It has apparently become en vogue lately to start playing devil’s advocate and announce that everything is just fine in our country. Some are claiming that consumers have deleveraged enough and that the banks are now healthy enough to start lending again. Others say that the Fed’s massive experiment with so-called Quantitative Easing, i.e. printing money, has worked and they point to the rising stock market as proof. I respectfully disagree with all three assertions.
First, total consumer debt has decreased about 10% since it peaked in 2007. This is a decent start, but far from the massive deleveraging that is needed in order for consumer balance sheets to be anywhere near the norm of the last 100 years. Secondly, it appears that too many people have very short memories when it comes to banks and their holdings. Have people forgotten how many losses the banks were allowed to hide starting in 2009? It became legal for banks to stop marking to market. They have hundreds of billions of dollars in losses that are not being accounted for. Banks may begin to lend again, but the room for error is so slim that it would only take a small downturn this time to push many banks into insolvency. As for the idea that a rising stock market proves QE is working, that is like saying that a car that moves forward after being filled up at the gas station proves that gasoline has fixed the problem with the cracked axle, the oil leak, and the bad transmission. It is simply spurious correlation. Printing by the Fed only increases the amount of money going into the stock market in the short-run. This has always been the case and it means nothing for the long-run health of the economy. If printing money could create genuine wealth then we should let the Fed stomp on the printing press accelerator as much as possible. We should also be giving this advice to third world countries in Africa and Asia. Just print money, it works here right?
We should never forget that printing money comes at considerable cost. The following chart should be shown to every citizen in this country every day until they fully understand what it means.
Look at the value of the dollar before the Federal Reserve came into existence in 1913. You could actually stuff your money under a mattress and the value of it would grow over time. This is of course the natural state of things. As economies progress and become more productive, the value of the currency should rise. Except for wartime, this is exactly what happened in the U.S. But in 1913 the dollar began its decline, interrupted only by the Great Depression. The Federal Reserve’s money creation has led to $1 in 1913 being worth 5 cents today.
Another statistic that should be shown to everybody until they understand it is this:
Finance Industry’s Share of Corporate Profits in 1948- 8%
Finance Industry’s Share of Corporate Profits in 2010- 42%
Think about how impossible this should be. How can an industry that produces no tangible product account for 42% of our country’s overall profits? In a country as diversified as the U.S. once was, this simply should not happen. But with the Federal Reserve combined with fractional reserve lending and FDIC guarantees, the banking sector has been allowed to grow almost uncontrollably, especially over the last 15 years.
So to my fellow contributors who think all is fine here in the U.S., I say look again. There are serious problems in this country and they begin with the structure of our financial system, led of course by the Federal Reserve. Until the power of the Federal Reserve is reined in, we will have serial bubbles, constant uncertainty, and a banking/finance industry that reaps gargantuan profits on the backs of those who lose savings due to the falling value of the dollar.
It is difficult to shield oneself from what is happening to our currency and economy. But there is of course one safe haven, and that is gold. Gold will have its up and downs, but it is truly the ultimate hedge against financial meltdown and our constantly debased currency. To those who will listen I say be ever vigilant against the Fed and their power to destroy the value of your savings. Do not become complacent as many investors did after the supposed recovery following the tech bubble crash. Things are not fine out there and the Fed has not saved us. In fact, the Fed has only made things worse and has delayed the great deleveraging that needs to take place. Prepare by holding gold and investing in companies who make things we need, such as food, energy, and usable water. I’m all for optimism, but listening to those who don’t understand the true roots of our problems will only make investors complacent at a time when they need to be on high alert.
Disclosure: I am long GLD, SGOL.