JohnAl

A Game of Confidence

There's something very different about this recession. You touch on it - the money question. Some, myself included, are questioning the monetary system itself.

An earlier commenter said that a fear of inflation is pushing the price of gold higher. That's true, but it's more than that. It's not only a lack of confidence in the future value of the dollar, it's the future of the dollar itself. The fiat dollar. The dollar that everybody is running to now for safety.

I believe that many are sensing that the dollar itself is in jeopardy. They instinctively know that all of this new debt, added to all of the existing debt, simply can't be paid back - not with dollars anywhere approaching what we know as the value of the dollar today. Obviously, the future value of the fiat dollar will be less - far less - than it is today. That leads some of us to question whether it can even survive.

I would have more confidence in the future of the dollar if I had more confidence in our ability to pay back our debt. But belief in that would require that I have confidence that we will have a booming recovery, and belief in that would require belief that our government is doing the right things. But I would have to suspend everything that I know about how the world works in order to believe that.

So I've completely lost confidence in the empire's fiat money - it's promise to pay. It's clear to me - the secular trend for the empire is bearish.

So this lack of confidence in the money itself influences my investing. Where can I save now, secure that my saving will at least have a reasonable chance of maintaining it's value? Unlike most, I don't see that safety in treasuries, except in the short term. I don't see that safety in equities, or in corporate bonds. I don't even see it in bank CDs. I don't even really see it in gold, but gold is the closest thing out there.

I'm sure I'm a bit of an outlier, but I believe that there are many of us who sense at least the possibility of big trouble ahead for the US dollar.

Economic Crisis Watch: Deflationary Creep to a 10% Household Savings Rate

One additional observation...

Because the fed has intervened to lower interest rates, savers are not going to benefit as much as they would have were the interest rates being set by the market. The result is that it will take longer than it otherwise would have for individual savers to reach their "I've saved enough it's okay to spend some now" comfort levels.

Economic Crisis Watch: Deflationary Creep to a 10% Household Savings Rate

Good analysis.

Normally, in a market economy with less government intervention than ours, this would be a time that increased saving would lead us back to a robust economy. The increase in saving would serve to lower interest rates which would make it more attractive for businesses to expand, and as savers began to feel more flush, we would see an increase consumer spending.

But of course the fed has intervened in the economy and we already have low interest rates. What's more, as you point out, much of the new saving is going into "safe" treasuries, and it's needed there in order to fund the massive stimulus and other new government spending initiatives.

So it seems likely that at some point we should see a "recovery", but that it will occur mostly in those segments of the economy receiving the government loot. So rather than consumer wants driving the allocation of resources which decides which business live and which die, it will be the government engineering the economy, the politicians deciding the economic winners and losers.

The result will be that the "recovery" will be less robust than it would otherwise be because it will not be based on consumer demand, but on politically created demand.

Predatory Legislators

"American spending created a boom in China, where the average person works in a sweatshop, lives in a hovel, and saves 25 percent of his earnings.

Meanwhile, in the United States, the average man lives in a house he can't pay for, drives a car he can't afford, and waits for the next shipment from Hong Kong for distractions he can't resist. He saves nothing and believes the Chinese will lend him money forever, on the same terms.

That this cannot go on forever hardly seems worth pointing out. Whether it goes on much longer, we cannot say. But that it will end badly seems a cinch."

(Bill Bonner and Addison Wiggin, Empire of Debt, 2006)

Obama Talks Himself Into - And Out of - Bank Nationalization

Face it, this is a no win situation. There are only two ways to fix this.

1. Let 'em go bankrupt and let the chips fall where they may.
2. Nationalize, wipe out equity, and stick the taxpayers with the rest of the mess.

Either way, a lot of people are gonna be hurt. Doing the first is the right thing to do, but it risks further economic turmoil. Who knows how much. Doing the second risks taxpayer insurrection.

So, even though he says he won't, Obama is gonna have to go with the band aid approach. Hello Japan.

Stop Trying to Jump-Start the Consumer - Barron's Interview

Mr. Albertson is right.

Time will heal the economy. What we are experiencing today, after all, is nothing more than the economy readjusting to the malinvestments made during the growth of the artificially created credit bubble. The government's attempt to reflate the credit bubble is the wrong medicine at the wrong time and will only prolong the readjustment period.

Voting (and Spending) Our Way to Catastrophe

"Let's have a new system ...."

How about simply a return to a constitutional system? The original democratic republic concept with the federal government subservient to the "shareholders", the states?

Personally, I distrust my state and local governments far less than I do the feds.

Voting (and Spending) Our Way to Catastrophe

I think we agree on the secular trend - the decline of the US empire and "the rise of the rest". (Not so much the rise of the rest though, as that we are reverting to the mean.)

