Kicking the Can

“Be wary of a woman who only shows
up when you are winning.”

—The Most Interesting Man in the World

But Who’s Winning?

We get a real kick out of The Most Interesting Man in the World. His style is classic – and his advice is perfectly delivered with a knowing dryness – making the Dos Equis TV commercials truly funny, and enjoyable. And he’s usually right on the money.

And it’s not just a man who should be wary of a woman who only shows up when he’s winning. Governments who benefit from the purchases of their debt simply because their currency is the best of the worst should be careful also. While U.S. Government bonds have benefited from the potential demise of the Euro – we believe reality may assert itself before long. The fiscal situation of the United States is arguably not much better than that of Greece and certain other European cohorts. Except for one thing – the U.S. has a printing press. The Federal Reserve can print money at will. And it has massively done so already during the current financial crisis in an attempt to keep the credit-fueled party going. Based on the history of the Fed since its inception, we see no reason why it would stop its printing. When Fed Chairman Bernanke and other politicians speak of defending the Dollar – we simply don’t believe them. Instead, we judge them by their actions and those of their predecessors.

Pictures Do Paint a Thousand Words

Thus as we look at the chart below[1] – we see from 1800 to 1913 the pre-Federal Reserve Bank United States had significant negative inflation. That’s right – negative inflation where the purchasing power of the Dollar relative to itself nearly doubled! However, from 1913 (the year the Fed was created) until 2009 – the Dollar has lost over 95% of its purchasing power.

The next chart[2] shows what’s happened from an inflationary standpoint since the U.S. closed its gold window in 1971 – no longer permitting foreign governments to exchange their Dollars for U.S. gold. (Thereby removing a significant limitation from Fed money-printing).

And what’s more, “official” inflation data is potentially being manipulated lower. The chart below[3] from John Williams’ Shadow Government Statistics shows that inflation calculated using pre-Clinton era methodology may be significantly higher than what’s being “reported.” (After all lower inflation numbers make net GDP look better. And lower inflation figures – mean smaller social security benefit increases).

It’s our belief politicians in the Unites States (and all over the world) will continue trying to kick the fiscal can down the road. After all who could get re-elected presiding over a deflationary collapse. As we’ve often told our regular readers – history shows us governments repudiate their debt by inflating/printing it away. By doing so the government waters down the value of the dollars it must repay its debt in.

And it’s also watering down the purchasing power of the dollars your savings are denominated in.

We believe it’s imperative to plan accordingly.

While there is a lot of tough reality going on out there – we maintain our positive outlook. That outlook is based on our belief that a bear market in one thing is often a bull market in another.

As we enter this critical time – now, more than ever – we 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.

1.westegg.com; “The Inflation Calculator”; Data supplied from the Consumer Price Index
2.Ibid.
3.Shadow Government Statistics; Alternate CPI Measures chart; Retrieved June 1, 2010