One CAN say that, with or without the heaping of ridicule and/or scorn, but at least with an arrogant and smug authority that comes from 100 percent certitude, that “The Mogambo is 100 percent certain that the consumer is 100 Freaking Percent (100FP) of the economy!”

I make this Bold Mogambo Assertion (BMA) for two reasons. First, I hope that by debunking this silly “the consumer is 70 percent of the economy” crapola, I will win a Nobel Prize or some other award that has a cash-award component of the prize winnings, perhaps one that has a LARGE cash-award component.

My argument is that the ultimate consumer pays the price for everything by buying and consuming, for instance, a frozen pizza or delicious candy bars, and maybe something nice to drink, knowing that a slice of the purchase price is used to pay back creditors and producers for the use of capital, labor and land invested in producing these – and more! – delicious ‘ready-to-eat’ snacks and treats of high caloric content, of which the sugary, chocolaty and salty varieties I find particularly good. Yum!

And speaking of spending, I was surprised to see that the current-account balance of the USA has collapsed to $673.3 billion in the last 12 months, down from its high of over $800 billion, and the trade balance has fallen to $730.4 billion in the last year, which is down about 20 percent from its high of a couple of years ago, too.

And while the 12.8 percent fall in industrial production in the last year seems like bad news for us Americans, it is worse by whole orders of magnitude other places. Japan has industrial production down 34.2 percent over the last 12 months, and in the euro area it is down by 20.2 percent.

Just when I thought I would go berserk at such horrific economic news, I see John Stepek at Money Morning newsletter had a subhead that caught my eye, which was “Three sound reasons to own gold.”

I admit that I did not read the article, but as far as I know, there are only two good reasons to own gold; to preserve wealth when prices are stable, and to make a lot of fiat wealth when your government acts so stupid as to create, or allow to be created, excess money and credit that eventually destroys the currency, especially when undertaken so as to enlarge the size of government, like now, which makes the problem of inflation worse because those more government weenies have a bigger incentive to save their own phony-baloney jobs, but can only make things worse.

Like, I said, I did not read the article because I am lazy, but the advice to buy gold is the lesson of the last 4,500 years of governments acting irresponsibly when given control of a fiat currency with which they could create as much money as they wished; inflation in prices inevitably caused chaos, misery, starvation and revolution.

I tried to explain to the employees that inflation in prices was essentially just a mismatch between gains in income, if any, versus gains in prices that must be paid with that income, which I hoped would prove to be a valuable insight when I then told them how I was slashing their salaries by a lousy 5 percent, and if they did not like it, then they could all go to hell because we are on our way to bankruptcy anyway.

I was going to suggest that the lesson, which they would immediately grasp if they were not so stupid, is to immediately buy as much gold, silver and oil as they could, but they were not in the mood to hear good advice gleaned from history, and instead wanted to whine about their puny pay cuts.

If they were not so stupid, they would see that buying gold now would easily make up for their meager income reductions, and if they had been buying gold, silver and oil all along, they would be miles ahead!

Whee! This investing stuff is easy!

Until next time,

The Mogambo Guru

Source: The Only Two Reasons to Own Gold

You saved the world 10 years ago. Can you please do it again?

Oh where, oh where is the committee to save the world when we need it?

Yesterday, the Dow closed below its November low. Down 89 points from the day before. Gold held steady at $976.

The jobless benefit rolls edged up to just shy of the 5 million mark. They’ll go over 10 million before this is over.

“US doubles Fannie, Freddie backing to $400 billion,” reports the Washington Post. What numskulls. They should have cut the two mortgage disaster twins loose long ago. Then we wouldn’t have such a huge hole to fill. Jumbo loans are not covered by Fannie or Freddie. They average, now, nearly 2% points higher than conventional mortgages. Why? Because they reflect the real cost of mortgage money on the free market – not the cost of mortgage funds in the twisted market of implied government guarantees.

But heck…we’re not giving advice to the politicians; they wouldn’t take it anyway.

So, let’s turn our attention back to the man who saved the world.

You know our version of this story, dear long-suffering reader. You’ve heard it so often you’re probably getting tired of it. Instead of allowing nature to correct the excesses of the ‘90s bubble in dot-coms, Alan Greenspan and his sidekicks juiced up the biggest speculative frenzy in history. For nearly 4 years, they kept the Fed’s key lending rate below the level of consumer price inflation. In other words – they were giving money away. No wonder people borrowed too much! They created a new bubble that was not centered in the stock market…but in housing. And since housing is the core asset of most American families, when this bubble popped it did far more damage than the explosion of the Nasdaq in 2000. In the last two years, homeowners have lost about 20% – 30% of their houses’ value. Stock-market investors in the US are down about 35%. Wall Street, as we knew it, has ceased to exist. And the world is entering the worst recession since the ‘30s.

At least, that’s what Alan Greenspan says. Well… what can we say to the man who has done more than any other to create this catastrophe?

Thanks a lot.

More news:

*** There’s more carnage in the markets in the UK today. The FTSE 100 is back below the key 4,000 level, as traders see that the Dow Jones yesterday closed below the November low.

