GDP-US Debt Parity Approaches
Tampa Bay, Florida
The wife and kids are whining that I need to give them more money because things cost more. Usually I just ignore them or politely tell them something like, “Go to hell, ungrateful parasites!” lock myself in the Secure Mogambo Bunker (SMB) and peer at them through the periscope until they go away and/or shut up.
This time, however, I just showed them an essay I printed out from The Huffington Post which brings us the bad news that “Tax receipts are on pace to drop 18 percent this year, the biggest single-year decline since the Great Depression, while the federal deficit balloons to a record $1.8 trillion.”
In case you were wondering, the author of the Huffington Post piece is wrong; the deficit will NOT “balloon” to “a record $1.8 trillion”, but instead, the budgeted deficit for this year alone brings us ANOTHER $1.8 trillion deficit to add to the $11.6 trillion in accumulated federal deficits, taking us to almost 100% of GDP! Hahaha! We’re freaking doomed!
The message to my kids, of course, is that their lack of income means, “Welcome to the club, jerks!” in that the essay clearly shows that neither I, nor anybody else, has more money these days, and in fact we all have less money, so obviously I don’t have any money to give them.
Of course, I am thinking to myself that if I did have any money, I would spend it on getting away from all of them and their whining and complaining by having a night out with my hoodlum friends, hopefully to drink myself into such a stupor that I can hopefully forget, for even one lousy minute, that I even have kids! Hahaha!
They immediately objected, of course, and so I just held up the printout in their faces and rudely said, “Tell it to the essay!”
In fact, speaking of taxes, it makes your hat fly up comically off your head in astonishment when you realize that total income and corporate taxes are less than this year’s federal budget deficit alone! And then you really start screaming your guts out in anger when you then realize that the total federal budget is 400% of total federal revenues! They are spending four times as much as they take in! Four times as much!
And then you start vomiting up blood and thinking dark, homicidal thoughts in Ultimate Mogambo Outrage (UMO) when you find out that the national debt already went up by over $2 trillion in the last year alone, thanks to Congress’s sneaky Supplemental Appropriations tricks, which was before the big budget deficits even started kicking in!
The statistics are, gathered from an Associated Press analysis, “Individual income tax receipts are down 22 percent from a year ago. Corporate income taxes are down 57 percent. Social Security tax receipts could drop for only the second time since 1940, and Medicare taxes are on pace to drop for only the third time ever.”
In fact, “The last time the government’s revenues were this bleak, the year was 1932 in the midst of the Depression.”
Bloomberg called it “The worst U.S. economic slump since the Great Depression”, as the Commerce Department reported that “Gross domestic product shrank at a better-than-forecast 1 percent annual pace after a 6.4 percent drop the prior three months.”
Later on in the article, we find that “The Commerce Department’s figures today, which included benchmark revisions to past years, showed that GDP has tumbled 3.9 percent since the second quarter of last year – the biggest drop since quarterly records began in 1947. GDP has fallen four straight quarters, the longest ever.”
This all makes sense when looking at other data, like how Karl Denninger of Market-Ticker.Denninger.net has been looking at “freight loadings both road and rail, along with port traffic data.”
He contends that this is the kind of “leading indicator” that is really important if you want to know what is going on, and the Bad, Bad News (BBN) is that “both import and export demand has effectively collapsed! We are now anywhere from 40 to 60% below comparable levels on imports and exports.”
Add it all together and you will be forgiven for getting the disquieting feeling that I am going to launch into a Loud Mogambo Tirade (LMT) about how history shows that you should be buying gold and silver with your depreciating dollars that will buy less and less, because they will almost certainly never again have the buying power that they have Right Freaking Now (RFN), which is something you will probably be able to say most every sorry day of the next, umm, decade or so. We’re freaking doomed!
So you were right: I did launch into a LMT about buying gold and silver! And you are also right if you thought, “Whee! This investing stuff is easy!”
Don’t Put Your Money on a US Recovery
Ouzilly, France
The future cometh…
Cash for bankers! Cash for Detroit’s clunkers! From one scam to the next…
But first, let us turn to the latest market update.
The Dow rose again yesterday – up 33 points, to close at 9,320. We set 10,000+ as our objective for this bounce. We’ll stick with it for a while longer.
Make no mistake though. No one knows how long this rally will last – certainly no one here at The Daily Reckoning vacation headquarters. It will continue until it runs out of gas. That could be tomorrow. It could be months from now.
It will run out of gas sooner or later, and probably this fall. A real, durable bull market would require an economic boom – a genuine recovery. We don’t see that happening…
But people must think it is happening…
“There are signs of a recovery in the US…” was a popular line at last night’s cocktail party. Several friends mentioned it. Each time, we had the same reply – we wouldn’t bet on it.
Yesterday, the price of oil rose; it ended the day at $71. And the dollar stayed where it was – at $1.44 per euro. Investors are betting on recovery – despite our advice.
And when the recovery turns out to be a clunker, they’ll probably put these trades into reverse. Oil will go down; the dollar will go up.
You want to speculate, dear reader? Sell oil…buy the dollar. Wait for another crash this autumn.
Why will there be another crash?
Because people believe something that isn’t true. People believe that there is a recovery…and that it is the result of stimulus efforts by the feds. The results from the second quarter show the economy still contracting…but at a slower pace, just –1% annually, rather than the -6.4% recorded in the first quarter. This is heralded throughout the world as proof that the crisis is receding.
“It if weren’t for stimulus spending, the contraction [in the 2nd quarter] would have been closer to 4%,” says the editorial in the International Herald Tribune. “The stimulus is helping…and more stimulus would help even more.”
Oh? Would it? Let’s look at stimulus-in-action:
‘Cash for Clunkers’ is a hare-brained scheme…but that doesn’t make it unpopular. The idea is to stimulate demand by, well, giving people money. But instead of just giving them money and letting them choose what to do with it, the feds decide they need a new car. In order to the get the money, people have to buy one.
According to the press reports, the program has been a great success wherever it has been put in place – in France and Germany, as well as in the United States.
If so, why not apply the concept elsewhere? How about cash for houses? Cash for liquor? Cash for newspapers? Cash for trips to Europe?
What’s so special about autos, in other words? And why is it a good thing for people to buy cars?
Oh c’mon, dear reader…don’t pretend you don’t know. The auto industry is huge…with many lobbyists and many organized groups interested in its wellbeing. It is an old and well-established industry with plenty of political clout.
