Killed By Inflation

When you have a fiat currency, sooner or later you get deficit spending, and that means that inflation is guaranteed, and it will devour the purchasing power of every dollar you own.

Many of us while away significant amounts of our working day thinking of ways to get rich quick so that we can abandon our hate-filled little families and take up with someone half our age but twice as nice. One of the ways to get wealthy that you always hear about is investing in the stock market.

But I have some bad news in that regard. If you think that your genius will produce fabulous gains in the stock market that will put you miles and miles ahead of any posse or bounty hunter, then Adam Hamilton, of the Zeal Intelligence newsletter, has some real news for you. "The S&P 500 went from 108 in the late 1960s to 107 in the early 1980s, for a small 1% loss. That is bad enough, to not earn any money over more than a decade, but if you look at the same slice of time in the inflation-adjusted data, investors actually lost nearly two-thirds of their purchasing power over this same period!"

See what I mean about inflation? You got killed by inflation! And the damned stock market didn’t help you out one little bit! Hahahaha! I’ll bet that little financial planner of yours never told you about THAT! Hahahaha! And even worse and more currently, the same thing can be said for the last five years, too!

Preserving Purchasing Power: It Will Devour Your Purchasing Power

So no matter what the clueless touts on TV say, neither stocks, nor bonds, nor houses will preserve your purchasing power over the long term nowadays. When you have a fiat currency, sooner or later you get deficit spending, and that means that inflation is guaranteed, and it will devour the purchasing power of every dollar you own.

But is there EVER a time when stocks preserved their purchasing power? If you had asked me, I would shrugged and said "Hell no, probably." But you did not ask me. All eyes are on Mr. Hamilton. Apparently he is ready for this question, because he immediately says, "Over the past half century from the absolute best-case moments in time to buy and sell for the long term, fully 7/8th of the gains investors could have reaped are illusory. These are wiped out by rising inflation decreasing purchasing power."

In case you, like me, missed the significance of that, they summed up by reiterating, "Thus inflation wiped out half of the best possible annual gains in the last half century or nearly 7/8th of the final compounded return."

While the audience goes "oooh!" and "ahhh!" at this revelation, I can almost hear him thinking to himself, "This Mogambo jerk is a real idiot! How can I summarize this in such a way that even a stray cat stumbling in here after eating a diseased rat can instantly understand?" Racking his brain, he finally says simply "Inflation has a huge impact." But I am wayyyYYYYyyyy ahead of this guy! I already knew that! I really did! I knew that already!

I know that with inflation, you can invest enough money to buy a Cadillac, and finally, after years and years of successful investing, you sell. After taxes and after inflation has eaten away at the purchasing value of your money, you get back enough to buy a Cadillac and maybe enough gasoline to get you home! Hahahaha! Invest a car and get a car! Real sharp investing there, dude! I can see that your retirement is well funded and in real good hands! Hahahaha!

Preserving Purchasing Power: Not Dead

From Doug Noland we get some interesting bits. For one, we learn that inflation is NOT dead for everybody. It’s only dead in the eyes of 1) lying government wonks and 2) lying Wall Street stock and bond touts. Speaking for myself, I reply to these guys saying how inflation is low, and how inflation is benign, and how inflation is under control, and how inflation is non-existent, with the Famous Mogambo Laugh Of Contempt And Scorn (FMLOCAS) which, when written out, is merely "Hahahahaha!" but which (in real life) sounds more like a hyena gagging up something disgusting. Mr. Noland is much more refined in his considered reply, which, in its entirety, reads "For the week, the CRB index added 0.6%, increasing y-t-d gains to 11.7%. The Goldman Sachs Commodities index jumped 2.2%, with 2005 gains rising to 40.7%."Hahaha! If that ain’t inflation, then what in the hell IS it? Hahaha!