Will it close below 4,000 on the day and on the week? If so – beware – there could be further falls ahead.

And the final blow could come from an unexpected source, says one team of colleagues here…

“FTSE to Crash almost 30% by April!” predicts The Fleet Street Letter. “Learn why this plunging emerging market economy could be about to blast the FTSE 100 below 3,000 come Easter… and the three “world beater” shares that could FLY out of the rubble in the years that follow…”

What are they talking about? You can read it for yourself here.

And more thoughts…

*** “Synchronized boom, synchronized bust,” explains our old friend Marc Faber in the Wall Street Journal. Greenspan’s EZ credit terms created a worldwide boom. Now, we pay for it with a worldwide bust.

Isn’t that the way it always works? For every action there is an equal and opposite reaction. For every bubble there’s a pin. And for every politician there’s an envelope with $100 bills in it.

But Greenspan’s successor wants to get his picture on the cover of TIME just as much as his former boss did. He’s determined to beat the bust. If he can do it, TIME will probably give him the Man of the Year award. If he can’t, he’ll probably get the ‘Schmuck of the Year’ award from us.

He’s tried cutting rates. In fact, he cut them more than Greenspan, who stopped at a nominal rate of 1%. Bernanke didn’t stop. Once he had his chainsaw in gear, he just kept cutting… down to zero.

Greenspan didn’t put in jeopardy the Fed’s own balance sheet either. When he was running things, the Fed held only a bare minimum of Wall Street’s junk assets. Now, they’ve got trillions’ worth of them.

Nor did Greenspan resort so nakedly to printing money. The Bernanke Fed has already used “quantitative easing.” Soon, the will embark on ‘inflation targeting’ too. No kidding. That’s what it says in the paper. Bernanke is going to set a target for inflation… say 3%… and keep the printing presses running hot until prices are rising by at least that much.

We never thought central bank management was a science. It certainly isn’t. The theories that guide it are unproven in practice… and unbelievable in theory. Instead, it’s all guesswork, bunkum and dead reckoning. Which is to say, the Fed will hit its target or we reckon the economy will be dead.

Maybe Ben Bernanke is a champion marksman… and maybe he isn’t. We don’t know, but if we were you, dear reader, we wouldn’t stand too close to the target… if you know what we mean.

And more thoughts…

*** Poor Old Europe. The news is all gloomy. All around the periphery of Europe, countries are in trouble. While the US bails out banks… France and Germany, at the centre of Europe, might have to bail out entire nations.

Ireland is in trouble. And Spain. And Italy. And Poland. And even England may be forced into bankruptcy. British finances are deteriorating at an “alarming” rate, says a report.

[Editor’s note: To find out the full extent of the economic problems the UK is facing – and how you can protect yourself and even profit from the fall out – please read this time-sensitive report. Click here.]

We knew it was madness – and we reported it to you, dear reader – when we visited Dublin two years ago. There in the middle of town were retail shops offering the Irish an opportunity to buy houses in Spain… Croatia… or even Georgia (not the US version… Stalin’s birthplace). Property prices soared in Ireland more than in the US. What you could get for your money was absurd – tiny, non-descript houses in rundown sections of town sold for more than $1 million. The Irish came to believe that property always went up – no matter where you bought it.

It was madness on the way up…and it will be madness on the way down. A friend reports that houses in Ireland are going “no bid” too.

“There’s a guy trying to sell a house for half what he paid for it 3 three years ago… and nobody is interested. He’s stuck,” says our source.

France and Germany may be stuck too. They’ve hitched their wagons to all these marginal countries on the fringe of Europe. Now, it looks like they’re going to have to get out and push.

*** And now for some really disturbing news. Even vice is getting gripped by the downturn. Yes, first we get a report that Playboy Magazine is taking such losses that it may be forced to sell out.

Then, a report circulates that the bordellos of Las Vegas have fallen on soft times. The truckers and tourists who used to frequent them no longer have the dough. The poor girls just sit around… waiting for the phone to ring.

And now cometh from England news that cocaine has fallen in price. It’s now cheaper than beer, says the Telegraph. Either the supply has increased, or the demand has fallen; we don’t know which.

“What’s the world coming to when cocaine is cheaper than beer or wine,” writes a friend. “Looks like we’ll have to change our vices, to economize…”

But here at the Daily Reckoning, we remain loyal to the old-fashioned vices. We’re not going to give up alcohol just because it’s become more expensive than hard drugs. We’ll stick to booze, thank you. Besides, a man who isn’t faithful to his vices is prey to every bad habit that comes along. You can’t trust him.

Source:  Synchronized Boom, Synchronized Bust

The front of a recent issue of Barron’s asks, “Are Treasury Bonds Safe?” which is actually a really stupid question since every doofus knows that Treasury bonds are perfectly safe because a fiat currency and a lapdog Federal Reserve means that they can print up all the money the Treasury needs with which to pay bondholders!