Tomorrow’s industries, by contrast, have no lobbyists…no organized labor…no pet congressmen…no political action committees. So who gets the money?
Here’s the problem: the meddlers are not only up against tomorrow’s industries…they’re up against tomorrow itself. It’s not as if Americans needed cars. Not at all. They’ve got plenty of wheels already. Three car households are typical. And they’re fairly new cars. Americans were on a buying spree during the bubble era, 2001-2007; they bought new cars along with everything else.
So, the goal of the ‘Cash for Clunkers’ scheme is not to increase the size of the US auto fleet, it’s to make it newer. People don’t need more cars. They only need to replace cars that get worn out. If they bought a car five years ago, they may be ready to buy another one. Or, they could probably wait until next year. Along come the feds with cash…and the buyer decides to replace his car this year rather than next.
This is heralded as a success. The feds have stimulated demand. But what about next year?
We’ll have more to say about this on Friday…but the auto example helps us see what a scam these stimulus schemes really are. They claim to boost demand. But they can’t really increase demand. All they can do is roll next year’s buying into the present year.
Sound familiar? That’s the very thing that has been happening for the last two generations. Consumers didn’t want to wait until they’d made the money to take their vacations or buy their houses. They turned to credit. They borrowed against future earnings. They spent money they hadn’t earned yet…thus bringing forward purchases that should have been made in the future. That’s why we have a depression; now, we’re in the future!
It had to come sooner or later. After drawing consumption forward for decades, Americans had to stop. Time had to catch-up. Homeowners had to pay down debt. Ken Rogoff, Harvard professor of economics, believes it will take them 6-8 years to do so.
But consumers spent more than they could reasonably be expected to pay back. They out-spent the future! They bought a ticket to somewhere beyond the future…to a place where they would never actually arrive. In many cases – especially in the housing market – lenders discovered they couldn’t get their money back, which is what led to the credit crunch and the collapse of Wall Street. Of the big five – Bear, Lehman, Goldman, JPMorgan and Merrill – only two survived intact. And we know now that Goldman only survived because Henry Paulson, former CEO of Goldman, then Treasury Secretary, arranged a hidden bailout. He had the government step in to save AIG, which owed Goldman $13 billion.
From one scam to another…that’s the way the feds do it. From bailing out Wall Street they now turn to bailing out the entire world economy – in a similarly fraudulent way. Tim Geithner told the Chinese last week that the United States would revive thanks to increased private demand. But the feds cannot really increase demand in the private sector. Increasing real demand would mean increasing real wages. And there’s no sign of that. To the contrary, incomes are going down.
Yesterday’s news tells us that personal incomes went down 1.3% in June. Incomes had gone up in May, by precisely the same amount – 1.3%, thanks to stimulus payments. Then, too, commentators saw it as a sign of recovery. But what the feds gave in May was taken away in June. The future caught up with the Obama administration’s stimulus efforts within 30 days. Net result = zero.
The June number reflected the biggest drop in income in four years. It is not surprising. We’re in a depression, remember? Salaries and wages fell 0.4% in June…the 9th drop in the last 10 months.
“It looks like there are finally some signs of recovery in the US,” said more than one person we talked to last night.
The occasion was a cocktail party…held on the grounds of a stately chateau. The summer social season is underway in Poitou. We are attending dinners, plays, cocktail receptions, barbecues and weddings.
Last night, waiters in tuxedos passed out champagne, foie gras canapés, and desserts while hundreds of guests milled about and talked.
“You might want to hedge your bets on this recovery,” we told one Daily Reckoning reader. “It’s probably not going to work out.”
“But I’m confused about something,” he continued. “You’ve been urging me to buy gold for years. And now you seem to be changing your mind.”
“No…no…not at all. I’m still a gold bug. It’s just that I expect this rebound to end…and for stocks to go down, possibly down a lot. The dollar is what people want when they are frightened. The dollar is going down now because they think there’s no longer anything to be frightened about. But when this recovery disappoints them, investors are going to be more frightened than ever. Because they’ll realize that we’re faced with a depression…and that the feds can’t do anything about it. They’re going to rush to the safety of dollars…at least for a while. Probably long enough to shake out a lot of gold buyers.”
Until tomorrow,
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After the storm comes a hard climb
By Martin Wolf
Is the world economy on its way out of the crisis? Has the world been learning the right lessons? The answer to both questions is: up to a point. We have done some of the right things and learnt some of the right lessons. But we have neither done enough nor learnt enough. Recovery will be slow and painful, with substantial danger of relapses.
Start, however, with the good news. The financial crisis, narrowly defined, is over: stock markets have rallied; liquidity is returning to markets; banks have been able to raise equity; and the extreme risk spreads in financial markets of last year have disappeared. When addressed powerfully, panics end. In this case, the commitment of the authorities to the rescue of a failing financial system was unprecedented. It has had the desired results.
The worst of the economic crisis is also passing. As the Organisation for Economic Co-operation and Development noted in its latest Economic Outlook, “for the first time since June 2007, the projections ... have been revised up for the OECD area as a whole compared with the previous issue”. Similarly, the International Monetary Fund states in its latest World Economic Outlook update that “economic growth during 2009-10 is now projected to be about half a percentage point higher than forecast by the IMF in April, reaching 2.5 per cent in 2010”.
Such a turning point in forecasts is an indicator of pending recovery. It emerges clearly in the successive monthly consensus of forecasts for 2010. Improvements in these forecasts can be seen for the US, Japan and the UK, though, worryingly, not for the eurozone (see chart). China’s forecasts show great resilience. Confidence in India is also rising.
Yet we must put this news, welcome though it is, in context. The worst of the financial crisis may be behind us, but the financial system remains undercapitalised and weighed down with an as yet unknown burden of doubtful assets. It is also far from a truly “private” financial system. On the contrary, it is underpinned by massive explicit and implicit taxpayer support. The probability of mischief down the road is close to 100 per cent. But the current hope is that the road to any such mischief goes via a recovery.
Equally, the expected economic “recovery” is not going to feel like much of one. The latest consensus forecasts for growth in the high-income countries for 2010 are well below potential. Yet this is also at a time when the admittedly uncertain estimates of “output gaps” (or excess capacity) are at extreme levels. For 2009 the OECD estimates these at 4.9 per cent of potential gross domestic product in the US, 5.4 per cent in the UK, 5.5 per cent in the eurozone and 6.1 per cent in Japan. Given the forecasts for modest growth, excess capacity will be greater at the end of 2010 than at the end of 2009. The risks to inflation – or rather risks of deflation – are self-evident. So are the chances of further jumps in unemployment. In keeping with this, the “breakeven rate” of inflation implied by inflation-indexed and conventional US treasury bonds has fallen again, to close to 1.5 per cent. June’s hysteria over rising yields on conventional bonds looks absurd.
