No, sirree! You can expand the money supply the old-fashioned way, as it can be money made from plain, old, paper-and-ink! Fire up the presses! Monetary inflation the old-fashioned way!

Perhaps that is why Mark J. Lundeen, market analyst, writes that Currency in Circulation (CinC) can also be an inflationary problem, as “The historical period where the US saw double digit CPI inflation occurred from the mid 1970s to about 1982” which was a time when, “CinC’s annual increase was pegged at 10% during this period. The CPI Index soon followed.” Yikes! Double-digit inflation!

Well, if you are like me, you are wary of references to the ’70s and ’80s since someone is liable to bring up some of those embarrassing episodes from your past that you had hoped were now forgotten, hopefully forgiven, but past the statute of limitations in either event.

Thankfully, Mr. Lundeen is not referring to any of that, and says, “CinC, after falling for almost 8 years, has just recently jumped up to this same 10% year over year increase line that caused so many inflationary problems 30 years ago.” Yikes!

And besides, he says, “How can any economist claim that the Fed is fighting inflation when the US Currency in Circulation has increased 20,000% in the past 95 years?”

Well, already overwhelmed by the terrifying increases in the money supply thanks to the recent insanities of the Federal Reserve and Congress, my Delicate Mogambo System (DMS) cannot take another shock.

So with trembling fingers I quickly verify this, and I see that, as of April 27, 2009, currency in circulation was $903.3 billion, up $90.4 billion from this time last year! He’s right! An increase of MORE than 10%!

And if double-digit inflation is not bad enough, the news for the stock market (representing everybody’s retirement accounts) is bad, too, as explained when he notes, “capital gains and dividend payouts lagged inflation for 10 years after the surge of CinC inflation of 1971. If this pattern holds for the 2007/09 surge of CinC inflation, stock values, earnings and dividend payouts will be woefully sub-par for a decade or more.” Yikes!

Unfortunately, he seems to be being already proved right, as even he notes, “corporate earnings are currently crashing. And,” he asks, “without earnings, how long can the DJIA, Barron’s 50 and the S&P500 companies continue to pay dividends?” Good point!

Naturally, he figures that he expects to see “big cuts in dividend payouts within a year,” and that bond yields will rise “higher than most ‘experts’ believe possible,” which makes perfect sense to me when I see how the 30-year T-bond is priced so high that it now yields about 3 lousy percent, the lowest since the mid 1950s!

And what is the problem with creating excess paper, fiat money? Well, ask the people of Zimbabwe, whose moronic government has been creating so much of it for almost 15 years that, towards the end, inflation in prices could only be poorly estimated, as prices soared to more than a million percent, or a billion percent, or more. Nobody knows. A lot, though!

Well, the final upshot of constantly creating more and more money was provided by Junior Mogambo Ranger (JMR) Arlo S., who made sure I got the news from CommodityOnline.com that “Zimbabwe Declares Its Currency Dead.”

The article read, “Super-inflated Zimbabwe declared its currency, the Zimbabwean dollar, a dead one and is no longer being printed.” The fiat Zimbabwe dollar is worth zero!

Actually, this was inevitable, as nobody has used Zimbabwe dollars in a long time anyway, and non-governmental commerce was being conducted in foreign currencies and in grains of gold.

Later, we read that even such a catastrophic lesson has not penetrated any thick heads, as “Speaking to reporters here Zimbabwe’s Economic Planning Minister Elton Mangoma said the currency could be returned as a different currency or as notes once inflation was under control.” Hahahaha!

And what will gold be worth then? And one day, what will you answer when somebody asks you, “What will gold be worth at the end of the American super-inflation?” Hahaha!
I thought so! And that is why we both know that you should be buying gold right now!

Whee! This investing stuff is easy!

Until next time,

The Mogambo Guru

Source: The Killing of a Worthless Currency

We will borrow a term from a reader on the message board which seems apt. It is the credit depression. This amounts to a depression in the belief that tomorrow will be better than today. More on what this means economically in just a moment. But first, to the dictionary!

In Latin, a creditum is a loan or thing entrusted to another. The Latin for “to entrust” or “to believe” is “credere.” The word “creed” also has similar origins, as you can see.

So a credit depression is a period when belief or trust in a set of ideas falls to new lows. The basic creed itself (for example, the idea of fiat money) might even be, ahem, discredited.

