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Uncle Bill
02-28-2010, 01:55 PM
...(it would be hilarious if it weren't so freakin' true. [WSFT])

Once again, a bit of info from the MG. Enjoy, UB

True Fiscal Insanity: Creating Money to Buy Government Debt (http://dailyreckoning.com/true-fiscal-insanity-creating-money-to-buy-government-debt/)

By The Mogambo Guru (http://dailyreckoning.com/author/mogamboguru/)

http://dailyreckoning.com/files/2010/02/Deficit13.jpg (http://dailyreckoning.com/true-fiscal-insanity-creating-money-to-buy-government-debt/)
Tampa Bay, Florida –

I knew that something was amiss when I woke up and the house was quiet. Having the benefit of seeing a lot of movies where things were “too quiet”, I instantly knew that things being “too quiet!” meant that Indians were going to be attacking, or the Japanese attacking, or the Germans attacking, sometimes government goons rushing the place, or zombies, or the police. I dunno who, but you get the point.

Grabbing the bare necessities (a couple of pistols, a few Uzi submachine guns, a rocket-propelled grenade launcher and a lot of spare ammunition) I rolled off the bed onto the floor with the idea of scuttling into the closet to cringe in a defensive posture, bristling with weapons, making my enemies stop and think before killing me, giving me, I figure, a additional three more seconds to live!

Unfortunately, all those armaments were heavy, and it was pretty stupid of me to carry so much weight, now that I think about it, and I fell on the floor with a big clanking noise.

Still, nothing!

Then I saw why: it wasn’t attackers at all! The family had cleared out because my Mogambo Machine To Measure Magical Money (MMTMMM) was going nuts, banging and beeping, and clanging and cleeping, which is not even a real word, which only shows you how freaked out I still am when I instantly saw why: Federal Reserve Credit (the magical “money out of thin air” of story and song, which the gold standard would prevent), jumped a massive $31 billion last week – $31 billion in One Freaking Week (OFW)! – taking the total to a record $2.264 trillion.

The banks, for their part, can take this new credit that has appeared, as if by magic, on their books, and loan out Huge Freaking Multiples (HFM) of this $31 billion, according to the Fed’s preposterously-low required fractional-reserve ratio which is (and has been for almost two full decades) almost a zillion-to-one, which (multiplying a zillion times $31 billion) is slightly more than, as I understand it, a freaking gazillion.

Well, apparently, none of this reached the banks, as the Fed bought up, for itself in a disgusting orgy of monetization of government debt, in One Freaking Week (OFW), a massive $53.6 billion of “Securities bought outright”! The Fed created the money to buy government debt! Gaaaaagakkk!

That last word, properly pronounced with a guttural ending, was to indicate another in a series of Timeless Mogambo Truths (TMT), which, in this case, is don’t eat a burrito while you are reading Bad, Bad News (BBN) because you will gag and choke, mostly because it makes a big mess all over everything and the guy in the next cubicle starts whining, “Hey! Stop spitting on me!”, but also because transcripts of the people bugging your office will read it as “unintelligible, followed by gagging and choking”, which proves my point about eating burritos while reading BBN, although I am not sure if it works with, for example, tacos, so they are still OK as far as I am concerned.

In case you were wondering how much credit the Federal Reserve has made, so that it can use up some of it to buy, for itself in a loathsome fraud known as “monetizing the debt”, government debt, that particular horrific total comes to a record of $1.967 trillion, which is an astonishing $1.397 trillion higher than this time last year!!

As you would expect, the money supply is still rising, and the monetary base rose a whopping $56 billion in the last week, which is more than $560 for everybody in the Whole Freaking Country (WFC) that has a non-government job! In One Freaking Week (OFW)!

As Junior Mogambo Rangers (JMRs) know, perhaps intuitively or perhaps because I (as a proxy for the Austrian school of economics but who, if you call them up and ask them, say, “We never heard of this Mogambo person you speak of! Goodbye!”, but you can tell by their suspicious change of mood that they have) never seem to shut up about inflation being properly defined as an increase in the money supply and that inflation in consumer prices is a result of that, and here it is!

This increase in the money supply usually, firstly, has a stimulating effect or, in our case, prevention of the Big Freaking Bust (BFB) and economic devastation that we so richly deserve for a ridiculous, laughable half century of experimental socialist governmental deficit-spending and “putting every leveraged dollar to work!”, and the abysmal, total failure of the loathsome Federal Reserve to control the money supply so that the damned government couldn’t do crap like that without entering the money marketplace and bidding for the funds, like any other borrower, thus driving up interest rates, which made the economy slow down, which infuriated worker/voters, and the government would stop doing that fiscal incompetence immediately, or as soon as the next election rolled around, ignoring the possibly of a recall election in the interim, or even a general insurrection and revolution, perhaps ending with the people carrying me on their shoulders, a hero to rule the country as Emperor Mogambo (EM) who immediately installs a gold standard to protect the people’s money from inflation (which keeps from making the poor poorer because of the inevitable higher prices that the additional money causes), and, also as a treat for all my adult loyal subjects, dovetailing the arrival of 3-D TV with hearty encouragement to develop, at great speed, a brave, new world of 3-D pornography, leading America to a new golden age in many, many, many ways! I can hardly wait!

In the meantime, however, accumulate gold, silver and oil, especially using some kind of Dollar-Cost Averaging scheme, which has not been improved upon, either in its simplicity (you spend the same number of dollars per month, month after month) or its efficacy; it kicks butt over a long trend, as you are always buying more when they are cheap, and you buy less when they are more expensive.

