Inflation at Panic Levels

Yesterday, the markets were ready for a countertrend. The dead cats had been tossed out of a
10th floor window. It was time they bounced.

U.S. stocks have lost about $1.5 trillion from their high in October, ’07. Worldwide, stocks are off
about $5 trillion. Financials…builders…shippers and retailers…one by one, the sectors are getting
hit. And the news is almost all bad: foreclosures, house sales, unemployment, consumer
confidence, inflation…losses…declines. In fact, MarketWatch reports this morning, “For all of 2007,
the median sales price of an existing single-family home fell for the first time in the 40-year history
of the data.” Dun, dun, dunnnnnnn!

“Pain goes through the roof,” said a headline in the LA Times . We don’t know what the piece was
about but it recalled the “pain index” figures of the ’70s and ’80s. You just added the inflation rate
and the unemployment rate together; the result was a good measure of how people were

The last 25 years or so have produced falling pain index numbers. Inflation went down, generally.
And unemployment declined to such low levels that economists didn’t think it was possible for it to
go lower. “Full employment” they pronounced it. But now the inflation rate is back to levels that
caused Richard Nixon and Arthur Burns to panic in the early ’70s. They imposed price controls with
a CPI of 4.4% – almost the same level it is today.

Today, the pain index is nearly 10, by our calculation…not close to the levels of the ’70s, but rising.
(The misery index hit an all-time high under Jimmy Carter at 21.98.) But this time, it is not inflation
that is causing the Fed to panic…it’s recession and deflation.

The 1970s were marked by largely symbolic attempts to control inflation. After Richard Nixon’s
misbegotten price controls came Gerald Ford’s woebegone “Whip Inflation Now” buttons. Later,
Jimmy Carter would say that the cause of inflation was largely a mystery.

But now, the years ahead are likely to be marked by largely symbolic and fraudulent attempts to
control deflation – stay tuned.

“I would say that we’re already in a recession,” Jack Rivkin, who oversees $126 billion in New York
as chief investment officer at Neuberger Berman, said in an interview with Bloomberg Television.
“Odds are earnings are going to be down for 2008.”

Even memories are being downgraded.

“Worries that the good times were a mirage,” comes a headline from the New York Times . Ah
ha…the mainstream press is finally catching on to what we’ve been saying for the last five years.
The boom was a phony…a fraud…a scam…a mountebank and a humbug. It was a like a polished
flim-flam artist who flattered the middle classes with cash and credit – only to pick their pockets.
People thought they were getting richer – that’s the illusion that soft money policies are intended
to create – so they increased their expenses and went deeper into debt. Now they’re facing a
serious recession in the worst financial shape of any generation in history.

Meanwhile, gold and oil had been shooting up like geysers!

Obviously, it was time for a little backflow…a little correction…a little good news, just to keep the
lumpeninvestoriat confused and hopeful.

And so, yesterday, the Dow shot up more than 300 points. “The Fed has this thing under control,”
the numbskulls said to one another. “Put on the party music…it’s time to buy!”

The toughest thing about the ’02-’07 phony boom was that if you really understood it you generally
lost money. Except for gold and oil, which rose as you expected, nothing else cooperated. ‘I
wouldn’t buy houses at these prices,’ you said to your neighbor. Then, the dimwit bought a
house…and the thing went up another 50%. ‘Stocks are too dangerous at these levels,’ you told
your brother-in-law. Then, the fellow went out and bought Google and got rich. ‘I wouldn’t put any
money in China,’ you said to yourself (for no one was listening to you anymore)…and then the
Shanghai market rose again.

The boom years were hard years to be smart. It was better to be dumb; you made more money.

But now, the people who made money in the boom are at it again. ‘The worst is over,’ they say.
‘You gotta buy at these levels,’ they figure. ‘Don’t fight the Fed,’ they chant.

But while phony prosperity rewards stupidity, in real adversity there is a premium on brains.

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 "Inflation at Panic Levels"

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jimmy carter was right about the mystery of inflation.

i know the street values, and well it will cost you.

anyway, good old ludwig von mises, might say, when the feds open up the spigot, and hot air comes out, it’s time to think about a delightful glass of water and some fresh air.

food is a thing of the past, sow and reap your rewards. otherwise you go to the animal farm, and well i died of a self-inflicted gun shot to the head in 1984….

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