There’s lots of uncertainty out there about where our economy and our various markets are heading over the next several years. In the following pages I’ll do my best to lay out a general outline of where we’re headed, however, I can sum up my thoughts in a few short sentences. Read further to get the details, but in general, I would recommend that people be very cautious in assuming that borrowing and printing trillions of dollars will work as a “stimulus”. Since when did borrowing money to consume ever keep someone out of bankruptcy? The “stimulus” may appear to work for a year, or two, but the spending cannot be sustained because our creditors will not allow it. Therefore its beneficial aspects cannot be sustained. A productive economy does not benefit from a few new roads and bridges, etc. What is needed for real “stimulus” is investors and business people again taking risks, opening new businesses or expanding existing ones. A spending binge by the U.S. government, financed by debt, taxes, and printing money is the exact opposite of what is needed to create the environment for risk taking. Re-paving the road in front of my house is not going to give me the warm and fuzzies to risk capital and reputation in a new economic enterprise, when the current administration is intent upon vilifying every “rich” person and every evil corporation. On the contrary, the government is scaring the hell out of people like me with the very act of taking my money and spending it so frivolously. A good analogy of the U.S. is the “rich” playboy who has exhausted Daddy’s fortune, but is temporarily able to continue borrowing to sustain his playboy lifestyle. Eventually, the lenders will wise up and when the money spigot is cut off the playboy gets the agony of adjusting his lifestyle. Right now the U.S. economy is that playboy. We’ve exhausted our wealth and we’re only able to “appear” wealthy because of the massive amounts of personal, corporate, and government debt that we’ve incurred. We’re now waiting for the money spigot to get turned off by our Asian creditors!
The Obama Administration (Democratic) and the Democratically held House and Senate are spending trillions of dollars in bailouts (GM, Chrysler, AIG, etc.), bank capital injections, “stimulus” spending, “Cash for Clunkers”, on and on and on and on. In addition, the new administration is trying to spend another Trillion + with their plans for nationalized healthcare and the soon to be announced “Cash for Baby Diapers” and “Cash for Kittens” program.
To finance the everyday Trillions in normal spending plus the new Trillions in “stimulus” spending, the government can do one or more of the following activities to procure the money to finance its plethora of spending projects:
- increase taxes, which is politically risky;
- increase the debt on our children, which is also, as of late, becoming increasingly risky politically;
- the Federal Reserve can purchase the Treasury debt using its money printing ability called “quantitative easing”.
Although tax increases are being proposed they have not yet taken affect, instead the Treasury is borrowing more money and issuing more debt for our grandchildren to repay. The Treasury (our grandchildren) now owes around $12 Trillion dollars and our primary creditors, Asia and the Middle East, are getting anxious about our ability to pay back this Mount Everest of debt. With our lenders becoming scared and anxious, the Federal Reserve System (the nation’s central bank) comes to the rescue by purchasing the Treasury Notes and Bonds. Unfortunately the Federal Reserve System does not have any money to purchase anything, much less the Treasury debt, so it is just printing the money. Or, more accurately, the Federal Reserve, by the blip of a computer key, creates an electronic credit to the Treasury’s checking account at the Federal Reserve. Presto!!!! Almost by magic the Treasury has the money to finance its various activities to run the government, fight the wars, and stimulate the economy.
