The Howling Wolves of Financial Crisis
Things are so bizarre here lately that I spend all my time in the Bunker de la Mogambo (BDLM), nervously
whining and watching various meters, dials and readouts registering unusual, and scary, seismic economic
activity. With my wife out shopping us into the poorhouse, I am making good use of this sudden lack of
supervision to gobble Halloween candy by the handful. Now I have a stomachache, and my mood is pretty
sour...fearful and sour.
I assume that part of reason I’m fearful is that Total Fed Credit is down again this week, this time by $647
million, which is not a lot, I admit, but a far cry from the customary increases of three and four billion
dollars a week! So if the Fed is not creating excess credit, and hasn’t been for months, where is the
money coming from?
Before you answer, the Fed itself is not absorbing our debt, and their hoard declined by $1.1 billion last
week. The banks unloaded $33 billion in government bonds last week, too.
Hearing the raucous sound of the Mogambo Alert Klaxon (MAK), we rush to the Teletype machine to read
“Alert! Alert! Money had better start coming from some damned where, and pretty damned soon, as you
cannot get rising stock prices, rising bond prices, rising real estate prices and/or rising government prices
without lots and lots and lots of new money!”
After all, it’s not for nothing that Gary Tanashian of biiwii.com reveals, in his essay “Back to Bonds”, the
simple synopsis, “Ours is a system of chronic inflation. In a fiat system, it is growth in liquidity that spurs
economic growth at the expense of currencies.”
And speaking of the price of government rising, from Bloomberg we learn that wherever money is coming
from, it will need to increase a lot more in the future, as “States and municipalities” are asking the
dimwitted voters to approve “a record $80 billion in new bonds. The $80 billion and counting is contained
in 678 separate proposals.”
Sensing a chance to use math - and maybe learn some - I grab my calculator and say “Let’s see: 678
proposals in 50 states. Hmm! There seems to be something there, but what? What could it be?” Soon, I
give up, as the math is obviously too complicated, and I file it under “Suspicious Stuff.”
But an interesting non-math statistic about this municipal bond stuff is that “the amount is a record for a
general election, far eclipsing the previous record of $47 billion that was placed before the voters in
2002.” Thus, in a sudden embarrassment of riches, we not only learn that state and local governments are
idiots and are counting on the idiot voters to cut their own economic throats, but that $80 billion minus
$47 billion is defined as “far eclipsing”! A two-for!
So where is all the money coming from to finance the continuation of the rises in stocks and bonds and
houses and government? Well, for one thing, the Treasury put us another $10 billion in debt last week,
which is a nice piece of change, but foreign central banks only bought up $112 million (“Le chump change”
in French, so I hear) in American government and agency debt. The answer must lay elsewhere.
Instead of just telling you, as a special treat we will take a short field trip, as part of the annual Mogambo
Halloween Scare-A-Thon (MHSAT). Filing off the bus, we soon descend deep into the dark, dank, fetid
bowels of the banking system to get a look at Required Reserves. Fearlessly we wade through stinking,
slimy water, brushing aside vampires and zombies, but our blood suddenly congeals in our veins, like a
big glop of half-melted cheese on a cold hamburger, when our own eyes behold that reserves are now
down to a laughable $40 billion!
You roar “Hahahaha!” with the cold, hollow laugh of the damned. This is the denial stage. Next comes the
fear stage, and, if you are lucky, you will taste the acidic Vomit of Fear (VOF) in your mouth. If you are
not so lucky, you will feel the Bowel Evacuation of Fear (BEOF) in your bloomers.
But not even those social horrors can attenuate the shock of finding out that the banks are so massively
over-leveraged, that they have a measly $40 billion as reserves against $5.5 trillion in savings?
Hahahaha! (Again with that cold, hollow laugh of the damned).
My hands involuntarily clench and my eyes bug out in disbelief to think that a measly $40 billion as
reserves against a whopping $5.5 trillion in depositor liability is a trifling $0.0073 per dollar! Two-thirds of
one freaking cent!
And with a gigantic $6 trillion in the loans and leases portfolio of the banks, these “assets” only have to
decline by a trifling 1% in price to wipe out their entire reserves! Hahaha! This is the level of absolute,
ruinous insanity that reigns in the banks!