Behind the excess capacity and the massive increases in fiscal deficits is the disappearance of the high-spending consumer, above all from the US. This is suggested by the huge shifts in the balance between private sector incomes and spending implied by OECD forecasts for current account and fiscal balances. In 2007, the US private sector spent 2.4 per cent of GDP more than income. In 2009, suggests the OECD, it will be spending 7.9 per cent of GDP less than income. This massive shift into prudence – long called for by critics and so little appreciated now it has come – largely explains the shift into fiscal deficits: between 2007 and 2009, a 10.3 per cent of GDP shift in the private sector’s balance between income and spending was offset by a 7.3 per cent of GDP fiscal worsening and a 3 per cent of GDP improvement in the current account deficit (see chart). Even as it is, this fiscal offset has not prevented a deep recession.
Private sector prudence is likely to endure in a post-bubble world characterised by mountains of debt. In the last quarter of 2008 and the first quarter of 2009, US household borrowing was modestly negative. But at the end of the first quarter of 2009 the ratio of gross household debt to GDP was a mere 2 per cent of GDP lower than at the end of 2007. De-leveraging is a painful process: it has barely begun.
If, as is likely, the private sector remains prudent, the public sector will remain profligate. Moreover, so long as this period of retrenchment lasts, the risk will not be inflation, but rather deflation. The lesson from Japan is that fiscal profligacy and deflationary pressure can last longer than anybody imagines. The longer they last, the trickier and more inflationary the exit may prove.
Those who expect a swift return to the business-as-usual of 2006 are fantasists. A slow and difficult recovery, dominated by de-leveraging and deflationary risks, is the most likely prospect. Fiscal deficits will remain huge for years. The alternatives – liquidation of excess debt via either a burst of inflation or mass bankruptcy – will not be permitted. The persistently high unemployment and low growth may even threaten globalisation itself.
Depending heavily on massive monetary expansion and fiscal deficits in erstwhile high-spending countries will ultimately be unsustainable. As I have argued, the stronger is the growth in demand in erstwhile surplus countries, relative to potential GDP, and so the more powerful is global rebalancing, the healthier will be the global recovery. Is this going to happen? I doubt it.
If the exit into vigorous recovery seems still so uncertain, has the world at least been learning the right lessons for future management of the world economy? I believe not. The financial sector that is emerging from the crisis is even more riddled with moral hazard than the one that went into it. Its fundamental weaknesses are not yet redressed. Questions also remain about the working of the dollar-based international monetary system, the right targets for monetary policy, the management of global capital flows, the vulnerability of emerging economies, demonstrated in central and eastern Europe, and, not least, the financial fragility demonstrated so often and so painfully over the past three decades. However difficult the recovery may be, we must not ignore these questions. After my summer break, I look forward to addressing them in September.
I Worked for the Government Today without Pay
By Robert Higgs
According to the entry for me at Wikipedia, which I hope is reliable, I am a libertarian anarchist. Why would any person who fits that description work for the government at all, not to speak of working without pay? Well, my story is straightforward.
Some time ago I received in the mail from the U.S. Census Bureau a form to be filled out, to wit, the 2007 Survey of Business Owners and Self-Employed Persons questionnaire. I naturally threw it in the trash.
A few weeks later, I received another questionnaire whose cover letter read in part as follows:
We have not received your response to the 2007 Survey of Business Owners and Self-Employed Persons (SBO) questionnaire, Form SBO-1, which was mailed to you several weeks ago. These data are essential to business and government decision making. We need information about your business to provide reliable data for your industry and geographic area.
We remind you again that your response to this survey is mandatory under Title 13 of the United States Code. Applicable provisions of the law are shown on the back of this letter.
I hastened to read the back of the letter, where I found the following:
Mandatory Provisions of Law Pertaining to Economic Censuses — Section 224 as amended by Section 3571 of Title 18 United States Code.
Whoever, being the owner, official, agent, person in charge, or assistant to the person in charge, of any company, business, institution, establishment, religious body, or organization of any nature whatsoever, neglects or refuses, when requested by the Secretary or other authorized officer or employee of the Department of Commerce or bureau or agency thereof, to answer completely and correctly to the best of his knowledge all questions relating to his company, business, institution, establishment, religious body, or other orgnization, or to records or statistics in his official custody, contained on any census or other schedule, or questionnaire prepared and submitted to him under the authority of this title, shall be fined not more than $5,000; and if he willfully gives a false answer to any such questions, he shall be fined not more than $10,000.
I thought about throwing the second form in the trash, as I had thrown the first one. Then I thought about telling the U.S. Bureau of the Census to go to hell. Then I thought about the large, threatened fines, and I filled out the form. I spent about 15 minutes doing so. My rate of pay for having done so works out to exactly zero dollars per hour, which is somewhat less than I usually charge for my services.
Well, big deal, you may be thinking. But I invite you to pause and consider afresh what this little episode in my life illustrates.
First, so far as I can tell from reading the U.S. Constitution, the government has no Constitutional authority to demand that I answer these questions about my business. Perhaps, if I am mistaken, someone can direct me to the relevant clause of the document.
Second, the government’s stated rationale for collecting the information is lame. No great purpose is to be served. On a FAQ sheet included with the questionnaire, one finds a section headed “Why does the government take this survey?” But this section’s text merely states that the Census Bureau is required by law to take the survey every five years and describes the variables that are surveyed and the way in which these data will be combined with other data the government collects. The section does not give a substantive reason for collecting the data in the first place, seemingly assuming that if a certain kind of information might be of interest to the government or someone else, that interest suffices to justify the information’s forced collection at the expense of those who possess the information.
Another section of the FAQ sheet tells us “Who uses the survey data.” Users are said to include the Small Business Administration, local government commissions, government agencies at all levels, “a national women-owned business trade association” not identified by name, consultants and researchers, and individual businesses. In truth, however, information about my business is in all cases, literally as well as figuratively, none of their business. If these people want information about my business, why can’t they make me an offer for it? After all, it’s my property.
Well, as Al Capone is supposed to have said, you can get a lot more done with a kind word and a gun, than with a kind word alone. And everything the government gets done — including its extraction from me of information about my business — it gets done by threatening people with violence.
