"By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."
-- John Maynard Keynes
I am lucky. I have a lot of friends. But it's not merely the number of people I can count among their ranks that makes me lucky -- it's the sheer magnitude of their knowledge and experience that makes me so fortunate. And yet, at the same time, my friends, in the aggregate, exhibit such a wide array of beliefs and perspectives, that I take a lot of criticism from them for my own radical theories.
For instance, I have a lot of leftist friends who accuse me of being a Republican. They say things like, "All you care about is money and the stock market. You want to destroy the environment. You're a Republican."
Look, I don't want to destroy the environment. To be honest, I don't even really care about the environment. Don't get me wrong -- I like oxygen and trees and water just as much as the next guy -- but I think it's exceedingly arrogant for human beings to think we can destroy the environment. That's like suggesting we can permanently rid the world of Michael Jackson. Sure, he can die and all that. But we can't really get rid of him.
As for the rest of it, yes, I love money and I wish I had more of it. Toward that end I shall pursue its acquisition with great enthusiasm. Of course, in that regard, I'm no different than anyone else on this earth – including my leftist friends; I'm just not ashamed to be honest about it.
In any case – and despite my love of money -- I have a message for my leftist friends: I am no Republican. Quit calling me that.
On the other side of this confusing equation, I have a rather impressive number of conservative friends who think I am a Democrat. They say things like, "You think the pot should be legal, and you think the gays should be allowed to get married, and you think the Mexicans should be allowed to cross the border at will and overrun this country. You're a Democrat."
Just so you know, I'm rolling my eyes right now.
Yes, it's true -- I do believe in the plight of "the" pot-smoker, "the" gay, and even
"the" Mexican. And yet, despite my subscription to such seemingly "horrifying" -- not to mention stereotypical -- social constructs, I'm afraid I have some troubling news for my many right-leaning brothers and sisters: I'm no Democrat either. You're wrong. Please stop calling me that.
I think Barack Obama is a fine statesman, an eloquent speaker, a rather handsome man, and a gifted hand-shaker. But he is a horrible economist, and since the economy is the most important thing in the universe right now – with the possible exception of the demise of the King of Pop – I'm going to focus on that. Further, since we are talking about economics, I'm just going to lay it all out for you: Democrats are screwing things up. Bad. Of course, they're getting plenty of help from Republicans too.
For decades, the United States has been an arrogant and profligate nation, full of spoiled brats who borrowed as much as possible, fueling an insatiable collective desire to have more stuff. We have buried ourselves in designer clothes, new cars, houses, and boats. I admit much of the problem derived from a misdirected ethos for which we only have ourselves to blame. But every epistemological development has its roots, and it is not enough to say that the American people simply woke up one morning, got out their wallets, and suddenly found that they had become gluttonous consumers. No, there is always a catalyst, and in this case – as is so often true -- it was the government.
Washington D.C. is not full of people. It is full of politicians. Politicians need to be elected, and in order to do that, they must make their constituents happy. But in order to make those constituents happy, politicians must promise them stuff. And politicians have figured out that the most expedient way to make stuff accessible to their constituents is by manipulating the money supply. And so, the government makes money cheap, and the way it does that is by lowering interest rates and printing currency at an ever-increasing rate.
Think about it: what better way to become popular? You can't afford a home? Well we'll just monkey around with interests until you can! And then, we'll increase the money supply at a moderate rate – thus creating the illusion that otherwise relatively static asset-classes are actually increasing
in value – like, say, for instance… your house!
Hell, while we're at it, why not create programs that make tuition affordable for everyone? And if we're going to do that, why not just go ahead and create a national healthcare system everyone can afford? Are you worried about the cost? Don't! We'll just print more money and lower interest rates! That's how we do it!
Unfortunately, these "solutions" – which seem so elegant on the surface – actually form the very foundation of the enormous problem we're facing at this moment. When a government subsidizes any commodity, good, or service, it necessarily creates demand -- which in turn drives prices higher. But the prices aren't real – they're distorted constructs driven by false demand. Eventually the constant, steady increases sought by printing currency turn into explosive manias -- the bubbles with which we have become all too familiar.
Our government has perpetuated this terrible lie, creating artificial affordability and completely unrealistic valuations for almost every asset-class in the economy. But no Ponzi scheme can last forever, and the consequences of so many decades of financial mismanagement have descended upon us. Yet we haven't even come close to seeing the worst of it.
At the very moment when governments should be cutting spending, raising interest rates, and pulling currency out of the economy, they are doing the exact opposite – and this is true of every major economic power in the world. The United States alone has committed to spending almost $13 trillion to battle this economic crisis alone. And where will the money come from? Unfortunately, most of it is coming from the printing presses, and that means hyperinflation is on the way. I know some of you have a hard time believing that, so I guess we'll just have to wait and see. But I stand firm with my conviction. It's just math.
In the meantime, if you want my advice, put on your crash helmets and short U.S. Treasuries; the ride is going to be fast, furious, and very profitable for those of us who have been prescient enough to realize that the United States we know today has almost none of the qualities endowed to the government of the same name created in 1789.
With that, I will return to the place where I started today, because I'm sure you're simply aching to know where I actually do stand, politically. I suppose I could disappoint you. I could simply tell you I have no convictions -- that I refuse to take any position at all. But you're too smart for that…
So I'll tell you. But you're probably not going to like it. I am a champion of free markets, human rights, social progress, and the growth of knowledge. And I actually do like Mexicans, homosexuals, and pot-smokers. If you absolutely insist on ascribing a label to me, I suppose I would best be described as a classical Jeffersonian liberal.
And Mr. Jefferson would be as appalled as I am at what has become of the Great Experiment.
Disclosures: Paco is long TBT, UGL, UCD, and DXO. He also holds U.S. dollars by necessity, pending the advent of private gold-backed currencies.