WEBVTT

NOTE Inflation's Winners and Losers

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I want to take you back to September of 2008.

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It wasn't all that long ago, it was just about three years ago.

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And, you know, it appeared that the financial world was going to come to an end.

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Remember, Lehman Brothers, they filed for bankruptcy.

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The ones bullish on America, if you remember those ads,

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Merrill Lynch, they were not so bullish when they fell into the arms of Bank of America.

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And you may remember a company called AIG. AIG all of a sudden had to get out their tin cup and look for a quick $40 billion from the Federal Reserve to stay in business.

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So that's what was going on in September of 2008. And the nation's M2 money supply was an unadjusted $7.8 trillion at that point.

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And that was the month that Ben Bernanke, Tim Geithner, and Hank Paulson, they were working weekends, every weekend, trying to patch up their friends on Wall Street.

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Now meanwhile, on Main Street, things didn't look that bad. When you look at the government's at least narrowest form of measurement of unemployment, it was only 6.1 percent.

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And that was despite the economy losing 600,000 jobs the previous 8 months.

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Home values had fallen some, 7%, but hardly anybody was underwater at that point.

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So things really weren't that bad.

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But the Fed was panicking because they weren't really worried about Main Street.

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They were worried about Wall Street.

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On September 10th, 2008, the Fed's balance sheet totaled $927 billion.

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Sounds like a lot of money, but by October 1st, just three weeks later, their balance

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sheet had grown to $1.5 trillion.

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And on New Year's Eve, the Fed rang in the New Year with $2.2 trillion worth of assets.

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And all of this expansion by the Federal Reserve was so that you and I could go to our ATM

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machines and make sure that our money would come out on command.

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That's what we were told, remember, over and over and over again in the press.

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We want to make sure that people's money comes out of their ATM machine on command.

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Well, you know, this all worked out so well that Ben Bernanke was voted Times Person of

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the Year for 2009.

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And the reason that he was is that he, quote, provided creative leadership that helped ensure

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Martin Greenwald wrote that for time.

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Now I wonder if Greenwald shouldn't be careful what he wishes for, because two years on,

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he probably didn't imagine that the weakness that Bernanke supposedly was so great at creating

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would continue on indefinitely. The M2 money supply has marched steadily higher. It's gone

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higher by 1.7 trillion since that month in 2008, in the fall, to 9.5 trillion dollars

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is where M2 stands currently. 1.7 trillion in three years. Now what does that mean? These

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In September of 1981, the total M2 money supply was $1.7 trillion.

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So imagine, just 30 years ago, total M2 money supply, $1.7 trillion.

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Just in the last three years, the Fed has created $1.7 trillion.

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And by the way, lately, we haven't heard much about monetary growth, but in the last

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three months, the annual growth of M2 is nearly 24 percent.

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So money is starting to be created.

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Now how is this important and how does it relate to what I'm talking about today?

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Well, money isn't sprinkled from the sky by Ben Bernanke and Milton Friedman's helicopters

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that we've heard a lot about where they just, you know, money might come be floating down

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and if you're in the right place at the right time out here on Bourbon Street, drink in

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your hand and here comes some money.

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That's not really the way it works.

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Money supply increases are created through the commercial banking system with the help

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of the Federal Reserve.

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So they essentially can direct the money where they want it to go.

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Those who create the money first benefit at the expense of those who get it last, because

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people who get it first spend it on goods and services, the price of those goods and

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services rise, that increased demand, and people who get the money last then have to

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pay those higher prices.

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The fiat dollar is an elite system.

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Jim Grant, from Grant's Interest Rate Observer, told the Wall Street Journal recently.

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And Wall Street is its supporting interest group.

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Those nimble, market savvy, plugged-in folks know how to shuffle assets and exploit cheap

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funding from the Fed to lever up their profits and soften the downside, unquote.

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So after plunging to a very devilish 666 on the S&P in March of 2009, the stock market

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has recovered quite nicely since then, and that same index has reached 1,350 before running

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into some volatility here late in the year.

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Wall Street, by the way, 2009, that very tough year, they paid out $27.6 billion in bonuses.

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The next year, in 2010, they paid out $20.8 billion in bonuses.

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Mergers and acquisitions are all the rage.

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Leveraged buyouts, you're starting to see a few of those.

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And in fact, there's even a demand for trophy office buildings.

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An index for commercial property values by Green Street advisors,

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which is tilted toward high-end properties,

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has risen more than 45% from its 2009 lows. In fact, it's only 10% below its all-time highs.

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It's not just buildings that are on fire. Even the market for very fertile farm ground in Iowa is doing very well.

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120 acres just changed hands on October 4th for the highest price ever paid in Northeast

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Iowa for farmland at $16,750 per acre.

