It was horrifying, horrifying!

Richard Daughty
...the angriest guy in economics
The Mogambo Guru
Jan 17, 2007

-- I'm locked down, safe and secure, in the Mogambo Fortress Of Paranoia Central (MFOPC), away from the economic mayhem, and I'm idly surfing the net to monitor the unfolding slow-motion implosion of the world economy. I have my feet up on the console, and I am casually using the barrel of an AK-47 to tap out coded commands to the computer keyboard. Like an idiot, I wasn't really paying attention to what I was doing, old habits being what they are, and I reflexively clicked on Doug Noland's Credit Bubble Bulletin at PrudentBear.com.

Instantly, I knew I had made a mistake when, like some searing CIA laser beam burning into my fevered brain, the first thing I see is a graph of M2 money supply over the last twelve months.

It was horrifying, horrifying! The result was an involuntary spasm which resulted in a long burst of very expensive ammo being used up for nothing, making a hell of a racket and scaring me half to death, and a stupid oscilloscope got blasted into a zillion stupid pieces.

I had intended to dramatize this rising M2 thing by inserting a scary soundtrack of lightning, thunder crashing, wolves howling and policemen demanding that you come out with your hands up, with my wife's voice in the background shouting, "I know what you did, you stinking Mogambo trash (SMT)! We all know what you did, and now you're going down!"

But now, I figure that the shock of a machine gun blasting away in a closed space is already an appropriate amount of "scary" to accompany the one-year chart of the growth of M2 money supply, as the horror is that M2 is rising in a classic example of an exponential function.

In prose, an exponential function means that not only is the money supply growing, which is calamitous enough from an inflationary standpoint, but that it is rising faster and faster, too! So, at the tail end of the curve (which translates as "After awhile", or "After all the compounding starts taking noticeable effect", or "Next stop: Doomsville!"), M2 will be increasing straight up! Trillions of dollars will be created one day, and zillions of quadrillions the next, with infinity in sight.

For a real-world example of the results of exponentially increasing the money supply, you need go no further than Reuters, which reports that "Zimbabwe's annual inflation rate quickened to 1,281.1 percent in December from 1,098.8 percent previously." That's almost a 200% rise in one month, as inflation is rising exponentially! And next month it will be worse yet!

This brings up a terrific quote from someone's Internet essay which I, somehow, neglected to copy, to my dismay, but which ran along the lines of "The biggest tragedy is that nobody comprehends exponential functions." I never thought of it that way before, but he is absolutely right!

I'm not exactly sure of the next part of the quote, either, but I remember it as something like "Furthermore, we agree with The Mogambo that an unforgivable ignorance, corruption or sheer stupidity of what happens at the tail ends of a simple exponential function means that you are not educated enough, nor intelligent enough, nor trustworthy enough to be in any position of authority, especially in the Federal Reserve, which directly causes price inflation by creating too much money and credit, nor in Congress, which has the power and duty to stop this inflationary Federal Reserve insanity, but chooses not to, to its everlasting shame and infamy!"

Of course, I am not exactly sure that I am quoting it verbatim, but that's what I got out of reading it, anyway.

In a related note, as an old-school conspiracy buff, I cannot help but notice with disgust that Barron's has revamped its format, and will no longer carry any information about money supplies, Federal Reserve operations or the economic horrors of the excesses of debt that characterize the banking sector.

The Austrian Business Cycle Theory focuses directly on the operations of the banking sector. Milton Friedman, whose theories about money supply were official government policy for a time, died just a few months ago. The Federal Reserve has already refused to admit the terrifying growth in the M3 measure of the money supply by simply refusing to release the information.

And now Barron's ignominy is to help hide further evidence of the looming economic disaster by removing from their magazine everything connected with the banks and the money supplies, and focusing instead almost exclusively on two, basic, simple-minded things; the price and volume of stock and bond transactions. Hahaha!

