Relativity

“Put your hand on a hot stove for a minute, and it seems
like an hour. Sit with a pretty girl for an hour, and
it seems like a minute. THAT’S relativity.”

—Albert Einstein

It’s All Relative
Is there a better definition of relativity than Einstein’s?

And today we’re hearing of problems in Euro-land due to the fiscal woes of the “PIGS” countries (Portugal, Italy, Greece, and Spain). As the Europeans debate whether they should be bailed out (and the relatively fiscally sound Germans voice their displeasure at such a thought) – the Dollar has strengthened relative to the Euro.

The problem (in our eyes) lies in the fact that all world currencies (none of which is backed by gold) are losing purchasing power relative to themselves. In “Race to the Bottom” we discussed competitive global currency devaluation. As certain countries (including the U.S. and U.K) overspend, and print money to pay for what they can’t afford (watering down the value of their currencies in the process) – other nations purposefully debase the value of their money to keep their exports affordable in the global market. While the Euro and Dollar jockey against each other – it’s important to note that neither buys what it did several years ago. It’s our opinion the trend will continue.

Why do we feel this way? When Congressman Ron Paul introduced the “The Federal Reserve Transparency Act of 2009″ (a bill to audit the Federal Reserve Bank which the Fed is actively fighting) he said, “…Throughout its nearly 100-year history, the Federal Reserve has presided over the near-complete destruction of the United States dollar. Since 1913 the dollar has lost over 95% of its purchasing power, aided and abetted by the Federal Reserve’s loose monetary policy. How long will we as a Congress stand idly by while hard-working Americans see their savings eaten away by inflation? Only big-spending politicians and politically favored bankers benefit from inflation.”[1]

We highlighted the last two sentences of Congressman Paul’s quote because we feel he answered his own question. Congress, in our opinion, will continue to preside over the confiscation of American’s hard-earned savings via the inflation (government money printing) mechanism precisely because they and “politically favored bankers”[2] (who are a powerful lobby) “benefit”[3] from it. With a printing press, the U.S. Government/Congress (and the Fed) can continue to spend and also bail out Wall Street banks – with money it does not have, by creating it out of thin air.

No wonder the Fed doesn’t want to be audited.

Going Greek?

In his Telegraph.co.uk article titled “Moody’s Fears Social Unrest as AAA States Implement Austerity Plans”, Ambrose Evans-Pritchard writes:

“The US rating agency said the US, the UK, Germany, France, and Spain are walking a tightrope as they try to bring public finances under control without nipping recovery in the bud. It warned of “substantial execution risk” in withdrawal of stimulus. “Growth alone will not resolve an increasingly complicated debt equation. Preserving debt affordability at levels consistent with AAA ratings will invariably require fiscal adjustments of a magnitude that, in some cases, will test social cohesion,” said Pierre Cailleteau, the chief author. “We are not talking about revolution, but the severity of the crisis will force governments to make painful choices that expose weaknesses in society,” he said.”[4]

Riots and protests have taken place in Greece as the Greek government proposes austerity measures in an attempt to get its fiscal act together.[5]

The U.K. may be next with its AAA rating potentially hanging in the balance.[6] Kornelius Purps, fixed income director of Unicredit recently stated, “Britain’s AAA-rating is highly at risk. The budget deficit is huge at 13% of GDP …There will have to be absolute cuts in public salaries or pay, but nobody is talking about that.”[7]

In February the U.S. government incurred its biggest ever monthly deficit – $221 billion – increasing the 2010 year-to-date deficit 10.5% from fiscal year 2009.[8]

On March 5th, the United States Congressional Budget Office (CBO), provided a preliminary analysis of the President’s budget submission for fiscal year 2011.[9] The CBO determined the federal government would experience a deficit of $1.5 trillion in 2010 – amounting to 10.3% of gross domestic product (GDP).[10]

The UK’s budget deficit stands at 13% of GDP.[11] Greece’s at 12.7%.[12] The budget deficit of the United States is forecast at 10.3% of GDP.[13] To us, the primary difference isn’t a few percentage points. Instead – it’s America’s massive money-printing press. And it’s our concern fiscally irresponsible governments (the U.S. included) will monetize (print away) their debt.

As always – we believe preparedness often creates opportunity.

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, AIFA
Vice President
Ernharth Group
www.ernharth.com

Go to www.ernharth.com/economic-commentaries to read past articles from our Economic Commentary series.

1.Free Republic; “Bernanke Doesn’t Want Congress Running Monetary Policy”; March 13, 2010
2.Ibid.
3.Ibid.
4.Telegraph.co.uk; “Moody’s Fears Social Unrest as AAA States Implement Austerity Plans”; March 15, 2010
5.Bloomberg; “Greeks Strike Over Budget Cuts, Bonds, Stocks Decline”; March 11, 2010
6.Telegraph.co.uk; “Europe’s Banks Brace for UK Debt Crisis”; March 12, 2010
7.Ibid.
8.Wall Street Journal; “U.S. Monthly Budget Deficit Balloons to a Record”; March 10, 2010
9.Congressional Budget Office, “Preliminary Analysis of the President’s 2011 Budget”; March 5, 2010
10.Ibid.
11.Telegraph.co.uk; “Europe’s Banks Brace for UK Debt Crisis”; March 12, 2010
12.Telegraph.co.uk; “Eurozone Could Risk ‘Sovereign Debt Explosion”; March 12, 2010
13.Congressional Budget Office, “Preliminary Analysis of the President’s 2011 Budget”; March 5, 2010