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Price of land to grow corn on is up nearly 13% just in the last six months.

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Now, that's at the same time that the price of corn, which has actually grown on that

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land, has dropped from $8 a bushel to about $6.50 a bushel.

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As farmland auctioneer Del Beyer says, sometimes the math doesn't make sense in these deals.

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Speculative money, it's cheap money running into farmland, just like it's running into

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everything else.

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But this is the way it always works.

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More money out of nowhere means more bubbles, more booms, more busts.

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In fact, we could go back to John Law's Mississippi bubble.

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As banknotes were created, shares of the Mississippi Company were floated.

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In fact, so many banknotes were issued, the printers and the clerks couldn't even keep

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up.

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But speculators like Richard Cantion made fortunes as the price of the Mississippi Company

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and he actually went up 20 times and then of course crashed.

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Cantillon was among the first to buy in and he was about the first to cash out.

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He was a friend of laws and it's thought that he had a little insider information going

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in, bought his shares cheap and later he benefited again with information that his brother provided.

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Bernard Cantillon actually supervised the prospecting party that had sailed to Louisiana.

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If you remember the Mississippi Company, that was one of their primary assets, was anything

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in Louisiana in the New World.

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And law's propaganda had said there's a land of riches and gold, and that was the propaganda.

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Bernard Candion knew that instead when they found their way to Louisiana it was

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instead disease and hostile natives is what they found. So Candion relief

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realized that this bull mark was based on little more than smoke and mirrors and

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ever-increasing quantities of paper money. Now many others ran for the cover

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The number of silver as well. Vendors were not interested in taking paper, did so only at a discount.

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Livestock sellers would only take silver and gold. Price inflation was rampant.

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Prices rising 25% in just a matter of months. And in fact, the price of bread, very much a staple at that time, soared 300 to 400%.

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So while the speculators got rich, those who got out got very rich, the common person was just paying the price with higher prices.

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Now in Weimar, Germany, all of those in debt, all of those who knew how to speculate in the stock exchange,

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and all those who possessed foreign currency and could transfer money into material assets had a good chance to profit from an inflation.

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and those are the words of Bernd Wittig who wrote a book called Culture and

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Inflation in Weimar Germany and the German stock market we hear a lot about

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the inflation in Weimar Germany we don't hear a whole lot about the stock market

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at the time but the German stock market stood at 97 in January of 1919 by

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By January of 22, it was at 743, but by December, it actually rose to 89.81.

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So from 1914, 1922, the stock market rose 89 times during this hyperinflation.

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But would you have been better off in stocks or better off in the dollar, been better off

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in dollars?

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The dollar versus the German currency rose 1,525 times.

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Or you'd been better off in coal because it rose 1,250 times in that period of time.

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Weddig points out that the biggest debtor after World War I was the German government,

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which owed 154 Reichsmarks to its creditors.

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When the inflation ended November 15th, 1923, this enormous sum, adjusted for 1914 purchasing

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power, was worth only 15.4 finning.

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Essentially, virtually all the debt had been inflated away.

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And as he writes, the German state was probably the biggest winner in the inflation.

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Notice all those who had lent their money out of patriotic duty received only a fraction

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of their investment back, but they weren't the only winner.

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With cheap loans available to big businesses, large segments of the German industrial economy

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benefited as large firms were actually able to buy up small firms that were in trouble.

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It was like a takeover binge that we see currently.

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Through clever investment and ruthless speculation,

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a handful of businessmen profiteers

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created great industrial conglomerates

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within only a few years, writes Weddick.

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One observer called the five biggest industrialists

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the kings of inflation.

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In fact, Hugo Stein's The Richest

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The most powerful industrialist in Germany at the time justified inflation as a means

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of guaranteeing full employment.

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Same thing we hear out of the Fed right now.

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Not as something desirable, but simply as the only course open to a benevolent government.

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It was, he maintained, the only way whereby the life of the people could be sustained.

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Now after the peak, after the market peaked in late 1922, over a million Germans were

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actually speculating in stock market.

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And that's what happens in a hyperinflation, when you have inflation at all, people began

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to want to speculate instead of working hard.

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And they were engaged in speculation and with their dealings mainly through what was called

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called Winkelbankers, their back street operators who sprung up with the inflation, actually

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made their living entirely by trading foreign currency.

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And although they weren't members of any exchange, they actually played a significant part in

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and setting the exchange rates that were generated first in Berlin and then New York.

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At the end of July in 1923, German shares had presented themselves as a popular though

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unstable repository of wealth.

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But shareholders were actually a good deal poorer than what they thought they were.

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The fact that this impoverishment was actually largely veiled by these gigantic increases

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in their stock portfolios, but the fact is, even though their stocks were up, the price

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of every day necessities had gone up even faster.

