Inflation's Winners and Losers

0:00I want to take you back to September of 2008. It wasn't all that long ago, it was just about three years ago. And, you know, it appeared that the financial world was going to come to an end. Remember, Lehman Brothers, they filed for bankruptcy. The ones bullish on America, if you remember those ads, Merrill Lynch, they were not so bullish when they fell into the arms of Bank of America. 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. 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.

0:54And 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. 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. And that was despite the economy losing 600,000 jobs the previous 8 months. Home values had fallen some, 7%, but hardly anybody was underwater at that point. So things really weren't that bad.

1:39But the Fed was panicking because they weren't really worried about Main Street. They were worried about Wall Street. On September 10th, 2008, the Fed's balance sheet totaled $927 billion. Sounds like a lot of money, but by October 1st, just three weeks later, their balance sheet had grown to $1.5 trillion. And on New Year's Eve, the Fed rang in the New Year with $2.2 trillion worth of assets. And all of this expansion by the Federal Reserve was so that you and I could go to our ATM machines and make sure that our money would come out on command.

2:34That's what we were told, remember, over and over and over again in the press. We want to make sure that people's money comes out of their ATM machine on command. Well, you know, this all worked out so well that Ben Bernanke was voted Times Person of the Year for 2009. And the reason that he was is that he, quote, provided creative leadership that helped ensure Martin Greenwald wrote that for time. Now I wonder if Greenwald shouldn't be careful what he wishes for, because two years on, he probably didn't imagine that the weakness that Bernanke supposedly was so great at creating would continue on indefinitely. The M2 money supply has marched steadily higher. It's gone higher by 1.7 trillion since that month in 2008, in the fall, to 9.5 trillion dollars is where M2 stands currently. 1.7 trillion in three years. Now what does that mean? These In September of 1981, the total M2 money supply was $1.7 trillion.

4:14So imagine, just 30 years ago, total M2 money supply, $1.7 trillion. Just in the last three years, the Fed has created $1.7 trillion. And by the way, lately, we haven't heard much about monetary growth, but in the last three months, the annual growth of M2 is nearly 24 percent. So money is starting to be created. Now how is this important and how does it relate to what I'm talking about today? Well, money isn't sprinkled from the sky by Ben Bernanke and Milton Friedman's helicopters that we've heard a lot about where they just, you know, money might come be floating down and if you're in the right place at the right time out here on Bourbon Street, drink in your hand and here comes some money.

5:07That's not really the way it works. Money supply increases are created through the commercial banking system with the help of the Federal Reserve. So they essentially can direct the money where they want it to go. Those who create the money first benefit at the expense of those who get it last, because people who get it first spend it on goods and services, the price of those goods and services rise, that increased demand, and people who get the money last then have to pay those higher prices. The fiat dollar is an elite system. Jim Grant, from Grant's Interest Rate Observer, told the Wall Street Journal recently.

5:53And Wall Street is its supporting interest group. Those nimble, market savvy, plugged-in folks know how to shuffle assets and exploit cheap funding from the Fed to lever up their profits and soften the downside, unquote. So after plunging to a very devilish 666 on the S&P in March of 2009, the stock market has recovered quite nicely since then, and that same index has reached 1,350 before running into some volatility here late in the year. Wall Street, by the way, 2009, that very tough year, they paid out $27.6 billion in bonuses.

6:40The next year, in 2010, they paid out $20.8 billion in bonuses. Mergers and acquisitions are all the rage. Leveraged buyouts, you're starting to see a few of those. And in fact, there's even a demand for trophy office buildings. An index for commercial property values by Green Street advisors, which is tilted toward high-end properties, has risen more than 45% from its 2009 lows. In fact, it's only 10% below its all-time highs. It's not just buildings that are on fire. Even the market for very fertile farm ground in Iowa is doing very well.

7:28120 acres just changed hands on October 4th for the highest price ever paid in Northeast Iowa for farmland at $16,750 per acre. Price of land to grow corn on is up nearly 13% just in the last six months. Now, that's at the same time that the price of corn, which has actually grown on that land, has dropped from $8 a bushel to about $6.50 a bushel. As farmland auctioneer Del Beyer says, sometimes the math doesn't make sense in these deals.