So… Safe? Hell yes they are safe! You’d think that Barron’s would know that! Jeez! If I had been there at Barron’s, I would have suggested using this week’s cover for what I actually suggested for the cover of the employee newsletter.

At the meeting, I floated the idea of suggesting a splashy cover page with words in blazing red letters that read, “That Creepy Lowlife Mogambo (CLM), the same CLM that you plot against behind my back, was actually right! Hahaha! In fact, consumer price inflation is higher than interest rates – even the yield on the 30-year Treasury bond is less than 3 percent!”

In a second area on the cover, we put, “This means that anybody who is buying any debt – when the central banks of the world are creating more and more money and credit at such astronomical rates – is a real moron, or lunatic, or both, because bond prices will fall when interest rates rise in response to the inflation in prices, because that is the only response to the massive inflation in the money supply from all that excess money and credit being created Every Freaking Where (EFW) around the freaking globe!”

I interpreted their silence as thoughtful meditating on my terrific copy idea, and so I went on to further suggest that, in smaller letters, sort of in a power-packed subhead, “So buy gold now, you drooling morons, unless you think that you are So Freaking Special (SFS) that you, and America, will be totally unique in the last 4,500 years of various moronic governments creating excess money and credit to satisfy their gluttonous, insatiable appetites for spending, spending, spending, and then they all failed so miserably that their entire economies were, for centuries, sometimes forever, in decline, and everybody was ruined, and everybody was bankrupted, and Bad, Bad Things (BBT) happened for a long, long time!”

“Then,” I said triumphantly, “we add the teaser hook! We say, ‘How do you like them apples, morons?’”

Well, apparently their silence was not due to consideration and contemplation, but to communicate with each other telepathically to gang up on me as, instantly, almost in unison, it was moved, seconded and (against one lone dissenting “nay” vote) otherwise unanimously decided to throw me out the meeting and, if I understand the terms “And never come back!” correctly, ban me forever! How rude!

Well, Barron’s was no more receptive to my editorial suggestions than my co-workers were, although Barron’s then suggests, in smaller print, just like I had recommended earlier, that the real reason is exactly what I have been saying! They say, “Long-term Treasuries, now yielding less than 3%, could fall 25% in value as the recession ebbs and rates rise. If they’re held to maturity, the principal is secure, but you’d be stuck with today’s low rates for years.”

At this, I laugh, because every doofus knows this, too! Hahaha! What every doofus does not understand, however, is that every day, of every week, of every month, of every year, every one of those dollars will, by virtue of the Federal Reserve continually creating so much excess money and credit so that Congress can continue to borrow it to fund its outrageous deficit-spending to Somehow Save America (SSA), be continually worth less and less in terms of buying power, just like the dollar has suffered at the hands of the idiotic Congress and the Federal Reserve since 1913, so that they dollar has now lost about 96% of its buying power since 1913, and about a quarter of its remaining buying power was lost in the last few years alone!

And this, together with the economic disaster that is already out there, only proves the utter, utter failure of the Federal Reserve to “preserve the value of the dollar”, which is their freaking mission in life. Morons! Morons who should be in prison, along with the Congress-morons who let them get away with it! Vengeance! We want vengeance!

To illustrate this very point with a little comedy instead of seething hatred and homicidal revenge, Junior Mogambo Ranger (JMR) Rebecca H. sent a humorous image of the “new” $100,000 bill, which has the face of Ben Bernanke on it, and is called, right on the front so you know exactly what it is, a “Federal Reserve Thingy”. Hahaha! Perfect!

Mark J. Lundeen, independent market analyst, apparently has no time for comedy, and traces the real problem back to “The problem ‘monetary policy makers’ were having from 1954 to 1981″, which was that “their liquidity was flowing into CPI, consumer cost of living price inflation”, which was running somewhere around, ummm, a terrifying 10% or so and everybody was all freaked out and angry.

As a result, Paul Volker, chairman of the Federal Reserve at the time, “raised Fed Funds to 21%,” which is “6% higher than the US long bond yield” which, in 1981, meant that “the US Treasury was forced to offer a 15% coupon for its 20-year bond.” Wow!

This was also, as explained in the Mogambo’s Investing Made Easy (MIME) home study course, the exact time to switch from gold, which was setting a record of $850 an ounce at the time, into bonds, which were yielding a juicy 15%, and then make a fortune when those bonds zoomed in price as inflation in prices fell and thus interest rates fell to, today, less than 2%! Wow!

Unfortunately, Mr. Volcker wringing ruinous inflation from the economy at a terrible cost was not to last. Things soon went back to normal, the difference being that inflation in prices, he says, “stopped flowing into consumer prices”, and started going into financial assets.

I think that this was hugely aided by Congress authorizing the Individual Retirement Account in 1982, along with many other tax-advantaged investment vehicles over the years, which accidentally touches one of my sore spots, which is that this whole stupid idea of “investing for the long-term” is a Load Of Hooey (LOH), and I am embarrassed for this country that we turn out so many diplomas conferred on graduates who are supposedly thus certified as literate in basic math, but yet they are all completely clueless that “investing for the long-term” is obviously a huge freaking scam since it is mathematically impossible for the majority of people to take more money out of something than they put into them! Hahahaha! But nobody saw this! Hahaha! What morons!