The spineless politicians know that raising taxes is unpopular with current taxpayers and taking on more debt is becoming problematic as our creditors are getting uneasy about the creditworthiness of our young children and our unborn grandchildren. Let’s not even discuss the selfish arrogance involved with forcing mountains of debt on the backs of our children and grandchildren. Don’t even get me started about that piece of financing chicanery. Instead, our political giants in Washington have chosen a course which includes increasing the national debt AND printing money. Printing money always looks like the easy way to finance a deficit, at the beginning, because you avoid all those pissed off taxpayers who don’t want to pay higher taxes in order to finance the increased government spending. Printing money is the cheaters way of financing a debt. This “solution” to financing the gargantuan levels of government spending always appears harmless in the beginning, but eventually the laws of supply and demand rear their inevitable head. If you increase the supply of money flowing through an economy without increasing the supply of goods and services, the inevitable result will be higher prices. As prices begin to rise the reverse side of that coin is the value of the money begins to drop, which causes lenders to raise interest rates because they are concerned that the dollar they loan out today will not be worth a dollar in the future when the loan is repaid. Economic endeavors take on too much uncertainty when the value of the money you receive in return for the endeavor becomes unreliable. Money (the Dollar) is the “blood” circulating through the “body” of our economy and the entire world economy vis-à-vis the fact that the U.S. Dollar is the world’s reserve currency. Imagine draining ½ the blood out of your body then replacing the missing blood with plain old tap water? I’m not a physician, but I have to guess that your body would not work real well. As a matter of fact, I would dare to guess that you would probably be very, very sick or very, very dead! Likewise debasing our currency (diluting our economic blood) by printing money with the blip of a computer key through the Federal Reserve’s “quantitative easing” program pretty much accomplishes the same thing – it either makes the economy very sick or very dead! Here’s why: If you are a deposit customer of a bank (checking, money market, or certificate of deposit) you are, in effect, a money lender to that bank – if you have a deposit account at a bank you are lending that bank your money. Likewise, the bank that turns around and lends your deposit out to a borrower of the bank is also a lender. A bank “borrows” your deposit monies from you and then lends these monies out to their borrowers. OK, now that we’re all aware that each of us to a lesser or greater degree are “lenders”, imagine what happens when the value of the dollar is declining by say, 10% per year. If you lent the Bank your money you would need to get at least a 10% interest rate on your money just to breakeven. Of course you would also want another 3 – 5% for profit. In this scenario, the interest rate you receive on your deposit would need to be at least 13% – 15% (10% currency depreciation + 3% to 5% for profit). Now what would you do if the Dollar was depreciating so fast that no one could really determine what the rate of decline was? Would you “lend” (deposit) to the Bank at 13% – 15% if there was a good chance that the Dollar was depreciating at a rate faster than 10%? Probably not! During inflationary periods (depreciating currency equals rising prices), savers, who lend (deposit) to banks, or banks who lend to borrowers get hammered unless they are able to charge higher and higher rates of interest to compensate themselves for the loss in the value of the currency between the date they lend the money and the date the money is paid back. During inflationary periods lenders either charge exorbitant rates of interest or they just quit lending. If the inflation gets bad enough lenders stop lending altogether and begin trying to get rid of their currency as fast as they get it by purchasing hard assets (gold, silver, commodities, etc.) that will hold their purchasing value. At the peak of an inflationary cycle, it’s possible that the rush to get rid of the currency and purchase something “hard” begins to look a lot like the children’s game of “Hot Potato”. So you have a situation where savers (depositors) quit saving (depositing) and your banks get gun shy and charge exorbitant rates of interest to compensate and protect themselves from the currency debasement risk. That’s Great! In this scenario we have an economy that’s trying to function with no savings (no capital means no “Capitalism”) and/or sky high interest rates. It doesn’t take a genius – our Washington leaders excepted of course – to understand that printing money to finance the Treasury debt is not a real prudent idea.
So much for theory! Back to today’s reality. What is going on today?
With all the government bailouts, stimulus plans, “Cash for Clunkers”, etc. that you’re reading about, what is happening is we’re financing these spending projects with more and more Treasury Debt, purchased by foreigners AND by the Federal Reserve’s money printing. Our “funded” U.S. Treasury debt is approximately $12 Trillion and annual deficits (annual increases to that debt) are projected at $1 – $2 Trillion per year from now until the cows come home. As noted above, this debt is being financed in large part by our Asian and Middle Eastern trading partners. Soon, taxes will start rising, as well. But the key thing to remember is that the government, which has been broke long before this crisis, has just taken on even more debt and the Federal Reserve is printing even more money. Eventually, the world will wake up to the fact that the U.S. government and the U.S consumer are not particularly safe places to lend money. This is especially true now that Big Government liberals control the Presidency and the two houses of Congress. Our creditors (the Asians, Middle Eastearners) will either completely quit lending to the U.S., or they will demand much higher interest rates to compensate them for the high risk of loss through debt defaults and the inevitable debasement in the purchasing power of the dollar. The reader should remember that anyone who invests in dollar denominated assets has two ways to make or lose money:
- the actual rate of return on the investment itself;
- the conversion of their dollar profits/losses back into the currency of origin.
