It's been called "pushing on a string." This phrase describes what happens when a central bank, like the Fed, tries to stimulate credit demand by using one mechanism or another to lower interest rates in the hopes that it will entice borrowers to borrow more money and buy things with it, thus stimulating the economy. When borrowers are unwilling or unable to borrow, and lenders are unwilling to lend, then the rates could be lowered to zero and it wouldn't make a difference. People won't borrow. The economy will not be stimulated.
With the announcement that QE III is now here, Ben Bernanke announced that the Fed is pushing on that string, and is pushing with all its might. The seesaw battle between inflation and deflation will soon be at an end, and one of the 'flations will be declared the winner.
I have decided that it will be some species of inflation. Probably stagflation, where the things we need (like oil and food) as well as stocks, will become more and more expensive because the investment banks will borrow from the Fed at essentially zero percent and use that money to purchase stocks and to play in the commodities futures markets, driving the price of oil, gold, stocks, food, and raw materials up.
We are about to rediscover what real wealth is. For millenia real wealth was the ownership of the means of production of something that people needed to live. Land was wealth because you could put one kernel of corn in the ground and get back 800 kernels in return. In some places, water was wealth because everyone and everything needs water. In our modern economy, energy is wealth because the concentrated forms of energy, like oil, gas, and coal, enable a very few people to do amazing amounts of work. One man with a bulldozer can move more dirt in a day than 100 men with shovels can move in a week. In the more modern era, the factory that produces a valuable and useful product is wealth. When I lived in Cincinnati, a company called Cincinnati Millicron was closing a factory there. Millicron had pioneered the development of plastics in the WWII era. All of the equipment was auctioned off, and most of the mills and lathes and tools were bought by Chinese businessmen and shipped to China. The Chinese have been building real wealth. The Americans have been exporting it.
Gold and silver are a universally recognized form of real wealth because everyone is willing to take them in exchange for real goods and services. Paper money or the digital equivalent is not real wealth because its notional value changes all of the time. When the price of oil rises, it's not the oil that's becoming more valuable, it's the paper dollars that are becoming less valuable. The one selling the oil demands more of them in exchange for his barrel of oil. The last 80 years have been a longstanding attempt by those in power to hide and obscure that fact. We are at the end of that effort.
In the last 50 years, but particularly in the last 20 years, we have decided that those things are not real wealth anymore. Houses with giant mortgages, in which the "homeowner" actually had very little stake were considered wealth. But debt is not wealth.
Stocks were considered wealth, even though the underlying company's value did not justify the price of the stock. Shuffling other people's money around and taking a cut for the service was considered a wealth generating activity. Some services do generate wealth. The one who carries the goods from a farm or factory to the users of these products generates wealth. A doctor who can give relief from a disease or a dentist who can stop your toothache are wealth generators because people need what they've got. A doctor who makes your nose a different shape or a dentist who makes your teeth ultra white with cosmetic procedures does not generate wealth. In frivolous times he might generate income, but he does not produce wealth. In difficult times, he cannot even generate income.
Information can be a means to generate wealth or preserve wealth, but information itself is not wealth. We are so glutted with information that we cannot separate true from false information or process it into meaningful patterns very well. The U.S. Government had all of the pieces it needed to stop 9/11, but it did not have the ability to put all of those pieces together into a cohesive whole and act. Most of us are in exactly that position most of the time.
Frivolous times are over. The $20 per hour dog-sitting businesses will be out of business, as will the cosmetic dentistry and surgery clinics. The wardrobe choosers and closet organization specialists will probably not prosper.
If you want to protect yourself, own and invest in things that are real wealth or produce real wealth. The end of the game is at hand. The fiat monetary system is imploding in America, Europe, and Asia, the three most important centers of economic activity in the world. Those who hope for a return to the gold standard are deluded. It's a great idea, but it will never happen. The powers that be will never let it happen, because their power is derived from the ability to create money out of thin air. They currently have the power and they will always act to preserve and increase their power.
Instead, the trend is towards a very few (or perhaps only one) new fiat currency, probably primarily exchanged in electronic form so that the flow of money can be tracked very carefully and maximum tax revenue can be reaped from each transaction.
Those who own real wealth will not only survive, they will prosper through this transition, because people will still need the things that are represented by real wealth.
Get out of debt. Buy some gold and silver (and maybe stash away a few groceries.) Spend less than you make. Get rid of fake wealth and get into real wealth. Most of all, cleave close to God.
Wednesday, July 18, 2012
Saturday, January 7, 2012
Wednesday, January 4, 2012
2012 could be the year Germany lets the euro die
There will be no Chinese credit explosion this time, no real help from post-bubble India or over-stretched Brazil. It will be a global downturn on all fronts, aborting what remains of recovery even before industrial output in the OECD bloc has regained its pre-Lehman peak.
