May 02, 2006

Is it Getting Weimar in Here?

You can't help but look around these days and think that things are changing rapidly for the U.S. Dollar. Of course you have to know where to look and what to look for - most people don't have the foggiest idea on either count.

But now most people do know that last year's $3 plus gas prices were not just a hurricane induced aberation. Most people now realize that gas prices have risen dramatically and they are reminded of that fact once every week or so.

Though a mild winter did leave the impression that the global energy picture has not yet reached crisis stage, the increasing talk of $4 or $5 gasoline and $100 oil when combined with their personal experience at the pump has to be making people think a little bit about the value of the dollar.

The buzz of activity from elected officials undoubtedly soothes some nerves, but all the rising prices taken together - energy, housing, health care, transportation, tuition, and others - are beginning to have an effect that is contrary to the intent of the designers of the Bureau of Labor Statistics inflation report.

The inflation reporting methodology may need to be reworked once again because recently, inflation again appears to be overstated, or more accurately, the number being reported is higher than those in power would like it to be.

This seems to be the real inflation fighting work done by a government that has little choice other than to debase their currency in an attempt to forestall as long as possible the inevitable conclusion of this latest experiment with fiat money.

Unrestricted creation of money and credit, the real "mother's milk" of economic growth, always ends badly.

That was the point of the gold standard, however flawed that it was - to restrict the creation of money. Let money creation loose from the shackles of gold backing and combine with fractional reserve banking and Wall Street financial products, and there are virtually no limits to the amount of money and credit that can be created.

But, the funny thing about fiat money is that up until the point that the wheels are about to fall off, everything seems to be going along swimmingly.

Look at stock markets these days - the Dow Jones Industrial Average is getting ready to poke through the 2000 high and many foreign stock exchanges are setting new highs daily.

Is this what it felt like in the early days of the Weimar Inflation?

Before things really got out of hand?

Alarm Bells

Gold and silver should be setting off alarm bells around the world, as their rise since the hurricanes struck the Gulf Coast last year has been no less than meteoric. And there are no signs yet of any slow down.

Since last summer, gold has risen by 60 percent and silver over 100 percent.

Many old-timers have taken note of this development, but much of the rest of the world, including nearly all economists and financial news TV pundits, view this condition as a sort of freak occurrence - something completely and totally irrelevant to today's economy. An oddity.

The demand for commodities can be explained by robust global growth, but the flight away from fiat money is not something that is covered in the curriculum for economics majors these days.

Economists boldly assert that they, and not the market forces that determine relative value, are in control. Gold and silver are simply in a speculative bubble, an unnecessary inflation hedge, or an unneeded safe harbor during rising global tensions - that's the story.

While the economic statistics show a healthy economy with robust growth and benign inflation, the reality is far from this rosy scenario, and one by one, people will begin to understand the fundamental problems of this economy as it hits them time and again in their pocket book.

Obviously, we are nowhere near the condition of the Weimar Republic, where, at the height of the inflation, postage stamps had a face value of fifty billion marks and one poor old lady was assaulted as she transported a wheelbarrow full of marks to the baker to buy a loaf of bread.

The perpetrator dumped the marks out onto the sidewalk and absconded with the wheelbarrow.

In the months and years, ahead, when economic weakness is treated with the same U.S. Dollar remedy that has worked so many times in the past and the cure is found to no longer works its magic, that's when people will begin to realize what is happening.

That time may be sooner than most people think.

When the antidote must be applied in stronger and stronger doses despite the repercussions, despite the impact that these actions have on prices, that's when things will really heat up.

Until then, it will just feel a little Weimar.