It takes a real, first-class entrepreneur like The Mogambo to turn to advantage the ugly modern ideas of 1) removing the evidence of economic cataclysm from the public's view, 2) the blatantly corrupt, brain-dead stupidity of having voting machines that leave absolutely no verifiable trail to enable a recount, and 3) hedonic adjustments to inflation statistics.

Thus, I hereby proudly announce the introduction of the new "Golf, The Mogambo Way! (G,TMW!)" system, which is GUARANTEED! GUARANTEED! GUARANTEED! to take at least twenty strokes off your game! Twenty strokes!

While the exact details are, of course, a proprietary secret, the essential, theoretical nugget is that you merely insist on being allowed to keep the scores, which you do in absolute, total secrecy. To your own score per hole, simply hedonically adjust your score by, for example, deducting a tasty stroke for the terrific joke I told at the tee (putting everyone at ease and thus increasing net aggregate enjoyment), or deducting another stroke for not taking a divot (thus preserving the environment).

And since I always win the Miss Congeniality Award, too, I deduct one stroke per side as my Grand Prize for being such a peach of a guy, and I figure I'm a shoe-in if we had a swimsuit competition, which ought to be worth a few strokes right there!

And since nobody is ever allowed to look at the scorecard, I gotta tell ya- man, oh man! -it works like a dream! Hell, I set three new Course Records last week alone!

-- I have always figured that paying a premium for gold or silver rare (numismatic) coins was a mistake, and sure enough QED, while silver and gold bullion were up handsomely in the last couple of years, numismatic coins have, so I hear, lost about a third of their value. Mogambo advice; stick with bullion, as you are paying the absolute lowest price per ounce.

And speaking of gold, GoldForecaster.com gives us the news that Russian demand for gold is exceeding supply, and this "has turned Russia into an importer of gold already."

And, to make the future of gold shine a little brighter, they say that the central banks have sold so much gold already that there isn't that much left, and thus any "drop in Central Bank supplies is certain to produce a supply shortfall in 2007."

-- Bloomberg reports that "Crude oil fell below $52 a barrel for the first time in 19 months after a report showed that U.S. fuel consumption plunged to the lowest since April 2004." I am somewhat confused by the phrase "U.S. fuel consumption plunged", as they go right on to say "Implied demand for distillate fuel averaged 4.3 million barrels a day over the four weeks to Jan. 5, up 1.3 percent from a year earlier." Up!

Furthermore, "Gasoline use averaged 9.3 million barrels a day, up 0.5 percent from 2006." Up again!"

I guess is it all confined to the airlines, as "Jet-fuel consumption averaged 1.6 million barrels a day, down 8.1 percent."

I can't believe my eyes at the price of oil despite these fundamentals! So, buying oil at around this low level seems like such a sweet deal!

-- The Congressional action on raising the minimum wage by 40% over two years is perhaps what prompted the article "For $7.93 an Hour, It's Worth a Trip Across a State Line" by Timothy Egan. The essence of the story is that "In Washington State, the minimum wage is 54 percent higher than in Idaho. Businesses at the dividing line are a real-life laboratory for the effects of an increase."

After a lot of background information, Mr. Egan concluded that "raising prices to compensate for higher wages does not necessarily lead to losses in jobs and profits." I admit that that is true, as few things are "necessarily so" in anything, especially economics.

But what I know for Freaking Mogambo Sure (FMS) is that if the businesses do not raise prices to cover their higher labor costs, then they will make less profits. It's not economics; it's simple arithmetic. He concludes as much when he admits "Business owners say they have had to increase prices somewhat to keep up."

Aha! There! There it is! There is the reason NOT to increase the minimum wage; prices will go up! "Business owners say they have had to increase prices" he admits! And if you don't think, like little Timmy here obviously doesn't think, that inflation is the thing to be feared above all else, then I know that you are young, or ignorant, or stupid, or else you would know that there is nothing worse than inflation, as it is a killer of economies. It's THE real killer of economies! And nations, too!

