Huge Inflation
What an absurd old world we live in. The Bank of England is worried about deflation, but only so it can justify the massive inflation it’s cooking up. Barack Obama is outraged about US$165 million in bonuses at AIG and will use all legal means to stop them. Like he doesn’t have anything better to do. Here in Australia, local shares will probably follow New York’s lead and head down. Stocks on Wall Street finished up four days in a row, but couldn’t make it five. There was no earth-shattering earnings news. That left plenty of room for grandstanding and other chicanery.
Before we get to the chicanery, what’s shaking in the local market? The banks were up. Australia’s banks never had the chance to gorge themselves on the stuff that’s choking their counterparts in Europe and North America. They were stuck, instead, with large portfolios of residential mortgages. Plus, you can’t short sell them anyway. So how low could they go?
Markets are still in a kind of suspended animation, waiting to see if there is any coherent, intelligent, effective response by the financial players or their regulators to…you know…solve the problems. It could be a long wait.
All hole and no donut. That about sums up the response of the economists and officials trying to un-freeze credit markets and get the economy going. Why on earth is the President of the United States taking time to sort out how much people at AIG get paid? Probably because he wants to distract attention away from how much money he plans to spend, and spend ineffectively.
Look, there’s Elvis! Hey king!
That’s what distractions are, attempts to change the subject or divert focus.
Distract from what? Huge inflation. Yes. Yes. We know. There is no huge inflation now. In fact, industrial production in the United States fell for the fourth month in a row. It hasn’t been this low since 2002. But then, why would output grow when demand is falling and credit remains tight?
Money supply is not falling. Yet the good people who write the Bank of England’s Quarterly Bulletin are still warning of a “debt deflation trap.” You’ll find all the good stuff beginning on page 39. The Bank warns that the cost of debts is rising relative to everything else, making it harder for heavily indebted Britons to pay off debts. Britons are, by the way, heavily indebted.
But are falling prices really so inherently evil? Really…whoever complained about a cheaper cheeseburger? When was the last time you bellyached about the ever-declining price of a pint of beer?
The Bank study resurrects the last period of sustained deflation and connects it with the economic misery of the times, in the 1930s. Then, too, output collapsed. The world’s productive capacity far exceeded its demand. And money supply, for a time, briefly shrank as banks (who create most of the money in the fiat system) went out of business.
But all of this talk about the evil of falling prices is just a ruse. Excess capacity exists because the preceding inflationary bubble helped build factories to produce goods sold to people who bought them with credit. The demand was illusory. Unfortunately, the factories were real…it took real labour, real energy, and real raw materials to build them. They remained idle and unproductive unstill something else came along (World War Two) to reignite demand the and the need for war time production.
Falling prices aren’t inherently evil. If prices fall low enough, low cost producers of a given good or service are driven out of business. Supply tightens. Prices rise.
No…what the BoE and the Fed are doing is evoking the nightmare of the Depression to justify the coming inflation. The fiat money system can’t function without just a little inflation. The gradual erosion of purchasing power is what makes it unnoticeable and thus tolerable to private citizens. They don’t really notice it 2-3% at a time.
The trouble for the global system now is the tower of debts looming over the public and private sector in many economies. It’s all well and good if the general price level falls. But it’s no good if, while asset values like stocks and homes fall, debts remain fixed. An increase in the preference for cash makes debts a lot harder to pay off.
Of course, as you know by now, the preferred government answer is to inflate. This is what made the Chinese nervous last week as they reviewed Obama’s budget. But the BoE and the Fed have been quite clear about their intentions. They will inflate as much as they need to in order to get nominal asset prices stable.
There are some investors who buy the Fed’s bogus line that it can withdraw liquidity and sterilize its money printing before it leads to inflation in the economy. Believing this is a serious mistake that could cost you a lot of money.
The hedge against these inflationary policies (including here in Australia) is to invest in assets priced in dollars which cannot be created by a printing press. That includes oil, precious metals, and other energy commodities. The nominal price of these assets should rise as the money supply rises.
More on that tomorrow.
