U.S.D. R.I.P.

“The call for more money to fix the financial markets comes just as global inflation is beginning to cause real mischief…”

EVEN IN DEATH, it seems you’re no longer safe from the iniquities of inflation.

In Cheshire, England, a man has just been charged with stealing 400 bronze memorial plaques from his local crematorium. Bronze is 90% copper, and thanks to the price of copper quadrupling inside four years, the melt value of those RIPs now stands above 145,000 pounds — some $290,000 at today’s exchange rate.

Outside the Garden of Remembrance, beware the evils of inflation at dinnertime, too. Fishmongers in Thailand have been disguising meat from the deadly, and therefore worthless, puffer fish as salmon, reports the Associated Press, killing 15 people in the last three years.

Health and safety officials in Beijing, in the meantime, just raided a “recycled” chopsticks factory. It has been selling up to 100,000 pairs of used disposable bamboo chopsticks per day, without using any kind of disinfectant first.

In the United States, “My wife came back from Wal-Mart,” writes a reader of my Whiskey & Gunpowder colleague Mike Shedlock’s Global Economic Analysis, “complaining about her favorite major brand chicken breast patties going from 15 per pack about a year ago to 12 this winter to 10 per package at the same price recently.”

Also here at Whiskey, Fred Sheehan notes the same trend — the trend of $1 buying less stuff with each day that passes. General Mills, the giant U.S. food maker behind Lucky Charms and Cheerios, warned back in March that “input costs” were due to rise. Now the Minneapolis Star Tribune reports, “Customers will actually see lower prices per box, but the cereal boxes will be smaller, so the effect is a price increase of a few percent.”

This kind of creeping inflation — route No. 1 to giving you less stuff in return for each dollar, pound, euro, or yen that you spend — is nothing new, of course. On the shelves of the candy store just next-door to our offices here at BullionVault in London, the king-size Mars Bar ain’t what it used to be. It ain’t even what the standard Mars Bar used to be, either.

“Among the things money can’t buy is what it used to,” as Max Kauffman, the comedian, joked in the 1950s. But U.S. consumers have since lost their sense of humor. The dollar has dropped another 86% of its purchasing power since then.

So where next for the flight to safety? Here in the United Kingdom, and despite the pound sterling breaking back above $2 already this week, the cost of living has risen 30 times over since 1945.

Put another way, the pound — strongest of the world’s five major currencies in 2007 — now buys only 3.3% of the “stuff” that it bought at the end of the World War II. With the U.K. money supply still growing by 13% year over year, the trade-off between quantity and quality has only become clearer.

Less stuff per pound or dollar is as plain a definition of inflation as you’ll ever find. It works when prices rise — the common-or-garden use of the word — and it also works when rising prices are hidden by shrinking the size of what money buys.

In the inflation-crazed ’70s, corporations “discovered that they could increase profits and expand market share by degrading their product, advertising relentlessly, packaging it in a different form, and raising its unit price,” reports David Hackett Fisher in The Great Wave, his grand history of price revolutions across the last eight centuries. But less stuff per dollar wasn’t just a corporate strategy. It became a necessity as input prices rose across manufacturing, home building, transport, and, most crucially, the consumer goods sector.

David Slawson, a U.S. economist, made a study of this “competitive inflation” in the price of chocolate bars. They rose sevenfold between the late 1950s-1983 in a series of small 5 cent increments. “Each increase was disguised by making the bar larger at the same time,” he found, “the size of the bar having been gradually decreased since the time of the last price rise.”

Fast-forward 25 years, and what price a midmorning Snickers as summer ’07 drips through the guttering? The spot market in cocoa has taken a tumble so far this month, after forecasts of an oversized surplus in the 2007-2008 season. But the price of drinking a cup of tea in England rose by 5.5% in the year to July, according to the official government data.

At the sillier end of the hot beverages market, rising prices have finally forced me to swap my favorite cup of overpriced foam for an inferior bucket of what passes for coffee. The government’s statisticians might call this “substitution” — and as I’m now getting more liquid for less money, they might call the net result a drop in my cost of living, too!

But mud-flavored water — like secondhand chopsticks, unwashed and resold — does not mean the value of the cash in my wallet has risen.

“Governments are often tempted to answer the cry for more purchasing power by simply creating more money,” Jerry L. Jordan — a central banker, of all people — wrote in a recent issue of the Federal Reserve Bank of St. Louis Review. “But in so doing, the opposite effect is achieved — the purchasing power of money is actually reduced.”

“The result,” Jordan continues, “is inflation: a rise in the number of dollars required to purchase a given standard of living.”

Put another way, the current crisis in world investment markets will only increase the quantity of money — not its quality — even if fresh central bank lending somehow manages to bail out the world’s biggest investment banks. (Bailing out U.S. homeowners, whether through a dramatic return to the “emergency” interest rates of 2003 or by creating new money — out of thin air — to refinance their mortgage debt, will do just the same.)

One defense that cash savers and hard-put investors might choose is gold bullion. No one’s credit-backed promise, and impossible to create at will, gold remains as far from today’s mountain of complex financial junk as an investor can get.

Adrian Ash

August 30, 2007

The Daily Reckoning