-->Money Out Of Thin Air

The Daily Reckoning

Paris, France

Monday, 15 December 2003


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*** Saddam is finished... is the rally over, too?

*** Gold up... dollar down...

*** Producer prices fall in November... more on Euro-
snobs...

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"FINI!" says the cover headline on today's Liberation.

The man in the picture looks like any one of the thousands
of subway bums in Paris: Pathetic. Worn out. Helpless.

But before we had a chance to feel sorry for the poor man,
the paper announced that he was the object of so much of
the world's attention for the last 6 months - Saddam
Hussein.

Daily Reckoning readers are likely to be offered a little
more of the enemy's flank today. Stocks, bonds and the
dollar might rise nicely on the news of Saddam's capture.
'Sell!' is our advice. Saddam's regime may have posed no
threat to U.S. security, but his capture could well be one
of those decisive irrelevancies that mark the end of a
trend.

We could never quite get in sync with it, but all America
seems to hate Saddam and love debt. Hardly a single voter
ever met the man, but the Butcher of Baghdad is universally
- and no doubt deservedly - loathed. By contrast, Americans
have had plenty of introductions to debt, and rarely did
they come away unimpressed. Practically every encounter led
to an intimate affair of some sort. Now, while Saddam
provides a distraction, what better time for the lover to
stick a knife in their backs?

Unless Saddam can find a bucket of anthrax
somewhere... there is not likely to be much more good news
out of Iraq, Washington, or anywhere else. No more tax
cuts. No more spending increases. No more rate cuts.

We have been watching the stock market rise... and the
dollar fall... for the last few months. It all seemed so
gentle, so sweet. As if breaking records in new debt, in
federal deficits, in trade imbalances and bankruptcies made
no difference whatsoever. Somehow, it would all turn out
all right, like a romantic comedy with a happy ending.
America's incredible trade deficit might be resolved by a
lower dollar... the stock market might rise steadily, in
keeping with corporate profits... and the economy - isn't it
already in recovery? The lumps could leave the theater with
light hearts and empty heads.

Hmmm...

And now Saddam has been captured. Now, the way is clear to
build a model democracy in Iraq. Heck, if it works, we
might try to import it back to Washington.

This pleasant delirium... the intoxicating jig of democracy-
building... rising stocks... increasing debt... and a gently
falling dollar... will have to end sometime. Why not now?

Meanwhile, Addison brings more news:

-------------

Addison Wiggin, writing in Paris...

-"Ladies and gentlemen, we got him!" said the U.S.
military commander in Iraq yesterday. Already today, the
European and London lumps have punched the air, shouted
"Yes!" and added more than 1% to their indices in
celebration. With the Butcher of Baghdad's bearded mugshot
in Monday's press, the euro dropped sharply in early Asian
trade overnight.

-"Saddam Capture Sure To Boost Markets," says a headline
at CBSMarketWatch.com. So sure is everyone now that markets
will get a"boost," we can't help but pass on the warning
offered this morning by Dave Lewis at Chaos-onomics: beware
the"ego trade."

-"Of the many ways I discovered to lose money in this
game," says Lewis, a former hedge fund manager who has
since retired to the woods of Upstate New York to
contemplate his navel and trade his own accounts,"one of
the more seductive occurs when a news item, which I believe
has positive (or negative) implications for a market, is
released and the market, after moving in the direction I
expect, reverses, while my view remains stable. This sets
up the classic ego trade, 'this news is so clearly positive
(negative) that I'm just going to double up.' Who knows how
the big money will be using this catalyst to reposition, if
at all, or even what other political events might also be
catalyzed by the event. Better, I think, to let the dust
settle a bit before leaping in and forming a concrete
judgment."