Regards,
Dan Denning
www.dailyreckoning.com.au
March 18, 2009
Dan Denning
Dan Denning is the author of 2005's best-selling The Bull Hunter. A specialist in small-cap stocks, Dan draws on his network of global contacts from his base in Melbourne, Australia, and is a frequent contributor to The Daily Reckoning Australia.
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It seems everyone loved yesterday’s missive from James Howard Kunstler. I received this one just in time for today’s send:
“Thank you for the James Kunstler article on South Africa. It is an interesting contrast to the PBS article on the revitalization of the Joberg gold mining tunnels. I am more inclined to believe Kunstler.
“The Melrose Arch is a true example of community building, a possibility that is mostly ignored globally.
“Keep up these thought-provoking articles in Whiskey.”
You’re welcome and we aim to try.
But one Shooter makes this point:
“Unfortunately but undeniably, NO black governed nation has ever prospered. On the contrary, nations blacks have seized from white rule, and those that have always been black governed have steadily and often rapidly become dependent on the other nations of the world for gifts, grants, and donated food, [and are] usually ruled by despotic dictators, kings, and ‘emperors’.
“Haiti, taken from the French when it was a productive society, and Mugabe-transformed Zimbabwe where rich, bountiful farms are now fallow wastelands are just two prime examples countries the incompetence, inability, and corruption have destroyed. A few years ago more than a few highly reputable studies disclosed that after the 40+ years and many billions of aid from a wide spectrum of nations, the entire African continent is much worse off, living standards unimproved, hunger and extreme poverty widespread, all the efforts and treasure totally and completely wasted and the area daily descending into hell on earth.”
And I had such high hopes for the republic I was planning to found. (Check my picture on the Whiskey & Gunpowder authors’ page to see why that was funny.)
Haiti — the first independent black nation to emerge after white folk got so globally adventurous — isn’t exactly a shining example.
I’d like to point out, however, that it was the white nations of the world that had those cute little multi-year nervous breakdowns in 1918 and again in 1938.
And this whole fiat money experiment and encroaching collectivism don’t bode too well for the pale-faced nations either. That one thing you started in North America in the late 18th Century held some promise, but you see how that’s turning out. Nice republic…too bad we couldn’t keep it.
I’d say that human governments in general just don’t stand the test of time. It’s a basic Whiskey Bar tenet: The world goes to Hell…regularly…
We’ll talk more tomorrow.
Regards,
Gary Gibson
Managing Editor, Whiskey & Gunpowder
But Gary, it’s just your regular old picture — I was expecting to see you in some getup out of “The King in Yellow” or something. Emperor Norton, at least. (Okay, I know the point you were trying to make.)
[...] a look at the Whiskey and Gunpowder site to review their thoughts on [...]
Are all of your guest editors racists or what? Yes, these African countries have had decades of imcompetent leadership. Yes, they have practiced genocide etcetera, etcetera….but so did Saddam and Hitler. Is the graft, corruption and whatnot any better because the offenders where non-black? Africa had been used for centuries as the world’s grocery store. Britain “bought” people and gold there and now China buys gold and oil there. The contracts that have been written are probably awful and I’m sure they did not have anyone representing them. But maybe that’s only for white countries…….
“Unfortunately but undeniably, NO black governed nation has ever prospered. On the contrary, nations blacks have seized from white rule, and those that have always been black governed have steadily and often rapidly become dependent on the other nations of the world for gifts, grants, and donated food, [and are] usually ruled by despotic dictators, kings, and ‘emperors’. ”
Hey, don’t look at me that way! I’m not the one who made that comment. While I will agree that to the best of my knowledge no black-governed nation has prospered in the last several thousand years, that doesn’t prove that blacks are incapable of governing well. It proves that ignorant savages are unlikely to govern wisely, Mau Maus being a pretty good case in point. Or Saudis. Or the French, perhaps! We could say as easily–and with as much truth–that almost no nation run by those descended from Conquistadors has ever been ruled sensibly, well, or ethically, and I posit that the reason for both is precisely the same.