Oh, Higgs, you might be saying, you’re just overwrought and hyperventilating. But am I really? Suppose that I had very strong feelings about the privacy of my personal affairs, so I simply refused to provide the information requested. Eventually, subject to the vagaries of the government’s escalating enforcement actions, I might be issued a summons, which of course, I, having the strong feelings that I have about the matter, would ignore. Hence, in due course, police officers would be sent to arrest me for having ignored the summons. And I, having the strong feelings that I have about the matter, would naturally resist the arrest. Wherupon the police officers might shoot me dead if they felt inclined to do so, rather than simply beating me savagely and hauling my broken body off to jail.
And for what would the police have battered or killed me in this case? Precisely for having refused to fill out a bullshit form to provide information about my business that no one had a just right to demand of me in the first place. Obviously there’s no real justice at work here, but where’s the logic in the use of such brutally dispropotionate sanctions in response to such a petty act of noncompliance?
The logic — the same logic that leads the government to attach similar criminal sanctions to a indefinitely great number of petty infractions of its idiotic rules — is that the government wants you and me to obey its dictates slavishly regardless of their importance. It seeks not simple compliance where compliance might be required to accomplish an important public purpose. Instead it seeks immediate, unquestioning, universal compliance — including compliance with dictates so trivial that they ought never to have been the subject of government action in the first place — in order to put us in our place.
And that place is with our faces constantly under the government’s boot.
We live in a police state, a tyranny of genuinely grotesque dimensions, but because it has developed gradually over more than a century, we have gradually grown accustomed to its outrages and to its moronic and insulting requirements, each accompanied by criminal sanctions that amount to death threats, should we continue to resist. It is not a pleasant feeling to live immersed in a sea of death threats, surrounded by a variety of armed government thugs prepared to dish out beatings, tasings, and death whenever anyone, for whatever reason, resists the government’s orders. That we Americans have resigned ourselves to living in such an environment and, in many cases, continue to refer to this police state as a free country speaks volumes about our ability to follow Winston Smith’s example, in George Orwell’s Nineteen Eighty-Four, of loving Big Brother.
The Love of Liberty vs. the Love of Government
by Jacob G. Hornberger
The real battle taking place in America is between the lovers of liberty and the lovers of government. That’s what the healthcare debate is all about. The lovers of government want the federal government to operate a healthcare program. The lovers of liberty prefer a free market in healthcare, that is, a market free of government interference.
The lasting legacy of the paternalistic welfare state is that it has produced a nation of government lovers. How? By making people dependent, in one way or another, on the welfare largess of the state. Once people began receiving such largess, independence and love of liberty went out the window.
Consider, for example, Social Security. For more than 150 years Americans lived without this paternalistic program. They retained everything they earned because there was no income taxation. They decided how much to save for their retirement. They decided how much to help their aging parents and others. They treasured the freedom to make these types of decisions.
Then, along came the Franklin Roosevelt regime, which got the idea of Social Security from Otto von Bismarck, the Iron Chancellor of Germany, who himself had gotten the idea from German socialists. Elderly Americans were put on the dole, notwithstanding the fact, of course, that that first generation of Social Security recipients had not put anything into the system.
Roosevelt and his socialist cohorts knew precisely what Bismarck and the German socialists knew: that once people are placed on the dole, the way they look at government totally changes. People who previously viewed government as the major threat to their freedom and well-being now began seeing government as their provider, caretaker, and keeper. That’s when Americans began falling in love with the federal government.
It’s no different with healthcare. Look at the number of elderly people that are now on Medicare. I’d guess that 99 percent of them would never support an immediate and total repeal of this socialist program. They are as psychologically dependent on this program as an addict is to heroin. They could never imagine life without it. They love the government for having provided it to them. And, after all, it’s all free!
Whatever else might be said about Barack Obama, he is not a dumb man, any more than Franklin Roosevelt and Lyndon Johnson were. Obama knows that if he can just get his government-run healthcare program enacted, that will expand the number of people who are dependent on the federal largess. What could warm the cockles of a socialist more than adding to the rolls of those who love the government as a result of their dependency on it?
Obama, like Roosevelt and Johnson, is also aware of a political fact: that once a socialist program comes into existence, it becomes difficult politically to get rid of it. That’s because few politicians will dare antagonize those people who are dependent on the dole by calling for its repeal. Instead, the magic word “reform” becomes the standard lexicon.
Socialists like to pretend that their programs are “free.” Of course, that’s just nonsense. Socialism involves using the force of government (e.g., the IRS) to take money from one group of people and give it to another. It also inevitably involves ever-increasing expenditures — and taxes — needed to keep it going.
At first, socialism appears to be a big success. But that’s simply because there is enough wealth to confiscate and give to people. Consider Cuba, for example, which has long had a “free” health care program for everyone. When the socialists took power in 1959, there were lots of wealthy people. Today, the entire country is mired in deep poverty. Over time, that’s inevitably what happens with socialism. Weighed down with ever-increasing taxes, the producers of wealth begin slowing down and many of them simply stop producing wealth by retiring. Of course, that leaves the government less money to confiscate and redistribute.
So, given all the Americans who are now on the socialist dole in countless ways, do the lovers of liberty have any hope in prevailing over the lovers of government? I think we do. While the lovers of government are extolling the great “success” of such welfare state programs as Social Security and Medicare, millions of young Americans and middle-aged Americans are going to soon start feeling the financial burden even more than they already are, especially as more Baby Boomers begin retiring and go on the dole.
The fact is no generation can legitimately bind another generation into accepting its system of government. Every generation has the right to implement its own system. Americans who are now dead and older Americans living today chose the paternalistic welfare state.
But young people and middle-aged people have the right to repeal the welfare state, including Social Security, Medicare, and Medicaid, and restore a free market system to our land. It would be the best thing they could ever do, not only for themselves and their children but also for the elderly, who still have time to regain their love of liberty and personal independence before they pass on from this life.
Modern Survivalism Tenet Number Five
Food stored is an exceptional investment. You simply can’t lose by storing additional food that you use on a regular basis
by Jack SpirkoFood is increasing in cost faster than just about any investment right now and certainly faster than the rate of inflation. It seems the media has become fascinated with people practicing the modern survival philosophy. Indeed I would say that disaster prep has become one of the topics de jour at the moment. As always though mainstream media is myopic and focused on one and only one segment of modern survivalism and for now it seems to be those who store food.