- Back in March, when daisy-cutters were laying waste to
dunes in the desert, U.S. blue chips enjoyed their longest
rally in over two and a half years. London's FTSE 100 shot
up from a 7-year low, adding more than 17% in just 10 days'
trade. Even the pacifist Eurolumps from the chocolate-
making countries loved the gunfire. On 21 March, the U.S.
announced a"massive escalation" of aerial bombardment; the
German Dax put on 4%, while the cheese-eaters in Frogland
added 3.4% to the CAC 40.

- But there's the rub. In March, Western stock markets were
re-testing lows from October of last year. Investors seemed
happy to buy and hold for a"death dividend." Only, they
forgot to get out. With Saddam and his beard now safely
behind bars, there isn't much bull left in the War on
Terror.

- As you might expect, the dollar rallied overnight in
Asian trade - all the way back to $1.22 against the euro! A
puny little gain of just one penny. Your editors, holed up
in the Paris office, were hoping that with Saddam's hairy
derrière in the hoosegow, the price of Bordeaux would roll
back to more acceptable levels. Alas, the Butcher of
Baghdad is no match for the two-headed ghoul that has been
stalking the dollar of late: the"twin deficits - fiscal
and trade." Expect the dollar to begin running scared
again. Soon. Maybe even today.

-"Consumers Turn Gloomy Despite Good News," Reuters tells
the world this morning. The almighty U.S. consumer - savior
of the world's only growth engine - has failed to impress
with his Christmas shopping. And the preliminary reading
from the University of Michigan Consumer Sentiment
indicator indicates the index will drop to 89.6, rather
than rising to 96 as many economists expected."This result
is hard to believe," Stephen Stanley, senior economist with
RBS Greenwhich told Reuters. Stanley suggested the index
was out of sync with the other bullish numbers being spewed
forth by the financial media.

- Perhaps. Or... could it be that we're not giving the debt-
doused American consumers the credit (sic!) they deserve?
Is it possible that they are as skeptical of the 'recovery'
scenario numbers as the gloomy gusses who pen the Daily
Reckoning?

- If so, our fellow gloomster, Stephen Roach at Morgan
Stanley, thinks he's found an explanation. Roach:"This
jobless recovery has just celebrated its second
anniversary. Never in the modern-day history of the U.S.
business cycle has there been such a profound shortfall of
hiring. For months we've been hearing that's about to
change. The recent sharp acceleration in the U.S. economy,
in conjunction with a modest improvement on the overall
hiring front in the past four months, have led most to
believe that an old-fashioned hiring-led recovery is just
around the corner. Don't bet on it. The global labor
arbitrage tells me there's something new and big going on
that will continue to defy the optimistic spin that is now
being put on a still very sluggish American labor market."

- The 'job picture' remains uncertain, and yet, we learned
Friday that current account deficit
widened... significantly. The U.S. trade deficit for the
first ten months of this year came in at $409 billion...
just $9 billion shy of last years historic $418 billion.
The"politically sensitive" Chinese current account deficit
lept up to $13.6 billion for the month of October.

-"Oil stocks were muted on expectations the crude price
could recede," says FT.com of this morning's London trade.
Ah yes, black gold. New York's benchmark crude contract for
January delivery added $1.20 to $33 last week.

- OPEC ministers are blaming speculators - and why not?
America gobbles up one-quarter of the world's daily oil
production, but only has 2% of its reserves."[The price]
is on the high side, but not too high, bearing in mind the
decline in the U.S. dollar", the UAE oil minister told the
Tehran Times."Our revenue (purchasing power) has lost 20
to 25 percent since the beginning of this year. What we
gained in terms of oil prices, we lost in terms of
currencies."

- There's a way round this, of course: stop quoting oil in
dollars.

- As we mentioned on Friday, Reuters reported OPEC
Secretary General Alvaro Silva saying,"There is talk of
trading crude in euros. It's one of the alternatives,
either that or a basket of currencies. It is possible that
the organization will discuss this and take a decision at a
given time." But today, the Tehran Times reports Saudi oil
minister Ali al-Naimi in Cairo saying:"Nobody is talking
about the euro... As far as I know I have never said
anything about the euro."

