Modern Gods: Prince Philip and the Fed

by Bill Bonner
by Bill Bonner

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Show us a human being...and we will show you why democracy is a bad idea and why contrarian investing is a good one. From the South Pacific this morning comes news that a tribe in Melanesia believes that Britain’s Prince Philip is immortal.

"As unlikely as it sounds, the people of Yaohnanen and surrounding villages worship 85-year-old Prince Philip as a god," reports the Daily Telegraph. "They believe him to be the son of an ancient spirit who inhabits a nearby mountain, on the island of Tanna."

"You must tell King Philip that I’m getting old and I want him to come and visit me before I die," said the white-haired chief, who thinks he is about 80. "If he can’t come perhaps he could send us something: a Land Rover, bags of rice or a little money."

So, you see, dear reader, whether you have a bone through your nose or a Hermes tie around your neck, you want your gods to provide the same things. The difference is that Prince Philip might actually be a good sport and send the savages a few bags of rice. The Fed is almost certainly to disappoint the heathen on Wall Street.

Lately, we have seen the biggest bubbles in debt, delusion and fantasy in human history...more new money and credit created than ever...probably the biggest financial mistakes ever made...the largest drop in U.S. household wealth since the Depression...as many as 15 million negative-equity mortgages...a $57 trillion U.S. government "financing gap"...hundreds of trillions in derivative contracts...

...and now, if you believe recent trading results, it’s all over. Everything is okay.

The big financial news began with a remark by Fed chairman Ben Bernanke.

The Fed will "strongly resist" any surge in inflation expectations, he said.

What he means by that is obvious: America’s central bank is going to fight inflation and protect the dollar. At least, so he says.

Investors neither smiled nor blinked yesterday. Instead, they took him seriously. Oil dropped $3. Bonds sold off – sending the yield on the 10-year note back up over 4%. The bonds that sold off most, by the way, were mortgage bonds.

The property market is still weakening. The condominium vacancy rate has risen over 15% – the highest ever. And Floyd Norris of the New York Times says that one out of every four condos built since 2000 is empty. House prices nationwide are down about 13% from the top...but falling more and more rapidly – at a 25% rate in the last three months.

The crisis that began last year seems far from over.

But the big losses were in gold. The yellow metal was down $27 yesterday – to $871. Investors must have figured that gold was doomed – now that the Fed has turned its big guns to an inflation-fighting position.

Now, the dollar will strengthen...(it went up to $1.54 per euro yesterday)...inflation rates will go down...oil will go down – everything will be okay. Really. Honest. No kidding.

But the big question is: how can the Fed really fight inflation, after the biggest jump in unemployment in 22 years? How strongly can the Fed really resist inflation?

We don’t know, but it might not have to. American consumers are buying less from the rest of the world. This leaves less U.S. money in the hands of foreign central banks...and less reason for them to inflate their own currencies. Less demand = less inflation = lower prices. But the price of lower prices is high. It means a worldwide slump...which brings down oil, commodities, gold, employment – and equities. This is not the sort of world in which the Fed raises rates. The Fed’s "fight" against inflation is likely to succeed, in other words, only if it doesn’t need to fight at all.

• "What’s your solution?" asked a reader in response to my recent commentary. "Or isn’t there one? If the world’s population is going to implode will that be through mass starvation/dehydration? Or will we run out of beer and all end up killing each other? Or will a terrorist bomb wipe us all out first? Will technology save the day? Isn’t the whole thing survival of the fittest? Is survival of the fittest really the best way of describing it for the human race? Or is it more ‘luck’... Is there a solution, or do we just sit back and watch the world fall apart?"

• Here we have no solutions...and no prayers. (If we have any hope of God’s intercession in our lives, we’re not going to waste it on the economy.) Instead, we sit back and let the world go whither it wouldst. We just try to figure out where it is going...and get a parking place before everyone else shows up!

June 12, 2008

Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21^st Century and Empire of Debt: The Rise Of An Epic Financial Crisis and the co-author with Lila Rajiva of Mobs, Messiahs and Markets (Wiley, 2007).

Copyright © 2008 Bill Bonner

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