Deflation Works on Yesterday’s Bubbles

Shocking news today…Americans get poorer!

Yesterday, the Dow staged a big comeback – up 256 points. Gold rose $16 too – to $948. And oil hit a new record – just shy of $115. Then, it went over $115 in overnight trading.

So everyone is happy – except those who are short. The goldbugs are happy because gold is headed back to $1,000. Wall Street is happy because stocks are going up. The oil industry is happy…and so are the people who make ethanol…and the people who make hybrid, fuel-efficient cars.

And here at Markets and Money headquarters, in the building with the golden balls, we’re happy too. But we’re happy for no particular reason. As near as we can tell, things are working out just fine – God is in His heaven; the Queen is on her throne; and investors are getting what’s coming to them.

We held our own Council of Nicea last night…about 3AM…after much meditation and drinking. And we came up with a creed. This is the way we think things are now:

I. We believe the Great Moderation is over. It has given way to a period of volatility…a period of Great Flation – of two sorts, both Inflation and Deflation, sometimes warring with each other…sometimes joining forces…sometimes not sure which way they’re going or what they are doing. Deflation, as we all know, is the work of the devil. But inflation is the work, primarily, of America’s own central bank. According to the shadow statistics on the subject (the Treasury no longer reports the numbers), the broadest measure of U.S. money supply, M3, is rising at nearly 20% per year. If output were steady, it should mean price increases of 20% per year too. Maybe more.

So far that hasn’t happened – except in some key areas, which we’ll come to in a minute.

II. We believe that Deflation is doing its work on yesterday’s bubbles – primarily the financial industry and U.S. residential housing. Inflation, on the other hand, focuses on tomorrow’s bubbles – in resources, soft commodities, precious metals and oil.

As for deflation, we see it working on the housing industry, where housing starts are at their lowest level in 17 years…driving consumer confidence down to its lowest level since 1993. The Fed’s Beige Book confirmed that recession was either on the way or already here.

Forbes reports that the worst markets are Miami, Denver, Baltimore and Chicago. We don’t know much about the other places, but until this last bubble, Baltimore property prices had been going down for 80 years. Now, they seem to be back on trend.

The Los Angeles Times adds that prices are being depressed by foreclosed properties – which are dumped back on the market. USA Today says the situation is going to get worse before it gets better. And bankruptcy filings – caused largely by falling house prices – rose 37% last year.

We have little new information from the financial sector – except that Merrill Lynch wrote down another $6-$8 billion. There is also the note in today’s news that John Paulson may have made more money than any human being has ever made – taking home $3.7 billion, thanks to the generous and simpleminded investors in his hedge fund. Paulson bet big that subprime loans would go down. He was right. Now, he’s the Alpha male of Wall Street.

Of course, the whole thing is a terrific fraud, on almost every level. Maybe he took only “2 and 20” of his clients’ money last year. A lucky bet makes the managers rich…but eventually, the clients will go broke. More below…

We’re suspicious of numbers anyway. They mumble. They equivocate. They lie. Mr. Paulson may be the most miserable human being alive, for all we know. Yet, the world is focused on numbers…and on money…and we earn our living writing about it. But what do we really know? What do the numbers really tell us? We can’t really know anything important about Paulson; all we have to look at is the twisted figures.

As for inflation…yesterday, we saw not only a new all-time high for the price of oil…but all commodities are near record highs. Gold has gone up 37% in the last 12 months. Copper – thought to be a measure of economic health – is near its high. In Europe, consumer price inflation is rising at its fastest pace in 16 years.

III. We believe that the combined effect of these flations will be to lower the net worth of the United States of America. Its credits and its debits will be marked down by them both. Most important, the value of its labor will be reduced…so that Americans will be better able to pay their debts and compete (given their skills and capital formation) on the world market. (Keep reading…the figures are shocking…)

IV. And we believe that this is the way capitalism is s’posed to work – people get neither what they want nor what they expect, but what they deserve. Americans have been on top of the world for more than half a century. They have gotten ahead of themselves…they’ve challenged the gods. They have tried to do things that mortals cannot do – live beyond their means and remake the rest of the world in their own image…on borrowed money, no less. They need to be taken down a peg.

But wait, you’re probably wondering…how come Americans can’t stay on top of the world for another 50 years? Well, no law says they can’t. And maybe they will…but not before they’ve been whacked hard enough to make them change their ways. If they’re going to continue spending money at the present rate, they need to figure out some way to get more of it. Almost certainly, they will have to cut back instead. But that’s what this trend is all about – cutting back Americans’ wages, debts and spending power. And they hardly notice!

All those trillions of dollars they sent overseas represent claims on the U.S. economy…on its wealth…on its treasure…on its resources and productive capacity. But every day that the dollar goes down, those dollars buy less. Meaning, Americans’ debts go down.

Of course, their earnings go down too. Since the end of the 19th century, Americans have earned more than any other group. But at today’s dollar/euro exchange rate, many nations are already much richer than Americans. The average American earned about $38,000 last year. But the average person in Switzerland earned $64,000. In Denmark, the average salary was $62,000. In Norway, Luxembourg and Germany all had average salaries around $60,000. The Belgians earned an average of $47,000. And the French…yes, dear reader…the frogs are now richer than Americans. The average Frenchman earns $42,000 per year. How’s that for divine comedy? How’s that for taking the starch out of the flag? In the measure that really counts – money – the French are ahead of Americans by a substantial margin.

Oh la la…

Still, we are happy here at the building with the golden balls…and we end on an optimistic, uplifting note: Rome reinvented itself several times – and managed to stay on top of the ancient world for at least five centuries. But each renaissance was a bloody affair – marked by civil war, revolution, slave uprising, barbarian invasion, bankruptcy and inflation. Augustus took power after defeating Mark Antony and Cleopatra at the battle of Actium. Then, he had his cousin (Ceasar’s son by Cleopatra) executed and solidified his control by murdering 100 Senators.

We know this will sound attractive to many readers.

*** The latest news tells us that New York’s economy is being helped by a massive influx of tourists from Europe. The Big Apple may seem expensive to most Americans…but to Europeans, it has become a lot cheaper.

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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1 Comment on "Deflation Works on Yesterday’s Bubbles"

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Zeke Putnam
It seems to me America has been on a financial continuum. When I was a young man, the stock market was for those that were wealthy so they had the gains/losses. Then it became the place for pension plans, etc. Then it became the place for everybody to make/lose their fortune but still only for the players. Now, as they say in poker, we’re all in. We are gambling the money of every taxpayer, no matter what level of wealth, that the American “dream” can be had by anyone breathing. In middle age, I learned it is much better to… Read more »
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