Still Stuck in Japan

We came to Aiken, South Carolina, partly to get away from Maryland's ice and snow and partly so wife Elizabeth could enter horse-riding competitions. But Old Man Winter must have snuck into the back seat. He arrived here in South Carolina when we did. An ice storm hit yesterday, immobilizing almost the entire South. The horses were left shivering in their stables. We were stuck too … 

But let us turn to the financial news … then we'll come back to the hotel, where we are currently snowed in.  On Wednesday, there was no follow through to Tuesday's strong showing in the US stock market. The Dow lost 32 points. Gold rose $5 closer to the $1,300-an-ounce mark. US stocks don't seem to know what direction they want to go. Gold seems to want to go up. 

Our guess is that gold won't go up much … not yet. There's little inflation pressure (officially measured, at least). And the expectation that QE would lead to higher prices has largely faded from investors' imaginations. The more experience we have of the Fed's "improv" policies, the more we realize that they stimulate neither a genuine economic recovery … nor genuine inflation. 


We're in Japan, in other words. And we may be there for a long, long time. Buenos Aires will have to wait! 


Keeping the Lights On

Yesterday, the Senate went along with the House. No debt ceiling problems this year, it said. Government finances are looking better. January's deficit was only $10 billion – down from $100 billion for the same period a year ago. The Congressional Budget Office is calling for a $514 billion shortfall for this year … and a $478 billion deficit in 2015. 

That's good news, isn't it?  Well … it depends on your point of view. 

Deficits are a way for the feds to waste money on their favorite projects. Billions for the bankers. Billions for retirees. Billions for the weak and the lame. Take away these billions, and we're better off in the long run. Government spending is consumed, not invested. It does little to build a real economy. 

But deficits are also "stimulus." When the banks won't lend, and citizens won't borrow, deficit spending is about the only way to get money into the hands of consumers.  In the short run at least, this money keeps the lights on and the wheels turning. 

Economists are simpletons. They believe this spending by the government is as good as spending by the private sector. Nor can they tell the difference between demand that comes from real people, with real money they get from real wages … and the 'demand' that comes from borrow-and-spend policies, helped along by the Fed's artificially low interest rates. 

The difference is critical. One leads to real growth and wealth. The other leads to a disastrous debt bubble and poverty. But remember, that's the long run. In the short run, we're in a spell of Tokyo-style deleveraging. And the Fed's QE and ZIRP policies have not been enough to break the private sector's resistance to taking on more debt. 

As in Japan, only government – bless its stupid, shriveled little heart – goes deeper into debt. Already, the feds have more debt than they can repay. The biggest financial story of the next quarter century will be what happens to that debt. 

Stay tuned … 


Holed Up in Aiken

Now, back to Aiken, South Carolina … 

Cornered in our hotel, we were afraid we would develop a kind of cabin fever. We might go crazy and become a danger to the other guests.  Instead, we found the whole thing kind of a lark … 

The hotel was redone a few years ago. It has wood paneling in the lobby, with fireplaces on each end. Richly furnished, it is not a bad place to be holed up … as long as the food holds out and the power stays on. Last night, a pianist played for a few hours – Scott Joplin, George Gershwin, Cole Porter.

The small crowd of refugees who had slid into the hotel before the traffic stopped gathered round. Among them is a thespian troupe, which is supposed to perform in a local theatre … unless the performance is cancelled due to the weather. 

One of them sat down at the piano and began a lively medley of show tunes, while others began singing. "Boisterously" and "enthusiastically" describe their singing style better than "elegantly" or "melodically." It was lively and uninhibited. 

Today, we sit in the lobby … working on our computer … as the other denizens of the hotel come and go … looking out the window at the sleet and snow … 

"It's not letting up," says one.  "Guess we'll be here for a while longer," says another.  "Hope they don't run out of vittles," adds a third.

One young woman sits before the fire knitting. Another works on her computer on a side table. Her companion keeps an eye on his stocks, looking at a laptop computer. 

"Hey … I knew I should have bought more of that," he said.  "I'm going to short Amazon and Green Mountain Coffee," he announced to no one in particular.  A little later: "Gold is the worst. You can't spend it. You gotta store it."

He went on … and on. His companion, a pretty woman in her 40s, put her head down on his shoulder. "Would you shut up …" she seemed to say. 

Meanwhile, the theatre group is rehearsing "I Get My Kicks on Route 66" at the other end of the room.  "No," says the hotel manager, speaking into a telephone, "No, ma'am. We're not open. We're only serving lunch to our hotel guests." 

A couple of retirees showed up at the door, driven from their home by cold, hunger or boredom. They came in. The manager rushed over.  The poor couple looked around. About a dozen people were in the lobby, drinking tea in front of the fire … sitting at the bar sipping wine… practicing their musical numbers … checking their stock prices. 

"I'm sorry. We're closed." 



The above article is from Diary of a Rogue Economist originally written for Bonner & Partners.

Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.





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One Response to “Why the “Inflation” Crowd Is Wrong”

  • Vess:

    I am sorry, but among all the useless narrative I couldn’t find a single argument regarding why exactly Bill thinks that the “inflation” crowd is “wrong”.

    Is it because the deficit is lower this year than the next one? Inflation is not deficit, inflation is the increase of the true money supply. There is more of it this year than the previous one.

    Or is it because the governments are hopelessly indebted? That presumes that the debt will be defaulted on (as in written off). But an equally (more, in my opinion) possibility is that it will be inflated away.

    Official inflation is low? Only for people who don’t eat, drive, use medical services or go to college.

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