The red herring of dollar
decline By The Mogambo Guru
The spooky, chilling news is that M3 is
going up at an annual rate of over 14%, which is
made worse by the fact that the rate of growth is
getting faster and faster!
Naturally, the
dollar went down in value, and now the dollar
index has dropped to less than 78, which is about
as low as it has ever gotten in modern history.
James Turk in his Freemarket Gold &
Money Report asks, "Will
the
mismanagement of the dollar end in deflation as
the mountain of dollar denominated debt collapses
reducing the money supply, or will it end in
inflation as the Federal Reserve pumps up the
money supply in order to bail-out debtors - and in
particular, the US government - with an endless
quantity of newly created dollars?"
Well,
I was bravely gearing up to try and answer that
question, hoping to impress that cute little
reporter from the World Sun Times Herald newspaper
with how smart I was, perhaps overcoming being
handicapped in the romantic vein by her strong
antipathy to my disgusting appearance, manners,
odor, hateful attitude, vicious streak or old age,
and I was really sweating bullets since I had no
idea what in the hell he was talking about, making
my odor problem even worse.
Fortunately, I
was suddenly relieved to discover that I did not
even have to try, as Mr Turk went on to explain
that, "The reality is that this debate is a red
herring. Only half the question is being
addressed, namely the supply of money. In other
words, the debate centers on whether the supply of
dollars will increase or decrease. What about
demand? The antagonists to this debate ignore
demand by assuming that the demand for dollars
will continue to grow. But what if it doesn't?
What if it drops?" In fact, he says, "In the end,
demand is more important than supply."
When he said, "demand is more important
than supply", it really hit home with me, as a
recent analysis of my business records revealed
that while I offer an unlimited supply of stupid
economic and investment advice ("Go to hell and
leave me alone!"), there is no demand! This
instantly explains why my income is literally zero
and I have no money, and his point is thus proved.
Secretly, I have to laugh, because all this time I
thought it was because my wife and kids were
stealing me blind, and I have been making their
lives into a living hell for it! Hahaha! I guess
the joke's on me!
So I was naturally
disappointed that he did not actually answer that
question about what happens if demand for dollars
does not grow, either, and I was raising my hand
to tell him about how it was getting close to
lunchtime, and if he needed someone to sum it all
up, I was prepared to say, "We're freaking
doomed!" and be done with it.
Well, I
could see the blood drain from his face as he
noticed that I wanted to interject a comment. Thus
motivated, he quickly got to the point and
answered by saying, "I expect that the demand for
the dollar will eventually plummet as years of
overspending, under-saving and over-borrowing in
the United States eventually take their toll on an
over-valued currency."
He explains,
"Because the dollar is a liability (ie, someone's
promise), the quality of the dollar is only as
good as the assets on the monetary balance sheet.
It is these assets that give the dollar its value,
a recognition based upon the most fundamental
accounting premise that liabilities are only as
good as the assets supporting them. If the assets
did not have value, then the liabilities we call
dollars would not have any value either and would
not circulate as currency. Are these IOUs on the
monetary balance sheet really worth $12,006.7
billion? That is the single question of paramount
importance."
Perhaps this "what is it
worth?" question prompted the astonishing activity
in the banks that FT.com announces with the
headline, "Banks agree $75bn mortgage debt fund".
The laughable details are that Citigroup, Bank of
America and JP Morgan Chase "announced plans for a
fund to buy mortgage-linked securities in an
attempt to allay fears of a downward price spiral
that would hit the balance sheets of big banks."
Hahaha!
The New York Times helpfully
explains that "the effort is intended to help SIVs
[structured investment vehicles] that need to sell
securities do so in an orderly manner".
What these banks are proposing to do is to
collectively put up credit guarantees worth about
$75 billion to $100 billion (or whatever it
takes!) for this new fund, which will be named the
Master-Liquidity Enhancement Conduit (M-LEC).
The Executive Intelligence Review News
Service characterizes it as "Treasury Secretary
Henry Paulson, of Goldman Sachs, and his sidekick,
Treasury Undersecretary for Domestic Finance
("Plunge Protection") Robert Steel, also of
Goldman Sachs, are trying to orchestrate a crazy
$100 billion bailout scheme, which dwarfs the $3-4
billion bailout arranged for hedge fund LTCM by
the Federal Reserve in 1998."
Obviously,
the purpose of the bailout is simplicity itself;
nobody trusts the mortgage derivatives that the
banks have created, which have now imploded and
are revealed as being toxic crap that may not be
worth anything, since the financial instruments do
not have any demonstrated market value simply by
virtue of the fact that they have never traded on
the open market, and so nobody wants to buy them.
Now everybody is sitting on trillions of dollars'
worth of these stupid, mysterious things. What to
do?
And time is of the essence, too, as
Reuters quotes Robert Arnott of Research
Affiliates as saying, "We are coming off the
greatest lending bubble in US history. We will
feel its impact for a very long time."
So,
the Fed and the Treasury have all decided that
they are going to set up a huge special fund, with
untold billions of pretend dollars, drawing in
more investors to which the banks will sell
short-term paper to finance the bailout, so that
the banks can trade derivatives around amongst
themselves, thus establishing their "market
price"! Hahaha!
Suddenly, I realize that I
may be too hasty in dismissing this scheme! This
remarkable idea has given me a terrific business
idea! You are going to love this! You and I will
go into business, see, and each of us will
(believe it or not) sell dog turds back and forth
to each other, priced at the same per-ounce price
as gold! Hour after hour, we will busily sell them
back and forth between us, you buying mine and me
buying yours, thus proving that there really IS a
market for dog turds, and they are provably worth
their weight in gold! We, like these banks, will
both make a fortune! Whee! Hahahaha!
Reuters decided not to report on my
fabulous new Mogambo Business Venture (MBV) or my
new Mogambo Dog Turd ETF, but they did report
essentially the same thing when they wrote, "The
fund that is being contemplated would bail out
funds known as 'structured investment vehicles',
or SIVs."
This comes at a time (as just a
coincidence I am sure! Hahaha!), when "Banks
including Citigroup, Merrill Lynch & Co, and
UBS have in recent weeks announced billions of
dollars in asset write-offs and are still
struggling to sell off billions of dollars in
loans that financed acquisitions globally."
Ooops! If banks can't get rid of their own
turds, then perhaps my own dog turd business may
struggle too! Damn!
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.
Republished with permission
from The Daily Reckoning.
Copyright 2007, The Daily
Reckoning.
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
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