- Well, at least that's clear. There is talk of trading
crude in euros, but nobody is talking about it.

-------------

Bill Bonner, back in Paris...

*** Our new friend Gregor sends this note about the minutes
from the Fed meeting released Friday:

"Based on the wonderful news that the job market may not
recover until the end of 2005 or later (Fed minutes), the
market surged! Obviously none of these investors are
looking for jobs, like my son, a software engineer with a
PhD who has been unable to find employment in 2 1/2 years!
Apparently one trillion dollar deficits do not worry the
Fed. They also subscribe to the wonderful notion that we
have no inflation (only prices are going up!)

"Here are the two main excerpts from the minutes of the
Fed's meeting that spurred a large jump in Treasuries and
helped to catapult the Dow Jones Industrial Average above
10,000:

"'On Employment:

"'Looking ahead, members generally anticipated that an
economic performance in line with their expectations would
not entirely eliminate currently large margins of
unemployed labor and other resources until perhaps the
latter part of 2005 or even later.'

"'On Inflation:

"'In their review of the outlook for inflation, members
emphasized that the prospects for persisting slack in labor
and other resources in combination with substantial further
increases in productivity were likely to hold inflation to
very low levels over the next year or two.'

"In the minutes, the Fed basically said that it expects
resource utilization to remain low for the next one or two
years, resulting in a 'very low' (sic!) inflation rate and
requiring little in the way of future interest rate hikes.
The minutes fit the view of those who believe the Fed won't
raise rates until 2005, and they put a timeline on what the
Fed might mean by 'considerable period.' The minutes
assuaged concerns that developed in the bond market after
Tuesday's FOMC meeting, when the Fed indicated it was less
worried about risks for further disinflation and was more
confident about the economic outlook!"

*** Another Daily Reckoning reader:

"I've enjoyed the 'euro snobbiness' bits about the
difference in attitude, appearance and capabilities of
European workers and airport experiences. I'm afraid I have
to agree w/the writer. Every time I travel abroad and come
back to the States, it's as different as day and night. Why
don't more Americans see this or at least acknowledge it?
Call it Euro or Asian snobbiness if you want, it's true and
I'd rather be surrounded by well-mannered, well-spoken,
friendly and competent foreigners then rough, gruff, rude,
crude, incompetent Americans."

***"Talk of spreading democracy looms large in the
National Security Strategy," writes George Soros in
Atlantic Monthly."But when President Bush says, as he does
frequently, that freedom will prevail, he means that
America will prevail.

"In a free and open society, people are supposed to decide
for themselves what they mean by freedom and democracy, and
not simply follow America's lead. The contradiction is
especially apparent in the case of Iraq, and the occupation
of Iraq has brought the issue home. We came as liberators,
bringing freedom and democracy, but that is not how we are
perceived by a large part of the population. It is ironic
that the government of the most successful open society in
the world should have fallen into the hands of people who
ignore the first principles of open society. At home
Attorney General John Ashcroft has used the war on
terrorism to curtail civil liberties. Abroad the United
States is trying to impose its views and interests through
the use of military force.

"The invasion of Iraq was the first practical application
of the Bush doctrine, and it has turned out to be
counterproductive. A chasm has opened between America and
the rest of the world."

*** Back at home...

"I've got to find a new school for Edward... and I'm worried
about Jules..."

Elizabeth worries about education. Her husband disapproves
of it.

"And you're not helping at all with your casual attitude.
Jules is goofing off in school. You've got to encourage him
to do better or he'll never get in a good college.

"But he'll get into whatever college he wants to get into,"
Dad replied, making it worse for himself."If he wants to
go to a top school, he knows he has to work hard to get
good grades and do other things that make him an attractive
candidate. So, if he doesn't work hard to get good grades,
it means he doesn't really care about getting into a good
school. Which is okay with me, because I don't really think
it really matters. What matters is that they come out of
school with self-confidence, courage, ambition and
intellectual curiosity."