So now get a load of this: The kid even quotes some guy named Fazzari who says "If you look 10 years down the road, we will probably have no minimum wage jobs on this side of the border, and lots of higher-income jobs." Hahaha!

What he is saying that everybody else in the whole wide world is so sublimely stupid that we will voluntarily stay where we are, working at our dumb, dorky job for a hateful, pineheaded boss, all for less money, instead of moving to the Washington/Idaho border where they pay more! Hahaha!

If not everyone is as stupid as I am, and did move there, then the increasing numbers of job-seekers would drive the cost of labor down to the minimum, by the simple expedient of an oversupply of labor and profit-maximizing employers! Jeez! This stuff seems so obvious to me!

Timmy-boy, obviously not realizing how utterly ridiculous this whole idea is, chimes in with "Job figures from both states tend to support his point." Hahaha!

He sees the skepticism in my face and contempt in my voice, and retorts "Several studies have concluded that modest changes in the minimum wage have little effect on employment." I leap to my feet and exclaim in exasperation "Again, Mr. Egan, employment is NOT the issue! You already concluded earlier, and I admitted, that rising wages doesn't necessarily result in job losses! Inflation is the only issue!"

I'm thinking to myself "The little moron can't seem to comprehend that inflation has gotten so bad that the minimum wage is practically no income at all, but he blithely ignores the additional inflation that will be caused by raising the minimum wage! He figures it is not even worth talking about, I guess!"

He ignores me completely, and defensively says some university egghead named David Holland said "job loss was minimal when higher wages were forced on all businesses." Again with the job loss thing! He's like a broken record! But even so, he admits there WERE job losses! "Minimal" job losses as they may be, but we still end up with less jobs and higher prices by raising the minimum wage! My God! I scream anew "What in the hell is the matter with you people?"

Perhaps at my insane persistence at always bringing inflation into the discussion, he again admits that "business owners have found small ways to raise their prices," but that is all, I guess, okay with everybody (as ludicrous as that sounds), as "customers say they have barely noticed."

To prove it, he quotes a Mr. Singleton, who owns a pizza place, who says "We used to have a coupon, $3 off on any family-size pizza, and we changed that to $2 off. I haven't heard a single complaint."

Memo to Mr. Singleton: the complaining is done in the parking lot and on the way home, where the missus says "It seems that we used to eat here for $15. Now it's $16, plus another 20 cents on the tip! That's, in total, an 8% price hike! And their pizza just doesn't taste as good as it used to, either, now that I think about it! And I think he is using cheaper ingredients, too, the little illegal-immigrant bastard!

"And now that I think about it, YOU aren't as good as you used to be, either, buster! And slow down, slow down, slow down, you idiot, or you'll get a ticket, like that's just what we need around here! And let me tell you that you ate your pizza like a disgusting gluttonous pig, making these slobbering noises and yammer yammer yammer!" and the husband hears this, and thinks to himself "Well, a higher price means we can't come here as often, which is good news since I won't have to listen to her irritating voice as much!"

And it is not just the expense of higher labor costs that will drive prices up and customers away, but other related costs will go up, as unemployment compensation insurance and all of that other worker-protection stuff is figured as a percentage of payroll.

Additionally, the employer is responsible for half of the Social Security/Medicare tax on those wages, so another 40% raise in the minimum wage will cost the employer another 16 cents an hour in higher payroll tax alone for each worker, or about $330 a year.

All of this, and more, means that a higher minimum wage will result in higher prices, which is the thing that is bedeviling people in the first place! It doesn't stop inflation! It merely temporarily (a couple of years) partially recompenses less than 1% of workers for the disastrous declines in their living standards due to the ravages of inflation, while making life more expensive for everyone else in the whole freaking country, further absolutely impoverishing those who do not have a wage to increase! What a cruel trade-off!

