According to Bloomberg, a nickel is now worth six cents. Isn't that great news, our money actually increased in value! Umm, just one minor thing; the increase in value is due to the soaring cost of the nickel in our nickel.
Too bad dollars aren't still made of silver. But, that's the whole point of fiat money, right? It allows the issuer to produce as much as it pleases and distribute it wherever it pleases, at no cost to anyone except those who hold it as a store of value.
Monday, May 3, 2010
Friday, April 30, 2010
You'd better let it deflate, Mr. Bennie.
Even though this blog is dedicated to the topic of inflation, there is a potential alternative reality in our future. We could have deflation and there's a whole subset of economists and pundits who fervently believe that's where we're headed. I've been preaching just the opposite, that we're headed for bad inflation, possibly hyperinflation that destroys 100% of the value of the US dollar. I believe that because the people in charge of making the choice have given every indication that they will print until we have inflation. But let's be clear about one thing; there is absolutely no middle ground. We will not have moderate inflation and growth over the next two decades. We have too much debt, too many unfunded obligations, too many overpriced financial assets, like stocks and bonds. Real (inflation adjusted) economic growth is going to take a huge hit, either with inflation or deflation.
Ben Bernanke believes he can engineer our way out of this with some tricky driving of the economy through the minefield. He's insane. The planet is riddled with insolvency. This is not fixable through sleight of hand and manipulation of the money supply. That Keynesian bag of tricks won't work this time. There is not enough capital to produce the growth to pay off the debt and there aren't enough suckers left to loan more money. All we have is Bernanke and his printing press. If Ben ever comes to his senses, we could still choose the better course of action. Let the economy deflate. It will be incredibly painful, as bad or worse than the depression. The alternative will be worse because we will still have an economic collapse, and we will have resource hoarding, a dead currency, and a population that has learned the wrong incentives for future stability. That combination spells disaster.
Today's market was a harbinger of what lies ahead if Bernanke and Obama don't rethink their mindset. Stocks dropped hard; oil and gold, corn, wheat, cattle, hogs, cotton, soybeans, and copper all rose. Bernanke this week refusing to even hint at raising interest rates, coupled with a massive IMF bailout of Greece, may represent a bridge too far in terms of dollar viability. If that's not the case now, it will be soon. Our currency is in a precarious position. If the government and central bank don't quit "stimulating" now, we're in for a dose of stagflation that will make all previous financial crises look tame. One of these days, hard assets will start moving up against the dollar and they won't stop. The markets are saying enough is enough. Does Ben Bernanke listen?
Ben Bernanke believes he can engineer our way out of this with some tricky driving of the economy through the minefield. He's insane. The planet is riddled with insolvency. This is not fixable through sleight of hand and manipulation of the money supply. That Keynesian bag of tricks won't work this time. There is not enough capital to produce the growth to pay off the debt and there aren't enough suckers left to loan more money. All we have is Bernanke and his printing press. If Ben ever comes to his senses, we could still choose the better course of action. Let the economy deflate. It will be incredibly painful, as bad or worse than the depression. The alternative will be worse because we will still have an economic collapse, and we will have resource hoarding, a dead currency, and a population that has learned the wrong incentives for future stability. That combination spells disaster.
Today's market was a harbinger of what lies ahead if Bernanke and Obama don't rethink their mindset. Stocks dropped hard; oil and gold, corn, wheat, cattle, hogs, cotton, soybeans, and copper all rose. Bernanke this week refusing to even hint at raising interest rates, coupled with a massive IMF bailout of Greece, may represent a bridge too far in terms of dollar viability. If that's not the case now, it will be soon. Our currency is in a precarious position. If the government and central bank don't quit "stimulating" now, we're in for a dose of stagflation that will make all previous financial crises look tame. One of these days, hard assets will start moving up against the dollar and they won't stop. The markets are saying enough is enough. Does Ben Bernanke listen?
Thursday, April 29, 2010
Saudi Oil Exports Will Start to Decline.