As the host of the survival podcast I have been approached by a lot of media lately and recently was approached by a producer from "The Today Show" about helping them with a segment. When the producer stated to me, "well we have already filmed one family and they had a huge pantry, I got what I needed from them," I was done and politely choose not to be involved. A few weeks later the actual piece aired and after viewing it I am very glad that my name and brand will never be associated with it, you can view the segment on the NBC Website here. Make sure to watch the end when they sample a bit of the poppy seed cake.
One thing you never hear mentioned in any of these media segments about preppers storing food is the investment value the food represents in today's marketplace. In a recent LA Times Article a simple list of foods used in most American homes posted an 11% return on 16 common grocery items between 2007 and 2008. This trend of rising food prices has continued at the consumer level right on into 2009 despite drops in other commodities like oil. Compare that to the performance of stocks, mutual funds and other common investments from 2007–2009.
The key with storing food is you don't run out and just buy 50 cases of military style rations and put them away for a decade in a basement. Instead modern survival philosophy revolves around the mantra of "eat what you store and store what you eat." When you follow that concept you soon realize that storing food for the most part doesn't cost a dime more then you will spend anyway.
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Food Storage Rule One – Store What You Eat
Follow the simple logic that if you primarily store food items that you use everyday in your home that every dollar you spend was going to be spent anyway. Those six jars of spaghetti sauce you buy today would have still been purchased just over a few months rather then in one day. Keep in mind that when you go to the grocery store just about anything in the center of the store is storable. Most common food items we purchase today have shelf lives of at least 6 months and by making sure you check dates you can almost always find stuff that will easily go a year. Check in the back of the row for the items that were most recently stocked; sometimes this little trick adds 3–6 months of shelf life if new product was just brought in.
When you store what you eat you are not only spending money you will spend sooner of later, you actually spend less of it in total. How? You mitigate inflation. Buy a year's worth of an item today and six months later go see what the price of the item is, you are now eating that item and you have cheated the inflation. When I explain this to people the common objection is that "sure but sooner or later I have to buy more of it and at that point I pay the higher price." This is true and note I said you "mitigate inflation" not eliminate it. What you didn't pay was all the higher prices during the inflation curve. That may sound complex but it is a simple and proven business principle; it is exactly what Southwest Airlines does with fuel purchases and it is a huge reason why they stayed profitable even when much of the airline industry tanked.
Food Storage Rule Two – Take Advantage of Opportunity Buys
This concept is why you can win big beyond beating a portion of the inflation curve. It is also a two-pronged strategy. Prong one of it is during the build-up phase and simply involves watching for sales and quantity discounts. This concept has been discussed at length in just about every article ever written about the concepts of "thrift" and trimming family budgets so I won't belabor it now. Just understand that by watching for sales you can speed up the cost-effective aspect of getting at least a few months of reserves into your storage program.
Prong two of this concept comes into effect pretty much around the time you get to a 90-day sustainability point in your storage program. While long-term I think you should strive for six months and a year is certainly not overkill, 90 days is a huge accomplishment and it will get most people through 90 percent of the disasters we are most likely to face. Something almost magical will happen at this point though if you are truly "storing what you eat and eating what you store," you will find an ability to take the "opportunity buy" to a new level.
The way it works is choosing what you don't buy. Sound confusing? It isn't, in reality it is extremely simple. During any given 12-week interval you will find that for at least one week almost every common item in your pantry will go on sale. In most instances they will go on sale 2 or 3 times. Over a few months you will identify a few items that just never seem to go on sale and you will simply have to buy those as needed. For everything else though all you do is don't buy them when they are not on sale or if you are into coupons you don't buy them unless you have a coupon.
Now look, I am not talking about being "cheap" here or scraping by like a pauper. I am simply stating what should be obvious if we didn't look at stored food as being something sensational. When you have 90 days worth of an item in you home, you don't need to buy any more of it for 90 days. Now you don't want to run out, so you will have to buy more at some point. What you can do differently then the typical consumer though at this point is wait until the item is on sale, you find a quantity discount or you have a coupon for it before you buy it again. Just by doing this you will end up with a natural rotation of your stored food. In doing so you won't end up with a closet full of items that are all about to expire next month and need to be donated to a homeless shelter.
Food Storage Rule Three – Integrate Long-Term Items as Extenders/Adjuncts
When I speak about "storing what you eat and eating what you store" I am often asked if that means that you don't also store very long-term storage items, the answer is a definitive no. It is simply the case that a solid 60–90 days worth of stored everyday goods will be easier to acquire (or sell a spouse on acquiring) and provide more day to day utility then a case of military style rations and six buckets of wheat, beans and rice. Once you have 60–90 days of sustainability it is time to begin thinking a bit more long-term. As you acquire commercially produced storables you should seek ways to use these items from time to time as either main courses or at least adjuncts in your day-to-day meals.
The beauty of a hybrid approach to food storage is instead of say buying up a bunch of things you will only eat if you are forced to and then stocking six months worth of it somewhere in your home you can slowly over time get to a ratio of about 60% everyday goods and 40% long-term storage. With this ratio by the time you reach six months of sustainability you would have 4 months worth of everyday goods and 2 months worth of extreme long-term storage goods. A home pantry made up of such a ratio has a massive amount of utility, portability and adaptability to a variety of emergency situations. Additionally those who wish to stock up to a full year’s worth of food will often find it almost impossible to do so without some of these items making up a portion of their supplies.
For simplicity in my lectures I divide long-term storables up into two primary categories. While there are many more ways to divide and think about long-term storage this approach is a practical way for people to do the most important thing, get the food stored for the future. The first classification is what I refer to en mass as "commercially prepared storables," these include the infamous MREs (meals ready to eat) that our soldiers rely on for field rations and the far more useful products built specifically for the preparedness industry. MREs are another subject the semi-informed media at once associates with modern survivalists. They always seem to picture us sitting on a thousand cases of the dreadful things in some dark bunker, chewing on some beef jerky and waiting for the black helicopters to show up.
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The reality is while a few MREs never hurt to have around or specifically to have in a BOB (bug out bag), for long-term storage you will be a lot better served by the great products from companies like Mountain House, Provident Pantry and Yoder's Meats. These items are available from companies like Ready Made Resources and Safecastle Royal and provide you two primary benefits. First they have extreme storage life well into and over 10 years in the right environments. Second and just as important is they are actually very good food from a taste and usability stand point. I can't overstate how important it is for you to ensure that any of the commercial long-term goods you choose to rely on are something you will actually enjoy eating. For this reason I recommend purchasing a few cans of a few varieties and using them in preparing meals right away. Then over time acquire a supply of the ones that you and your family enjoy. That may sound really obvious but if I had a silver dollar for every person that told me they had "X number of cases stored of items they have never tasted," I would be a very wealthy man.
