Fire Up the Printing Press

What is the French gendarme doing outside our London apartment?

Did Britain go to war with France on Saturday night – and lose?

Or has the world finally entered the last stage of the fatal prosperity we call the Crack-Up Boom!

We know the source of this boom. Our own chief central banker, Ben Bernanke, let the cat out of the bag even before he took over from Alan Greenspan:

“Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation…the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper money system, a determined government can always generate higher spending, and, hence, positive inflation.”

Mr. Bernanke’s presses have since created the most positive inflation in history. Our jaw keeps dropping at the sight of so much money in so many places. In the art market, for example. In housing. In stocks and bonds. In private equity and public markets. In hedge funds, collectibles, and stuff of all sizes, calibers, brands, and utility.

The lust for Mr. Bernanke’s little pieces of green paper has set much of the world’s population into a state of delirium. In the outback of Australia, miners work overtime to dig ore out of the ground, for there are not enough miners, engineers and truck drivers to keep up with demand. Ships back up in Aussie harbors waiting to load the stuff on board – there are not enough ships either…and not enough capacity in port facilities. Then, the ore goes off to Asia…where it is transformed into rolls, bars, and sheets of steel. These are then turned into automobiles for one of Asia’s new millions of consumers…or trinkets, widgets, and gadgets for America’s insatiable buyers…or beams for one of thousands of new buildings in one of China’s dozens of new cities.

Everywhere in Asia…and much of the rest of the world…you hear the noise of the great boom – the hammers, trucks, cranes, factories, automobiles, shoppers, partiers. The cacophony of it is greater than at any time in history. The pace, the scale…the whole blooming thing…is unbelievable.

It came as no surprise, then, when Free Market Investor’s Christopher Hancock informed us that seven out of the world’s 10 tallest skyscrapers have appeared in the heart of what analysts peg as the next hotbed of wealth creation – Asia.

“The Taipei 101 Tower in Taiwan…the Petronas Towers in Kuala Lumpur…the Jin Mao Tower in Shanghai…the bullet-shaped Two International Finance Centre in Hong Kong…Citic Plaza in Guangzhou…Shun Hing Square in Shenzhen,” he told us.

“India, Singapore, Korea, Malaysia…while the U.S. real estate market cools, they’re all building like mad. And demanding dazzling amounts of concrete and steel to make it happen. China alone plans to add another 1,000 skyscrapers to the Shanghai skyline by 2011…and to double its demand for steel by 2031.

“That’s equal to using all the steel sold in the West today!”

Christopher sees a ‘second coming’ in the steel industry – and a huge opportunity for properly placed investors to profit.

At Long Beach Harbor, California, the flood of goods coming in from Asia is so stupendous that ships have to be diverted to Canada or Mexico. In Dubai, demand for waterfront villas is so great that developers have constructed whole new islands…and an indoor, air-conditioned mountain where rich, sun-struck Arabs can try a little downhill skiing!

And in the English newspapers, we find that a middle-class Englishman can now buy his own little bit of paradise – in Florida, Morocco or St. Lucia. In Florida, the Brits are now offered “luxury, detached villas” for as little as $368,000. (We didn’t even know they had “villas” in Florida…we remember bungalows, and we recall Groucho Marx saying, during the last big property boom in Florida – in the 1920s: “You can get any kind of house you want…you can get brick, you can get wood, you can get stucco…boy, can you get stucco.”)

One thing leads to another…the ankle bone is connected to the leg bone…America prints money; soon every nation is printing money. And soon, the whole world has money galore – green money with dead presidents, blue money with pictures of cathedral windows, purple money with a portrait of Adam Smith on it. Our own wallet is a veritable art gallery of currencies!

And soon, each bill is bidding against other bills in order to buy things – just like Mr. Bernanke said it would. We have seen what has happened to Monets, and to Mayfair. What we wait to see is what happens to milk and millet. Not to mention gold. Some things are more easily produced than others. Dollars come out, just as the Fed chief notes, easily. Milk, millet, and metals take more time and more investment. Milk is soaring…as more and more farmland is put to use for growing corn or beef.

Gold has gone nowhere for 14 months. It probably has some catching up to do.

Bill Bonner
The Daily Reckoning
London, England
Monday, July 9, 2007

More news:

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Addison Wiggin, reporting from the land of blue crabs and Natty Bohs…

“The Dubai government has ‘decreed’ a new fiscal plan that will help build the world’s largest shopping mall, airport and strip of hotels. His Highness Sheikh Mohammed bin Rashid al Maktoum granted the Al Bawadi hotel project twice as much money as originally budgeted, putting it on track to build 51 hotels with over 60,000 rooms — the largest grouping of hotels on the planet… including the biggest single hotel in the world, Asia-Asia, a 6,500-room beast.

