Pedal to the Metal
It's easy to be confused by the mass of conflicting economic data these days. You don't even have to be an educated economist to sound like an idiot, although a college education is always helpful. It's always amazed me that America is a place where the more educated people become the more ignorant they are. How can there be so much ignorance in a country with such high literacy rates, college educated people and high school graduation rates? A nation of people with pieces of papers saying they are educated is the same nation with a majority that can't think, reason, use basic logic or tell they are being lied to. America is a place where more and more people know less and less; yet, feel better about it than any other time in our Republic's history. Next to the rigged stock market American's self esteem has shown the most inflation in the 90's.
If a college education is a good indicator of an economist's ignorance, then a position in the Federal Reserve is a dead give away. Watching the elite pundits twisting in the wind over the Enron scandal is very enjoyable for me. Seeing President Pretzel whining about his mother-in-law losing $8,000 on Enron, or listening to Mrs. Lay whining about being broke is like turning on the television and coming upon a 3 day Monty Python festival. I mean, did the terrorists put LSD in the water supply and nobody informed me?
As far as current global economics goes, there are two conflicting, mutually neutralizing trends going on right now. The first is deflation and the second is inflation. The current result is a wash, or zero for the immediate future. Up here in the soggy Northwest we have a world class river called the Columbia. In this river empties another large river, the Snake, and also a smaller one called the Yakima. If you look at the Columbia as deflation, you will see the vast amount of water that needs to be diluted before inflation can take effect. Everywhere on the globe we are seeing competitive fiat currency devaluation to gain manufacturing leverage. For instance, the big three American auto companies just reported dismal January sales. The Japanese, dealing with a 134 yen to the dollar, are selling up a storm. As are the Koreans and even the hapless Europeans. Exactly how you can have an increase in auto prices under these conditions is a mystery to me. It's pretty simple, there will be no price inflation until the deflationary forces at work in the world are neutralized by the increases in fiat money supply.
Inflation, in the true economic sense, is an increase in the money supply. Price inflation is the result of inflation and not strictly speaking inflation. A quibble perhaps but it's important for me to be precise. God forbid you would think I'm an educated economist. What Mr. Magoo has really been doing is similar to the Yakima River dumping into the Columbia. While it's a lot of water, the volume isn't enough to have much of an impact on the Columbia. I think the current situation is a lot like Japan over the last decade. It's true the Bank of Japan cut interest rates, created a lot of fiat yen and the government spent a lot of money through deficit spending. All that is true. The thing people haven't grasped is this. Despite all the money created and spent in Japan one simple fact emerges to my mind. More money is being destroyed than can be created by Central Bank fiat funny money gymnastics. Mr. Magoo are you listening?
It's been obvious for the last several years Mr. Magoo has had his heavy foot pressing down on the fiat money creation petal. By any objective economic standard the fiat money creation has been the highest, in both percentage and actual dollar amounts, in American economic history. Still, as we lumber into 2002 there is not much to show for it. Sure, the whore press has been trumpeting the "recovery" of the last 60 days. Did I miss something here? The latest figures for January show American corporate bond defaults hit a record. American consumer debt is at 18.9% of disposable income. If my memory serves me right, the official rate for being classified as bankrupt is 20%. The entire consumer sector is 1.1% away from being considered bankrupt. To my uneducated, economic mind this is a pretty stunning statistic. Ah, the whore press tells us that the unemployment rate declined. Except the fine print tells us it happened because over one million people said why bother and didn't look for work. Or how about the so called retail recovery? You mean the one where consumer spending has actually fallen since August, over six months ago? Hey, quit being negative, it's only 1/10 of one percent after all and yes it was during Christmas. I guess a recovery means sales don't fall as much as we feared. Go tell that to Kmart which is going to close up to 700 stores and lay off 80,000 employees by March 31st. I'm being realistic as distinct from fools believing their lying leaders. The same clowns who gave us Enron are now telling us the economic recovery is here. Bullshit.
Mr. Magoo is like the guy who floods his car engine and keeps pumping the pedal. No matter how many times he pumps the pedal nothing happens. The problem is the carburetor electronic ignition, is flooded. It's completely useless to keep pumping, or creating more money, until time allows the fuel vapors to dissipate. Mr. Magoo hasn't figured this out yet. He mindlessly keeps his foot moving like a robot. All he is doing is filling the engine compartment with gasoline vapors. All he is doing is creating the conditions for an explosion. Mr. Magoo has moved way beyond incompetent into the criminally negligent arena. The result of Mr. Magoo's pump priming will not be inflation as many people think. The result of Mr. Magoo's folly will be the blowing up of the entire fiat economic system. One match and KABOOM.