Mr. Lundeen obviously does not want to get into a discussion where we are calling people morons and laughing at them, making crude jokes about their parents for siring such a mental defective mutant, all the while ordering round after round of alcoholic beverages and putting them on his tab so that I can drink and insult people until I finally pass out in my own vomit, and instead says that the effect was less than stellar, as “The bull markets returns in financial assets from 1982 to 2007 were mostly inflation”, which is, unfortunately true.

And inflation in the prices of something, or all things, will get worse and worse from here, as the Fed is on record as saying that they will not let deflation happen, and the European Central Bank is vowing to never let inflation fall below 2%, which is such terrible news that the fact that Germans are not rioting in the streets shows that they are now as stupid as the rest of us.

Which is one more reason to buy gold, as if one needed any more reasons to buy gold after already having hundreds of perfectly good reasons to buy gold already, and especially now that Obama and the Fed have pledged trillions and trillions of new reasons to buy gold! Whee! This investing stuff is easy!

Source: The U.S. Dollar: A Federal Reserve Thingy

Economists surveyed by the Wall Street Journal said things are going to get worse before they get better, but that they should start getting better around, oh, say, mid next year. “For the household sector, this will be the worst event we’ve had in the post-World War II period” says Bruce Kasman of J.P. Morgan Chase & Co.

Event? A rock concert is an event. A wedding is an event. A spelling bee is an event. A recession/global depression is not just an event. It’s a way of life, at least for awhile.

In the stock markets, Aussie stocks followed the negative lead set by New York overnight. And boy was it negative. It wasn’t so much the size of the fall in New York (the S&P was only down 2.85%). It was the news that Bank of America would be laying off 30,000 people.

Then there was the news that GM has hired bankruptcy lawyers. Then there was the news that Bernard Madoff was charged by the FBI with running a $50 billion ponzi scheme-a term he apparently used himself when confronted by senior employees. He also said the business was “one big lie.”

You get the drift. And to be fair, there’s been a whole lotta lying going on everywhere over the last few years. The net result is wealth destruction and, at least for some people, a real sense of shame. But people are resilient too. They’ll get back to the business of making ends meet. More on that below.

It’s not all bad news. The U.S. dollar called in sick again yesterday. Gold and oil, however, showed up bright and early and took advantage of the greenback’s illness to rally. Gold was up $17 and is up over 12% in the last month. Oil is trickier. But January crude futures were up over 10% as well on a weaker dollar and a possible OPEC production cut.

Gold, oil, and yields. These are the signals and prices we’re watching for signs of stress and leakage in the bond bubble. We mentioned yesterday that the popping of the bond bubble would unleash financial chaos. But that’s not a very useful term. So what did we really mean?

Well, the popping of the bond bubble is going to lead to a kind of financial Diaspora. Capital will flee from bondage to the U.S. government. But where will it go? Where is the land of milk and honey? Forty years is a long time to be wandering in the desert with a bunch of cash in your pocket.

This raises an interesting question. There are 14,600 days in forty years. You could wander a long way in that many days. What in the world were the Israelites doing the whole time? Going in circles? Arguing over directions?

Hmm. Maybe it took them so long to find the Promised Land because they didn’t have a map. That map, you could argue, came down in the form of the ten commandments Moses brought with him. Even peripatetic nations need laws. It is hard to have order with them (even if the laws are unwritten, they’re still there.)

What are we getting at? The investment laws of the universe have not been rewritten with this financial big bang. But you have a whole generation of personal, corporate, and government behavior that’s not fit for the purpose of living in a world where money is tighter. People will have to learn new habits, live within their means, and not rely on access to debt to improve their standard of living.

Investors have already begun the switch, with a preference for income and safety over capital gains and risk. The equity premium-what investors get over and above the so-called risk-free rate of return on government debt-is going to have to widen considerably to tempt people back into the capital markets with their savings.

But this is what happens with market cycles. Investors and institutions over indulge in the boom phase, using leverage to buy financial assets because the equity premium is so high. Now, the equity premium has all but collapsed. Some stocks have compelling value. But no one is interested in buying them.

What breaks the cycles? Entrepreneurs. Keep in mind the great Austrian economist and economic historian made a great distinction between capitalists and entrepreneurs. The capitalists provided the capital. But in Schumpeter’s theory, it was the entrepreneurs who unleashed the gales of creative destruction that blew down failed businesses and replaced them with newer, more competitive firms, better adapted for the world.

Right now, one set of failing institutions (governments) are trying to prop up another set of failing institutions (financial companies, auto makers, etc). This effort actually retards the very process that would cleanse the world of all its misallocated capital and investment. Real Schumpeterian capitalism is being gelded by a new generation of Keynesian socialists.

These socialists have always feared the risk of personal failure that’s inherent in any wealth-producing system, where there have to be winners and losers in the game of enterprise. Instead of accepting the naturalness of failure-and softening the blow where they can-they instead institutionalise failure.

