A World Without Inflation

This week, our fearless inflation fighter imagines a world without the dreaded ‘i-word’ – and as it turns out, the implications for the rest of the Sordid Mogambo Lifestyle (SML) are staggering.

From Spiegel.de we read "The Shrinking Influence of the US Federal Reserve" by Gabor Steingart, thankfully translated from the German by Christopher Sultan.

The article starts out with the fact that governments around the freaking world have been creating more and more money, sometimes increasing their money supplies by 50% or more a year. And thus they write, "Nowadays, purchasing power exceeds purchasing opportunity. Most of all, there is not enough oil, and too few raw materials and food products" when compared to the sheer, staggering tonnage of money available with which to buy the aforesaid oil, raw materials and food products.

"This is why," they write, "the price of a barrel of crude oil (159 liters) has increased from $25 (?16) in 2002 to $135 (?87) in 2008. And it is also why the price of corn has tripled in the same time period, while that of copper has almost quintupled."

Then I notice Mr. Sultan, the translator, betrays himself as an amateur, as he has mis-translated the original German word SchlagenkopfenMogambobuttkickenBernankedoofusschwein, which (in the original German) is almost homicidally venomous, as merely "Bernanke’s personal adversaries" and the innocuous-sounding "Bernanke’s critics", when it is obvious that the word means so, so, SO much more, which is why I wrote it in German in the first damned place! Or I would have, if I had written the article, which I did, admittedly, not, but which is beside the point.

Then, apparently rattled by my sudden, uncalled for criticism and my obvious skills in the subtle nuances of the German language, Herr Steingart really gets weird! Listen to this: "If the inflation introduced in the United States is excluded, a small miracle is revealed, namely something approaching price stability." Hahahaha!

Let me get this straight: If you take out inflation from the rise in prices, then prices did not rise? No kidding? Hahahaha! This is too, too much!

But immediately I saw that it was too tempting a technique not to try! I immediately raced home and told my wife that if you take out all the times that I acted thoughtlessly in a conceited, self-absorbed, "me-me-me!" kind of way, and you neglected to count all the times that I was either screaming at, or aloof to, her and the stupid kids, and you discounted all the times where I just disappeared for days at a crack, then it appears that I was NOT a total failure as a husband and father! I’m borderline, damn it! Borderline! I’m still good!

You should have seen the look on her stupid face when I kept yelling at her, "Admit it! Admit that it is true that I am not the worst husband and father the world has ever seen! Admit it, damn it! Admit it! Admit it! Admit it!" over and over, louder and louder.

And then, giving her time to think it over, and still giddy with excitement, I ran to work and barged into my boss’s office to tell her, "If you ignored all the stupid mistakes I made, and you forgot all the complaints about me from clients and all the other stupid employees, then I was NOT the worst employee in the whole company! I’m at least borderline! Borderline, damn it! Admit it! Admit it! Admit it!"

Well, as usual, I get no respect from her, either, and all she wants to know is why I am barging into her office in the middle of the afternoon, dressed for playing golf, since I had called in sick this morning? Jeez! See the kind of "let’s change the subject" crap I have to put up with every damned day of my damned life? It’s like I’m cursed or something!

Anyway, so I go back home, and finish reading the article, where Mr. Steingart goes on, "Adjusted for inflation, prices are in fact rising by only 2.3 percent." Hahaha! I can’t help myself! Prices are rising "only" 2.3% above the rate of inflation, after you take out inflation! Hahahaha! Unbelievable! He doesn’t say what the 2.3% is, if it isn’t inflation, which is kind of funny.

And since we are being funny, I forget where I got this, but " Officials with the International Monetary Fund (IMF) have informed Bernanke about a plan that would have been unheard-of in the past: a general examination of the US financial system. The IMF’s board of directors has ruled that a so-called Financial Sector Assessment Program (FSAP) is to be carried out in the United States. It is nothing less than an X-ray of the entire US financial system." Hahahaha!

The reason given is that "Under its bylaws, the IMF is charged with the supervision of the international monetary system." To illustrate the fairness of its request, the article notes, "Roughly two-thirds of IMF members – but never the United States – have already endured this painful procedure."

Painful? Americans? Americans putting up with painful? Hahahaha! Don’t make me laugh!

