It was here in Manchester, England, that Europeans stole a march on
the rest of the world. The Industrial Revolution made it possible for
people to produce more wealth, more quickly.
But now, two things are happening:
First, the planet seems to be running low on easily obtainable energy.
Cheap oil fired the furnaces, filled the pistons, and greased the
gears of the whole machine. Now, oil is not so cheap... In fact, it
hit a new record high last week.
Second, the non-Europeans have caught on to the magic of the
Industrial Revolution. They're building newer and better factories -
and staffing them with cheaper, harder working labor. What's more,
they're competing with the West for the raw materials to feed their
factories. And, perhaps most im****tant, they've got money - mountains
of it. While Europeans - led by Anglo-Saxons - squandered their wealth
on pointless wars and frivolous spending, the non-Europeans have been
saving and investing. The Chinese, for example, are said to save more
than 25% of their incomes.
And now, a kind of financial war seems to have broken out. We have
opined that this is not merely a war between inflation and
deflation...but a war of Total Liquidation...in which the huge debts
built up during the expansion phase of the credit cycle - roughly,
1980-2007 - mostly in the West, especially in America and Britain,
will be written down, written off, and inflated away.
Neither inflation nor deflation will be a clear winner, in other
words. Instead, like WWI, both will do damage...and in the end, very
few people will be better off. Some possible exceptions - gold miners,
commodity producers, and emerging markets.
No one will benefit much from deflation. But commodities and gold will
reap some gain from inflation.
On Friday, for example, we saw both in action. The Dow tumbled 256
points - after GE proved that it could was vulnerable too. Its shares
lost 13% of their value in a single day. What provoked the run on GE
was disappointing earnings - particularly, you guessed it, in its
finance division.
Finance was the big winner in the expansion of 2002-2007; it will be
the big loser in the contraction phase.
While deflation was battering investors' wealth...inflation was aiming
its wallops at consumers' budgets. Rice and oil hit record highs. Corn
and tin too.
Interestingly, $6 corn is too much for the ethanol business. The
industry was a fraud from the get-go, requiring taxpayers' money to
justify turning corn into fuel. But now, even with subsidies, corn is
too expensive and the ethanol producers are going bust.
They deserved it. But pity the poor people who have to eat. A handy
chart on this weekend's edition of El Pais shows what has happened to
basic food prices. In the last two years, corn, wheat and rice have
all more than doubled. And get this, in 2007, stockpiles of these
grains fell to their lowest level in 25 years.
No wonder there are food riots breaking out all over the place.
But let's return to our big picture view.
Inflation and deflation only appear to be "at war" with one another.
Sometimes inflation has the upper hand. Sometimes, deflation. But over
the next few years they will make common cause in the destruction of
wealth in America, Britain and a few other economies.
Why do we single out the Anglo-Saxon economies? Because they were the
ones that most feverishly embraced what became known as the "Anglo-
Saxon model" of economic growth, what our friend Kurt Richeb=E4cher used
to call "late, degenerate capitalism," marked by a freewheeling
financial industry, widespread securitization of debt, and overall
debt at breathtaking levels.
One awkward feature of this model was the fact that the rich got a lot
richer...while the poor stayed about where they were.
The Financial Times explains:
"After decades of 'financialisation' in the US and other Anglophone
economies, whereby financial services have increased their share of
gross domestic product, banks are being bailed out - using public
money...
"From a political perspective the notable feature of the
inegalitarian, free-market era that began in the 1980s is how little
backlash there has been against the stagnation of ordinary people's
earnings in such a large ****tion of the developed world
economy. ...This is potentially dangerous territory...
"Between 1979 and 2005 the pre-tax income for the poorest households
grew by 1.3 per cent a year, middle incomes before tax grew by less
than 1 per cent a year, while those of households in the top 1 per
cent grew by 200 per cent pre-tax and, more strikingly, 228 per cent
post-tax.
"The result of this lopsided distribution of income growth was that by
2005 the average after-tax income for the bottom fifth of households
was $15,300, for the middle fifth $50,200 and for the top 1 per cent
just over $1m.
"Looked at from another perspective, in 1979 the post-tax income of
the top 1 per cent was 8 times higher than that of middle income
families and 23 times higher than the lowest fifth. By 2005 those
ratios grew respectively to 21 and 70. The process reached its extreme
point with US President George W. Bush's tax cuts. Emmanuel Saez of
the University of California at Berkeley estimates that in the
economic expansion of 2002-06 the plutocratic top 1 per cent captured
almost three-quarters of income growth.
