Unfortunately, it’s starting to happen… The Federal Reserve is now in the throes of unwinding it’s unprecedented monetary stimulous (i.e. money printing), and it’s hitting developing markets severely. Brazil, Argentina, Russia, and other developing markets are feeling the impact of foreign capital fleeing their fragile economies, and their currencies are losing value at an incredible rate.
The pressure is on as governments are bombarded by public outcry of their citizens who can’t afford basic necessities, since their paychecks, for the most part, are fixed, and inflation is running rampant as the value of their local currencies plummet.
Here is my prediction, and it’s not a pretty one: China, Russia, India, and other countries that have already made plans and have taken actions to conduct trade in their own currencies, rather than having to convert to US dollars to make the trade, will start pushing for a “world exchange” currency to replace the US dollar as the world’s reserve currency. Let’s face it– they already dont like the US, and the rhetoric surrounding removing our stimulus and the drastic impact it has had on the emerging markets has them even more up in arms. In short, they blame the US. They hated us even when our easy money policy helped to pump up their economies, and hate us even more now that we are cutting back. Cutting back is simply the right thing to do for our country, and the fact is, the rest of the world will have to deal with it.
I believe China and others will now use the devastation and point to the rest of the world, saying “look how much harm the US has done to these countries… we MUST reduce our dependence on the dollar”. And there it will begin, and the harm it does to the United States will make our 2008 great recession look like child’s play.
By losing our status as the world’s reserve currency, we wont be able to simply print more dollars to repay debt, and it is going to get quite ugly. Don’t believe me? just look at the history of England when the British Sterling was replaced by the US Dollar as the world reserve currency… it ain’t gonna be pretty in the least.
The Congressional Budget Office has spoken: Obamacare to cost over 2 million American jobs, at a time we can least afford it.
The news media has finally connected the dots as to where we are headed. The fact of the matter is, no matter how much I support having people that need medical care being able to receive it, there is simply no mathematical way, whatsoever, that 30 million more people can be insured without cost– to someone.
What the news media is doing a bad job of explaining is this: Obamacare is a disincentive to work additional hours for people that are in most need of the insurance becasue they work part time, or in a low wage job, and someone is going to have to bear the cost of this. There simply are no “free” lunches.
Consider this example: A single mother works a part time job in a law firm during the day, and the law firm doesnt provide insurance to part time workers. To have insurance, the mother bartends on weekends to make enough money to buy her own individual health insurance to care for herself and her child. As a result of Obamacare’s subsidies, it makes no sense for the mother to keep the bartending job, since she is working basically to be able to pay for her own health insurance. She does what anyone with any sense would do– she quits that job, and since her income is now lower, she qualifies for the subsidies, so her insurance is paid for, and she only has to work the one part time job. Work less, same end result. It’s a winner for her.
The problem is this: That subsidy has to come from somewhere. Where, then, does the money come from? It comes from higher premiums from all of the rest of us, and higher taxes. Any time there is someone receiving a benefit, and the burden of having to “earn” that benefit is not borne by the recipient, it is a sure-fire way to destroy the very heart of an economic system that has allowed us all to enjoy the highest standard of living in the world. In this case, the mother receives not only the benefit of the insurance, but also of not bearing the burden of paying for it. It is a disincentive for this young woman to be productive, plain and simple, and to bear the burden of having to produce fruit of her labor to pay for things like healthcare, in this instance.
Sometimes it’s hard to see the unfairness in this becasue it involves a service (medical care), and there are strong emotional feelings regarding people’s health. Let’s, for an instant, however consider a different benefit. Let’s say instead of healthcare, we had a law in this country that promised a free Mercedes to every family unit, and that if that family could not ordinarily afford a Mercedes, the government would give them a free one. The mother, in this case, works her job as a weekend bartender to pay for a Mercedes. This new law passed, as I described above, and now the mother can quit her job as a bartender, and still get the Mercedes. After all, why would she work every weekend, when she can now stay home and have Saturday nights to herself, and still have the Mercedes?
That’s exactly what is happening with Obamacare, and why the CBO is correct in their analysis. It will cost us dearly as a nation in lost productivity. I don’t drive a Mercedes, since I dont want to have to afford it. If I wanted a Mercedes, I could always work more hours and get a second job. The difference is, I am “free” to make the decision about what I want, and what I am willing to do to get it. With Obamacare, I have no choice. Not only do I not have a choice as far as whether I want this insurance or not, but what is coming through higher taxes and lost productivity is a lower standard of living for all of us (i.e. a real plus a “hidden” tax on our work efforts) to pay for insurance for others. And this has a very distinct label: it’s called SOCIALISM.