Or, if you are like most people, you are an impatient, greedy little bastard who wants to make the biggest, most maximum profit possible, as soon as possible, by taking maximum risk that gold, silver and oil will never be cheaper than they are now, then you should rush out and buy as much gold, silver and oil as possible Right Freaking Now (RFN), exhausting every source of credit you can get your clutching, grasping little hands on, and then selling the kid’s stuff and buying more gold, silver and oil with that money, too!

Somewhere in between these extremes you will find yourself, my budding Junior Mogambo Ranger (JMR)! The effects of massive increases in the money supply (horrifying inflation) will lead you to True Mogambo Enlightenment (TME) about how economics really, really works, and in a blazing moment of incandescent, transcendent clarity, you will suddenly realize you have to buy gold, silver and oil, right away, because, “Whee! This investing stuff is easy!”
The Mogambo Guru (http://dailyreckoning.com/author/mogamboguru/)
for The Daily Reckoning (http://dailyreckoning.com/)

Uncle Bill
02-28-2010, 02:08 PM
Catching up on my Daily Reckoning reading, this Bonner column is really worth a read...clever but informative info.

UB


The Daily Reckoning Presents

A Propensity to Screw Up


http://www.agorafinancial.com/temp/DR/email/template/BillBonner.jpgBill Bonner


Poor Ms. Cosgrove. The Florida woman wrecked her car in 1976. While driving under the Brooklyn Bridge a tarp filled with rainwater fell on it. Then, she lost the $17,500 compensation check from the insurance company.

Her luck seemed to change last week – 33 years later. She found the check in a drawer. But now she discovers two disagreeable things at once – that her insurance company has gone out of business...and the check would be worth barely $5,000 – if she were able to cash it.

What follows is a brief reverie on the way credits go bad. There are accidents. There are mistakes. There are acts of God and acts of parliament. To give readers a preview, we suspect that the world’s savers and investors are about to follow Ms. Cosgrove – losing money due to bad luck, bad judgment, bad management and bad policy decisions. We leave God to explain His own acts, if He cares to. Our attention is on Ms. Cosgrave’s claim check.

Price movements are neither good nor bad; it depends on the cause of them. In a properly functioning economy, prices go up and down. Rising prices suggest scarcity, signaling to consumers that they should switch to substitutes. And they tell producers to get on the ball and stock the shelves with new supply. Falling prices send the opposite message...trimming profit margins and telling producers to cut back.

Here at The Daily Reckoning, when we go into a liquor store and find lower prices, we are delighted. We stock up. But we are clearly out of step with mainstream economists. Most economists want to see higher prices in the liquor store. And they think they can improve the economy by forcing prices upward. Their beef with falling prices is that they trigger what Keynes described as a “propensity to save.” Consumers see lower prices, he theorized; they then delay spending in the hopes of a better price. Demand falls, incomes go down. And you have a depression on your hands.

“Unfortunately, most historians and economists are conditioned to believe that steadily and sharply falling prices must result in depression...” writes Murray Rothbard in his History of Money and Banking in the United States. Mr. Rothbard noted that falling prices were neither cause nor effect of depression, but a natural feature of prosperity. In the decade of 1879 to 1889, for example, wages in America rose by 23% – in real terms. “No decade before or since produced such a sustainable rise in real wages,” comments Rothbard. In terms of improvements to material well being too, the economist R. W. Goldsmith concluded that no decade matched the 1880s...with 3.8% annual gains.

But this was also a decade when prices fell. Prices at the wholesale level fell 10%. Retail prices dropped 4.2%. How come falling prices didn’t cause a depression? In 1884, several big Wall Street banks...including Grant and Ward, the Marine Bank of New York and Penn Bank of Pittsburgh...along with 10,000 businesses across the country...went broke. There was panic on Wall Street. But even this did not cause a depression. The government did nothing. Thanks perhaps to its incapacity, within weeks the economy was back on its feet and the decade of prosperity continued.

This is just the way of the world, when the world is allowed to have its way. In a normal economy, prices are honest. They tell capitalists where and how to invest their money. Businesses increase capacity. They get better at what they do. Unit costs go down. Increased productivity brings higher wages and lower prices – prosperity, in other words.

If that is all there were to it, the world would be more prosperous, but less entertaining. There are honest price movements. And there are the other kind, prompted by changes in the money supply. Natural price movements send useful information; inflation (or deflation)-driven signals are a form of economic counter-intelligence – fraudulent signals intended to mislead. Monetary inflation pushes prices up; but only because money is becoming more abundant, not because goods are becoming more scarce. Businesses, investors and consumers get the wrong idea. Typically, consumers overspend and businesses over-invest. The consumer thinks he sees increasing scarcity. The businessman thinks he sees rising demand. Both are wrong. Both lose money. Even the government is misled by its own flimflam; it sees increasing tax receipts and expands services.

The planet has never seen so much monetary inflation before. In just the last 7 years, worldwide monetary reserve assets have tripled – from less than $2.5 trillion to more than $7.5 trillion. And yet, consumer prices continue to fall...as they have for the last 27 years. In January, despite the Fed’s target, The Wall Street Journal reports that “consumer prices [in the US] actually fell by 0.1%....”

Last week, leading economists at the IMF and the Fed wondered aloud they shouldn’t deceive the public even further, by setting higher inflation targets. Currently, central banks aim for 2%. Talk is of doubling it to 4%.

Maybe they know what they are doing. Maybe they don’t. Advice to readers: if you get a large check, don’t wait 33 years to cash it.

Regards,

Bill Bonner
for The Daily Reckoning