Rising Commodity Prices - The Real Causes
Bill Bonner - Fri 11 Apr, 2008
US growth has stalled but the money supply keeps growing
Writing From Buenos Aires:
We are back among civilised people. People who worry about money, that is.
So, what has happened in the world of money since we were gone?
Not too much, apparently.
US stocks are still down about 7% for the year. The Nasdaq has lost 12%.
The dollar is still near its all-time low against the euro, at $1.57. And the yen, too, is near an all-time high – at 98 to the dollar. And gold?
Maybe we were right. Maybe we just had our last chance ever to buy gold for less than $900 an ounce. And maybe what we have now is our last chance to buy it for less than $1,000. The price today is $931.
We are bullish on gold because we are realistic about human nature. Give someone an opportunity to print money and you can be sure that sooner or later, come what may, he’ll take it.
The feds no longer tell us how much money they’re ‘printing,’ but experts say M3, the broadest measure of new money creation, is higher than 15% per year. Let’s see, money increases at 15% per year…and how fast is the supply of goods and services increasing?
Uh oh…the IMF says the US is headed for recession. Some economists think the country is already in recession. What that means is that the supply of goods and services is barely increasing at all. Which means, the extra money has to bid for the EXISTING goods and services.
No need to beat around the bush about it. What this means is that monetary inflation is driving up prices.
The price of oil is $112. Wheat, corn, soybeans, rice – all the grains are near record highs too. Many countries are banning exports. Many are controlling prices. (See below…) Mexico, for example, has price controls on tortillas.
Of course, the real cause of rising food prices is a falling value of paper money. But only the European Central Bank seems to take its mission to protect the euro seriously – it’s holding rates steady. While the ECB tries to hold the line against inflation, the rest of the world’s central bankers are giving inflation all the slack they can. The Bank of England, following the US lead, cut its key rate yesterday by a quarter point.
Let’s go back to our war analogy. It’s a battle between the forces of inflation and the forces of deflation, we keep saying – one side unstoppable…the other immoveable.
But what kind of war is this? Glad you asked because we were thinking about that very question as we sat in front of the fire up in the mountains yesterday.
The Franco-Prussian war of 1870 was a great war. The French declared war on the Germans, for some reason that no one seems to recall. The Huns attacked, rolled up the French army …and laid siege to Paris. In the city, residents soon had to eat rats and cats to stay alive. Parisians exchanged recipes and made the most of it.
The whole thing was over fairly quickly. The Frogs capitulated, agreed to pay reparations, and the Germans withdrew (keeping the Teuton-speaking area of Alsace.)
It was a nice war because it had a clear winner…and because it was over like a good street brawl, before the cops came. And the Germans were very civilised about it. They didn’t set up bases in France. They didn’t stretch out the war for years…or make the French learn to speak German. They won it fair and square, and then went back to their strudel and fraulein. Which made Europeans think that war was not such a bad thing.
Then came WWI. Oh la la…this was a war of a different sort. It went on for four years. At enormous cost to everyone…millions of dead…trillions in financial losses…
…and who won? Nobody.
We bring it up because this financial battle looks to us like that kind of war. A war of liquidation…in which people lose money they thought they had – either to inflation or to deflation.
Yesterday, Lehman Bros. liquidated three of its funds. And, as mentioned above, a big part of the stock market has been liquidated. And housing gains are being liquidated at about 10% per year…
…and remember, inflation liquidates almost everything…including the value of American labour. As consumer prices go up and the dollar goes down, the relative price of American labour falls. The working man is liquidated.
But if this is a WWI kind of war…everyone gets liquidated – investors, lenders, borrowers, consumers, businessmen, householders, working people…everyone. People who worry about money will have less to worry about, in other words.
*** We thought about not coming back.
Hard against the Andes, winemakers such as our next-door neighbour, Donald Hess, are making some of the best wine in the world. Next door is a long way away – about a 40 minute drive. But it’s worth it. Not only can you stock up on wine, Hess operates a great restaurant too.
Later, after we returned home, we sat in front of the fire and dozed off.
Maybe it was the lack of oxygen, (it takes a few days to get used to the altitude), or maybe it was Donald Hess’s Malbec wine… Whatever the cause, we drifted into such a state of relaxation that Juanita, who tends the kitchen, thought she should sound the alarm.
“Senor Bonner?” she asked.
Then, seeing that we awoke readily, she was reassured, and offered us a cup of tea – mate, of course. We drank it, put a few more sticks on the fire…and drifted off again.
In the morning, we had mounted up and ridden out to a little valley about two hours’ ride to the east.
“That’s where I was born,” said Jorge, pointing to what appeared to be a pile of washed out adobe bricks. Jorge, now 54, had such a broad smile we wondered what kind of a childhood he must have had.
“I lived there until I was 17. Then, we moved down into the valley.”
We had been riding for about an hour. The place where Jorge grew up was an hour’s horseback ride from the ranch house, itself a 40-minute drive away from the closest neighbour, which is more than four hours from the nearest major city. Jorge must have had no other means of transportation except horseback. He must have had no access to school…or not much. He must have had little or no access to TV or medical attention.
Even now, as foreman of the ranch, Jorge gets a house to live in – basic, but not bad. He has no television, but he does manage to get a weak signal on his radio. His electricity comes from the same source as ours – a power plant we installed on the property last year. His hot water comes from a solar heater on his roof.
(Solar power was supposed to be cheap. But it hasn’t turned out that way. Something is always going wrong. And each time something goes on the frizz an engineer has to make the five-hour drive from Salta to fix it.)
We know Jorge’s finances too – since we pay his salary. He earns less than a trash collector in America…less than a hamburger flipper…all of $500 per month. But our bet is that his net worth is higher than most Americans. Jorge can’t spend money – and can’t borrow it either. There is nowhere to spend it. And no bank would lend to him. And yet, there he is – a picture of health and happiness, a smile always on his lips, ready with a kind word for everyone.
Which makes us think the whole thing is a fraud. Worrying about money, we mean.
“You really should give Jorge a raise,” said our business manager down here. “He hasn’t had a raise in three years, and inflation has been running between 10% and 20% per year. Nobody knows for sure because the government lies about the numbers. But anyway you figure it, Jorge should get more money.”
“Of course…of course,” we replied. “But Jorge is already richer than any of us. We have never met such a good natured, happy fellow. Obviously, money has nothing to do with it.”
*** Meanwhile, USA Today tells us that top CEOs may be presiding over disasters, but they are not about to share the misery of the shareholders. The pay of the chief executives of America’s 50 largest corporations averages about $15 million says the paper. And it doesn’t seem to matter whether the shareholders are making money or not. Take the CEO of KB Homes, for example. The company lost $929 million last year. Its share price fell 70%. Still, CEO Mezger got paid 1,000 times more than Jorge.
Go figure.