The economic matches are everywhere these days. Isn't it interesting nobody talks about how much money has been drained out of the system in the last two years? Several trillion in stock market losses. Hundreds of billions in September 11th losses. Bond defaults, credit card defaults, bankruptcies in record numbers. We have seen the largest global bond default in Argentina, followed by the largest corporate bankruptcy in Enron and now the largest retail collapse in K-Mart. Against which Mr. Magoo has created a few hundred billion in new fiat dollars. Trillions disappear and billions are created. Do the math. It's also interesting the Fed Mint has had to lay off people making coins recently. It seems everyone is emptying their piggy banks and so fewer new coins are needed. Despite a massive increase in the amount of money created, economic activity is contracting. How can that be?
It can be because Mr. Magoo is neither the mighty Snake or smaller Yakima rivers flowing into the Columbia of deflation. Instead, Mr. Magoo is a drunken fool pissing into the Columbia and thinking he will impact it. Our central bank version of King Cannute trying to tell the ocean tide to stop coming in.
The reason we can have the kind of increases in money supply we have seen without an explosion in the prices people pay for goods and services is simple. The deflationary forces at work in the global economy are crushing any feeble attempts at inflating the money supply. The deflationary hurricane is now spreading from goods into services. Recently, I purchased a new pair of eyeglasses. The price in September was $375. The price in January was $275. That's deflation. Binyon' does what it has to in order to make the sale and survive. Don't believe the myth that price deflation won't impact services, medicine and the like. People can and do make decisions to defer, delay or avoid services based on price during hard economic times. Just ask the hospitality industry. I'm unimpressed with either Mr. Magoo's money increases or increases in government spending right now. The amount of money being destroyed is greater, in both percentage and dollar amount, than the fiat money being created. It's that simple. This view explains the deep panic infecting the Fed. Mr. Magoo is like a guy pumping the pedal while stuck on the railroad track and watching the train headlight get closer. I'm sure the bath water he reputedly bathes in contains a lot of yellow these days. Gold will do nothing in terms of price increases under conditions like this. Gold will do well in terms of price stability I think. The Japanese feel so since they are buying gold in record amounts as their financial system implodes.
Speaking of Japan, a brief update is in order. The prime minister, approval rating of 72%, fired a highly popular reform female minister a few days ago. Some feel his popularity will plummet and render any further attempts to reform Japan futile. March 31st is looming and the Japanese public has begun a shift into gold as I mentioned above. Interesting isn't it? Argentina is continuing to slide into anarchy. I believe Argentina is a test case of our global masters in the ways to manipulate the populace in economic matters. What is happening down there will eventually happen on a global basis. No doubt about that at all.
Mr. Crudele of the New York Post tells us the J P Morgan is in trouble. Mr. Crudele correctly called the Global Crossing bankruptcy and now this. Sometimes, the powers that be let things slip to prepare the sheep for the fleecing. J P Morgan is one the major bank stockholders, i.e. owners, of the Federal Reserve. The Federal Reserve will ABSOLUTELY have to bail out J P Morgan to the tune of tens, hundreds of billions of dollars. Little conflict of interest there, but what did the founding fathers know about Central Banks. I mean they just banned them didn't they? So, I'd look for a major, major financial debacle involving the Fed and J P Morgan real soon. For the record, Fannie Mae, and also Ginnie Mae, the mortgage beasts with at least one trillion dollars in "assets", I mean mortgage debts, are called GSE"s. A GSE is a government sponsored entity. I think you know, or at least your wallet should know, where I'm going with this. Looks like the ole economic swimming pool is full of Piranha to me.
Finally, a few comments on the many emails my last essay prompted. Thanks for the kind and insightful comments, even the ones I didn't agree with. One gentleman said Memorial Day was too early and another says the system will hang together for the foreseeable future. Not if J P Morgan goes down it won't. 96 Trillion dollars in derivatives is coming home to roost and it ain't no pigeon. Looks to be one of those 25 foot wingspan Dinosaur birds out of Jurassic Park with an empty stomach. I vote we feed it Mr. Magoo first, Mr. Lay second and any member of the Council of Foreign Relations we can find for desert.