Fearful Effects of Inflation

The Daily Reckoning
Bill Bonner
London, England
Monday, January 23, 2006

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Friday, the stock market seemed to notice that trouble is afoot. The Dow dropped more than 200 points as investors put their ears to the ground. Even Google, usually on a tear, failed to escape - shares were down 36 points.

Where was that rumbling noise coming from? Newspapers now talk of oil shooting over $100 a barrel...if the Iran situation gets out of control.

And what about things in Iraq? Are they still going according to the neo-con plan? Do they even have a plan?

Meanwhile, here at home, the real estate boom seems to be decomposing. It is already giving off rumors. People have tried selling houses; they’re not always getting the price they hoped for. In some cases, they’re not getting any price at all. Inventories rise.

“Dramatically,” is how New York Mayor Michael Bloomberg describes the decay of the local real estate market. It would take a “miracle,” says Bloomberg, to stop falling prices now.

“Higher interest rates,” was a reason cited by Hizzoner. A look at the yield curve last week only made investors more nervous. It was ‘inverted’ - a classic early recession signal.

Leaning down, cupping their hands to their ears to try to hear...you could see investors’ lips moving. They were putting two and two together.

“If oil rises or house prices fall, how will consumers be able to keep spending?” they asked themselves. “Last year, real wages went down. It was only by taking equity out of their homes that people were able to keep going. And so, two million of them went broke.”

We have nothing to add to investors’ concerns this morning. We are happy to see them sweat - if only briefly and only slightly. It takes a load off our own shoulders; let them do some of the worrying.

Instead, we pass along some of our thoughts from this weekend.

The thoughts began with an innocent request. “Would you sew a button on our coat?” we asked Elizabeth.

“I’ll ask Angelica, the cleaning woman from Colombia, to do it,” came the reply.

“OK...but it looks like it needs a button on the other side, because the fabric is getting pretty weak.”

“Well, then, we better take it to a tailor and get it done right.”

We had just come back from church. The excursion had cost an amazing amount of money. Nearly $50 in cab rides, to and from, plus the $10 we put in the collection plate (which made us feel like a miser in comparison to the cab ride), and then we stopped and bought a magazine, shoe polish and a brush to put it on with. By the time we got home, we were lighter by about $90.

“Wait a minute...if you send it out, it will cost at least $5...maybe $10. Can’t you do it yourself?”

“I just don’t have time...”

When we were young and poor, we wouldn’t have thought twice about it. Our own labor was cheap. Capital was dear. Almost whatever it was, we did it ourselves. But now, times have changed. Capital is cheap. It is labor (or time) that is dear. We might even prefer to do the job ourselves, but we don’t have the time. We’re too busy. So, we pay someone else to do it - even at rates that take our breath away.

As you get older, you have less and less time left. But if you’ve been lucky, or saved your money, you have more capital available. And if you’ve been on the ball, you should also have accumulated some skill, or wisdom that makes your time and capital worth more, because you know what to do with it. You can no longer afford to spend your time washing the car or painting the living room, for example; your time is too valuable. Those jobs are given out to people who have more labor and less capital than you do. (If you want to paint the living room, you have to count it as a leisure activity, knowing that someone else could certainly do it cheaper - when you add in the cost of your own time - and, probably, better.)

Take China, a poor country. A few years ago, maybe still even today, it had so much labor and so little capital it had to build its roads by hand. Instead of expensive earth moving equipment, hundreds of workers pitched in with shovels and wicker baskets.

In Nicaragua, also a poor country, trenches are still dug by hand. “It costs about the same as having a back-hoe do the work,” explained our friend, Antonio. “But this way at least people get to work.”

North of Nicaragua, on the other side of the Rio Grande, is a mature, rich country. Gringo labor is expensive. Like an aging capitalist, Norte Americano is forced to depend on its wisdom, skills, and capital. This seems to be working for the rich there. They’re doing OK, according to most reports. But a few rungs lower on the economic ladder, where people get paid weekly, often in cash, the average American has no more real skills - maybe less - than his average counterpart in India or China. What does he know how to do? Operate a car and a TV remote? Maybe.

The average man in a poor country has gotten used to living without money; he’s learned how to do things himself. He learned how to “make do,” and treasure every bit of capital that comes his way. The average man in America, on the other hand, has gotten used to having money...and credit. He’s used to having someone else prepare his meals, pave his roads, make his gadgets, and take care of his aged grandmother. Worse of all, he’s forgotten how to save money. As a result, he has no capital, and a negative income statement; he spends more than he earns. He lives week-to-week, paycheck-to-paycheck, trusting that things will all work out somehow. Like an old man on Social Security, he listens for trouble and hopes the system doesn’t run out of money before he runs out of time.