And everybody else up the line will want more money, especially the guy who used to make 40% more than minimum wage, and who will now, thanks to the increase, make only the minimum wage! Hahaha! Welcome to the hell of inflation!

But this, sadly, is the sorry course that the corrupt, incompetent Congress has decided on, instead of doing the right thing and forcing the Federal Reserve to hold money supply growth (and thus inflation), at a constant of "zero", which is optimal.

So buckle your seatbelts on the Inflation Express, because it will be a hell of a ride from here on out!

-- In the Whiskey & Gunpowder newsletter we read that the energy density of ethanol is less than petroleum, as "The standard, accepted measurement of energy density for ethanol is 26.8 megajoules per kilogram. This clearly compares unfavorably with the energy density of gasoline at 45 megajoules per kilogram."

So, you get a lot less energy per unit of weight. Worse, "The energy return on energy investment (EROEI) of ethanol" is "break-even at best", because oil just gets pumped out of the ground at minimal energy expense.

He asks the pertinent question. "So will the U.S. really wind up running its motorized culture on corn-based ethanol? According to Cornell researcher David Pimental, if the entire U.S. grain crop were converted to ethanol, it would satisfy about 15% of U.S. automotive fuel needs. The answer is no."

But that doesn't mean we won't try, as seemingly evidenced by Bloomberg when they report that the price of corn has surged to a 10-year high, "sparking rallies for soybeans and wheat, after the U.S. forecast the smallest global supplies in 29 years as record demand for ethanol uses up more of the crop."

Hahaha! You slightly reduce the necessary increase in imported oil needed to satisfy an increasing demand for energy, but at the cost of making everybody's food horrendously more expensive? Hahaha! This is too, too rich, and government meddling at its worst!

-- The new catalog from Liberty Fund books contains the offering of "The Works and Correspondence of David Ricardo." As fascinating as that sounds, what I really, really want to get a-hold of is one particular study cited in the advertising copy, where "Robert Barro of Harvard University used Ricardo's equivalence theorem to argue that the distinction between government taxing its citizens or deficit spending on credit is inconsequential to the long-term aggregate economy." Hahaha! I have heard some ridiculous things in my life, but this may be a new record!

Now, I figure that they threw that Barro thing in there as an inside joke or something, as ridiculing something so preposterous and insanely stupid is always amusing, until I realize with horror that this dingle-berry egghead at Harvard had the necessary gravitas to actually get people- powerful, official, policy-moving people -to believe something so freaking insane that he should be as embarrassed to say it as I am fearful to hear it, and he didn't get fired for it!

For the record, let me tell you for a fact that not only is this Barro dude completely wrong, wrong, wrong, but you can take it from me, the Mighty Loudmouth Mogambo (MLM) that Chaos Theory has proved, beyond any scintilla of doubt, that even the smallest, teensiest, weensiest change in anything, particularly things connected with taxes or deficit spending, will have PROFOUNDLY different, completely unpredictable effects after only a few iterations of the system, which, in the case of the modern financial network, starts cycling in about two seconds. Or less. Probably less. A lot less. Almost instantly. And with backdating options, you can even go backwards in time! Hahaha!

Pardon me for taking the time to laugh at the foul corruption of America's executives, as it is not a laughing matter that things economic get progressively more and more different, more mutated, from all the little differences of the changes simply causing more changes, making the system evermore different at each iteration of the system.

And all the new differences, and resultant changes to the system, change things around and around, back and forth in a giant feedback loop, and everything is unpredictably spiraling away, away, away from where the economy would otherwise have gone.

Ergo, even a small change in the tax code, alone, will produce wildly different outcomes after awhile, and to even utter the ludicrous and laughable lunacy that there is no difference in the outcomes when given the choice between two completely different regimes, namely taxing and borrowing, makes me so angry that I can no longer sit, but must stand, bellowing in outrage (BIO)!

