Agora Financial’s Rude Awakening

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• Higher prices the world over – is this the end of cheap livin’?
• Sinners and saints face the doom of profligacy together,
• The ‘flations face off, why “in” is winning and plenty more…

Joel Bowman, reporting from Sousse, Tunisia…

The Dow coughed up another 220 points on Friday to finish the day down on 11,842.69. Gold rose over $10 to break back through the $900 mark. It sits around $903 this morning. Oil too rose a little and still hovers around the $136 mark.

So stand the numbers that matter…for today. As for tomorrow, we wouldn’t dare guess where things are heading, except to say, “Way up!”…and, “Way down!”

“Way up” will be the trend for all things in short supply and high demand. We’ll put basic foods, medicines (including cigarettes and beer), and energy in this basket. In the “way down” basket, expect to see things in contracting demand and painfully plentiful supply. Here in Tunisia, you would fit knock-off Nike trainers in this category. They spill over from every storefront…but everyone here wears sandals. It’s just too hot for sweaty sneakers. In the U.S., dollars slot squarely into this category. There are simply too many of the buggers and the demand side of the ledger doesn’t look particularly healthy.

But unlike poorly sewn fake footwear in Tunisia, many of the world’s highly sought after commodities are priced in greenbacks. That means things like oil, up there at $136 a barrel, go through the roof. As crude remains a major input for just about every other necessary of today’s existence - from fertilizers to footwear - you can expect those things to go up in price too. The result: global inflation. Bill Bonner explains below…

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Inflation Goes Global
By Bill Bonner

“Cost of living spirals,” begins The Times of London. “Families face 40% rise in energy bills.”

“Inflation outstrips salary rises for first time, and it’ll get worse,” adds the Daily Mail. “While wage increases are running at 3.2%, the Consumer Prices Index has gone up by 3.3% – its highest rise since 1992.”

As if struck by a new strain of social disease, the English are starting to itch and moan. The papers have made a fuss and the doctor has been called in. In the interest of full disclosure, we have no sympathy for either the patient or the doctor. Both delighted in it when they were contracting the malady; that is, they frolicked gaily when prices for their houses and their shares were going up. Nor was any grumble heard from the City (London’s equivalent of Wall Street) when juiced-up bonuses were handed out. But now that prices for beer and petrol swell like beestings, they’re reaching for quack ointments and mountebank remedies.

Naturally, the witch doctors have their potions: Tax the greedy oil companies, stop “excessive speculation,” control prices, nationalize the mortgage industry, raise interest rates…no, lower interest rates!

All of this might have been foreseen by Antonio Rosmini, a 19th century catholic priest. He wrote that humans were not necessarily “angels, confirmed in grace.” Instead, they were “fallible.” And then, he must have had central bankers in mind when he noted that government “is composed of people, who since they are men, are prone to error.”

There are many different kinds of errors. But among central bankers, one is practically universal – they tend to over-do it. There are many things of which more is not necessarily better. Desserts and mistresses, for example. One or two is plenty. But it is inflation we are writing about. The first bit of it hits an economy like a shot of whiskey on an empty stomach. Then, more drinks keep the party atmosphere going for a while. It is not long before you reach the point of where things get out of hand. Pretty soon, you’re doing things you’ll regret.

But let us look at the doctor’s report:

Inflation was not his fault, was the gist of Mervyn King’s letter to the chancellor. Instead, it was the result of “development in the global balance of demand and supply of food and energy”. Then, get used to it, he seemed to say: Inflation “is likely to remain markedly above the target until well into 2009.” Musing on how the inflation rate might be brought down to the 2% target, he went on: “The path of bank rate that will be necessary to meet the 2 percent target is uncertain.”

‘Or impossible,’ he might have added. Britain already has the highest interest rates among the G7 nations…and the lowest inflation rate. In the United States, for example, inflation is running nearly a full percent hotter. And it looks as though prices will all go higher almost everywhere. In America, imports are rising at more than 15% per year, the fastest increase since 1982. In Britain, producers’ input prices are up 27.9% over a year ago. It won’t be long before these wholesale germs turn into a retail epidemic.

Already, much of the world is scratching and grousing as if it had lice. Consumer inflation is rising at 8.5% in the Middle Kingdom…while the costs of its own inputs soar. In Russia, consumer prices are going up 10.5%. In Vietnam, at 25%. And in Zimbabwe? Who’s counting?

Whence all this inflation? You have Mervyn King’s explanation. We will give you our own.

Last week came word that the Gulf States were piling up $1.5 billion net per day in oil revenues. In China, not an oil exporter, the rate of growth of foreign currency reserves has slowed down recently, but the country still nets about $1 billion per day. Overseas central banks accumulate Everests of these dollars, and lend many of them back to the United States – by buying U.S. Treasury bonds. To give you an idea of how fast this mountain of money is growing, foreign central bank holdings of U.S. treasury bonds, held in custody at the Fed, are increasing at a 37% annual rate.

But to buy these dollars, foreign central banks must increase their own currencies to pay for them. And so the global inflation contagion continues to function much as it did for the last five years – except that the flow of funds has shifted away from the finished product exporters in Asia in favor of the exporters of food and energy in the Gulf, Brazil and Russia. The world’s leading central bank is still over-doing it. Result: higher prices.

That is how it works. But for why it works that way, we turn from sinners to a saint. Yes, that same Antonio Rosmini. In 2007, a decree from the Vatican confirmed that he had indeed performed a miracle. Then, in November, he was beatified by Pope Benedict 16th.

Rosmini was a catholic priest, but also an economist. He was our kind of economist, not one who wanted to put his clumsy paws on the knobs and levers of the delicate machinery of capitalism…but one who stood back, admiring it…and trying to figure out how it worked. Back in the middle of the 19th century, free market economics (what we would call ‘libertarianism’ or Austrian school economics) was regarded by the catholic church as only one short step removed from Satanism. Rosmini’s career and his life were cut short when he was put on trial by the Vatican in 1854. He died the following year. Thirty three years later, 40 of his “propositions” were condemned by the Holy Church. But by rehabilitating Rosmini, the Vatican is at least headed in the right direction.

Now, it is the profane authorities who err. Just as he said they would.

[Rude Endnote: Don’t forget, you can catch Bill alongside an allstar cast at this year’s Agora Financial Investment Symposium in Vancouver next month. For details about the conference and the speakers attending, click here.

Until tomorrow…

Cheers,

Joel Bowman
Rude Awakening

aussiejoel@the-rude-awakening.com