I forced a wooden smile onto my face as I stood up and slowly - so as not to draw attention to myself - started walking towards the kitchen so as to run out of the back door, bolting like a scared little coward to the Mogambo Secret Bunker Of Security (MSBOS) so that I could frantically lock myself in, throw a couple of security systems to the "Fully Armed" position, and clutch my teddy bear tightly to my chest until I finally settled down.

Normally, this would be catastrophic, as that much money added to the money supply would send inflation raging to the moon. But these days, so much money is being lost that even this $2 trillion is not enough to make bond investors wake up out of their fearful trance and demand higher yields in the face of impending inflation, and these bond buyer guys are real idiots, accepting about 4% as a yield on a 30-year bond! Hahahaha! Morons!

In fact, I assume that bond buyers are all drug addicts who are not aware of what they are doing, morons who are not aware of what they are doing, or grubby slicksters who are buying them on behalf of drug addicts and morons! Hahaha!

Bill Bonner here at The Daily Reckoning is apparently not ready to ascribe to my new Mogambo Drug Addicts And Moron Bond Theory (MDAAMBT), but seems more horrified by how much money has been lost, as "Stock markets around the world have deflated by about $10 trillion. U.S. housing has deflated by about $5 trillion", and I seem to recall that the director of the Congressional Budget Office, Peter Orszag, testified that some $2 trillion in retirement savings has been lost over the past year or so.

And as insane as all that seems, it is destined to get a lot more insane, as we can infer from a Wall Street Journal article titled "Two-Year Yield (If You Can Call It That) Tilts Lower", which refers to the ludicrously low yield on government bonds these days with a humorous degree of surprised disbelief.

The article notes, "Last week, the Fed cuts its fed-funds target rate to 1%. Then, the two-year yield touched a historical low of 1.06%", which is so low that I cannot stop myself from laughing at any moron buying a government bond and paying such a high price for it that the imputed yield is one lousy percent!

Hell, the government's new and "official" GDP deflator (the amount of inflation in prices that must be wrung from raw GDP data to produce "real" GDP) just jumped to an annual rate of 4.2%! Just how stupid do you have to be to lock up your money for two years in order to get $1.08 per hundred dollars, while you lost $4.20 per hundred in buying power? Hahaha! Morons!

Well, as bizarre as that is, it is going to get even MORE bizarre, as the WSJ article went on to say that rate cuts by the Fed are just getting started, and that "HSBC economists expect the Fed to trim the target rate to zero by the end of June"! What? An interest rate of literally zero? Zero! Hahahaha! The mark of the truly, truly desperate!

And, even more startling, "Credit Suisse predicts the two-year yield will drop to 1% by the end of the year and dive to 0.5% by the first quarter of 2009", which is such insanely low yield in light of the sheer amounts of money that the central banks of the world are suddenly creating, and promise to keep creating, that you involuntarily leap atop your desk and howl like a wounded wolf out on the lone prairie, going "OwwwooOOOOoooo!", pausing only to scratch a few fleas while everyone around you is yelling at you to shut up, and then you snarl at them.

In short, I'm insane, and everybody is insane for ever believing that the morons at the Federal Reserve and their childishly-simplistic, brain-dead ilk that infest the majority of the nation's universities know what they are talking about, when their stupid neo-Keynesian, equation-driven "econometric" stupidities have failed so miserably!

Perhaps Sam Mathid in his essay at 321Gold.com says it best when he notes that "Nowhere is there reference to prior criminality and stupidity on such a grand scale. There is no historical precedent."

This would usually lead me to a long harangue about how you should be buying gold, silver and oil at these low, low prices in response to such monetary and fiscal outrages, but it is late, I am tired, I already have plenty of each.

And if you, too, have plenty of each, then relax, as you have nothing to worry about, and you should go to bed and get a good night's sleep, too.

And if you do not likewise have plenty of each, then while I am not in the mood to call you a halfwit lowlife ignorant moron who deserves economic death for not having plenty of each, consider yourself enlightened as to your true status, and tremble.

