Brother can you spare a wheelbarrow?

Sunday 6th July 2008

Will Kiwis eventually need a wheelbarrow full of cash to pay for a week's groceries

Surely, there can be few things more evocative of the pain of the 1930s great depression than Harburg and Gorney's "Brother can you spare a dime". Studying the verses a theme comes to us from the everyman narrator who tells his bitter tale - that of once optimistic, industrious, and courageous people who had now outlived their usefulness. At NZ Gold we think it possible that Kiwis will be heard humming the same tune - as the great credit financed economic fraud unwinds (although we suspect some of the lyrics will be very different)►

O.K., so at NZ Gold we are not about to make a living writing songs! Yet we trust our words go some way to conveying a theme that we have constantly maintained at this website - the risk that the terminal stages of the great worldwide credit orgy will deliver a 'Weimar style' hyperinflation. Indeed, in our first article from 20th May 2006 "Why we believe you must hold gold" we warned our readers about the potential impact of inflationary forces on food - when such ideas might have been considered scaremongering. In that update we commented: "Maybe hyperinflation will effectively wipe out the burden of your mortgage, but that's not much use if the cost of feeding your family has moved way beyond your reach!". Frankly, for our own self-interest and that of others, we would prefer to have been proved wrong in our analysis but there can be few Kiwis in July 2008 who are not reeling from the rising costs of putting basic foodstuffs on the table. Of course, it is with food and petrol where New Zealand - and a raft of other countries - have experienced their 'Pauline revelation' of inflationary forces in recent months. When the first of the legion articles on this subject began appearing we carefully archived them for future reference. Yet the amount of material on this subject is now so voluminous it is no longer a case of searching for articles to vindicate our position - it is a situation of them being so abundant that our filing cabinet is overwhelmed!

Essential, in our view, to understanding the real reasons why the cost of living is rising so savagely and ubiquitously is to confront - however unpalatable it may be - an unavoidable truth. A huge (although not exclusive) component in what is happening has its origins in the same factors that drove house prices to ridiculous multiples of annual income. This is the effective destruction of monies purchasing power caused by a grotesque oversupply - an inflation initially welcomed by most people provided they had at least a foot on the housing ladder! What very few people realised - when  real estate agents stood astride the nation like colossi - was that the exploding 'number of times income' required to purchase a home actually reflected a nation getting poorer not richer. At NZ Gold we would suggest, however unpopular such sentiments may be, that if Kiwis and Poms had really been getting wealthier during the much hyped 'boom' then the multiple of average income required to buy a house would have fallen - not risen to absurd and unprecedented extremes. It causes us to reflect on how prescient that great British Parliamentarian Enoch Powell was when he warned in an article in October 1980 of those leaders who► 'inhabit a never never land where it would be possible - given "moderation" on all sides - to enjoy the sweetness of inflating the currency without suffering the punishment that follows. It is too bad that so many are found who still believe them'. We cannot imagine that the long deceased Mr Powell would have been too impressed by the number of people in Britain, the United States, New Zealand and elsewhere who - almost thirty years on - were persuaded until recently by the 'never never land con. Yet in some circumstances it is understandable. A rare convergence of events allowed - for some years - 'easy money' to fuel house prices whilst cheap oil, intensive agriculture, technological advances, the emergence of China as low cost manufacturer of last resort, and political 'massaging' of official inflation figures delivered a relatively benign general cost of living. The upshot was transnational derangement, in which people came to believe that their house (or houses) could earn more than them in perpetuity and thus allow a ceaseless process of 'equity release'. Now it would appear it is time for Enoch's 'punishment'.