Apparently, we are so screwed up economically that the IMF, an organization of Leftists, socialists, Keynesian-befuddled, fiat-money yahoos and (seemingly) various mental defectives, thinks it is necessary to find out what is wrong with us! Hahaha!

As if Bush, Cheney, the Treasury, the Congress, or the Fed would allow anyone, especially foreigners, to go snooping around and finding evidence of their staggering mismanagement, their unfathomable stupidities, and their unbelievable frauds and corruptions! Hahaha! Too, too much!

Hell, nobody has ever been allowed to look at, much less audit, America’s gold (held by the Federal Reserve) since the ’50s, or the Fed’s books, ever!

But I am supposed to think that, "As part of the assessment, the Fed, the Securities and Exchange Commission (SEC), the major investment banks, mortgage banks and hedge funds will be asked to hand over confidential documents to the IMF team. They will be required to answer the questions they are asked during interviews. Their databases will be subjected to so-called stress tests – worst-case scenarios designed to simulate the broader effects of failures of other major financial institutions or a continuing decline of the dollar." Hahaha!

First we get the outrage of Treasury Secretary Paulson wanting the Federal Reserve to be given huge, new, awesomely sweeping powers to intrude anywhere it wants, and actually manipulate private financial firms (and your money), and now this? Hahaha!

We’re freaking doomed! Ugh.

Until next time,

The Mogambo Guru
for The Daily Reckoning
July 7, 2008

The Mogambo sez: I am sure that you have been reading the headlines about how gold, silver and oil led the league, as the saying goes, in the first half, and how everything else was a big, fat loser. Those headlines, plus the preceding sentence, should be more that enough if you are smart, literate or lucky. It will never be enough if you are not.

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.

The Mogambo Guru is quoted frequently in Barron’s, The Daily Reckoning and other fine publications.

U.S. markets were closed on Friday…

…Still, the world did not stand still so Americans could enjoy their fireworks and hotdogs.

"Americans are so nice…so positive. I always like going back to the United States." This was the word from Elizabeth, who just returned from the Land of the Free this morning.

"When you live in France you forget how nice strangers can be. But it is amazing how big people have gotten."

(Being "nice" is something Americans strive to be; it is not something the French care about particularly. Instead, on the surface, the French are "correct" or polite. Later, you find that they are as nice as Americans, but not as big.)

Meanwhile, bad things continue to happen to nice people:

"Credit crisis is going to get worse," says The Wall Street Journal.

Elsewhere in the paper it was reported that the rate of joblessness for more than six months is rising.

And this from Kiplinger’s: "Home equity door slams shut."

House prices are down across the United States. In Southern California, for example, the typical house is about 20% cheaper than it was two years ago. In some areas, where developers built thousands of new houses, prices are off as much as 40%. To make matters worse, many of these houses are far from town centers – requiring long commutes for work, shopping or entertainment. And gasoline is a lot more expensive than it was when the houses were first designed.

Americans earn dollars. But the "almighty dollar no longer exists," says the Associated Press. They have a currency without purchasing power…or staying power.

Americans are all set – for a world that no longer exists. They have home equity lines and credit cards – but the easy credit is disappearing. They have their suburban palaces and their land barges – but they can no longer afford the energy required to run them. Even their eating habits evolved for a different world. Real wages failed to rise, so families put more people to work…and gave up home-cooked meals and backyard gardens in favor of dining out. Restaurants – in an era of cheap food and cheap energy – competed for customers by offering bigger and bigger portions. Everything got supersized – people too.

Now Americans are getting their supersized desserts. Not because they haven’t been nice. But because they haven’t been good. That’s how free enterprise really works; it rewards virtue – hard work, saving, investing, learning, taking risks, etc. As for those who spend too much and save too little – it kicks them in the derriere.

Today, they need to borrow almost $3 billion per day simply to make ends meet. And half the national debt – about $5 trillion – is owed to foreigners. Much of that money is in the hands of central banks, as part of their $4.8 trillion in foreign reserves. Then, there is a mountain of dollars in the hands of Sovereign Wealth Funds. (Tomorrow, we will have more to say about SWFs…)

It’s the biggest transfer of wealth the world has ever seen. And it comes in many different forms. Billions are transferred from American motorists to oil-exporting countries. There’s also the billions transferred to the auto-exporters. When Americans buy cars today they’re more likely to buy one made by a foreign company than one made by the Big Three. And there are the billions shipped over to food exporters too. America used to be the biggest exporter of food in the world. Even today, we’ve seen estimates that the entire world’s population could be fed on what America COULD produce. But when the United States got squeezed by high energy prices, Americans decided to squeeze energy out of their own food crops. Result: they pay record prices for energy AND food.

