Weimar Inflation in America

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"Chaos and fear never sleep. This morning the first news story I read was a piece from the Los Angeles Daily News about police threatening to beat down and arrest any "disorderlies" trying to get their money out of a failed IndyMac bank branch in Pasadena, CA. Apparently, after being turned away Monday, customers began lining up at 1:30 a.m. the next morning to take out any cash they had in excess of the $100,000 maximum insured by the FDIC. The scene was reportedly emotional and tense. At another IndyMac branch in Encino, the police were called in after line jumpers threatened to turn an ordinary bank run into a full-on riot.

Yes, it's here. Welcome to the Depression. No, don't drop whatever it is you're doing. Don't get up. It's not going anywhere. It will wait. It's just going to sit over here in the corner and read a magazine while you do whatever it is you need to do.

A Depression doesn't run hot and fierce like some crazed meth burner. A Depression is methodical, purposeful, patient. It will build a shelter out of tree branches and newspaper, light a small, well-contained campfire and wait you out, brother. While you feed on the empty calories of denial and popcorn, it will quietly gather shards of broken dreams and fashion them into a terrible weapon of blunt force reality.

It's a hell of a thing to call this day and age the next Depression. It's dangerous tinfoil hat territory inhabited mostly by screeching lunatics and volatile nutjobs. But by the time they get squeezed out by reputable folks the whole gig will be up, the circus will have left town.

But how can this be? To understand the mechanics of this, the nature of it, let's look back at the last Great Depression

Despite the seeming enormity of it in retrospect, the stock market crash of 1929 barely even registered for most Americans. The day before the crash, Time Magazine's Oct. 28, 1929 issue was business as usual; national stories, Washington stories, a review of the newest plays opening in Manhattan, a piece on a cat washing contest in Kingston, NC.

A week later, in the wake of the stock plunge, the cover story was as far from a piece on crashing share prices as you could image.minyanville.com/assets/FCK_Aug2007/...imeposrtcrash.jpg" style="max-width:560px" />get - a profile of a man named Samuel Insull, the "financial father of the Chicago opera." The crash did make the magazine, of course, second billing in the Business section in a piece titled, "Bankers v. Panic." The next piece, however, was about a $2.5 million investment by a Wall Street investment bank in orchids: "Last week, however, to the orchid industry went 2,500,000 Wall Street dollars, not squandered, but carefully invested."

Heh. Yes, the dream dies hard, doesn't it?

It took a little more than two full years, Dec. 11, 1931, before the New York Bank of the United States would collapse. Surely that would rattle a few cages. Well, no cover play, that was reserved for Dr. James Henry Breasted, "foremost Egyptologist of the U. S.", but the bank collapse did garner a story in the Business section, below a piece on Lorillard Co., then in the news as "the only major industrial concern in the U.S. to resume dividends in 1931."

Jesus, Mary and Joseph, what is wrong with these people? Haven't they even the vaguest sense of the impending doom they face? Someone should warn them. They're headed straight into a vicious buzz saw. It's like watching drunken sheep follow one another off the Cliffs of Moher.

On January 22, 1932 things turned desperate. The Reconstruction Finance Corporation was formed to dole out government aid to banks, railroads, farm mortgage associations and all manner of failed business enterprises. By any decent measure of journalistic standards, this deserved top billing in a weekly newsmagazine. So Time's cover story on playwright Philip Barry's 11th play, "The Animal Kingdom," comes as a sharp, kneecap-shattering nightstick blow.

By the end of the following year, 1933, President Franklin Delano Roosevelt had squeezed the Emergency Banking Act through Congress, signed the Economy Act, the Credit Act, the Reforestation Relief Act, the Agricultural Adjustment Act, the Farm Act, the Federal Securities Act, the National Cooperative Employment Service Act, the Home Owner's Loan Act, the Glass-Steagall Act, the National Industrial Recovery Act, the Emergency Railroad Transportation Act, created the Federal Emergency Relief Administration, the Federal Deposit Insurance Corporation and Civil Works Administration.

In short, everything in America was falling to pieces and going to hell. And yet I am staring right now at the cover of Time from August 7, 1933, just past the mid-point of that awful year, and Marie Dressler is on the cover in full character as a "a raffish, vigorous old woman whose generous heart thumps under sleazy clothes that do not fit her." image.minyanville.com/assets/FCK_Aug2007/Image/football.jpg" style="max-width:560px" />

Three months later, the November 13 cover is "Football."

The December 4 cover features Seton Porter of National Distillers, whom the magazine, with bald-faced envy, claims has "50% of all U.S. whiskey in his saddlebags."