"Yes, but good schools help develop those attitudes..."

"Maybe, maybe not. Remember that story of the old Black man
in Alabama who had become a millionaire by building a bank
during the Jim Crow era. He had barely gotten to the 8th
grade. So a reporter asked him how he did it. He said:
'When you've got no education, you've got to use your
head.'"

"Well, good for him. But most people need to be encouraged
to use their heads... and the better they do in school the
better they use their heads... and the better colleges they
get into, the better they do in life. So, please keep your
contrarian comments on education to yourself and help me
nag Jules to do his homework..."

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The Daily Reckoning PRESENTS: The exponential explosion of
dollar-denominated credit... through the"miracle of
fractional banking"...


MONEY OUT OF THIN AIR
By the Mogambo Guru

Foreign central banks are shifting into overdrive on their
holdings of U.S. debt last week, as evidenced by their
balances at the Fed increasing by $9 billion to a new
record. Hahaha! Dorks!

Just to show those jerk foreigners that they haven't
cornered the market in stupidity, U.S. banks also bought up
a nice $4 billion themselves!

But, and if you really want to see something scary, walk
with me over to where the Treasury holds sway, and we will
cling to each other in fear and whimper pitifully as we
watch vile specters swirl around us, and we note that they
issued another $17 billion of debt in the same short week!

The whole scene reminds me of the end of the movie"Raiders
of the Lost Ark," where our intrepid hero, Indiana Jones
and his perky girlfriend are bound to a post, and the Nazis
are opening the Lost Ark of the Covenant and all those
angels are swirling around. At first the specters are
beautiful and friendly, like what happens when you first
start printing money and creating excess credit. Everything
is wonderful and lovely! Then, right before our very eyes,
the angels metamorphose into shrieking, devouring demons,
and everyone is killed and the earth is swept bare, except
our hero and his lovely sidekick.

But getting back into something more attuned to reality as
it really exists, we note that the Fed increased raw,
fungible credit by $5.8 billion, too! In one week! And, I
might add, to a new record, another new all-time new high,
never before seen since the inception of the entire Federal
Reserve System! A veritable avalanche of raw, naked credit,
the original high-powered money if ever there were such a
thing, the fabled Money Out Of Thin Air of story and song,
money that can be multiplied by almost a hundred-fold, a
thousand-fold, a million-fold, a zillion-fold, all through
the miracle of fractional banking!

I say this even though people at the supermarket always
look at me like I have lost my mind when I stand by the
checkout counter and tell them about it, because taking a
very, very rough estimate of the multiplier, I look at
Required Reserves, $41.64 billion, and divide that by
Savings/other Deposits of $4084.8 billion. And what happens
when you do that?

Well, if you are like me, and you have my powerful skills
with calculators, then you get some weird series of answers
because you did something wrong with all those confusing
buttons and then, in desperation, you finally ask someone
who is just walking by to please use come over here and
figure this damn thing out for me, then we get the
surprising answer of 0.01.

This means that for every dollar of deposits, banks
actually have only one cent of reserves in case people come
looking for their money. Okay. Now, taking a look at Total
Assets of the U.S. banking system, we find roughly $4,381
billion. And when we compare that to the reserves of $41
billion, it is, likewise, one puny cent of reserves against
a dollar's worth of some of those loans going bad.

That one cent in reserves, that one measly penny, is
backing up both a growing contingency of souring loans
going bad, AND people wanting their money! Whew!

And now, as part of your homework for today, I want you to
go and get a textbook, any textbook, on economics, and look
up the authors' example of fractional reserve banking. What
is the standard amount of reserves that THEY use to
illustrate the use of fractional reserves? Ten percent!
They, meaning guys who write textbooks, would have an
entire dime's worth of reserves for every dollar of
deposits! And we have, in real life, a lousy penny! A
penny!