Saudi Arabia is serving notice to the world that they are not going to be the engine that supplies our growing appetite for oil in coming years. The Saudis generally play their cards close to the vest when it comes to information about reserves and production capacity, but now they are saying that future exports will decline due to growing internal consumption. However, some experts believe that declining Saudi production will be the larger contributing factor. No matter the cause, when the world's leader in both reserves and production says that its external output will drop, there's a problem.
Numerous reports say that Saudi's (and the world's) largest oil field, Ghawar, is now in decline. Another indication of potential declining output was when Saudi Aramco began exploration efforts in the Red Sea, an area it had previously ignored to focus on low hanging fruit in the eastern province. Saudi production has been stagnant in recent years, although that is attributable in part to OPEC quotas. But if the world's largest oil producer is running into supply constraints at a time when the world's central banks are pumping record quantities of fiat scrip, the inflation picture will take on a ominous new dimension.
Numerous reports say that Saudi's (and the world's) largest oil field, Ghawar, is now in decline. Another indication of potential declining output was when Saudi Aramco began exploration efforts in the Red Sea, an area it had previously ignored to focus on low hanging fruit in the eastern province. Saudi production has been stagnant in recent years, although that is attributable in part to OPEC quotas. But if the world's largest oil producer is running into supply constraints at a time when the world's central banks are pumping record quantities of fiat scrip, the inflation picture will take on a ominous new dimension.
Tuesday, April 27, 2010
Iron Ore Producers Threaten to Cut Supplies
China says that iron ore producers Vale, BHP Billiton and Rio Tinto are threatening supply cuts if steel companies don't accept their price hikes.
“They adopted a threatening policy,” Luo said. “If you don’t accept iron ore prices before a deadline, they threaten to cut supplies. Is this iron ore negotiations?”
Global commodity consumers had better quickly get used to hard bargaining over prices. As the world is being flooded with fiat currencies, commodity producers are going to demand a higher price for their scarce product, as they should. They have no need for monopoly money. If China wants good prices, they should price their contracts in yuan and conduct responsible monetary policy. If they continue to peg to the US dollar, they should expect prices to continue rising because the US central bank is not going to conduct responsible monetary policy.
The World Steel Association called on authorities globally to examine the iron ore market after Brazil’s Vale broke with a 40-year custom of selling on annual contracts and won a 90 percent price increase from Japanese mills. The Chinese government this month said it was investigating the possibility that BHP Billiton, Rio Tinto and Vale may be monopolizing supplies of the steelmaking ingredient.
They can examine and file complaints to their hearts' content. Producer nations are not going to accept trash fiat for hard assets. Not gonna happen.
“They adopted a threatening policy,” Luo said. “If you don’t accept iron ore prices before a deadline, they threaten to cut supplies. Is this iron ore negotiations?”
Global commodity consumers had better quickly get used to hard bargaining over prices. As the world is being flooded with fiat currencies, commodity producers are going to demand a higher price for their scarce product, as they should. They have no need for monopoly money. If China wants good prices, they should price their contracts in yuan and conduct responsible monetary policy. If they continue to peg to the US dollar, they should expect prices to continue rising because the US central bank is not going to conduct responsible monetary policy.
The World Steel Association called on authorities globally to examine the iron ore market after Brazil’s Vale broke with a 40-year custom of selling on annual contracts and won a 90 percent price increase from Japanese mills. The Chinese government this month said it was investigating the possibility that BHP Billiton, Rio Tinto and Vale may be monopolizing supplies of the steelmaking ingredient.
They can examine and file complaints to their hearts' content. Producer nations are not going to accept trash fiat for hard assets. Not gonna happen.
The Wall Street Journal notes commodity inflation.
This article in the Wall Street Journal documents the blatant inflation that is sweeping around the world.
An unrelenting rise in the cost of raw materials—largely driven by mounting demand from Asia—is cutting corporate profits, hitting stocks and, in some cases, pushing up consumer prices.