Of course, it wasn’t just money the U.S. was sending abroad. It was also know-how, technology, and habits. The habit of saving, for example, packed its bags in the early ’90s – and moved to Asia. And foreign students filled America’s best universities and then often went back to Korea, or China, or Vietnam – taking their equations with them. Back at home, they set up newer, better factories – and ate America’s lunch! Back in the late ’90s, this loss of manufacturing seemed not to matter. Americans came to believe they could do something better than making things – we could create, invent and finance. "They sweat; we think," was the conceit.

But how do you like those foreigners? It turned out, they could think too. Not only that, but the combination of thinking and making things proved hard to beat. Like Japan before them, the exporting nations soon equaled U.S. quality…and then surpassed it. The United States is now a net importer – of energy…of food…and even technology. At least, that’s what we hear. And finance? It’s collapsing…and will probably return to where it was before the credit bubble. Historically, the financial industry provided only about 10% of U.S. corporate profits. In the bubble, the percentage rose to 40%…and is now headed back down.

Wages are rising in China, India, Russia and Brazil…but they are stagnant or falling in the U.S. of A. We reported the staggering fact in these reckonings last week: Since ’67, consumer prices are, officially, up seven times. Wages in America are up exactly the same amount. In other words, during your editor’s entire adult lifetime Americans’ per hour earnings have not increased a single penny.

Funny none of the presidential candidates mentioned it.

*** "Traders on alert for ‘capitulation territory,’" is the headline in today’s International Herald Tribune.

Stock markets all over the world are getting whacked. They’re at a 5-month low, even beneath where they were when Bear Stearns went bust. Japanese, European and American stocks (as measured by the S&P) are all in bear market territory – all down at least 20% from their peaks.

Naturally, "some investors are beginning to scent a possible end to the slide."

It was dumb money that was buying stocks at their all-time peaks. Not only in the United States, but everywhere. It is imbecilic money that buys now, in our opinion.

We are a long way from "capitulation territory." When it comes, you will not see stocks selling at 15 times earnings. You’ll see them selling at 5 times earnings. And you won’t see the Dow at 14 times the price of gold. You’ll see it at 2, 3 or maybe 5 times the gold price.

Most importantly, when investors finally give up on stocks, you won’t find articles in the major press telling you that investors are "on alert" for the bottom. They will have lost interest – and their money – long before.

Despite all their woes, Americans have still barely begun to cut back on spending and begun to save in a major way. Sooner or later they will. And if the savings rate goes back to where it was in the early ’90s – at nearly 8% of personal income – it will take about $800 billion out of consumer spending. You can imagine what that will do to retailers…to the auto and aviation industries…and to Wall Street.

Stay clear of stocks, dear reader. Stick with cash and gold.

*** Politicians know better than to talk about real issues. Instead, they argue about which one goes to church more often…or who is best able to fight "terrorists"…or whose taxes will be raised. Of course, they might want to talk about the real threats to the nation, but they know the voters wouldn’t stand for it.

"Who are you going to vote for?" asked a well-meaning friend from New Zealand.

"Vote…I never vote."

"Why not?"

"Statistically, it is a waste of time," we explained. "Barack Obama will be elected Grand Wizard of the Ku Klux Klan before my vote makes any difference in a presidential election. But there’s a moral reason too. Suppose my man wins? Then, I bear some responsibility for what he does. I have no idea what he might do…and no control whatever over him… "

"But isn’t this an important election?"

"Maybe, maybe not. Economically, the cake has already been baked. The next president isn’t going to like it very much. And he’ll do all he can to avoid having to eat it. All these rebates and bailouts – I suspect that we haven’t seen anything yet. Whoever is elected…we’re probably going to see $1 trillion deficits…and the collapse of the dollar, along with the post-Bretton Woods financial system…"


Until tomorrow,

Bill Bonner
The Daily Reckoning