We’d suggest that 2009 will be the year when a lot of previously and thoughtless held beliefs are discredited. Just ask Ramalinga Raju, the previous head of Satyam Computer Services (NYSE: SAY). Satyam is India’s fourth-largest software export services firm.

Raju is the former head of Satyam because he quit last week after telling investors the company’s profits had been falsely inflated for years. The stock price fell by nearly 80% after the lie was disclosed. He said about $1 billion of the company’s so-called cash-or 94% of the total on the books-was a complete fabrication (from the Latin Fabricare, to fashion or to build).

Now we are finding out how much of modern commerce and economic activity has been built on a lie. That is why etymologies are so useful. The names of things and what we actually call them tell us something about their nature (if they are aptly named). In these days of 24/7 news and digital media, we drift away from the origin of things and have little time to question where they came from.

Thank goodness we can take time out to reckon daily!

In any event, the credit depression is upon us. Raju, Madoff, Adolf Merckle…these are just the poster boys for the crisis. The collapse in real asset values and real wealth is going to cost a lot of people a lot more. But then you’ve heard that before from us, so we won’t dwell on it.

In Australia you won’t find a lot of obvious signs that the credit depression is upon us. After all, the National Australia Bank used the Rudd government’s guarantee of bank debt to raise $3.5 billion from U.S. investors yesterday. ANZ has managed to borrow $3.7 billion as well. In fact, according to Eric Johnston in today’s Age, Aussie banks have used the guarantee to secure over $37 billion funding.

But what does this really mean? “Secure funding” is just another way of saying “borrow money.” To the extent that the money is raised overseas, it’s both good and bad. It’s good if you believe it shows that foreign lenders trust the Aussie government guarantee and loan the banks money.

It’s bad, however, in that Australia banks are importing capital from foreign lenders. Capital is an increasingly scarce resource these days. And though the banks have been able to borrow, it’s been at higher rates than this time last year. How much of the foreign-sourced capital is going to make it back to Australian borrowers (both business and household?) Hmm.

And what about the retail economy? November retail sales figures were better than expected. But according to Steve Scott in today’s Financial Review, once you strip out food sales from the figures, it was actually the worst November on record for retail sales. Ouch.

“How bad do you think it will get,” asked a friend in an e-mail yesterday. Our friend has a Master’s Degree in Classics (Latin and Greek). We know that when he starts wondering what’s going on in the economy there are probably a lot of other people starting to sit up and question their basic economic beliefs too. Here is what we told him.

“First, our long national love affair with debt is over. When you first fall in love, you’re happy to ignore all the little blemishes, faults, and habits that later drive you insane. The dependence on revolving credit, home equity lines of credit, and zero percent financing didn’t seem like a bad thing as long as people had steady incomes and could pay the interest.

“But now, asset values are falling…but the principal on the debt remains. People will shake themselves vigorously and wake up to the credit depression we live in. They will learn to live within, or even below, their means. Wherever that level is, it’s a lot lower than today. The upside is that it’s probably more natural and relaxing and less stressful. Stress kills the brain. So people may be poorer and hungrier. But some of them may actually be happier. Not all, mind you.

“Second, as people dial back their spending and consumption habits, it sends ripples throughout the economy. For example, tomorrow’s jobs figure in the U.S. will likely be the worst in sixty years. Over 700,000 Americans will have lost their jobs in December. This is on top of 400,000 in November.

“A million people axed in two months. Job losses result in fewer incomes, and incomes are the source of business profits. As jobs and incomes fall, so do business profits, and thus business hiring. A feedback loop.

“Plus, in these kinds of times, people save more and spend less. In an economy based on consumption (not production) lower levels of spending are bad for stocks and jobs. The government will try to fix this by giving people more money to spend. But the problem isn’t with people. It’s with the model. An economy structurally oriented to consumption is not one that produces real wealth or long-term capital assets. It just produces people who have debts they cannot pay, albeit in a house with a nice TV and great digital programming.

“As household and business consumption (spending) fall, the government, under the banner of Keynes, will take to the field en masse. The armies of Fed money will be deployed, street by street, to patrol the economy in little platoons of stimulation. The ammunition for these armies will come from either Japanese or Chinese savers (via bond purchases) or from nowhere (the Fed creating more money).

