January 28, 2012
Floodgates
“I wish it were possible to obtain a single amendment to our Constitution. I would be willing to depend on that alone for the reduction of the administration of our government to the genuine principles of its constitution; I mean an additional article, taking from the federal government the power to borrow money.”
–Thomas Jefferson
An Insolvent Global Banking System
Ah, what would it be like if Jefferson had gotten his wish? The government forced to have its act together. No more spending money it did not have. No more Federal Reserve Bank money printing to buy pieces of paper called treasuries (government debt) – or to use to bail out big banks (not just American, but foreign too) which make bad decisions…
OK, back to reality… I’ve said it before and I’ll say it again – it’s my opinion the global banking system is insolvent. But for $trillions already printed out of thin air by the Federal Reserve (and other world central banks), and injected into the banking system, I believe a massive post-Lehman regression to the mean (some would call it a deflationary collapse) would have already taken place. I see the system still teetering on the edge of the abyss, and unless multiples of $trillions are printed and injected into the world financial system within the next 3-6 months – it may be “look out below!”
Speaking of Insolvent…
Speaking of insolvent, the United States, along with certain other developed nations, appear to be broke. After yet another increase ($2.4 trillion) in the U.S. debt ceiling passed in the summer of 2011 – the United States government has blown through $900 billion-$1trillion in about half a year to crack the $15 trillion mark. To me, the rocket fuel propelling this seemingly unfettered skyrocketing of the debt — is the ability of the United States (via the Federal Reserve Bank) to print money with impunity. It’s becoming increasingly clear that, but for the luxury of having the world’s reserve currency (at least for now), and being able to print like mad – it would be impossible to meet the promises made by politicians, or to bail out large banks which make bad investment decisions. Let alone pay down the debt.
A Price To Pay
But there is a price to pay as there typically is. I’ve long believed, and stated, that heavily indebted nations will choose to pay their debts by printing and debasing the currency. Those who really pay are the citizens via the stealth tax called inflation — as the dollars their savings are denominated in are watered down, and purchasing power is lost. That is, unless, in my opinion, they correlate their portfolios to the inflation phenomenon.
Inflation You Say?
Yes, inflation. Not the way the government calculates it today, but the way it was calculated pre-1980. Once again I’ll refer (as I did in Inflation) to the chart below from John William’s Shadow Government Statistics (shadowstats.com). Simply put, the red line is today’s “official” inflation rate – the CPI-U (consumer price index). The blue line (ShadowStats SGS Alternate CPI, 1980) is based on the pre-1980 official methodology for computing the CPI-U. I.E. the blue line is representative of the way inflation/CPI used to be calculated before 1980. An inflation rate, by the way, I find far more realistic today as I hit the grocery store, gas pump, etc., to make my purchases.
The Monetary Floodgates Open Wider
In Inflation(for reasons I mention therein) I wrote:
“As I see it, the housing sector is nowhere near a real recovery as deleveraging continues. I believe the Fed will print like mad in an attempt to prop it up.”
And now, per the AP, we learn more cold, hard, facts on housing:
“Fewer Americans bought new homes in December. The decline made 2011 the worst year for new-home sales on records dating back nearly half a century. The Commerce Department said Thursday new-home sales fell 2.2 percent last month to a seasonally adjusted annual pace of 307,000. The pace is less than half the 700,000 that economists say must be sold in a healthy economy. About 302,000 new homes were sold last year. That’s less than the 323,000 sold in 2010, making last year’s sales the worst on records dating back to 1963. And it coincides with a report last week that said 2011 was the weakest year for single-family home construction on record.”[1]
Followed by what to me is the predictable money-printing response from the Fed as reported by Bloomberg:
“The Committee expects to maintain a highly accommodative stance for monetary policy,” the Federal Open Market Committee said in a statement released in Washington today. “Economic conditions — including low rates of resource utilization and a subdued outlook for inflation over the medium run — are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”… Fed Chairman Ben S. Bernanke, speaking at a news conference after the statements, said that the option of further large- scale bond purchases is still “on the table.”[2]
Some Thoughts
Regarding Bernanke’s “subdued outlook for inflation over the medium run” – perhaps he should acquaint himself with Williams’ Shadowstats.com pre-1980 inflation calculation methodology above. Or perhaps we should ask him to explain what he means by “over the medium run”.
And where will the money come from to purchase the bonds Bernanke mentions the Fed is apparently preparing to buy?
Most likely, where it’s been coming from — the printing press. Currency debasement, here we come.
And thus, we help our clients plan accordingly.
As always, I maintain my positive outlook. That outlook is based on my belief a bear market in one thing is often a bull market in another.
As we enter this critical time – now, more than ever – I believe investors need to focus on their investment strategies. Those readers who are clients are fully aware of the strategies we’re implementing in light of unfolding economic circumstances. Others may feel free to contact us to learn more.
Sincerely,
Stephan R. Ernharth, JD
Vice President
Ernharth Group
www.ernharth.com
Go to www.ernharth.com/economic-commentaries to read past articles from our Economic Commentary series.
