The Bernanke Agreement

The Daily Reckoning PRESENTS:Here at the DR headquarters, we’ve been more than a little worried that the world as we know it is coming to an end. Today, we have some hard and fast proof. The Mogambo actually agrees with a member of the Federal Reserve…


Ben Bernanke, the chairman of the Federal Reserve, was speaking at Princeton University, his old alma mater, and he said that the central bank “doesn’t really have good instruments for addressing asset price bubbles should they exist, particularly if they are in one particular segment or another,” which is true, and I agree with him, as much as it goes against my Grumpy Mogambo Nature (GMN) to agree with anything this Bernanke guy says.

Bernanke also said, “It’s generally a bad idea for the Fed to be the arbiter of asset prices,” which is also true! I shake my head in disbelief at what I am hearing him say, and then he goes on to say, “The Fed doesn’t really have any better information than other people in the market about what the correct value of asset prices is,” which is also true! Again, I have to agree with Ben Bernanke, and you notice how my flesh crawls because of it.

The article notes that Alan Blinder, who is a former Fed vice chairman and is now a Princeton economics professor (making him a colleague of Bernanke), “wrote a paper last year saying Greenspan may have been the ‘greatest central banker’ ever,” which tells you all you need to know about Alan Blinder.

Blinder explains the Greenspan-Bernanke approach to bubbles: It is magic! Something wonderful somehow happens when “basically, you do nothing and then the corollary to that is that you mop up after they burst to keep the financial system from taking a big fall.” Hahaha! This never fails to crack me up! I am not sure what planet this doofus Blinder comes from or what kind of medication he is taking to make his mental processes so weird that even Princeton would hire him, but his vaunted “doing nothing” is easily contradicted by the fact that the Federal Reserve was doing something! For freaking years, decade after decade, the Federal Reserve has not been doing “nothing,” you dimwit! They were doing something! Something horrible! They were creating whole oceans of credit out of thin air, every damned day of the week! Week after week! Month after month! Year after year! Decade after decade! The money went into horrendous price inflation in stocks, bonds, houses and the size (and cost) of government!

And now, businesses are complaining that they can’t attract quality employees because housing prices are so high. The government solemnly strokes its collective chin and says, “Hmmm! This is serious! We need government action!” Utility prices are rising so high that voters are complaining. The government again strokes its collective chin and says, “Hmmm! This is serious! We need government action!”

But let’s get away from this silliness, because as you can see, I am working myself into one of my Hysterical, Screaming Mogambo Spells (HSMS). So, let’s return to his prepared remarks, where we cool down considerably, and actually agree with Bernanke when he says, “stable prices are desirable in themselves and thus are an important goal of monetary policy.” Hooray! Yes! Yes they are!

And then, he also goes on to say, “stable prices are also a prerequisite to the achievement of the Federal Reserve’s other mandated objectives, high employment and moderate long-term interest rates.” I leap to my feet and shout, “Hooray! Hooray for Ben Bernanke!” and then I am shocked at hearing myself say it! I feel dizzy at the experience! Whew!

Bernanke is lying, and he wants inflation, lots of inflation. It is inflation that curses my soul and I have nightmares, especially now, as new inflation figures keep coming out, and coming out, and coming out, until the sheer tonnage of horrifying statistics about how the prices of things are rising sends me crawling back to the closet under the stairs, where I whimper in dread.

So, how bad was it? It must have been bad, as all I remember reading was that the U.S. Labor Department said, “Consumer prices were up 4 percent for the 12 months, ” and then, I woke up a while later, stretched out on the floor, insensate. Slowly regaining consciousness, hand-over-hand I crawled back into my chair, and found that the rest of the sentence was: “ended in January compared with a 3.4 percent year-over-year gain the previous month. Core prices were 2.1 percent higher compared with a 2.2 percent year-over-year increase in December.”

And, how does one protect oneself, and offset this enormous rise in prices? Well, the bad news for us poor proletariat working trash is that working isn’t going to do it! The same article added that the U.S. Labor Department reported, “Weekly earnings of workers, adjusted for inflation, fell 0.2 percent in January and were down 0.4 percent in the last 12 months.” Hahaha! Welcome to the hell of fiat money!

