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Thread: Bill Bonner on 'The New Inflation' ...

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    Default Bill Bonner on 'The New Inflation' ...

    by Bill Bonner of dailyreckoning.com


    "First, there was the New Woman.
    Then, there was the New Economy.
    Now there is the New Inflation.

    Asset inflation is as different from the regular kind as an illicit affair
    is from an ordinary one. It is much more agreeable when it comes in...and
    much more painful when it goes away.

    And it is not all created by central banks or Treasury Departments.

    By now, we understand central bank inflation only too well. It worms its
    way down to the consumer economy through the banking system. Eventually,
    but not immediately, prices rise. And when prices rise too steeply, voters
    begin to howl...businesses get jumpy...investors start to flinch...and the
    whole economy goes sour like old milk.

    But this 'New Inflation' is different. It is the 'Wave of Liquidity' that
    is floating up prices of capital assets...and rich peoples' toys...all
    over the planet. Yes, dear reader, the rich have done very well out of all
    this new liquid. It has boosted up their wealth. Their stocks, their
    bonds, their property...even the works of art that adorn their walls have
    floated up.

    Where does all this money come from? Ah...that's what is new about it. And
    it is why the financial industry is making so much money.

    It works like this. You have a house worth $100,000. You take out a
    mortgage for $50,000. Then the mortgage is mixed together with other
    mortgages, stirred, shaken and sold to a financial house, X. There, it is
    used as collateral for a loan of $500,000...which is invested in a
    leveraged buy-out of a Company Y...which then issues bonds worth $5
    million, which are taken up by hedge fund Z, that borrowed the money to
    buy them from the Japanese at a low interest rate, exchanged it for
    dollars, and now invests in these junk bonds at twice the yield.

    At every step, the financial intermediaries make their commissions, their
    spreads, and their fees. At every step, the amount of notional 'money' in
    the world multiplies. Your income has not changed...your house is still
    the same...business Y makes no more profits. The real economy remains just
    as it was. This feverish financial activity...this 'financialization of
    the economy' adds nothing...not one jot or tittle...to the real wealth
    that is in the world. There are no more factories...no more diamonds...no
    more steak sandwiches. All this

    money-shuffling produces nothing but more
    profits for the money- shufflers and more wealth for the rich people
    around the table.

    As long as the credit bubble expands...it also expands the values of the
    assets held by the rich. Their stocks, bonds...junk bonds...and all other
    assets, go up in price. Which means, that they are the beneficiaries of
    the New Inflation. When their junk bonds or houses or stocks go up in
    value...they have more purchasing power. They can trade financial assets
    for other assets. They can use them to buy a time-share in a corporate
    jet...or a vacation house at St. Barts. Or, they can simply buy more
    'stuff.'

    We can be sure that they are not going to drive up the price of toilet
    paper or margarine, however. Consumer prices are, broadly speaking,
    unaffected. The rich don't use more toilet paper just because they have
    more money. Nor do they eat more hamburgers. But insofar as they have more
    purchasing power, thanks to this New Inflation, they grow richer, compared
    to the rest of the world.

    This might not make much difference, eventually, of course. Every dollar
    created out of thin air eventually goes back from whence it came. All this
    pseudo-wealth - created by the New Inflation - will eventually disappear.
    Credit booms are typically followed by credit busts. Junk bonds typically
    have their moments of glory, followed by their hours of desperation and
    defeat. Things that go up so spectacularly can be expected to go down in a
    sensational way too.

    But here is where the real problem arises. While financial assets rose in
    price, so did the debt burden on the proletariat. The New Inflation meant
    new wealth to the rich; to the lumpen...the booboisie...it meant
    debt-financing. What the middle and lower classes got out of it was an
    opportunity to ruin themselves; which they took up readily.

    New Inflation is sure to be followed by New Deflation. We wonder what that
    will feel like."

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    Default Re: Bill Bonner on 'The New Inflation' ...

    quickly followed by the Mogambo Guru on Bill Bonner and Thomas Jefferson

    (snip)"So, now I'm laying there on the floor, gasping out my life in ragged breaths, and I'm thinking that this is all getting too, too weird. In my last moments, I am contemplating various ways that this monetary insanity could possibly work out, other than The Mogambo seizing control of the government, punishing the bad, rewarding the good, re-establishing the Constitutional requirement of a gold-backed money, and taking up where Caligula left off because his imagination was too limited.

    Thus, primed for an alternative, possible scenario, and wondering what the government would try to do to fix the mess they made, I was therefore a sucker for the Bloomberg.com report that "China's central bank relaxed currency controls to make it easier for individuals to buy stocks and bonds abroad and help reduce the value of the yuan."

    My ears prick up to Full Mogambo Alert (FMA) at this! This, then, is the deal that Paulson and Bernanke worked out with the Chinese! They don't want any more dollars, but what do they want? They want to fuel their economic growth by making stuff! And to do that, they would like to have the machinery, patents, know-how and trade secrets that are rusting away in America.

    And now, thanks to this nefarious "deal", they will get it all, and we will get all of our dollars back in exchange for giving them ownership of all our means of production!

    How does that Thomas Jefferson quote go? Something about how if you act like a bunch of corrupt morons and disregard your own Constitutional requirement that requires money to be of only silver and gold, but instead allow the exact polar opposite with a fiat currency and/or zero controls over the actions of the banks (as coordinated by the Federal Reserve to allow them to create too much money and credit) to create an economic system composed of massive government spending and raw, mindless consumption of a parasitic populace, then you will end up as landless, penniless serfs in the very land our fathers gave us?

    Well, if President Jefferson were alive today, I would call him up and tell him "Hey! Tom! Here it is, dude!" which I am sure he would appreciate knowing.

    And speaking of Jefferson, my buddy Jeff C. sent me a forward of the "Firearms Refresher Course" which also had another quote by Thomas Jefferson that I particularly liked, and which seems spookily relevant. It read, "Those who hammer their guns into plows will plow for those who do not."

    And now, putting it all together into this elegant New Mogambo Theory (NMT), we are allowing the Chinese to own our stocks, which means they own our businesses and all the assets, and you can bet that they will be using their increasing wealth and influence to get Congress to outlaw private ownership of guns, because an unarmed, helpless, desperate and angry serf is much better than an armed, capable, dangerous, desperate and angry one."(snip)

    from

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