G-7 Central banks: the US $ will be devalued.

The Daily Reckoning PRESENTS: Mogambo on Monday! The great one is
horrified at this year's choice for the Nobel Prize in
Economics... especially since they have eclipsed his own bid,
yet again.

I note with a certain shudder that econometricians have won the
Nobel Prize in Economics this year.

And if there is one thing that raises goose-bumps up and down my
spine, it is econometrics. This is the crowd of mathematical
idiot savant dimwits that got us where we are today, as they
prove that up is down, square is round, left is right, and black
is white. When psychiatrists can accurately measure personal
behavior, and then use that to accurately measure crowd behavior,
and use that to accurately predict crowd behavior over the long
term, THEN you can start giving out prizes in econometrics. But
not a minute sooner, as far as I am concerned.

Perhaps an analogy will help to explain.

It's Saturday morning. You are slouched in front of the TV,
having a cup of coffee, trying to ignore your wife screaming at
you, "Are you going to sit there in your underwear all day
watching TV?" and there is this movie on, and an exciting one,
too, where Godzilla is attacking Tokyo. The army general is
explaining that they are optimistic, although to date they have
found that guns, rockets, grenades, tanks, fighter aircraft and
large-diameter artillery have proved totally ineffective against
this enormous, rampaging monster.

Meanwhile, Godzilla continues terrorizing the city
infrastructure, stomping on bridges and things.

Now, here is where it gets weird, because the hero, who is an
American economics professor, is explaining how econometrics
proves that this whole Godzilla thing is not as bad as it looks.
"Consider that the clean-up and rebuilding of a devastated Tokyo,
which would unleash a massive burst of economic activity, as you
can see in my new equation!" he says. "Construction jobs for
everybody! More activity! More spending!! Therefore more taxes!
And therefore more government programs, which will cost us
nothing, because they were paid for by the increased economic
activity!"

And then the American economist hypnotizes everybody by waving
some equations and computer models seductively, and says the
magic words "Nobel Prize And Incomprehensible Math! Nobel Prize
And Incomprehensible Math!!" and convinces everybody that these
Nobel Prize winning equations prove, with the he absolute
finality of mathematical precision, that letting Godzilla destroy
the city and kill all the people is a recipe for a glorious boom!
That will end up making everybody rich!

In a rising wave of revulsion, you look at your coffee cup and
wonder if the cat did something inappropriate in it, because a
bad smell is suddenly coming from somewhere. But you decide it is
just the movie, so you idly pick up the remote, and you switch
over to another channel - click! - and there is a Pharaoh, whose
American economist son-in-law is explaining how the mighty
Pharaoh should pay attention to econometrics and start building
pyramids, which would be a terrific program, and it would employ
millions of people.

"And you are actually making an investment in the future,"
explains the American economist, laying prostrate before the
divine king, "as the building boom would guarantee rising
aggregate income, and the multiplier that I have included here in
this ancillary set of equations proves that tourists will come
from around the world to see these things. I mean, it ain't
Disney Land or anything, but they are these huge freaking piles
of rocks! And if you declare the pyramids to be one of the Seven
Wonders of the World, you'll be knee-deep in tourists in no time,
and you'll make a fortune, dude! I mean, oh Merciful and Wise
Pharaoh, and Egypt will have a glorious expanding economy, and in
the end we will all end up gloriously rich! And people will sing
your praises forever, mighty Pharaoh, as I have proved
mathematically that Egypt will always reign supreme over the
whole world!"

No, apparently the analogies didn't help. Sorry. Unless it
demonstrated my profound natural antipathy toward econometrics,
and then it is a big success. And I have a natural antipathy
towards it because Alan Greenspan and his Fed buddies all love
that stuff, and, I mean, look around you at the result!

I almost hate to keep harping on this, but the one thing that
happened that did NOT cause instant panic was the news that the
central banks of the world, the G-7, having met at Dubai, all
agree that the dollar is going to finally be devalued, but in
deliberate, controlled steps!

Therefore, every imported thing that you buy, from now on, will
now cost you more, unless the exporters decide to cut prices and
cut their own throats. Every day, day after day, more and more
higher prices!

It staggers the mind! I am actually surprised to find that the
world is not erupting in flames! If you check back through your
library of Mogambo Guru, you will note that this is the damned
price inflation that I say always follows monetary inflation. The
same price inflation that always follows monetary inflation that
the Austrians have always said was coming. And now it is coming
to a theater near you! And now, it's here! This is it! The
central banks have all agreed to do it!