Until next time,

The Mogambo Guru

• A World of Financial Freeloaders
• Roasting G-20 Weenies on a Golden Spit
• Gold and Silver Demand Unprecedented
• Patching Up The World With Golden Glue
• Federal Reserve Has Destroyed the Economy

Despite the fact that the Dow and S&P 500 were able to overcome yesterday's unfortunate data, ending slightly up as the closing bell rang, this morning was a different story all together. Concerns over the what effect the weak economy will have on corporate profits hit the overseas markets hard. Japan's Nikkei index tanked 9.6% and European shares plunged about 7% this morning.

The gloom over growth expectation is now worldwide...says one expert:

"Periods of panic punctuated by occasional calm appears to be the manner of the things for now."

The Dow, S&P and Nasdaq futures all fell so much that they set off the "circuit breaker rules". In other words, the exchanges reached pre-specified limits that can't be broken until pit trading starts. However, once trading opens, all bets are off. Hence, the 'bloodbath'.

You how the saying goes: America sneezes, and the rest of the world catches a cold. It might be time to stock up on tissues...we are looking at a case of walking pneumonia.

*** The FOMC is meeting next week and the general consensus is that they will indeed cut rates. Really, how could they not? But some speculate that they will go where no Fed has gone before: below 1%.

"Everyone at the Fed has pretty much told you they're going to cut," said Rich Yamarone, director of economic research at Argus Research. "They're in kitchen sink mode now. Rate cuts, fiscal stimulus, bailouts - they're throwing in everything they can right now."

However, there's a chance that lowering rates below 1% won't even make a blip on the radar in the United States' struggling economy...rate cuts just aren't as important as they once were.

"It's a window dressing, only a psychological weapon," said Sung Won Sohn, economics professor at Cal State University Channel Islands. "Right now, the problem isn't the cost of the Fed's money, it's that the existing money supply isn't circulating. The pipelines are clogged."

*** The price of oil fell below $65 a barrel today, even though OPEC decided to cut oil production by 1.5 million barrels a day starting next month. The black goo is selling for 50% less than it was just a few months ago due to a pretty major crimp in global demand.

In a statement released by OPEC they said: "Oil prices have witnessed a dramatic collapse - unprecedented in speed and magnitude. This slowdown in demand is serving to exacerbate the situation in a market which has been oversupplied with crude for some time."

The saving grace here could be the recent dollar strength. Today, the greenback rose against most major currencies - except for the yen. The yen rose to a 13-year high against the dollar overnight.

"The Japanese currency also surged against the euro after Belarus, Ukraine, Hungary and Iceland joined Pakistan in requesting at least $20 billion of emergency loans from the IMF. Fear that pressures in Eastern Europe will have a negative effect on Euroland is another reason the euro continues to drift lower vs. the US$. European banks lending to emerging markets is about 21 percent of GDP and UK banks loans are around 24%, compared to 4% for the US and 5% for Japan. Eastern European currencies continue to be under speculative attack, and the currency markets are selling the Euro due to its close relationships to these emerging markets."

*** The signs of the difficult economic times the United States is facing is showing up everywhere...and most likely at your favorite restaurant as well. Chris Mayer explains:

"The convulsing U.S. economy is really the big topic of conversation everywhere. It's affecting all kinds of businesses now. Anthony Bourdain, whose book Kitchen Confidential is one of my favorites, recently talked about how the economy is affecting the restaurant business. He was at Caesar's Palace in Atlantic City doing some kind of cooking demonstration. Afterward, he offered some thoughts on what the recession will bring: 'There are going to be a number of real sea changes in the business model of the fine-dining restaurants, and in basic menus. The proportions are going to change, the menu selections are going to change.'

"The upside to this? 'Cooks will learn to how to cook shanks and shoulders and hooves and snouts well.' In other words, they'll learn to really cook using things previously discarded. It has long been a theme running through Bourdain's books and his TV show that great cooks (and great food) emerge from essentially poorer cultures. Whether it is the budgetary constraints or shortages or lack of certain ingredients, these cooks must be more creative. They learn skills that cooks in richer circumstances never learn. Brilliant cooks and wonderful dishes are born in such environments.