One glaring example is the sky-rocketing cost of rubber, a major tire component, which has climbed nearly 74% this year after rising 92% in 2009. Industry analysts and some tire makers, including Goodyear Tire and Rubber Co., in Akron, Ohio, and Bridgestone Corp., in Tokyo, have warned investors about a potential hit to profits.
A similar concern faces firms that buy other rapidly rising raw materials. Palladium, which goes into car exhaust systems, is up nearly 39% this year, potentially boosting costs for U.S. car makers as they seek to emerge from their slump.
Lumber, a major cost for home builders, is up nearly 59%. Analysts at Raymond James lowered their ratings on three home builders last week, in part citing "surging lumber costs."
Iron-ore prices also are rising, while oil and copper prices have tacked on to last year's huge gains.
Data on producer prices released by the Bureau of Labor Statistics on Thursday shows how rapidly the pressure on corporate America is mounting. The producer-price index showed that crude goods such as iron ore, construction sand and pulp shot up 44.5% year-over-year, the fastest rate since 1974. Including energy and food costs, crude goods prices rose 33.4%.
-----
Rubber's rally is driven by booming demand in China, where car sales rose 56% in March compared to a year prior, according to IHS Global Insight, as well as elsewhere in Asia. ....Goodyear raised prices up to 8% on some tires last week, citing higher raw material costs, and rivals have done the same.
-----
Meantime, home builders are facing rising costs, even as the industry tries to claw its way back from the housing slump. The gains in lumber prices have added about $2,400, or 1.1%, to the price of the median home, according to the National Association of Home Builders.
Listen closely tomorrow when Ben Bernanke says he sees no evidence of inflationary pressures. Americans need to store these statements very securely in their memory so that there will be accountability for what comes next.
An unrelenting rise in the cost of raw materials—largely driven by mounting demand from Asia—is cutting corporate profits, hitting stocks and, in some cases, pushing up consumer prices.
One glaring example is the sky-rocketing cost of rubber, a major tire component, which has climbed nearly 74% this year after rising 92% in 2009. Industry analysts and some tire makers, including Goodyear Tire and Rubber Co., in Akron, Ohio, and Bridgestone Corp., in Tokyo, have warned investors about a potential hit to profits.
A similar concern faces firms that buy other rapidly rising raw materials. Palladium, which goes into car exhaust systems, is up nearly 39% this year, potentially boosting costs for U.S. car makers as they seek to emerge from their slump.
Lumber, a major cost for home builders, is up nearly 59%. Analysts at Raymond James lowered their ratings on three home builders last week, in part citing "surging lumber costs."
Iron-ore prices also are rising, while oil and copper prices have tacked on to last year's huge gains.
Data on producer prices released by the Bureau of Labor Statistics on Thursday shows how rapidly the pressure on corporate America is mounting. The producer-price index showed that crude goods such as iron ore, construction sand and pulp shot up 44.5% year-over-year, the fastest rate since 1974. Including energy and food costs, crude goods prices rose 33.4%.
-----
Rubber's rally is driven by booming demand in China, where car sales rose 56% in March compared to a year prior, according to IHS Global Insight, as well as elsewhere in Asia. ....Goodyear raised prices up to 8% on some tires last week, citing higher raw material costs, and rivals have done the same.
-----
Meantime, home builders are facing rising costs, even as the industry tries to claw its way back from the housing slump. The gains in lumber prices have added about $2,400, or 1.1%, to the price of the median home, according to the National Association of Home Builders.
Listen closely tomorrow when Ben Bernanke says he sees no evidence of inflationary pressures. Americans need to store these statements very securely in their memory so that there will be accountability for what comes next.
Now it gets interesting.
The US stock market dropped about 2% today as European credit markets came under broadening pressure. The realization is growing that, without the benefit of a printing press, practically none of the Western European nations are solvent. For that matter, neither is the USA, or Japan, or the United Kingdom. It's not a liquidity issue, or a growth issue, or a housing crisis. What we have is a full blown, irrevocable, unavoidable, global, sovereign debt crisis.