So that’s what we have now. Welcome to the State of Failure. Your mission, should you choose to accept it, is to avoid citizenship in this State and carve out a semi-sovereign State of your own, at least financially. More on this ambitious plan to find the Promised Land next week. Until then…

Source: Search for the Promised Land

Martin Hutchinson says the Fed has finally starting doing its job: putting price stability over Wall Street’s demands. Real interest rates are negative. This is feeding inflation. It also means Treasury bond yields – also currently below the rate of inflation – are too low and should begin to rise again.

Martin says investors can profit from this situation with the Rydex Juno Inverse Government Long Bond Strategy (MUTF:RYJUX).

More from Martin in Money Morning:

The statement that was issued after the policymaking meeting was somewhat “hawkish,” suggesting that the U.S. Federal Reserve is awakening to the dangers of persistent and gently rising inflation.

Wall Street was initially spooked: it had hoped for the usual bounce that follows a Fed rate cut. However, investors subsequently decided the Fed’s inaction meant things weren’t so bad after all. Actually, the inaction was the first example in several years of the Fed doing its job – standing up to the easy-money politicians and Wall Street in the pursuit of lower inflation.

The Consumer Price Index (CPI) for August registered a decline in prices of 0.1%, which observers hailed as an indication that inflation worries are at an end. But don’t you believe a word of it; the decline was entirely due to the recent fall in oil prices, which we here at Money Morning expect will one day reverse course and resume their upward march. The only question is when that will happen and what the catalyst will be to make it so.

In terms of the CPI, the “real” consumer price inflation was actually 5.4% over the past 12 months, which makes the 2.0% Federal Funds rate look pretty silly.

The same is true all over the world: Inflation rates are either well above the local bank base rates (2.3% vs. 0.5% in Japan, 12.1% vs. 9.0% in India), or are only just below them (3.8% vs. 4.25% in the Eurozone, 4.8% vs. 5.0% in Britain). Only China has inflation of 4.8% to go against a bank rate of 7.2% – just reduced from 7.47% – but China had been holding prices down with direct controls for the Summer Olympic Games, so its current inflation number is pretty dodgy.

If interest rates are at or below the inflation rate in most of the world, then it follows that global monetary policy is expansionary and inflation can be expected to increase generally.

You can’t entirely blame the world’s central banks; we have been in a credit crunch for more than a year now, and investment banks the size of Lehman Brothers (NYSE:LEH) and Merrill Lynch (NYSE:MER) getting in trouble is a pretty good indication that all is not well. However, there’s also no denying that low or negative real interest rates will tend to produce an acceleration of inflation.

The two objectives – saving the world banking system, and keeping inflation under control – are in conflict.

The market demonstrates the solution to the conflict.

On Monday the Federal Funds rate traded for much of the day at 6.0%, versus the Fed’s target of 2.0%. To get the market Federal Funds rate down towards the target, the Fed needed to inject lots of liquidity, which it did – to the tune of about $70 billion.

That liquidity increased the money supply, but only to make up for the decrease caused by bank failures and market fear, thus restoring the market’s balance and lowering the Federal Funds rate to about 3.0% by the end of the day’s trading. An interest rate cut Tuesday would simply have moved the “target” Federal Funds rate, rather than the actual rate, and would have led to more inflationary pressures without materially helping the banking system.

Indeed, one can wish that the Fed had confined itself to injecting liquidity throughout this prolonged credit crunch, keeping the Federal Funds rate level at its September 2007 level of 5.25%. In that case oil prices would probably never have soared to $147 a barrel, and U.S. inflation might have remained safely around 3.0%.

Going forward, it seems clear that next time the FOMC meets without having had about half of Wall Street disappear in the preceding week (the next scheduled meeting is Oct. 28-29), it will be tempted to announce a modest interest-rate rise, unless the U.S. economy is truly in the tank by then. Of course, the Fed would remain ready to lower rates again if a deep recession appeared, or to inject liquidity if more banks got in trouble.

That would suggest that the current sharp drop in yields on long Treasury bonds has been overdone (from 4.25% in June to 3.25% yesterday (Tuesday) morning, before rebounding to 3.49% at yesterday’s close). Thus, a rebound in Treasury bond yield – taking them significantly above the level of inflation – is called for as money is tightened and the Federal Funds rate rises.

To take advantage of such a yield rebound, you should consider the Rydex Juno Inverse Government Long Bond Strategy (MUTF:RYJUX). This invests in short futures contracts on long-term Treasuries. It can be expected to gain as Treasury yields rise.

Source: Federal Reserve Policymakers Stand Up to Wall Street’s Easy-Money Crowd

“What’s different?” asked colleague Manraaj Singh at this morning’s conference.

Early every morning, while most Americans are still in their beds, your editor joins a group of analysts and financial journalists to discuss the day’s news.

“What happened to the price of copper? Why are Asian stocks going down? Are they really going to cut rates today?” The answers are not always satisfying, but the questions keep coming.

And the question this morning was: what has really changed?

