news media, the money and the economy, what is left to debase? Leave it to John Stepek of MoneyWeek.com to fill us in. He writes, "The fall in the number of AAA-rated company debt issues has credit ratings agency Moody's wondering whether it needs to lower its standards. Daniel Curry, head of corporate finance in the Americas, tells the FT: 'We are wondering if it makes sense to keep the quantitative standards at the same level for triple A's.'"

Mr. Stepek rightly asks, "Why is this happening?" I can tell by quickly scanning the rest of his article that there are a lot of tightly-reasoned, probably correct-in-every-respect conclusions, all of which are sure to confuse and confound me because - a.) I am pretty stupid, and b.) I don't care; because all I know is the one basic fact that I need to know to hate it, hate it, hate it. And that is that this Moody's guy says that they are considering magically increasing the number of AAA-rated bonds, which pay (theoretically) lower yields as the offset to the higher "safety" in the "quality" of the bonds. Ergo, AAA bond issuers have to pay a lower coupon (interest) rate.

Therefore, I say with my usual Mogambo understatement, that this is just a sorry, sick, slippery, sleazy, scandalous, slimy, sleaze ball, scumbag way of reducing the expense that financial entities have to pay on bonds that they issue, effectively lowering the interest rate, which, when plugged into any one of their idiotic equations and ridiculous econometric models used by the Federal Reserve, means "Let The Good Times Roll!" Which means that, regardless of the horrible consequences, they believe that the asset prices will, in the short run, increase in response…and that is enough for them.

The sad, sorry fact is that the only ethical way to increase the quantity of AAA-rated bonds, is to either have more companies become more credit-worthy by cleaning up their act, or have credit-worthy companies issue more bonds. You don't dumb-down quality. But Moody's is, no doubt, going to take the latter course of action.

The effect is that garbage-quality DDD rated bonds, like, for example, those of Mogambo Overpriced Cheap Crap, Inc., are now - voila! - AAA-rated at a stroke!

Wow! If I knew that my DDD-rated Mogambo Overpriced Cheap Crap bonds (which have to pay a very high coupon (interest) rate to offset their complete lack of quality) were going to be re-rated tomorrow to AAA in one fell swoop, it would have taken a lot of real dim bulbs not to see at least a dozen ways to make obscene profits from the resultant explosion in the price of those heretofore worthless Mogambo bonds. What a scam!

If you are dissatisfied with hearing me say that the corrupt government is behind everything ugly and debased, which is the Mogambo Answer To Everything (MATE), perhaps you will be happier with the essay "Search for Yield and Gold" by Christopher Laird of the PrudentSquirrel.com site. He writes, "The reason the USD is strengthening is because gigantic entities such as macro funds and insurance companies are buying all the 'quality' sovereign bonds they can get their hands on. The ones that actually pay some interest. That means the USD denominated ones."

The facts are, he writes, that "the USD now pays a 3% interest premium over the Yen, and 1 to 2% over the Euro denominated bonds." He soon notes that these things lead inexorably to "gold's ultimate rise to incredible heights."

But 3% over Yen? Wow! How is this possible? The answer is that the moronic Japanese, who have now decided not to eliminate their long-standing, absurdly-low interest rate policy (as the had previously announced) make it possible to still borrow Yen at almost nothing (0.25% interest) and buy American (and other) government debt, paying upwards of, obviously, 3.25% interest.

Richard Russell's Dow Theory Letter says, "At times…the stock market is unclear about what lies ahead, and this is one of those times. I say that because the D-J Industrial Average and the D-J Transportation Average are at extreme odds. They just don't agree at all. The Industrials are saying that the situation is probably OK. The Transports are saying, 'Don't you believe it, there's something very wrong going on.'"

Robert Rhea, the genius Dow theorist of the 1930s, wrote that "when the Averages disagree, it's almost always a sign of distribution." But what is distribution? Mr. Rhea writes, "Distribution is a process whereby stocks move from strong hands to weaker hands. And that's what bothers me about this market. I'll say it again; the Averages are refusing to agree. In fact, it's one of the widest divergences I've ever seen."

Perhaps this had something to do with - to be blunt - stuff not selling, as I note that wholesale inventories were up $4.4 billion in August, and up $34 billion from this time last year, too.

Or maybe it was the trade deficit, and how it widened by 2.7%, moving up to $69.9 billion. The previous record was $68.0 billion in July. The merchandise trade balance got worse, too, and the deficit was a big negative $75.5 billion in August, which was also a new record, and also up from the previous record setting merchandise trade balance deficit of negative $73.5 billion, set in July.