And while it is very, very hard to type standing up, my trigger finger is rapidly twitching so much from the fear and sheer adrenaline of it all that I am now typing with only that one fabulous forefinger, and man, I'm making great time! My finger is a blur, skittering across the keyboard! Even I am impressed! Look at it go!

-- In all the excitement, I almost forgot to look at Total Fed Credit, and when I did, I found that it dropped a seemingly large $14.9 billion last week, taking the total back to $844.5 billion, the same level as the beginning of December. Don't get too excited thinking "The Federal Reserve has finally wised up and are stopping that insane increasing money and credit." This drop if TFC, while very large, only takes us back part way from the huge, huge increases in both November and December.

-- Uranium was the big investment winner last year, and Justice Litle of Outstanding Investments notes that things are still percolating pretty along well. So much so, in fact, that recently rising from $56 to $60 per pound was "the largest weekly increase on record."

"So how big is the market for uranium?" you ask. Well, now that you mention it, I would like to know, too! And, in sheer coincidence, here is the Money and Markets newsletter to say "In 2005, about 16% of the world's electricity came from 440 nuclear reactors. That required about 77,000 metric tonnes of uranium." That works out to, if I calculated it correctly, 175 tonnes per reactor.

"But mines only supplied about 48,000 tonnes," he says. "The rest came mostly from reprocessed Russian nuclear weapons - a program that's slated to end. Meanwhile, there are 28 reactors under construction around the world and another 62 are being planned. All told, scientists estimate that the world will need about 900 more nuclear power plants by 2050!" Twice as many as now! Wow! And how! Maybe these guys are really on to something big with that uranium thing!

-- The last desperate gasp of the mortgage market may be at hand, as Toni Cherniawski of the Practical Investor newsletter says "The latest game in town is the 'no pay' loan where you can postpone payment on your mortgage and credit cards for up to 6 months."

This "Mogambo Doomsday In The Mortgage Industry Scenario (MDITMIS)" fits well with news from Aaron Krowne, of ml-implode.com, who figures that at the last update on Jan 14, 2007, the "Latest count of US Mortgage lenders that have croaked since about Dec 2006: 10 lenders have now gone kaput."

-- Lisa P. writes that "Each year, because I really, really have nothing better to do, I spend a couple days computing the Real Inflation Rate based on the things we actually buy. I compare what was spent during all of 2005 with what was spent during all of 2006 on natural gas, electricity, water, groceries, health insurance.... a REAL 'basket of goods', not some government-adjusted basket of lies. I normalize the figures to account for differences in such things as weather and getting older and ignore some things which cannot be normal. Anyway, the rate for 2006 was 7.06%." Yikes! Three times higher than the lying, corrupt government says!

I note that, in comparison to her (and most everybody's) assessment of the price inflation situation, inflation in the CR(30)-Continuous Commodity Index was a cool 100% in the last 4 years, which is an annual compounded rate of 18.9%.

As if you had to be told, "We're freaking screwed!"

And if you don't similarly think so, despite of the staggering, overwhelming evidence to the contrary, then there is something very, very wrong with you, and thus I am afraid of you, and that explains why I am nervously holding this pistol while we talk, why I never turn my back on you, ever, or even blink.

Ugh.

***Mogambo sez: Money is fleeing hither and yon around the world, going here, then going there, making this go up in price when it comes, and that go down in price when it goes.

This is how the whole thing shakes itself apart, and then how everyone belatedly realizes that gold would reign supreme in the end, like it always has, and like it always will, and that a stable money supply that is guaranteed by the gold exchange standard is the only way to keep the government from letting the banks kill all of us again the next time, because it is too late for us this time, and that is why you gotta - you just gotta! - get silver or gold, or both, Right Freaking Now (RFN).

Jan 16, 2007
Richard Daughty

Richard Daughty is general partner and C.O.O. for Smith Consultant Group, serving the financial and medical communities, and the writer/publisher 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.