U.S. stocks held steady yesterday, but they’re down 5% so far this year. The dollar held steady yesterday too, but it is down for the year too – about 6% against the euro and the yen. The Europe- or Japan-based stock market investor has lost more than 10% of his money.

Meanwhile, the fall of the dollar has increased prices for imports. While the United States used to “import deflation” from Asia and elsewhere, now it imports inflation. Prices are rising all over the world.

Yesterday, European producer prices were reported rising at 6.1% per year. High prices have caused the biggest drop in retail sales on record. And yesterday, they had to call out the riot squad in Brussels, to battle fishermen who were kvetching about high fuel costs.

In China, retail prices are rising at an 8.5% rate – the fastest in 12 years.

In Russia, prices are going up at a 14.39% rate.

In Vietnam, the consumer price inflation rate is running at 25%.

In Venezuela, the inflation rate is 29%.

And in Zimbabwe…well, Zimbabwe is another story altogether, with inflation going up so fast they can’t even measure it. Prices are said to be increasing at 160,000% to 200,000% per year. But who can tell? There’s nothing to buy.

Back in Asia…the region’s central banks had hoped that Milton Friedman was wrong. They had hoped that a worldwide economic slowdown would reduce domestic inflation rates. So, they left their lending rates low – considerably lower than the CPI – in order to keep their economies turning over. In Thailand, for example, the central bank lends at 3.25%, while consumer prices rise at more than 6%.

Sound familiar? The United States also keeps its key-lending rate well below the inflation rate – and for the same reason. The Fed lends at 2%. Inflation was last clocked running twice as fast.

We pause here in honest admiration for our fellow investors – the kind of admiration we feel for members of a bomb disposal unit, or a knife-thrower’s assistant. What are we to think? They are lending money to world’s biggest debtor – the U.S. government – for 10 years at 3.94%. That’s yesterday’s yield on the 10-year T-note. If nothing changes, they will get nothing for their trouble. If inflation rates rise (or just happen to be understated), or the dollar falls, the speculation will blow up in their faces.

But along comes Ben Bernanke, with an apparent change of brain. Now, says the captain of the Fed’s rapid response recession-fighting team, further inflation is unwelcome in the United States of America. Supposedly, these words alone took $5 off the global oil price.

But what really has changed? Can the U.S. central bank really begin fighting inflation in a serious way?

The feds have discovered the same two things that their Asian central banker colleagues have found out: that the globalization street goes both ways…and that Milton Friedman was right. Inflation is a monetary phenomenon, observed Friedman. When you increase the amount of money in circulation, ceteris paribus, prices are going to go up. That they didn’t go up much in the last 15 years is merely because there were important other trends going on – notably, globalization, which was driving down prices. But now, traffic on the Avenida de Globalization is going in the other direction. And just as it was very difficult to cause inflation while globalized markets were cutting prices, so is it very difficult to stop inflation when globalized markets are increasing them.

*** Can the Fed really begin fighting inflation? Ah, dear reader…do you see the cruel twist to the story?

While the Fed couldn’t seem to create inflation in those wonderful years of the Great Moderation…now, it probably can’t do much to stop it. The U.S. imports an Everest of stuff from overseas. And stuff made overseas is becoming more expensive. The Fed can raise rates to try to cool the U.S. economy and reduce the amount of stuff Americans buy. But those darned Asians and Europeans can still buy more, and prices can still go up.

Besides, any further ‘cooling’ of the U.S. economy is risky. It could freeze up.

The crisis is said to be over on Wall Street. But the Financial Times says new IPOs are being taken off the schedule…short action on Lehman Bros. is at a record level (speculators are betting that the company is going down) and Moody’s says it might downgrade credit ratings for MBIA and Ambac.

The money just isn’t flowing as fluidly in Manhattan as it used to. An AP story tells us that apartment sales were off 21% in the first quarter. And over on Long Island, where the Wall Streeters have their weekend homes, lenders are said to cutting off home equity lines.

In the center of the country, bankruptcy filings are up 27% in Illinois. And out in Las Vegas, the mortgage fraud capital of the world, a $5 billion casino project has just been cancelled.

And this just in – California is officially suffering a drought.

Under these conditions, we’d expect Ben Bernanke to make some gestures toward protecting the dollar and reducing inflation. But we’d also expect that most of the air coming from the Fed will be hot, not cold.

“The Fed seems to be trying to create a situation whereby they are seen to be fighting inflation, simply by not lowering rates any further,” says MoneyMorning. “This is because, while the Fed may have no interest in fighting inflation, they have a big interest in fighting what they call ‘inflationary expectations’. In other words, they are more interested in fighting people’s perception of the problem, rather than the problem itself.

As noted, Bernanke’s words gave a big boost to the buck. The weak U.S. currency has “contributed to the unwelcome rise in import prices and consumer-price inflation,” Bernanke told an international bankers forum.

The Fed is “attentive to the implications of changes in the value of the dollar for inflation and inflation expectations, and will continue to formulate policy to guard against risks” to price stability and sustainable growth, Bernanke said.

