02/13/09 London, England “We hate you guys…”
Mr. Luo Ping, director general at China’s Banking Regulatory Commission, speaking in New York on Wednesday, shared his opinion of U.S. bailout policies:
“Once you start issuing $1 trillion-$2 trillion …we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.”
Reports in the press this week say that China is considering ways to diversify out of the dollar. The Chinese are no fools. They see what is coming. And they know what it will do to them – the holders of the largest pile of dollars ever assembled.
The Financial Times made it perfectly clear to them in a cartoon yesterday. It shows Barack Obama in front of a huge smoking trashcan filled with dollars. The president is pouring on gasoline.
Yes, dear reader, Mr. Ping has caught on. And the rest of the world is catching on too. The feds are printing trillions of dollars…and dumping them in banks and zombie corporations. They’ve got out their Zippo lighters…their firestarters…their kindling and crumpled paper.
But getting this blaze going is harder than most people think. It could take months…or even years.
Yesterday, the Dow held steady. But oil continued to sink. The price per barrel fell below $35.
France is officially in recession, says today’s La Tribune. GDP fell at a 1.2% rate in the last quarter, the government announced. A decline of 1% is expected for 2009.
Spain is in a worse recession. Property sales are off 30%. The GDP is expected to decline 3.3% this year. And unemployment is projected to reach 19% by 2010.
“Falling like a rock,” says La Tribune of Spain’s economy.
Meanwhile, “India set for slowest growth in six years,” says the FT.
“Austria warns of dangers in potential Ukraine ‘catastrophe,’” continues the gloom and doom.
And in Japan:
“Deflation fears grow as wholesales prices fall.”
“Pioneer lays off 10,000 workers…”
World trade is collapsing. Now everyone is complaining about ‘protectionism.’ The next G7 meeting has protectionism – and how to avoid it – at the top of the agenda. But protectionism is just the reaction, not the cause. Trade is collapsing because people have become reluctant to spend, invest or lend anywhere – especially, far from home.
The guy who invented the shipping container industry works in the office above us, here in the “Sea Container Building” in London. You know, the building with the gold balls on the roof. He’s an American from Kentucky who later got into the railroad business and went broke. But after WWII he figured out that shipping could be made much more efficient by putting goods into metal containers and using big cranes to stack them on ships. Thanks to his innovation, globalized trade got a huge boost.
But now, for the first time in its 53-year history, container traffic is going down. In the last four months, not a single new container vessel has been ordered. China – the planet’s largest factory – is making, selling and shipping less stuff to the rest of the world. Exports to the United States are down 10% year on year; exports to Europe are down 17%.
In the United States itself: “CEOs see grim economic outlook…”
“Biggest GDP drop since ’46…”
“Toll Bros. first quarter revenue down 51%…no end in sight to real estate trouble…”
“Caterpillar to cut 2000 jobs…”
The headlines are nearly unanimous: it’s deflation that menaces the world, not inflation. But Sparky Benarnke…and Barack “House-o-fire” Obama…are on the case. They’re not going to rest until they get that darned conflagration going.
Eventually, they’ll get a small flame started… And then, watch out…it could burn, baby, burn… like a brush fire in Australia.
And that’s when the Chinese will really hate us.
*** “Fears of a return to the 1930s are too pessimistic,” writes David Bowers in the FT.
Au contraire, they seem too optimistic to us.
In the ’30s, the feds still had a residual respect for law and order. So did the public. When the Roosevelt administration went about taking control of the economy, it had to fight against the courts the whole way. As many as 1,600 injunctions were issued to prevent the feds from carrying out their grandiose plan. When these cases got to the Supreme Court, the court threw out key parts of Roosevelt’s program as unconstitutional. The U.S. Constitution was meant to limit was government could do. Apart from the express undertakings described in the document, all other things were supposed to be left to the states and to individual citizens. Nowhere in the U.S. Constitution was there any mention of an “industrial recovery” program, for example. So the Supremes threw it out.
Then, Roosevelt attacked the court itself. He argued that “nine old men” should not be allowed to stop progress. He tried to pack the court with more justices ready to do his bidding. This was too much for Congress to swallow; even his vice president was against it. The amendment to increase the number of Supreme Court justices failed.
But then, the old men themselves failed. They died. And as their mortal envelopes got packed in the dirt, new justices were appointed – such as Felix Frankfurter and William O. Douglas – who were willing to go along.
This time there is practically no resistance. President Obama enjoys support, both wide and deep. The public is behind him. Congress is on his side. And the courts have long since given up trying to limit the power of the federal government.
Everyone wants something for nothing. And everyone believes he can get it from the feds. As a result, we’re looking at trillion dollar deficits – as far as the eye can see.
That’s not all, of course. Back in the ’30s, the dollar was still linked to gold. The price was set by law and dollar holders were free to convert their dollars into gold at the statutory price. In order to devalue the dollar, the Roosevelt administration had to call in the nation’s gold – making it illegal for private citizens to hold the yellow metal – and then revalue gold upwards. In a stroke of a pen, debts denominated in dollars were clipped 60%.