The second wave will hit with youth unemployment already at 45pc in Greece and 49pc in Spain; and with the US labour participation rate already at depression levels of 64pc.
We will hear more about Italy's Red Brigades, Greece's Sect of Revolutionaries, and America's militia groups, and how democracies respond. Proto-fascism in Hungary is our warning.
China's surgical soft-landing will slip control, like Fed tightening in 1929 and 2007, or Japan's squeeze in 1990. Once construction has run amok, bears will have their way.
Since the purpose of New Year predictions is to stick one's neck out, let me hazard that China will devalue the yuan in 2012. It will export yet more spare capacity into a deflationary world, until the West retaliates and starts to turn its back on globalisation. Capital outflows will accelerate. The idea that China can rescue anybody will seem quaint.
The strong yen has already pushed Japan back into deflation, and fresh recession. Public debt has reached one quadrillion yen, as noted acidly by Tokyo's R&I rating agency when it stripped Japan of its AAA rating last month. That is $12.8 trillion, or Italy plus Spain times four. There is a graveyard full of Gaijin commentators who wrote off Japan too soon. Will the dam break this year at last, with tax covering less than half of spending, public debt at 237pc of GDP, ever fewer workers, and a state pension fund now selling government bonds? Perhaps. As R&I warns, Europe's woes have brought sovereign debt into very sharp focus.
America will look resilient for a few months. The payroll tax deal has averted a fiscal shock, but that is all. Money growth (M3) has sputtered out, and velocity is falling. Politics on Capitol Hill will restrain Ben Bernanke from launching QE3 until the Tea Party can see the eye-whites of deflation. Six-month PCE inflation was 2.9pc in August, 2.4pc in September, 1.6pc in October, and 1.2pc in November. Not there yet. Prepare for a Wall Street squall first. Whether the scare of early 2012 turns seriously ugly depends on the nerve of policy-makers. Shock absorbers are worn thin, but not exhausted. Central banks have the means to prevent a 1930s outcome, even with rates at zero, if willing to deploy Fisher-Friedman monetary stimulus with conviction, buying assets from non-banks and targeting nominal GDP growth of 5pc. But policy defeatism is in the air, and Austro-liquidationists are winning the popular debate.
The second leg of our Kondratieff Winter comes at an awful moment for Euroland, just as the North-South split turns deadly. The European Central Bank has guaranteed trouble by letting M3 money contract. Fiscal tightening into the downward slide will make matters worse. A credit crunch as banks shrink loan books by €1 trillion to meet capital ratios will do the rest. All policy levers are set on deep recession, and deep recession is what Europe will get. Monetary union is too damaged to parry these blows. The ECB's Mario Draghi will cut interest rates to 0.5pc by February, just to keep pace with passive tightening. Half-hearted purchases of Italian and Spanish bonds will drift on, doing more harm than good. By reducing existing bond-holders to junior status, the ECB will ensure a slow exodus. Draghi knows this. His hands are tied.
The Bundesbank will wage guerrilla war against money printing through the pages of Die Welt and Handelsblatt, paralyzing the ECB's Council until Angela Merkel orders Jens Weidmann to desist. By then it will be too late, deliberately so. Contraction will play havoc with budgets in Italy, Spain, Portugal, and France. Austerity alone will seem a Sisyphean task. Club Med leaders will not be able to command popular assent for such 1930s scorched-earth strategies.
Politics will fracture further, splintering to the hard Left and Right. The Front National's Marie Le Pen's will beat Maréchal Sarkozy into the French run-off invoking 'terroir' and the ancient franc. Escalating levels of coercion will be needed to uphold the Project, with EU commissars eating alone in the administered territories of Greece and Italy.
Far from protecting credit ratings, Europe's self-defeating policies will bring a blizzard of downgrades. France's AAA will go, obviously. So will Austria's as banking woes deepen in Hungary, Ukraine, and Croatia. Vigilantes will take a closer look at Holland's household debt, off the charts at 270pc of disposable income. The shrinking AAA core will leave Germany propping up the EFSF bail-out fund, until the weight of contingent liabilities endangers Germany itself. That will concentrate minds. France's President Hollande will "triangulate", playing the pan-Latin card to discomfit Berlin and force a policy change. Portugal's Troika sacrifices will prove as futile as Greek efforts before. Lisbon's second bail-out will come just as Greece graduates from riots to insurrection, and Italy's Silvio Berlusconi will try to snatch power again by whipping up fury against Tedeschi. Bundestag patience will snap at such disorder everywhere.
Germany will not be able to fudge EMU any longer. It must either immolate itself, accepting a debt union and internal inflation to save a currency it never wanted and doesn't love; or opt instead to uphold fiscal sovereignty and the essence of its own democracy, and let the Project die. The shrewd, equivocating, ice-cold Chancellor will quietly oust arch-europhile Wolfgang Schauble and let the Project die, always pretending otherwise. Just an idle hunch. Guten Rutsch.