8:15Speculative money, it's cheap money running into farmland, just like it's running into everything else. But this is the way it always works. More money out of nowhere means more bubbles, more booms, more busts. In fact, we could go back to John Law's Mississippi bubble. As banknotes were created, shares of the Mississippi Company were floated. In fact, so many banknotes were issued, the printers and the clerks couldn't even keep up. But speculators like Richard Cantion made fortunes as the price of the Mississippi Company and he actually went up 20 times and then of course crashed. Cantillon was among the first to buy in and he was about the first to cash out.

9:06He was a friend of laws and it's thought that he had a little insider information going in, bought his shares cheap and later he benefited again with information that his brother provided. Bernard Cantillon actually supervised the prospecting party that had sailed to Louisiana. If you remember the Mississippi Company, that was one of their primary assets, was anything in Louisiana in the New World. And law's propaganda had said there's a land of riches and gold, and that was the propaganda. Bernard Candion knew that instead when they found their way to Louisiana it was instead disease and hostile natives is what they found. So Candion relief realized that this bull mark was based on little more than smoke and mirrors and ever-increasing quantities of paper money. Now many others ran for the cover The number of silver as well. Vendors were not interested in taking paper, did so only at a discount.

10:16Livestock sellers would only take silver and gold. Price inflation was rampant. 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%. So while the speculators got rich, those who got out got very rich, the common person was just paying the price with higher prices. Now in Weimar, Germany, all of those in debt, all of those who knew how to speculate in the stock exchange, and all those who possessed foreign currency and could transfer money into material assets had a good chance to profit from an inflation.

11:03and those are the words of Bernd Wittig who wrote a book called Culture and Inflation in Weimar Germany and the German stock market we hear a lot about the inflation in Weimar Germany we don't hear a whole lot about the stock market at the time but the German stock market stood at 97 in January of 1919 by By January of 22, it was at 743, but by December, it actually rose to 89.81. So from 1914, 1922, the stock market rose 89 times during this hyperinflation. But would you have been better off in stocks or better off in the dollar, been better off in dollars?

11:53The dollar versus the German currency rose 1,525 times. Or you'd been better off in coal because it rose 1,250 times in that period of time. Weddig points out that the biggest debtor after World War I was the German government, which owed 154 Reichsmarks to its creditors. When the inflation ended November 15th, 1923, this enormous sum, adjusted for 1914 purchasing power, was worth only 15.4 finning. Essentially, virtually all the debt had been inflated away. And as he writes, the German state was probably the biggest winner in the inflation.

12:43Notice all those who had lent their money out of patriotic duty received only a fraction of their investment back, but they weren't the only winner. With cheap loans available to big businesses, large segments of the German industrial economy benefited as large firms were actually able to buy up small firms that were in trouble. It was like a takeover binge that we see currently. Through clever investment and ruthless speculation, a handful of businessmen profiteers created great industrial conglomerates within only a few years, writes Weddick. One observer called the five biggest industrialists the kings of inflation.

13:34In fact, Hugo Stein's The Richest The most powerful industrialist in Germany at the time justified inflation as a means of guaranteeing full employment. Same thing we hear out of the Fed right now. Not as something desirable, but simply as the only course open to a benevolent government. It was, he maintained, the only way whereby the life of the people could be sustained. Now after the peak, after the market peaked in late 1922, over a million Germans were actually speculating in stock market. And that's what happens in a hyperinflation, when you have inflation at all, people began to want to speculate instead of working hard.

14:22And they were engaged in speculation and with their dealings mainly through what was called called Winkelbankers, their back street operators who sprung up with the inflation, actually made their living entirely by trading foreign currency. And although they weren't members of any exchange, they actually played a significant part in and setting the exchange rates that were generated first in Berlin and then New York. At the end of July in 1923, German shares had presented themselves as a popular though unstable repository of wealth.

15:10But shareholders were actually a good deal poorer than what they thought they were. The fact that this impoverishment was actually largely veiled by these gigantic increases in their stock portfolios, but the fact is, even though their stocks were up, the price of every day necessities had gone up even faster. Now some got rich in the black market during this period, farmers profited actually from and Barter, and they were able to gain great wealth that way because they had real goods, they had real assets to trade with. A few years ago, of course, Wiemann Germany was back in the early 1900s, 1919, 1920, but just a few years ago we had a situation in Zimbabwe.

