The Guennol Lioness

Which country had the best performing stock market in the world last year?

Answer: Zimbabwe, up 12,000%.

But since the Zimbabwe dollar trades at 25 million to the U.S. dollar, it doesn't mean very much.  You can be a billionaire in Zimbabwe and still be impoverished.  That is an extreme example of inflation.

Of course in America that could never happen.  Our stated inflation rate runs 2-3% per year at the most.  In reality, the inflation rate is more like 8-10%, but there are very good reasons for understating inflation.  Millions of Social Security recipients and Federal retirees have their pensions increases tied to the inflation rate.  So if you understate the CPI, you save a lot of money.

In addition, the Gross Domestic Product is computed by backing out inflation.  So if the economy grew at 6% in nominal terms, you deduct the official 2% inflation rate, and conclude that the real rate of economic growth was 4%.  Then everyone yells, "Horray!" and buys lots of stocks.  In reality, the inflation rate was 8%, so that 6% nominal growth translates to a negative 2% economic contraction.  The simple fact is that the economy has been in recession for at least the past two years.

You would never know this from listening to the cheerleaders on CNBS.  The financial analysts assure us that all is well.  If you've tried to buy groceries or gas lately, you know better.  Or health insurance or college tuition or anything but a big-screen TV.  But the official CPI is constantly reformulated to remove food, energy costs, or anything else that might be going up.

To make matters even worse, the anemic growth of the past seven years was accomplished only at the expense of enormous monetary and fiscal stimulus.  The M3 money supply (if the govt would publish it) was climbing at the rate of 16.7% in February, an all time high.  Zimbabwe, here we come.

What little growth we have seen since 2000 was underpinned by massive consumer spending made possible by mortgage refinancing.  Anyone with half a brain could have seen that this was unsustainable, but it wasn't until last year that someone actually stopped to ask whether a crappy one-bedroom condo in a bad neighbrorhood was really worth half a million dollars.

So now the Fed has to lower rates to reliquify the banks.  The banks have to be able to borrow short at 1% to lend longat 4% (doesn't that have disaster written all over it, and didn't they learn anything from the 70's?) to make enough money to stay solvent.  By the way, that thing you saw falling off a cliff was the value of the U.S. dollar.

Which brings me to the Guennol Lioness.  This is a miniature sculpture, barely 3 inches tall, and its legs are broken off.  But when Sotheby's auctioned it in December, it was expected to realize $14-18 million.  That's in U.S., not Zimbabwe dollars.

It actually sold for $57 million.  I don't know what its historical significance is, but unless that little thing can cure cancer, it ain't worth $57 million.  No, we don't have any inflation.

George F. Bush, you're doing a fine job.