So things will cost more! All thing will cost more. How much
more? A lot more! Wake up! Get up and run for your life!

And the people who are paying these higher prices for things are
going to then find that they have to charge more for the things
that THEY sell, or suffer a decline in their standard of living!
And so they raise THEIR prices! And then everybody else starts
raising THEIR prices, and that causes all OTHER prices to go up,
and that increases costs, and so everyone finds that prices must
be raised some more! And the rapid rise in prices causes the
reported inflation rate to rise, and then interest rates rise,
which increases costs to businesses, who must then raise prices
to offset these new higher interest rates costs!

Perhaps an example from my own life will clarify. Suppose I only
have ten bucks a day to spend on food, and I get a six-pack of
beer, a tub of fried chicken, and a pack of smokes.

Then prices go up by ten percent. Then my ten bucks a day will
only buy a six-pack of beer, a regular chicken platter, and a
pack of cheap smokes.

Then prices go up by another ten percent. Now I can only afford
two beers, an economy-sized chicken dinner, and a pack of really
cheap smokes.

Then prices go up by another ten percent, and I can only buy one
beer, a drumstick, and a pouch of "Cheap-O Loose Tobacco," which
has the motto "Premium floor sweepings from real cigarette
companies!"

And in case you are at a loss to understand why the sirens in the
Mogambo Bunker are blaring, why the klaxons are sounding, why all
the bells are ringing, or why I have maps showing emergency
routes out of town, the answer is that price inflation is here!

So forget Godzilla smashing through your garage; the rapid rise
in prices is going to be far worse than anything Godzilla can do
to you!

Jonathan Clements, a columnist for the Wall Street Journal,
wrote an interesting piece in last Wednesday's issue, entitled
"Why the Rising Market is a Bummer: Practically Everything's
Overpriced." And this is exactly what I have been saying, because
it is what real economists have always said, namely excess
production of money and credit eventually works its way into
prices. And now this Clements fella says that the gigantic,
cancerous volumes of money and credit generated by the profligate
and totally irresponsible Fed for the last decade or two, and I
see that I forgot to include a gratuitous insulting remark, such
as "the Fed is also a bunch of morons who couldn't think their
way out of a paper bag," has now worked its way into the prices
of everything.

In the old days, of course, this used to be known as inflation.
Now the Fed calls it "fighting deflation."

And when we say everything is overpriced, I do mean everything,
from stocks and bonds, to houses, to collectibles, to overly
generous government salaries and benefit packages, to overly
generous executive salaries and benefit packages, to practically
every other freaking thing under the damn sun.

Since I am one of those who grew up during a time when America
was the smartest, toughest, wisest, richest and most wonderful
dog on the street, it's embarrassing to watch, as we prove that
we are among the dumbest dogs on the damn street. Because if
there is one thing that you do NOT want, it is price inflation.

And yet here we are, creating credit and money at levels never
before seen, guaranteeing roaring inflation! And we're doling out
prizes to the geniuses who help make justify it with math.

Regards,

The Mogambo Guru,
for The Daily Reckoning

P.S. Just as I am putting the revolver to my head in a coward's
way out, I notice that even California wised up enough to get rid
of Gray Davis, so I am still hopeful that there is a spark of
that old America left. And to show my gratitude, I am not going
to say any bad things about California for a long time.

Mogambo Sez: S&P stocks are selling at 33 times earnings. Nasdaq
100 stocks are selling, by one estimate, at 8 times SALES, and
another estimate is that the Nasdaq is selling for a P/E of 233.
Houses are selling at over three times median income. Private
household debt is financing 20% of GDP, and the debt is at record
levels, both absolute and relative, in all of American history.
Interest income has been slashed to negative real returns.
Government deficit spending is exploding.

And gold is only selling for... ?

Editor's note: Richard Daughty is general partner and C.O.O. for
Smith Consultant Group, serving the financial and medical
communities, and the editor of the Mogambo Guru economic
newsletter, an avocational exercise the better to heap disrespect
on those who desperately deserve it.

The Mogambo Guru is quoted frequently in Barron's, The Daily
Reckoning, and other fine publications. If you're inclined to
read more, you'll find the whole Mogambo here:

Importing Deflation – Big Bad News
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