Even worse, from Bloomberg we read: “Energy and food costs drove U.S. consumer prices up by the most in four months in January.” When considering the cost of all goods, the report reveals “Goods prices are 3.8 percent higher than in January 2005.”

And services, which were supposed to be some fabulous panacea, are inflating even more, as we read: “Service prices rose 0.5 percent last month and are up 4.1 percent over the last year.”

And the Harper’s Index notes, “Percentage change since 2000 in the average amount U.S. workers spend on out-of-pocket medical expenses: +93.”

I like the Reuters headline better, as it conveys a little more urgency, when they write, “January Consumer Prices Surge.” I would love it more if the headline were a quote from The Mogambo, namely: “Inflation is coming to kill you and your family!”

But nobody wants to remember what happens to prices when you expand the money supply so much, which is that prices rise to accommodate all the money, and you get inflation in prices. If you think higher prices is a non-event, then get a load of this AP headline: “Families’ budget squeezed by rising costs.” The article went on to say, “From an economic point of view, core inflation – for now – isn’t overly worrisome but it is ‘generating some angst within the Fed,’ said Sherry Cooper, chief economist at BMO Nesbitt Burns.”

Apparently, Ms. Cooper is unaware of the irony that the article in which she is being quoted says that families are being “squeezed.” And, I guess it is a matter of opinion whether or not a family being “squeezed” is “overly worrisome,” although if Ms. Cooper would care to come over to my house, I will happily put her head in a vise and then she can tell me whether or not getting squeezed is “overly worrisome.”

Until next week,

The Mogambo Guru
for The Daily Reckoning
March 6, 2006

Mogambo Sez: Emphasize silver, as the looming ETF in silver will mean, as Ted Butler, writing at, says, “There’s no way this much silver could be bought without sending the price to $100 an ounce.” And with silver selling for less than 10 bucks an ounce, that’s a nice ten-bagger gain!

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 Mogambo Guru is quoted frequently in Barron’s, The Daily Reckoning and other fine publications. If you’re inclined to read more, you’ll find the whole Mogambo here.

“The Earth is Flat,” says Thomas L. Friedman.

Every time we check, Friedman’s book is way ahead of our Empire of Debt in the rankings. We see people reading it numbly on airplanes. We see it stacked up like waffles at the entrance of B. Dalton’s and Barnes and Noble (we have to rummage around to find our book!). And what earnest business executive has failed to read at least enough of it so he can talk about “globalization” unintelligently?

We have been following Friedman’s work in the press now for several years. It is so appallingly empty-headed that for a long time we couldn’t bring ourselves to buy his book; we were afraid we’d feel obliged to read it.

Well, last week, we found it on sale at a 15% discount, and picked up a copy. As expected, the book is only suitable for children…and only for them to sit on or club each other over the head with.

But what do we know?

Friedman claims to have made a discovery equal and opposite to that of Christopher Columbus. While Columbus found that the Earth was round, Friedman notices that it is now flattened out. Thanks to modern technology and the spread of robust American-style capitalism (to say nothing of the protection racket run by the empire’s military forces), we all play on the same level field of global commerce. We also wear the same clothes (business suits for adults, Che T-shirts for the young), talk the same language (English), share the same political ideology (humbug democracy), and worship the same God (mammon).

We are all one. One people. One world. With one idea: to get rich. And in this new flat Earth, we can all get rich, too. Now, the entire world can compete, share technology, share information, and share opportunities. It is as if the world had been flattened into a kind of United States of Earth, where people in Mississippi can live as well as those in New Hampshire – competing for the same jobs, trading, cooperating, schlepping their way toward a New World Order that is better for everyone.

Globalization takes the wrinkles and creases out of the planet. You can now eat the same Chinese food in Newport News as in New Delhi. You can buy the same clothes in Toronto as in Quangzshou. You can live in the same apartment, designed by the same architect, and built of the same materials in Buenos Aires as in Belfast. And of course, you can watch CNN everywhere.

