This is it. Back up the truck and load it up. Trichet is awesome, but he is fighting the tide, and those who fight the tide always lose. The dollar’s rally is all about the relative weakness of the euro. I won’t tell you again.
It is expected that the EU central bank head, Trichet, will today BOOST its key short rate. Trichet is correctly pointing out that massive inflation is on the horizon. Look for further crushing of the dollar, a nominal rally in precious metals, and of course, a spike in nominal oil prices.
I still say that, eventually, Trichet will be forced to competitively devalue the euro. Today’s probable action will make the ultimate reaction all the more theatrical.
A Mr. Richard Fader of Ft. Lee, New Jersey writes, “Enrico Hale, you are always bashing the dollar and America. If you love Europe and Japan so much, why don’t you marry them?” I take Mr. Fader’s point: while I don’t know of a way to marry a continent, or a collection of overpopulated volcanic islands, why don’t I invest in Europe or Japan? Why don’t I just move there? Why don’t I hold my assets in their currencies?
Believe me, I’ve thought about it. I lifted my boycott of France after the rejection by the French people of surrender monkey mentality, which was heralded by the election of Sarkozy (whom I would like to hereby nominate for US President).
London is a very cool city. England as a whole is quite civilized. There is some excellent scenery in France, and lord knows they know their way around a butter sauce and a bunch of fermented grapes. I have never been to Prague. The whole Scandinavian region is very attractive, especially Denmark.
Alas, it turns out that Europe is headed for the same problems we are experiencing. Of course, the euro and all other European currencies are fiat currencies. Europe is borrowing its butt off, just as we are. Europe has a housing / real estate / mortgage crisis as bad as ours, and in some areas, an even worse crisis, which I know is hard to conceive. I listened recently to this extremely disturbing and depressing Economist podcast which catalogs the woes Europe is experiencing, and which are about to explode. The collapse of Northern Rock was just an appetizer. The SocGen debacle was really unrelated to the core problems, but certainly doesn’t help matters. I look for the outright failure of some pretty big banks in Europe in the next six months. My top pick for the kickoff is Banco Santander, but I would give three to one odds that the next one to go is a Spanish bank.
So far, the European Central Bank has held firm against cutting its equivalent of the discount rate (and I would hereby like to nominate Jean-Claude Trichet for Chairman of the US Federal Reserve), but it is sadly, lamentably inevitable that the ECB will follow the Fed down to zero. The Bank of England has already commenced cutting.
I don’t have solid data at hand regarding M3 growth in Europe. I have been assured, however, by people who ought to know that, if anything, M3 growth in Europe exceeds that in the US. I am trying to track down some information on this.
I cannot bear to contemplate Japan right now. See Part Four to come.
By the way, the last word in the title of this post probably ought to be pronounced with a closing platial-dental africative, to properly signify the author’s sentiments about the state of the economy.
Lenin is said to have said the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equality equity in the existing distribution of wealth…. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to become almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.
John Maynard Keynes
The US Dollar recently reached an all-time low against the Euro, a point where it takes $1.52 to buy 1 euro. The all time high for the dollar against the Euro was $1 = .82 euros. Thus, since the high in 2000, the value of the dollar against the euro has halved.
Yet, during this time, the federal government would have us believe that annual inflation has averaged something on the order of 3% or so.
For the first time in recorded history, all the major currencies of the world are fiat currencies, mere symbols without any actual goods or commodities standing behind them.
The appropriate subtitles for this article would be either “The Revenge of Milton Friedman” or “Maybe Ron Paul is not such a kook after all.”
I now believe that the global system of fiat currencies cannot be sustained. Will the civilized world return to a metallic currency standard? I don’t know, but I feel pretty confident that central banks will be forced, sooner or later, to make their currencies redeemable in some kind of actual commodity.
There have been several modern cases of hyper inflation in relatively civilized places, like Brazil and Argentina. The cure for the hyperinflation in these cases ultimately rested on the discipline of a pegging their currencies at least somewhat to the US dollar. Now, the US dollar is certainly not an actual commodity, but it was relatively “hard” at that time, compared to the local currency.
The United States is headed for massive inflation. I don’t know that we will actually experience hyperinflation (and god knows I hope not), but inflation is already running at a double digit annual rate. I have added an excellent website to the blogroll, Shadow Government Stats, which provides at least some analysis of the broadest measure of the money supply, M3, which the Federal Reserve stopped reporting a few years ago. I really have no way of validating Shadow Stat’s figures, but this website claims that M3 is currently growing at a rate of about 16% annually. M3 growth doesn’t directly translate one-for-one into consumer price inflation, but as Milton Friedman points out, inflation is a monetary phenomenon, which eventually shows up in prices of goods, services and labor. The M3 growth is like a tidal wave approaching the shore–out in the deep ocean, it is a minor swell, but when it reaches the shore it towers up to 20 feet and crashes down, destroying everything in its path.
Now, here is an anomaly which is hard to explain: the 10 year Treasury note is selling at a yield around 4%. How can this be, if inflation is in the double digits? Why, why, why, please god tell me, why do investors accept a loss of at least 6% annually in order to lend the US Government money?
Update: Duh! Tentative hypothesis for the above paradox: the fed funds rate is at 2.5% and dropping like a rock. Investors can demand 13% all day long, but the Fed stands ready to operate the currency printing press until Helicopter Ben’s arm falls off, and how can a non-currency-printing-press-owner compete with that? During the soon-to-be-seen-as-comparitively-mild 70s bout with stagflation, the discount rate was much closer to the rate of inflation, eventually being boosted all the way to 14%. You could look it up.
Ok, I don’t really understand this. But, I don’t believe that this inexplicable generosity can persist. It seems to me inevitable that lenders will cease to be willing to lend at a loss. Then, it is inevitable that the 10 year rate will increase to a level higher than the rate of inflation. With inflation of at least 10% annually, the 10 year treasury note ought to be yielding at least 12%, or 13%. Mortgages should be commanding 14% to 16%. The discount rate should be at about 6-8%.
I think maybe we’re seeing the beginning of this. The Fed is down on its knees, begging the banks to lend money. The banks don’t want to do it. Helicopter Ben Bernanke is even now as I write firing up the choppers loaded with baskets of greenbacks.
A period of high inflation is excellent for debtors, and is very very bad for those on a fixed income and for those with accumulated capital.
So, I guess the thing to do is borrow as much money as possible and buy hard assets. I have been buying gold and silver. I am not happy about it. I am an emotional wreck every time I hit the button to execute a trade to buy more precious metals. I just don’t know what else to do.
Here is an interesting fact, which I learned from reading Milton Friedman’s Money Mischief: Episodes in Monetary History: the ratio between the price of gold and silver back to antiquity to relatively modern times has fluctuated in range between about 8 to 1, to as much as 30 to 1. For many centuries, since the early Christian Era until the last century or so, it fluctuated in a much narrower range, around 15 to 1. Right now, silver is trading at about $19.50 per ounce, and gold is trading at about $950 per ounce, a ratio of about 50 to 1. I leave the obvious thought to the reader.