"What does this have to do with investing? Well, besides simply noting the ripple effects of Wall Street's self-immolation, I think that living through this environment will make you a better investor. Anybody can invest when things are going well - a lot of skills don't matter when the markets are rising. But when things get dicey, it suddenly becomes important again to understand what you're buying and to know how to value assets.

"Right now, there is still a tremendous amount of fear out there, which leads to valuations far removed from underlying business values. If you can't get excited about some of the values on your screen now, I'm not sure what you're hoping for."

*** Yesterday, everyone's favorite former Fed chief testified in front of the House committee about the nation's worsening credit crisis.

"We are in the midst of a once-in-a-century credit tsunami," he said to the House Oversight and Reform Committee.

That said, Big Al believes that the United States will emerge from this crisis with a "far sounder financial system." And that he was "shocked" that the financial system broke down.

However, some Committee members weren't buying Ol'Bubbles song and dance (and neither were you, dear reader - but more on that below).

CNN reports that in his opening statement, Rep. Henry Waxman, D-Calif., committee chairman, opined that the current crisis could have been prevented "if regulators had paid more attention and intervened with responsible legislation. The list of regulatory mistakes and misjudgments is long and the cost to taxpayers and the economy is staggering."

By and far, you agree with this sentiment. We asked yesterday for our long-time DR sufferers to write in about your thoughts to Greenspan's testimony...and here's what you had to say:

"I think Big Al and the Federal Reserve's lending practices are largely part of the blame," writes one DR reader.

"It was the Federal Reserves practice of lending money out for virtually free (1% for over a year) that I believe was the core problem that fueled all of the rest of the items that Big All mentioned. Guess he forgot to mention that item.

"Then Bernanke took over (realizing that the housing market was becoming way over valued) and raised the overnight lending rate 0.25 % every time they met till they finally 'popped' the housing bubble (which needed to be popped, but way to late). You can see it on the chart.

See this key interest rate chart at bankrate.com from 2001 to 2008:

"I guess it was fun while it lasted!"

Writes another:

"As always the case with Mr. Greenspan it is not what he says but what he is not saying.

"He is not telling that he supported (reckless) lending by offering money below inflation rate.

"He is not telling that people should not trust rating agencies because they are paid by the issuer.

"He is not telling that his oversight on the financial market was insufficient and lax.

"The mistakes he mentioned others made are surely lessons to learn from.

"But no doubt in my opinion; Mr. Greenspan is one of the main culprits originating this crisis."

And another: "Yes Greenspan is full of it but what a 'maestro'. After whipping the morons on the hill over and over through the years (they were afraid to parse his babble for fear of looking uninformed or stupid) Greenspan mea culpas that his 'free market' philosophy let him down. Har har har har har har har!!! He feeds them gibberish in which he now supports more regulation after having virtually blown up the world through incompetence and self-serving water carrying for his masters. Now he lays it at the feet of the 'free market' in one of the most managed economies on the earth. The dopes on the hill are used to beating up on slow-witted baseball players so this was easy for Mr. Maestro. Out the door he went without a single mention of the guillotine as a fitting punishment."

We'll leave you on that uplifting note...have a great weekend!

Short Fuse

The Daily Reckoning Australia

• Hank Paulson’s Desperate Measures to Save His Friends on Wall Street
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• Ranting Against Free markets and Wall Street
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• After the Bailout of Wall Street, Everybody Wants Cash

In addition to extremely poor 3rd quarter earning results, Realty Trac reported that over 81,000 home were foreclosed upon in September. This is a 71% increases from the same time period just a year ago.

"I wouldn't be surprised to see foreclosures increase as the economy slows down," said Rick Sharga, Realty Trac's VP of marketing. "The people living paycheck to paycheck are at risk if they lose their jobs. It will cause more people to lose their homes."