“Either way, the result seems unambiguously bad. If borrowed, the stimulus money must be repaid, and presumably at increasingly higher rates of interest the more rapidly America’s fiscal position erodes. Either way, with interest expense already nearly 10% of the Federal budget, you can expect it to rise when the U.S. government has to pay interest on a trillion dollars of new borrowing.

“To meet these interest payments, the government is going to have to raise taxes or cut spending. Of course that’s hard to do when you’re deliberately spending more to begin with. If spending is going to be cut, it’d have to be from Defense, or Social Security and Medicare/Medicaid benefits (raising the retirement age, means testing benefits).

“But even with more borrowing and higher taxes, it’s likely the Fed is going to have to simply print new money to conduct its unconventional monetary policy. Money supply will grow. And what does that really mean? Inflation. Much higher inflation. Rising prices for everyday goods like food and fuel and clothes.

“Inflation is also a huge tax on savers and those who live on a fixed income. You know, the prudent people who saved for their own retirement. Inflation accelerates the depletion rate of their accumulated savings by steadily reducing purchasing power. $10,000 saved in 1970 ain’t what it used to be. This should be good for gold, however.

“As inflation punishes those living on a fixed income, it will also push them closer to needing some sort of government aid. This in turn raises the percentage of federal spending going to Social Security and Medicare and Medicaid. It’s a transfer of old age and pension provisions from the private sector to the public sector.

“But can America really afford it? Clearly not, which more than sucks for people who’ve lived their whole adult lives believing they’d be able to retire comfortably through a combination of a diversified portfolio and a supplementary check from the Social Security Administration.

“It’s looking more and more like the entire project of spending a quarter of your adult productive life idle and living off the income generated from your assets (houses, stocks, savings) is…well…dead. It simply ain’t gonna happen for most people. And by most, we’re talking 99%. People will work longer, harder, and leave leaner and meaner than they ever thought they’d have to.

“The rest of the world will not be ready to continue funding America’s desire to live beyond its means. Why would Chinese and Japanese savers continue to invest in U.S. bonds and notes (effectively keeping U.S. interest rates low AND loaning Uncle Sam the money he needs to keep the promises he’s made?)

“In a world where investors are focused only on annual rates of return on their capital, you could argue that global savers would pour money into the U.S. govt bond market now and until the cows come home. It’s the safest bet in the world.

“But that’s not the world we live in anymore. In the world in which we live—the one with a credit depression—capital (accumulated savings…or surplus income from your hard work) is a scarce and jealously guarded asset. You have to reckon people will be more worried about the return OF their capital than the return ON their capital.

“All of which means America’s days of borrowing at low rates of interest from the rest of the world in order to build an economy based on buying things…are over. So you should find a job with a real skill that people are willing to pay for. Get your money out of stocks (though they’ll bounce in the next few months probably). Look for a home you can really live in and want to own (and aren’t trying to flip). But generally, your greatest assets will probably be your real skills that can be traded for goods or services (and not financial instruments you hold in a portfolio). It’ll be hard for people to live off income generated from financial assets…mostly because those assets are going to keep falling in real terms for quite a while.

“So that’s how bad it could be. But human beings are hardy and resourceful. We’ll find a way to put food on the table. Speaking of which, it’s lunch time! Gotta go!”

Source: The Credit Depression

There are, as I understand it, police reports that people two freaking blocks away dialed 911 in a panic because they heard my screaming and crying in terror when I saw what was going on in the banks and at the Federal Reserve.

First off, Total Fed Credit was up about $5 billion last week, which is, in the parlance, “goodly sized!”, which makes me howl in dismay because this is the ultimate source of fiat money! Total Fed Credit is the legendary stuff from which fiat money springs… From the bowels of the banks, in whose bowels this credit first appeared (thanks to the Fed depositing it there from their bowels!), and which was turned into some multiple of this $5 billion credit when someone borrowed some huge, unbelievable multiple (fractional reserve banking at its finest!) of this $5 billion increase in TFC from the aforementioned banks.

That is the situation in a nutshell, and if you are suddenly cold with fear and you feel a scream of terror rising in your chest at the obvious fraud, then congratulations! This means that you are achieving Total Mogambo Enlightenment (TME), which means you now understand the significance of the seeming overuse of the word “bowels” in the preceding paragraph, and now you are appropriately disgusted at the repellent true nature of fiat money.

