Monstrous inflation in socialist Venezuela -- Hello, Bernie Sanders

Pricing Perspectives on Money, Monsters . . . and a Good Man

By —— Bio and Archives--January 13, 2018

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Pricing Perspectives on Money, Monsters
Regular readers at CFP may have stumbled upon one or more of my essays, and maybe lingered long enough to learn two of my lifelong interests are economics and hockey. A recent event caused me to reflect on those interests and put some perspective to the pricing of goods and services.

My early introduction to economics came in my pre-teen years when I began to collect stamps. Not for financial gain . . . just for fun. I enjoyed the variety of colors, pictures, emblems, and shapes like any child would. One in my possession was a German stamp circa 1923, not very colorful as I remember it, but interesting in that it was priced at 10 million marks! Looking back on it gives a different meaning to the phrase “going postal”! I knew we could send a letter in Canada for 3 cents and the difference was confusing. A million of anything was incomprehensible to me then. And inflation was something I associated with balloons. Much later in life I would learn that real inflation affects the price of everything. And out of control inflation was something to be feared, kinda like the monster Godzilla.

Monstrous inflation in socialist Venezuela—Hello, Bernie Sanders

German monster inflation began without screaming in the streets. That would come later. To finance “the war to end all wars” (remember WW1?) Germany declared it would no longer convert its currency into gold. It borrowed money, hoping to repay the debt when it won the war and ravaged its victims. Oops! At that time, four of the once steady German marks could be exchanged for one US dollar. Recognizing German efficiency and assuming their postal system was as competent as ours (keep the laughter down) a stamp should have cost a fraction of one mark.

Of course this was well before my arrival in the world, but I was well into my career in finance when Richard Nixon made a similar decision in 1971. He meant to counter inflation amid a fear that people would rather own an ounce of gold than the thirty-five US dollars it could be exchanged for at that time. Ergo the government would end up with all the dollars and there would be no gold in Fort Knox. He was right about that part. Had the inevitable taken place we never would have been introduced to Goldfinger and Pussy Galore! Big oops!

Now we have the fascinating case of monstrous inflation in socialist Venezuela. (A shout out here to Bernie Sanders and his not so merry millennials! What are they teaching those snowflakes anyway?) Late last year the rate of inflation screamed past 4000% and, according to IMF “experts” (such as they may be called), is heading toward 24,000%! Why stop there? Who can predict that? Why not a zillion%? Of course interest payments on Venezuelan bonds are suspended and the carcasses, er bonds, are trading “flat”, meaning no coupon clipping for income. Coupons could still have value though in a country suffering from a lack of toilet paper. Apparently being oil rich and a member of OPEC isn’t quite enough to get by on. Each carcass, soon due for principal repayment in 2019, is selling for a small fraction of the face value. Seems like a good short to me. If there are any film makers in the country they have an opportunity to create their own home grown monster. They could call it Bondzgonni . . . or something.

When I started out in the world of investment in stocks and bonds I received a slice of sage advice: Never invest your money in a country where they wear straw hats all year round. Go to your globe and think about that. Speaking of banana republics, let’s distinguish between the cost of renting money, aka interest rates, and the price/value of money. The latter is what money can be exchanged for. Bananas cost about 20 cents each today so $1 is worth 5 bananas.

As much as central banks fear inflation, apparently they fear deflation more. That’s new to most of us. Unlike rampant inflation where you spend money as fast as you can before it becomes worthless as prices for everything soar ever upward, in a deflationary environment you hoard cash, waiting to buy goods and services later at lower prices. Bargains everywhere if you just wait! Predictably, the economy grinds to a halt when nothing is being purchased and unemployment skyrockets. Cue the entrance of a different monster . . . Rodan!

To avoid the foregoing and spur borrowing and buying, central banks have determined the appropriate weapon to slay the deflation monster is a NIRP . . . “negative interest rate policy”. As you might expect, Japan is pursuing a NIRP. They are good at creating and naming monsters. And these monsters are such box office hits other countries are pursuing them rather than fleeing from them. The European Central Bank, fearing deflation on the continent, dictated savers who normally would expect to receive some amount of interest, would have to pay banks to hold their cash on deposit. Of course, alternatively, one could stuff cash under the mattress to avoid the bank fees. Might spur gun sales . . . and the purchase of pit bulls as pets. The Chair of the Board of Governors of the Federal Reserve System even floated the notion we might see the dreaded NIRP in America. I wonder if one will need special glasses to view it?

What’s the point of all this?

Now to my other fave . . . hockey. Recently, one of the game’s most beloved players passed from this life. He was Johnny Bower, revered goaltender for the Toronto Maple Leafs for a dozen seasons. He was born in 1924, around the time of the severe German inflation, and lived long enough to observe the dramatic change in the value of personal services such as he provided. As a youth he fashioned his first goalie pads from a discarded mattress. His stick was carved from a tree limb, and pucks were “road apples”. . . frozen balls of horse manure.

In the original six-team National Hockey League (now 31 teams), jobs were hard to come by and fiercely protected by those who had them. Players would remain on the ice even when severely hurt rather than let another prospect take their place in the lineup. Bower came to the Maple Leaf organization at age 33 after toiling for years in the minor leagues for peanuts in pay. He led the team to four Stanley Cups and retired at age 45. He won the coveted Vezina Trophy twice, awarded annually to the league’s best goaltender. Recently, and thankfully prior to his death, he was named one of the best 100 players of all time. He played in the era when no one wore a helmet, and no goalies had masks. He lost many of his teeth to errant pucks and sticks and had over 200 stitches laced into his face, most endured without a numbing agent.


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Johnny Bower, Toronto Maple Leafs

And what was all that worth? In 1967, the year Toronto won their last Stanley Cup with Bower guarding the net, he got a raise in pay . . . to $11,000. That was for the entire season . . . not for one series, or one game! When he retired at the end of the 1969-70 season his final annual pay was $25,000.

Fast forward to today. The highest paid goaltender in the NHL, playing for the NY Rangers, signed on for 7 years at $8.5 million per annum. So far, he has won one Vezina Trophy and zero Stanley Cups. It’s unlikely there will be any more of either. Heck, even Toronto’s coach who never played professional hockey, has a decent contract. He signed on for $50 million over 8 years. He has one Stanley Cup to his credit, earned while coaching the Detroit Red Wings several seasons ago.

Toronto has 13 Stanley Cup wins in 100 years of league play, second only to Montreal (23). But the team hasn’t won a Cup since the last one with Bower in goal in 1967. That’s 50 years! Forget the predicted consequences of the phony global warming scare, that’s a real drought being experienced! You think Toronto badly misses “Mr. Maple Leaf”, as he became known? What would he be worth today?

Canada Post honored Bower with a stamp a few years ago. It cost 49 cents. To match the man’s worth 10 trillion cents would not have been enough!

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Bob Christie -- Bio and Archives | Comments

Bob was born in Toronto and began his financial career as a trader on the Toronto Stock Exchange. He relocated to California and became SVP and CFO of a $multi-billion diversified financial entity. He served on the board of many companies in Canada and US. An avid yachtsman, he owns a twin diesel ocean going vessel once featured in Architectural Digest magazine. He maintains a hockey web site. “slapshotreport.com” and currently resides in Sausalito, California.

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