If you read the Daily Reckoning, you pretty soon get the impression that we are living in a series of interactive bubbles, all of which could burst and lead us into a state of economic chaos. The Americans, and we Canadians too, are contending with bubbles in the securities and housing markets, but that doesn't really worry us very much because we also have a credit bubble. If you really want something, you buy it on credit. If you really want to buy a house as its price goes up, you can do it with a no down payment mortgage. You can then flip it if you want to make some money.
But things are really OK here compared to some parts of the world. Our inflationary bubbles are miniscule compared to, for example, Zimbabwe: How bad is inflation in Zimbabwe? Well, consider this: at a supermarket near the center of this tatterdemalion capital [Harare], toilet paper costs $417. No, not per roll. Four hundred seventeen Zimbabwean dollars is the value of a single two-ply sheet. A roll costs $145,750 - in American currency, about 69 cents. The price of toilet paper, like everything else here, soars almost daily, spawning jokes about an impending better use for Zimbabwe's $500 bill, now the smallest in circulation. (Michael Wines, NYTimes, May 2, 2006) Zimbabwe's inflation rate is currently 1,000%. Can you imagine what this is doing to people on fixed incomes or no incomes in a city like Harare with its 3 million people? But as the same NYT article points out: Zimbabwe's inflation is hardly history's worst - in Weimar Germany in 1923, prices quadrupled each month, compared with doubling about once every three or four months in Zimbabwe. My father was a young man in Germany at the time. He often told the story of people taking a wheelbarrow of money to do their grocery shopping. He did tend to exadgerate but, who knows, maybe he really did see what he told us about. When I spent a month in Russia in 1995, that country was in the midst of inflation. The rouble had sunk from parity with the US dollar to a value of 500 roubles to the dollar. Why? Because everything had fallen apart and the government was unable to tax anyone. So it printed large quantities of money to pay its debts and keep itself going. That is what Weimar did after WWI and that is what Mugabe is doing in Zimbabwe. In reading the Daily Reckoning, you often get the impression that its principal writers, William Bonner and Addison Wiggen, are in a state of nostalgic longing for the gold standard. Bring it back, they seem to be saying. What they maybe forgetting is that even under the gold standard there were all kinds of ways to debase currency. You could mix gold coins with a cheaper metal or you could move to a bimetalic standard - silver as well as gold - as William Jennings Bryan advocated in his famous speech of 1896: "Having behind us the producing masses of this nation and the world, supported by the commercial interests, the laboring interests and the toilers everywhere, we will answer their demand for a gold standard by saying to them: You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold." Of course, as with all politicians, his motives were not really all that pure. He was making a pitch on behalf of western silver mining interests. Should we worry about the bubbles we live in. Well, perhaps not excessively. Unlike Zimbabwe, Weimar or post Communist Russia, our rich world economies are strong. But, if you read the Daily Reckoning, you are left with the haunting feeling that cruch-time could come and debts could become unmanagable. My advice? Don't read the Daily Reckoning unless you really want to. If you do, go to http://www1.youreletters.com/t/1278246/16101858/23/0/ but be prepared to suffer some anxieties and go on prozac. Ed
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