One of the benefits of TME is that there are no real bowels involved at all (unlike when raising children or pets), nor any fees or dues to pay, except for the price of your very soul and sanity, because now you begin to comprehend the terrifying enormity of what happens to a country so completely idiotic that they ignore their own Constitution’s Article 1, Section 10 requirement that only silver and gold coin can be made a tender in payment of debt, and instead, use the One Damned Thing (ODT) that the Founding Fathers and everybody else feared above all others, namely a fiat currency!

A damned silly piece of paper or electronic fluff that can be increased, without limit, at the mere caprice of an authority figure, which is the ODT we didn’t want because this inevitable increase in the supply of fiat money leads to increases in prices, and history is FULL of the ugliness of what happens when people can no longer afford food because their money is rendered worthless! It’s a killer-diller!

As the solid foundation of your True Mogambo Enlightenment (TME), you have the fact that not once in the 4,000-year history of man and money has this “fiat money” crap NOT led to total ruination. Not once. Not even close.

And then, as your TME skills grow and develop, you will become evermore horrified, evermore paranoid, evermore suspicious and hateful, when you read things like how the Non-Borrowed Reserves in the banks hit a new record in disgusting banking infamy; they now have to report a staggering negative $111.8 billion in Non-Borrowed Reserves!

The brain explodes; “What? Total Reserves in the banks are the same lousy $42 billion that they have always laughably been for the freaking last decade or so, but now Non-Borrowed Reserves are a negative $111.8 billion? Gaaaahhhh! It makes no sense! Don’t make me crap in my pants out of horror!”

Of course, it will just keep getting weirder, and you will crap in your pants at the horror of the economic mistakes being made, and your TME skills will grow stronger until one day you find yourself gobbling heart medication by the handful at the mere sight of a fact like, well, how last week the Fed itself sold another $17 billion of its stash of government debt.

Interestingly, the Federal Reserve has now sold over one-third of its stash, taking their remaining stranglehold on us, through our money, down to $502 billion, waaAAAaaaay off from the $790 billion they had in August, 2007, and even down from their $713 billion in March, just two months ago! Panic mode!

And as you quickly blossom into a full-fledged Junior Mogambo Ranger (JMR) after about two minutes of TME, you will be outraged and personally insulted that only you, of all the people around you – people that you now regard with contempt and loathing – see the awful significance of how inflation in prices is the thing that is going to destroy this country, which it will because the demonic Alan Greenspan and the Fed has destroyed our country by creating so much money and credit for so many, many years, which produced, first, inflation in the prices of stocks and the prices of bonds, which everyone loved, and then inflation in the size of government, which everyone loved, then inflation in the prices of houses, which everyone loved, and now inflation in commodities like food and energy, which nobody loves, and now nobody likes you because you remind them of me, and they all hate me, and I hate them back because they are stupid and they elected people to Congress who have destroyed us.

And though you will, thanks to the True Mogambo Enlightenment (TME) side of you, foresee many, many horrors that will inflict the dollar, and thus the country, and be sorely afraid, you will also know that the answer to your own financial salvation, and verily the salvation of a country, is to own gold. And you will.

It’s the Greedy Mogambo Side (GMS) of you that makes you think that the only thing better than financial salvation is having lots and lots of financial salvation, and that path lies in owning lots and lots of gold and silver. Me, too! Whee!

P.S. To get The Daily Reckoning sent directly to your inbox, sign up for our free email newsletter, or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.

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.

Source: Fiat Ruination

When Albert Hofmann — the Swiss chemist who discovered LSD — passed away at the start of this month, newspaper editors the world over reported it as the death of the man “who experienced the first ever bad trip.”

But Hofmann’s hallucinations seem little worse than most acid-induced visions. Or so people tell us…

“Beginning dizziness,” he wrote in his lab journal for 19 April 1943. Looking to find a stimulant for the circulatory and respiratory systems, he’d just concocted — and taken — a big dose of lysergic acid diethylamide-25.

“Feeling of anxiety,” he noted, before adding in due course “Difficulty in concentration. Visual disturbances. Desire to laugh.”

Finally, Hofmann scrawled the words “most severe crisis” and fled the lab on his bicycle. It seemed to stay stationary even as it wheeled him back home, where his neighbor — who brought him a nice glass of milk to calm him down — appeared as a witch in a colored mask.

