By John Reizner |
Could it be possible to think in our current economic times that America may lose complete control over its own economic future? Has an economic and financial process begun that may not easily be undone that could threaten the very core of what is left of our economic, financial and social well-being?
I believe one big problem lies with the pyramiding of debt over decades by our elected officials: the rapid expansion of the United States public debt and our country's expanding yearly budget deficits. The national debt is now $11 trillion. Wikipedia states that under the 2010 Obama budget projections, the debt is projected to reach $20 trillion by 2015, but is expected to increase to nearly 100% of GDP by 2010 and remain at that level. Vice President Joe Biden has now admitted to miscalculating the "strength" of the potential recovery. All bets are off. And that is what I believe the Obama stimulus plan(s) are doing: adding to our debt and betting our future on failing companies and industries.
The federal debt explosion may lead in time to more severe consequences for the dollar (the dollar index is currently at 80.05). Our dollar is debased by excessive Federal Reserve money creation which eventually causes inflation. A sharp upward revaluation of gold and silver, food prices and medicine may accelerate once the economy responds to the printing of money out of thin air and debt monetization. Can you imagine paying $10 for a gallon of gas? When I was a child, my father complained about 29 cent-a-gallon gas! The oil companies do not have the license to print money. The government does!
We did not vote out of office the many legislators (both Republicans and Democrats), who voted for toxic spending programs over the years, even while those programs were effectively maxing out our country's credit cards. Many programs created in the Great Depression of the 1930's are still on the books, long after the recovery from that prolonged slump. The depth and suffering of the people in the Great Depression is general knowledge. But that terrible time's economic and social duress may have been prolonged for years because of the very programs which were intended to cure it!
The depression of 1921 may be highly instructive to our current predicament. It is only being explored in greater detail now because it was over so quickly! This was a dramatic deflationary slump which was quite severe. The Wikipedia Free Encyclopedia states that the fall in the GNP price deflator from 1920 to 1921 was the largest one-year percentage decline in over 120 years. This is greater than the Great Depression of the 1930's!
Wikipedia further states that a robust recovery followed the deep deflation of 1920-1921. In the 22 months after the economy bottomed, industrial production rose over 60%, the money stock expanded by double digits, and wholesale prices rose by 9%. Net national product rose over 20% in the corresponding two calendar years.
The economy's sharp recovery has been attributed by some economists to President Harding's non-interventionist economic policy and fiscal restraint (he sharply downsized federal spending). This is the exact opposite of what is being done today under President Barack Obama and what was done under both Bushes. The Federal Reserve did not become active in open market operations until after the 1921 recovery, so the Federal Reserve did not play a part in this remarkable recovery.Again, Federal Reserve intervention on a large scale (such as we have seen under Alan Greenspan and Ben Bernanke) did not play a part in the splendid economic recovery seen after 1921).
This episode is a wonderful example of the success of Joseph Schumpeter's "creative destruction," where in an economic downturn the declining businesses simply fail and economic resources are reallocated to successful businesses so that the winners get the economy going again. This is certainly a better alternative than having our economy possibly go through a prolonged depression.
George Soros, now re-retired from managing his hedge fund enterprise, stated in an interview on Chinese television that the cost of creative destruction has been too too great. Soros mentioned that he had had a dinner engagement with Alan Greenspan, a believer in Schumpeter's theory. During the dinner, Greenspan recanted his belief in the theory, indicating that this time the cost had been too great. Soros stated in the Chinese television interview that the failure of Lehman Brothers was a "game changing event," and it was the time for the Federal Reserve and the regulators to step in to stop the carnage.
It may have turned out better if our leaders simply let the losers take their losses and not have the government simply print money with less and less value to pay our bills and to "stimulate" losing industries. We could have avoided spending hundreds of billions on bailing out AIG and other firms (AIG's chairman was reported to have said that maybe the company should have been allowed to fail). Our economy may have righted itself in a shorter time. Are we really economically better off now for all the bailouts? Let's just take our medicine and be done with it so we can move on and recover just as the economy did after the 1920-21 depression.
Warren Buffett, on the other hand, believes that Bernanke has been doing a good job in his intervention in the economy. It is conceivable to me that if many major institutions had been allowed to fail, the Dow Jones average may have fallen a great deal further than 6469.95, the low it hit in March 2009, but there may have been an accelerated stock market and economic recovery out of the abysses once economic resources were reallocated to winning businesses and the federal government was perceived worldwide to be solvent. Instead we are now rewarding the losers with huge amounts of money and many nations with large pools of dollars are looking for an exit strategy to get rid of their dollar reserves. This potentially puts our society's economic and social fabric at risk.