If a foreigner makes a killing on a particular dollar denominated investment – Treasury debt, corporate stocks, bonds, real estate, whatever – but then loses money when he converts his dollar profits back into the original foreign currency he STILL LOSES MONEY! Foreigners DO NOT invest in this country because they love us; they invest here because they like making money in a stable economic, political, and monetary environment. Right now the economic and monetary environments are extremely unstable. Will the foreigners continue to show up to purchase U.S. assets, including Treasury debt, real estate, stocks, bonds, etc.?? What happens if they decide to go elsewhere to make their investments? When the foreigners quit demanding Dollars to lend to the U.S. Treasury or to make other investments in Dollar denominated assets the Dollar will collapse in value and hard assets like gold, silver and other commodities will begin a parabolic rise in value. Interest rates will begin to explode upwards as the world’s biggest debtor, the U.S. Treasury, gobbles up any available capital at any price. The world’s second biggest debtor, the U.S. consumer, will be left to compete in the marketplace with Uncle Sam for any lendable capital. Interest rates will head dramatically upwards.
There is an alternative to the above scenario. The spineless politicians could actually have a “come to Jesus” moment and decide to finance their spending in a more honest fashion than printing money or making our children and grandchildren pay for our selfish profligacy. They could decide to tax the hell out of a dwindling base of taxpayers. The problem with this, however, is that the people and companies that they will target for increased taxes (the undeserving “rich” and the dastardly and evil corporations) do not have to put their money to work in the U.S. They can easily move offshore, or they can simply retire and quit paying taxes altogether. Remember, the massive Baby Boomer generation is beginning to retire (i.e. quit working and QUIT PAYING TAXES) by the millions, starting this year, 2009. Driving our most productive and profitable people and companies offshore has been going on now for 30+ years, but it will get worse as the government, run by Big Government liberals, will be much more predatory in its search for tax revenues. As more and more of America’s productive capacity is driven offshore or retires, our tax base gets further and further eroded, which means the government will be more and more desperate to find money wherever it can. The predatory tax policies of the government, the regulatory overkill, the extortionist demands of the unions and the trial lawyers have each contributed to the gradual atrophy of our manufacturing capacity by about 70% over the last 30 years. This problem will only get worse. Far worse! Can you spell “France” or “Argentina”?
Don’t be fooled into thinking that the good times will return anytime soon. The anti-capitalist/pro socialist sentiments of our political leaders will continue the inexorable decline of the U.S. economy and the average American is not savvy enough to understand that big government is not his friend. The small government/low taxes/modest use of debt/personal responsibility philosophy of our founding fathers has long since been replaced by selfish “free lunchism” and a philosophy of “somebody else should be forced to feed me, clothe me, and take care of all my needs”. As of the 2008 elections, the three branches of our government are now dominated by Big Government liberals who are committed to pandering to this attitude. The average American and his Socialist panderers in Washington don’t understand that wealth is not created by government. You don’t create more wealth by punishing the wealth producers through policies of income re-distribution. We are rapidly becoming France, and the American public is not savvy enough to resist the allure of the “free” lunch provided by government and the allure of Big Brother solving all of our problems for us. While we’re becoming France, Asia and India and the emerging 3rd world countries will gladly accept and welcome the flight of capital from the U.S. I’m afraid that the wheels have fallen off the U.S. racecar! Don’t make any bets that the wheels are going to get put back on by the following policies being implemented and/or discussed by the genius Boobs in Washington:
- Give every American a check for $600. Of course we don’t have $600 for every American, so let’s just borrow the money from our grandkids — OH WAIT !!! We already did that back in June and July of 2008. I’m impressed with how much good that $160 Billion in extra debt has done to turn around our economy. Genius! Pure genius!