I suddenly hear wolves howling in the distance as I contemplate the significance of almost-zero reserves,
and it is an ominous, ominous sign, as signified by the, you know, wolf thing and the eerie howling and
With a weary sigh of despondent resignation and utter dismay, the camera zooms in for a dramatic close-
up of the Lips of the Mogambo (LOTM) as he says, for the ages, “Thus, the ugly truism, ‘All financial crises
originate in the banks!’”
I am proud to announce my fabulous new Mogambo Theory, which I call the Mogambo Theory Of Economic
Spaghetti (MTOES). The best way to explain it is to imagine that you are sitting at the table, having dinner
with your in-laws, in your new clothes, and you are eating spaghetti. Being the careful little person that
you are, you put on a bib to protect your clothes, and you position your napkin in your lap just perfectly
so, and you try to eat very carefully and slowly, instead of wallowing in your food and gobbling it down
with your bare hands like you do at home, making those disgusting, pig-like slobbering sounds and
listening to your family yelling “Ewww, dad! Gross!” In short, you have taken every possible, prissy
precaution to protect yourself.
Like most economic systems, the situation is usually in hand, bite after bite, and everything is fine, even
when her dad asks about my “intentions” and “future plans” concerning his daughter, since we seem to
survive by borrowing money from him, and I almost choke to death on a meatball as I angrily think to
myself “You want the truth, old man? You can’t handle the truth!”
Then “it” happens! Without warning, some errant combination of unseen forces, some remarkable
coincidence of unpredictable vectors, occurs, and a tiny, little, eensy-weensy drop of red sauce is
suddenly, and mysteriously, propelled up, up, up in a perfect parabolic trajectory, vastly exceeding the
statistical averages of “droplet splatter dispersion”, and, arcing up and out, lands (blip!) on the sleeve of
my, I mean your, shirt - one, single, tiny red dot of marinara sauce in an ocean of crisp whiteness and
This, then, is the fabled chaotic and destructive “fat tail” of probability distributions, and it is the random,
improbable, wildly-chaotic event that causes the messing of a shirt, the failure of Long Term Capital
Management, and all of the other systems based on probability that exclude the guaranteed statistical
certainty of a catastrophic event of some kind, especially ones with so infinitely many variables.
The only other 100% sure-fire thing in economics is the probability that an economic system based on the
over-creation of fiat currency and/or insane levels of fractional-reserve banking credit, will implode; just
as they have imploded every time in history that they have ever been tried by a government that is so
brain dead, or so ignorant, or so insane, or so corrupt as to try it, given the absolute, provable certainty
that trying it is guaranteed to fail and cause, as it always seemed at the time, unimaginable suffering,
ruination and misery.
From Bloomberg.com we learn that the Commerce Department reported that “disposable income, or the
money left over after taxes, rose 0.5 percent for a second month. The gain left disposable income up 5.9
percent from the same month last year. Adjusted for inflation, last month’s 0.8 percent jump in disposable
income was the biggest in a year.”
I guess it all depends on how you define “income”, because the people I know who have only earned
income to live on are telling me that they don’t see any increases in their wages, which sounds ominous,
until you realize that the only people I know are the ones I met in a holding cell or one stupid court-
ordered therapy group or another, and so these people are, like me, anti-social scumbag pieces of human
trash with paranoid tendencies and multiple personalities (three, if you count Invisible Dave), so it’s not
surprising that we are not getting raises, and, indeed, the surprising thing is that we have jobs at all!
But if you include as income the income from governments increasing spending, and governments paying
more interest dollars because they have been issuing more debt, and if you include the increase in
incomes by CEO’s making insanely huge salaries, involving hundreds of millions, if not more than a billion,
in salary and benefits and options and outright gifts...then okay, incomes are going up.
But the Commerce Department is not interested in my choice of friends, probably because every secret-
police government agency already has all that information on file. They just go on to say that there was a
0.1% rise in spending, and that incomes were up 0.5 percent.
That all sounds nice, but alarmingly, “the report’s price gauge tied to spending patterns and excluding food
and energy costs, the Fed’s preferred measure, was up 2.4 percent from September 2005, down from a
2.5 percent year-over-year increase a month earlier.”
