- Written by Bill Bonner, Founder and President, Agora Inc.
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Savers still believe they can trust the dollar. And they are probably right -- for now.
On Friday, the Facebook boys got creamed...
That's what happens when your business model sucks. The social network was counting on Zynga -- another time waster -- for revenue. Apparently, people have found new ways to waste time than playing FarmVille. One of Zynga's founders wondered publicly whether the idea was just a fad, and not a real business after all, after the stock fell 41%.
But the big news last week... the news that turned stocks around... was what Mario Draghi said. After several down days, his words caused stocks to rise in the U.S. (187 points on the Dow).
What did he say?
He said he is willing to put the European Central Bank's credit and credibility on the line -- to prevent a sovereign bond meltdown in European nations... to prevent the bankruptcy of European banks... and to protect the credibility European Union itself. From Reuters:
European Central Bank President Mario Draghi pledged on Thursday to do whatever was necessary to protect the eurozone from collapse, sending a strong signal that inflated Spanish and Italian borrowing costs were in his sights.
Fears about the eurozone's future are intensifying with Spain and Italy facing frenzied pressure on financial markets and Greece holding crunch meetings with its international lenders having failed to keep its repair plans on track, raising fresh questions about its place in the currency bloc...
The comments are Draghi's boldest to date and suggest the central bank is ready to defend Italy and Spain whose borrowing costs have hit unsustainable levels...
Economists think despite the reservations it could be forced to buy bonds again, or support struggling eurozone countries via the back door.
Is that a sound business model? Central banks can print money. They can buy government bonds. So, the money spent by government seems to come from nowhere. But will this approach pay out any better than Zynga's business model? Or will the public get tired of it?
Meanwhile, "the whole world is Argentina now," says an Argentine analyst.
What does he mean by that?
"All these maneuvers... tricks... all these fixes... we've been doing that forever. You do one dumb thing and then you have to do two dumb things to try to correct the damage done by the first thing. Eventually, you run out of dumb things. Then, you suffer high rates of inflation...or bankruptcy. Sometimes both."
Politicians in Argentina haven't run out of dumb things yet. They are as clever and rascally as any public officials in the world. But inflation is already on their backs.
Officially at about 10%, it was actually about 25% last year. And this year the unofficial, off-the-record, informal tallies are putting consumer price increases near 35%. Since 2007, consumer prices have nearly tripled. And the supply of money in circulation is increasing at about a 36% annual rate. The situation is starting to look out of control.
What should you do when inflation rates increase? Protect yourself by moving your money to a more solid paper currency... or buy things that won't lose their value.
In Latin America, people with money have traditionally saved in U.S. dollars... preferably in a bank account in Miami.
Ooops! Looks as though it may already be too late for many Argentines. Here's the latest from the land of the Peronistas, from Daniel Politi:
Earlier this month, Argentina's Central Bank officially banned the purchase of U.S. dollars for savings, making official what had already been a de facto government policy following months of tightening controls on the foreign-exchange market as a way of protecting foreign reserves. Now only those traveling abroad are allowed to buy foreign currency provided they get permission from the government tax agency first.
The prohibitions mark the latest in President Cristina Fernández de Kirchner's whack-a-mole approach to policy. The government imposes palliative measures to deal with problems of its own making, using tactics that only make them worse in the long run. The problem at the heart of the new currency policy is the government's inability and unwillingness to deal with inflation. (Stagflation might soon be a more accurate term, considering that the economy contracted in May for the first time since 2009.)
The U.S. is coming to resemble Argentina. Its policymakers try one dumb fix after another. But so far, savers still believe they can trust the dollar. And they are probably right -- for now.
People in Greece and Argentina seek refuge in the dollar. This supports the greenback's rise in value. And for the time being, rising prices merely reinforce the trend. Record prices in the farm sector, caused by a drought and heat wave, are already driving up food prices. But this just causes households to reduce spending in other areas. Less spending leads to lower sales... lower employment... and lower prices for other goods and services!
To our Argentine friend: "It doesn't seem much like Argentina."
"Not yet," came the reply. "But it will."