Thursday, July 19, 2007

Hyperinflation in Zimbabwe. USA next..

This business of the Fed simply printing up cash to buy the stock market is nuts. We are going the way of Zimbabwe. And nobody seems to notice, or care. As long as the stock market goes up, everything else can go to hell.

By the way, the Zimbabwe Stock Exchange is soaring much faster than the mighty Dow:

Here is a chart that shows the hyper inflation of the Zimbabwe Stock Exchange (click for a higher res image). It seems to show the ZSE's Industrial Index going from almost zero to 55 million in one year! A helpful Harare stock analyst, Shumba Seti of the African Banking Corporation, emailed me this chart and the weekly closing prices for this index for the past year. The ZSE was not actually at zero in July 19, 2006, it was at seventy thousand (70,084). One year later this index closed at thirty three million (33,582,892). This gives a year on year percentage rise of 47,818%!!! This is down considerably from its peak at July 3rd at 53,354,792 (a 76,000% rise in less than one year). The reason for the recent downturn is that Zimbabwe's authoritarian president Mugabe imposed price controls in the last week in June, a few days before the ZSE hit its peak. Price contols has had the effect of making almost all commerce other than barter impossible in the country: Zimbabwe Price Controls Wreak Havoc on Economy.

To return to America, it sounds like good news that the Dow Industrials has closed over 14,000 for the first time. Suppose it happened to close above 18,000 by year end? What's not to like? And maybe 25,000 or 30,000 the next year? Wow! But at what point would the celebrations in the NYC ballrooms turn to panic? At what point do we start to suspect there is nothing there, that these "dollars" are becoming increasingly worthless and irrelevent even as they multiply geometrically?

Some people might point out that a soaring stock market could be an inflation hedge. Perhaps. Unfortunately it is also the most un-equal distributer of wealth. This is how it works: the Fed has its Plunge Protection Team (see wiki page). They buy futures in the Dow, the S&P, and other indexes. Brokers and their automated trading programs see a fat spread between the future contract and the underlying stocks, so they buy the stock and sell the future. They get as sure a profit as is possible in this uncertain world. The stocks go up. The Fed sells the contract at a loss. This way the Fed injects money into the economy. Much of it goes directly into broker's pockets. The corporations love the flow of capital.

Does any of it trickle down to those not participating in the market? In a real, and growing economy a little bit would in fact trickle down (not that this method of economic stimulous is in any way justified). Corporations would invest in new plants, new stores, they would hire more workers. That is not happening in the USA. Corporations are buying back their own stock, buying other corporations. The market is simply feeding on itself. This is not growth. It is a dead end. The end result, in an extreme example, is for all to see: Zimbabwe. National economic collapse. There, but for a little common sense, we'll be.

1 comment:

bucyrus said...

One major difference.. the USA has F-14s, stealth bombers, subs and ships. They can TAKE anything they want. The bully in the schoolyard will survive, take my word for it. If it gets too painful for Joe Sixpack, the missiles will fly.