The terrorist acts at the Boston Marathon were reprehensible, performed by a coward, or group of cowards and aimed at doing damage to so-called “soft targets”. Let’s ditch the political correctness and call it what it is: innocent, civilian men, women and children. Yep, folks, it sure is a new era upon us.
Throughout the day yesterday, Gold was selling off in a hard way, as were other commodities. stocks were in a steep descent, only deepended by the bombs at the Boston Marathon in the last hour of trading. It was a brutal reminder just how fragile this economic recovery has been.
For those fortunate enough to have solid 401(k) and investment balances, the past few years have been quite good as the U.S. and other countries (most notably and recently Japan) have pumped trillions of printed dollars into the economies of the world, which has been driving the stock market to pre-crash highs once again. The big question is whether those dollars have been chasing solid fundamentals in the underlying companies, or just fleeing low-return bonds and treasuries, and selling out of traditional safe-havens like gold.
There are two components to consider in the record sell-off in commodities: First, in a world of hyper-inlfation that many think will eventually arise from all the monetary stimulous, commodities can help protect against the loss of purchasing power since they too will rise to meteoric levels if, in fact, inflation kicks in hard. The second is in severe financial duress, commodities such as silver and gold are viewed as safe-havens against collapsing currencies, which can (and did in post WWI Germany) become literally worthless.
The only rational explanation for the recent sell off in gold is that despite slow growth and many fundamental problems in virtually every major economy world wide, the market thinks the net result of all the currency printing is still going to be slow growth. With China, the world’s second largest economy logging a decrease in growth for the first quarter, yesterday’s steep sell-off in both the stock markets and commodities, aggravated (although not caused) by the bombings in Boston show an incredible amount of uncertainty… the beneficiary? U.S. Treasuries. The good news for the U.S. is that with demand for treasuries comes more cheap money to further over-stimulate the economy. The only rational conclusion I can draw is that the opium of trillions of stimulous being pumped into the economies world over will continue and the market will recover, until the next “trigger event” causes a decline of such epic proportions that we wont be able to recover.
Yes, the world as we knew it is gone for good. We were reminded yesterday just how vulnerable we are to attack. I believe that our financial world has changed as well as we are well beyond the point of no return with the reckless “print and spend” strategy of the federal government. And I believe our day of financial reckoning is right around the corner, just when all of us were starting to feel some comfort again. Shedding debt and acquiring safe-haven assets is now more important than ever to protect your family’s financial future.
Trillions upon trillions of new debt. High unemployment. Anemic growth.
Let’s face facts: THE WORLD IS IN SHAMBLES. Unfortunately for all of us, neither Romney, Obama, or resurrecting Ronald Regan from the afterlife will solve the problems. To compare the federal government (or the governments of the Euro Zone) to your own household, the only thing the economies of the world are running on right now are borrowed funds. When the United States wants to borrow money, they sell treasury bills to investors to raise funds. The issue coming to the forefront lately is that sooner or later, the United States will reach the tipping point with its debt load, and no longer will be able to afford to make the interest payments. At that point, investors will no longer be willing to lend even more money to the United States, and the currency will collapse.
Sound unrealistic, and like it can’t happen here at home? It’s already dangerously close to happening in Greece, Ireland, Italy and Spain. The United States is already borrowing as high as 40 cents of every dollar it spends, and total tax revenues collected are far less than the amount needed to pay for the massive largesse of federal and state government services, medicare, social welfare programs, and all that’s left in the social security “fund” is a bunch of ‘IOU’s” from Uncle Sam. We face the beginning of the current wave of the baby-boomers retiring, which will swell the ranks of social security receipients, thereby exacerbating the problem.
If this was your household, this would mean that you earned, for instance, $4,000 per month in take home pay, but had bills the debt service was $6,000 per month. Obviously, millions of americans did just that as bonuses disappeared, hours were cut, and jobs were lost over the past five years. And they resorted to borrowing money from credit cards and lines of credit in order to fill the $2,000 per month gap between income and expenses. As they did so, the payments increased. The gap of $2,00o per month soon became $2,300 per month, then $2,700 per month, and on and on until there was no more available credit since the credit limits were reached. this same scenario is unfolding across the nation at the state and county government level, since as people have lost jobs, companies have shuttered their doors, deferred purchases, and generally tightened the proverbial belt, tax revenues have fallen dramatically for many local governments.
