In Gono We Trust: U.S. Inflation on its Zimbabwe Up

There it is, dear reader…the future of the United States of America.

This just in:

We have it from our usually unreliable source in Washington that Gideon Gono, now head of the Zimbabwean central bank, has been called in to aid the Obama Administration. In secret talks, Gono has agreed to replace the out-going Ben Bernanke, who is said to be going to work as a helicopter pilot. Gono will take over the Fed. And a new bill has already been designed – our source was able to sneak out a copy of the new note – for 1 million U.S. dollars. That’s Gideon Gono’s picture on it.

According to reports, Gono insisted on getting his face on the bill as part of the deal. “Dead presidents are a dime a dozen,” he is said to have remarked. “And this is just the beginning; we can add zeros later.”

Gono was in the news yesterday for other reasons too. Zimbabwe has taken a couple of bold steps recently. First, it announced that henceforth citizens would be allowed to use currency other than the stuff produced by its own central bank. This came as a great relief to the people of the nation – who were already using U.S. dollars to replace the Zimbabwean brand. With 230 million percent inflation, the Zimbabwe dollar has not been so much a store of value but an incinerator of it. Second, Gono announced that he was taking 12 zeros off the Zimbabwean currency. Twelve seems like a lot. And it seems like only yesterday that Gono introduced the first note with 12 zeros on it – the 1 trillion Zim dollar note.

But that’s the problem with zeros. They’ve got holes in them. You add nothin’ to nothin’ and you still got nothin’. Easy come. Easy go. You can as easily add zeros as take them off. At the end of the day, the extra zero gets you zilch.

Still, dear reader….

In Gono We Trust. Our economy is in a terrible mess. We need inflation; only Gono seems to know how to get it.

Yesterday, the report card on the economy came in. It showed growth in the last quarter of last year at MINUS 3.8%. “Could have been worse,” say economists. It WILL be worse, we reply. This Depression is just getting started.

The Dow fell 40 points yesterday. We’re in February already. Investors look back and see that stocks have lost more than 8% so far this year – the worst on record. In 87% of cases, what goes down in January goes down all year long. Last year, we had the worst stock market performance on record. But what the heck…records are made to be broken. This year will probably be worse still.

Macy’s said it laid off 7,000 people. California says it is kiting checks. And Republicans say they are digging in their heels about Obama’s Bailout Boondogglization program. They favor boondoggles of their own.

Consumer spending fell last month – for the 6th month in a row. Consumers are exhibiting the quality that economists fear… “the propensity to save.” Until last year, of course, they had a propensity to spend. Now, all the news tells us that what ought to happen is happening now; consumers are closing their pocketbooks.

According to mainstream economists, this “propensity to save” thing is as welcome as halitosis. It’s a conversation stopper, for sure. One man’s expiration is another’s inspiration. One’s spending is another’s income, in other words. So when he stops spending, the whole system of consumer spending comes to a halt. Sales plummet. Incomes fall. Jobs are lost.

Hey…welcome to the Depression of 2008-? And get ready to welcome Gideon Gono to the Fed. We need him.

*** Yesterday, we promised to take up a theme…hmmmm….what was it…? Oh yes, the critical issue…when.

When? When what?

Oh yes…when will deflation turn into inflation?

You want a date, don’t you dear reader? You want to know exactly when you should switch out of Treasury bonds and into stocks, gold and freeze-dried food. Alas, that we can’t give you. Not even an approximate date.

This past weekend, we sat down in the Dr. Richebacher chair that we keep next to the fireplace. It’s the chair where Kurt Richebacher used to do his heavy thinking. We inherited it from the family after he died.

We sat and we tried to channel Kurt. What would he think…we wondered.

“Imagine you are in a small town,” we thought we heard him say. “Imagine that the banker printed up the town’s money in his basement. One day, he went a little crazy and started making huge loans, even to unqualified borrowers, at very low rates of interest. You would soon have a boom on your hands, with everyone paying for everything with IOUs, all derived from the bank’s easy credit policy. But, eventually, when it was discovered that people couldn’t repay their loans, there would be a terrible bust.