“Al Bawadi will simultaneously become the world’s biggest shopping center, with 300 movie theaters, 1,500 restaurants and what’s sure to be many more stores and shops. The price tag for this mega-strip of hotels and shops? $60 billion.”

See today’s issue of the 5 Min. Forecast for some pictures to illustrate what’s happening in the Sheikdom by the Sea.

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And more views:

*** Forbes calls it, “The Sleaziest Show On Earth.” They are referring to the hedge fund industry.

“Hedge funds will suck in $100 billion this year from an ever-broader swath of investors,” says the magazine. “Pretty good for a business rife with exorbitant fees, phony numbers and outright thievery.”

We are pleased to see the mainstream media catching on. Hedge funds are a great way for hedge fund managers to make money; they’re a terrible way for an investor to try to make money.

There are a lot more funds than there used to be – maybe as many as 9,000 of them. And a lot of these funds are being marketed to the lumpeninvestoriat. Now, rather than helping the rich lose money, they are helping the not-so-rich get into a serious jam.

“The unwashed masses can get into this volatile sideshow for as little as $5,000…2). Among the 1,800 largest U.S. pension funds, endowments and foundations, almost one-quarter held hedge fund investments last year, up from 12% in 2000. U.S. pension funds plan to plow $250 billion into hedge funds in future years, 20 times the amount of exposure they have now, says researcher Greenwich Associates. Calpers, the $165 billion retirement fund for California state employees, has invested $500 million and plans to double the sum.

“What is driving this red-hot industry: fees that would be outlandish or even illegal if extracted from a plain old mutual fund. ‘It’s obscene,’ says Alice Handy, who invested in hedge funds for over a decade while running the University of Virginia endowment. ‘The fee structure is so compelling that everyone and his brother want to run a hedge fund now.”

The mainstream media is also beginning to understand what a racket private equity is. Moody’s attacked private equity this morning – noting that the PE firms add neither shareholder value nor value to the greater economic community. Supposedly, firms taken private are able to focus their investments on long-term objectives. In practice, the new owner’s outlook is very short-sighted, loading the company up with debt so they can pay themselves large fees, and hoping to get out of town before the posse shows up.

*** Yesterday, we strolled out onto the street in front of our apartment and two blue motorcycles went by…both of them were BMWs and both had men in blue uniforms, with white belts.

“Hey…they’re French gendarmes,” said Henry. “What are they doing here?”

It was the Tour de France. First came the gendarmes on their motorcycles, clearing the way. Then, came the British police, also mounted on motorcycles…then came the automobiles of the sponsors. Skoda, the automaker, must be playing a big role in this year’s Tour, because it seemed as though most of the cars were Skodas.

Finally, along came the bicyclists themselves…gaily dressed in their bright outfits…pedaling along in this first show-off parade through the streets of London.

It was a beautiful sight…and a beautiful day to see it. For the first time this summer, it seemed like summer. The sun was out…temperatures had warmed up. Crowds filled the streets…and the outdoor cafes.

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The Daily Reckoning PRESENTS: Inflation is roundly regarded as an economic evil – a danger zone that is to be avoided at all costs. Why then, are governments around the world knowingly venturing into this financial “no man’s land” by constantly printing valueless paper money? As the Mogambo explains, this is nothing short of insanity. Read on…

WHEN GOOD MONEY GOES BAD

Junior Mogambo Ranger (JMR) Ben writes that we can witness “Gresham’s Law in action, and what other countries will be facing with this rampant worldwide inflation.”

In case you forgot, Gresham’s Law is popularly known as, “Bad money drives out good money.” In effect, people will hoard valuable money but will spend (and thus get rid of) money that is relatively more worthless.

The case in point that JMR Ben thoughtfully provided was a link to the news.bbc.co.uk report titled “Sharp Practice of Melting Coins.” It seems that inflation in prices in India (due to the Indian central bank creating so damned much money and credit every freaking day, just like all the other stupid central banks of the stupid world) has made the rupee almost valueless, but the little bit of metal in the coins is so valuable that “Millions of Indian coins are being smuggled into neighbouring Bangladesh and turned into razor blades.”

How much more valuable is the metal in the coin? The conversion ratio is a one-rupee coin can be made into seven razor blades, worth 35 rupees!

The natural result of Gresham’s law in action is “an acute shortage of coins in many parts of India.”

Naturally, coping mechanisms spring up, such as, “Shopkeepers ask customers to buy more to make it a round figure so that small change does not have to be given out”, shopkeepers giving “toffees or cigarettes to make it a round figure”, and even issuing cardboard scrip.

