Inflationary Tortillas

Consumers are suffering because the stupid European governments boosted spending for a decade or more, the money financed by debt, and it is all of this spending that has made the purchasing power of the euro to fall. How do we fix this? The Mogambo has an answer.

The biggest laugh I had all week was from Bloomberg.com reporting that “European consumers are ‘suffering as surging food and energy prices erode the value of their wages’, finance officials said” which is not itself funny, but the article immediately goes on that this is “urging governments to boost spending to help the poorest deal with the fastest inflation in 16 years.” Hahahaha!

Consumers are suffering because the stupid European governments boosted spending for a decade or more, the money financed by debt, and it is all of this spending that has made the purchasing power of the euro to fall. And now the governments are going to boost spending some more Hahaha!

But it’s okay, these guys are saying, because it’s “to help the poorest deal with the fastest inflation in 16 years.” Hahahaha! Idiots! As Strother Martin said of Butch Cassidy and the Sundance Kid in the movie of the same name as they went down the mountain to La Paz, “Idiots! I’ve got idiots on my team!”

For example, Jean-Claude Juncker of Luxembourg is quoted as saying, “The least well off in our societies are very seriously exposed to a loss of purchasing power due to the increase of oil prices, of commodity prices and food prices”, which is true.

Then, bizarrely, he says that this inflation-from-too-much-spending makes it imperative that “It’s up to public budgets to react to this loss in purchasing power by helping out the least well off”! Hahahaha!

And how does he suggest we do that? Naturally, anybody with an ounce of brains or education knows that the first thing you do is stop creating more money and credit, which is what causes a “loss in purchasing power” in the first damned place.

Naturally, I figure that since the solution is so simple that it was time to go out for something tasty to eat and something wet to drink, and then maybe take in a couple of XXX-rated movies, but I was wrong, as here comes European Central Bank President Jean-Claude Trichet saying that inflation will remain “high” for quite some time to come, and European Union Monetary Affairs Commissioner Joaquin Almunia saying “We need to do more,” because “Inflation is a socially negative tax on the poorest” people, which it is, and that is why it is so imperative to stop creating more money and credit now not create more, you idiots!

Participating in this Gang of Morons Idiocy (GOMI) is U.K. Chancellor of the Exchequer Alistair Darling, who “cut the tax bills of Britain’s poorest families by 2.7 billion pounds ($5.25 billion) in a bid to cushion the blow from higher prices”, which is a nice thing to do, especially if you don’t want to overlook the fact that they were taxing Britain’s poorest families to start with, which tells you all you need to know about the good intentions of the British government.

But the horror is that they are NOT proposing to stop creating more money and credit! They were proposing to create MORE money and credit, making everything worse, as we learn to our horror when Darling said he will “raise government borrowing to finance the decision as slower economic growth curbs tax revenue.”

John Stepek, writing in the Money Morning newsletter from MoneyWeek.com, writes “Gordon Brown’s response to the end of his economic ‘miracle’ is to rattle off yet another succession of bills. You’d think he’d realise that the British consumer is sick of bills by now. But no. The man once laughably described as the Iron Chancellor has thrown off all pretence of fiscal competence and is now flinging money he doesn’t have at problems he can’t solve.”

And speaking of inflationary things that people can’t solve, Christopher Laird of PrudentSquirrel.com writes that “There is a report that 25% of the world wheat crop is at serious risk of a new virulent wheat rust that chokes the wheat before it comes to head. The US has its own concerns over a wheat rust spreading through the Mid West. So, what are the chances of a record grain harvest in 08?”

Naturally, I have no idea about the chances of anything since I figure that neither my marriage nor my career will last until the weekend, and so Mr. Laird gives us a hint. “Just to give an idea of the concern about food,” he writes, “China just spent a $400 a ton premium on fertilizer that used to cost $170 a ton Jan 08. It was a huge order. Reason? They are afraid that if they don’t have great harvests this year, tens of millions may starve in 09.”

And in case you don’t care about Europeans but are concerned about the other hemisphere because that is where you live, SteveQuayle.com posted a news.bbc.so.uk story that “The price of tortillas, a staple food in Mexico, are set to rise 18% in the next few weeks, an industry group says”.

This is bad news because “Thousands of people protested against tortilla price rises in Mexico last year” when tortilla prices rose “by more than 10%.”