More news from our currency counselor...

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

“The first part of a double whammy hit the dollar Friday afternoon, when St. Louis Fed President Poole, said in an interview that he's less concerned with inflation than he was six months ago, and that the Fed may soon stop raising rates.”

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

The Daily Pfennig

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Bill Bonner, back in London with more thoughts from the weekend...

*** Sir Alan Greenspan steps down next week, and as we skim the news, we see the press is crammed with tributes to “the greatest central banker - ever.”

“Under Greenspan’s watch,” writes The Washington Post, “the economy thrived despite stock market crashes, international financial crises, terrorist attacks, wars and other shocks.”

As we were just about to classify this piece as another homage to Greenspan, something catches our eye: “Still his legacy will be judged not just by his record at the Fed,” continues The Post, “but also by the economy he bequeaths.”

Uh-oh...this is the point where things stop looking so cheery for Big Al - when people start examining what effect his E-Z money policies have really had on the economy.

“The Fed’s low interest rates encouraged consumers to borrow and spend on houses, autos and other goods, spurring economic growth for several years when businesses were cutting jobs and reluctant to invest.

“The result is a prosperity built on borrowing.”

[Ed. Note: American's have stopped making things...our wealth is built on credit. The more we borrow, the richer we feel - when in fact nearly every asset we own is made in some other country that we paid for with borrowed money. Don’t allow yourself to be blinded by the delusions of empire...

America’s Wake-Up Call

*** “We live in a decadent age,” said the reverend doctor Peter Mullen in Sunday’s sermon. “It is decadent not because people sin; people have always sinned. It is decadent because they don’t believe in sin; they don’t believe there is a difference between doing something right and something wrong.”

We weren’t supposed to think of the economy. But it is our métier - the ball and chain we drag around with us like a condemned man.

“The devil loves lies,” Mullen continued. “They keep people from seeing the truth of God’s world. They falsely believe that they can do whatever they want without paying the price for it - neither in this world, nor in the next. Who does God think he is, anyway, to interfere with our lifestyle choices?”

“You know, the Ten Commandments are not called the Ten Suggestions. And for good reason...”

Mr. Mullen believes the contemporary approach to the Ten Commandments is little different to the Fed’s approach to monetary policy - both are part of today’s obsession with making things E-Z. Taking one example, he looks at one commandment: Thou shalt worship no graven images.

“Now there’s a commandment that everyone believes is kept. But whom do we think we are kidding? Our whole domestic economy is based on envy and covetousness.

Everyone lusts after so many graven images; they go into debt trying to keep up with them. Just look at the tabloids.”

*** The Sunday edition of El Pais, Madrid’s leading newspaper, includes a photo of Evo Morales, president elect of Bolivia, being invested as “Great Condor” of the indigenous people. Morales pledged to change the “sad history of exploitation,” by following in the footsteps of Che Guevara. We presume he does not intend to follow Che’s footsteps all the way to La Higuera, Bolivia, where the revolutionist was gunned down by troops on October 9, 1967.

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The Daily Reckoning PRESENTS: Do you hear that noise, dear reader? The faint wailing in the background that’s getting louder and louder by the second? The wild increase in money and debt in the past twelve weeks has given our masked economist a case of the Screaming Mogambo Willies...

FEARFUL EFFECTS OF INFLATION
by The Mogambo Guru

I knew something was wrong when I woke up Friday morning. Not only was my Wall Street Journal missing, but my wife was acting real nervous and suspicious, and the kid was hiding behind the couch. What was going on? I soon found out, and, as obviously predicted, was highly frightened to see that Total Fed Credit actually declined by $17 billion last week! The ability, or actions, of the banks in creating money out of thin air was, gulp, lowered by $17 billion dollars? In one week?

To be fair, reversing the excesses of the customary end-of-year monetary goosing by the Federal Reserve is pretty par for the course, as it happens every year about this time. But meanwhile, the money supply is still growing quite handsomely, as reported by Bill Bonner at The Daily Reckoning, who writes, "In the latest reported week, more than $25 billion was added to the nation’s money supply. If this were to continue, it would add more new money in 18 months than the present value of all the gold ever mined." Hahaha!

The money supply is going up faster than the growth in the economy, which means that prices will increase (to absorb all that money), and the supply of money is increasing, in one lousy year, more than the value of all the gold in the whole world? And now you wonder if gold is going to go up in price? Hahaha! It's not if gold will go up, but how much it is going to go up in price! And I am betting gold will go up a lot! And if it does not, then I will be surprised, because this would be the first time in all of history when gold did not rise mightily in price when faced with the enormous economic idiocies, like the ones that currently bedevil us, especially when using a fiat currency as money!