John Williams, of shadowstats.com says “The ‘improvement’ all was tied to year-ago CPI comparisons that
were distorted by the effects of Hurricane Katrina. Those effects and distortions will reverse in the months
If you have still not moved into gold, perhaps you will reevaluate your position when erudite reader David
W. says that you can extract some very good advice from the movie “A Beautiful Mind.” He writes, “The
fact is that the spontaneous re-monetization of the precious metals is a Nash equilibrium. What this
means in English is that an ideal financial strategy for everyone on Earth is to buy as much gold and silver
as they can, as soon as possible.”
Or if you don’t want to steadily, and boringly, increase your wealth, but just want to know how to trade
gold with technical analysis, then the Aden sisters at AdenForecast.com have just what you need, although
they do not have, I am sorry to report, what I need, which is free calendars with pictures of pretty ladies
in skimpy bathing suits smiling at me with that wicked “come hither” look in their eyes.
I was kind of surprised, too, since they were ladies themselves, and so it seemed kind of a natural for
them to innately understand what creepy degenerates like me are looking for in a quality investment
But they don’t even talk about the calendar thing or how they called the cops on me because they were
“creeped out” by my innocent inquiry, but instead get right to the lesson when they say that “gold’s 65-
week moving average is the most important indicator to follow. It’s been excellent in identifying gold’s
As proof, they report that “gold has been above this moving average since 2001 and it’s kept us on the
right side of the major rise since then. As long as gold stays above this average at $549, it’ll continue
signaling to stay with gold.”
Jealous that these ladies are getting all the attention in spite of that whole calendar fiasco, I suddenly
jump in to interrupt them so that I can glory in a little attention for a while. I pipe up, “And if you are
using the technique of dollar-cost-averaging, whereby you invest the same dollar amount each month,
then you are consistently buying more when it is cheap and buying less when it is more dear, as long as
the trend continues.”
I look over and I can see them standing there dumbfounded, their mouths hanging open in astonishment
at my rude and completely unexpected interruption. Interpreting that to mean “Fascinating, Mr. Mogambo!
Please tell us more!” I happily go on to my conclusion. “And that, my Darling Mogambo Cherubs (DMC), is
how successful investing is done over the long haul, whether in gold or anything else!”
One reason that I am laying low these days is not just because of that unfortunate “misunderstanding”
with Miss Mighty Aphrodite at the, “Wet, Wicked Women, Writhing and Wrestling Night” at a local
gentleman’s club (mott “Ladies drink free! Skanks, too!”). The bigger reason was that John Williams’s
Shadow Government Statistics has graphed out what he calls the “SGS Alternate Consumer Inflation
measure, which reverses the methodological gimmicks of the last 25 years or so, plus an adjustment for
the Clinton-Era geometric weighting that is not otherwise accounted for in BLS historic bookkeeping.”
A look at the graph clearly shows that inflation, measured the old-fashioned way, bottomed in 1982 (at a
little over 2%, which is still very bad), has trended continuously up since then, and is now currently off its
peak of about 11% inflation, and is actually “only” about 9% right now. If you feel faint, then
congratulations; you comprehend the gut-wrenching enormity of that statistic.
Gasping for air, we listen as Williams goes on to say that the government’s “reporting based on generally
accepted accounting principles (GAAP) - due for release in mid-December - also should show
deterioration, with the actual 2006 deficit in excess of $3.5 trillion.” An annual, accrued government
budget deficit of $3.5 trillion? And people are dialing 911 because they think I’m crazy for screaming,
“We’re freaking doomed!” at 2:00 A.M.? There is no justice!
Perhaps this is why the Matt Crensen article, “GAO chief warns economic disaster looms” on Yahoo.com,
made such a splash with so many people. But beyond that headline, Mr Crensen writes, “What they don’t
talk about is a dirty little secret everyone in Washington knows, or at least should. The vast majority of
economists and budget analysts agree: The ship of state is on a disastrous course, and will founder on the
reefs of economic disaster if nothing is done to correct it.”
Well, I got some Bad, Bad Mogambo News (BBMN) for this “vast majority” of economists, budget analysts,
and this Crenson guy, too - nothing can be done. We are, to use the proper scientific term, screwed.
And the proof is simplicity itself; if something COULD be done, someone in all of history would have
thought of it by now, as they have all, at one time or another, been in the throes of this exact same, sorry
economic situation; that of a huge government needing hugely more money. And although everyone
furiously tried everything they could think of, including ruinous taxation, robbing the Jews, the churches or
the nobility, and even declaring war on another country to confiscate their wealth so that they could pay
some bills - nothing worked. Nothing. Nothing has ever worked. And it won’t this time, either.
