Commodities on a Roll — Inflation or OOGABOOGAH?
In early May, I mentioned that the CCI (Continuous Commodities Index) had broken out from a six-month base. After a brief dip which didn’t even retest support, the CCI powered to fresh highs this week. The weekly chart shows that after being nearly chopped in half during the second half of 2008, the CCI has retraced a third of its losses in the past six months.
An important component of commodities’ bounceback is the weakening U.S. dollar. During most of last winter, the market was rewarding the U.S. for its ‘bold’ moves to spend its way out of financial collapse. After sober reflection, that ‘boldness’ now looks more like ‘psychotic delusion.’
When Airman Ben (head space cadet at the Federal Reserve) dumped a tanker load of kerosene onto the financial markets, he expected the traditional 12 to 18 month ‘grace period’ before inflation started to flare up. But now, to his horror, it appears that last December’s commodity washout was an overshoot to the downside. Just as the dollar’s ‘stroke of boldness’ rally last winter was a delusionary overshoot into thin air. Now, relentlessly rising gasoline prices are clubbing staggering consumers like a baby seal hunt.
The only plausible way for Airman Ben to snuff this already dangerous inflationary brushfire would be to chop his doubled balance sheet in half — as in ‘Miracle Diet Man Sheds One Trillion Pounds.’ In the remote event that he were to do so, the current ‘dead man walking’ economy would morph into ‘Autumn of 1931 kamikaze power dive to hell.’
Thirty-eight years of delusional fiat-currency crack smoking (best exemplified by the smug, mumbling goofball Greenspan) have left the U.S. nearly as busted as eastern Europe after its 45-year sequestration into communist autarky. What part of ‘command economies don’t work’ does the Federal Reserve Board not understand? But the definitive end of the late ‘American century’ (that would be the 20th, gramps) was signaled by the gargantuan, ongoing LooterFests which have robbed the 21st century’s seed capital. No capital, no recovery.
A fine fix indeed. If I were Airman Ben, I’d petition the former president (the guy who slotted him into the Fed hotseat) for a modest cottage on his ‘extradition-safe’ rancho in Paraguay. Then, ignoring the disturbing images of burning cities on the televisora, I’d settle in to pen my memoirs — ‘HOW I LOST TEN TRILLION AMEROS DAYTRADING THE ECONOMY.’ Subtitle: And Why I Won’t Give Up Till I Find the Real Killer of the Dollar. LOL, Ben!
But if Ben fails to take my entirely serious advice, then it’s his next move. What’ll it be, Ben — inflation … or OUGABOOGAH?
Have you read this piece by Simon Johnson?–The Quiet Coup–Atlantic Monthly:
"Squeezing the oligarchs, though, is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or—here’s a classic Kremlin bailout technique—the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk—at least until the riots grow too large.
Becoming a Banana Republic
In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.
But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.
Davos, put him on the Daily Digest again.