Negative Monetary Inflation: Everyone Pays and No-one Benefits


I am nervously looking through the periscope of the Mogambo Bunker Of Ultimate Defensive Posture (MBOUDP), currently outfitted with the optional Awesome Offensive Capabilities Package (AOCP), and I am surveying the smoking carnage in the financial landscape bemusedly.

Investors who are still sitting on their stocks apparently have a Big Undying Belief (BUB) in the ability of the Fed, Wall Street and the Plunge Protection Team (that was created by an Executive Order issued by President Ronald Reagan to “manage” any stock market “surprise”) to keep the markets from falling, or are very stupid, or are all playing with someone else’s money, or are whacked out on drugs either prescription, over-the-counter or illegal (or all three at once), or something even more bizarre, like believing in the complete absence of counter-party risk in the hedge “insurance” provided by buying enormous amounts of mysterious derivatives at huge degrees of leverage.

And stockholders are screwed anyway, because even if everybody sells all their stocks, where in the hell do they put all that money? They have to put it into bonds, just because there is no other market so big that it can absorb so, so, so damned much money! And central banks of the world are making more money and credit all the time, too, to add to the pressure!

Thus the yield on all US Treasury debt fell to less than 5% last week when the stock market sold off and all that money went into bonds. This “flight to the safety of US bonds” is a Very Poor Move (VPM) because, thanks to, we know that consumer price inflation (as measured by the old-fashioned way of measuring the increase in consumer prices) is running at around 10% (or more!) right now!

So, by buying bonds, these yahoos are getting a nominal yield of less than half of the rate of inflation? Out of which they have to pay a lot of taxes, commissions, fees and expenses, so that they actually end up losing money at a rate that is nearly triple – TRIPLE! – the bond yield that they are buying? Hahahaha! What morons!

This is the modern way to “make money”? They think that they are making money by literally losing three times as much purchasing power as they are making? Hahahaha! This is the best that “investment professionals” can do? Hahahaha! We’re freaking doomed! And your retirement account is in the hands of these guys? Hahaha! YOU’RE freaking doomed!

Okay, okay, I admit that is not really fair, as federal rules require that they remain fully invested, and that means that they can’t sell even if they wanted to, which gets back to the absolute arrogance and stupidity of the people we elect to Congress (except Ron Paul) who made these laws, and the average American idiots who, even knowing this, keep putting their money into these investments! Hahahaha!

Well, as wrong as they are about that, they are even more wrong when they actually believe that owning precious metals is so old-fashioned and stupid, and how they are so smart to be making whole scads of money in a stock market that is still priced at an astonishing price-to-earnings (P/E) ratio of nearly 20!

A P/E of 20 means that you are spending twenty bucks to buy a share of stock in a company that makes one lousy dollar per year per share! In other words, the company itself will not earn enough to equal what you paid for it until after twenty long, long years of waiting and hoping. Then, twenty years from now, maybe you will finally see some profit from your investment. Wow! What optimism!

This is why this “P/E of 20” thing is around the point where all previous stock markets, both on this planet you call Earth and in all the other planets in the cosmos, both now and in all of history, eventually fell, corrected, or collapsed and ruined the hell out of everything.

In case you were wondering, the historical average P/E for a stock or stock market is around 12 to 14 or so, although it has gotten down to around 4 to 7 or so at big market bottoms and around 20 at the tops of bull markets.

In short, stocks ain’t cheap, and the evidence is that there are Very, Very, Very Few (VVVF) instances in history where stocks went from expensive (like they are now), to even more expensive, to very expensive, to extremely expensive, to ridiculously expensive over the long term, thus explaining why there are no stories of legendary speculators who made plenty big wampum by “buying high and selling high”. Perhaps this is why the market wisdom of “sell high” appears only after the admonition to “buy low”, and not after “buy high”.

But this is not about how we are the biggest bunch of buttheads in the universe for coupling the economy, the government, everybody’s assets and everybody’s retirement accounts with a manufactured inflation in the stock, bond, government and housing markets, because if those markets ever stop going up, everything else will stop going up, too, and this means that the Fed would be pressured to continue inflating the money supply forever, which means that inflation in consumer prices will continue forever, too, regardless of how insanely, criminally irresponsible it is for the Federal Reserve to do so, or how even MORE criminally irresponsible it is for the Congress (except for Ron Paul) to abet and oblige it to do so.

And neither is this about how all of this terrifying inflation requires that the money and credit needed by the new buyers will be created out of thin air by the banking system, and sure enough, Total Fed Credit has been going freaking bananas since 1997, and the stock, bond, real estate and government markets have been going freaking bananas since then, too, all thanks to the horrid Alan Greenspan, who will surely go to straight to hell when he dies because of all the misery, suffering and deaths that will happen as a direct result of him increasing Total Fed Credit continuously for all (pause for dramatic effect) those (pause) years, and thus increasing the money supply for all (pause) those (pause) years, and now we are going to have inflation in consumer prices for (insert a long, overly dramatic pause, during which you may take a drink, scratch something that itches, or smoke ’em if you got ’em) FREAKING YEARS TO COME!!!!