The reason that blacks as a rule have been less successful than whites is CULTURAL, not due to an excess of melanin in their skin. The same could be said in Latin America; a small number of Europeans thrust primative cultures in a new direction without sufficient supervision and support to inculcate the best Western values, although the Catholic Church tried, and perhaps some things are innate, because in general Latin Americans seem pretty happy with Banana Republics. Does it really matter if it as an Aztec priest or Hugo Chavez who rips your bleeding heart out if that is your idea of right and normal? (Well, okay, I may be being melodramatic. I don’t know how Hugo disposes of his enemies. Probably simple gunshots.) By all accounts many of the blacks loved the white plantation owners and their children, but when the tribes assembled and the call went out, whoops! there went another rubber tree plantation.
I still like my theory of causation at least in the US. Simple educational levels are not sufficient to account for different success rates, and I can quote you figures to show that levels for blacks and whites in the Fifties were all but identical in terms of literacy; the big difference was in illegitimacy.
A quick consideration of successful Blacks in our country will demonstrate my point. What do Maxine Waters, Al Sharpton, Jesse Jackson, Ted Kennedy, Barney Franks, and Tom Daschle all have in common?
They are all demagogues who have learned how to milk the system and I despise all of them.
What do Maxine Waters, Al Sharpton, Jesse Jackson, Dr. Walter Williams, Thomas Sowell, and Gary Gibson have in common?
Black skin in assorted shades. The last three have the sort of attributes that we can admire: they are intelligent, articulate, principled, and would make terrific dinner partners. They have the character and kindness to make good friends. Gary has a standing invitation to visit the rancho.
What I told Gary privately was that any nation he founded and governed would be a success and that I would volunteer to be Vice Potentate–after a good stint at th’ tannin’ salon ’cause I brown up real’ nice. Just joshing; I know better than to think I would need a kinky wig and black contacts, because the kind of nation Gary would lead wouldn’t care that my skin is fish-belly white.
There, now, do you suppose Eric Holder feels all better?!
Ken! Spurt of laughter. I want to see him in one of the get-ups Eddy Murphy wore in “Coming to America!” With his no doubt beautiful wife wearing the outfit the bride chosen by the king wore, while standing on one foot, hopping, and going “Arf! Arf! Arf!” Then she can sing a Puccini aria and give a scholarly dissertation on the Kondratieff wave, because I’m sure anyone Gary chose is spectacular.
Are all of your guest editors racists or what?
MY DEAR QUANTELLA:
I CAN SPEAK ONLY FOR MYSELF, AND I HAVE ONLY BEEN A GUEST ONCE, BUT FOR MYSELF–NO. I AM NOT A RACIST. I CHOOSE MY FRIENDS ON THE BASIS OF THEIR CULTURE, IN THE SENSE OF THEIR CHARACTER, THEIR PRINCIPLES, THEIR BEHAVIOR, THEIR KINDNESS, THEIR TRUSTWORTHINESS, AND THEIR ATTITUDES TOWARDS LIFE. I LOOK FIRST AT EYES: IS THERE KINDNESS, HUMOR, AND INTELLIGENCE THERE? I LOOK NEXT FOR A SMILE THAT INDICATES GOOD HUMOR AND A FRIENDLY NATURE. IF I DO NOT FIND THOSE I LOOK NO FARTHER, BUT I AM KIND TO EVERYONE AS A LIFE-LONG CHARACTER TRAIT.
I KNOW THAT I AM NOT ENTIRELY FREE FROM PREJUDICE, IF IT CAN BE STIGMATIZED THUSLY. I FIND THOSE WHO ARE VILE-TEMPERED OR FOUL-MOUTHED DISTASTEFUL, AND I HAVE A PARTIALITY FOR THOSE WHO ARE INTELLIGENT AND ERUDITE, THOSE WHO CAN LISTEN INTELLIGENTLY EVEN WHEN CONVERSATION TURNS TO AN AREA OUTSIDE THEIR EXPERTISE.