If you want a good lesson in inflation by creating excesses of money and credit, financing a whole lot of government corruption with a high degree of murderous viciousness, theft and criminal stupidity, then look no farther than Zimbabwe, as we hear from Reuters that "Zimbabwe's central bank governor on Monday raised the country's main lending rate by 200 percentage points to 500 percent in a drive against skyrocketing inflation and a severe economic crisis. Its inflation rate of 1,204.06 percent is the world's highest, while unemployment has vaulted to more than 70 percent as companies either fold or are forced to downsize."

So inflation is twice the official interest rate? Hahaha! Requiring people to borrow money at 500% to make 1,204%, which produces more inflation in prices, is supposed to stop people from borrowing money at 500% to earn 1,204%, even though it produces inflation in prices? Hahaha! This is so idiotically insane that if there's one country that the United Nations SHOULD invade to depose a ruthless, thieving, murderous dictator and imprison whole swaths of his henchmen and collaborators to save the people and the country, forget Afghanistan and Iraq. This is it right here!

And this Zimbabwe madness may be here in America sooner than you think, as I extrapolate from reading Alec Nevalainen at Coinflation.com, who wrote that "Zinc passed the $1.80 mark today, and that means the current 'penny' has a melt value of $0.0101867." In fact, he adds "All the coins in your penny jar are worth more than their denomination (except for steel cents made during WW2)."

And sure enough, he includes the five year charts of copper, zinc and nickel (of which our money is made), which are all up hundreds of percents, as they have all literally tripled and quadrupled in the last five years!

What to do? He predicts steel or aluminum coins in our future.

If you are still unconvinced, but deadly tired of me constantly yelling at you to buy more gold and silver, then prepare to be turned around with "Get Ready for Gold's Turnaround" by Ben Abelson of ResourceInvestor.com, who writes that John Hussman, of the Hussman Funds, "has done extensive research on historical economic and relative valuation factors and what they suggest about future returns for mining shares."

First, he tells us that "early recessionary or pre-recessionary periods are some of the strongest historical times for appreciation in the mining shares. These time periods are typically represented by declining long-term interest rates, rising inflation, and a contracting economy." I look out of the window, and note in my Mogambo Daily Log (Stardate 6539 point 4) that we already have the aforementioned rising inflation and contracting economy. And if Moody's is successful in debasing AAA bonds, you will also see, theoretically, declining long-term interest rates. So three out of three!

Mr. Abelson goes on to say, "According to Hussman's research (which spans several decades), at the rare historical periods when 1) the rate of inflation is higher than 6 months earlier, 2) treasury bond yields are lower than six months earlier, 3) the Institute of Supply Management's Purchaser's Index is below 50 (representing a contracting manufacturing sector) and 4) the Gold/XAU ratio has been above 4.0, the XAU has returned an average…" and by this time I am busily scribbling in my notes about these four important points, and I realize that I am going to have to ask him to repeat them, probably a lot of times. I am thusly completely unprepared for him to go on to say that the average return was "123.63% annualized!"

The pencil flies out of my hand at my astonishment, lands in the lap of Little Miss Susie Wonderful (who thinks she is such hot stuff) who quickly brushes my pencil to the floor, as she makes this stupid little face and says, rudely, "Ewww! Mogambo cooties!" and everybody laughs.

Fortunately, Mr. Ableson is a classy guy, and he takes no notice of me sticking out my tongue and making obscene gestures at them all, but immediately goes on to say, "Currently, all of these are factors…in alignment, with the sole exception of the ISM Index. And, that index recently declined to 52.9% for September, suggesting the manufacturing sector is getting dangerously close to contracting."

To show you an example of the laughable stupidities in general (and economic stupidities in particular) that reign supreme in the United States, and that make a mockery of our claim of being an educated, intelligent nation, get a load of this AP headline: "Experts support minimum wage hike". The subhead is, "Group of 650 includes five Nobel recipients; Colorado gets ready to vote on issue."

The article reports that "more than 650 economists, including five winners of the Nobel Prize for economics, called Wednesday for an increase in the minimum wage, saying the value of the last increase, in 1997, has been 'fully eroded.'" Well, duh! What in the hell did they think was going to happen when they stupidly applauded Alan Greenspan for his deplorable, massive increases in money and credit that started, coincidentally, in 1997? I mean, how stupid can you be, to act surprised now? Jeez!

The list of economic chowder-heads and numbskulls that participated in this idiocy includes "Nobel Prize winners Kenneth Arrow of Stanford University, Lawrence Klein of the University of Pennsylvania, Robert Solow of the Massachusetts Institute of Technology, Joseph Stiglitz at Columbia University and Clive Granger of the University of California, San Diego." They noted "in a statement released Wednesday that the real value of today's federal minimum wage is less than it has been at any time since 1951."