- If borrowing $160 Billion from our unborn grandchildren and sending it to low income Americans to spend on an Asian made TV set was such a great idea back in the summer of 2008, why not do more of it! Of course the Asian made TV set cost $1,500 — he/she used their $600 government rescue check and then borrowed $900 from the same Asian that sold them the TV set. Worked like a charm to stabilize our economy, didn’t it? Genius! Pure genius!
- Several billion for “Cash for Clunkers” was another doozy of an idea. Of course the idea was to re-distribute $4,500 of taxpayer monies and give it to the “free” lunch crowd toward the purchase of an automobile, hopefully a Ford, GM or Chrysler, so as to payback the unions dominating that industry for all their support in getting the Democratic party elected. Didn’t quite work out that way, most of the “Cash for Clunkers” went to purchase foreign made autos – Toyotas, Hondas, etc. So we took monies belonging to our taxpayers (the people that earned the money) let it briefly pass through the hands of “free lunch” Americans where it eventually ended up in the hands of our Asian friends. The good times don’t stop there, however, as the $4,500 was only a down payment and the car buyer had to incur additional debt on top of the gargantuan mountain of debt they already have. Genius, pure genius!
- Another idea of pure genius floating around Washington is the idea of forcing banks and mortgage companies that hold mortgages to write-off and reduce the principal amount owed and reduce the interest rate charged to Borrowers. I’m sure the banking and mortgage industry will see this as a great idea!! If this is done, the mortgage industry will raise its credit standards and its pricing to compensate for the losses being forced on them by our geniuses in Congress. On top of that, what are the chances that our under-capitalized banking system will be able to attract investor capital when the banks are being forced to write off billions in underwater loans because the idiot trial lawyers running Washington thinks it’s a good idea? When the clowns in Washington have destroyed the ability of the banking system to recapitalize itself in the marketplace, I’m sure we can look forward to another doozy of a taxpayer financed bail-out plan for the banks. Genius! Pure genius!
- Another whopper of an idea is to nationalize our healthcare system for everyone in the U.S., not just old people. Since Medicaid and Medicare (“free” healthcare for the elderly) will eventually bankrupt the U.S., why not accelerate the entire bankruptcy process by offering “free” healthcare to 100% of American citizens, and, of course we wouldn’t want to exclude our illegal Mexican friends. Genius! Pure genius!
- Let’s also help out our union organizers, who have done so much to bring health and vitality to our automotive and airline industries. Let’s help them force their extortionist demands on even more American companies and turn every state into Michigan by making the secret ballot illegal when it comes to voting whether, or not, you want to have a union represent you in your workplace. Legislation is ready to be signed by our new Socialist president that will make the secret ballot illegal. So the union thugs can strong arm a recalcitrant worker who has to publicly declare his/her desire to not join a union. Imagine the strong arming that will be done to the hold-outs that don’t want to unionize. Genius! Pure genius!
- Here’s another great idea: change the way Bank’s account for their assets. Much talk is under way with the Boobs in Washington to eliminate the “mark to market” method of accounting. “Mark to market” accounting means that if a Bank purchases a security for $1 Million and its value declines to $400,000, then the $400,000 figure is what the Bank is allowed to show as its value. To eliminate “mark to market” accounting means the Bank gets to continue the fairy tale that its asset is still worth $1 Million. So Congress wants the Banks to utilize an accounting system that massively overstates the financial strength of a given Bank. Sounds like a great idea! Let’s see now, Banks are afraid to lend to each other now when we have honest accounting, let’s see what happens when the accounting begins to look like Enron and you can’t rely on the Bank’s accounting to accurately represent the financial strength of the Bank. This is what the Japanese did in the 1990’s and they had a 15 year recession — it’s called the Lost Decade in Japan. Genius! Pure genius!