I believe that Americans were in denial regarding the consequences of buying houses with no-money down. Indeed, many banks were overly aggressive in offering no-documentation loans. Wall Street was complicit in securitizing those mortgages, "taking away" the risk from mortgages which had faint hope of being repaid. It is true that many on Wall Street attempted to reduce their risk exposure through complex, privately-traded derivatives which blew up when the subprime crisis hit. These bets exploded in a very nasty way, as we all know today.
We may be facing significantly higher inflation rates than we would like to admit in the future if we do not elect leaders who will not squander our nation's resources. During the latter part of the 1970's, inflation rapidly accelerated into double digits and interest rates soared to 21%. I recall at the time walking into a major New York City bank and being offered a 19% return on one year commercial paper. The banker, who sat behind a spacious desk with no personal computer (they weren't around then!), told me that the bank would not offer longer terms than one year on such an investment. That may be true of commercial paper, but in the 1970's, 30-year triple A rated United States Treasury bonds lost almost half their par value of 100 as interest rates soared skyward. That could happen again, or worse.
We are now monetizing debt in a manner similar to what led to the great inflation of the 1970's. The difference is that at that time we were the largest creditor nation on earth. Now we are the world's largest debtor. The well has run dry. We may be in for tough times ahead if we do not elect leaders who will responsibly take care of taxpayer money. Ron Paul has said he does not want to interfere with the Federal Reserve operations. He just wants to know what they are doing.
Paul Volker was appointed as Federal Reserve Chairman in 1979 to stop the inflationary economic mess, and fortunately, he succeeded by tightening the money supply. Though this led to a very deep recession, it cleansed high inflation from the economic system. The economy proceeded to have almost twenty years of non-inflationary growth. It would be very surprising if he could return to the position when Bernanke's term expires in January 2010.
The 1980's-1990's expansion was interrupted by the 1987 stock market crash (which was in the context of a long term bull market in stocks), and a banking and real estate depression in the early 1990's where many bank shares were available at bargain prices. Such bank shares such as Wells Fargo in 1992 and others multiplied in value many times during the 1990's. The difference between now and the prior 1982-2000 equities bull market is that we appear to still remain in a secular bear market, though inflation hedges may outperform in the coming years.
I will not speculate on the short term direction of the gold and silver markets, but the fundamentals at this time appear to make a strong foundation for higher prices over the next few years. The 1970's gold and silver bull market lasted ten years with a sharp drop in gold and silver prices at mid decade. This mid-decade correction in the metals complex coincided with a severe bear market in equities in 1973-74. However, the stock market did bounce back, and the metals and oil prices surged for the remainder of that inflationary decade.
The current gold and silver bull market that began in 1999 is approaching the duration of the 1970's bull market. No one can know for certain whether the buoyancy in gold and silver prices will accelerate and continue beyond the ten year term of the 1970's bull run. No one knows for certain whether the gold market price (currently at $913 per troy ounce) may hold in this range or decline before a potential price expansion. But as I see it, the fundamentals of the gold and silver markets appear to support an extension of their ten year bull market. Again, fundamentals can change and technical support levels are regularly violated in all types of markets. But under the scenario that I foresee, conditions appear to support further price expansion.
Our economy may be experiencing the beginning of a powerful monetary inflation in the midst of the morass in which we find ourselves. This may take time to develop. Indeed, it is possible for an economy to experience recession and monetary inflation at the same time. Once inflation starts, it is difficult to stop.
Ownership of physical gold and/or silver may be an excellent investment strategy to hedge one's portfolio against the potential for future inflation and economic disruption. Yet, Americans may still have time to mitigate the situation. If enough people demand that our elected officials rein in unnecessary spending and bailouts, we may recapture our economic future. If President Obama appoints a Federal Reserve Chairman in January 2010 who would strive to maintain the integrity of our money, then we may have a better chance at securing our economic destiny. We may need to uproot some of President Obama's "change" to secure our economic security.
I have further rebalanced my portfolio by selling gold bars, though I still retain gold bar and silver bullion positions. I have added agricultural, silver and natural gas ETF's to my portfolio. I continue to own shares in major integrated oil companies, a major oil service firm and a gas pipeline company. Other positions include various common stocks, mutual funds containing various domestic and foreign equities and the Franklin Templeton Hard Currency Fund.