The Hyperinflationary Depression

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The U.S. economy is not growing, it is shrinking, says Walter J. Williams. We are already in recession. Forget stagflation, he adds. What we need to prepare for is “hyperinflationary depression.”

We are still quaking from yesterday’s revelations, reported at the bottom of our very own Daily Reckoning. We knew the Feds’ numbers were bogus. Now, along comes an honest economist, the aforementioned Mr. Williams, with a serious reckoning of how bogus they really are:

Unemployment is not 5% or 6%. Computed the way it used to be, it is twice as high. And the U.S. deficit? If the Feds didn’t use Enronesque accounting techniques, it would be around $11 trillion. As for the national debt, Williams says, “The fiscal 2005 statement shows that total federal obligations at the end September were $51 trillion; over four times the level of GDP.”

There will be hell to pay for all these statistical prevarications, Mr. Williams believes. And the first payment is likely to be in the imperial currency itself — the dollar.

But yesterday, Ben Bernanke spoke and the dollar rose.

“Market participants do not harbor significant reservations about the economic outlook,” said the nation’s top banker, adding that corporate risk spreads “would seem to be consistent with continuing solid economic growth.”

There is the problem, dear reader. Despite the repeated alarum sounded in these pages, more “market participants do not harbor significant reservations about the economic outlook.” What are these market participants thinking? Significant reservations are exactly what they most desperately need and most recklessly lack. You can buy a junk bond and get only 3% more yield than you would get from a U.S. Treasury. Surely, the treasuries are time bombs, but what are the bonds of Iraq or a dreamy dot.com? They don’t even have timers; they could blow up at any moment.

But who knows? And who cares?

Both junk and non-junk are calibrated in dollars. The dollar itself is the currency about which one should harbor the most significant reservations.

Here, we turn the microphone over to an old man — Warren Buffett. The Sage of Omaha is 75. As far as we can tell, he still has his wits about him. But, there are some markets to which youth is better suited than age, recklessness is better rewarded than prudence, and ignorance pays off better than wisdom. This Fin de Bubble period is one of those times. You’d have to be a fool to buy many of today’s popular investments, but being a fool is the only way to make money. Fortunately for the bubble people, there are a lot of fools, and a lot of investors whose ignorance is not merely spotty, but encyclopedic.

Poor Buffett is neither ignorant, nor reckless, nor young. He doesn’t seem to fit in. Earlier this week, a popular financial columnist declared him “out of touch” with modern market forces. Why? Well, it’s because he, almost alone, harbors significant reservations — notably about the dollar. Yesterday brought news that Buffett is still out of touch.

Bloomberg reports: “‘I think over time the dollar will weaken,’ Buffett told reporters, after ringing the opening bell at the New York Stock Exchange on Monday. ‘I have no idea if it’ll be this year or five years from now.’

“Buffett, chairman of the [Berkshire Hathaway] insurance and investment firm, has been betting the U.S. trade deficit would weaken the nation’s currency since 2002. Between 2002 and 2004, Berkshire made $2.96 billion on Buffett’s bet against the dollar. Last year the company had $955 million in losses as the U.S. Dollar Index advanced 13 percent.

“‘It’s the consumer action in the end. We have no governmental policies to counteract that we are sending a couple billion dollars a day abroad,’ Buffett said. ‘We are buying goods and selling capital.’

“To compensate for the current-account deficit and maintain the value of the dollar, the U.S. needs to attract about $2.5 billion a day from overseas, or about $75 billion a month.”

We checked; in terms of euros, the dollar has barely moved for a long time. But, in terms of gold, it is worth only half what it was in 2000. This is where history will be made, we think. But what history?

Against gold, the dollar is collapsing and people scarcely notice, except the English, who have finally realized what bunglers their central bankers are.

The London Times: “Merrill Lynch predicted that gold would hit $600 an ounce in the long term after its recent rise above $500. Last month the precious metal hit a 25-year high of $579.50 an ounce amid concern among investors that America’s huge trade gap would force a weakening of the dollar. The Chancellor sold 395 tonnes of Britain’s gold reserves between 1999 and 2002, generating $3.5 billion. At yesterday’s London closing price of $554.10 he would have generated more than $7 billion (4 billion).”