The only difference between your household (same goes for local governments) and the federal government is that neither you or Stockton, California can print its own currency… but Uncle Sam can. And boy, has he ever. The only reason Bernanke & Co. have been able to get away with this much artificial stimulous has been general deflation of assets and slow growth, which is keeping inlfation in check, despite Bernanke going hog wild with the printing press. If the economy picks up steam, inflation is sure to follow. The problem here is two-fold: First, if this scenario unfolds, inflation is likely to be incredible. Inflation is based on expectations, and the premium we will all have to pay is based on the “expected” loss of purchasing power in the future. The second thing is wealth will further be destroyed for the banks (and ultimately investors) when we repay our long term debt on things such as home mortgages with inflated dollars. In either case, current consumption in excess of current income creates a destruction of wealth. The bottom line is that whether its your household or the federal government, or the whole world for that matter, consuming more than we produce eats into the excess we have stored up. When the excess is all gone (and as a world we are dangerously close to the tipping point), wealth is destroyed, and there will be riots in the streets. There already are riots in many parts of the world, and the reality is here with us now.
Unfortunately for most of us in the world, midsummer 2007 will likely be the turning point from the “good ol days” of yesteryear to the mess we have on our hands now.
Before summer ’07, things were pretty much normal, if not good for the majority of us– we went to our jobs, our kids grew up and went off to college, we paid our bills, and had the general feeling that every day was a step forward as we productively built our futures, one brick at a time.
Then came the winds– the housing bubble “burst” in August of 2007. We notice that the sky was a little less sunny, but I dont think any of us had any idea of the magnitude of the storms to come.
Within one year, Lehman Brothers filed for bankruptcy, which was a first in a chain of events that set the financial world on edge. We learned about the widespread greed on Wall Street with “securitized” mortgages, and the mess of underwater home values. The newspapers of the day’s headlines read: CREDIT MARKETS FROZEN, and we wondered as the rain started and the winds howled at how it would affect us.
People stopped spending and hoarded cash. Businesses sales plummeted, resulting in job cuts and a soaring unemployment rate. This fed the cycle even more as the folks that still had a job worried about whether they would also lose it, and tightened the belt. Those who were already unemployed didnt have the choice, and did what they had to just to survive.
2009 came and went with little change– things were tough. by summer 2010, the Obama administration was trying to tell us all that the recession had “officially ended” in the summer of 2009. By the fall of 2010, the stock markets began responding positively. Then Tunisia. Then Egypt. Now the crisis in Japan, and the “war” in Libya. The markets have been hammered as of late, and new worries abound about soaring food, clothing, and energy costs and the impact on what amounts to an anemic recovery, at best.
Are we headed for the fated “double-dip” recession, and just too myopic to see that we may already be “in” it? I dont have a crystal ball– but I do have my concerns.
Unemployment has come down a bit, but the numbers are skewed. The number of people who are considered gainfully re-employed are re-employed at much less than they used to make. Businesses are still struggling. People are still worried. Tax revenues are down at the Federal and State levels, while the total debtload is up dramatically.
All Americans ended up tightening the proverbial belt when the wheels started coming off the economic wagon, and dealt with debt by either paying off gobs of obligations, filing for bankruptcy, or settling the debt. What did the federal government do? It took on more debt. It’s “income” from tax revenues is down dramatically, which is no different than any of us taking a big pay cut. We paid off debt in our households– Our government borrowed more. Their only solution has been to print more money to pay off the debt– a benefit they have that we as citizens cannot do. Our dollar is therefore losing value, and there is now talk of the dollar losing it’s status as the world’s base currency. The largest bond buyer in the world, PIMCO, has quit buying U.S. Treasuries. China has already slowed it’s pace in buying up US treasuries, and threatens to cut even further.
All of this sure isnt stacking up in favor of a robust recovery, and even hints at possibly plunging us into the double-dip scenario. State governments are functionally bankrupt. The federal government is definitionally bankrupt. Many households have drained their resources just weather the storm since 2007, and dont have the emergency nest eggs they had before the crisis began.
Are we headed for another several years of turmoil? I wish I knew for sure. What I do know is that even if we are in a “recovery”, it looks to be a long and treacherous road to recovery, and by the time it happens, we are unlikely to remember what “normal” felt like in the first place…. it begs the question… is THIS the new normal? Was pre-2007 the world as we “knew” it? are we going to be bouncing our grandkids on our knees some day recollecting the “good ol days” before 2007?