- The Socialists in Washington have given hundreds of Billions to bail out General Motors, and Chrysler (among others) in order to pander to the union voters in Michigan, so that they can keep their $72 per hour jobs and benefits packages, while their next highest paid competitor receives an average $45 per hour in pay and benefits. Let me make sure I’ve gotten this correctly: the Democrats in Washington are giving the over paid union workers hundreds of billions borrowed from our grandchildren so they can continue to get overpaid 60% more than Toyota pays? Genius! Pure Genius!
- These same Socialists will come a running when the states run out of money and come to Washington for a bail-out. California has already stepped to the front of the line with its multi-Billion dollar bail-out request. Downsizing their spending never crosses the mind of these giants of the legislative process. Genius! Pure Genius!
I hope through my sarcasm in this article that you, the reader, get even a small inkling of the level of respect I have for those clowns in Washington and in many state capitols. Of course, this is what you get when you elect trial lawyer hacks and con men and give them authority over the $14 Trillion American economy. What do you expect?
Folks, I’m painting a pretty bleak picture. It’s not hard to see where we’re headed and I see nothing in the philosophical make up of Congress, our new President, nor the American people that would indicate that we are going to do an about face, cast off big government, and return to our founding principals. If anything, it will get worse. As the economy grinds into recession/depression the people will scream for more “free” government handouts. The Socialists in Congress will be only too happy to pander to the people with more “free” government programs. Can you say “Parley vous Francais”???
Now, assuming you think I am even ½ way right, what do you do about it?
Suggestions for your wealth portfolios:
- Get out of debt as best you can.
- Sell any real estate that you don’t live in. In general, real estate will not be a place to park your wealth. Even the so called “bargains” that we’re seeing now will not look like “bargains” once interest rates begin their inevitable rise. Remember that most real estate is purchased with credit, and credit, to the degree that it is even available in the future, will be very, very expensive. High interest rates will kill the real estate market in most places. There will be some markets that continue to reflect rising real estate values, but not overall. Be careful if you think your market is immune from high interest rates or the recession contagion that is sweeping our country.
- If you must remain in debt, lock in fixed interest rates on the debt. Don’t get caught with a variable rate mortgage or home equity line of credit. Interest rates are about to explode upward! Go to your lender and ask them to “fix” the rate. Interest rates are still at near historic lows. This won’t last much longer.
- Sell your bond portfolio or avoid bonds altogether if you have monies to invest. Higher interest rates will cremate the value of a bond portfolio.
- Be very, very wary of corporate stocks! I know what all the Wall Street talking heads are telling you — stay in the market, or else you’ll miss out on all the money to be made when all of this turns around. I’ve got news for the talking heads – by the time this turns around you might be a lot older and . . . a lot poorer!!! I know you’ve probably lost a ton of money already, but you’re just going to lose even more if you don’t get out ASAP. The market may continue to rally due to all the trillions in “stimulus”, but you must remember that this stimulus spending can’t go on much longer because our creditors will not tolerate it. Eventually the music will stop, the money will stop flowing, and the rallies in the stock market will have to rely on its underlying fundamentals, which are abysmal. The stock market may continue to rally in nominal terms, but will never be able to keep up with the inflation that is coming down the road. For that you will need to be invested in precious metals and other commodities.
- Some stocks will do great, but you have to be very, very selective. For example, I’m bullish on oil and gas stocks, over the long run. War related defense type stocks will probably perform well. I’m not seeing a lot of brotherly love appearing on the horizon. If anything, warfare over oil and gas, fresh water, food stocks, commodities, etc. will probably be picking up steam in the near, mid and far future. And, thanks to our ever lovable terrorist friends, I think it’s a safe bet to assume that jihad and revolution will continue to pick up steam. Despite the ability of our new Socialist president to walk on water I don’t think he will be able to persuade our enemies that they’ve been naughty and should give up their aims to destroy us. Of course even if being “tough” was in the vocabulary of the new administration, considering the fact that the U.S. is bankrupt –we now can’t afford to be “tough”. The U.S. is almost bankrupt – we can’t afford anymore wars and our enemies know this. So even though the U.S. can’t afford anymore wars, the rest of the world will be only too happy to push their nefarious agendas and to start and fight wars.