Bill Bonner at Daily Reckoning.com says “The Dow is higher; but the dollar is worth less, and gold is worth
a lot more. In order to keep up with the dollar index, the Dow would have to be at 15,000 to be even with
And since in Mogambo Land we like to talk of gold...what of gold? Mr. Bonner obligingly says “In order to
keep up with gold, the Dow would have to trade at 23,000.” Hahahaha! Thanks! Go gold!
Mr. Bonner, apparently gratified that I am so easy to please, and thinking that maybe I’ll go away soon if I
get freaked out, cruelly adds “What’s more, a couple of analysts at the Fed just looked at inflation in a
new way, which they consider to be a better reflection of actual price trends. What they found is that
consumer price inflation is under-estimated by about 30%. Instead of 2% inflation, they say, the real level
is about 3 percent. If so, it makes the Dow an even bigger loser in real terms.”
Gaaaahh! And, even worse, as we march into the future, inflation will march right along with us, “moving
the goalpost.” So, when will the graphs of the nominal Dow and the inflation-adjusted Dow cross, you ask?
I bend over to look into your eyes, and I say, “Almost assuredly never, or for the rest of your life, which
is, as far as you are concerned, the same thing.”
As if there is not already a burgeoning demand for, and a falling supply of, silver, reflected in its rising
price, reader Robert B writes “I work in an electronics factory, and the new lead-free solder we are
moving into is made of silver. Well, 3% by weight, the remainder being tin and a small bit of copper. The
European Union is going to lead free, so U.S. electronic manufacturers are switching to lead-free solder to
sell to that market. They also fear that California will go that route soon.” Three percent by weight! Wow!
The Commerce Department said the drop in house prices “was the biggest decrease since an 11.2 percent
year-over-year drop in December 1970. The median price was the lowest since $211,600 in September
What makes this so especially chilling is that in the MoneyWeek.com newsletter, we learn that RH Asset
Management says they have looked at the “S&P composite lagged 12-months compared to the NAHB
House Index. This chart shows an extraordinary 0.79 correlation!”
Using statistics to advantage, they note that “If that level of correlation were to continue, then there is
only one way for the American stock market to go - down - big time!”
Beyond that, they offer even more practical market lore when they say “We are now in the fifth month of
Dow Theory non-confirmation. The new highs set by the Industrials have still not been confirmed by the
Transports. This ongoing non-confirmation is an indication of potential trouble unless, before too long, the
Transports confirm the new highs of the Industrials.”
To leave no stone unturned, they also emphasize the importance of the inverted yield curve; when they
appear, they are usually followed by “recession with an average lead in time of nine months.”
I thoughtfully stroke my chin and say to myself “Hmmm! The yield curve has been inverted a long time!
We must be getting to the end of that ‘average lead time of nine months!’” But before I could blurt it out,
they say “If there is to be a recession in the United States next year, and we are pretty convinced there
will be, then the stock market will have declined before the recession.”
Before I can ask myself why this is, they provide the answer to my unvoiced question by saying that “the
stock market declining is part of what causes a recession, not the other way round.” Hmmm! An
The article “America and the Dollar Illusion” by Gabor Steingart in Der Spiegel magazine has caused some
stir, and rightly so. It is a very good summary of the ugly economic situation, but beyond that, he also
says “Arguably, the imminent economic crisis is the most thoroughly predicted one in recent history.
Rather than refuting the crisis, the current U.S. economic boom merely heralds it.”
I look out over the class, and I see them scratching their empty little heads, wondering “Huh? How can an
economic boom herald a crisis?” Naturally, I was soon rising to my feet to launch into my classic
Mogambo Cause-And-Effect (MCAE) lecture, where I scream insults at everybody for being so stupid that
they can’t comprehend the simple, basic fact that busts follow booms because of the boom, and if there
was no damned boom to start with, then there would be no bust, and there would have been no boom if
the damned Federal Reserve hadn’t let the banks create the money to pay for it all!
I was planning on calling them “slope-browed troglodytes”, which I thought was pretty funny, and which
would have been the only funny thing about this whole sorry economic mess.