So, Mexicans rioted at 10% inflation, and now everyone is wondering what they will do about 18% inflation in tortillas? Hahahaha! Welcome to inflationary hell! Ugh.

The Mogambo Sez: Ahh, commodities! Verily I say unto thee; thy gold, thy silver and thy oil sustain me when all others wouldst betray me, as they now betray all those who were tempted by the charms and promises of “invest in the stock market, invest in the bond market, invest in the housing market, and invest in a larger government for the long-term!”

Until next time,

The Mogambo Guru
for The Daily Reckoning
May 26, 2008

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.

Today is a holiday in Britain and America. But here at The Daily Reckoning, we are on the job – because there are things that need to be reckoned with.

Before we get down to serious reckoning, however, we give you a look at the news from the end of last week.

On Friday, the Dow fell another 145 points. Oil stuck around $132 and the dollar at $1.57 per euro. Gold rose to $925.

Remember when you could buy an ounce of gold for less than $100? We do. Remember when you could buy a gallon of gas for 25 cents? We do. What is Memorial Day for…but for remembering?

First, let us pause for a moment of silence, in honor of our ancestors, our veterans and our war dead. Like Pericles, we recognize that we have a big debt to the generations that went before us — their sacrifices have helped made us what we are…and made the country what it is. They saved. They invented. They built. What we see around us is mostly the result of their hard work…and many years of saving. If our ancestors had used up everything they produced, there would have been nothing left behind. But they didn’t. They left us their inventions and their constructions. They left us money, too. In the post-WWI period up until the mid-‘1980s, America was the world’s biggest creditor. More people owed more money to Americans than to any other nation. Public finances were occasionally stretched – such as during WWII itself – but from the founding of the republic almost until the Reagan years, each federal administration generally tried to leave the government cash till in about the same state it found it.

But in the space of a single generation, that huge legacy of capital and custom has been squandered. Now, the United States is the world’s greatest debtor – by a huge margin. Every year, it spends approximately 6% more than it earns. Its leaders have abandoned the virtuous practices of their ancestors. They no longer even pay them the homage of hypocrisy; they don’t even pretend to balance the budget, and the latest tally reported in these reckonings put the total unfunded liability at $61 trillion. This has effectively bankrupted the average family. It also turns every new baby in the U.S.A. into a major debtor – with more than $100,000 worth of unpaid bills -on the day he is born.

So we have a lot to remember this Memorial Day, and a lot to reckon with.

Warren Buffett was born in 1930. He must remember what the United States was like when it was still growing and genuinely prosperous.

“I’m fond of 1929,” said he a few months ago. “I was conceived that year and have always had an agreeable feeling towards the crash.”

Now, the richest man in the world, Buffett has come to Europe looking for better investments.

In an interview for Der Speigel, the Sage of the Plains said the United States was already in a recession and that it would be “deeper and longer than people think.”

He was in Madrid over the weekend, so we picked up a copy of El Pais to see what else he was saying.

When will growth in the U.S. economy pick up, the Spanish paper wanted to know?

“I have no idea,” Buffett replied.

When will the financial markets stabilize?” El Pais persisted.

“No idea about that either.”

So you see, Buffett could write for The Daily Reckoning; he would fit right in. Go ahead; ask us a question. We’ll give you the same answer Buffett gives:

We have no idea. But we do have opinions.

And in our opinion, George Soros is probably right when he says:

“The current financial crisis was precipitated by a bubble in the US housing market. In some ways it resembles other crises that have occurred since the end of the second world war at intervals ranging from four to 10 years. However, there is a profound difference: the current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency. The periodic crises were part of a larger boom-bust process. The current crisis is the culmination of a super-boom that has lasted for more than 60 years.”

*** Yes, it was a super-boom that Soros describes. And it coincided with your author’s life. He was born at the beginning of it. He has now reached what he thinks is the end of it. That financial super-boom also probably marked America’s great peak – when everything went so well for so long that politicians and central bankers all wanted to claim credit for it.

But the tippy top of the peak also coincided with a number of trends and events that made it possible. Among the most important was a low oil price. Back in the ’70s, the price of oil went to $30 – and shocked the world. It stayed around that level for 5 years, long enough to convince people that it was permanent. Consumers – especially in Europe – learned to live with less energy. Oil companies spent fortunes to produce more. And then the price plummeted back to $10…and world enjoyed a great boom.

