Inflation. Why It Spells The End Of Life As We Knew It

London, England

What goes around, comes around...

Every country in the world has had to put up with finger wagging and scolding from US officials. The US economy was the world’s best for so many years — and American experts, government officials, professors, and consultants never got tired of saying so.

But now...as the Rolling Stones put it... "the table’s turning...her turn to cry." Now, the tears are coming from the US; the foreigners are doing the scolding.

Bloomberg reports that US housing starts are at their lowest level in 17 years. Housing prices are going down too, while consumer prices go up — both apparently at a faster and faster rate.

Producer prices in the US rose 1.4% last month, following an increase of 0.2% the month before...annualizing the two months gives us a rate just shy of 10%.

Meanwhile, price paid by producers were 7.2% higher than a year ago.

Worldwide inflation is about 7%, says Bill Gross of PIMCO. And since price inflation has now been globalized, there is no escaping. Here in Britain, consumer price inflation, officially, is running at its highest rate in 10 years.

"There is really nothing we can do about it," said an analyst at this morning’s investment meeting. "We’re a small island. We have to import things from overseas. Prices are rising everywhere. How can they not rise here? We’re just at the beginning of this trend. It’s going to get worse."

It is going to get worse everywhere. Inflation is in the pipes. Soon, it will be backing up in the bathtub drain and spilling over from the sink. Over the last 15 years, the world has seen huge inputs of ‘liquidity’ — cash and credit from central banks and the financial industry. Everyone was perfectly happy when this juice was going into asset prices. But one by one the bubbles have popped...and now the liquidity goes where it is unwelcome — into commodities, food, and fuel.

Consumers and central banks are both trapped. Central banks want to lower rates and increase liquidity in order to stimulate a sagging economy. But their inflation no longer swells assets prices and nourishes economic growth; now it leaks into consumer prices.

And the poor American consumer...he spent his entire career preparing for an economy that no longer exists. He has a big house...a big car...and, often, a big mortgage. America’s far-flung suburbs were invented when gasoline was only about 25 cents a gallon and real US incomes were rising. We remember it well. We’d drive into a gas station and tell the pump monkey: "Let me have $2 worth." Heck, 2 bucks’ worth was all you needed. You got eight gallons — enough to last you all week. Now, gasoline is $4 a gallon....and real incomes are scarcely higher than they were in the late ‘60s. And now the typical commuter lives too far out in the suburbs to walk to work. And even if he could, this item from the Wall Street Journal offers little comfort:

"Pain at the Other Pump: Shoe Prices Rise." The story tells us that footwear is going up too — about 10% to 15% next year, which "would be the largest single-year increase in more than 50 years."

And the poor man didn’t bother to save money, because he didn’t need to. His house rose in price...and there was always someone ready to lend him money when he needed it. But now...the cost of credit is going up too.

What we are looking at is big. It’s an historic turnaround. In financial terms, it is the end of the era of cheap credit. In cultural terms, it’s the end of the prosperous, suburban USA as we have known it...the USA that we grew up in.

The last credit expansion began, by the way, with the Reagan Revolution, in the very early ‘80s, with bond yields over 15%. It ended either in 2003 or 2005 or a couple weeks ago. Yields on the 10-year treasury note fell below 4% on several occasions. But now they are rising. Investors fear rising inflation. Even at current rates, they still buy treasuries at yields below the rate of consumer price inflation. But they’ll regret it, in our opinion. The trend seems to be up. It is the beginning of what probably will be a long period of higher inflation rates...higher bond yields...and tighter credit generally.

So too have we entered into a period of higher energy costs. The price of oil hit a new intraday high yesterday at nearly $140. It will probably drop back below $100...but the days of $10...$20...or even $50 oil are probably gone forever.

And the suburbs? Are they dead too? We don’t know...but hope so; we never liked them.

All this is bad news for people who organized their lives on cheap oil and cheap credit — especially those for whom it is too late to make big changes.

USA Today reports, for example, that the rate of bankruptcy is skyrocketing among old people. From 1991 to 2007, the rate went up 150%. But for those 75 to 84, the rate has exploded 433%.

The poor codgers. It’s bad enough being old. Imagine being broke too.

And back to the foreigners:

*** A few weeks ago, the Indians were giving America a piece of their mind. This week, it’s the Chinese. The subprime crisis was caused by Washington’s "warped conception" of market regulation, said a Chinese banking regulator... and the Chinese media has gone so far as to compare China’s decisive action in Sichuan Province after the earthquake to the Bush administration’s diddling after Hurricane Katrina.

"U.S. credibility and the credibility of U.S. financial markets is zero everywhere in the world," says Joseph E. Stiglitz, a professor of economics at Columbia University. "Anybody looking at this from the outside says, ‘There’s been a lot of hot air coming out of the U.S., so why should we listen to these guys when they didn’t know how to manage risk?’ "

The Chinese yuan has gone up 11% against the dollar so far this year.

*** When it rains, it pours. The Midwest has seen the worst flooding in 15 years...pushing up grain prices even higher.

But it could be worse. You could be in Argentina, from which our colleague Paola Pecora reports on the latest conditions (farmers are blocking roads to protest tax increases):

No market for grains
Running out of food and fuel
Inflationary expectations rising
Consumers expect to consume 24% less than the year before
220 roads blocked
An actual 20% drop in consumption spending
74% of people expect higher prices
Increasing poverty
Fall in foreign exchange reserves at the Central Bank
Public debt higher than before the default of 2001
Flight of bank deposits
Real incomes falling

"Things get worse every week," writes Paola.
P.S. If you enjoyed this article then we encourage you to sign up for the free Fleet Street Daily eletter. Learn what you can expect from today's markets -- and how to prosper in the face of uncertainty. You won't find more thought provoking writing anywhere on the Internet.

^ Back to top

BlinkList
Del.icio.us
Digg
Facebook
Google Bookmarks
Livejournal
Newsvine
Reddit
StumbleUpon
Yahoo! My Web

Inflation. Why It Spells The End Of Life As We Knew It

RELATED ARTICLES

FLEET STREET LETTER

SMART COMMODITIES UK

PROFIT HUNTER

ZURICH CLUB

Inflation. Why It Spells The End Of Life As We Knew It