The thing that I find particularly interesting was that "Almonds, particularly popular in US snacks and confectioneries, have more than doubled in price to $8,400 a tonne in the past two years. Cocoa beans have soared from £600 a tonne to £1,647." But as wonderful as that sounds, the price of hazelnuts, it turns out, has "risen more than fivefold from about $2,150 a tonne two years ago, to a peak of $11,120 earlier this year."

More ominously, he quotes Simone Meier on the Bloomberg site, who said that in July, "Money supply growth in the dozen countries sharing the euro unexpectedly gained at the fastest pace since October 2003." And if you don’t remember anything that I taught you except for one thing, I hope that you remember that an increase in the money supply always precedes the resultant and unstoppable increase in prices.

It is an increase in prices which we common-as-dirt consumer sluggards out here in the real world call "inflation," which we hate, because when we get to the checkout counter and that mean old biddy in that stupid little apron hits that "total" button, I know that it is going to be higher than it has ever been before, and I am going to scream in agony and clutch my heart in mortal pain, and then she will laugh ("Hahaha!") at my distress, and say how she hopes I die!

So how much is the money supply expanding? Ms. Meier writes, "M3, the ECB’s measure of money supply, accelerated to a 7.9 percent increase from a year earlier." Well, that is true, and as bad as that is, what is NOT mentioned is that the narrowest measure of money supply (cash and equivalents), according to the Economist magazine, is increasing at 10.5% in the Euro area!

So what does all of this expansion of money and credit mean, as far as inflation is concerned? I am charmed that you asked me that, because it is inflation that is the thing to be feared more than all other fears, including monsters under your bed or the CIA spying on you and making your life a living hell. Like, for instance, how my water heater "mysteriously" suddenly sprung a leak recently. I mean, it was in perfect operating order (POO) for twenty years in a row, and suddenly, one day, for no reason at all, it breaks? Gimme a break!

But this is not about how government agents are beaming invisible rays into my brain ("Consume! Consume!"), but about how the inflation in the money supply for the last several years is already showing up in prices, and the continual increase in the money supplies means MORE price inflation in the future.

But there are those who think, especially idiots and people who have taken a lot of drugs, that a little inflation is a good thing. To these people I say, "Step up a little closer to me when you say that, so that I can reach out and slap your face for saying something so stupid."

If there is one thing that I want you to remember, it is that there is no acceptable level of price inflation above zero. Zero is the upper bound on acceptable inflation. And if you think otherwise, like the horrid Ben Bernanke and a lot of other morons who ought to have their faces slapped, then show me one other time in all of history when a "little" inflation was a good thing.


The Mogambo Guru
for The Daily Reckoning

September 05, 2005

The Mogambo Sez: It just keeps getting weirder and weirder, and I get weirder and weirder, too. But the eerie way that the stock market keeps going up in spite of everything, and how bonds keep going up in spite of everything, and how gold keeps going down in spite of everything is taking a real toll on me. And I already have gold. So I can only imagine with horror the panic of people who do NOT have gold!

These grubby little manipulations of the gold market are a gift to you, allowing you to buy gold at artificial very low prices. Take it. And silver, too. So take some of that, too.

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.

Laissez les bons temps rouler.

As the 1990s moved along, the unofficial motto of New Orleans became the unofficial motto of the entire nation. Let the good times roll. And every time something came along that threatened a bout of sanity – the collapse of the tech stock bubble, the recession of 2001-02 – financial officials reacted as they always do – by looting the future.

In ancient Rome, when the imperial program of foreign wars and domestic bread and circuses became so expensive as to bring the empire close to bankruptcy, financial authorities reacted by increasing the money supply. Silver mines in Spain moved to round-the-clock production. Meanwhile, the actual silver and gold content of the imperial money reduced. The coins were "clipped" so the mint could produce more of them with the same stock of precious metal. Let the good times roll.

In Rome, 17 centuries later, the Mussolini government found itself in much the same fix. Prior administrations had already loaded the nation with debt. Il Duce campaigned on a platform of cutting expenses and reducing the debt, but faced with crisis (or opportunity) he borrowed even more. Let the good times roll.