The Euro zone is the first manifestation of this catastrophe because EMU countries handcuffed themselves into a situation where they did not individually have the ability to print their currency at will. The effect is as if they borrowed money in a currency other than their own. Sovereign borrowers like the US and the UK have been able to kick the can down the road, hiding their own insolvency by printing money out of thin air. Japan has survived by printing and by borrowing from their own people's vast savings at practically zero return. The Greeks, Portuguese, Italians, Irish, Spaniards, they don't have those choices. Unable to debase the Euro without the consent of the Germans, they'll have to default the old fashioned way; stiff your creditors.
Now I think that a nice round of big fat sovereign defaults would be a good thing in the long run. With the rise of socialism in the western world over the last few decades, spurred on by a global media machine that never saw an unncecessary government expenditure, people have actually forgotten that borrowed money must eventually be repaid; a reminder is in order. Politicians have played right along, assuring their hapless constituents that as long as the economy was growing at an exponential rate, as long as debt/GDP was shrinking, everything was fine. Two minor problems. Economies can't grow exponentially forever in a closed system, i.e. planet Earth, without running into resource constraints. And debt has been growing at a faster exponential pace than the economies. Now the economies have stopped growing and the debt is growing faster. That spells default. Massively globally interconnected, bank destroying, conflict creating, default.
Today, the defaults are beginning. Greece is the canary in the coal mine, but the rest of us are nothing but bigger canaries. In the US we have two options going forward. We can bite the bullet and admit that there is no chance of growing our way out the accumulated debt burden. This will be very painful for some very powerful people, people who wield a lot of money and influence. Or we can invoke the memory of John Maynard Keynes, print more money, lots more money, and increase the debt and money supply faster than our economy can grow. That is the genesis of inflation, actually it's the definition of inflation, and it will be very painful for lots and lots of little people who don't have their congressman's personal number on speed dial. Which path do you think we'll choose?
Today, gold hit a new all time high in terms of the Euro, very close in terms of the US dollar. Tomorrow, Ben Bernanke gets his latest chance to tell us which path the United States has chosen. Don't listen to Ben's words; he's a liar. Watch gold for the next few weeks and you'll have the answer.
The Euro zone is the first manifestation of this catastrophe because EMU countries handcuffed themselves into a situation where they did not individually have the ability to print their currency at will. The effect is as if they borrowed money in a currency other than their own. Sovereign borrowers like the US and the UK have been able to kick the can down the road, hiding their own insolvency by printing money out of thin air. Japan has survived by printing and by borrowing from their own people's vast savings at practically zero return. The Greeks, Portuguese, Italians, Irish, Spaniards, they don't have those choices. Unable to debase the Euro without the consent of the Germans, they'll have to default the old fashioned way; stiff your creditors.
Now I think that a nice round of big fat sovereign defaults would be a good thing in the long run. With the rise of socialism in the western world over the last few decades, spurred on by a global media machine that never saw an unncecessary government expenditure, people have actually forgotten that borrowed money must eventually be repaid; a reminder is in order. Politicians have played right along, assuring their hapless constituents that as long as the economy was growing at an exponential rate, as long as debt/GDP was shrinking, everything was fine. Two minor problems. Economies can't grow exponentially forever in a closed system, i.e. planet Earth, without running into resource constraints. And debt has been growing at a faster exponential pace than the economies. Now the economies have stopped growing and the debt is growing faster. That spells default. Massively globally interconnected, bank destroying, conflict creating, default.
Today, the defaults are beginning. Greece is the canary in the coal mine, but the rest of us are nothing but bigger canaries. In the US we have two options going forward. We can bite the bullet and admit that there is no chance of growing our way out the accumulated debt burden. This will be very painful for some very powerful people, people who wield a lot of money and influence. Or we can invoke the memory of John Maynard Keynes, print more money, lots more money, and increase the debt and money supply faster than our economy can grow. That is the genesis of inflation, actually it's the definition of inflation, and it will be very painful for lots and lots of little people who don't have their congressman's personal number on speed dial. Which path do you think we'll choose?