Then they laughably said, collectively, "We believe that a modest increase in the minimum wage would improve the well-being of low wage workers and would not have the adverse effects that critics have claimed." Hahaha! What morons! These blubbering halfwits are saying that increasing wages, which increases expenses for businesses, does not mean that businesses will have to charge higher prices to make up for it? Hahaha! And are they also saying, in their economics bizarre-speak, that businesses charging higher prices in response to paying higher wages is somehow different from any other price increases (which is merely a devaluation of the buying power of the wages), which was the whole freaking problem to start with? Hahahaha! Morons!

The article notes that "critics of a minimum wage hike have contended [that] a higher minimum wage leads employers to cut jobs or move them offshore. They also say that many minimum wage earners are teenagers working after-school jobs." What in the hell is that about? I, for one, am a big, big, BIG critic of increasing the minimum wage, but I don't agree that higher minimum wages necessarily means less jobs for Americans. And I don't agree that screwing over teenagers is a reason not to raise the minimum wage. And I know that there are a lot of grown people, many with children, who are unsuccessfully trying to eke out a living on their miserable, low-value wages, and that is why I ceaselessly champion the idea of restraining the ability of the Federal Reserve to create money and credit, which will keep prices from rising in the first damned place!

I also note that the economics blowhards and this little twerp reporter all neglected to even mention the resultant effect on prices, which will go up because of raising the minimum wage (and, directly or indirectly, a lot of other wages) which is the exact freaking opposite effect that these ridiculous do-gooders intended! If that is not staggering incompetence, then what in the hell is it?

And then they get all huffy when I howl in outrage at such deliberate deception, and the next thing you know, there are security guards all over the place, and I'm going "Hi, Bill! Hey there, Jimbo!" and they're going "Hi, Mogambo!" and I'm going "Do you still want that five dollars I owe you?" and they go "Eat some Mace, creep!" and I'm going "Ow! Ow! Ow!"

But nobody notices, or even cares, about the mistreated Mogambo, nor did anybody mention the increasing horror inflicted on people who do not have jobs to get these higher wages, although they will have to pay the higher and higher prices from now on, too. So the unemployed, and the sick, and the tragically handicapped, and the criminals, and all the people on fixed incomes are all going to suffer much, much more at the hands of inflation in prices because of this "raising the minimum wage" stupidity.

I am outraged! I am only mollified by the notion that there is surely a place in hell for idiotic poseurs who masquerade as economists, and as a result of their incompetence, stupidity, corruption or just plain evil viciousness, consign millions of people to an inflationary hell on earth. Bastards! I denounce them all!

Economics: Hallucinated Wealth by John Michael Greer of the Archdruid Report/ Energy Bulletin writes, "It surprises me how many people still seem to think that the main business of a modern economy is the production and distribution of goods and services. In point of fact, far and away the majority of economic activity today consists of the production and exchange of IOUs. The United States has the world's largest economy not because it produces more goods and services than anyone else - it doesn't, not by a long shot - but because it produces more IOUs than anyone else, and sells those IOUs to the rest of the world in exchange for goods and services." Well put, Mr. Greer!

Mr. Greer also darkly educates us that "in the Great Depression, one of the most common responses to the stock market crash was to seek some other way of getting rich quick - chain letters, lotteries, you name it. For that matter, one of the main driving forces behind the 1928-1929 stock market bubble was the Florida real estate boom and bust earlier in the decade; when that went down, a lot of people who got soaked, went into stocks in the hope of recouping their losses, just as many people burned in the 2000 tech stock crash piled into the current real estate bubble."

Sound like any economy you know? Still don't think there are parallels? Hahaha! You will!

The Fudge Factory, an essay by Rob Kirby of KirbyAnalytics.com, starts off with a bar chart of "U.S. Petroleum Consumption Growth (Change from previous year)". The five things charted are total petroleum growth, motor gasoline, jet fuel, distillate fuel and "other." Mr. Kirby looks up "distillate fuel" in the Wikipedia, and reports, "distillate usually refers to fuel oils produced through distillation, such as diesel and heating oil."

The graph itself shows that the growth in this mysterious "other" category was down about 150% last year, and is down 200% this year, too! Huh? And when this elusive "other" category was factored into growth, it actually made total growth in petroleum consumption negative last year! Negative! And this year, too!

I was leaping to my feet to make a real stink about this, but Mr. Kirby was faster, and verily his voice rose in righteous indignation, and said loud and clear "The anecdotal data above IS COMPLETELY INCONSISTENT WITH DECLINING PRICES OF ENERGY." Suddenly, I am clapping my hands and stomping my feet and shouting "Hallelujah, brother! Oh, yes! Testify! Testify, my man!" which, I gather, didn't go over all that well with him or the rest of the audience.

But next year, ominously, the EIE is forecasting that (cue the dark and foreboding music) everything hits explosive growth, including the undefined "other." Oops!