And new evidence of increases in consumer prices comes from Junior Mogambo Ranger (JMR) Chuck from Billings, who reports that the inflationary rise in the price of breakfast cereals is being disguised by re-sizing the boxes down to a smaller size, with the sneaky result that you pay the same amount of money for a box of cereal, but get less cereal, which is the alternative to making you pay more money to get the same amount of cereal.

JMR Chuck figures that this new packaging strategy “will result in approximately a 13% decrease in the amount of product in each box, in order to avoid a price increase (!). Can it just be coincidence that this is also the approximate increase in the money supply? And that it reflects the actual rate of price inflation? Um, no, stupid question, food price increases are not reflected in the CPI, so there is nothing to worry about. We are all FREAKING DOOMED TO EAT SMALLER BOWLS OF CEREAL!”

As an aside, The Economist magazine reports that (in England, anyway) “cocaine is cheaper now than it was a decade ago”. A decade! Maybe the new way that the government/Fed calculates its hedonically-jiggered inflation statistics, “proving” that inflation is always going down or is even “benign”, is actually correct in some things!
The lesson of this? When you can’t afford food because of the rising cost of food, you can use the Fed’s new “substitution effect”, which is to substitute cocaine (which went down in price) for food (which went up in price) in your market basket, and thus inflation is reduced to less than zero for you! Hahaha! Who knew? Drugs as an anti-inflationary device! And probably lose a lot of weight, too!

Or maybe the government/Fed will just disguise the inflation in breakfast cereals by pricing breakfast cereals as “dollars per box” and not “cents per ounce”! Therefore, since the price per box did not go up because there is less cereal in each box, inflation in cereals would be zero!

And with the “substitution effect” in play, we can then assume that the Fed will say that all consumers would try to escape higher prices in other foodstuffs by switching to breakfast cereals (which still cost the same in “dollars per box”), which in turn would be substituted by cocaine (which went down in price), driving overall inflation in food to less than zero! Hahaha!

And the breakfast cereal company itself would have to be pretty stupid not to at least mention how they are selling more boxes of cereal (although neglecting to mention that they are actually selling less actual cereal since each box has less cereal in it), hopefully driving the stock, and the stock options of the executives, up! And taking the whole stock market up with it!

This inflation thing, not to mention the lying about it, makes me so crazy with anger that I was going to the window to throw open the sash and begin to again verbally assail my stupid neighbours for being such economic dimwits, and how they are going to pay dearly for their economic and financial follies, and for their political folly of consistently electing, “I Love Big Government Programs” morons and moronettes to the federal government (except Ron Paul), who immediately turned the government into a giant giveaway machine, and how that is EXACTLY what the Founding Fathers were trying to prevent when they took steps to make sure that the government did NOT have the power to create the money to spend and expand, and they did this by requiring that money be only of silver (and gold) for the sole reason that the government cannot just print the damned stuff.

And to tell the truth, I like screaming at them because I love the looks on their stupid faces when I tell them how long and loud I am going to laugh at them, my voice dripping with contempt, and how much I will enjoy watching them suffer from the precipitous decline in their living standards that they will be forced to endure.

Well, I was halted in mid-stride towards the window when my thunder was suddenly available, with no work, from Bob Wood of Kaizen Managed Assets, who quotes Jens Parsson from his book, Dying of Money. He writes, “Everyone loves an early inflation. The effects at the beginning of inflation are all good. There is steeper money expansion, rising government spending, increased government budget deficits, booming stock markets, and spectacular general prosperity, all in the midst of temporarily stable prices.

“This is the early part of the cycle. In the later inflation, on the other hand, the effects are all bad. The government may steadily increase the money inflation in order to stave off the latter effects, but the latter effects patiently wait. In terminal inflation, there is faltering prosperity, tightness of money, falling stock markets, rising taxes, still larger government deficits, and still roaring money expansion, now accompanied by soaring prices and ineffectiveness of traditional remedies.”

The tragic summary is that in the beginning of a monetary inflation, “Everyone benefits and no one pays”. Unfortunately, at the end, “Everyone pays and no one benefits. This is the full cycle of every inflation”.

I bring this up not because I love bringing this up (although I do, and in fact I perseverate about inflation in some bizarre, mentally ill, one-track-mind focus all the time because it scares the living hell out of me), but because Total Fed Credit did NOT go up last week! In fact, it went down by another US$3.7 billion! Yow! You can’t have inflation without creating the money to make it happen!

In fact, TFC has actually been relatively constant at around US$855 billion for the last nine months or so, the longest stretch of “stable” TFC in Fed history since 1997! (Before that, TFC didn’t change all that much on an annual percentage basis).

I say that this is what is making the stock and housing markets go down; the lagged effect of the cessation of the constant, continual creation of excess money and credit needed to finance a bull market finally overwhelms mere momentum bullishness!

If so, there will be plenty more to come!

The Mogambo Guru
for The Daily Reckoning Australia

Mogambo Guru
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.

Leave a Reply

1 Comment on "Negative Monetary Inflation: Everyone Pays and No-one Benefits"

Notify of

Sort by:   newest | oldest | most voted
Deron Kawamoto
Deron Kawamoto
9 years 2 months ago

I particularly liked your cocaine and “less than zero” references. I suspect that some of the folks that buy into the government’s statistics will pay for their foolishness by “working” like Robert Downey Jr at the end of the movie.

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to