The Bread War

Uh-oh. Looks like the Mighty Masked Economist is pulling out all the stops: loading up on ammo, counting his gold and stocking up on Spam. Why? Well, it might have something to do with the lack of new Fed credit…

I creep out from behind the couch and nervously peek between the tightly drawn curtains in the living room. I darkly note that, ominously, things are getting really spooky out there, and I am not a happy dude when I am spooked. Dangerous and homicidal maybe, but not happy. Perhaps even a marked tendency toward loud, hysterical outrage, but definitely not happy.

For instance, how about the spookiness of almost no increase in Total Fed Credit last week? That $1.1 billion was almost nothing! Even currency in circulation is holding steady.

Of course, we can always count on foreign central banks, which put another $4.6 billion into increasing the clotted hoard of over-priced, low-yielding American government and agency debt in their custodial accounts at the Fed. As an aside, I hear that if you stand downwind of the Federal Reserve, you can actually smell the stench.

But even all that foreign central bank stuff may be coming to an end very soon, as we read on Bloomberg.com: "Bank of Japan Governor Toshihiko Fukui said Japan needs to adjust rates from near zero percent ‘without delay’ to prevent companies from investing excessively and the economy from overheating."

So, this is getting to be serious business here, because new money has to always (homework assignment: Underline the word "always" and meditate on its significance) be coming from somewhere, more and more all the time, as that is the whole point of a Ponzi-finance scheme. It’s the only thing that makes it work: You either come up with more money, always, all the time, forever, or prices of some things go down. Or the prices of most things go down. Or the prices of all things go down. I dunno. I never was good at multiple-choice questions, and I am not going to try and answer this one, either.

But the world’s governments and central banks are deathly afraid that the Ponzi-finance schemes that produced the bubbles in stocks, bonds and real estate will go bust, as all Ponzi schemes do. It’s not that they feel bad for you (because believe me when I tell you that the government does not give a rat’s patootie about you), but because the governments have their own outrageous Ponzi-schemes, such as Medicare, Social Security and a myriad of other welfare/transfer/government programs. Not to mention all the graft and corruption. Perhaps that is why Sprott Asset Management says, "Nary has a crash ever occurred in these areas without the central banks turning on the spigots. We highly doubt it will be any different this time."

So, these things will go down in price unless, unless, unless more money gets created (by the simple expedient of somebody going deeper into debt) to buy out the current owners of those assets, handing them a profit that is taxable. It’s that simple.

One thing I am very, very, very sure about, though, is that gold and silver will be a fabulous asset that will undergo a huge inflation in price. Another thing that I am sure about is that one day in the not-too-distant future, your grandchildren, with the advantage of 20/20 hindsight, will be able to prove that in 2006, with gold and silver selling at less than $700 an ounce and $13 an ounce respectively, precious metals were the Mogambo Freaking Bargain Of The Century (MFBOTC), and your grandchildren will laugh at you ("Hahaha!") because you did not buy gold and silver then, proving that you were so stupid that whereas even newborn babies can see that the MGBOTC was right in front of your eyes the whole time, you, perversely, kept all your money (and even put more money!) into the Ponzi-stock market, the Ponzi-bond market, the Ponzi-government economy, and the Ponzi real estate market! Hahahaha! Now you are forced to eat weeds and bugs because all of your money is gone and the song was right: "Nobody loves you when you’re down and out."

Don’t think it can happen? Well, pull up a chair and let me tell you about Zimbabwe, the most grossly, insanely mismanaged economy in the history of the world; they confiscated the assets of the only profitable businesses in the country and they printed money. For perspective, a decade ago the Zimbabwe dollar was roughly equal to the U.S. dollar.

Anyway, according to a woman known only as Cathy, who actually lives in Zimbabwe and gets paid in Zimbabwe dollars, "Petrol was 260 thousand dollars a litre three weeks ago. Last week, it rose to 360 thousand a litre and this week it galloped to 500 thousand dollars a litre and then disappeared altogether." Disappeared!

I am thinking to myself, "Big deal! Not being able to afford gasoline just means that you have to send your whining wife and/or kids walking to the store to buy bread, frozen pizza, and some of those little chocolate donuts that I love so, so much and too, too much to share with hateful, ungrateful family members."