The second main category of long-term storables are items with huge storage life that you can acquire and store simply in containers like sealed 5-gallon buckets. The primary ones are rice, beans and wheat. This is another area where I have seen my fellow preppers "go off the deep end" and stock some ridiculous quantity at the expense of more practical goods. We have to understand that as preppers we have two primary finite resources, one is money and the other is space. While grains can help us manage our financial limitations they can also when relied on to excess consume our spatial resources beyond what is practical.
Food Storage Rule Four – Become a Producer
In becoming a producer you kick your food storage program into overdrive. There are really two main aspects when it comes to producing vs. simply consuming in regard to stored food. The first and the one most people think of when I say "become a producer" is various methods of growing your own food, foraging wild edibles, maintaining small livestock and perhaps hunting and fishing. Each of these takes upon a level of production vs. consumer-level activity. When properly leveraged they take your efforts beyond what a finite concept like storage can ever do alone.
Of them all hunting and fishing are the most limited. I enjoy both of these sports and see them as a great way to add protein to my home without a trip to the grocery store. However, when we honestly assess them for use in a true disaster scenario we have to accept that we are not going to be the only ones that see wild game as a source of food. In a true long-term disaster game and fish will quickly become scarce, in a personal level disaster we still have seasons, limits and access to contend with. Hence when it comes to wild game your best use of them is in preserving them via canning, drying, etc. (which is part of the second aspect of production).
Moving on to foraging, this is a slightly improved upon method of production. The chief advantage is that you don't really put any work into cultivation, planting and weeding – you simply harvest wild edibles like blueberries, blackberries, miner's lettuce and countless other sources of wild food. There are some commonalties though when it comes to forage with harvesting game. You also have seasons, in this case seasons when the items are available. You won't find beechnuts in March or blueberries in October. You also need access to wild areas where the items are available and once again in a long-term disaster these items will quickly come under pressure as more and more people have to rely on them. Hence again they are best as adjuncts and will do the most good if you utilize methods of preserving them when they are most abundant.
The final methods of direct production revolve around planting gardens, permanent crops (like nut trees, grape vines, fruit trees, etc.) and keeping various forms of livestock. Going deeply into any of these is beyond the scope of this article but suffice to say by practicing seed saving, breeding, etc. these options can represent wholly renewable sources of food. This can include things like your annual apple harvest, eggs from chickens, meat from rabbits, salad greens (often in all seasons) and other options like cheese from fresh milk or even making wine or mead from grapes or honey if you keep bees. When you add even a small amount of gardening, permanent crops or livestock to a well-stocked pantry it greatly extends sustainability and independence. It also compensates for the simple fact that total storage capacity is finite.
The second aspect of being a producer rests upon being a producer of storable items no matter how your possession of them originates. In other words if you grow peppers and dehydrate them or if you buy a bulk deal on beef and can it with a pressure canner doesn't matter, either way you are taking on some aspect of production. When you take on the production role of preservation you give yourself options and resource unavailable to the standard consumer. Say you visit a Farmer's Market during heavy harvest and find a great deal on beans. The consumer eats a few meals for a low cost while the harvest is in peak. The producer that cans or dehydrates can buy a large quantity and preserve them for well over a year for a fraction of the cost of a prepared storable item and at a much better quality as well. Additionally he supports local agriculture and trust me, that farmer you buy from today, is an ally you want if we ever have a food shortage.
There are many methods of preservation we have lost touch with that have been used a great deal over the years. These methods were quite common right up until we had a freezer and a refrigerator in every home. To truly increase your independence and preparations there are a few you should consider. These include root cellaring, canning, dehydration, salting, fermentation, smoking and pickling. If you take the time to slowly develop the resources and skills to use a few of or even all of these methods you will reach a level of self-sufficiency that most modern Americans can no longer even conceive of.
Conclusion – Seek a Holistic Solution Not Magic Bullets
If you think about these four rules as a single process you begin to quickly see how each supports and improves the results of the other. By combining opportunity buying with a method of preservation, you do more for your stability then either could do alone. By purchasing commercial long-term storables that provide quality protein and growing high-quality vegetables in a garden each provides more adaptability to the other. In time with patience and dedication each rule changes the way you think and you soon find yourself empowered. Food storage is not a fear-based activity as it is often painted by the media. Done with rational logic and a well-crafted plan it doesn't appease fear, it abolishes fear and frees you from the gerbil wheel that most Americans call the economy.
A food storage plan based on the four rules is extremely robust and flexible. If any one component fails or falls short during a disaster the others can compensate for it. If a disaster becomes extreme in duration your production capacity allows you to sustain what a finite storage supply can never accommodate. On the other hand your stored reserves give you the critical time to ramp up production without an immediate need that is impossible to meet with pure agriculture, foraging and livestock from a standing start. In short when you have food getting more is relatively easy, when you are out of food finding enough to survive on is very difficult.
Today a person that practices these rules is often referred by names such as "survivalist" or "extremist" or even perhaps they are called an "alarmist." Yet it was only a century ago that such people were simply called Americans. These people were your grandparents and your great grandparents and we can learn a lot from how they lived when putting food on the table involved more then a trip to the drive-through. By practicing the common sense wisdom they left for us, we can live a better life today, if times get tough or even if they don't.
Fed Independence Is A Myth
John TamnyThe Constitution didn't intend it to be autonomous.
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The Fed is not an independent body free of political coercion, but rather an institution whose actions have long been dictated by the president and politicians in power. More important, since Congress is empowered through the Constitution "To coin Money, regulate the Value thereof," it's folly for general defenders of central bank independence to presume that this applies to our own Federal Reserve.
On Jan. 31, 1970, Arthur Burns was sworn in by President Richard Nixon as chairman of the Fed. And while the Fed was at least nominally known as an independent entity, Nixon and others were well aware that the Fed's alleged independence was purely symbolic.
As Nixon noted at the time, excitement over Burns' nomination was "a standing vote of appreciation in advance for low interest rates and more money." Nixon made plain that he had "strong views" on the economy, and said about Burns that while "I respect his independence … I hope that independently he will consider that my views are the ones that should be followed."