16:06We had negative real interest rates in Zimbabwe, and this caused the same thing to happen, for people to move their money from money market instruments to equity and then to buy up residential real estate. These pricing bubbles were exacerbated by the emergence of a growing class of speculators, according to the IMF, the access to bank loans at negative rates of real interest. In particular, the RBC subsidized credit scheme added liquidity to the financial system, helped to fuel the asset price bubbles as the low-cross resources had been used in part by exporters to buy shares on the Zimbabwe stock exchange or in real estate.

16:55Negative interest rates also encourage an attitude of buy now rather than wait, further contributing According to the Acceleration of Inflation, according to the IMF. It's hard to imagine that the Zimbabwe Stock Exchange was actually the best performing stock exchange in 2007, but a financial commentator, John Paul Koning, wrote at the time in April of 2007, the Zimbabwe Stock Exchange is the best performing stock exchange in the world with the key Zimbabwe industrials up some 595% since the beginning of the year. And in the last 12 months, the index has been up 12,000%.

17:43This jump in share prices is far an excess of increase in consumer prices. While the country is crumbling, the Zimbabwe and share speculator is keeping up much better The Central Banker, Gideon Gono, closed down the Zimbabwe Stock Exchange in November 2008. Unless there is more discipline and honor, the exchange will stay closed. I can't be bothered, he said. He didn't know when it would open. And what he did was he commissioned a study.

18:30Gono was a guy who wanted to blame everything from the weather to reparations to actually now the stock market for inflation. Printing money, he didn't think had anything to do with price increases. And so he had this study commissioned and the study came back unsurprisingly with the conclusion that argued, quote, that the stock market has traditionally been one of the drivers behind Zimbabwe's hyperinflation. So these days here in America, bankers have been kind of stingy in terms of lending to Real people and real businesses, total loans actually have been flat.

19:20But at the same time, bankers can't get enough of lending the U.S. government paper. In fact, they have bought $500 billion in Treasury securities and agency securities during the past two years. They've essentially turned around and done the government return the favor, so to speak, using the bailouts to help the government, albeit somewhat indirectly using money from the Fed. So bankers get money from the Fed and then they turn around and buy U.S. government securities. So with all this money rushing into stocks and real estate, especially government bonds, By the looks of it, none of it has found its way to Main Street, except in the form of higher prices.

20:16And I know a number of you in this room probably follow John Williams at shadowstats.com, who says that prices actually are increasing at over a 10% annual clip. And while the Fed's QEs, quantitative easings, were supposed to stimulate hiring, unemployment has actually soared during 2008 and 2009. Remember when I started the story, unemployment was 6%. It's gone to over 10% on that narrowest of measurements. But if you include the people who have given up looking for work or are just employed part-time, by the government's measure I think these people total about 17%. And actually Williams includes the people have dropped off the rolls and have just given up work, and by his numbers, counting unemployment the old-fashioned way, nearly one in four Americans is out of work.

21:19So we've had all this money, all this government, all this debt, and we still have one in four Americans out of work. Now Williams says consumer prices have roared upwards. The government says that there's been no inflation. In fact, there is no inflation from the second quarter, or the third quarter of 2008 to the third quarter of 2010. There's been absolutely no inflation. Prices haven't gone anywhere, unless you've actually been buying things. After two years of receiving no cost of living increase, those who draw Social Security will will finally get a little bump of 3.6% to their checks going forward in the next year.

22:08But of course, this is far below what actual prices have done. At the same time, a record number of Americans are drawing food stamps. Uncle Sam is the one putting food on the table for 46 million Americans. That's 15% of the population. Now this is no different, interestingly, than Weimar, Germany. Weimar, Germany, blue and white collar workers alike were ravaged by the inflation. Higher ranking civil servants lost two-thirds of their buying power. Lower level civil servants lost, or employees lost a quarter of theirs. Wettek writes that the The biggest losers in the Weimar inflation were those who had saved money or who depended on entitlement programs from the state.

