What a tangled web we weave - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 25 September 2013
What a tangled web we weave A  A  A

Paris, France

Uh, Janet...remember:

Oh what a tangled web we weave
When first we practice to deceive

First, let's check the markets. Again, the Dow sold off a little - down 66 points. And again, gold sold off too - down $10.

In August, our guess was that we would see falling stocks and rising gold as the dominant trends of the fall season. So far, we haven't seen much in the way of trends at all. The Fed announcement of last week should have been followed by robust increases in both stock and gold prices. But what happened? After the first day...both headed down.

What's up? What if the economy were not really recovering at all? You've seen the evidence. Lowest household income since 1984. Falling wages. Fewer people working (as a percentage of the working age population) than ever. Industrial output...barely positive. And yet, stocks are near an all-time high. Why?

What if Fed policy is the main thing driving stocks and gold? And what if both had already fully priced in the Fed's QE-to-Eternity policy? Then, where could they go? Only down, right?

Maybe...at least until something new comes along... Stay tuned.

Back to Janet.

Every government wants to manipulate the value of its currency. It will always say that it is acting in the name of some public purpose - to protect citizens' savings, or to promote employment, or to stimulate a recovery.

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You don't have to be a crusty cynic to understand the real reason: to help the ruling elite transfer more power and money to itself.

Rarely has that been more apparent than in Venezuela, where Hugo Chavez restricted free trading in the bolivar in order to promote his own political ambitions. Most prominent among those ambitions was his desire to be re-elected. And the way to be re-elected is to give (or appear to give) something to the masses that they couldn't get on their own.

That, dear reader, is why 7 out of 10 American families get more from the feds than they pay in taxes. Government confers on its favorites the right to lie, cheat, steal, and even murder other people. In a democracy, the will of the majority must be won with these tools - they are all government has to work with (it produces no wealth on its own, so it has nothing to offer otherwise). Typically, shrewd leaders offer giveaways to the poor; dollar for dollar, their votes come cheaper than those of the rich. One of those giveaways is artificially low consumer prices. The great politician announces to the masses, for example, that he "will not permit the evil capitalists to raise prices on milk and bread and other basic food items." That's always a crowd pleaser.

He runs into problems, however, when he is simultaneously ripping off rich and poor by printing extra units of his currency. This causes prices to rise. If he isn't careful, people will catch on. So, he is almost forced to lie about the source of inflation and put on price controls.

Shortages inevitably follow, causing inappropriate investment, consumer binges and other problems...which eventually overwhelm the economy. But the lying, cheating, and stealing can be fun while they last - which can be a very long time. In Mr. Chavez's case, they lasted longer than he did.

And here we have an update from Caracas from Reuters:

    If you live in Venezuela and want to fly abroad, get in line.

    Flights are booked solid months in advance, not from a new interest in exotic destinations but because locals are profiting from a play on the nation's tightly controlled currency market.

    The airline scramble has added to shortages, power cuts and runaway prices as another symbol of the Byzantine economic challenges facing the new government of President Nicolas Maduro in the South American OPEC nation.

    "It's like you're trapped here," said travel agent Doris Gaal, telling a customer he would be better off taking a boat to a Caribbean island because the daily flights are fully booked. "It's all because of these stupid dollars!"

    After a decade of currency controls set up by late socialist leader Hugo Chavez in 2003, the disparity between the official and black-market rates for the local bolivar currency is higher than ever. Greenbacks now sell on the illegal market at about seven times the government price of 6.3 to the dollar.

    There are strict limits on the availability of dollars at the 6.3 rate, but Venezuelans are cashing in on a special currency provision for travelers. With a valid airline ticket, Venezuelans may exchange up to $3,000 at the government rate.

    Some are not even flying, leaving many planes half empty.
The poor travel agent has it wrong. The dollars are not nearly as stupid as the bolivars. But both are ignorant in a crucial and destructive way. Prices are information. They are supposed to give us important cues. Low farm prices tell farmers to plant less on the lower 40. High prices of old phonographs tell householders to go look around in the attic. High prices for credit tell lenders to lend more and borrowers to borrow less.

Lying about the real value of the bolivar, the Venezuelan feds have created an awkward mess. But the US feds lie too. Prices are set, not by willing buyers and sellers for their mutual benefit, but by the Fed, for the benefit of the feds' favorites. The Fed adds dollars to the world's supply...and uses them to purchase bonds...thus artificially driving up bond prices (and driving down yields). Low yields tell borrowers a fib -that there are more resources available to be borrowed than there really are. Borrowers take the miscues...they add more debt...and the whole web of credit yields, currency values, consumer prices and asset values becomes even more tangled.

Eventually, it is so tangled that it cannot be untangled. Like the Gordian knot, it must be cut...

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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