But, perhaps I was too hasty, and there is more to this than meets the eye! Sure enough, she goes on to write, "In complete contrast to the realities of four-figure inflation, this week a dramatic crisis arose with bread. Bakers put the price up; the government ordered them to put it back down. At the price stipulated by government, bakers said they were operating at a loss and putting twenty thousand jobs at risk." What to do? Well, in their own defense, the "Bakers took out a full page advert in the press detailing the increases of everything from flour and yeast to wages, packaging and delivery."

The result? Hahaha! The same in Zimbabwe as everywhere else, my Darling Mogambo Cherub (DMC)! For instance, our own American government calculates that there is almost no inflation, and so price increases are, therefore, proof of price gouging, for which you can be fined and sent to prison! She says almost the same thing about the comparable idiocy of the Zimbabwe government when she writes, "The government refused to allow the price increases and called in the police. In a week over 280 bakers and shop assistants have been fined for overcharging."

Now that we have the predictable government response out of the way, let’s now turn our attention to the predictable economic response. She writes, "As the bread war continued all week, the obvious happened, and fewer and fewer shops had bread on their shelves as less and less loaves were baked." It disappeared, just like the gasoline that disappeared! This is proof – proof! – of a Martian invasion to take our resources and women back to Mars with them on their flying saucers!

It is strange that she doesn’t even mention this manifest Martian menace, but instead she summarizes, "It has been an absurd but now familiar case of denial by the government." At this, I laugh! I say, "Welcome to the club, lady!" All of this is no less absurd, and no less familiar, as the denial and suppression by our own American government, the irresponsible American press, the calumny of the mainstream universities, and the horrid, insane Federal Reserve about our monetary and price inflations, which differ from Zimbabwe only in degree. Only in degree!

But this is not about how Zimbabweans can’t afford bread and are now forced to eat weeds and bugs. Instead, the point I was painfully belaboring is that since all of the money and assets in America are now debt ("putting equity to work!"), and since interest rates are still hovering around the lowest in history and thus destined to rise significantly, that this lack of increase in Total Fed Credit is frightening, sort of like when I came down to breakfast and my wife was standing there wearing a hockey mask and holding a chainsaw. As she yanks the handle, cranking it to roaring life, she lunged at me with it, screaming, "You’re going down, you sick jerk!" And my daughter was yelling encouragement: "Get him, mom!"

But I’m not here to talk about Father’s Day this year. The point is that this lack of new credit is that kind of spooky: It leaves an impression on you!

Perhaps we should, instead, listen to the calm, steady and rational voice of Hans Sennholz, who says, "As soon as goods prices and wage rates begin to rise, businessmen need additional funds. As long as the Fed provides them, the boom can continue and even accelerate. It comes to an end when the Fed ceases to throw new funds on the loan market or the quantity launched no longer suffices to feed the boom. At that time, the readjustment, that is, the recession, begins."

And I assume that it will manifest as described by the folks at DailyReckoning.com, who write, "The feds spared the nation a serious correction in 2001. But they did it at the expense of America’s working classes, who were lured deep into debt in order to keep spending. Now that rates are rising, they find it impossible to continue."

If I was writing that, I would have finished the sentence by saying, "they find it impossible to continue" with "eating real food, and they had to eat weeds and bugs, and they lived in their cars, and then the government turned this excess population of weed eaters and bug suckers into Soylent Green, a nutritious food supplement that we used to buy oil."

Anyway, this is actually about how most assets will deflate in price, and there will be a simultaneous inflation in some other asset. Choose wrong, and your living standards fall to the point where you are, again, eating weeds and bugs, but choose correctly and you can do anything you want to do and strut around like you own the place because you probably do. And if not, you can hire so many lawyers that you can destroy anybody who says you don’t or can’t.

Putting words into the mouth of Captain Hook, of TreasureChests.info, I note that economic history is always boom-bust, therefore it is cyclic, and therefore, it always repeats itself. He writes, "we would like to point out that like Rome, where it was not outside forces that finally caused its demise, but the rot from within, sooner or later price managers / bankers / politicos will have wrung as much speculation out of the current population as possible, and stock markets (most equities) will ultimately collapse in price."

Until next we meet…

The Mogambo Guru
for The Daily Reckoning
July 3, 2006

Mogambo sez: You can almost smell the fear in the gold and silver shorts, as more and more people are waking up to the fact, without elaboration, that every time in the entire course of history that a government committed these kinds of monetary sins, it was gold and silver that saved the day for those wise enough to buy and hold them. And it was curtains for everyone else.

