THE RUSTY OLD SAW GOES, ARE MADE TO BE BROKEN. So, incorrigibly
jingoistic as always, and fully aware it still has a ways to go, we
have every confidence that the U.S.A. can ultimately break
Zimbabwe's record, set only this year, of an annual inflation rate
please. We know that, at least by the official count, our own
inflation rate remains in single digits. But, if a rapidly
undeveloping country like Zimbabwe can lift its rate nearly 35,000
percentage points in a single month, our vaunted American know-how
with a little concentrated effort can surely top that.
such natural advantages as a world of experience in running up debt
and living far, far beyond our means, we're blessed with an
administration and a Congress dedicated to the debasement of the
currency, a Federal Reserve manifestly willing to pay any price for
even a modicum of fleeting growth and vast legions of financial
operators of great ingenuity and little conscience who can turn
something into nothing.
prerequisite to making a serious run for the No. 1 spot is to drop
pronto the fiction of "core" inflation. A handy if crude
device aimed at befuddling the masses here at home by craftily
eliminating any commodity whose price is rising from our yardsticks
of inflation, it's totally counter-productive if we truly intend to
happens, the time is particularly ripe for us to get serious about
participating in this mug's game (or should be say, more aptly, this
Mugabe's game?). For it's an election year and things are getting
deliciously nastier. You can tell that from the rude sound of halos
being knocked off candidates' fair heads.
McCain, the Republican hopeful, not the least of whose claims to
political fame is that he's Mr. Clean, is accused of playing footsie
with lobbyists eager to curry his fancy and abuse his good name.
Sen. Obama has achieved the front-running position among the
Democrats by sedulously eschewing substance in favor of
pulse-pounding rhetoric, featuring, it emerges, some particularly
stirring oratorical flourishes he "borrowed," unbeknownst
to the audience and without a by-your-leave from the involuntary
that each of the senators, duly accompanied by adoring loyal spouse,
will follow the precedent set by Hillary and Bill Clinton in 1992
and appear on 60 Minutes to forthrightly -- or at least
solemnly -- deny the allegations of doing anything untoward and
earnestly vow never to do it again.
program's end, as the cameras zero in on the beatific couple, there
won't be a dry eye in the nation, especially if it's one of those
days when the wind is kicking up a storm of dust particles. In any
event, because this is an election year, being called to account for
questionable past behavior provides further incentive to adhere to
protocol that requires candidates for such high office to shed even
the faintest suspicion of fiscal restraint.
advice to Zimbabwe is to revel while you can in setting a new
all-time global high in inflation. For as the immortal Pogo would
warn, the future is gaining on you, and the future is us.
WE'D BE REMISS IF WE FAILED TO TAKE DUE NOTE of the fact
there is a different view of inflation abroad among a lot of savvy
folks. We'd dearly love to cheer you up and break the mist of gloom
that seems to envelop these columns by reporting they don't see it
as the prime threat to the economy or the financial markets. Which
is, this eminent company-which includes the likes of Albert Edwards,
now of Société Générale (clear evidence
that the French bank, despite getting swindled out of $7 billion,
can't be all bad)-believes the looming monster menace is not
inflation, but its opposite number, deflation.
really boils down to choosing your poison, which even we must admit,
unless you're a Borgia, is not an especially merry enterprise. But
don't despair, our erudite old buddy and Roundtable member Marc
Faber posits that inflation and deflation can coexist (which strikes
us as the worst of all possible worlds). As to our own view, we
think it's one of those rare instances when both sides of the
argument have it right, and our expectation is for a ravaging
inflation to be followed by a debilitating deflation.