23:02It's like today's social security. Inflation made these entitlements, which were not adjusted often enough to the general price increases, and these became essentially worthless. Professionals who saved money for their retirement and those who depended on rental income suffered as well due to tight rent control regulations, which insufficiently adjusted the rents you could charge to the inflationary price hikes. Now in America today, in terms of housing, that's the middle class's primary asset, right? It's their house.

23:51But for 28% of homeowners in the United States, that asset is now a liability. 28% of the homeowners in America are underwater. They owe more than the house is worth. The folks at Zillow.com say that we get tired of telling the same grim story, but unfortunately, this is a story that needs to be told, is what their chief economist told Bloomberg. And if you believe Robert Schiller, who puts together the Case-Schiller index of home values, he believes home prices will fall another five to ten percent. So again, the middle class, their largest asset, is going to probably turn into a liability.

24:44So Bernanke's fix-it for all of this has been cheap money and more of it. But that policy has been called into question over and over and over by Austrians, as long ago as in a book called Capital in Production by Richard von Striegel. Striegel pointed out that the creditworthy will not be interested in borrowing in a crisis, but those industries forced to liquidate during the crisis, they're all too eager to borrow. And unfortunately the government these days wants to shovel money at failed industries to prop them up rather than having them go away. Striegel writes, however, satisfying this demand implies delaying the liquidation of and the crisis, lengthening and strengthening it, for it is essentially to this situation that a significant demand for credit by those who would like to work towards continuing the boom, that is, an unhealthy demand for credit exists along with a significantly reduced demand for new sound investments.

25:55Well, while times are tough for normal folks, life's pretty good for those on Wall Street. Well, alright, except if you're John Corzine and MF Global, it hasn't been a particularly good week for them. But for many people, it's been pretty decent on Wall Street. In fact, they had another birthday to celebrate. Wall Street is known for its big birthday celebrations. There's a hedge fund manager, Leon Black, celebrated his 60th recently. And he had a couple hundred of his closest friends out to his South Edmonton estate out on the ocean.

26:43And if you're going to throw a party, if you're going to go, go big, right? So he had Elton John play for an hour and a half, Greatest Hits, that cost a cool million dollars, but if you're going to have Vera Wang and Michael Bloomberg, Martha Stewart, Howard Stern and esteemed guests like Chuck Schumer, you know, you've got to serve them Paul Lattman writes for the New York Times,

27:41Mr. Corzine didn't seem to do as well with it. Former Lehman Brothers partner and financial novelist Michael Thomas believed the party actually to be in bad taste, however. He said this behavior suggests that they are isolated from the rest of the world, living behind these great big hedges, and in a way they are. In fact, they are. That group of people is different, are different from everyone else. calls well for them because they're getting the cheap money first to speculate. Meanwhile, everyone else who's savings, if you have money to save, you're getting maybe a few basis points on it at the bank or maybe nothing at all while you delay consumption and the prices you pay at the store continue to roar upward.

28:34Now, wealth inequality is a big hot button right now. Of course, there's nothing wrong with inequality, per se. But when Ben Bernanke was asked about it this week, he said he actually sympathizes with those in the Occupy Wall Street movement. During his news conference, the Fed chairman said he understands that many people are dissatisfied with the State of the Economy. Income disparity between rich and poor has actually been widening for 30 years, he pointed out. Of course, 30 years ago, or a little more than 30 years ago, is when the last shred of the gold standard actually was done away with.

29:21I think there might be some connection there. He said, I sympathize with the notion that the economy is not performing where we would like it to. 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. Well, that's just double talk from Bernanke. Creating money out of nowhere doesn't create jobs for the average person. 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.

30:11That's the healing of the boom that came forward. 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. It just keeps these businesses intact and they can slowly get rid of people. And that funding and that capital is misdirected away from places where it could create jobs. And therefore, his program, his bailout plan that he is so proud of, is really keeping unemployment high.

30:58So just as the Fed creates inflation, the Fed actually creates inequality by funneling Newly created money to their friends in government and their friends in Wall Street. No different than what John Law did, what Gideon Gono did, and the central bankers in Weimar, Germany. But this won't last forever. If one doesn't terminate this expansionist policy, if we don't return to balanced budgets, If we don't stop government borrowing and let the market determine interest rates, as Mises wrote, one chooses the German way of 1923.