And the pertinent lesson is not just that the people who bought gold and silver prospered, but that the people who bought early in the cycle made the most money when gold and silver rose.

Editor’s Note: 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 trouble with Paris, we realized, walking home from work on Friday, is that there are too many French people in the city.

By contrast, London is a great city, because it has so few Englishmen. In the best neighborhoods of central London the only Englishmen we see are driving taxicabs.

Readers will say we exaggerate. We don’t deny it. There are plenty of Englishmen in London and plenty of foreigners in Paris. But everything happens at the margin, as economists say. At the margin, Paris is a French city; London is an international one. Paris is an attractive capital city. London is a great one.

We have more to say about this…below, but first let us get back to work:

Tomorrow is the Fourth of July. It is Independence Day for the land of immigrants. Many people in America are taking a long holiday weekend. But here at The Daily Reckoning headquarters in London, we recognize no national holidays. There is always something to be reckoned with, regardless of time of day or country of origin. Today, we reckon with the fact that gold has jumped back from its recent correction and now is once-again over our target-buying price of $600.

We laid out our best guess as to what is happening on Friday: The U.S. is still following Japan into a long, hard slump – with softening real estate leading the way.

"America’s day of reckoning is nigh," says a headline in this week’s MoneyWeek. Quoting Barron’s Alan Abelson, MoneyWeek remarks, "it has been the greatest housing bubble since shelter-seeking man first crawled out of his dank cave."

Housing bubbles can’t last forever. Even the biggest one in history has to deflate sometime. Why not now?

On Sunday, we called a friend in the eye of bubble – South Florida, just north of Miami – to ask about the weather. "Did you manage to sell your house?" we wanted to know.

"No, there is just too much stuff for sale," came the answer. "It’s hard to get anyone to take our place seriously."

Our research concluded, we turn back to theory and pontification.

"A housing slowdown is especially ominous since the sector has underpinned growth over the past years…" MoneyWeek warns. Why? Because the recession of 2001-2002 was followed by very weak job growth. Those few jobs that were created tended to be related to one of two big industries: housing and war. Both industries flourished on cheap credit. Homebuyers need low rates in order to buy houses they otherwise can’t afford. They need cheap credit, too, so that they can refinance…taking out what little equity they have so they can spend the money on things they don’t really need. And the empire needs low rates in order to finance its war against terror – more specifically, its periphery wars to subdue the poppy growers of Afghanistan and the desert tribes of Mesopotamia.

We stop a moment to reflect on one of the protagonists in the war against terror – Osama bin Laden. The man publicly announced his strategy. He would lure the Great Satan to waste his energy, his money, and his reputation in a futile war. For every $1,000 expended by bin Laden’s forces, the United States would have to spend $100 million! Sooner or later, the empire would be exhausted. It would be bled dry, bankrupt – powerless to defend itself.

The strategy was simple. It was unsurprising and hardly inspired; it is a typical strategy for guerrilla struggles. What is surprising is that the U.S. Empire would be so simpleminded as to fall into the trap in such a big way. The cost of these peripheral wars has just passed $500 billion, said a press report last week. What has that money bought? According to a survey of both Democrat and Republican strategists, it has gained us nothing. The terrorists are a bigger threat today than they were when the war was announced.

But now, Ben Bernanke is fighting his own war. He is out to prove that he can battle inflation, and win. As we pointed out last week, this use of overwhelming force against a minor enemy may have unintended and unpleasant consequences. It may trigger an unexpected flank attack – by deflation! As the housing bubble deflates, a lot of people are going to have a lot less money in their pockets – agents, brokers, granite counter-top makers, developers, road builders, and all the millions of people who have come to depend on rising house prices for their spending money. That’s why David Rosenberg of Merrill Lynch puts the odds of recession next year at 40%, and why we would put them even higher.

What does this mean for the price of gold? Recessions are not typically inflationary. People spend less, so prices tend not to rise. Gold may not go up as fast or as far as its bugs believe, but this could be a recession as strange and grotesque as the boom that preceded it. While Americans in the homeland might find they have too few dollars, holders overseas could find they have too many. Gold could rise in price, even as domestic consumer prices, property, and financial assets generally fall.

More news from our currency counselor…

————–

Chris Gaffney, reporting from the EverBank world-currency trading desk in St. Louis:

"With a history of rigged elections, the longer an official announcement is delayed, the more volatile this currency will be. We still feel there are better places to put your speculative dollar and would stay away from the peso for now."