Clever wag, Jim Otis, otherwise known as The Optimist, writes, "The CPI once was an acronym for the Consumer Price Index on which we based adjustments to salaries and senior citizens' income to proudly honor our promises. With the advent of exclusions (energy, food, etc.) and hedonics in recent years, the CPI now stands for Consistent Price Immobility." Hahaha! Good one!

Or how about Congressional Price Incompetence! Or how about Crggkom Plgrrgg Irqbl, which is Klingon for "The index of how those dirty central bank bastards have issued too much money and credit, for too long, which produced price inflation and bubbles, and now my mother, and my father, and my wife, and my little Klingon children, and all the rest of my Kinglon relatives, and my Valruka slaves, and my Andarian-nebula concubines are all having a hard time making ends meet, and how I am up to my freaking Klingon eyebrows with their incessant whining and crying and whining and crying until I just want to lob a couple of photon torpedoes at them and be done with it!"

Believe it or not, there are people who write me and say "Dear Mogambo, When buying gold and silver, how much is enough?" and I write them back and say "Just keep buying it, and keep sending it to me, addressed to "Occupant", so I can hold it for you, and I will tell you when it is enough."

When they don't fall for that obvious scam, my real answer is to buy a little gold or silver. Get a good night's sleep, and get up tomorrow and ask yourself "Do I have enough gold and silver?" If your answer is "no", then buy some more. Keep up this routine until one morning you wake up and you answer "yes!" Now you know how much is enough!

Judging from the insult mail, hate mail and actual death threats, this answer is deemed to be clearly insufficient. But now I will merely refer these inquisitive readers to "When Atlas Shrugged, Part Tw Gibson's Paradox and the gold price" by Antal E. Fekete, who is a Professor at Intermountain Institute for Science and Applied Mathematics. He writes, "My theory of interest is centered around the constant marginal utility of gold."

There you have it! The marginal utility of gold is constant! What is marginal utility? Well, for example, if you have been chugging malt-liquor brewskis with your hoodlum friends all afternoon and now you are so stinking drunk that you can't even raise your head up off of the bathroom floor, and the thought of another beer makes you want to puke some more, then the marginal utility of another beer is declining.

But with gold, no matter how much you have, getting more is just as terrific, which translates as constant marginal utility.

The only thing better would be to have increasing marginal utility! For each additional unit of gold I got, I would get more of an increase in satisfaction (utility) than I got from the last unit of gold I got. Each new unit produces more utility than the last! Hahaha! I love this stuff!

In fact, in my latest pathetic bid to win a Nobel Prize and those luscious millions that constitute the cash portion of the prize, I will now introduce the new Mogambo Theory Of Increasing Utility Of Gold (MTOIUOG). Since the adage is "He who owns the gold makes the rules", indicating supreme, absolute domination and maximum utility by virtue of owning all the gold, then there have to be (barring a quantum leap) some intervening steps in utility along the way to the ultimate goal, which is, of course, the rise of Omnipotent Emperor Mogambo, owner of all the gold, dishing out truth, justice and the Mogambo Way. Ergo, gold must have increasing utility along the way to Maximum Utility!

I notice that Professor Fekete callously ignores my profound theoretical economics breakthrough here, and sails blithely on to note, "That there is a limit to gold hoarding is due solely to the institution of interest. The opportunity cost of hoarding gold is just forgone interest. This is a distinctive property of gold. The hoarding of all other goods is severely limited by declining marginal utility."

A slap in the face! He mentions declining marginal utility, and refers obliquely to his own theory of constant utility for gold, but he snubs my theory of increasing utility! That's it, buster! You are NOT invited to my combination Mogambo Nobel Prize celebration, hog-fest, and biker beer blast with a kick-ass band. And being a judge in the Miss Mogambo beauty pageant? Forget it, pal!

Now he apparently wants to come crawling back into the Good Graces Of The Mogambo (GGOTM), and offers, since he knows I am very interested in price inflation (which is the manifestation of a falling dollar), the insight that "the regime of the irredeemable dollar is subject to the 'sudden death syndrome', a malady afflicting all fiat currencies with a 100 percent fatality rate." Thanks, Professor! We're even!

If I owned UPS and Fedex, which I am sure that I probably do in one of the mutual funds I own, I would be upset to read in the Adrian Van Eck newsletter that, "party bosses have just shoved through shocking new rules that will strip away 90% of the Chinese international small-package market from UPS and Fedex and reserve it for Red China's state-owned carriers, after the American firms had invested Millions of Dollars in China and developed techniques that showed Beijing how to organize this activity. "

****Mogambo sez: I love the way that gold, silver and oil are falling into my trap! If I hadn't spent all my money at Patty's Palace of Pizza and Porn, I'd buy more. I only hope you don't make the same mistake.