I'm not yet in the camp that sees this happening quickly though. Not saying it can't. It certainly could. But it could also happen over the course of years, even decades. The wild card is government. They're everywhere, they're in control, and (as we're seeing right now) they're capable of doing lots of stupid and destructive things.

Also, I sense that my probability on a secular turn around is higher than yours. The probability is low, but it's there and it's growing. You and I both know that a secular turn around requires that a democratic majority return to the classical liberal / libertarian views of the founders, and while we don't see that in the electorate today my sense is that we ARE seeing growth in the number of people considering those values.

It's quite disturbing for me that the future for my kids doesn't look all that bright at the moment. But my advice to them is the same today as it would be at any other time: Be productive. Save. Invest. Protect your investments. Watch what government is doing and act accordingly. In all actions, remember always what is most important (family). And live life such that, at the end of each day when you stand in front of the mirror, you like the person you see.

(I'm enjoying your novel, BTW. I think I have the good guys figured out but the antagonist still has me in suspense!)

12 Reasons to Short Gold

The contrarian in me wants to short, or at least stop buying, but I'm not only still in but buying more on most every pull back. PMs are rising because people are still betting on inflation and as long as that play is on I'm along for the ride.

Plus, I just don't see either, how this ends without price inflation:

-The US gov needs to borrow trillions.

-The Chinese are making noise about cutting back their lending and asking for assurances on the soundness of the dollar.

-The trade surplus to all the big international lenders (China, Japan, Arabs) is down 'cause we're broke and not buying their stuff so they'll have fewer dollars to buy our increasingly growing debt.

-There's clearly a treasury bubble.

So how do they fund the expanding debt without Bernanke's help?

Sounds like an inflation scenario to me. Just wish I knew when.

Just Pay Off Everyone's Mortgage

(...rolling my eyes...)

All those in favor have big mortgages. The rest of us are opposed.

Next dumb idea?

The Great Awakening: Boomers, Your Crisis Has Arrived (Part 3 of 3)

Mr. Quinn, another thought provoking article. Nice job!

I'm a bit (just a bit) more optimistic about the future, because I sense that attitudes ARE changing, and they are changing quickly. I see it happening here, on other forums that I frequent, and among friends and work colleagues. There IS a growing sense that we are still heading in the wrong direction and that we need to change course.

Most people I know opposed the TARP, oppose the stimulus (certainly in it's present form), and oppose most if not all of the new treasury bailout plan. More and more people recognize the reality of all of this - that it amounts to little more than a transfer of credit bubble economy losses from the powerful elite to the helpless taxpayer.

So I believe that if the President and congress don't change course, and I doubt that they will, there will be a political revolution in the 2010 congressional elections and the course WILL be changed!

All the country needs to survive this, and to come out the other end of it headed for prosperity, is to rediscover our roots and what made this country what it is: individual freedom.

The further the government moves to restrict freedom, the greater the resistance from those of us who crave it and the easier the sell to those who still need to be convinced.

Obama Stimulus Plan: Bailout or Wimp Out?

It's going to take a lot more than seizing the banks, dumping toxic assets on the taxpayers, wiping out bank shareholders and putting caps on executive pay to restore MY faith in the financial system of the US.

It's going to take a completely new monetary system. A SOUND one.

Maybe that's just me though.

What's Going to Replace the Dollar?

"It's IDIOTIC to think WAMPUM (gold, silver etc.) will replace any currency."

Is it really? PMs have been used as money by many cultures throughout much of human history, and as the author points out, a modern PM backed money wouldn't necessitate carrying around metal. The conveniences of modern banking would still exist.

I do think it's likely that before we arrive at this juncture, though, there will be attempts to replace the dollar with other fiat currencies. Governments don't give up easily, and they need the fiat currency to maintain their power and their growth.

My guess is that the next step, which will come only after things get worse in the US and the government gets increasingly desperate, is that there will be an attempt at a world currency. This would necessitate the US giving up much of it's advantage though, which is why I don't see it happening until things are much worse here. They may even make a show at tying this new currency to PMs in some way. But it will be a sham. They will want to maintain their ability to create money out of thin air.

Stimulus Watch: Unnecessary Tradeoff

Yes, the money to pay for the stimulus - long OR short term - has to come from somewhere. So the key question is this:

Why do we think that government planners, or politicians passing legislation in a panic, are better at allocating scarce resources than the market?

Truth is, they aren't. Truth is, the stimulus will enrich some (those on the receiving end), and it'll be hard to see the losers because we won't know what the borrowed (or printed) money that pays for this would have done had the stimulus not taken it. Who will ever know what good could have come from the resources had they not gone to the stimulus?

In the end, the stimulus - both long AND short term - is nothing but a big wealth transfer.

Get Ready for Tomorrow's Employment Data

"There are two kinds of statistics, the kind you look up and the kind you make up." ~Rex Stout, Death of a Doxy

"98% of all statistics are made up." ~Author Unknown