The Financial Policies of Never-Never Land

Thursday, May 1, 2008

It is May Day in Europe. It is a holiday for almost everyone. But here at The Daily Reckoning ’s mobile headquarters, we keep reckoning day in and day out.

And what we reckon today is that two extraordinary things happened yesterday – related to one another and equally absurd.

Yesterday, the Fed did what it was widely expected to do – it lowered rates by 25 bps, bringing the key Fed lending rate down to 2%, or about half the rate of consumer price inflation. And that is where we begin to wonder. What kind of a bank would lend money for less than the inflation rate? Isn’t it sure to lose money?

Yes, of course...but it’s a long, long story...

The other extraordinary thing that happened was that the U.S. federal government began sending people “tax rebates.” Of course, they are not tax rebates at all. Everyone who filed a tax return will get $300, whether he owed any taxes or not. A taxpayer will get another $300. Plus, children and dependents will get $300 each.

Alas, today’s news tells us that much of the presumed benefit from the giveaway program will be lost because of higher fuel and food prices.

(And here we offer some helpful advice: We’ve heard that SUVs aren’t selling very well anymore. Maybe the feds should give every family an SUV – one made in America, of course. That would be good for the auto industry – and then people could take the money they save from not having to buy a new car themselves and use it to buy gasoline and groceries.)

The U.S. government is already $9.3 trillion in debt (not to mention the other $40 trillion ‘financing gap’). It is giving out money it doesn’t really have – $106 billion worth. But it is doing so for good reason – or so it believes. The president of all the Americans – George W. Bush – said that the handouts will be “good for the consumer economy.”

Lending money below the inflation rate...giving out money you don’t have, when you are already so deep in debt you will never get out – how could any of this be good for the real economy? But by this time we are so far into Never-Never Land that we will never find our way back.

A consumer economy may benefit from consumer spending – but only if consumers have money to spend. If giving away phony money, which you don’t really have, could make things better – why stop at $300 a head? Why not give away $1,000 a person...or $5,000?

Likewise, if it’s a good idea to lend money at 2% below the inflation rate...why not lend it at 10% below the inflation rate?

The really extraordinary thing is that the brightest minds in the nation think they can control the economy in these extraordinary ways. But they would think so, wouldn’t they? The guy who believes drinking doesn’t affect his driving is always the guy with the whiskey bottle.

Meanwhile, there was some ordinary news yesterday too. The Dow eased off 11 points. The euro stayed at $1.55. And gold lost another $11 – dropping to $866. Wouldn’t it be nice if the price would fall below $800! Maybe it will; maybe it won’t. But Dear Readers are urged not to lose heart. This bull market in gold isn’t over yet. The real excitement is still ahead.

*** Our commodities superstar, Kevin Kerr, recently went to meet with corn and soybean farmers (as well as feedlot operators) and he told MarketWatch , “the conversation was positive but also fearful.”

“The overwhelming sense of farmers here is that the average urbanite is unfazed by what farmers are going through. After all, costs for the average farmer are up more than 100%. Profit margins have narrowed or become non-existent and fuel costs, especially diesel, have been a killer.

“Farmers feel that the average consumer blames them and think the farmer is getting rich of these food costs; when in reality there are no yachts in Waseca, Minn., only farmers trying to grow their crops and take care of their families.

“The increase in input costs has been as big a burden on farmers as it has on the rest of us. The average person living in the city is relatively unconcerned as long as the water is running, they have a job, the ATM works and there is food on the shelf. Most urbanites are likely more concerned with who got the boot on ‘American Idol’ then the possible approaching food disaster.

“One thing is for sure, agriculture markets are not like other commodities, and demand and pent-up demand are real. This year, the corn crop needs to be a bumper crop or there will be a shortfall. It’s likely that we will have a low yield crop, and $7.50 corn is a real possibility.

“Corn-based ethanol remains the law of the land, and like it or not, nothing is going to change in an election year. All bets are off until we know who will be president.”

** Brazil is booming. Its bonds were upgraded yesterday. Now, they’re considered investment quality. The Brazilian currency is rising against the dollar. Exports tripled in the last five years. The country is now a net creditor with the rest of the world – with $171 billion in reserves. And its stock market is the best-performing major market in the world this year.

Ah yes...the world turns. Now, the banana republics get rich, while the rich go bananas.

Until tomorrow,

Bill Bonner