| Saturday, July 5, 2014 | Issue #76 | | Joel Bowman, checking in from Obzor, Bulgaria...
The Russians are coming! The Russians are coming!
At least, the Bulgarians certainly hope so...
We came to the seaside republic a week ago. It's picturesque in all the right ways. Sandy beaches. Rolling hills. Fields of sunflowers worshipping that fiery blaze in the sky.
In history and culture and even natural wonders, Bulgaria is rich. Financially... not so much.
Despite a decade or so of above-average growth, the country is still relatively poor. The cost of living is low... but so are average wages. The mean income is about €400 per month, one of the lowest in Europe. Now, in its summer months, is "cash season."
One in every two workers in Bulgaria earns his keep in the "services sector," meaning hospitality and the like. Every year, around this time, thousands of young waiters, bartenders and wannabe event promoters migrate from the capital, Sofia, in the west, to the Black Sea shores here in the east. They come to cash in during the holiday high season, which begins this weekend.
It's like Punta del Este, Uruguay, in January... or Cancun, Mexico, during spring break... or Detroit, Michigan, during... well, never mind.
If all goes to plan, there'll be parties and chain-smoking and chunky gold necklaces and clothing you wouldn't believe was made to fit a grown woman, but which grown women will wear just the same. Chintzy resort towns with names like Golden Sands and Sunny Beach will stay up late. Dance floors will watch the sun rise. Money will roll in.
If the Russians don't come, however, hotel rooms will sit unoccupied... restaurant tables will go unreserved... vodka will be left to stand in the bottle...
Nobody wants to see that. Least of all thirsty Russians... who are due any moment.
Let the celebrations begin, we say... just give us a few hours to get out of town before they do...
Meanwhile, in parts of the world over which the Iron Curtain did not drape, markets keep on keepin' on. In the U.S. and the rest of the "developed" world (including Japan), the funny money continues to roll off the Central Banks' presses. Prices continue to rise, inflation being (everywhere and always, as Milton Friedman famously observed) a "monetary phenomenon."
Where is the money going, you ask? Hey, if we knew the answer to that question... we'd be there, arms wide open.
Actually, we do know. So does everyone. It's right there at the gas pump... in the grocery stores... on the restaurant bill. And yes, it's built into a healthy portion of the Dow's 17,000 points.
Last week, the Feds told Americans that consumer price inflation (CPI) was rising at a 2.1% annualized clip. In other words, "Citizens, thanks to our efforts, your money is losing 2.1% of its purchasing power every 12 months."
They didn't use those words, of course. But it's the same thing.
Inflation - sometimes called the "sneaky tax," due to its insidious nature - is a tricky number to get one's arms around. The Feds have their method of calculation (always subject to whim and caprice)... universities another (same deal)... and independent auditors something altogether different.
The real figure - which nobody seems to know - matters because it tells us what money itself is worth... or, to put it another way, how quickly it is becoming worthless. Anyone can become a millionaire by printing notes... just ask the Russians and Bulgarians of 1997.
In this weekend's edition of The Daily Grind, we welcome Bill Bonner to the podium. In his feature column, below, Bill reveals how no one government has a monopoly on graft, humbug and outright lies. In fact, they are more or less common "traits of the State."
If inflation can happen here and there and in dozens and dozens of other sovereign nations during the course of government idiocy, it can happen wherever you are too. And maybe - just maybe - it's already started. Read on for more...
The Weakest Link By Bill Bonner
 | | A chain of deception, humbug and larceny has corrupted the entire U.S. economy. From top to bottom, every financial decision has been twisted in one direction or another.
From student loans and payday loans to the corporate borrowing binge and the stock buybacks it fuels - from link to link, money from nowhere leads to somewhere people want to go. Especially to higher asset prices.
At the lower end, it doesn't look so good. Students graduating this year who took out government-backed loans are saddled with an average of $33,000 in debt. They'll spend decades paying it off... at best.
Homebuyers too find themselves not so much benefiting from cheap money as competing with it. Private equity firms with billions of dollars in ultra-low cost leverage have bid up the cost of homes in key markets.
The average buyer pays higher prices as a result... and then finds himself indentured to the lenders for most of his life.
The typical American household also finds itself with a major headache. Rising real prices press from the right (about which we will discuss more in a minute). Falling real wages squeeze hard on the left. And its debt burden, though slightly smaller than it was in 2007, is still heavy.
A Dear Price to Pay
But at the upper end, people are delighted. Banks - with the happy connivance of the Fed - create new money. Corporations use it to buy their own shares. Central banks buy shares too. (What else are they going to do with all the money they create?)
Besides, buying stocks seems to please everyone who matters. Investors are happy. Speculators are happy. Economists are happy. Politicians are happy too.
After all, a rising stock market means the economy is getting better, doesn't it?
But there is a heavy price to pay, dear reader. The financiers end up owning more of the real businesses... the real enterprises... the real houses... the real output of the real economy.
Wall Street firms own more houses. And more stocks. All are bought with money that they - or their cronies - created.
Imagine that you were a well-connected Wall Street insider. You had borrowed at the beginning of last year and bought the S&P 500. What a genius you were. With a 30% gain in the stock market... and a cost of money at only, say, 4%, you're 26% ahead - on money you never earned nor saved!
What a hoot!
Print more money. Buy more assets. Keep at it until you own the whole shebang, no?
And what's to stop you? Who complains? Who even notices?
The Weak Link
But there has to be a weak link in this chain somewhere.
The Bureau of Labor Statistics says consumer prices are rising at an annual rate of 2.1%. MIT says they're going up twice as fast. And John Williams of ShadowStats reminds us that if you figured the CPI according to the formula used by the U.S. government as recently as 1990 (it's been changed since), you'd have an inflation reading of 6%.
And if the inflation rate is 6%, real (inflation-adjusted) GDP is collapsing.
Nominal GDP growth (which doesn't take account of inflation) in the first quarter was only about 1%. Reduced by 2% in real terms, it left the real GDP growth for the quarter at minus 1%. Adjust for 6% inflation, on the other hand, and you get growth at minus 5%.
Six percent inflation also cuts deeply into the rest of the economic numbers. Hourly wages, for example, may be back to 1968 levels when adjusted by official inflation numbers. But adjust them using John Williams' calculations, and wages too are collapsing.
We also saw that the official numbers show consumer prices up 39% since 2000. The Fed's favorite PCE deflator (a measure of the change in the cost of living similar to the CPI) shows them up only 31%. But taking an average of food, energy, transportation and housing - the things that really matter - prices are up about 50%!
Where's the weak link?
It is in the money: the stuff the links are made of. This is not money that was forged in real commerce... tempered by beads of real sweat... and hammered with the sledge of savings.
No... this money lacks tensile strength.
Put it to the test. What will it do?
Our guess is that it will break.
Regards,
Bill Bonner
Founder, Agora Inc. A Note From Joel: In addition to having founded Agora Publishing and authored several best-selling books, Bill is chairman of Bonner & Partners Family Office, a project dedicated to helping turn family wealth into permanent wealth. You can check out his always-insightful musings at Diary of a Rogue Economist. | | | |
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