An Economic, Social, and Political Catastrophe — Road to Inflation

Your regular editor Greg Canavan has taken a few days off to spend with his kids before they go back to school next week. So for today and tomorrow, Bill Bonner is in the driver’s seat.

This morning, the Irish Independent reports:

US consumer prices climbed by the most in nearly nine years in March as the end of pandemic lockdowns triggered a rebound in travel and commuting that pushed up the cost of petrol, car rentals and hotel stays.

The death of an empire begins with a whimper…and ends with a bang.

We trod lightly over the whimpers. After all, they are mostly silly…and puerile. Together, they generate a lot of noise, but they mean nothing. They are pointless…stupid…time-wasters.

Big deal

Today, we sink into more serious matters. The Big Bang, that is.

Yes, the katastrophenhausse. The empire suffers a thousand paper cuts — trivia, distractions, and BS. But the deeper wound comes from the people who control the money.

The logical and inevitable consequence of the Federal Reserve’s money printing and reckless spending is inflation. Prices go up.

No big deal?

Well…actually…inflation is not always everywhere, and only a monetary phenomenon. It is much more than that.

It is an economic, social, and political catastrophe.

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Asset inflation

Before we go further, we will point out that ‘inflation’ refers to increasing the money supply. This ‘inflation’ then goes somewhere…but not always where and when you want it to go.

So far, in the 21st century, it has mostly gone into asset prices.

The Nasdaq 100, for example, home to many of the US’ leading tech companies, has gone up more than 500% over the last 10 years. But Sanford Bernstein Research tells us that 37% of companies in the tech sector are unprofitable.

Housing, too, has been distorted by price inflation. We are now in the second housing bubble of the century, with prices rising even faster than they did in the last one. Politico reports:

Home prices in January — typically a slow month for the market — were up 14 percent over the same month the previous year, while sales jumped 24 percent, despite an unemployment rate that was almost twice as high. Demand for existing homes is so strong that the average residence is on the market for just three weeks, and inventory is at a record low after seeing its steepest drop last year since the data was first tracked in 1999.

Inventory is at a record low? Didn’t Trump and Biden’s $5 trillion of ‘stimulus’ increase output…including the supply of new houses?

No, it didn’t. While house prices are 43% higher than they were at the height of the last housing bubble, the rate of new house construction is down nearly 50%.

Hmmm…more money…fewer houses available to buy? What do you get? Well, let’s take a look.

Road to ruin

Let’s take a little trip…a little vacation…to the biggest island in the Caribbean.

There, we will find an example of what we’re looking for — a social, political, and economic catastrophe approaching its climax.

Back in the 1950s, Cuba was a vacation spot. A jewel, with the fifth-highest per capita income in the Western Hemisphere, equal to 41% of the US, making the average Cuban wealthier than the typical American in the poorer states such as Mississippi or South Carolina.

Cuba was second to the US in ownership of automobiles and telephones, and first in ownership of TV sets. It was a mecca for American tourists.

A friend recalls, as a child, family vacations every year in Cuba. Ernest Hemingway lived for 20 years outside of Havana. And Lucille Ball’s husband — Desi Arnaz — brought the popular Cuban rhythms to New York and American television.

Had it been allowed to evolve in a normal way, Havana probably would have become like Las Vegas — but with Latin culture and a beach — rather than the dilapidated metropolis it is now.

But so desperate are people for government — like children for parents — that they will put up with almost anything, no matter how bad.

And so it was that the Castro regime — with its central planning and price controls — set Cuba on the road to ruin, where it stayed for the next 60 years.

Dire economic crisis

This week, the Castros’ reign comes to an end. Financial Times reports:

Cuba’s last Castro is set to leave the political stage, as Fidel’s 89-year-old brother Raúl cedes power to a younger generation at next week’s communist party congress which must also tackle a dire economic crisis and growing political dissent.

The ‘dire economic crisis’ is the rather obvious fruit of dumbbell policies pursued over the last six decades.

They began with the appointment of Che Guevara, the famous revolutionary, as head of the central bank of Cuba. Mr Guevara knew no more about banking than current US Treasury Secretary and former head of the Federal Reserve Janet Yellen does.

The result was an early setback for the new government…to be followed by many more over the years — almost all of them driven by activist bureaucrats, who thought they could do a better job of allocating capital than the ‘market’.

The end result is now on display.

This is cattle country,’ the FT quotes a source in Camagüey province, ‘but there’s no milk, butter, yogurt or meat.

Cuba imports 60% of its food. And when its tourism industry hit the skids in the COVID-19 panic of 2020, it left very little money available for other things.

Over the years, some 1.4 million Cubans left the island. Those who remain live like paupers. That is not to say they are necessarily unhappy or unwell. But its pursuit of ‘equality’ left most Cubans poorer.

Government can’t equalise up; for that would require creating new wealth.

It can only equalise down, by taking away money and redistributing it…and destroying much of the wealth-generating capacity of the free economy in the process.

At first, Castro’s Cuba relied on the Soviet Union for subsidies — selling its sugar at inflated prices. Then, it depended on Venezuelan oil money to keep going.

Both of these socialist paradises have gone into the ditch. And now, Cuba is on its own…desperately trying to hold itself together.

End in sight

But alert dear readers are already wondering: Why doesn’t the Bank of Cuba just print up some more money, like the US is doing? Doesn’t it know the ‘stimmy’ trick?

Well, what do you think?

Of course, Cuban central bankers read the same books and journals as those everywhere else.

The Cuban government recently devalued the peso by 96%…and raised salaries for everyone who works for the government — but not for the 40% of workers who actually produce goods and services.

And guess what? Cuba approaches its Big Bang finale.

Consumer price inflation there is said to be approaching 500% this year. And new revolutionaries gather around Havana…like sharks off the Playa Paraiso…ready to take a bite out of Havana’s aging rulers.

Regards,

Dan Denning Signature

Bill Bonner,
For The Rum Rebellion

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Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries.

A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities.

Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally.

With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance.

Bill has been a weekly contributor to The Rum Rebellion.


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