By John Reizner |
Sir John Templeton's sentiment that never before in U.S. history has our government and its citizens accumulated the level of financial debt as we have recently was referenced in my February 28th, 2007 article. And it is the citizenry who usually suffers from the eventual debt reckoning, forcing a decline in their living standards, Templeton believes.
The last great debt liquidation in the United States happened as the 1930's Depression unfolded. After the stock market Crash of October 1929, the fledgling Federal Reserve shrank the money supply by a third, presumably to fight inflation, only exasperating the severe economic downturn of the 1930's.
A valuable book is Investing the Templeton Way: The Market-Beating Strategies of Value Investing's Legendary Bargain Hunter, about the person Money magazine calls "the greatest stock picker of the century," legendary fund manager Sir John Templeton.
The Federal Reserve in 2008 under the weight of the public budget deficit and profligate government spending is once again desperately trying to prevent or postpone a final reckoning of both our country's public debt and our citizens' privately held debt. The public debt is well known and has been advertised by many commentators and financial writers for years. It seems to have a life of its own, mostly growing from economic cycle to cycle, except for a short period of a balanced Federal budget during the Clinton years. The Federal Reserve, through its current interest rate easing as a response to the subprime debt crisis (though that easing might be reversed in the future to fight inflation), may succeed in inflating away part of that massive Federal budget deficit. The problem is that as the level of public and private debt has increased through several economic cycles without a cleansing of the system, it has become more difficult through each economic downturn for the Fed to get the economy going again through its usual monetary activities. Note that Alan Greenspan had to lower key interest rates to 1% after the stock market bubble burst in 2000 before the economy and the stock market recovered.
Today, the Federal Reserve under Chairman Bernanke has attempted to stem an economic bankruptcy contagion with the Bear Stearns bailout. This is at the cost of a massive Federal Reserve easing, which I believe may exasperate the inflation that we are now experiencing down the road. We may have barely entered recession and already the Federal Reserve is giving the economy full courses of antibiotics. Allowing the business cycle to complete takes out the excesses and bubbles in the system - the Fed may be today attempting to repeal the business cycle by avoiding the slightest whisper of recession.
The subprime debt crisis, partially caused by fraudulent and/or overly aggressive lending practices, has caused many people to lose their homes because of their high debt levels. Some perhaps should not have qualified for their loans in the first place. The Federal government now is offering assistance to creditworthy individuals whose mortgage payments may be escalating due to the terms of their mortgages. As bad as the credit and real estate crunch may seem, there may be responsible new buyers out there who would qualify for and deserve good home loans.
On the investment front, there are some very savvy investors, Warren Buffett among them, who have been diversifying their portfolio or their company's portfolio to include non-U.S. companies. The dollar in late 2007-2008 declined through a two decade shelf of chart support and (except for short to medium term upward countertrends) may trade lower long term. Adding to the mix, we may find with the possibility of a Democratic Party triple-sweep later this election year, policies enacted that may hinder the stock market's progress in a manner not seen since the late 1970's. I discussed this possibility and its consequences in this article. However, it may be that certain inflation sensitive investments do well over the longer term.
I own shares of the Templeton Global Bond Fund to take further advantage of the potential of a declining dollar. Gold is also a beneficiary of a declining dollar over the long term, and has even made upward progress during the last few years when the dollar has been intermittently strong. Gold can also be a hedge against a debt crisis such as we have seen with the subprime contagion, though the recent March 2008 high in gold was marked by the Federal Reserve bailout of Bear Stearns, which has hopefully stemmed the tide of the current crisis. I have owned gold over the last several years and plan to continue holding the yellow metal.
The Federal Reserve's job is to fight inflation. As Chairman Bernanke is a student of the 1930's Great Depression when the economic system failed, he seems determined to prevent a similar economic catastrophe from happening again. Thus, recently we have seen easy money policies implemented designed to stimulate the economy and the housing market, where the hurt is greatest. Preventing a debt implosion whereby the financial system collapses seems to be on the Fed's priority list. That the Federal Reserve has taken such steps in the face of a current inflation indicates that the possibility of such a collapse has been seen as a possible reality.