Today, gold hit a new all time high in terms of the Euro, very close in terms of the US dollar. Tomorrow, Ben Bernanke gets his latest chance to tell us which path the United States has chosen. Don't listen to Ben's words; he's a liar. Watch gold for the next few weeks and you'll have the answer.
Thursday, April 22, 2010
Questions I'd like to ask Ben Bernanke
Here are some questions I'd love to ask Bernanke. I've taken the liberty of providing Ben's answers since he'll never actually answer questions like this.
Me: What is your estimate of inflation for the next 10 years?
Ben: It's difficult to predict economic variables over a long time period. Our job is to respond to the data as we get it.
Me: Okay, what is your target rate for inflation over the next 10 years? What rate of inflation does your policy aim for?
Ben: Our stated inflation goal is 2%.
Me: For how much of that 10 year period do you anticipate that real interest rates will be negative? Currently savers are lending their money to the banks at zero percent, while inflation is running 2% year over year. We lose money, or donate to your banker friends, every day due to loss of purchasing power. How long will retirees and the risk averse individuals be required to fund the bonuses of your friends?
Ben: It's unfortunate that savers aren't getting a good return, but my mandate is to do what's best for the country.
Me: Repeating the question, for how much of that 10 year period will savers get a negative return on their money?
Ben: Interest rates will remain at exceptionally low levels for an extended period of time.
Me: I see. So what would be your advice to a retiree who can't tolerate the blowup of another liquidity induced asset bubble created by the federal reserve? What about the millions of Americans who don't trust their money to the Wall Street sharks? How much risk do they have to take on just to maintain the value of their dollars, much less make a small return? Should they run the risk of buying overvalued stocks, which currently return more every week than their money market fund returns in a year? Or should they just chew up their savings and depend on the state for support after the money's gone?
Ben: We don't see any evidence of significant mispricing of any asset classes.
Me: All due respect, Ben, you and your institution have missed two of the three largest bubbles in US history in the last decade. Your assurances are worthless.
Ben: The S&P 500 is still 20% below 2007 levels. That doesn't suggest a bubble.
Me: Uh, Ben, 2007 was a bubble. It was a very big bubble. I know you are blind to them in progress, but now you can't see them in retrospect either?
Ben: It wasn't a bubble, it was a credit crisis. It was due to an imbalance of savings by the Chinese, which they imprudently loaned to American home buyers.
Me: And keeping the Fed Funds rate at 1% for a couple of years while housing prices were going up 20% a year had nothing to do with it?
Ben: My mandate is to do what's best for the country.
Me: So what is your response to critics who say that your policy right now is brewing up a bad bout of inflation. Negative real interest rates, printing money to buy overpriced assets, massive government fiscal stimulus, all leading us toward high inflation, possibly hyperinflation?
Ben: The risk of inflation is low. We are more concerned about deflation.
Me: Deflation would be bad for your friends in the banking business, eh?
Ben: Yes, and that would hurt the rest of us.
Me: Don't you mean the rest of "you"?
Ben: Whatever.
Me: Is the price of gold suggesting deflation, near all time highs and rising?
Ben: The price of gold reflects concern about the economic system.
Me: Oil? Up 150% in the last 13 months?
Ben: Speculative activity can temporarily misprice assets?
Me: I thought you didn't see any mispriced asset classes?
Ben: Not broad classes.
Me: Oh. What about copper, up about 200% over the same period? Nickel, iron, farmland, silver, platinum, palladium, coal. All up sharply and rising faster.
Ben: Those are just signs of economic recovery.
Me: But not enough recovery to tolerate anything other than free money.
Ben: No.
Me: So is the stock market signalling deflation? The Nasdaq 100, the highest beta growth stocks are up 100% in 13 months. High growth stocks hate deflation. How do you reconcile that?
Ben: Markets can sometimes get a little ahead of themselves. We at the Fed see an economy still at risk of deflation.