- Be careful about too much money being placed in “safe” bets like bank CD’s, money market accounts, etc. The FDIC now guarantees most deposits and the U.S. Government guarantees the FDIC, so bank deposits will be “safe” in the sense that even if your bank fails, you will get the nominal value of your money back, because the government will just print the money to support the FDIC and your local bank. But you will lose the inflation adjusted value of your money caused by the money printing. In other words, if the entire banking system collapses, and the FDIC collapses, the Federal Reserve will just print the money to reimburse depositors, and recapitalize the FDIC and the Banks. Presto! Everything’s great again! Eventually the money printing will cause massive inflation (depreciating the Dollar). Remember you’re not trying to keep your money, what you’re trying to keep is the purchasing power of your money. There’s a huge difference. For example, if your bank is paying you 4% interest per year and inflation is 10% per year, then at the end of the first year you have slipped 6% in your purchasing power. Over a long period of time you will have lost all of the purchasing power of your money. Historically, CD’s do not keep up with inflation. The U.S. government is the largest debtor in the world, next in line is the U.S. citizen. Governments and people that are deep in debt LOVE inflation because it reduces the real, inflation adjusted cost of the debt AND because it typically increases the value of any underlying asset associated with the debt. In other words, the debtor pays back the debt with money that has been debased, so the lender gets the nominal value of his money back, but not the actual, real inflation adjusted value of his money. Trust me that the interest rate you will receive on your CD’s will in no way compensate you for the real rate of inflation (currency debasement). Inflation is about to explode! Big time! Can you spell “Weimar Republic” (post World War I Germany) or Argentina, or more recently Zimbabwe? Hopefully, it won’t get that bad in the U.S., but who knows?
- Buy Gold and Silver and Platinum.
It’s my opinion, of course, but I’m far more convinced that bad things are about to happen to the U.S. economy than I am that economic sanity is about to implant itself in the thick skulls dominating Washington. I mean it’s very simple to me: if the imminent collapse of the world’s entire financial system can only be saved by the U.S. government borrowing and printing trillions of dollars that we can’t afford, then we’re in a world of hurt. Here’s the reality: we have a government that is so deep in “funded” debt totaling approximately $12 Trillion that it can never be repaid, and that’s not even beginning to try to figure out how to pay back the unfunded liabilities estimated at $56 Trillion to support Medicare and Social Security for our now retiring Baby Boomers and existing seniors. We have everlasting projected annual deficits or increases to that debt between $1 and $2 Trillion dollars as far as the eye can see. Worst of all, we have a vast amount of the citizenry in this country that is now addicted to their government provided “free lunch” and will fight to the death via the ballot box to make sure that Big Government Spenders keep getting re-elected. So, there’s no stopping the money spending freight train. We have citizens in this country that are just buried to their eyeballs in debt and we have an economy that is 70% dependent upon that same consumer continuing to SPEND, SPEND, SPEND. We have our Asian and Middle Eastern creditors who are beginning to worry about financing this mountain of debt. They’re also desperate to get out from the pending collapse of the Dollar, but can’t figure out how to hit the “Exit Door” without getting stampeded themselves. The recent bull market in commodities is an indication to me that the Asians, in particular, are roving the planet in an effort to dump their dollars by purchasing and obtaining access to raw materials to support their own internal economies. Their main concern now is how to dump the Dollar without anybody else figuring out they’re trying to dump the Dollar. They don’t want to trigger the stampede out of the Dollar because with all their trillions of Dollar reserves they’ll end up getting crushed. We have brewing right now a recipe for a Titanic type episode for the Dollar and for tsunami sized increases in interest rates, money printing, and financial and economic turmoil and a very real possibly of a monetary meltdown. What more do I need to say: Do you own Gold, Silver, and Platinum?
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