"Figures for wealth, derived from the Federal Reserve Board's Survey
of Consumer Finances, are less up-to-date but the picture is similar.
The share of US wealth owned by the top 1 per cent of households rose
steadily from 20 per cent in 1976 to 38 per cent in 1998."
The backlash has already begun - just listen to America's presidential
candidates. They're all bidding for the resentful voter - complaining
about high executive salaries, kvetching about the Bush
Administration's bail out of the banks, and whining about tax cuts for
the rich. They all want to soak the rich...and bailout the 'little
guy.'
But they can stop worrying. Wealth is self-correcting. Economic
success is self-healing. In this new downturn, the rich will lose more
than the poor - simply because they have more to lose. They were the
big gainers from the Industrial Revolution...and then the late,
degenerate financialization stage of capitalism. They will probably be
its biggest losers too.
*** Talk about the rich getting poorer! Just look what's happening to
those million-dollar McMansions out in the desert.
"Pity the poor homeowner in Las Vegas," writes our colleague Byron
King, "with 12-inch tiles on the floor instead of the de rigueur 20-
inch tiles. Or thin granite veneer near the bathtub instead of granite
slab. These manses are now obsolete, and perhaps unsaleable to any but
the least hip. Really, can you spell 'Loser?' Dude, where's your
seeing-eye dog?"
Byron is referring to the speed with which a rich man's house in Las
Vegas becomes a not-so-rich man's house... The hot desert sun seems to
do to housing fa****ons about the same thing it does to lettuce. Crisp
new places wilt after only a few years. Then, you can barely give them
away. The rich don't want them because they're no longer cool And the
poor can't afford them. What can you do? Blow them up?
The LA Times ads details:
"They blow up aging casinos in this town. Now, some are wondering what
to do about yesterday's desert dream homes.
"Take the foreclosed million-dollar house realty agent Michael Antos
recently showed. Please.
"To the untrained eye, the four-bedroom, five-bath retreat may appear
top-drawer, ****mmering with granite and marble throughout, and with
posh touches like a pool with a sandy beach entry.
"But Antos pointed out that the house was showing its age. After all,
it was built in 2000. In Vegas, that makes it as dated as a coin-
operated slot machine.
"The chandelier? Plastic. The granite surrounding the upstairs bathtub
is tile, not slab. And those polished travertine tiles in the entryway
may look luxurious, but at 12 inches by 12 inches, they just won't cut
it today.
"Now you've gotta have at least 20 by 20 to sell something at this
price," Antos explained.
"The housing slump has fattened the inventory of unsold homes
throughout the country, and a staggering 51% of them in Las Vegas are
vacant. But there's another twist to the story here: a glut of glitzy
homes.
"About 1,000 houses are listed for sale in Las Vegas for $1 million or
higher, more than 600 of them built since 2004. But unless they've
been constructed in the last year or two, the properties are
considered out-of-date, making them all that more difficult to sell,
real estate agents say."
*** The Olympic torch went through Buenos Aires on Friday. People
began assembling on the sidewalk about 3PM...small groups at first.
Then the crowds grew. By 3:30 the crowds and the traffic were so thick
we wondered how the torch would get through.
And then the police showed up - dozens of motorcycles and squad
cars...then, whole phalanxes...each one driving the crowds back
further...and directing the cars onto side streets. It seemed
disorganized. Kids played in the streets. Police didn't seem to know
which direction to push back the crowds.
About 5 minutes later, we heard the honking of horns...and went back
out on the balcony. The parade took place on the Ave. 9 de Julio - the
widest street in the world, which happens to be right outside our
South American office. From down the street came a group of runners
dressed in red...flanked by what appeared to be volunteers of all
sorts, running along with them. Then came buses - many of them flying
Chinese flags...and a few Chinese on bicycles... And an open bus full
of people with cameras. And then, finally, came a group of runners
with a young girl in the middle of them; she was carrying the Olympic
torch. The crowd cheered. More red flags. And then more buses, more
runners, more police motorcycles, and more Chinese people.
Then, gradually, the crowds dispersed like a bad smell. And then it
started raining.
Until tomorrow,
Bill Bonner
The Daily Reckoning
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