Me: But Apple Computer, with a market cap of a quarter trillion dollars and a PE ratio in the upper 20's is not a sign of a bubble. Retail indexes hitting all time highs. Stocks jumping 10-15% a day, after running up 300% in the last year.
Ben: I can't comment on individual stocks.
Me: Do you own gold, Ben?
Ben: No comment.
Me: What is your estimate of inflation for the next 10 years?
Ben: It's difficult to predict economic variables over a long time period. Our job is to respond to the data as we get it.
Me: Okay, what is your target rate for inflation over the next 10 years? What rate of inflation does your policy aim for?
Ben: Our stated inflation goal is 2%.
Me: For how much of that 10 year period do you anticipate that real interest rates will be negative? Currently savers are lending their money to the banks at zero percent, while inflation is running 2% year over year. We lose money, or donate to your banker friends, every day due to loss of purchasing power. How long will retirees and the risk averse individuals be required to fund the bonuses of your friends?
Ben: It's unfortunate that savers aren't getting a good return, but my mandate is to do what's best for the country.
Me: Repeating the question, for how much of that 10 year period will savers get a negative return on their money?
Ben: Interest rates will remain at exceptionally low levels for an extended period of time.
Me: I see. So what would be your advice to a retiree who can't tolerate the blowup of another liquidity induced asset bubble created by the federal reserve? What about the millions of Americans who don't trust their money to the Wall Street sharks? How much risk do they have to take on just to maintain the value of their dollars, much less make a small return? Should they run the risk of buying overvalued stocks, which currently return more every week than their money market fund returns in a year? Or should they just chew up their savings and depend on the state for support after the money's gone?
Ben: We don't see any evidence of significant mispricing of any asset classes.
Me: All due respect, Ben, you and your institution have missed two of the three largest bubbles in US history in the last decade. Your assurances are worthless.
Ben: The S&P 500 is still 20% below 2007 levels. That doesn't suggest a bubble.
Me: Uh, Ben, 2007 was a bubble. It was a very big bubble. I know you are blind to them in progress, but now you can't see them in retrospect either?
Ben: It wasn't a bubble, it was a credit crisis. It was due to an imbalance of savings by the Chinese, which they imprudently loaned to American home buyers.
Me: And keeping the Fed Funds rate at 1% for a couple of years while housing prices were going up 20% a year had nothing to do with it?
Ben: My mandate is to do what's best for the country.
Me: So what is your response to critics who say that your policy right now is brewing up a bad bout of inflation. Negative real interest rates, printing money to buy overpriced assets, massive government fiscal stimulus, all leading us toward high inflation, possibly hyperinflation?
Ben: The risk of inflation is low. We are more concerned about deflation.
Me: Deflation would be bad for your friends in the banking business, eh?
Ben: Yes, and that would hurt the rest of us.
Me: Don't you mean the rest of "you"?
Ben: Whatever.
Me: Is the price of gold suggesting deflation, near all time highs and rising?
Ben: The price of gold reflects concern about the economic system.
Me: Oil? Up 150% in the last 13 months?
Ben: Speculative activity can temporarily misprice assets?
Me: I thought you didn't see any mispriced asset classes?
Ben: Not broad classes.
Me: Oh. What about copper, up about 200% over the same period? Nickel, iron, farmland, silver, platinum, palladium, coal. All up sharply and rising faster.
Ben: Those are just signs of economic recovery.
Me: But not enough recovery to tolerate anything other than free money.
Ben: No.
Me: So is the stock market signalling deflation? The Nasdaq 100, the highest beta growth stocks are up 100% in 13 months. High growth stocks hate deflation. How do you reconcile that?
Ben: Markets can sometimes get a little ahead of themselves. We at the Fed see an economy still at risk of deflation.
Me: But Apple Computer, with a market cap of a quarter trillion dollars and a PE ratio in the upper 20's is not a sign of a bubble. Retail indexes hitting all time highs. Stocks jumping 10-15% a day, after running up 300% in the last year.
Ben: I can't comment on individual stocks.
Me: Do you own gold, Ben?
Ben: No comment.
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