This is quickly turning into some kind of perverse joke. These people deserve the Depression, dammit! No wonder the country has gone to hell; all anyone cares about is Tugboat Annie, football and whiskey.

Hahaha. Kind of like today. And there it is, finally, the point. We are slowly sidling up to The Fear. With wealth and lifestyles evaporating right before our eyes, The Fear is really the only tangible thing we can hold onto. The Fear is always worse than the actualization. The Fear feeds on potentiality, unimaginable potentiality.

Now, there are two ways to look at that. One is to despair over our misfortune at finding ourselves in the wrong place at the right time, taken along for a ride on this wave past the cresting point, and the other is to consider what adventures await on the other side. I'm in the second camp because I am an optimistic person by nature, or at least a defensive pessimist, and also because I understand that despite it all, we will continue to live our lives, raise children the best we can and find ways to make the best of whatever situation we are in.

During the first Great Depression, times were tough for many people, but even now the vast majority of us will adapt and continue on and soon take for granted the change in lifestyle that may (or for some may not) entail.

I read a piece in the New York Times several months ago by a woman consistently finding herself feeling humiliated by her parents' reckless disregard for money during the Depression - they didn't have much anyway, but her parents were intent on squandering what little they could accumulate on fancy clothes and cocktail parties. As I remember the story, she asked her mom, "Why on earth are you having a party with things the way they are?" Her mother, without missing a beat, said, "It's times like these when people need parties most of all."

Indeed. The time for preparations and battening down the hatches has passed. It's finally here. Let's party."

You know the old cliche - We have nothing to fear, but fear itself. The Greater Depression. Yeah, right.

Happy Trading. Party on, Wayne.

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal

Good Afternoon,

Bullion prices tried for higher ground as the new week began, and for the most part were successful in maintaining near the $930 level as stocks took another beating on financial worries and crude oil advanced a bit on the day. A variety of localized geopolitical hotspots continued to lend support to metals buyers as well. Bombs exploded in a variety of locations around the world (Turkey, Iraq, India, Gaza, Pakistan) keeping global worries on full boil. Rising prices once again dented Indian demand which had shown signs of life at prices nearer $915 last week.

Crude oil made advances which brought it to near $124.75 per barrel in the wake of a fresh Nigerian militant attack on a Shell pipeline in that country. However, speculators in black gold turned net short for the first time in 17 months according to the latest CFTC data. Hedge fund performance scorecards turned sour in recent weeks, along with their bets on perpetually rising oil prices. At the same time, the sticker shock engendered by oil speculation will imminently spill over into the retail consumer area as one store after another will pull out the price-stamping machines and raise, raise, raise.

The euro (at 1.574) may have started the week off on a better note, had it not been for profit warnings from RyanAir and the weakest reading in German consumer confidence in five years. The greenback traded at a three-week high against the common currency before slipping on expectations of widening credit losses after two more small banks closed shop last Friday and their deposits were sold to Mutual of Omaha. No depositors lost money on the event. Confidence is another story...Seven US banks have failed year-to-date.

The IMF feels that the credit crisis continues to render the world's financial markets as fragile as fine china and that the potential for a full $1 trillion in write-offs is still there. About half as much has been hemorrhaged thus far. The Fund believes that although the broad housing first-aid bill that is about to get autographed by Mr. Bush does provide a solution for half of the US housing market, the end of the crisis can only be envisioned once US homes begin to turn around in value. Inflation risks are as visible as the ones to world growth however, and central bankers will have to pay attention to price stability a bit more than to financial market stability. Difficult job for one and all, but the alternatives remain undesirable

New York spot prices traded on both sides of the unchanged marker on Monday, but not by much at all. Participants were mainly seen as gearing up for a slew of potentially market-moving US economic figures slated to hit the wires from tomorrow onward. At last check, the yellow metal was quoted at $920.00 - ahead by 60 cents on the day. Given the near 190-point slump in the Dow and the greenback's 22 point slide on the index (to 72.66) as well as the still resilient oil market, gold should really have advanced to about $945 on the day. Consumer confidence, GDP, employment and Case-Schiller home prices might all have an impact of larger magnitude on the dollar, stocks and commodities as the week progresses. Oil however, remains the central focus among participants as it has had such an influence over practically everything for the first half of this year.

Just when discoveries of manipulation in the oil market started to be made, players in the black gold pits got a reprieve-of sorts-from...their friendly Republican lawmakers. The Financial Times reports that: "A US Senate proposal designed to curb speculation and increase transparency in the energy markets was blocked by Republican legislators on Friday. The move frustrates Democratic efforts to show the party is taking action on record petrol prices. The Stop Excessive Speculation Act, sponsored by Harry Reid, the Senate majority leader, fell 10 votes short of clearing a procedural hurdle." Long live the lobbyists. Hey, it's an election year in the good ole' USA.