The most surprising, astonishing and terrifying thing was the actual, in-your-face admission of further government debasement of the money! My eyes pop from my head in disbelief as I read that “The mints took corrective action – scaling down the metal content of the coins – but that has not stopped the shortages.”

If the Indian mints wanted to take “corrective action” against the inflation that is rendering the coins worthless as money, they would storm the central bank of India and stop them from creating so much money and credit!

And it is not just Indians, but according to a fax from Junior Mogambo Ranger (JMR) Andrew G. of a Globe and Mail article, inflation in Canada is making them think of ditching the penny. The metal in the Canadian penny is worth so much more than the one-cent face value of the coin that pennies are, just like in India, being hoarded. To make up the shortfall, the Royal Canadian Mint was forced to increase production of pennies to 1.4 billion last year, enough pennies to represent “63 percent of total circulating coin production.”

This phenomenon of disappearing coins must be happening almost everywhere, too, as all currencies are being debased by their central banks, and coins with a low, fixed denomination on them are doomed as the buying power of the coin falls below the melt value of the metal in the coins.

And sure enough, the article notes that “Australia [stopped] making one-and two-cent coins in 1990. New Zealand stopped making them three years before that. France, Norway and Britain are among the other countries that have eliminated low-denomination coins.”

So inflation is hitting everywhere, literally rendering money increasingly valueless, and yet the governments allow the banks to just keep printing more and more of it! This is insane!

Bill Bonner of DailyReckoning.com doesn’t want to talk about what or who (looking directly at me) is insane or not, but astutely notes that “if you could really get rich by printing more currency, Zimbabweans would all be as rich as Midas, since the Mugabe government runs the presses night and day.”

And to underscore this point, Junior Mogambo Ranger (JMR) Phil S. forwarded the latest Cathy Buckle letters from Zimbabwe. She lives there, coping with the highest inflation (over 5,000% at last estimate) in the world, the most stupid, corrupt and demonic government in the world, and where prices are now (according to Ms. Buckle) “going up by an estimated 10 percent every day.”

But Ms. Buckle does not want to be drawn into a boring discussion with The Mogambo about inflation in the theoretical abstract, but sticks to the horrific specifics and says, “Because of the oppressive, iron-fist regulations from Harare, individuals are only allowed to withdraw one and a half million dollars at a time from the bank – even if they have just deposited a hundred times that amount the same day. The bank charges a ‘handling fee’ for the withdrawal of amounts of one and a half million dollars or less, but you cannot withdraw more without applying for permission from the Reserve Bank in Harare.”

Aside from the fact that the Zimbabwe dollar and the U.S. dollar were on a rough parity a decade or so ago, “To put all these figures in perspective,” she explains, “you have to stand in a queue in the bank for four days in a row – each day drawing out the maximum amount, each day paying the ‘handling fee’ – in order to purchase one tank of fuel for your car.” One tank of gas!

And if you want to hear some good news of belated smarts as pertains to money and how fiat money in the hands of an irresponsible government always becomes worthless, Julian D.W. Phillips in The Gold Forecaster newsletter notes that “Italy has no plans to sell any gold, which is unsurprising given the very poor history of the Italian lira. They too have seen several currencies come and go in the last one hundred years, so they have few illusions about the joys of compound interest. After all, adding noughts to a currency doesn’t make them more valuable; it’s the buying power that counts.”

Until next week,

The Mogambo Guru
for The Daily Reckoning
July 9, 2007

Mogambo sez: For those of you who question my smarts (“You’re an idiot!”) and wave your little clinical reports around (“And I can prove it!”) when I say that gold will explode upward in price because gold ALWAYS explodes upwards in price in the bust that follows the boom, I present the MarketWatch.com headline, “Gold rises on safe-haven buying, dollar weakness.”

This is how it always is at the beginning of the bust after the long boom; people get tired of running back and forth between stocks and bonds when they seem to lose money every time as both stocks and bonds will trend downward in price as the asset boom deflates and consumer prices rise, and they finally say, “I’m getting slaughtered here! To hell with this! I’ll buy what people always bought at times like these, when stocks are overpriced, and bonds are overpriced, and houses are overpriced, and government spending and size is huge, and everyone is up to their ears in debt, and there is nowhere else to go; I’ll buy precious metals!”

That’s why I know, with absolutely no doubt in my mind whatsoever, that the big moves in gold and silver are ahead. It’s how history repeats itself. And it always does, as it seemingly must.

Editor’s Note: This year, the Mighty Mogambo is actually going to bravely exit his Big Mogambo Bunker (BMB) in order to speak at the Agora Financial Investment Symposium in Vancouver, British Columbia. Don’t miss this opportunity to hear his rants live, on why “We are all Freaking Doomed!”

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.