“Bernanke’s defense was about as strong as he could make it, given the U.S. policy of letting only the U.S. Treasury Secretary speak about matters concerning the dollar,” said Tony Crescenzi, chief bond market strategist at Miller Tabak & Co.

However, as Peter Schiff, president of Euro Pacific Capital, points out, only imposing sharp interest-rate hikes and curbing the rate of growth in the money supply will strengthen the dollar and cut inflation. And those could kill off any economic recovery.

That leaves the Fed to walk the tightrope between the rock and the hard place. Some observers were speculating that the tough talk could be followed with Washington intervening in currency markets by buying dollars and selling other currency, a prospect one analyst believes could happen as early as today.

Source: Bernanke Talk of Inflation Vigilance Supports Dollar – Fed Teetering on the Tightrope

Speaking via satellite at the International Monetary Conference in Barcelona, Spain, Bernanke said the Fed is working with the Treasury to “carefully monitor developments in foreign exchange markets.” The Fed Chair said he was aware the effect of the dollar’s decline on inflation and price expectations, Bloomberg News reported.

Also, interest rates are currently “well positioned” to promote both growth and stable prices, he added.

“I can’t recall such a strong defense of the dollar from a Fed chairman,” Sophia Drossos, a currency strategist at Morgan Stanley (MS) who used to work at the New York Fed, where she helped manage the central bank’s foreign-exchange holdings, told Bloomberg. “The Fed is putting its marker down in letting the market know that a weaker dollar would be detrimental.”

Ordinarily, the state of the greenback would fall under the Treasury’s watchful eye, but Bernanke’s comments show the Fed chief is aware of the effect the aggressive rate-slashing campaign of the past several months has had on global currencies. The dollar has dropped 16% against the euro, driving up the cost of dollar-denominated commodities such as oil.

“The challenges that our economy has faced over the past year or so have generated some downward pressures on the foreign exchange value of the dollar, which have contributed to the unwelcome rise in import prices and consumer price inflation,” Bernanke said.

He went on to acknowledge the Fed’s commitment to “ensuring that the dollar remains a strong and stable currency.”

The comments from the Fed chairman gave an immediate boost to the dollar, as it climbed to $1.545 against the euro and commanded 105.3 against the yen in mid-afternoon trading.

Analysts, as well as Fed futures, are pointing to a Fed on pause at the June meeting of the Federal Open Market Committee (FOMC). It is expected the FOMC will vote to hold rates steady, especially in light of the minutes of the April meeting, which revealed the last vote to reduce the Fed Funds rate 25 basis points was a close call for many.

At least one Fed member has gone on record as being against further cuts. Dallas Fed President Richard W. Fisher is the only FOMC policymaker to “dissent” three times on prior votes to lower the central bank’s key interest rate. Fisher has gone so far as to suggest holding rates steady may not be enough to fight current price pressures.

“If inflationary developments and, more important, inflation expectations continue to worsen, I would expect a change of course in monetary policy to occur sooner rather than later, even in the face of an anemic” U.S. economy, Fisher said during a speech in San Francisco last week.

Source: Fed Chair Comments Boost Greenback

French President Nicolas Sarkozy said on Tuesday the European Union should consider capping sales taxes on fuel products if oil prices rose further but his proposal got short shrift from Brussels. Sarkozy also suggested siphoning off extra revenues from sales taxes on petrol to create a fund for professionals, such as fishermen protesting about the price of fuel, who are hardest hit by the jump in energy prices.

“Oil has gone up 60% in 6 months putting big pressure on US household budgets,” says Bill Bonner in The Daily Reckoning.

“Now, instead of taking the hint – that it’s time to go in the other direction, by raising rates to head off rising prices – speculators think Ben Bernanke will continue battling deflation with further rate cuts. Maybe, maybe not… but our guess is that it doesn’t matter.

“Even if the Fed raises rates, it is unlikely to raise them enough to block the consumer price inflation already in the pipeline.”

The biggest laugh The Mogambo Guru has had all week was from Bloomberg.com reporting that “European consumers are ‘suffering as surging food and energy prices erode the value of their wages’, finance officials said.” The article continues that this is “urging governments to boost spending to help the poorest deal with the fastest inflation in 16 years.”

“Consumers are suffering because the stupid European governments boosted spending for a decade or more, the money financed by debt, and it is all of this spending that has made the purchasing power of the euro to fall,” says Mogambo. “And now the governments are going to boost spending some more Hahaha!”

Yesterday, markets were closed in both the US and Britain. Still, here at the Daily Reckoning’s mobile command post, we continued our lonely vigil. What are we waiting for? What are we watching for?

Ah, dear reader…just a little dignity, a little grace, a little courage and beauty. That’s all we ask. Can we find it on Wall Street? In Washington? In politics or economics? We hope so, because that’s all we have to work with here at the Daily Reckoning.