The only thing threatening this brave, new ironed-out world, according to Friedman, is that some people don’t want to go along with it: backward-looking losers who think religion is more important than material progress, insurgents who defy the imperial authority and protectionists who want to push a stick into the wheels of history.

If those were the only threats, Friedman may have a decent point, but Friedman is like a geologist who has his head stuck in the clouds: Rain, wind, sun, storm…all of it seems to wash down and wear down the surface of the Earth, he notices astutely. Ah ha, he concludes, the mountains will keep on eroding. Pretty soon, the whole world will be as flat as Kansas.

Of course, if he had any imagination, curiosity or even remembered to look down at the ground under his feet, he would have wondered how it was possible that after so many millions of years of leveling, the Earth was not flat already. And if he had bothered to look beneath the surface, he would see why: there are new volcanoes bubbling up all the time, new mountain ranges welling up, and eruptions waiting to explode.

Geologist Stephen Roach sees his seismograph twitching:

“First in manufacturing, now in services, the global labor arbitrage has been unrelenting in pushing U.S. pay rates down to international norms. But the real wage compression in the United States has not been uniform across the income spectrum. In large part, that has occurred because increasingly broad segments of the American labor market are now exposed to a uniquely powerful competitive force – the IT-enabled arbitrage. Courtesy of the hyper-speed of sharply accelerating Internet penetration, the global labor arbitrage has pushed into areas that historically have been unaccustomed to wage competition. In earlier research I found that the disconnect between compensation and productivity growth during the current economic expansion has been much greater in services than in manufacturing. This once nontradable segment of the U.S. economy is now feeling the increasingly powerful forces of the global labor arbitrage for the first time ever (see my 8 July 2005 dispatch, ‘Back to the Drawing Board’).

“The Internet has forever changed the competitive climate for most white-collar knowledge workers. Courtesy of near-ubiquitous connectivity, the output of the knowledge worker can now be e-mailed to a desktop from anywhere in the world. That brings low-cost, well-trained, highly educated workers in Bangalore, Shanghai, and Eastern and Central Europe into the global knowledge-worker pool. That’s now true of software programmers, engineers, designers, as well as a broad array of professionals toiling in legal, accounting, medical, actuarial, consulting, and financial-analyst positions. Within this global pool of like-quality workers, a powerful arbitrage acts to narrow wage disparities. As a result, real wage compression in open economies like the United States has moved rapidly up the value chain – sparing an increasingly small portion of those at the very top of the occupational hierarchy. In short, the IT-enabled global labor arbitrage is a guaranteed recipe for mounting income inequality.”

Income inequality has been growing in the United States for the last 35 years, says Roach. We have explained why many times. Per capital income is $1,700 in China. It is $38,000 in America. As the Chinese (and others) compete with American workers, the low end of the wage scale in the United States is held down. Since the wage difference is so great, this process has a long way to go. While he goes deeper and deeper into debt, the average American employee may not enjoy any real income growth for the next two decades.

The rich, on the other hand, continue to make rapid financial progress. They are the ones who own the companies that benefit from lower wages and globalized markets.

Economists measure wage equality with way they call a Gini Index. At zero, people all earn the same thing. At 100, the rich get all the income. Currently, in Japan the Gini Index is 25. In Europe, it is 32. In America, the index is at 40, and in China, it is at 45.

In America, low-level earners can’t get ahead because they have no bargaining power. They are competing with a billion workers in Asia willing to do the same work for less than one-tenth the cost. And in China, there is also growing income inequality between those who have joined the global economy and those who have not. Some 500 million people live in coastal cities in China and participate in modern commerce, but there are another 700 million who still live in the countryside. While the cities grow richer, the poor in China are left behind, like America’s industrial workers.

In short, the world is not getting flatter at all. It is getting flatter in some areas, and steeper in others. There is less difference between China’s industrial workers and those in America, but the difference between the globalized wage slave and the capitalists who employ them is growing.

Beneath the surface of Friedman’s flat Earth, the pressure is growing -either in China or in America and sooner or later, it is bound to explode.

More news from our currency counselor…


Chuck Butler, reporting from the EverBank trading desk in St. Louis:

“I have to warn you about the Bank of Japan’s meeting this week, for if they decide that there is no imminent need to change their currency policy, the yen will suffer in the short term.”