That boom seems to be over, it drowned in the rising tide of the oil price. The black goo has gone up $50 a barrel since last September. The world’s consumers and producers should simply take the price clue with good grace – cutting back consumption and looking for new supplies, just as they did in the ’70s.

That is what is happening. The oil companies are spending four times as much on exploration as they did eight years ago. And consumers are being forced to cut back too. But it is not all that is happening. Central banks are fighting the correction with everything they have – and all they have is cheap money.

As you know, the combination of higher fuel prices…and lower housing prices…is squeezing America’s family. Comes news at the end of last week that the typical house in California is down 32% from a year ago. The state also has the second highest foreclosure rate in the nation, with one out of every 204 houses going back to lenders.

The other thing putting pressure on U.S. family budgets is the price of food. For the 15 years, up to 2007, food prices rose only 2.5% per year. This was the “Great Moderation” that central banks felt so proud of. But in the last 12 months, food prices are said to be up 4%.

We use the expression “said to be” as a polite way so saying that the government is lying. The raw data show food prices going up twice to three times as fast. Wholesale food prices are going up even faster. And every independent tally of prices at the supermarket shows much bigger increases than the government’s numbers are willing to confess.

For example, on this Memorial Day, you’ll find the price of hot dogs about 7% higher than a year ago, according to the Associated Press. Soda and potato chips are 10% higher. And hamburger buns are up 17%.

What do we have to thank for such high prices? Partly, it is a natural, cyclical trend in the food sector. But that’s not all. There is also all that cheap money that central banks are putting out. Speculators are using it to wager on oil…and food.

*** Think you’ve got it bad. El Pais sent a reporter to Cuba to see how the island was doing now that Fidel has stepped down.

It appears that bro’ Raul is trying to take the country in the direction China has taken: preserve the communists’ grip on power, but give the economy some air.

The El Pais reporter found a country desperate for some fresh air. Nothing seems to work – not even the public toilets. And thanks to bad agricultural policies (collective farming) vast tracks of what would otherwise be productive farmland have gone to seed. A nasty shrub tree, the marabu, has taken over. Crews of laborers work all day, with machetes, clearing them out.

A man can clear two “cordels” of land in a day, each measuring 400 square meters, says the reporter. For each cordel cleared in the Cuban worker’s paradise, he is paid 1 euro (about $1.57).

But if the money is bad, the satisfaction is worse.

“You can clear a whole field,” said one worker, “and then if they don’t put tractors and pesticide on it, you’ve done nothing. It [the marabu] just comes back.”

*** “When the price of oil was $25 and gold was $300, it was easy to know what to do with your money,” lamented MoneyWeek editor Merryn Somerset Webb last week. “Now, it’s not so easy.”

A friend in Paris echoed her sentiment on the weekend:

“I just don’t know what to do…I’ve got all my money in cash, because I can’t decide…and the dollar is falling. This is terrible. What should I do?”

We gave our friend the same answer Buffett gave El Pais. We don’t know.

It is not given to man to know his fate. We don’t know what will happen.

Still, you need to make decisions. So, here we offer a very little, very modest bit of advice. It is worth every penny you pay for your Daily Reckoning subscription:

First, pay attention to your business…or your earnings. This is where you get your money. Make sure you understand what you’re doing.

Then, make sure your costs are lower than your income.

If you have a house, make sure it is a place to live, not a speculation.

When you invest, there too make sure you’re really investing – not speculating. Buffett told El Pais what he always tells investors: never invest in anything you don’t understand. If you don’t understand it – that is, how the underlying business works and how you will make money from it – it’s not an investment. It’s just a speculation.

Right now, we are putting cash into three things:

1) Gold…for all the reasons you have read about in these Daily Reckonings. Is gold going up? We don’t know…we think there is a fair chance of it. But we don’t care; the gold (we hope) is for the next generation.

2) Swiss francs…because it is not the dollar

3) Emerging markets…because they are going up; it’s a trend we think will continue as the world economy regresses to the mean. We suggest an ETF of major developing markets…recognizing that some will probably fail and others will continue to grow.

What about oil? What about commodities? We don’t know enough about them to speculate. But from what we see, they look toppy.

Enjoy your Memorial Day,

Bill Bonner
The Daily Reckoning