Inflation is Battering the Value of Cash, America Honours its Dead Presidents

America took a holiday yesterday to honour its dead presidents. The rest of the world remained at work. Of course, here at Markets and Money headquarters in London, we rarely rest. But we honour dead presidents every day.

Jacksons, Franklins, Lincolns… we watch… we wait… we wonder what will happen to them.

The news is full of inflation. In China, the rate of consumer price inflation has risen to an 11-year high – at greater than 7%. The cost of living is rising fast in the Middle Kingdom. Wages are going up even faster. Suddenly, China’s low-cost exports are no longer holding the world’s prices down. Now, they are driving them up!

“Tea prices set to soar,” says one headline in today’s Financial Times. “Cost of steel to rise as producers agree to pay 70% more for ore,” says another one.

Oil is back over $100. Wheat is selling at prices three times as high as a year ago. The commodity index is near record highs.

A few years ago, nobody cared about the cost of tea in China. But now, prices are rising all over the world… and people are nervous.

Yesterday, we proposed a theory. If the future is really as bleak as economists seem to think, how come the stock market hasn’t gone down more? The stock market looks ahead; why couldn’t it see trouble on the way?

Our answer is that the stock market sees trouble coming from two directions. On the one side, deflation is dragging down capital values – houses, stocks, bad credits. (Corporate debt is the next debacle, warns The Wall Street Journal.)

But on the other side, inflation is battering the value of cash itself. Who wants to hold dead presidents when they are losing 4% per year and inflation is rising? Historically, in times of inflation, it’s better to hold shares in profit making businesses that can raise their prices than it is to hold cash.

With cannons to the left of them… and cannons to the right… all volleying and thundering… what direction should stocks go? Maybe they see it all… and sit tight?

In the Financial Times this morning is a brief description of Barclays Equity Gilt study, which the bank has been publishing for the last 53 years. The study takes a long view of the performance of British stocks and finds that for nearly 100 years – from 1899 to 1985 – U.K. stocks actually lost investors money. Compared to retail prices, the real return on equities over that entire period was negative. Part of the explanation is that Britain had peaked out. It had been the world’s leading imperial brand for at least the previous 100 years. Its people had grown rich. But by the turn of the century, both America and Germany were offering fierce competition. America’s GDP surpassed Britain’s around 1900. Germany’s GDP rose higher than Britain’s a few years later. Then, in the Great War of 1914, Britain passed the baton of imperial leadership to the United States.

Britain was having a hard time keeping up. As we’ve just seen, in real terms, its stocks went down for the next 85 years. So did its currency. The pound lost 99.3% of its value since 1899.

In America, the “dead presidents” didn’t do much better. We don’t have equivalent numbers, but the dollar lost at least 95% of its value during the same period. Lately, the dollar falls even faster than the pound. In 1985, we recall dimly, a pound and a dollar were worth about the same thing. Twenty-three years later, the pound is worth nearly twice as much as a dollar.

What lesson do we draw from this? First, if the United States really has peaked out, Warren Buffett is wrong. He says that selling the United States short is “not smart.” But if America has hit its peak, as we think it has, 100 years after Britain’s peak, selling the U.S. short is exactly what you want to do. Sell its shares. And sell its money.

Write a little note… put it in a sealed envelope… address it to your heirs: “Open in the year 2100:”

“Dear Hearts,

“In the year of our Lord, 2008, I sold the United States short. Warren Buffett told me not to, but I did it anyway. Was I right? Here… I enclose a dollar bill as a memento. Today, if I had three or four more of those, I could buy a cup of coffee. If I had 920 of them, I could buy an ounce of gold. Good luck with it.”

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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2 Comments on "Inflation is Battering the Value of Cash, America Honours its Dead Presidents"

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Moti Teckchandani

Its a financial system which is broken..we are heading towards full blown capitalism matured Death. there are plently of articles in all news papers.

Solution and my prayers for the Humanity… and and I can give you many more websites upon request.


One has to wonder, at which point does Warren Buffet make the cross-over from “Financial Genius” to “Old and Senile”…

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