Oil went up yesterday. Asian markets fell – with Japan taking its biggest hit in 6 weeks. And the dollar fell. Speculators are beginning to bet that the Fed will cut rates for an 8th time; that’s the world on the street. As we predicted, the first 7 cuts have done wonders for the prices of oil, gold and commodities…but little for the real economy. Oil has gone up 60% in 6 months…putting big pressure on US household budgets. Now, instead of taking the hint – that it’s time to go in the other direction, by raising rates to head off rising prices – speculators think Ben Bernanke will continue battling deflation with further rate cuts. Maybe, maybe not…but our guess is that it doesn’t matter. Even if the Fed raises rates, it is unlikely to raise them enough to block the consumer price inflation already in the pipeline.

In economic theory, the supply of money is the key to prices. Prices should remain more or less stable when the supply of money increases at the same rate as the supply of goods and services. But in the last 15 years, the US money supply increased about twice as fast as GDP. The surprising thing was that prices didn’t rise. That was the period known as the Great Moderation. Food prices only increased at a 2.5% annual rate…even though money supply, MZM, was going up at nearly 9%.

We have given our opinion as to why consumer prices did not go up. We guessed, too, that those trends that labored so hard to hold them down have now walked off the job. Prices now seem to be adjusting to a higher money supply, with food up 4% last year, officially. Unofficially and anecdotally, consumer prices are rising at about 10% per year.

But while consumer prices were stable during that 15 year period…asset prices frequently went into bubble territory. And now, we await the Final Bubble, dear reader…about which we will have more to say later in the week.

In the meantime, the winner of the Enron Prize, and former head man at the Fed, Alan Greenspan, is in the news this morning. The Financial Times reports that he believes “there still greater than 50% probability of recession.”

Warren Buffett, on the other hand, says recession is already a fact of life. And he says it will be “deeper and longer that people expect.”

The old timer’s definition of a recession was ‘when your neighbor loses his job.’ When you lose your own job, it’s a depression. How many people have lost their jobs in this downturn? Well, for the answer to that question we look to the same people who give us the official inflation numbers – the apparatchiks at the U.S. Labor Department. Therein, of course, hangs a tale…and we will let Dana Samuelson of Danagold tell it:

” The average person judges a recession mainly on employment. If jobs are available, then the economy is holding up. If jobs are scarce, the economy is poor. By that standard, the economy is really struggling, with payrolls down in each of the first four months of the year. But the headline figures, again, don’t reflect the lived reality of Americans. At 5.0% in April, down from 5.1% in March, the current BLS unemployment rate is relatively low by historical standards. Yet the number of jobless Americans of prime working age, that is, men aged 24 to 54, is historically high at 13.1%. Most of these people don’t qualify as unemployed but they are nonetheless out of work.

“Why don’t these would-be workers show up in the headline statistics? Mainly because the government’s definition of the unemployed includes only people who do not have a job, have actively looked for work in the four weeks preceding the survey, and are currently available for work. But it excludes the self-employed, 1099 workers who can’t get enough contracts, those working part-time or on commission only, and the under-employed (like real estate agents waiting tables or mortgage brokers bagging groceries). It also doesn’t count those who’ve given up looking for work altogether—a category known as “discouraged workers,” defined as persons not currently looking for work specifically because they believe there aren’t any jobs available for them. Some analysts say this particular group of jobless Americans—who believe their prospects for finding a job are getting ever dimmer, yet who don’t figure in the computation of the unemployment rate—represent the nation’s dire job situation. According to John Williams’ Shadow Government Statistics , the primary source for unbiased economic data, if adjusted for “discouraged workers,” the actual unemployment figure for April rose to 13.1%, up from 13.0% in March. Now that’s recessionary!”

Real inflation at 10%? Real unemployment at 13%? Maybe. But we have not quite seen the fall off in consumer spending that these numbers suggest…

…stay tuned.

More thoughts…

*** Since we have so little market news to report to you, we will take our quest for truth and beauty to other areas: global warming and the children of Israel for example. Both are touchy issues. In Europe, if you say you are skeptical of global warming, they look at you like a lion at a Christian. In America, you can say almost any nasty thing you want against Arabs…but if you are planning to run for public office, don’t dare to criticize Israel.

We begin by telling a story. A Jewish colleague told us yesterday.

“You really have to be careful to maintain good relations with your neighbors. That’s something my family discovered in WWII. My father was just a little boy in Paris when the war broke out…and then the French surrendered. You know, France was divided in two…there was the zone occupied by the Nazis and there was the unoccupied zone to the South. Since they were Jewish, they figured they’d sneak across the line and once they got to the unoccupied zone, they would just keep a low profile, not mention to anyone that they were Jews, and they would be safe. But my father was only a kid. And when they put him in the local school, in the little town they were staying in, the first thing he did was tell everyone that he was a Jew. So everyone knew why they were there. And then, when the Germans took over all of France anyone in the village could have denounced them and get them sent to a concentration camp. But no one did.”

This recalled another story. A disagreeable French woman, then in her ‘70s, once told us that during the war she had been the directress of a boarding school for little children. It was a catholic boarding school. But it was wartime and a few of the children were Jewish, sent there by their parents in the hopes that they would be safe.