»The Daily Reckoning by Bill Borner

Is this a sound business model?
30 JULY 2012

Baltimore, Maryland

Friday, the Facebook boys got creamed...

That's what happens when your business model sucks. Specifically, the social network was counting on Zynga - another time waster - for revenue. Apparently, people have found new ways to waste time. One of Zynga's founders wondered publicly whether the whole 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 around stocks...was what Mario Draghi said. After several down days, his words caused stocks to rise in the US - 187 points on the Dow.

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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 meltdown of the European banks...to prevent the bankruptcy of several European nations...and to protect the whole European Union. Reuters has the story:

(Reuters) - European Central Bank President Mario Draghi pledged on Thursday to do whatever was necessary to protect the euro zone from collapse, sending a strong signal that inflated Spanish and Italian borrowing costs were in his sights.

Fears about the euro zone'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 euro zone 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. This year, the unofficial, off-the-record, informal tallies are putting consumer price increases near 35%. Since 2007, prices have nearly tripled, and the supply of money in circulation is increasing at about a 36% annual rate --.which is beginning to look like the situation is 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, traditionally, people with money have saved their money in dollars...preferably in a bank account in Miami.

"But you can't wait too long to do it," says

Ooops. Looks like it might already be too late for many Argentines. Here's the latest from the land of the Peronistas, from Daniel Politi:

BUENOS AIRES - 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 Fernandez 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 US is coming to resemble Argentina. It's policymakers try one dumb fix after another. But so far, savers still believe they can trust the dollar. And they are probably right - for a while.

People in Greece and Argentina seek refuge in the dollar - causing the greenback to 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."

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