Somethin's Happenin Here. What It Is Aint Exactly Clear

I haven’t given much advice on this blog, beyond “old school” exhortations like stay out of debt unless absolutely necessary. I don’t think I have made any prognostications. If I was all that smart, I would be retired and living in Hawaii. Today, however, I would like to take on an argument in which I believe both sides are correct and in doing so; I will have made a prediction.

Something is happening in the macroeconomic world that seems to confound the experts. The Treasury Department and the Federal Reserve Bank are creating money and dumping it into the economy at an absolutely frightening rate. If the United State Government is to remain solvent, it must at some point in the future repay all the debt being created in this desperate attempt to prevent the economy from completely capsizing. The attempt is so desperate, that recently our Vice President stated, “We have to go spend money, to keep from going bankrupt.” There are only two ways to repay this debt, taxes or inflation.

A fair number of knowledgeable people are raising the specter of hyperinflation, a situation, where overnight a currency can become worthless. It has happened before in places like Argentina, it is happening now in places like Zimbabwe, and it will happen again. Generally it is believed that inflation is a monetary event caused by too much currency chasing too few goods. The Government is creating money out of nothing and dumping it into the economy at a historically unprecedented rate, but the Consumer Price Index is actually at a negative 1%. The Core Inflation Rate is right about 2%, just where the Government wants it to be. Economists believe that a little inflation is good for the economy. In times of inflation, the costs of commodities rise. Last year Aluminum was over $3,250 per metric ton. This year the price has recovered a bit and stands at about $1,600 per metric ton. (Note: I read these numbers off graphs. The number is only as accurate as my eyeball.) The price of lumber, platinum, and even wheat reflect a similar pattern, hardly hyperinflation.

What is going on here? Some savants point out that the world’s supply of dollars has actually dropped, because so much of the world’s wealth was destroyed in the debacle of 2008. My house is worth roughly $150,000 less than it was worth in 2006. Some economists would consider that fact in their calculations of currency available to chase other goods. I have lost roughly 1/3 of the money I invested in Hong Kong and Shanghai Bank, more dollars gone. In fact, someone observed that the Government effort to restart the economy could be likened to a man trying to patch a hole in a dam with more water. No one knows how much of the trillion or more in subprime mortgage bonds and Alt-A investment vehicles (liar loans) might be worth. The Government has agreed to insure their value in a scheme so convoluted; I don’t begin to understand what it all really means. The Federal Reserve has relaxed accounting rules so the banks can keep these dubious assets on their books and claim full value. This has been compared to the Bureau of Labor Statistics lying about the unemployment rate so not to upset voters when the rate is unacceptably high. I remember a while back some of this toxic waste was selling at about 20 cents on the dollar. Last week a block of something like $800 million was sold for about 30 cents on the dollar. There is no way of knowing how representative of the overall quality of these bonds these two sales might have been. 30 cents on the dollar may have been a high price for some better stuff.

Everyone knows what the end game will entail. The value of all fiat money eventually drops to zero. From Wikipedia, “Fiat money is money declared by a government to be legal tender. The term derives from the Latin fiat, meaning "let it be done". Fiat money achieves value because a government accepts it in payment of taxes and says it can be used within the country as a "tender" (offering) to pay all debts.” Fiat money is backed by nothing but the coercive power of the government and your faith in that power. The United States cut the dollar loose from the gold standard in 1971. Given the amount of dollar denominated debt held by the Chinese, it is unlikely we will ever return to the gold standard.

I have concluded that at sometime in the future the value of the American dollar will drop to zero. The problem is I have no idea when this might happen, next week, next year, or a century from today. If inflation is waiting in the wings, I should be buying real things, like property, lumber, gold, safe foreign currency (like the Swiss Franc) and commodities. I do have some of that stuff in my investment portfolio, but I also have Government bonds denominated in good old U.S. Dollars. However, if you really believe we are facing a “Road Warrior” scenario, I would encourage you to invest in shotgun shells and gasoline, as well as cigarettes and bar soap for trading purposes.

Psalm 27

[1] The LORD is my light and my salvation; whom shall I fear? the LORD is the strength of my life; of whom shall I be afraid?
[2] When the wicked, even mine enemies and my foes, came upon me to eat up my flesh, they stumbled and fell.
[3] Though an host should encamp against me, my heart shall not fear: though war should rise against me, in this will I be confident.
[4] One thing have I desired of the LORD, that will I seek after; that I may dwell in the house of the LORD all the days of my life, to behold the beauty of the LORD, and to inquire in his temple.
[5] For in the time of trouble he shall hide me in his pavilion: in the secret of his tabernacle shall he hide me; he shall set me up upon a rock.
[6] And now shall mine head be lifted up above mine enemies round about me: therefore will I offer in his tabernacle sacrifices of joy; I will sing, yea, I will sing praises unto the LORD.
[7] Hear, O LORD, when I cry with my voice: have mercy also upon me, and answer me.
[8] When thou saidst, Seek ye my face; my heart said unto thee, Thy face, LORD, will I seek.
[9] Hide not thy face far from me; put not thy servant away in anger: thou hast been my help; leave me not, neither forsake me, O God of my salvation.
[10] When my father and my mother forsake me, then the LORD will take me up.
[11] Teach me thy way, O LORD, and lead me in a plain path, because of mine enemies.
[12] Deliver me not over unto the will of mine enemies: for false witnesses are risen up against me, and such as breathe out cruelty.
[13] I had fainted, unless I had believed to see the goodness of the LORD in the land of the living.
[14] Wait on the LORD: be of good courage, and he shall strengthen thine heart: wait, I say, on the LORD.