It could be argued that perhaps these homeowners should have thought about that minor detail before they took on mortgages they couldn't truly afford, but we digress...

Shelia Blair, chairwoman of the FDIC is working on a plan to help the struggling homeowners.

"Loan guarantees could be used as an incentive for services to modify loans," Blair said, "Specifically the government could establish standards for loan modifications and provide guarantees for loans meeting those standards."

The outcome of which being, Blair continued, "unaffordable loans could be converted into loans that are sustainable over the long term."

This news should make the protesters that we at the Mortgage Bankers Association annual convention this week happy. MarketWatch reports that several members of the political protest group Code Pink showed up at the convention and the groups co-found Medea Benjamin "walked on stage during a panel discussion on Fannie Mae and Freddie Mac and demanded a moratorium on foreclosures. Meanwhile, outside the Moscone West Convention Center in San Francisco, another group of people picketed as convention attendees entered on Monday morning."

Code Pink and the Party for Socialism and Liberation were in full effect at the convention, with their main issue being the over $700 billion bailout. The battle cry was "Jail them, don't bail them." Catchy.

"The main point, and the main issue for everyone, is there should be a stop to foreclosures and evictions and the government should be assisting the victims of the crisis and not the people who created it," said Richard Becker, spokesman for the Party for Socialism and Liberation.

But why are they protesting at the MBA conference? "The relationship between the mortgage bankers and Wall Street is just connecting a couple of dots," Benjamin said. "When the housing bubble became a more general economic crisis, the ways to deal with it were coming from Wall Street and the bankers, and not coming from the point of view of who were the victims of this, people who had been pushed into loans they should never have gotten," Benjamin said.

Now, we agree that $700 billion is a steep price tag to help out Wall Streets 'masters of the universe' - but there is something to be said about accountability at all levels of this crisis. We can't help but wonder how these homeowners did not see this coming. If you live paycheck to paycheck, how did you think you could afford a mortgage payment?

We are astounded by the overwhelming naivete of the American people, who believed that interest rates would always stay low and that they could used their home as an ATM indefinitely.

But, as our fearless leader often points out, "People believe what they need to believe when they need to believe it."

*** The Labor Department reported yesterday that there were more "mass layoffs" (where 50 or more employees are let go at one time) than in any month since September 2001.

From The Washington Post :

"Companies that announced plans this week to cut jobs include Internet company Yahoo (1,500 positions), pharmaceutical company Merck (7,200), National City bank (4,000) and Comcast, the cable company (300)."

Looks like we can forgo the retail boost we usually see in the next couple of months because of holiday spending. Santa's bag is sure to be a little lighter than usual this year...

*** Our friend Chuck Butler highlighted an interesting quote from Founding Father Thomas Jefferson in today's issue of The Daily Pfennig:

"The central bank is an institution of the most deadly hostility existing against the Principles and form of our Constitution...Bankers are more dangerous than standing armies...(and) if the American people allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the People of all their property until their children will wake up homeless on the continent their Fathers conquered."

We thought this quote was quite apropos, especially considering that one of the 'Founding Fathers of the credit crisis' testified today in Washington. That's right, Big Al was on the Hill today, and said that we in the midst of a 'credit tsunami'.

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Usually the great American economist, Irving Fisher, is quoted because of his views on the 1929 Crash, in which, through optimism he lost a fortune. There is no rule that great economists have to be successful speculators. A rather similar speculation by Maynard Keynes in the currency market nearly bankrupted him; he had to be bailed out by his father, an older and more cautious economist of the classical school.

In November of 1907, Irving Fisher wrote an anonymous comment in the Yale Review, which is worth quoting: “The recent sensational events in Wall Street have been the occasion of a great deal of discussion as to the present soundness or unsoundness of the industrial and commercial world, and as to the causes which have precipitated so sharp and sudden a panic. Among the causes assigned have been the character of the speeches of President (Theodore) Roosevelt and of Gov. (Charles Evan) Hughes (of New York), the will of ‘fringed finance’, the organisation and promotion of trusts, with their undigested securities and their arbitrary effects on prices, and the particular characteristics of the individuals and firms who have failed.”