So I was actually salivating at the prospect of insulting and belittling the class, but when I went to wipe
the spittle from my lips with my shirtsleeve in preparation for the assault, this Steinart guy jumps in and,
taking us into an entirely new direction, says “Biologists have observed similar phenomena in plants
contaminated by toxins. Before they wither, they produce one last batch of healthy shoots - to the point
that they can hardly be distinguished from healthy plants. Some speak of a panic bloom.”
Panic plant bloom! Panic market boom! Markets emulating nature! How intriguing!
Mike Shedlock of the Whiskey & Gunpowder newsletter notes that “Bill Gross’ $97 billion Total Return Bond
Fund has gained 2.5% this year” and the “$5.2 billion Fidelity Government Income Fund has earned 2.16%
so far this year.”
I can feel a laugh coming up, bubbling up from deep, deep down, as the people who have stupidly piled
into these two massive bond funds, driving down the yield of bonds as their mindless money cascaded in,
have lost buying power, thanks to inflation! Hahaha! They can buy less now than they could when they
invested the money in the first place! Hahaha! Morons! Big, stupid morons! Hahaha!
But Mr. Shedlock is far too classy for that kind of rude insult stuff, and instead, calmly and reservedly
says, with an unmistakable touch of aristocratic breeding, “Enquiring minds might be wondering how it is
remotely possible for a government bond fund to be up only 2.16-2.5% so far this year. After all,” he says
with a sneer of contempt, “anyone parked in three-six-month Treasuries would be up 5% annualized or
so.” Hahaha! Good one, Mike! I mean, Mr. Shedlock, sir!
Richard S. sent an InformationClearingHouse.info item titled “Rigging the Market; the Secret Maneuverings
of the Plunge Protection Team” by Mike Whitney. He writes that “Some people believe that the
government has no right to interfere in the activities of ‘free markets’. Others think it is a prudent way of
staving off economic collapse. Still others believe that the intrusion of government, aided by the privately-
owned Federal Reserve and the NYSE, naturally favors the larger institutional investors and creates an
uneven playing field for small investors.”
What do I think? Hmmm! I quickly review all these options, so that I can pick the one I like the best, at
least superficially, whereupon I would then heap ridicule on anyone who dares to disagree with me by
stupidly selecting another of the choices.
So I am still narrowing my choice down (“Which one could end up with me in charge?”) when he says that
I am wasting my time, as “Whatever side one is on, it is proof-positive that ‘free markets’ are merely a
public relations myth with no basis in reality.” Hahaha! Good point!
Doug Noland in his Credit Bubble Bulletin at PrudentBear.com writes that Bloomberg reports that
Australia’s consumer prices rose at an annual rate of 3.9 percent. And I can tell you that it is bound to get
a lot worse, because their money supply is still expanding at double-digit rates.
And the weird weather will continue to be weird, as he relays a Bloomberg item to us which reports that
the “El Nino weather conditions, which can cause drought in the Asia-Pacific region and flooding in the
Americas, intensified during October, Australia’s Bureau of Meteorology said today.”
And from the Economist magazine we learn that the world-wide damage caused by the El Nino last year
means that inflation in food prices is heating up, as “Led by higher grain and soya prices, our food index
has reached a nine-year high. Drought will cut Australia’s wheat harvest by more than half in 2006-07.
End season stocks will be the lowest for 29 years.”
David K. sent me the item that recently aired on the Colbert Report TV show. In it he asks, in part two of
his interview with Dr. Peter Agre (Nobel prize-winning chemist), “Is there a Nobel prize for throwing your
Dr. Agre is reported to have said “Yes, I believe it’s the Economics prize”. Hahahaha! Good one! And as
you can gather just by looking out of your window and judging by the terrifyingly, egregiously bad results
of the ministrations of the current crop of university-trained economists who have seized control of the
banking system here and around the world, he is absolutely right. Well, if not actually throwing it, then
wallowing in it, anyway. Ugh.
****Mogambo sez: Scared? Tired? Tired and being scared? If so, then buy more gold and silver bullion. If
not, then you will be, so buy some gold and silver. Either way, I think you get the message.
And, lest I forget, get some oil, which is destined to rise as the dollar falls, if nothing else.
www.dailyreckoning.com" target="_blank">-> www.dailyreckoning.com
Most you probably think I'm one of the most paranoid people you've ever met, although you seem to put up
with me because . . . why?
Just remember when things go into the crapper, someone tried to warn you.
I will have to come back to that one.