Of course, the authorities would prefer you to believe that it is exclusively a matter of burgeoning demand, inadequate supply, capitalist greed, and excessive diversion of resources to the creation of biofuels that is causing their once 'benign' inflation era to end so suddenly. At NZ Gold we would admit that these are aggravating 'factors' and within this we note news attributing some 75% of recent price rises in food to the biofuel madness alone! However, we are cynical and have our suspicions that the excessive creation - particularly of United States Dollars in which commodities are generally priced - is the biggest single component in driving prices upwards. Put simply too many pieces of paper calling themselves dollars are chasing too few resources. An extreme example of this is described in the online version of Britain's Daily Telegraph newspaper (July 5th 2008) when it reviews prices at a supermarket in Zimbabwe's capital Harare.

Clearly, the outrageous figures quoted above have arisen because Zimbabwe has been adding zeros to its currency with Weimar German enthusiasm and it tragically illustrates the point that, irrespective of other factors, it is an excess of currency that underlies malignant episodes of inflation. Fortunately (although not so if you live there) Zimbabwe remains a bizarre aberration but it should be remembered that you do not need anything approaching Robert Mugabe's disregard for the principles of sound money to cause major disruption. In this regard gold speaks volumes since United States President Richard Nixon ended his nation's quasi gold standard in 1971 - when just US$35 were needed to buy one ounce of the yellow metal. At close on Friday July 4th 2008 you needed US$935 to buy that same ounce - an increase of almost 2,600% in 37 years. In our view this is an important reminder of how the purchasing power of money has been decimated in recent decades even though various national currencies may give an illusion of strength. Within this the New Zealand Dollar is currently a splendid example, because we are ceaselessly told by exporters and farmers (who have a vested interest of course) that our currency is overvalued. At NZ Gold we would suggest a more honest assessment is to say that the New Zealand Dollar has shown relative strength against some other fiat monies over recent years - but that does not mean its purchasing power is remaining intact. On the contrary, we would suggest that we have one awful paper unit that has simply been - in recent times - less awful than some others. Vested interests want the Kiwi to fall because it will increase their supply of nominal New Zealand Dollars - with which debts can then be 'dishonestly' repudiated - whilst also providing extra funds for acquisitions. Meanwhile 'Joe Public' finds the costs of everything the nation imports going through the roof. At NZ Gold we have never understood how a weaker currency can make a nation genuinely richer - if this were the case then presumably debasing the dollar to worthlessness would make us all fabulously wealthy. Funny how it doesn't seem to have worked in Zimbabwe!

So what does all this mean for our readers? Well, we suspect New Zealand's circumstances have the potential to aggressively 'compound' the inflationary drivers we have described above - because Kiwis have migrated so far into Enoch Powell's 'Never Never Land'. The offender par excellence has - of course - been the insane levels of debt accumulated via the property market. Circumstances are worsened by the astonishing level of our balance of payments deficit that suggests a country living outrageously beyond its means! What this signals to us is that an incredibly difficult 'juxtaposition' is likely to arise between the need to facilitate the 'dishonest' repudiation of Joe Public's debts for reasons of political expediency (not to mention social order) and the fact that such actions could implode the currency aka Weimar Germany. Already we have recently seen growing 'suggestions' that the Reserve Bank Act should be amended to repudiate its exclusive focus on inflation and - make no mistake - this is code from vested interests for a change designed to repudiate their debts and to gain new nominal New Zealand Dollars through inflation. At NZ Gold we would prefer not to think of the consequences of such actions on those confined to a fixed income or unable to negotiate enhanced wages/salaries/allowances for the inflationary maelstrom that could be unleashed.

As we scan the horizon we can, as always, only offer our humble thoughts. Make sure you are holding some gold and, particularly if you are fashion conscious, get yourself a nice character wheelbarrow before they are snapped up! At NZ Gold we were delighted to find the one in the picture above replete with designer borer in the handles (woodworm to our U.K. Readers) and a fine rusted patina. If the time comes when people have to present with vast quantities of banknotes to buy a few days groceries we think our barrow will be the source of much envy - in a New Zealand finally forced to 'cut its hedonistic cloth' to a level commensurate with its true rather than its illusory levels of national wealth.

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