Calming the Mogambo Guru, a Man Who Needs Calming Much of the Time
March 5, 2008
Mogambo Guru
The Daily Reckoning
Dear MG:
You don't mind if I call you MG, do you? I mean no disrespect. I in no way equate your performance with the British car that required a tune-up every 100 miles. Morris Garage is long gone. You are still here.
Anyway, I have just read your piece that was published on January 8, "The Cornered Rat Defense of Inflationary Collapse."
I have long appreciated your spirited defense of the inevitability of inflationary collapse and the destruction of civilization as we know it.
I detected a trace of waffling on your part, which is surely rare for a man as well-armed as you are, with his own bunker and everything. Waffling doth not become you. (It still astounds me that even you became you.) You wrote:
There is a line of argument which says that because money will be literally disappearing as loans default and new loans are not taken out, inflation in the money supply will fall, which means that prices will fall, and thus this proves that we are going to suffer a deflationary collapse instead of an inflationary collapse, where prices go up and up.You gotta admit; it seems to be a compelling argument; the money supply will fall as loans go bad, which means consumer prices will fall. And with loans going bad, nobody is going to either make a loan or take one, and so the money supply will not grow.
This presents a real difficulty for me, as it means that when people demand that I defend my thesis that we will, instead, see an inflationary collapse, I can't. The fall in the money supply seems so compelling!
So I nervously hem and haw, desperately looking for some plausible reason, and I can't think of one, and pretty soon I am resorting to personal attacks against the person questioning me ("Did your stupid kids dream up that question, or is that your own stupid question?) and all-in-all I get to feeling like a cornered rat, which usually leads to the Attack Without Mercy (AWM), which is, actually a "surprise attack" even if the enemy knows right where you are, is looking at you, and is actually laying in ambush for you! I get this little-known tactical nugget from General Armstrong Custer himself in the movie "Little Big Man", where he said, in this very "they know we're here!" circumstance, "Nothing is more surprising than the attack without mercy!"
You then cited some calming words from Peter Schiff, who reassures us -- and you -- that inflationary collapse is alive and well and is preparing for a real comeback.
Far be it from me to comment on Mr. Schiff's assessment, which has to do with foreign currencies and imports and I forget exactly what, since anything more complex than a piece of green paper with a dead politician's picture on it confuses me.
I call your attention to your main concern:
You gotta admit; it seems to be a compelling argument; the money supply will fall as loans go bad, which means consumer prices will fall. And with loans going bad, nobody is going to either make a loan or take one, and so the money supply will not grow.
I am missing something here -- as several of our largest banks are, as well. They made bad loans, yes. (Describing these loans as bad is like describing Dolly Parton as shapely. Accurate, but incomplete.) But the money did not go away.
The money went to borrowers who were not credit-worthy. Well, this may be too strong. They were not credit-worthy unless the lender had some very large men of the staff who specialize in persuasive motivational techniques.
The borrowers immediately handed the money over to sellers of things, especially houses. The sellers took the money and ran, frequently imitating the borrowers by purchasing larger, more expensive houses. They borrowed money to finance their move up.
Anyway, all that money did not go away. It's still out there. What went away was the solvency of the lending institutions, which are now lining up at the temporary (it says here) Term Auction Facility window of the Federal Reserve System. ("Temporary" as in "income tax withholding is a temporary wartime measure until the Germans and Japs are defeated unconditionally.")
The Federal Reserve System is prepared to lend money to said lending institutions, so as to tide them over temporarily until things settle down.
The lending institutions (i.e., banks) hand over to the Federal Reserve System collateral -- ownership of pieces of paper with borrowers' signatures on them, papers which guarantee that said borrowers will repay loans made to them based on the value of houses they used to live in, but have in the meantime abandoned or soon will, whenever the lending institutions' lawyers can locate the deeds, which seem to have disappeared, in order to foreclose. But the loans are as good as gold, or soon will be. So, they qualify as TAFfy collateral. Then the Federal Reserve creates money for them to lend.
The language of the Federal Reserve is quite clear on collateral -- quite clear -- or as you might put it, hahaha.
Under the Term Auction Facility (TAF) program, the Federal Reserve will auction term funds to depository institutions against the wide variety of collateral that can be used to secure loans at the discount window. All depository institutions that are judged to be in generally sound financial condition by their local Reserve Bank and that are eligible to borrow under the primary credit discount window program will be eligible to participate in TAF auctions. All advances must be fully collateralized. By allowing the Federal Reserve to inject term funds through a broader range of counterparties and against a broader range of collateral than open market operations, this facility could help promote the efficient dissemination of liquidity when the unsecured interbank markets are under stress.
Speaking of being under stress, how are things in the bunker? I have often wondered, does Papa John's Pizza deliver in your area? I mean, deliver more than once?
So, be reassured. The money is still there. Also, whenever the folks at the Federal Reserve want to add more money, they can do so. Temporarily.
You are concerned about a lack of future lending. "And with loans going bad, nobody is going to either make a loan or take one, and so the money supply will not grow." I assure you, MG, that for as long as the United States Treasury operates, there will be opportunities to lend, with the very best collateral: digits that represent pieces of paper that guarantee repayment, backed by the full faith and credit of the United States Government, including Congress. This is prime paper, rated AAA by the same agencies that rated subprime loans A.
My best to your wife and children.
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