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Now some got rich in the black market during this period, farmers profited actually from

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and Barter, and they were able to gain great wealth that way because they had real goods,

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they had real assets to trade with.

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A few years ago, of course, Wiemann Germany was back in the early 1900s, 1919, 1920, but

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just a few years ago we had a situation in Zimbabwe.

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We had negative real interest rates in Zimbabwe, and this caused the same thing to happen,

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for people to move their money from money market instruments to equity and then to buy

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up residential real estate.

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These pricing bubbles were exacerbated by the emergence of a growing class of speculators,

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according to the IMF, the access to bank loans at negative rates of real interest.

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In particular, the RBC subsidized credit scheme added liquidity to the financial system, helped

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to fuel the asset price bubbles as the low-cross resources had been used in part by exporters

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to buy shares on the Zimbabwe stock exchange or in real estate.

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Negative interest rates also encourage an attitude of buy now rather than wait, further contributing

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According to the Acceleration of Inflation, according to the IMF.

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It's hard to imagine that the Zimbabwe Stock Exchange was actually the best performing

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stock exchange in 2007, but a financial commentator, John Paul Koning, wrote at the time in April

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of 2007, the Zimbabwe Stock Exchange is the best performing stock exchange in the world

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with the key Zimbabwe industrials up some 595% since the beginning of the year.

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And in the last 12 months, the index has been up 12,000%.

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This jump in share prices is far an excess of increase in consumer prices.

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While the country is crumbling, the Zimbabwe and share speculator is keeping up much better

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The Central Banker, Gideon Gono, closed down the Zimbabwe Stock Exchange in November 2008.

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Unless there is more discipline and honor, the exchange will stay closed.

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I can't be bothered, he said.

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He didn't know when it would open.

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And what he did was he commissioned a study.

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Gono was a guy who wanted to blame everything from the weather to reparations to actually

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now the stock market for inflation.

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Printing money, he didn't think had anything to do with price increases.

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And so he had this study commissioned and the study came back unsurprisingly with the

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conclusion that argued, quote, that the stock market has traditionally been one of the drivers

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behind Zimbabwe's hyperinflation.

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So these days here in America, bankers have been kind of stingy in terms of lending to

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Real people and real businesses, total loans actually have been flat.

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But at the same time, bankers can't get enough of lending the U.S. government paper.

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In fact, they have bought $500 billion in Treasury securities and agency securities

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during the past two years.

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They've essentially turned around and done the government return the favor, so to speak,

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using the bailouts to help the government, albeit somewhat indirectly using money from

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the Fed.

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So bankers get money from the Fed and then they turn around and buy U.S. government securities.

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So with all this money rushing into stocks and real estate, especially government bonds,

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By the looks of it, none of it has found its way to Main Street, except in the form of

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higher prices.

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And I know a number of you in this room probably follow John Williams at shadowstats.com, who

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says that prices actually are increasing at over a 10% annual clip.

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And while the Fed's QEs, quantitative easings, were supposed to stimulate hiring, unemployment

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has actually soared during 2008 and 2009. Remember when I started the story, unemployment

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was 6%. It's gone to over 10% on that narrowest of measurements. But if you include the people

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who have given up looking for work or are just employed part-time, by the government's

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measure I think these people total about 17%. And actually Williams includes the people

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have dropped off the rolls and have just given up work, and by his numbers, counting unemployment

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the old-fashioned way, nearly one in four Americans is out of work.

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So we've had all this money, all this government, all this debt, and we still have one in four

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Americans out of work.

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Now Williams says consumer prices have roared upwards.

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The government says that there's been no inflation.

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In fact, there is no inflation from the second quarter, or the third quarter of 2008 to the

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third quarter of 2010.

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There's been absolutely no inflation.

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Prices haven't gone anywhere, unless you've actually been buying things.

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After two years of receiving no cost of living increase, those who draw Social Security will

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will finally get a little bump of 3.6% to their checks going forward in the next year.

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But of course, this is far below what actual prices have done. At the same time, a record

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number of Americans are drawing food stamps. Uncle Sam is the one putting food on the table

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for 46 million Americans. That's 15% of the population. Now this is no different, interestingly,

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than Weimar, Germany. Weimar, Germany, blue and white collar workers alike were ravaged

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by the inflation. Higher ranking civil servants lost two-thirds of their buying power. Lower

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level civil servants lost, or employees lost a quarter of theirs. Wettek writes that the

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The biggest losers in the Weimar inflation were those who had saved money or who depended

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on entitlement programs from the state.

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It's like today's social security.

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Inflation made these entitlements, which were not adjusted often enough to the general price

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increases, and these became essentially worthless.

