December 16, 2011

Staring Contest

“The trifling economy of paper (money), as a cheaper medium, or its convenience for transmission, weighs nothing in opposition to the advantages of the precious metals… it is liable to be abused, has been, is, and forever will be abused, in every country in which it is permitted.”
–Thomas Jefferson

“That paper money has some advantages is admitted. But that its abuses also are inevitable and, by breaking up the measure of value, makes a lottery of all private property, cannot be denied.”
–Thomas Jefferson

“Scenes are now to take place as will open the eyes of credulity and of insanity itself, to the dangers of a paper medium abandoned to the discretion of avarice and of swindlers.”
–Thomas Jefferson

“Money is the barometer of a society’s virtue.”
–Ayn Rand

Getting Ready To Blink

I’ve long believed there are two possible outcomes for decades of monumentally expanding money and credit.  One is deflationary collapse.  The other is hyperinflation.  As American and European central bankers seemingly try to win a staring contest against reality – my bet is on reality.  And reality as I see it is that the global banking system is largely insolvent.  So insolvent in my opinion, that if $trillions are not injected (by being printed out of thin air) into the global banking/financial system pronto (as in extremely soon) – the world could be looking at a deflationary collapse of historic proportions.  I don’t believe central bankers and politicians want deflation.  I think the mere thought of it petrifies them.  And while I believe long-term, repetitive government money printing, along with fast and loose credit expansion has led to the crisis at hand – this, to me, unfortunately is where things stand.  It’s my opinion the Fed and other central banks are about to blink – and print like mad.

Bernanke And Senators Meet

Regardless of what Fed Chairman Ben Bernanke has said in the past, I believe that as the glass falls off the table the Fed, along with other central banks will reach out to grab it.  I’m of the opinion the glass has already rolled off the edge, and the Fed is currently setting the stage for a European and American bailout, along with QE of massive proportions.  Despite it’s recent “agreement to agree” to get its fiscal house in order, I think Europe may not get its act together before a collapse.  And I don’t think the Fed, Bernanke, and U.S. politicians want to wait until it’s to late to intervene, because the repercussions likely would be felt in the U.S. and around the globe.

Just how serious about the crisis are politicians and the Fed?  On December 14, the Senate Republican caucus invited Bernanke to apprise them on the unfolding (snowballing) European fiscal crisis.[1]  According to Bloomberg:

“Senator Bob Corker, a Republican from Tennessee, said Bernanke made it “very clear” in closed-door comments today the central bank doesn’t intend to rescue European financial institutions. Lindsey Graham, a South Carolina Republican, said Bernanke told lawmakers that “he doesn’t have the intention or the authority” to bail out countries or banks. Both senators spoke to reporters after leaving the one-hour session at the Capitol in Washington.[2]

On the other hand,the Fed Chairman also informed Republican senators he’s concerned about Europe’s sovereign debt problems having repercussions on the U.S. economy.[3]  Senators Orrin Hatch of Utah and Mike Johanns of Nebraska stated Bernanke cautioned that the economic collapse of Europe would have a negative impact on the U.S. economy.[4]  Hatch told CNN, “He’s very concerned… He did say that if they can’t get their things in order, it could affect us. A collapse over there would be detrimental to us.”[5]


I see this as serious jawboning by both the Fed and politicians.  I believe all involved already knew the situation is extremely serious and that action is warranted to attemptpreventing a European collapse, and the potentially resulting contagion spreading to the US (and the world) due to global financial interconnectivity.  I see the Fed Chairman’s meeting with the Republican caucus, his reported comments, along with the senatorial response as largely scripted and designed to pave the way for monetary intervention (money printing).  Perhaps Bernanke’s comments to Senators were designed to get them to beg him/provide him the authority to intervene.

Bernanke and Congress are also likely aware Fed bailouts of foreign banks are not popular among U.S. citizens.  It’s my opinion that’s why the information on past loans has not been shouted from the rooftops.  The recent (and first ever) GAO (Government Accountability Office) audit of the Fed has shown it lent over 3 $trillion to financial institutions in the U.K., Germany, Switzerland, France and Belgium between 2007-2010.[6]  I’d not be surprised to soon see more European bank bailouts, along with more QE in the U.S. on the way.  All with freshly printed money.

The Basics

Regular readers have heard this before and I’ll say it again.  History shows us overly indebted governments tend to repudiate their debt by inflating/printing it away (devaluing the currency their debts must be paid back in – the same currency their citizens’ savings are denominated in).  I believe the last thing heavily indebted governments want is deflation, which would require them to pay back their debt in a potentially significantly stronger currency.  Large banks (making bad/risky investments which did not work out) tend to get bailed out.

The U.S. government and those in Europe are heavily (some would say hopelessly) in debt.  Many large financial institutions are teetering due to bad investment decisions.  It’s my opinion more massive bailouts, quantitative easing (QE), and money printing loom – regardless of what global central bankers and politicians say.

At Ernharth Group we 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.


Stephan R. Ernharth, JD
Vice President
Ernharth Group

Go to to read past articles from our Economic Commentary series.

[1] CNNMoney, “Bernanke Worries Europe’s Woes Will Spill Into U.S.” December 14, 2011
[2] Bloomberg, “Bernanke: Fed Has No Plans to Aid EU Banks” December 14, 2011
[4] Ibid