You can make a lot of money by watching bankers, we long ago concluded. You see where they are lending money — and you sell the borrowers short. Or, you look at what they are selling — and you buy it. In the late ’90s, so many banks wanted to sell gold that they had to collude to avoid glutting the market. Each central bank was only allowed to sell a certain amount each year. Britain led the way with its massive sale of nearly 400 tons, driving the price of gold down to a 20-year low. Debts and deficits were running wild. Wall Street was giddy over the biggest bubble in history. All over the world, central banks were goosing up their printing presses trying to keep up with the stacks of dollars arriving in their vaults. Was there ever a worse time to sell gold? We can’t think of one.

But, bankers — especially central bankers — like politicians, can generally be counted on to do the wrong thing. At the end of the millennium, they did not let us down.

If Buffett, Williams, and we are right, this history has only begun. The dollar will lead the economy into a “hyperinflationary depression.” If we are right, there will be dollars, dollars everywhere, but not a drop of real liquidity.

Eventually, the Bank of Ben Bernanke will do just what it has promised: increasing the money supply as fast as it can, but people will still not be able to pay their bills. Prices for oil, gold, copper, and dinner may soar…while mortgages will go unpaid, houses will be foreclosed, and real incomes will fall. Gasoline prices rose 14 cents in a single week, says the Atlanta paper, but producer prices registered their biggest drop in almost three years, says Bloomberg.

Inflation and deflation side by side. The dollar will plummet on world markets, and yet, in the hands of American lumpenconsumers, it will be more precious than ever. How is it possible? What does it mean?

Ah, dear reader, that history…that coy tease…she will reveal all, but only when she wants, and only at great expense.

u2022 We went over to the Savoy for breakfast with a friend this morning. If you have never been to the Savoy, it is worth a visit. The place is elegantly furnished — almost opulent in an English kind of way. High tea at the Savoy is a treat. (We used to prefer high tea at Browns, but they’ve recently redecorated Browns so that it is more stylish and less attractive.) The last time we were there, we were entertained by a string quartet, while eating more delicate sandwiches and pastries than we could comfortably stomach. Breakfast, on the other hand, was very simple — just tea and croissants.

A French woman accompanied us; we were not in the mood for the heavy full English breakfast.

“We were sorry to leave London,” she told us. “Compared to Paris, London is really much more lively. Paris seems dreary after you’ve lived in London. I know it has become very expensive to live in London, but sometimes I think it is worth it.

“There are so many restaurants — so much to do. And it’s so good for the children…especially our children. They are among a different crowd of people — much more diverse, and of course, English-speaking, too. So, they get the best of both cultures. We spoke French at home, and they spoke English and French at school. They had friends from many different backgrounds. Yes, we were sorry to go back to Paris…it was a very difficult adjustment for the children.”

For a while, the sun came out. It looked as though spring might really be coming. But by the time we had finished our tea, the sky had clouded over again; an icy wind blew.

u2022 History continues grinding away at George W. Bush’s administration. There seems no end in sight to the bad news coming out of the Middle East.

The London papers say two out of three Americans now think the war against Iraq was a mistake. The other one is an idiot, they imply.

The British prime minister, meanwhile, is an “honorary neoconservative,” says Francis Fukayama, who has deluded himself into thinking that democracy can be imposed at the speed of one’s choosing — and at the point of a gun.

“Something similar happened to Bush,” Fukayama continues. “When he stood for president, he talked about having a ‘humble’ foreign policy and attached nation building, and since then he has talked himself into believing in it.

“That’s why this whole thing has been such a terrible disappointment. It has turned out exactly the opposite.”

Wars of choice are almost always disappointing, we notice. Whether you call them “preemptive” wars, or merely opportunistic wars — they all seem to end up in misery and regret. As Bismarck put it, “it is like committing suicide for fear of death.”

Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and Empire of Debt: The Rise Of An Epic Financial Crisis.

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