Now, there’s no need even for the pen. Dollars float on a sea of debt…with no golden anchor to windward. All it takes is a whoosh of inflationary breeze and the buck is off! No need for calling in gold. No need for legislation. In a few days, the value of the dollar could be cut in half…or by 75%…or more.
And who’s going to protest? The Chinese? Yes…but they don’t vote in U.S. elections.
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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Stumbled across the story of Hungarian inflation on Wikipedia and this in the Holy Scriptures the other day :
After the hyperinflation in Hungary
Hungary went through the worst inflation ever between the end of 1945 and July 1946. In 1944, the highest denomination was 1,000 pengő. By the end of 1945, it was 10,000,000 pengő. The highest denomination in mid-1946 was 100,000,000,000,000,000,000 pengő. A special currency the adópengő – or tax pengő – was created for tax and postal payments [1]. The value of the adópengő was adjusted each day, by radio announcement. On January 1, 1946 one adópengő equaled one pengő. By late July, one adópengő equaled 2,000,000,000,000,000,000,000 or 2×1021pengő. When the pengo was replaced in August 1946 by the forint, the total value of all Hungarian banknotes in circulation amounted to one-thousandth of one US dollar. [13] It is the most severe known incident of inflation recorded, peaking at 1.3 × 1016 percent per month (prices double every 15 hours) [14] . The overall impact of hyperinflation: On 18 August, 1946 400,000,000,000,000,000,000,000,000,000 or 4×1029 (four hundred octillion [ short scale ] ) pengő became 1 forint.
One source [2] states that this hyperinflation was purposely started by trained Russian Marxists in order to destroy the Hungarian middle and upper classes. The 1946 currency reform changed the currency to forint. Previously, between 1922 and 1924 inflation in Hungary reached 98%.
Proverb 30
8Remove far from me vanity and lies: give me neither poverty nor riches; feed me with food convenient for me:
9Lest I be full, and deny thee, and say, Who is the LORD? or lest I be poor, and steal, and take the name of my God in vain.
The Chinese will certainly protest! They are asking Hillary for a “guarantee” we won’t inflate the dollar to nothing, but really they are probably just buying time to diversify…
Caterpillar has in fact cut 22.000 jobs,
Yours
Let’s not forget the growth impediments being constructed as we speak. The capability to service future debt erodes daily with each new regulation and protectionist overture.
The money under my management is firmly entrenched in gold and short 30-Year Treasuries. I think this is an essential pair trade since the government has only two options: borrow or print. Borrowing more will drive bond yields higher, and printing will devalue the dollar and hence drive gold higher. My guess is that both will occur, but I want to be ready for both contingencies.
I almost feel ashamed to say this, but I also think it prudent for every gold investor to place a small insurance (short) bet should we be proven wrong within some time frame.
Your readers are growing old –eyesight dimming. Going blind -even with my granny specs –trying to read here. Please go back to old format…..please MN
Are the Chinese so ignorant of the basic connections between money and finance, and the real economy of production, that they did not see that there was no way that their massive pile of dollars could retain “real value”? Worryingly, I think the answer is yes! After all, Japan had developed on the export led model, then Korea, Taiwan, Singapore etc. They just followed the path.
We now have everything crumbling at the same time. One,the bloated worldwide financial system that had been force fed for many years by extremely low interset rates (think Japan in the 90s, then the US after the dot com bust). Two, the industries built up on the back of the wide spread real estate boom (construction and construction materials of course, but also consumer goods and services enabled by equity extraction).
I can’t help thinking of the analogy with the Victorian bushfires. Years and years of build up of flammable materials and the preconditions for fire. The conflagrations starting somehow (lightning, power poles failing, arson) but then sweeping all in front. A wind change, ferocious heat, fighting useless, flight useless, helicoptors useless (are you reading this Ben?).
Are we at the end? No! This fire has hardly started yet!
Hillary hectoring the Chinese holder of American Debt. Priceless
Back in the Arch Federalist FDR’s day, photos of the Federal Mall showed a near solid line of obviously temporary huts lining both sides of the Mall. These building were erected hastily and sometimes shoddily on purpose….both the occupants and buildings were to be gone after the emergency of a military build-up to fight totalitarianism was over. A solid building would be too tempting and Congress might then make temporary Federal programs, heaven forfend, permanent. Unfortunately these buildings did leave the mall after victory but they were replaced by the stolid Pentagon, a kind of Black Hole of American Founding Principles and Money.
What’s really hilarious is that Congress can go out on the steps of the Capitol and look south to the Lincoln Memorial…a monument celebrating the Executive that made them most irrelevant and then go right back in and vote for but another Military-Security appropriations bill that further erodes their already tenuous relevancy. No wonder “cause and effect” seems to have been banished from the Imperial Realm. With every military appropriations bill should be a standard motherhood language stating “A Bill to Eliminate Congress in the Fullness of Time, or even sooner if possible”