Bezos Blasts Off

We’re writing this morning before the inflation numbers come out. Economists are expecting core prices (excluding food and energy) to rise at about 3.5% on a year-on-year basis — the fastest pace in 28 years.

But it could be more. Here’s CNBC:

“It will be hot. It could be up to 5%,” said Diane Swonk, chief economist at Grant Thornton. “The worst of the heat is going to be the second quarter in terms of headline. It will be interesting to see what it looks like when you strip out the extremes. I think we’re still going to have a warm summer when you have surge pricing kicking in for everything from airfares to hotels.

This week, we’re trying to straighten out some of the confusion about ‘inflation’.

It refers to a specific phenomenon — falsifying prices by raising (inflating) the money supply. And it always leads to strange, scammy, and out-of-this-world outcomes, as we will see in a minute…

The entire economy is MoviePass Now,’ wrote Kevin Roose in The New York Times three years ago.

That is, it was a fraud, financed by the Federal Reserve’s below zero (in real terms) interest rates.

Today, we offer an update. Readers will not be astonished at our conclusion: Now it’s an even bigger fraud.

Price imposters

But let’s back up a moment to pick up a passage from yesterday. It’s not the fact that inflation brings higher prices that is the problem. It’s that the prices it brings are imposters. Fake. Untrue. With an ‘information content’ that lies.

If chocolate bonbon prices were to rise, for example, it would tell us something important — that supplies were tight while demand was running loose.

Consumers might be persuaded to switch to other bonbons. Hershey’s might decide to get on the ball.

But if the prices were merely ‘inflated’ by additional money printing, what would we learn? Nothing.

When the feds ‘inflate’, they distort prices and queer the whole economy. Soon investors, businesses, and households get the wrong idea…make the wrong decisions…and real output falls, even as prices continue to rise.

EXPOSED: The truth behind Australia’s ‘miracle’ economy

Bubbles, BS, and bamboozles become common.

Andrew Dickson White showed how it works in his book, Fiat Money Inflation in France. He described how in the 1790s, ‘knots of plotting schemers at the city centers were becoming bloated with sudden wealth…

In the schemes and speculations put forth by stock-jobbers and stimulated by the printing of more currency, multitudes of small fortunes were absorbed and lost while a few swollen fortunes were rapidly aggregated in the larger cities.

Inflation does not just raise prices, in other words.

Bad ending

OK…with that straight…we can look at an example — MoviePass.

The company was in the news last week, as it settled its case with the Federal Trade Commission (FTC). Engadget has the details:

Almost a couple of years after MoviePass shut down, its operators have agreed to settle with the FTC over allegations that they blocked subscribers from using the service and didn’t adequately secure users’ data.

The commission accused MoviePass and its parent company of employing several tactics to prevent subscribers from being able to use the service as advertised. MoviePass was supposed to give users access to one movie per day for a monthly fee, which dropped from $50 to $10, but operators allegedly invalidated subscriber passwords on purpose to give the company sufficient reason to freeze accounts on the basis of “suspicious activity or potential fraud.”

The MoviePass strategy had the whole thing backward, buying its tickets at retail prices…and selling them to customers at wholesale prices. It lost money on every customer.

The idea was to get a whole bunch of subscribers…and then sell the ‘data’.

Apparently, the data wasn’t worth very much. So the people who ran the show tried to limit their losses by not delivering the product — movies. They altered customers’ passwords…and then made it impossible to change them.

This show was going to have a very bad ending, even before the lion growled.

Bad strategy

But as Mr Dickson White noticed, it’s the sort of thing you get up to when the feds distort the real cost of money.

For the last 13 years (save a few months in 2018/19), the cost of fed credit has been lower than the inflation rate. Many start-ups…as well as well-established zombies…found it easy to raise money — billions of it.

And as Tesla CEO Elon Musk and countless others have discovered, as long as you can borrow cheaply, you don’t need to ever provide a good service, deliver a good product, satisfy a customer, or make a profit.

Instead, you can ‘burn’ capital…making us all poorer.

The MoviePass strategy was actually pioneered during the dotcom bubble of the late 1990s.

Companies should not worry about making money, said the experts. They should go for market share…get the ‘first-mover advantage’, and later profit from the ‘network effect’.

When everyone is used to using your app, then…and only then…can you raise prices and make a profit.

Most of the companies that tried to implement the strategy in the late 1990s went bust in the Nasdaq crash of 2000. Investors saw prices falling and declined to put in more money. Without the almost unlimited access to capital, the businesses failed.

Boldly going where no CEO has gone before

Of course, there were a few survivors. Most prominent among them was Amazon CEO Jeff Bezos, whose business offered a useful service…and whose expand, expand, expand strategy proved durable enough to make him the richest man in the world.

He is now the most ‘bloated with wealth’ of all — even though Amazon may never earn enough money to justify the huge sums invested in it!

And last week, with his swollen fortune behind him, Bezos announced that he is aiming for new worlds to conquer.

Yes, he and his brother Mark are going to take a trip — into space!

Whee! Blast off!

And guess what? You can go with them.

Yes, dear reader, they’re auctioning off another seat. Bidding ends on Saturday. As of this writing, the top bid is US$3.5 million.

And why not? It’s just fake money!


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Bill Bonner,
For The Rum Rebellion

PS: The Rum Rebellion is a fantastic place to start your investment journey. We talk about the big trends driving the Australian Economy. Learn all about it here.

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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