We’re talking about inflation.
First a word of caution. Everything that MUST happen DOES happen. But it
doesn’t always happen when and how you think it should. We warned about
the coming end of the Bubble Epoque for 10 years before it actually
happened. Now, we’re warning about inflation coming. Readers may draw
their own conclusions.
“In a world of debt and deflation,” writes Crispin Odey in the Financial
Times, “inflation is our friend.”
The Financial Times is required reading among policy makers. They read it
to find out about the latest fashions in their trade. In a matter of days,
they are wearing the season’s new styles themselves.
The world’s financial authorities have a duty to maintain the integrity of
the financial system...which means, maintaining the value of the currency.
Those that lived through the ’70s have a horror of inflation. They feel
they must fight against it...protect against it...and keep an eye out for
it. Yet, in front of them is the worst financial crisis since the Great
Bloomberg reports that 236,000 houses were foreclosed in 2008. In
California, house prices are already down 42% from their peak...and still
And just yesterday, Boeing lost its first order for 787 Dreamliner...and
announced that it would have to let 10,000 workers go. Starbucks said it
would turn 6,700 of its people loose. And the International Labor
Organization in Geneva estimated that as many as 50 million people
worldwide could lose their jobs “if the situation continues to
The situation is continuing to deteriorate. “There’s not a moment to
spare,” says President Obama. We have to fix things.
There are only three choices, says Martin Wolf in the Financial Times.
Liquidation. Inflation. Or Boondogglization.
Here at The Daily Reckoning, we’ll take the first solution. Let the chips
fall where they may...clear the market...and then get on with things.
“To choose that option must be insane,” says Wolf. Ooooh... Well, we’re
not going to be provoked by that kind of low-bred name calling. We’ll take
the high road: sticks and stones will break our bones, but words will
never hurt us. Wait...why not...Mr. Wolf is a moron!
He – and most of the ‘responsible’ commentators – like the third solution,
a devil’s pudding of sugar-coated carrots and wet-noodle sticks including
Keynsian spending, bailouts, massive infrastructure projects, giveaways,
new regulations, new programs...a little of this...a little of
that...adding trillions in public debt and hoping that the economy grows
its way out of it. In the confusion of the crisis, you can also expect the
Obama government to sneak in a total overhaul of the nation’s health care
system...and maybe its education system too.
So far, boondogglization is the policy the feds have favored. It’s as
though a liquor truck had over-turned in a bad neighborhood. Within
minutes, people are out in the street grabbing every unbroken bottle.
In Mr. Obama’s relief plan, for example, there are free drinks for almost
everyone. Wall Street financiers. Bankers. Homeowners. Builders.
Steelmakers. The House of Representatives – guardians of the nation’s
purse – took a hard look at it...red-penciled $6 billion out of $825
billion...and let it pass.
But little by little...day by day...the policy makers are being drawn
towards the second solution: inflation. Boondoggles aren’t enough.
Borrowing and taxing alone won’t do it. A dollar borrowed or taxed merely
transfers it from the hands of the person who earned it to the hands of
someone who didn’t. What the system needs is new money. More money. Money
that isn’t stolen or defrauded from someone else. And economists are
beginning to realize it.
*** The opinion mongers are softening up the world’s head. Inflation is
not such a bad thing, they keep saying. A little inflation will, in fact,
be a good thing. Crispin Odey’s analysis is closer to our own than most
others. The problem, he says, is not credit; it’s debt. The authorities
may be able to increase credit by throwing money to the banks; but people
who are deeply in debt are still bad credit risks.
Martin Wolf, at the Financial Times, outlines the size of the debt
“Let us start with some facts. The ratio of US public and private debt to
gross domestic product reached 358% in the 3rd quarter of 2008. This was
much the highest in US history. The previous peak of 300% was reached in
1933, during the Great Depression.
“Nearly all of this debt is private. That reached an all-time high of 294%
of GCP in 2007, a rise of 105 percentage points over the previous decade.
“Particularly remarkable is the composition of the increased debt. In the
early 1930s, most US private debt was owed by non-financial companies, so
balance sheet deflation occurred in companies, as was also the case in
Japan in the 1990s. This time, however, the big increase in debt was in
the financial and household sectors.
“Over the past three decades the debt of the US financial sector grew six
times faster than nominal GDP. The consequent increases in its scale and
leverage explain why, at the peak, the financial sector allegedly
generated 40% of US corporate profits....
“Household debt – most of based on rising housing values – rose from 66%
of US GDP in ’97 to 100% in ’07”
What to do with all this debt?
“If central banks and governments are aggressive enough, they can generate
inflation which will lower the debt burden,” Wolf writes. “But they will
imperil – if not terminate the experiment with un-backed fiat (or
man-made) money that started in 1971.”
Yes...exactly...that is what we expect.
“The world’s total outstanding debts have to be reduced,” continues Mr.
Odey, clearheadedly. “Our populations and companies need the means and the
time to pay them off. These means are profits and pay rises.”
Not much the feds can do about profits and pay rises – at least not
directly. But the last part of Odey’s formula sounds like a winner to us:
“The other thing we need is inflation...
“Inflation will allow debt to reduce day by day. Price rises will make
companies going concerns, earning their way back to profit. Pay rises will
enable households and consumers to pay down what they owe while saving
more and spending some. And inflation allows interest rates to rise but
still remain negative in real terms. It is healthier that people receive
an annual pay rise than take out an extra annual loan – as they have been
doing since 2000. This package will allow markets to breathe again.”
Inflation is coming back into style. Count on it.
*** We promised an interview with the master. Forget Keynes. Forget
Friedman. The economist that everyone should be paying attention to is
Inflation is coming back in style. And Gideon Gono is its star. While
other central bankers flounder, he’s proven that you can have
inflation...and have it more abundantly than you want.
Gono, if you haven’t heard of him, is Robert Mugabe’s right hand man. And
Robert Mugabe is the number one man in Zimbabwe, an African country with a
real ‘riches to rags’ story. It was one of the wealthiest and safest
countries in Africa when it was run by Ian Smith in the ’70s. But the
meddlers and world-improvers couldn’t leave well enough alone. They helped
put Mugabe in power. Since then, the place has gone to Hell.
Gideon Gono, 47 years old, lives in a 47-bedroom mansion in Harare. He
says he doesn’t drink, only sleeps 4 hours a night, and runs regularly. He
is known as “Mr. Inflation” for his Olympian efforts to increase the
country’s money supply. He does this the old fashioned way – by printing
pieces of paper will lots of zeros on them. Newsweek Magazine seems to
have found him in a talkative mood:
Asked what he thought of the worldwide credit crash, he replied:
“I sit back and see the world today crying over the recent credit crunch,
becoming hysterical about something which has not even lasted for a year,
and I have been living with it for 10 years. My country has had to go for
the past decade without credit... Out of the necessity to exist, to ensure
my people survive, I had to find myself printing money. I found myself
doing extraordinary things that aren’t in the textbooks. Then the IMF
asked the US to please print money. I began to see the whole world now in
a mode of practicing what they have been saying I should not.”
The Daily Reckoning
The Daily Reckoning PRESENTS: When something dramatic happens, like an
airplane crash, it all mobilizes and comes on-site. That’s OK when major
disasters are one-off incidents. But what if several incidents occur in
short order or close proximity? What happens when money, if not energy,
gets scarce? The whole process could get overwhelmed. Byron King
DEALING WITH MODERN COMPLEXITY
by Byron W. King
I was in New York City last week for some meetings. I was walking around
Lower Manhattan and – in a city that large – by chance bumped into an old
Navy buddy who now works for the National Transportation Safety Board
(NTSB). The NTSB ball cap gave him away. He was investigating the
“splashdown” of the US Airways Flight 1549 in the Hudson River. It was an
unbelievable coincidence to see this fellow after many years.
My NTSB friend was good enough to get me past the security and near the
aircraft as it floated in the water. It was nighttime. The weather was
very cold and windy, so all the physical work was just plain tough. (Pity
the frigid divers, placing slings under the fuselage and wings.) The giant
cranes were just getting ready to lift the aircraft hulk out of the river
and onto a barge. I was taken in by all the personnel and equipment at the
scene of the crash – and this was a nonfatal crash, thank God!
There were New York police and firefighters. There were Port Authority
cops. There were New York Dept. of Environmental Conservation people and
folks from the U.S. Environmental Protection Agency. There were New York
City Hazmat people, the Army Corps of Engineers, the U.S. Coast Guard and
the Federal Aviation Administration. There were people from the State
University of New York scanning the river bottom with sonar.
There were reps from a multitude of private entities like U.S. Airways
(naturally), Airbus (ditto), the crane company employees, diving and
salvage people, insurance carriers, environmental testing firms and many
others. There were lots of news media there as well. There was even a
Salvation Army truck on-site, with pots of hot coffee and sandwiches for
the many people who were part of the effort.
And then there were lots of spectators, including people working out
behind the glass at a gym inside an adjacent building. They were watching
the whole scene from the comfort of their StairMasters and Lifecycles.
My take-away thought about this was how complex our society has become.
There are layers upon layers of complexity and astonishing levels of
technical expertise. There are so many different organizations, agencies,
groupings of people and assemblages of equipment. It all costs a lot of
money and consumes a lot of energy. When something dramatic happens, like
an airplane crash, it all mobilizes and comes on-site. That’s OK when
major disasters are one-off incidents. But what if several incidents occur
in short order or close proximity? What happens when money, if not energy,
gets scarce? The whole process could get overwhelmed.
Of course, New York knows something about dealing with disasters. After
all, we were about three blocks from the site of the former World Trade
Center. Still, it takes years to hire and train all of these experts. And
more years to acquire all this sophisticated gear. It’s a very laborious
and expensive process. Just keeping this level of capability on a standby
basis requires a massive commitment of resources. When you need it, you
need it now. If you don’t have it, you can’t build it up quickly. And when
you have it (like New York has some of everything), you don’t want to get
rid of it in some frenzy of so-called cost cutting. But still, it makes me
Societies develop layers of complexity to solve problems. The thing to
keep in mind, however, is the historical fact that every complex
civilization that has ever lived on this world has collapsed. Bar none.
All societies have come to an end. Cultural anthropologist Joseph Tainter
documented this in 1988 in his astonishing book The Collapse of Complex
That is, as societies become more complex, the costs of meeting new
challenges increase. Eventually, every society arrives at a point at which
devoting extra resources to meeting new challenges produces diminishing
returns. Then negative returns. Along comes a systemic shock. The shock
might be internal (resource exhaustion, for example) or external (foreign
war, for another example). And the shock triggers collapse. When collapse
occurs, it almost always occurs rapidly. Things fall apart and quickly
decay to a much lower state of complexity. Societies become less complex
by collapsing into smaller, much less complex subgroups.
The Western world – certainly, the U.S. – has spent the past century
engaged in an arms race of social complexity. And from where we now stand,
there’s no gentle “build-down.” The more people who understand that, the
Meanwhile, we have a new U.S. president. You-know-who. And the new
president has a new secretary at the Dept. of Energy (DOE), Steven Chu,
who received a Nobel Prize in physics. (That’s a refreshing change for the
DOE.) And the new DOE secretary has a new chief of staff, Rod O’Connor.
Mr. O’Connor has a master’s degree in public administration from Harvard.
And he worked for Al Gore in both the Senate and White House. Mr. O’Connor
organized and ran the 2000 Democratic National Convention in Los Angeles
as well as the 2004 Democratic National Convention in Boston. And he was
chief of staff of the Democratic National Committee.
I’ve never met Mr. O’Connor. But I have met Joseph Tainter (see above). It
seems to me that what we need at DOE is a more of a Rickover man (Hyman
Rickover being “the Father of the Nuclear Navy”), not a Gore man whose
claim to fame is strong political credentials. So is this a sign of the
politicization of energy? I’m shocked. I truly want to see the country do
well in the next four years. As a nation, we cannot afford to screw up,
either with energy in general or at the Energy Dept. We shall see what
happens at DOE. Meanwhile, I hope that Mr. O’Connor reads Mr. Tainter’s
book. He can even have my copy. It’s underlined.
Until next we meet,
Byron W. King
for The Daily Reckoning
Editor’s Note: The above was taken from the most recent issue of Energy &
Scarcity Investor. Learn how you can read the full issue by clicking
Byron King currently serves as an attorney in Pittsburgh, Pennsylvania. He
received his Juris Doctor from the University of Pittsburgh School of Law
in 1981 and is a cum laude graduate of Harvard University. Byron is also
editor of Outstanding Investments and Energy & Scarcity Investor.
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