But we aren't here to talk about gold and how much money is going to be made in gold, although it is one of my favorite things to talk about. Instead, we were talking about the money supply, and almost as if by accident I happened upon the essay "The Fed's Money Supply Armament Is Underway," by Robert McHugh, which was posted on FinancialSense.com. He writes that the money supply figure known as M-3 "has been launched into outer space, up another $56.3 billion last week, up $92.4 billion over the past two. This is some real horsepower. Over six weeks," he says, M-3 is "up $177.8 billion. These annualized growth rates are 28.7 percent, 23.6 percent, and 15.3 percent respectively."

As soon as I read that, I gulped, suddenly nervous and edgy. He then soothingly adds, "Those are the seasonally adjusted figures." I think to myself, "Whew! That was close! I coulda had a heart attack!" Now I am starting to relax a little, because adjusting "seasonally" and "annually" are two of my favorite statistical tricks.

Seeing that I am temporarily distracted, suddenly Mr. McHugh springs the trap, and says, "The raw, non-seasonally adjusted, figure is up $293.3 billion over the past 12 weeks, on a pace to add $1.2 trillion in money to the economy." Bam! Right between the eyes! Stunned, I had to read that sentence several times, as my mind kept refusing to comprehend what I was reading, probably because I was screaming in fear. This kind of wild increase in money and debt gives me a case of the Screaming Mogambo Willies (SMW). Then he says, calmly, "Wow." That's it. Just "wow."

Outraged, I leap up and, utilizing my famous Mogambo Editor's Pen (MED), write in big, red letters on the wall, "Exclamation points missing! Exclamation points missing, missing, missing!!!" And I am angrily stabbing the wall with the pen for additional emphasis.

In fact, now that I think about it, this will be my entry into this year's hotly awaited contest, the "International Most Egregious Lack Of Exclamation Points Competition!" In Correct Mogambo Literary Style (CMLS), it should have read "Wow!!!!" which, when applied to economics, is your signal to buy more gold and wear a sidearm for the next couple of weeks, just in case. I urge these precautions because this kind of incredible, profligate, unbelievable monetary inflation means that we will get a corresponding price inflation after a just a little while, and people typically go berserk when they can't afford to even live anymore because prices are so high, and then the kids start getting hungry and whiny.

But if you are sick of hearing me run my big, fat mouth and you want some hard, real evidence of inflation, read things like the article entitled "Energy costs drive US inflation" on the BBC.co.uk website. It read, "Wholesale prices in the U.S. rose at their fastest rate in 15 years during 2005, as the effects of soaring energy prices took their toll." The fastest rise in price inflation in 15 years? My hands shake at the prospect.

The actual numbers are no picnic themselves, in that "The Labor Department producer price index (PPI) rose 5.4% in 2005, driven by a 23.9% hike in energy costs. For December, the PPI - which gauges price changes before they reach the customer - rose 0.9%, the biggest jump since September's 1.7%."

Not only that, but "Food costs moved up by nearly 1% in December, following a 0.5% November gain." If you are a carnivore, then you're in better shape than those poor vegetarians, who got clobbered in December as the price of vegetables "soared 22% during the month, the biggest gain in more than a year." But even we vicious, meat-eating, super-predator omnivores are looking at inflation in food prices that are, annualized, 12% a year!

This is the stuff of Nightmares on Federal Reserve Street, which is not a movie, but if it was, it would scare the hell out of you, and you would die of a heart attack just from watching the fearful effects of inflation caused by creating too much money and credit, which is why they don't make the movie.

And speaking of rising energy costs, Doug Noland passes on the news from the Financial Times, where Carola Hoyos writes, “The oil revenues of the Organization of the Petroleum Exporting Countries, the cartel that controls 40 per cent of the world’s oil supplies, will increase by 10 per cent to a record $522bn this year, the U.S. Department of Energy forecasts."

Now, I am sure that you noticed that they didn't say that OPEC was going to be pumping 10% more oil, mostly because OPEC ain't a-gonna be pumping no 10% more oil. And in fact, if Peak Oil is here, they will probably be pumping less oil. So, the increase in "oil revenues" that OPEC will be making must, by process of elimination, be because of higher prices. Yikes! So, prices are going to be 10% higher? Ugh.

Until next week,

The Mogambo Guru
for The Daily Reckoning

Mogambo Sez: Mogambo, him say oil go up. Oil go up. Mogambo, him say gold go up. Gold go up. Mogambo him say silver go up. Silver go up. Mogambo, him big medicine. Mogambo now say too buy heap big oil, gold, silver.

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, and a vocational 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:

American Consternation

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