And if you spend any time reading that section, you will
note that nowhere in the text do the authors of those
textbooks ever imply that reserves would get down to one
lousy penny! Does that imply something to you?

And why is this possible, anyway? Because we have a fiat
currency, and a guy named Greenspan who will stoop to
anything, and another guy named Bernanke and his printing
press, and if the banks ever need any money, for anything,
they can just let those two know, and they and their
Federal Reserve will just - presto! - print up some credit,
and buy the holdings of the banks, which also went up last
week, as I noted above somewhere. In short, they commit
monetary fraud on a grand scale.

They will even print up actual currency! Which I add with
that hysterical arching of my eyebrows and high-decibel
voice, arms flailing about like my arms were on fire,
although without the leaping up and down because the old
knees aren't what they used to be, they did just that, last
week! Again! They printed up $4.4 billion in cash! Dollar
bills! And they have printed up, in the last year, $38
billion! Lovely stacks and stacks, pallet after pallet, of
tens and twenties and fifties and hundreds! About $138 for
every man, woman and child in the whole country.

$4.5 billion in one week doesn't sound like that much, I
admit, but it is for one lousy week, and can't you see
where this is headed? Now imagine not just one week, but a
month's worth of $4.5 billion weeks, a year's worth of $4.5
billion weeks, a decade's worth of $4.5 billion weeks! It
adds up!

And you think, and pardon me while I try and stifle this
laughter, that the dollars that you are putting away today
- tee hee! - into your retirement plan - giggle! - are
going to maintain their - snort snort! - purchasing power
when you - hahahaha! - retire? Pardon me, but
hahahahahahaha! I can't help myself! Hahahaha!

Wiping the tears away from my eyes, my ribs really hurting
from all that laughing, I note that the Federal Reserve and
the Treasury are debasing your money right in front of your
eyes, and yet you think - hahahahaha! - that when you
retire, every one of those dollars you are depositing today
will be every bit as valuable years and years from now?
Hahahaha! And you admit that you are watching the Fed and
the Treasury debasing your money right in front of your own
eyes, week after week after week, and yet you STILL believe
that a dollar today is the same as a dollar tomorrow?
Hahahahaha! Stop! Stop! You're killing me! Hahahaha!

Now far be it from me, taking a long breath and trying to
calm down and be serious for a minute because I am such a
classy guy deep down, to suggest that there is any
connection at all between the Fed creating money out of
thin air to buy up government bonds, and thus effectively
extinguishing the debt through that particular fraud, and
the fact that the banks suddenly decided to acquire more
government bonds. Must be a mere, umm, coincidence.
(Hahahaha! Now I'm killing myself!)

So, in one stellar example, we have all had a good laugh, I
have demonstrated the perils of a fiat currency, the danger
of fractional banking, related it all to"Raiders" (which
is a helluva good movie, a classic, really), and now I've
predicted that we are all going to die, except for the
PWOG, which is an acronym for People Who Own Gold, because
you know what a sucker I am for acronyms, especially silly-
sounding ones, because things are going to get really,
really ugly one day real soon, and this may be the only bit
of levity that we get out of it.


Regards,

The Mogambo Guru,
For the Daily Reckoning

P.S. Doug Casey, editor of the newsletter International
Speculator, thinks that"the precious metals are the only
place to be. But I've said for years that, this cycle, gold
isn't just going to go through the roof. It's going to the
moon."

Man! As a guy who has a little gold, and my wife has some
gold fillings in her teeth that I have had my eye on, and
which I am including in my pathetic net-worth calculations,
this kind of happy-talk about gold being in a record-
setting bull market mania really appeals to me in the
greedy, I'm going-to-be-so-rich-I can't-wait way. If you
had listened to the Mogambo and bought some gold, too, then
you would also be doing a little dance and singing"We're
in the money! We're in the money!" Well, maybe not quite
yet. But soon!