He felt possessed by demons. The furniture in his bedroom began to menace him. All pretty run of the mill stuff if you dabble with psychotropics, in short.

But such “fantastic images” don’t always ease into the sensations of “good fortune and gratitude” Hofmann got to enjoy later that day. Hallucinations can still cause the “most severe crisis” — even without some fool laying Witches Hat by the Incredible String Band on the turntable.

“Inflation will return to the two percent target,” claimed Mervyn King, head of the Bank of England, and one half of the financial furry freak brothers running Anglo-American monetary policy.

“Growth will eventually recover to a sustainable rate.”

Just a central banker’s wide-eyed hallucination? Maybe not. Like Albert Hofmann’s wobbly bike-ride six decades ago, the credit cycle will get us home in good time, ready to turn once again from boom to bubble to bust. But like any powerful psychedelic, the trip gobbled down by Western investors could last much longer than anyone dares hope right now.

And just what was the Governor smoking when he claimed, “In these [current] circumstances, the household saving rate is likely to rise…”?

The Bank of England has been cutting U.K. interest rates since December. Its latest Inflation Report says it will continue to cut interest rates “in line with [bond] market expectations,” too.

And U.K. households have grown their savings only once when interest rates fell in the last four-and-half decades. That brief period lasted for two years at the start of the 1990s.

Both before and since — and most markedly during the previous post-war recessions (of 1974 and 1981) — people have tweaked their savings almost precisely in line with changes to the rate of interest, as set by the Bank of England itself.

King’s starry-eyed vision, however, “is part of a rebalancing of the U.K. economy, away from spending and importing, toward saving and exporting,” he told reporters last week.

The sky’s turned all purple in Washington too if U.S. policy-makers think the credit crunch will somehow boost household savings there.

Put another way, “who had heard of collateralized debt obligations just 10 years ago?” as Niall Ferguson, history professor at Harvard, asked in a speech opening New York’s new Museum of Finance back in January this year.

“Collateralized loan obligations? Credit derivatives? These forms of financial instrument are of very recent origin. So are the hedge funds; so are the private equity partnerships; so are the sovereign wealth funds; and so are those wonderfully named entities, the conduits…”

~~~~~~~~~~~One Day Left~~~~~~~~~~~

Closed to New Investors for the Last Six Years — Now Open Again…

The “Chaffee Royalty Program” That Turned Every $1 Into $50

In 2002, the same royalty “paycheck program” that paid out $50 for every $1 invested… decided to shut the door to new “members.”

In 2008, that door is open again…and it just got easier than ever to “make money while you sleep”…

Brand New Report Right Here.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

It is beyond comical to watch all the various pundits applaud the Fed’s action as they piece together bailouts and desperately cheap money. Those who cheer them are nothing more than apologists for a crooked and predatory monetary system. Maybe it would be wise to look deeply and understand that this “ultimate private franchise” is the root cause of the problems they are getting credit for patching up??

The elitist international bankers who own the Fed are inflators by charter. They are licensed by Congress to supply what we use as money. Here’s their historic report card:

One of the Fed’s mandates is “stable prices”. A shrinking and shrinking dollar won’t get that job done. That looks like an F from this angle, even if you grade on the curve.

Pretty clever of them for sure. How exactly did they accomplish such an extraordinary feat?

Yep, they issued unfathomable debt. This pleases the politicians. Well connected cronies are thrilled. Individual recipients of the funny money are certainly pleased. Too bad our future generations have to pay these debts. Or do they?

Both of these above charts are from “Your US Dollar Ain’t Worth a plug Nickel”. I’m not quite old enough to know what a ‘plug nickel’ is but the illustration gives a strong hint.

The more debt (money) these central planners issue the more they cream off the top. Debt is to the non-Federal non-Reserve as chicken is to KFC. One franchise is just an order of magnitude, more elite than the other.

Would you like to see an example of what happens when inflation fails?

This is an example of a decade of falling real estate and stock prices from Japanese history. It is a clear cut demonstration of the ravages of deflation. Central bankers have nightmares about such scenarios. This is what happens when fiat money freezes up.

Japanese banks didn’t stop making money available. They were practically giving it away with itty bitty interest rates (under one percent). They tried and tried to “stimulate” their economy. Nothing worked. The populace refused to borrow and spend.