Fast forward to August of 1971, and Nixon was moving in the direction of severing the dollar's all-important link to gold. Burns strongly defended the existing Bretton Woods monetary order, and as Rice University historian Allen Matusow wrote in his book Nixon's Economy, "Burns shrewdly played on Nixon's fears of political injury if he quit the gold standard." Burns pointed out that Nixon would be condemned for "devaluing the dollar," that "Pravda would hail these developments as a sign of disintegrating capitalism," plus it would be "hated by business and financial people."
But as is well known now, Nixon got his way despite Burns' protests against the U.S. leaving the gold standard. Fed officials surely talk up the central bank's freedom to administer monetary policy as they see fit, but as the Nixon years showed, the Fed is very much an agency coerced by politicians.
Moving on to Paul Volcker's reign as Fed chairman from 1979 to 1987, though it was no secret that he quietly lobbied congressmen and senators against the Reagan tax cuts, the supposedly non-political Fed had publicly endorsed Reagan's tax plan in "general terms" according to economics writer William Greider's book, Secrets of the Temple. Discussing the Fed's alleged independence at the time, Rep. Henry Reuss noted that "If Volcker had that much independence in his system, he would have showed it in the summer of 1981. Instead, he supinely went along with the administration's fiscal policy and he certainly didn't object to the instructions he was given."
Ultimately the Reagan administration very much wanted lower interest rates from the Fed to go with its tax cuts, and to some degree the administration got its wish. In return for a rate reduction from the Volcker Fed, tax increases were then put on the table to blunt some of the impact of the 1981 reductions. Far from acting independently, the Volcker Fed traded rate cuts for tax increases despite its desire to keep rates higher than the administration wanted.
Regarding the Volcker Fed's three-year flirtation with monetarism from 1979 to 1982, this policy's stupendous failure nearly made Reagan a one-term president, and pressure from GOP notables including the late Jack Kemp (who called for Volcker's resignation) surely hastened the Fed's departure from the use of quantity targets. Though the Fed's nominal independence allowed it to be stubborn about a policy that was crushing the U.S. economy, it's fair to say that political considerations factored into its welcome decision to ditch a monetary theory that had proved so wanting.
And when it came time for Reagan to make a decision on Volcker's reappointment in 1984, according to Greider, the Fed chairman agreed that he would eventually step down before his term ended so that Reagan could make his own appointment. Greider was also told by high administration officials that in return for Volcker's reappointment, there was an implicit agreement that "the Fed would provide sufficient growth in the money supply to insure sustained economic growth, without inflation." Greider acknowledged that Volcker "vigorously denied that he had ever discussed the conduct of monetary policy in connection with his reappointment," but as he also noted, "the president's men thought they had an understanding with the Federal Reserve chairman."
When Volcker stepped down as Fed chairman in 1987, Alan Greenspan suggested in The Age of Turbulence, his memoirs, that he reluctantly accepted Reagan's nomination to the top central bank post. But as columnist Robert Novak observed in 2007, Greenspan "aggressively promoted himself for the job." Politics, as they always have, played a role in Greenspan's nomination.
And when Bill Clinton took over the presidency in 1993, Greenspan did not behave as an independent observer of the political scene. Rather, Novak reported that Greenspan's choice to sit in between Tipper Gore and Hillary Clinton during the president's deficit reduction speech offended his "Federal Reserve colleagues" who "viewed taking that seat as undermining the Fed's cherished independence." Rather than attempt to obscure the most political of moves, Greenspan prominently displayed the picture of him sitting with Clinton and Gore in his book.
Greenspan's assertion in Turbulence that "a sound budget will bring long-term rates down" made him very much at home with the "Rubinomics" crowd of the Clinton administration, and sure enough, he says he "had an unusually fruitful and harmonious working relationship" with both Treasury Secretary Robert Rubin and his successor, Lawrence Summers. Impressive company for sure, but a supposedly independent Fed chairman would logically not express opinions about budgetary issues, let alone be tight with political figures in any administration.
And as I wrote in this column two weeks ago, it was no secret that our present Fed chairman, Ben Bernanke, aggressively courted the right for the central bank's top job in 2005. As Reuters columnist James Pethokoukis recently wrote, Bernanke is "now conducting an explicit re-election campaign for another four-year term as Federal Reserve chairman come next January." A truly independent Fed chair would correctly see such blatant politicking as tawdry, and for good or bad, beneath the job itself.
As part of his charm offensive, Bernanke told a town meeting in Kansas City, "I don't think the American people want Congress running monetary policy." In arguing that Congress should vacate its constitutional prerogative when it comes to the coining of money, Bernanke channeled his Fed predecessor, who wrote that if the Fed's discussions were made transparent as some in Congress wanted, "the meetings would become a series of bland, written presentations" in which the advantages of "unfettered debate would be lost."
What all who favor a secretive, independent Fed miss is that not only has history shown the Fed's supposed independence to be mythical, but that the Constitution makes plain that the Fed shouldn't be independent. Even more important, the Fed shouldn't so much be conducting monetary policy as it should be blandly following a price rule whereby the dollar's value is stabilized, preferably in terms of gold. The reality is that we don't need monetary policy, we just need a rule that says the value of the dollar should not be a moving target.
Assuming a price rule was to materialize, there would be no problem in Congress demanding total Federal Reserve oversight, and empowering the Fed to do but one thing: maintain a stable dollar from here to eternity. If so, the Fed would no longer burden the economy with interest-rate machinations and vain attempts at controlling the money supply. The Fed's greatly reduced monetary mandate would likely lead to transparent activity too boring for anyone to watch.
John Tamny is editor of RealClearMarkets, a senior economist with H.C. Wainwright Economics and a senior economic adviser to Toreador Research and Trading. He writes a weekly column for Forbes.
Fred Admits Journalistic Dishonesty About Mexico
by Fred ReedI have a confession to make to my readers. I have been lying about Mexico. Yes. I am a poor sinner and meant no harm, but the devil got into me, and I have done wrong. I have said that Mexico was a pleasant country of agreeable people, and harmless. I have said that children here run and play in the fountains and enjoy the blessed life of the happy young. No, no! It wasn’t true. They die of hunger in the streets. Nay, Haiti must seem a paradise by comparison.
Oh, if I could repent and redeem myself! I know now I have lured many innocent Americans, virgins (well, that may be stretching it), children, people of ripe years and helpless, into this hellhole of disease and corruption, where they have been robbed and killed and left to moulder in unmarked graves, like Ambrose Bierce. I laughed at Americans who asked me whether Mexico had paved roads. Oh, the shame of it! The truth is that Mexico does not. There are no paved roads in Mexico.