For the rest of this story, and for more insights into the world currency markets, see today’s issue of The Daily Pfennig


Bill Bonner, back in London with more opinions and thoughts…

*** A reader writes (in response to the DR Weekend Edition):

“The Wiggins, and everyone else for that matter, would do well to sit tight and watch the price changes on their local MLS come down.

“In the early 80’s, I went to college in Baltimore and lived on St. Paul St. and the corner of Preston, not the best spot at the time. We used to frequent Fells Point, which was the East end of the Inner Harbor. It was mostly a run down wharf with some dive bars and crab houses. I can only imagine what they’re getting for real estate there now. Camden Yards was a just another railhead and the city was selling row houses on Federal Hill for a $1. You had to commit to live there for at least a year, and spend a certain amount (can’t remember how much) of money on renovation. Look how Federal Hill turned out.

“Since my time in Baltimore, I’ve spent 20 years doing real estate appraisals, both residential and commercial, and have seen appreciation and corrections as well as the S&L debacle. Remember the RTC? Another tale of government bungling! When the bubble bursts or corrects, whatever you choose to call it, may not be as clearly defined as the correction that took place after the stock market crash in 1987. It will most likely be a slow melting spring thaw – unless, of course, there’s some kind of market shock that causes a real estate greenhouse effect and the ice on the lake just falls in!”

*** And another insightful comment:

“Bill, you wrote: ‘A Polish friend told us the national debt in Poland was 40% of GDP. ‘Shameful,’ she said.

“‘But the official national debt in America is nearly 60% of GDP and rising faster under the Bush administration than under any administration America has ever seen.’

“You’ll be delighted to know that I’m Polish too (born and bred in Krakow, a good place to be if you’re looking for a relatively priced chateau:) but that’s not why I’m writing to you. Funnily enough, there was an interesting article in yesterday’s edition of Canada’s Financial Post comparing Polish & U.S. 10-year bond yields. In a nutshell, the writer somewhat concluded that of the two countries, Poland may very well be a safer place to invest since it’s offering a higher yield (or something to that effect).

“Obviously, this kind of conclusion is open to further probing and certainly is subject to relativity; however, one can’t help but notice that merely 10-15 years ago, this kind of article could only be categorized as sheer and extraordinary absurdity. The fact that in 2006 it made the front page in all matter of seriousness only underlines the signs of the Empire’s slow and steady disintegration right before our very own eyes. Who knows, that may very well be the reason why so many people do not see it (including Poles). It certainly wouldn’t be the first time in history to witness this kind of collective blindness, as the events that took place in Poland during the 1980s certainly attest to that.”

*** And this, from Strategic Investment editor, Dan Denning, now working in Australia and keeping his eye on Asia:

“I think it’s all going to fly spectacularly apart in China.

“The Chinese have been courting ecological disaster by burning so much coal. Its huge cheap labor force is getting old and ailing with problems it doesn’t have the money or the health care system to fix. Families will bear the burden. But hundreds of millions of them can’t do it earning a living from agriculture, which is already suffering from lack of arable land, or land seized for commercial development. So, you have megacities (that need food, energy, and water on a massive scale) filled with sick old people and millions of young men who must have jobs to be kept off the streets and less dangerous. To whom will China sell if and when U.S. demand craters? To itself, perhaps – for a while.

“But it’s a problem of scale. Cheap credit and cheap fuel have made globalization happen, creating a giant economy of scale.

“You could argue that global trade runs in cycles itself. The boom cycle necessarily involves cheap raw materials prices at the beginning, and as those materials get expensive, especially energy, the cycle peaks. Near the end, where we are now, resources don’t trade freely. Instead of a market price and efficient allocation (which would mean lower prices or at least self-correcting prices), you get a geopolitical premium and national strategic hoarding. The market mechanism fails.

“We’re on the edge of a bust phase. China has built an energy-intensive 20th century industrial production economy on the edge of en epic collapse in global trade. They’ve made a grand strategic error of the first order. But what do you expect? They’re still communists with a linear view of history – a determinist view.”

The Daily Reckoning