he makes clear in his latest Gloom, Boom and Doom epistle, is
bearish on the outlook for both our economy and stock market (not,
to be sure, an unfamiliar stance for him). He points out that since
financial institutions have provided or facilitated the excessive
credit growth that has fueled the big bull markets in equities in
recent years, you would logically assume that strategists, money
managers and other such investment luminaries "would get a
wake-up call" when the stock prices of those financial
institutions, which got so fat, rich and sassy from their dubious
only illustrates Marc's one fault: Despite his having journeyed to
the far corners of the earth and seen everything, he's still too
generous and forgiving of human frailty. What the diehard bulls
can't grasp, he sighs, is that the credit bubble has burst and the
deep wounds being inflicted on the financial sector portend an
extended and painful period of weakness both for it and the general
he's a bit more pessimistic than even that downbeat assessment
suggests. For his reading of financial history is that "the
bursting of a bubble has always been a signal that the economics of
a region or a sector had changed, or were about to change, for a
very long time, if not permanently."
follows, then, that the radically changed environment brought about
by the bursting of the credit bubble, one of the true mothers of all
bubbles, is likely to result in a much more subdued global economy.
And not just for a year, but a long time, possibly a very long time.
OF CREDIT, AS WE JUST WERE, this seems a timely occasion to give
some to Stephanie Pomboy. Stephanie, as you're probably aware since
she's no stranger to this space, puts out MacroMavens, a weekly
commentary on the economy and the markets, enlivened by her
sparkling prose and acid wit that adorn a wealth of insight and
The occasion is the sixth anniversary of MacroMavens. If you've just
come in, Stephanie is unorthodoxy personified, wonderfully adept at
puncturing myths and popping bubbles with pointed fact, whether
originating in Wall Street, Washington or other louche locales. The
credit crisis has provided a great stomping ground for her from its
incipiency through the seizing up of the SWAPS market; invariably,
she's a step or two ahead of the actual disaster.
grandiose plans to prop up the sinking homeowner appear absurd to
her in the face of the obvious question: With $6 trillion of the $8
trillion in residential mortgage debt securitized, how do you get a
lender to renegotiate a mortgage when you don't know who the lender
interesting in her latest screed, we thought, were her candidates
for the next serious casualties of the credit collapse, credit cards
and commercial real estate. For a spell now, Stephanie has been
predicting that to make up the void in home-equity lending,
consumers will shift to plastic, foreshadowing a bumper crop of
credit-card delinquencies. And she observes that "while
smiley-faced pundits laud 'still low' delinquency rates," such
figures conceal the fact that explosive growth in credit-card
borrowing has been accompanied by a "massive increase" in
dollar amount of delinquencies.
terrible accident waiting to happen, Stephanie cautions, is
commercial real estate. Eager to make up for lost residential
mortgage volume, banks have been pouring dough hand over first into
the commercial real-estate market, creating, naturally, a huge and
swiftly inflating bubble. Such profligate lending has swollen
commercial real-estate loans to 14% of all bank loans, the largest
slice since data first was collected 13 years ago.
delinquencies are starting to rise apace with the burgeoning loans
and have reached their highest level in a decade. The problem is a
dead certainty to get worse, as troubles in Wall Street spill over
into the commercial real estate market. Stephanie cites a report by
CB Richard Ellis that 42% of commercial real estate in lower
Manhattan and 28% in midtown is tied to the financial sector.
on the frantic scurrying about in Washington to come up with some
palliatives for distressed homeowners (especially those who vote)
and stretched-to-the-limit lenders (especially those who chip into
campaign coffers) Stephanie views the efforts with something between
wonder and mild incredulity.
to the conventional wisdom and the traditional lack of any kind of
wisdom in Washington, she avers, "The current credit bust is
not simply a function of reckless real-estate lending -- residential
and commercial. It is a function of interest rate 'resets' across
the entire U.S. economy."
aren't the "only ones who haplessly heeded Greenspan's call to
ARMS." Everyone, she explains, switched to borrowing short.
Municipalities, for example, as we've just had unhappy reason to
discover. And so did Corporate America with a vengeance:
Floating-rate paper now accounts for 54% of its overall issuance, up
from 26% in 2002, and a tidy $565 billion in corporate bonds have to
be rolled over this year, 34% greater than last year.
face, what's so funny?