So long as we are talking politics, money, and blame gamesmanship, let's look at what was today thought to be the cause of next year's US budget deficit. The AP reports that:

"The White House says the slowdown in the economy is chiefly responsible for a big jump in next year's budget deficit. It also predicts the economy will grow at a rate of 1.6 percent this year and rebound at a greater than 2 percent rate next year. Bush's successor will inherit a deficit that's likely to exceed a half-trillion dollars once war costs are factored in. This year's deficit will tally $389 billion. That's way up from $162 billion last year. The new figures are so eye-popping that the next president may face pressure to take action instead of adding to it with expensive spending programs as promised by Democrat Barack Obama or new tax cuts pledged by Republican John McCain." 

Let's see...at the $12 billion monthly rate that Nobel laureate Joseph Stiglitz estimates the war to cost these days, it would seem like the slowdown in the economy should be one culprit that could be (safely) excluded from the list of causes... Sure, shrinking tax revenues will play their share in the red ink to be seen, but subtract the Stiglitz number and you get the picture. The forecast does call for a return to a surplus...in 2012. But, hey it's election time in the good ole' USA. The next CEO in the White House (R) or (D) will inherit a spreadsheet he may not wish to open...

Silver rose a dime on the day, and was quoted at $17.44 while the noble metals made small advances with platinum adding $18 to $1758 and palladium gaining $5 to $387 per ounce respectively. News that Toyota -now the leading global vehicle seller- has lowered its global sales forecast to 9.2 million units (down 350,000) could still keep platinum under cautious trading conditions as the week progresses. Barring further geopolitical news of import (such as Iran trumpeting the fact that it now has some 6,000 enriched-uranium producing centrifuges) gold may trade at, and finish above the $930 mark today as the trade preps for the busy economic calendar ahead.

Picking up on the IMF inflation warnings, one of the Fed's frequently quoted spokesmen proposed some not-so-novel ideas that are nevertheless making the rounds as monetary policymakers as well as Washington lawmakers are trying to navigate the current storm. Bloomberg bring us the story:

"Federal Reserve Governor Frederic Mishkin said the central bank should adopt an inflation 'goal' and extend its forecasts to at least five years to increase public confidence in the outlook for the economy.

"The horizon for the projections on output growth, unemployment and inflation should be lengthened" to five or more years, Mishkin said in the text of a speech at the Peterson Institute for International Economics in Washington.

Fed Chairman Ben S. Bernanke doubled the number of forecasts by the Federal Open Market Committee and broadened their scope last November to try to better inform the public about the Fed's views on growth, employment and inflation.

"Some room for further improvement still remains," Mishkin said. Setting an inflation target "would produce important benefits in economic performance and democratic accountability."

Bernanke warned Congress in testimony on July 15 that "upside risks" to inflation have worsened amid "significant downside risks" to economic growth. Congress, attempting to calm financial markets, passed legislation last week giving the Treasury Department authority to channel capital to Fannie Mae and Freddie Mac through loans and equity investments. The bill, which would mandate the Federal Housing Administration to insure $300 billion in mortgages, is expected to be signed into law this week by President George W. Bush. Mishkin, who only briefly discussed the current economy in his text, said during the question period that the economy has faced "a perfect storm of shocks" with rising energy prices and a financial crisis.

"As a policy maker, it doesn't get any worse than this," he said. The current crisis makes his proposal "particularly relevant," he said.

"Output growth in recent quarters has fallen below potential and the unemployment rate is, as best as I can judge, above the natural rate," Mishkin said. "Sharp increases in the price of many commodities have driven inflation above rates consistent with price stability."

Mishkin, who has advocated setting an inflation target for many years, said during the question period that a target should focus on overall price changes rather than a core figure that excludes food and energy prices.

"It should be an inflation rate that actually affects people," he said. "People care a hell of a lot about what they are paying for gas."

 A recent drop in oil prices has been "very welcome," he said. "Energy prices can't keep going up forever."

As food and energy prices moderate, core inflation and overall inflation measures are likely to converge, he said.

The Fed voted June 25 to keep the benchmark U.S. interest rate at 2 percent, pausing after seven consecutive reductions since September. Mishkin, 57, resigned in May as a member of the board of governors. He will return to the Graduate School of Business at Columbia University as a professor of economics and resume teaching in the fall. The meeting of the FOMC on Aug. 5 will be his last."

Get ready for more active days as we ease into the week. If the last ten trading sessions were any indications of things to come, the next four could provide more than enough material for financial news writers everywhere.

Happy Trading.

Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal