But who should we thank for these remarkable events - a price induced famine…a poverty ‘time bomb’? How could these things be happening in the 21st century - nearly two decades after the fall of the Berlin Wall…more than a century after the invention of the mechanical reaper…and 95 years after the creation of America’s central bank? Ah…there’s the funny part.

Prices are twice as high as they were two years ago. Is the weather twice as bad? Are people suddenly eating twice as much? No? Then what happened? What has happened is that the central bank has created bubble-like conditions in the commodity markets.

An update from Kevin Kerr:

“Many are saying that the commodities bubble is bursting and that all will be well. I don’t think so, but all of this selling will certainly give us at Resource Trader Alert a better chance to buy back in at cheaper levels, especially in the metals, although not yet.

“We are seeing crude oil pull back, and it seems that sugar is along for the ride. I expect sugar to pull back even further, but then turn around after summer - maybe even before.

“As far as the grains go, it’s a completely different story. The weather in the Midwest has been awful, and farmers are getting itchy. Rain - even snow - and very cold ground temperatures continue to hinder farmers. This market remains very, very choppy, so be prepared for some wild swings. However, come harvest time, I think both our beans and corn will leave our RTA portfolio smiling.”

If you aren’t yet an RTA subscriber, now is the time. Kevin is offering 3 FREE months of this elite trading service - but only until midnight on May 12. See here.

*** “Fed moves to loosen tight credit,” begins a story in the New York Times this morning.

A related article - in the LA Times - tells us that the crunch in subprime is now grinding down on cash-out refinancing, investment property and vacation homes.

But the Fed makes haste to the rescue. Two days after cutting rates down to 2%, the Bank of Ben Bernanke announced - without much fanfare, hoping it would be ignored - that it would accept credit card debt, student loans and even car loans as collateral. Student loans are now being traded on private markets at discounts of about 25%. But the Fed takes them at full value…and charges only 2% for the loan, about half the rate of consumer price inflation.

What kind of way is that to run a bank, you might ask? Don’t bother…

The bubble has sprung a lead…the Fed is doing all it can to keep it pumped up.

*** Meanwhile, Warren Buffett has gone into the business of insuring municipal bonds. His competitors don’t deserve their triple A rating, he observed last week. AMBAC, for example, watched its stock price tumble from $96 to $4 in the space of a year. Its credit is so bad it has to pay 14% to borrow money. Buffett says he’s never before seen such a company rated AAA.

*** And the art market is preparing for a big test. So far, the very peak of the socio-economic pyramid has been relatively immune from pain. The rich are still getting richer, as near as we can tell. Occasionally, the papers speak of problems among the “rich.” But the people they are talking about are not really rich. Often, they have two large incomes…two large houses…and two large mortgages - along with all the expenses of living high on the hog, circa 2008 - including private schools, club memberships, ski vacations, and so forth. At the end of the day, they don’t really have much capital to protect them from rising prices or adverse economic trends. But the truly rich are truly different. They don’t have mortgages. They don’t depend on their incomes. And they often have sources of wealth beyond the dollar.

The rich can afford to hold gold, for example, even though the yellow metal provides no yield. They don’t need to rely on it to pay for their retirement…so they can take a longer view. They can invest differently because they don’t need current income. And they are often more concerned with protecting or enjoying wealth than with making more. But they are human, just like the rest of us…and just like the rest of us; they are gullible, credulous, and moronic. The last time we looked, Manhattan apartments were selling at record prices. Luxury airplanes and yachts are still selling well, too. And so are works of ‘art.’

Here we add a little detail that we think may be important. Recent sales at Sotheby’s and Christie’s have set records for Chinese and Russian art. You won’t have to think long or hard to figure out why. The Chinese and Russians have a lot more money than they used to.

The rich in the West have more money too. But so far, the art market has been doing a good job of separating them from it.

The test of prices on Western art is coming in three weeks, when the big auction houses have $1.8 billion on sale. In recent years prices have swollen to bubble levels. Many works have little or no real merit - they are merely gaudy, sensational, or pure gimmicks. Still, investors felt clever paying extraordinary sums for these things…and then, even cleverer when they went up in price.

The works of Richard Prince, for example, were put together just a few years ago. Kenny Schachter, an art-critic friend of Marc Faber’s, described his oeuvre as “consisting of large silkscreens on canvas, of purloined covers of pulp fiction novels involving a series of books with nurses in the titles…” such as “Wayward Nurse,” or “Surfing Nurse,” and so forth. In 2003, you could have bought one for $75,000 to $150,000. Two years later, prices topped $1 million. A year later, one was sold at auction for $2.5 million. And in 2007, one of the nurses hit $6 million.

“What is the inherent value of these works?” asks Mr. Schachter.

About as much as a dot.com without a product or a business plan, is our guess. But what will addled buyers pay? We don’t know…it depends on how eager they are to get rid of their money.

*** A note from Addison on the Maryland Film Festival:

“When Dick Cheney told Paul O’Neill deficits don’t matter,” we found ourselves explaining to the audience after Saturday night’s screening of I.O.U.S.A. at the Maryland Film Festival, “he didn’t mean that they don’t matter economically. Of course, deficits matter in economics. What he meant is politically, politicians don’t get punished by voters for running deficits.”

In the movie, former Treasury Secretary Paul O’Neill tells the story about the day Cheney said, “deficits don’t matter” to him in a cabinet meeting. He also talks about the day he was fired from the Bush Administration for “a difference of opinion.”

“Well,” said a gentleman in the second row “let me explain things from the policy makers point of view…”

“Uh ho,” Patrick, the director of the film said. He was standing next to me at the front of the theatre. “Are we in trouble?”

The gentleman went on at some length about the “political coalescence” that had take shape in the 1990s, whereby both parties agreed, that despite their differences, keeping the nation’s finances sound should be a priority for everyone.

But that all flew out the window in 2002 when you had the third of the three consecutive tax cuts go into effect at the exact same time that self-imposed “pay as you go” spending laws expired. The nation’s revenues dried up. But spending exploded. For the first time this year, we’ve seen a $3 trillion dollar budget proposal. The deficit is expected to reach beyond $500 billion.

The gentleman, it turned out, was Paul Sarbanes, the former Senator from Maryland whose name gives the willies to corporate legal and accounting firms across the civilized world. Sarbanes co-authored the much-rued Sarbanes-Oxley corporate transparency law. And, now retired, had some extra time on his hands to come and instruct us on the subject of our own movie.

Patrick, a Chicago born, recovering Union supporter was impressed and took the time to raise the issue of disparity of wealth in the country. We were a little more subdued. This is exactly the crux of the problem with I.O.U.S.A. - the film, the project and the nation. Once you get down to brass tacks and start talking about specific solutions you run into two sides of an economic argument that are equally entrenched.

On the one hand you have the Arthur Laffer, supply-side zealots, of which the current president is one. On the other you have the died-in the wool New New Dealers who see government programs - most notably social security and medicare - as the bedrock of their parties’ existence. Their current arguments sound like this:

Neo Lafferites: “Let’s keep the tax cuts permanent”
New New Dealers: “The nation needs universal health care.”

Neither the twain shall meet. If we’re successful in getting I.O.U.S.A. into theatres this August and as part of the “national conversation” in time for the political conventions…this is the crux of the problem. With these two sides entrenched, Washington and the political system is broken. And you are the victim. “If we do nothing,” David Walker likes to point out “the national debt alone rises by $3-$4 trillion a year. That’s if we do nothing.”

Which is exactly what we’re doing now. Nothing.

Unfortunately, it won’t be the Paul Sarbanes or the Arthur Laffers of the world who have to pay the price. It will be you and your family.

*** Tomorrow…more on the coming revolution (yes…you heard that right)…

Until then,

Bill Bonner
The Daily Reckoning

Pages: 1 2

Pages: 1 2