The Greenspan Fed speaks English, but its modus operandi is pure Latin. Let the good times roll – at least until the maestro is out of office. As predicted in the Daily Reckoning last week, the hurricane down in the bayous is providing the Fed with another crisis…and another opportunity to do the wrong thing.

"Fed rate hikes now in doubt," says an AFP headline.

The New York Times carried an estimate that the hurricane could cost the nation as much as $100 billion. Nobody really knows, but the cost must be huge.

Katrina was the rainy day for which people are meant to save. But Americans of the Greenspan era saw no need to save. The latest figures show them saving in July at the rate of MINUS 0.6% of income. Oh la la…laissez les bon temps rouler! Not since The Flood has so many rich people saved so little money. In the month preceding the most costly flood to ever strike America, residents of the fair land saved less than zero…in fact, they ate into their savings in order to keep the good times rolling. And now that they are soggy from the storm they look to their temporal authorities to "do something."

What can the functionaries do? Just as there was no Noah to load them onto an ark, nor was there any pharaoh with his trusty Joseph filling the national coffers during the seven fat years. Robert Mabro of the Oxford Institute of Energy Studies says the U.S. refining system had "no reserves, no excess capacity, no cushions." He might have been speaking for the entire economy…which many years ago had switched from ‘just in case,’ to ‘just in time.’ The Strategic Oil Reserve is said to have only a 35-day supply, hardly enough for seven lean years. The Federal Government has no reserves of money or plywood to which it can turn. A few fusty, old citizens had the sense to stock their own supplies of cash and canned goods. But most seem to have no more reserves than their leaders. And now they turn their faces to Washington…

More news, from our Pittsburg correspondent…


Byron King, reporting from Pennsylvania:

"One of the problems empires need to solve is how and where to get fresh troops. Typically, they run out of their own manpower and need to enlist foreigners to do the fighting. Often the foreigners eventually figure out that they have the real power and take over.

"America is having trouble finding soldiers. But here, its economic weakness is proving a blessing."


Bill Bonner, with more opinions from London:

*** Last week, gasoline rose above $3 a gallon. Prices were reported as high as $3.79 – with drivers lined up to get the stuff. Papers reported "spot shortages."

How will Greenspan react to this new "crisis?" Will he not react as the ancient Romans…and the modern ones? Can he not be expected to do as he always had – to provide more easy money to help the Big Easy out?

*** What will be the effect of the hurricane disaster? "History suggests not much," says the Economist.

We don’t know. A few dimwits imagine that a natural disaster can be a positive thing. They see the clean-up and the new building as economic boons. Of course, if it were that easy to make economic progress, we could knock out the levees every few years. No, the hurricane is a negative for the wealth of Americans. It will cost money to undo the damage.

It could be also that the disaster could bring about a change of sentiment. Occasionally, people become worried that they are over-stretched…that they have taken on too much…that they are not prepared to meet the challenges that life throws their way. Three-dollar gasoline may push them in that direction.

Once begun, it can be a hard thing to reverse. House prices would fall – knocking down the valuations upon which so much consumer credit depends. Sentiment would soon be reinforced by reality. The people who thought they should spend less would soon find it impossible to spend more.

*** The boys begin their new school in London today.

Saturday, we went around looking for school supplies. What an awful experience. The shops in Kensington were so crowded you could barely make your way through them. Stores that sell the shoes that 15-year-olds want to buy are particularly revolting. They seem to think customers want to listen to terrible music while they shop. After a few minutes your editor couldn’t stand it any longer; he had to leave. Someone should give the clerks I.Q. tests after a few days on the job. The noise is bound to knock off a few points.

In the shoe store we found the same canvas sneakers we recall buying when we were 15 – then known as Chuck Taylor’s All Stars. Unbelievably, the shoes themselves have scarcely changed in the intervening 40 years. But now they have become fashion items – selling for $180 a pair!

The Daily Reckoning