THE BEST MALE FRIEND I HAVE, OTHER THAN MY MATE, IS HALF BLACK AND HALF INDIAN AND I DIDN’T EVEN NOTICE IT FOR THE FIRST TWO WEEKS HE WORKED FOR ME–WHEN HE POINTED IT OUT. DESPITE SEEING ASIA WITH HIS SHIRT OFF, I GUESS I JUST THOUGHT HE HAD A GOOD TAN–IF I THOUGHT ABOUT IT AT ALL. IT DIDN’T MATTER, YOU SEE. I VALUE HIM FOR HIS CHARACTER, HIS WORK ETHIC, HIS ENORMOUS KNOWLEDGE, HIS SENSE OF HUMOR, HIS KINDNESS, HIS DEVOTION AND THE CARE HE TAKES OF ME AND OUR ANIMALS…AND THE FACT THAT ANYBODY WHO CALLED ME A BIGOT WOULD HAVE TO ANSWER TO HIM!
Yes, these African countries have had decades of imcompetent leadership. DECADES OF INCOMPETENT LEADERSHIP SINCE COLONIAL POWERS LEFT. THEY SCARCELY HAD MODELS OF ENLIGHTENED GOVERNMENT BEFORE THE ARRIVAL OF THOSE WHO DID MUCH TO BRING COMMERCE, INFRA-STRUCTURE, EDUCATION, AND OPPORTUNITY. THE FOREIGNERS MADE A PROFIT BUT THEY EARNED IT. Yes, they have practiced genocide etcetera, etcetera….but so did Saddam and Hitler. Is the graft, corruption and whatnot any better because the offenders where non-black? NO, OF COURSE IT IS NOT. NOR IS IT ANY MORE ADMIRABLE, NOR IS GENOCIDE TYPICAL OF “CIVILIZED” NATIONS, ALTHOUGH GRAFT AND CORRUPTION ARE BECOMING SO INCREASINGLY. Africa had been used for centuries as the world’s grocery store. I’LL GO…TEA, RUBBER, GOLD, DIAMONDS, APES, IVORY, PEACOCKS, MALACHITE, URANIUM, AND THE SLAVES THAT ARABS AND BLACK KINGS SOLD TO THE BRITISH THERE FOR A WHILE. GROCERIES? WHAT, OTHER THAN DATES? MAYBE COCONUTS AND BANANAS?
Britain “bought” people and gold there and now China buys gold and oil there. The contracts that have been written are probably awful and I’m sure they did not have anyone representing them. GEE…PERHAPS THEY COULD HAVE USED SOME OF THE EARLY CHECKS TO BUY GOOD LAWYERS INSTEAD OF SWISS BANK ACCOUNTS, PALACES, AND UZIS.
CAN YOU IMAGINE ANYONE TAKING ADVANTAGE OF NELSON MANDELA AND HIS CHARMING BRIDE? I WOULDN’T THINK CHEATING A MAN WHO THOUGHT UP “NECKLACING” WAS A GOOD IDEA.
But maybe that’s only for white countries…NO, DEAR, BUT ONLY IN SOME WHITE COUNTRIES CAN ONE SAY ANY OFFENSIVE THING ONE FEELS LIKE WITHOUT RETRIBUTION WORSE THAN THAT I HAVE METED OUT, AT LEAST IF ONE IS ON THE “POLITICALLY CORRECT” SIDE OF THE TABLE.
YOU HAVE INSULTED MR. GIBSON, ME, AND A HOST OF DISTINGUISHED CONTRIBUTORS, WHEN IF YOU HAD READ THE TEXT MORE CAREFULLY YOU WOULD HAVE SEEN THAT THE COMMENT WHICH AROUSED YOUR IRE WAS FROM ANOTHER READER. IT WAS ALSO FACTUAL, SO FAR AS IT WENT.
WHAT IS PARTICULARLY AMUSING IS THAT I WROTE A REBUTTAL TO THAT STATEMENT, MYSELF. I ATTRIBUTE THE FAILURE OF SUCH BLACK NATIONS NOT TO PIGMENTATION BUT TO CULTURE, AND I WILL REITERATE THAT IN A LIFETIME OF WATCHING BLACK NATIONS CHANGE HANDS AND NAMES, ALL THAT EVER REALLY CHANGES IS WHO IS IN POWER AND WHO IS RAIDING THE TREASURY AND MURDERING ENEMIES. THAT IS A PART OF THEIR CULTURE, AND UNTIL THEY CHANGE IT THEY WILL REMAIN IGNORANT, SELF-SERVING, AND SAVAGE.
LBT