“That is where you are now. (I say ‘you,’ because I am no longer among the living…but I have to say, heaven is not a bad place to be… There is almost a total absence of economists, lawyers…and not a politician anywhere.) It is a period of price discovery in the credit market…because no one knows who can pay his bills and who can’t. The IOUs are being marked down. Unemployment is rising, too, as the local economy slows down. Consumer demand has been greatly reduced as every has gotten poorer.

“Now, the banker sees what a mess the place has become. Naturally, he wants to do what he can. He tries to lend more money, but people have been down that road; they are reluctant to borrow. Then, he undertakes to build a new ballpark…you know, for playing baseball. And he decides to upgrade the town hall too…printing up the money to pay for it, as necessary, and to pay for a variety of projects to keep his friends and relatives employed.

“But while he is trying to get the boom going again, the bust is still going on. For every dollar he puts back into the town economy, $2 or $3 is taken out. Instead, of spending money like they used to…citizens stuff it in mattresses and bank accounts (much of it comes back to the bank where it started!)

“This process can go on for much longer than you think. Because the banker is, in effect, standing in the way of what needs to happen. He is blocking the process of price discovery…by lending money to deadbeat debtors and propping up businesses that are no longer profitable. The baker, for example, had built a fancy oven to produce 200 pastries every day. When the boom was in full swing, he sold every one of them. But now that people are cutting back, he sells only half as many. His investment in the new oven is now a losing proposition. But it takes the market a long time to find out; because the banker gives him enough money to carry on…when he should have declared bankruptcy months ago. And so with the tailor and the hat-maker and all the rest.

“Eventually, the banker realizes that his efforts to restart the boom have failed. Instead of spending money, people use it to pay down their debts. They cut their expenses; they reduce their output; and they’ll continue to use their cash surpluses to pay their debts until their they are back down to where they usually are, he reasons. Even then, people are likely to save because they’ve gotten in the habit of saving; this could go on for a long time, he figures.

“And then, he realizes that the only way to prevent people from falling into the ‘propensity to save’ trap is to make them realize that the currency is not worth saving…that it is losing value. That is when he will turn to Gonoism. He will go down into the basement; print up stacks of $100 bills…and begin passing them out on street-corners.”

Inflation is needed. Not just more credit from the bank. But money…cash…free cash…piles of it.

The U.S. currently has about $1 trillion worth of spare output capacity. It has about $6 trillion worth of private debt – above and beyond what is traditionally considered ‘normal.’ And unemployment is rising. As long as those things persist, prices are not likely to go up. First, because business has no pricing power – not when there is excess capacity. In our example above, for instance, the baker can double his output of pastries with no further investment nor additional costs. He cannot raise prices; instead, he’ll probably lower them in order to compete with the baker down the street who also has excess capacity. Nor are labor rates going to go up – not when workers are still being laid off. The proletariat has no more pricing power than the bourgeoisie. And as for consumers…they won’t go back to consuming until they’ve lightened their debt burden. With $6 trillion, more or less, to unload it will be a long time before they’re ready to spend again.

So don’t expect miracles from the Boondogglization programs. Prices won’t rise until central bankers Go Gono. And once they’ve gone Gono…things will really start to pop! Stay tuned.

*** Our friend, Nassim Taleb, author of the The Black Swan, told the Davos crew that “we should not trust these bankers. Look at their track record. The only way to stop the process is for the government to own those banks.”

Yes, dear reader, everyone is jumping all over the bankers. As we pointed out two weeks ago, there are two schools of thought. Either the bankers are evil. Or they are just very, very stupid.

Jamie Dimon, chief of JPMorgan Chase, joined the ‘they are stupid’ camp.

“God knows, some really stupid things were done by American banks and by American investment banks,” he said. But he went on to suggest that maybe the bankers weren’t the only morons. “To policy makers, I say: ‘Where were they?’”

The grammar suggests he really is stupid enough to be a politician. He probably meant to say: “To policy makers, I say: “Where were YOU?”

But the thought seems correct to us. Where were the regulators…the policy makers…the economists…the commentators…the media…the analysts…the rating agencies.? And where were investors? Of course, they were all in the same place as the bankers – fantasyland.

And now, guess what? They’re still in fantasyland…imaging that these trillion-dollar boondoggles will erase the mistakes caused by their earlier fantasy.

Oh, Mr. Gono, wherefore art thou?

Until tomorrow,

Bill Bonner
The Daily Reckoning

The Daily Reckoning