This sounds very like the first debate on the causes of the 2008 panic. Various politicians, bankers and regulators have been blamed for the crisis, and some very foolish mistakes have indeed been made – it should have been seen that the failure to rescue Lehman Brothers would spread the contagion of panic, and for that mistake the Secretary of Treasury, Henry Paulson – himself an old Wall Street hand – must take a share of the blame.

Yet we are already moving into a second, and more serious debate on the underlying causes of the pause of our own time. Karl Marx has even been resurrected as a plausible expositor of the contradictions of capitalism, and interesting articles have been written about the explanatory value of Keynesian theory. Again it is worth while to read Irving Fisher’s commentary piece.

“While undoubtedly some of these (personal) factors have had an influence on the result, they have been merely precipitating causes and are of far less importance than the causes which for years have been making ready for present conditions. We refer to the progressive rise in prices due undoubtedly to the increasing supplies of gold.”

In the period before 2008, it was not the increase in the supplies of gold which was distorting the money supply, but a huge increase in debt of all kinds, national, corporate, banking and personal. This did not lead to any particularly large increase in the prices of consumer goods, but it did lead to an increase in asset values, and particularly in housing prices, where the high prices were financed by collateralised mortgage instruments. Eventually it also resulted in an almost vertical increase in the price of oil, accompanied by a similar rise in the price of gas.

Irving Fisher believed that a period of rising prices was likely to be followed by excessive debt and by unsound investment – the 21st century phrase is “irrational exuberance”. He believed that there had always been a link between the supply of money and the level of prices, and even quotes from the Frogs of Aristophenes to show that the ancient Greeks were aware of it.

“For your old and standard pieces valued and approved and tried, Are registered and abandoned for the trash of yesterday, For a vile adulterate issue, drossy, counterfeit and base which the traffic of the City passes current in their place.”

Fisher points out, in his book on The Purchasing Power of Money that the quantity theory of money was stated by the Roman author, Julius Paulus in about 200 A.D. and that is was accepted by Locke, Hume, Adam Smith, Ricardo, Mill, Walker, Marshall Hadley, Kemmerer, “and most writers on the subject”.

In 2008, the panic has occurred on a world wide scale. As in 1907, the immediate and apparent events have been “merely precipitating causes”, to use Fisher’s phrase. Inside a very short period of time, starting in mid September, banks had to close or merge in centre after centre around the globe. For a global crisis we have to look for general rather than local causes.

Already, Governments have discussed the possibility of a new global conference to stabilise world commerce and banking. The trouble is that neither Governments nor public opinions have any clear view of the questions, let alone the answers to them. Nor are there economists with the intellectual authority of Keynes or Fisher, or Friedman, though the United States have produced some Nobel Prize Winners and there are some first class bankers, who have been able to steer their own banks through the storm.

There is one question which has not been asked, but would have to be discussed before the world convenes a second Bretton Woods. The first Bretton Woods, much influenced by Maynard Keynes, adopted a system of fixed rate convertibility into the dollar, with margins of flexibility, while the dollar was itself convertible into gold. Since President Nixon terminated gold convertibility in 1971, the world exchange register has consisted of unconvertible paper currencies, floating in terms of each other. The eurozone is the exception in which European currencies have been merged with each other.

The question is, therefore, one of convertibility or non-convertibility. Is a non-redeemable paper currency inherently unstable? Did it cause the 2008 panic? Should a second Bretton Woods try to create a new global convertibility? Or is the global free float the best we can hope for?

William Rees-Mogg
for The Daily Reckoning Australia

• Irving Fisher Remains Immensely Important in the History of Economic Thought
• Irving Fisher Has Come Back Into Fashion
• David Ricardo is the Dominant British Economist of the Nineteenth Century
• What Caused the Economic Crisis
• A New Bretton Woods Vs. The Old Bretton Woods