by: Hyperinflation
October 19, 2009
For the fourth consecutive week, all important monetary aggregates reached yet another new all time high. Not to mention The Federal Reserve's update to the enormous growth in their balance sheet, which now stands at 2.2 Trillion.
This was all augmented by the current press release regarding consumer spending, which saw a dramatic spike (remember we already have an unsustainable savings rate in the low single digits). This will ultimately be to the detriment of the economy as real economic growth (capital formation is a function of savings and investment) will prove impossible without the necessary investment into the various parts of the structure of production.
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Without this, it will prove inevitable for continued rising unemployment to be present as well as the conveniently overlooked percentage of discouraged workers. It is amazing how people can overlook the fact that this is the worst recession/depression since 1929 even with doctored government statistics such as the unemployment rate.
Pre- 1990, unemployment included discouraged workers (those who have given up looking for a job) as well as those forced to settle for part-time work. Imagine what this statistic would be if we reverted back to how it should be and was counted before 1990. I have seen figures ranging from (17%-21%) unemployment if counted as such.
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The Federal Reserves Balance Sheet as of 9/30/2009
* A 2 year growth rate of over 150% (from 869 Billion in 2007 to 2.2 Trillion as of the end of September), this contains 1.6 Trillion of GSE securities held by the Fed. A substantial portion includes almost or completely worthless commercial paper i.e. agency securities, mortgage backed securities and monetized debt securities (which artificially suppresses interest rates)
* Even If the entire mortgage backed security portfolio eventually snagged 50 cents on the dollar (which is rather aggressive given the fact Fannie (FNM) and Freddie (FRE) were the largest purchaser of MBS, of which there is a high probability these contain the most toxic MBS out there). The Fed would essentially be inflating as they printed much more currency to purchase these securities than they will ever get back.
If that isn't enough the record monetary base (now standing over 1.9 Trillion) indicates both a high likelihood of loan defaults or banking crisis expected by the Fed, (record bank reserves of 922 Billion - while the Fed pays interest on these reserves) whose actions clearly indicate incredible economic uncertainty. These banks are obviously in just as bad a shape as before the $10+ trillion bailout programs began in 2008.
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So how are we able to push consumer spending up back to over 70% of the GDP if the economy is in such bad shape? Well that is very simple: A dangerous combination of record deficit spending and record sales of sovereign debt to our trading partners (The Chinese now hold an estimated 2.1 Trillion of treasuries).
Sure the actions might delay the pain for maybe a year or two, but this will end if even worse economic conditions than we are currently living through appear and the nail in the economic coffin - an eventual currency crisis. Obama has these grandeur plans of government programs that will improve everyone's standard of living, but they will come at a much greater cost in the end. It will be time to pay the piper for over a decade of increasing deficit spending, rampant debt accumulation, and easy (inflationary) money policies that will drive the cost of consumer goods. The illusory decade of excess and living beyond our means with a complete lack of savings and the exponential rise of unfunded liabilities (social security, Medicare, Medicaid, defense, etc) which is estimated to have a NPV of 90 Trillion, is over. Of course we could default on those repayments which the elderly and soon to be retirees are counting on, but that is only a pipe dream.
I would be utterly amazed if we made it through the next 5 years without inflation at least as bad (though much likely extremely worse) than that seen in the late 70s. We expect jobs to be created out of thin air which will increase government revenue, but in case it isn't obvious already: you can't print your way to prosperity - you can only print your way to poverty. Aside from the massive bailout and stimulus programs we expect to fund the record government budget (below) in addition to those things not presented - such as the enormous interest payments needed to service our debt, unfunded liabilities (healthcare, housing, etc) - all without severely de-basing our currency?
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Anyone with half a brain can see that the only way to help protect the purchasing power of the USD as well as our standards of living is for government to get out of the way. Let those institutions fail that can't survive on their own, cut government spending, stop accumulating as much debt that we can get out hands on, let the market determine interest rates, (they should be very high now as the demand curve in regards the loanable funds market has shifted out significantly as it does in all economic times) so that people will be forced to save and healthy capital formation can resume.
Until then, as many have figured out, the USD is not the place to be. Unless you believe Bernanke will somehow engineer monetary policy that will save the day (though every economic forecast he has made in his entire life has been wrong) while at the same time keeping a lid on the inflation tsunami growing ever bigger with each passing day. Protect your wealth in equities (preferably foreign), Gold, Silver and Commodities in general before there is nothing left.
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