For the rest of this story, and for more market insights see today’s issue of The Daily Pfennig

————–

And more commentary from London…

*** "I am confused," begins a thoughtful letter from a Dear Reader. "You say (in a bit of a sweeping generalisation) that CEO’s are not Junkers. They have no sense of national identity; they are just all out for themselves. And then you defend yourself against your would-be Junker reader, staying loyal to his sense of national identity for better or worse, whilst painting a picture of braver ancestors setting out for ‘a place where they could mind their own business, earn a living and find happiness in their own way.’ Not all out for themselves then?

"Your reader accuses you of being a coward for deserting the U.S., but then describes himself as staying put in a ‘bunker,’ which sounds rather cowardly.

"He also claims to be envious of your many different places of residence, which suggests that he would like to be in that position too, but for that pesky sense of courageous loyalty to his home which forbids it. A Bunker not a Junker.

"Is that the problem with everyone who doesn’t stay put? Does he lack backbone?" you ask.

"Many of those who don’t stay put almost certainly don’t lack backbone. They are the Junkers who become émigrés – sometimes through choice, sometimes not – and who then go on to build a new nation for Junkers. However, I have no doubt that hidden amongst those many émigrés on whom the U.S. nation was built were Bunkers, who would never have become émigrés if it were just up to them and their backbones.

"Sometimes people who choose to move are not émigrés. Some of them probably have backbone, some don’t. There may be Junkers and Bunkers in their number. They do have a strong sense of ‘tribe,’ however, which is a kind of nationhood. We call them nomads or gypsies.

"But I don’t think you are a gypsy, Bill. You are an example of a relatively modern phenomenon – someone who chooses to live in several different places. So, how do we describe someone like you? Someone who can and does happily choose to call several different places home, and whose ‘tribe,’ as such, is similarly widely scattered across the globe. And is your choosing to live this way a question of backbone, or something else?"

We were thinking about that question as we walked through Knightsbridge, passing in front of the Mandarin Hotel, and then Harrod’s. We were wondering what we were, and why we were what we were. We noticed, first, that we were hardly alone. The streets were full of people who didn’t seem to belong there anymore than we did. Pakistanis, Indians, Persians, Chinese, Russians, Irish, Scots – people passed speaking various tongues and dialects, but we rarely heard an English accent. There is even a huge community of French people in London. But they are not the same French people you find in Paris. Here, their arms swing more freely. They are less interested in protecting their own niches, status, and privileges. They are more interested in finding new opportunities for themselves.

Whether French or Danish or Indonesian…this huge tide of immigrants make central London one of the most dynamic, interesting and expensive cities on Earth.

Paris, by contrast, is a little dull. The French have plenty of immigrants too, but of a different sort. They tend to end up in public housing in the suburbs of the city – supported by taxpayers. In the city center, except for tourists, one finds French people almost everywhere.

*** A young man with an accent and a carpet-cleaning truck showed up at our door in London on Saturday morning.

"I haf come to clean your carpets," he said. He was a blond man of modest stature. Not bad looking. His eyes were blue and had a shrewdness to them. He also seemed impatient.

"I don’t know anything about it," we replied. "I’ll have to call my wife."

"I don’t haf de paperwork," he continued. "But it could haf been de landlord who called. I’ll call my office. Can I use your phone?"

After several phone attempts to call, we could reach neither his boss nor ours.

"Well…den jus let me wash the carpets, " he said.

"OK…why not?" we responded.

In an hour and a half he had cleaned the carpets, been paid 97 pounds in cash, and was on his way.

"What? You paid him in cash?" When we finally got Elizabeth on the phone she explained gently that we were idiots.

"I never called a carpet cleaner. That’s a scam. That’s why his office number didn’t work. I’m surprised you fell for it, " exclaimed Elizabeth.

"Well, it was a good scam. The guy worked well. And the carpets really are clean. If we had gotten it done by a legitimate service, it would probably have cost more. He might have been a crook, but at least he was an honest crook, "we noted.

*** Great cities attract immigrants. And immigrants hustle, helping to turn ordinary cities into great cities. Show us an American city that is full of immigrants and we will show you a great city. Whereas, a city full of hunkered down Americans is almost sure to be second rate at best.

It is interesting, no? The people without the backbone to stay put are the very same ones who came to America, and helped make it a great country.

We’ll have more to say about this tomorrow…on the Fourth of July.