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Professionals who saved money for their retirement and those who depended on rental income suffered

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as well due to tight rent control regulations, which insufficiently adjusted the rents you

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could charge to the inflationary price hikes.

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Now in America today, in terms of housing, that's the middle class's primary asset, right? It's their house.

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But for 28% of homeowners in the United States, that asset is now a liability.

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28% of the homeowners in America are underwater. They owe more than the house is worth.

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The folks at Zillow.com say that we get tired of telling the same grim story, but unfortunately,

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this is a story that needs to be told, is what their chief economist told Bloomberg.

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And if you believe Robert Schiller, who puts together the Case-Schiller index of home values,

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he believes home prices will fall another five to ten percent.

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So again, the middle class, their largest asset, is going to probably turn into a liability.

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So Bernanke's fix-it for all of this has been cheap money and more of it.

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But that policy has been called into question over and over and over by Austrians, as long

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ago as in a book called Capital in Production by Richard von Striegel.

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Striegel pointed out that the creditworthy will not be interested in borrowing in a crisis,

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but those industries forced to liquidate during the crisis, they're all too eager to borrow.

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And unfortunately the government these days wants to shovel money at failed industries

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to prop them up rather than having them go away.

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Striegel writes, however, satisfying this demand implies delaying the liquidation of

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and the crisis, lengthening and strengthening it, for it is essentially to this situation

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that a significant demand for credit by those who would like to work towards continuing

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the boom, that is, an unhealthy demand for credit exists along with a significantly reduced

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demand for new sound investments.

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Well, while times are tough for normal folks, life's pretty good for those on Wall Street.

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Well, alright, except if you're John Corzine and MF Global, it hasn't been a particularly

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good week for them.

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But for many people, it's been pretty decent on Wall Street.

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In fact, they had another birthday to celebrate.

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Wall Street is known for its big birthday celebrations.

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There's a hedge fund manager, Leon Black, celebrated his 60th recently.

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And he had a couple hundred of his closest friends out to his South Edmonton estate out

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on the ocean.

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And if you're going to throw a party, if you're going to go, go big, right?

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So he had Elton John play for an hour and a half, Greatest Hits, that cost a cool million

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dollars, but if you're going to have Vera Wang and Michael Bloomberg, Martha Stewart,

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Howard Stern and esteemed guests like Chuck Schumer, you know, you've got to serve them

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Paul Lattman writes for the New York Times,

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Mr. Corzine didn't seem to do as well with it.

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Former Lehman Brothers partner and financial novelist Michael Thomas believed the party

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actually to be in bad taste, however.

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He said this behavior suggests that they are isolated from the rest of the world, living

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behind these great big hedges, and in a way they are.

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In fact, they are.

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That group of people is different, are different from everyone else.

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calls well for them because they're getting the cheap money first to speculate.

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Meanwhile, everyone else who's savings, if you have money to save, you're getting maybe

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a few basis points on it at the bank or maybe nothing at all while you delay consumption

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and the prices you pay at the store continue to roar upward.

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Now, wealth inequality is a big hot button right now.

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Of course, there's nothing wrong with inequality, per se.

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But when Ben Bernanke was asked about it this week, he said he actually sympathizes with

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those in the Occupy Wall Street movement.

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During his news conference, the Fed chairman said he understands that many people are dissatisfied

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with the State of the Economy.

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Income disparity between rich and poor has actually been widening for 30 years, he pointed

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out.

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Of course, 30 years ago, or a little more than 30 years ago, is when the last shred

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of the gold standard actually was done away with.

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I think there might be some connection there.

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He said, I sympathize with the notion that the economy is not performing where we would

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like it to.

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The Fed chair said his employer was doing all it could to create jobs, and he said more jobs is going to narrow that inequality.

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Well, that's just double talk from Bernanke.

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Creating money out of nowhere doesn't create jobs for the average person.

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The new money goes only serves to prop up existing failed businesses, and when it does that, it keeps the economy from healing, because that's what a recession is.

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That's the healing of the boom that came forward.

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So when you're propping up financial firms, when you're keeping Fannie and Freddie in business, when you're keeping Bank of America in business, this doesn't create new jobs.

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It just keeps these businesses intact and they can slowly get rid of people.

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And that funding and that capital is misdirected away from places where it could create jobs.

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And therefore, his program, his bailout plan that he is so proud of, is really keeping

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unemployment high.

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So just as the Fed creates inflation, the Fed actually creates inequality by funneling

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Newly created money to their friends in government and their friends in Wall Street.

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No different than what John Law did, what Gideon Gono did, and the central bankers in

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Weimar, Germany.

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But this won't last forever.

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If one doesn't terminate this expansionist policy, if we don't return to balanced budgets,

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If we don't stop government borrowing and let the market determine interest rates, as

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Mises wrote, one chooses the German way of 1923.