How I repent my lies. But it is too late.
What changed my life, and brought me to truth and the hope of salvation was the horrid death of my friend Richard and his sweet family. We found his mortal remains in the burning rubble of his home in Jocotepec, a village on the north shore of Lake Chapala. Beside his half-eaten body we found his diary of his family’s last days. I reproduce parts of it here with other accurate and damning verities about this abominable country.
“July 2. We have been hearing gunfire in the hills but figure it is just narcos settling accounts. It has happened before.”
Proof that there is no morality in Mexico. The sign above, found everywhere, indicates a nude beach. Oh, how I fear for our young.
“July 6. Explosions in the hills last night. Probably RPGs.”
Any American living here, if honest, will tell you that rocket fire is common. Especially during fiestas. Veterans of Viet Nam say that at times the detonations are as intense as anything they experienced in Asia.
“July 9. My daughter Chuleta arrived late at school today. A rabid coyote was in the street outside the house. She came back right away, having found that her class had been kidnapped again, except those at home with swine flu. The teachers say that if the children are released they will have to make the days up.”
Fred in Guadalajara, in front of burst water mains. There is no maintenance in Mexico. Everything crumbles.
“July 10. Peter Johnson is dead, presumably from food poisoning from bad mocha at the coffee shop on the plaza. Our group of Americans no longer leave our houses. We are cut off.”
And to think that I once made fun of Americans who believed disease to be everywhere in Mexico. How many of them have I killed with my fabrications?
Evidence of epidemic. In this photo of Fred and family, Violeta is suffering from reverse lockjaw, a rare form of tetanus. There is no treatment. The Mexican government will not warn you of this.
“July 14. A policeman was shot to death by narcos this morning in the plaza, apparently to steal his cocaine. The water-treatment plant has stopped working. We fear plagues.”
Torture is common in Mexico. Here we see Fred with his friend Will Powell, who was white until the Mexican police put him into a pizza oven for interrogation.
“July 17. We stay in the house. Chuleta is sick with cholera. Dr. Perez came from the government clinic and sacrificed a chicken, but she got no better. He said it was a difficult case and would require a specialist who would chant and burn pig entrails.”
Food has become scarce in Mexico, a failed state. The reason of course is that the narcos have taken over all the farms to plant hemp, coca, poppies, and marijuana. A certain amount of corn is grown in clandestine fields in the mountains, but aircraft from the government spray these crops with herbicides.
Starvation is rife in the cities. The authorities do not even collect the bodies.
“July 19. Chuleta died today. We were going to have a funeral but the wild dogs ate her.”
Indicates nude beach for mutants. A country that encourages harlotry and promiscuity among the genetically differently-abled is clearly reprehensible.
“July 21. I am alone. Even the government is attacking us. The helicopter of the Mexican air force dropped a load of cheap plaster bulls on the house. One hit my wife on the head. I was able to bury her decently because the sewage overflow from the water treatment plant has drowned the wild dogs.”
We who live in this inferno have learned not to trust the government. For years we heard from the peasants of nightmarish creatures that came from volcanic vents and devastated whole populations. We didn’t believe it. President Calderon himself assured us that it wasn’t true. Strange creatures? What nonsense. But then….
These things, whatever they are, prowl Guadalajara, eating pedestrians. The government, concerned about tourism, keeps very quiet about it.
“July 23. We are doomed. This will be my last entry. The sewage has reached the front gate and feral possums have come from the hills to feed on corpses. If anyone finds this, tell my daughters in Spokane goodbye. For God’s sake stay away from Mexico.
The possums are coming….”
The Most Important Economic Phenomenon and How to Play It
The most important economic phenomenon lying ahead of us, which we must understand as traders and/or investors, is the inflation-versus-deflation battle.Below I discuss this most important of all financial phenomena, one poorly understood by the public at large, as we lead into specific ways to position ourselves in the marketplace.
Inflation-or-deflation is a phenomenon not just of money supply, but of money in circulation.
When Federal Reserve Chairman Ben Bernanke was interviewed recently by Congressman Ron Paul (R-TX), one of the smartest guys in Congress, he didn't give the full answer.
Here's an excerpt from that interview (with some additional comments Rep. Paul then gave to correspondent Neil Cavuto):
Ron Paul: So it seems to me that you're in the midst of massive inflation, but I guess you have a different definition. When you double the money supply, that's not inflation itself? Or are you looking at only prices?
Ben Bernanke: "Inflation" is the change in the price of the consumer price level, which is very stable right now, and the various measure of money, as you know, in the broad measures of money, the measures that cut the measures of money in circulation like M1 and M2 are not growing quickly.
Neil Cavuto: So, Congressman, he more or less said your inflation concern was misplaced. What do you make of that?
Ron Paul: Yeah, that's what he said. But when it comes, people will realize they should have been more concerned. Just like he was totally unconcerned about the crisis building. Remember the many years and months before the crisis hit he reassured everybody that there were no problems. So I don't know why we should be reassured by him now saying, "Don't worry about inflation."
But I was trying to make the point that the definitions are different. If you increase the supply of money, that is inflation. It causes harm, even if you don't have your rise in prices yet. But we do have rising prices in medical care and there is a lot of inflation out there.
Neil Cavuto: And you've been arguing that a lot of this federal printing of money led by the Fed and all these rescues and bailouts where we are pulling money out of our you know what, I mean, that's going to be eventually inflationary. Now, to be fair to you, you've been saying this long before even our economists started picking up on this. What is your worry now? How pronounced is this threat? How soon is this threat?
Ron Paul: Well, I don't think you can predict, that's one thing, Austrian economics teaches you that you can predict trends, but not timing and yet, it will come because the money supply has been increased. ...
Neil Cavuto: He said he's going to be ready for that, Congressman, and that the Fed is already ready to act when it happens.
Ron Paul: Yeah, sure.
Neil Cavuto: But you argue once you see it, it's too late to address it.
Ron Paul: Yeah, he also said that he will never monetize the debt. Well, he has no choice. If he doesn't monetize the debt, interest rates are going to skyrocket and that he doesn't want and the financial markets don't want that. So he would be fired rather quickly by the president if he allowed, if he said, if he lived up to saying, "I'm not going to monetize any debt."
Certainly Bernanke didn't create the mess we're in now; his predecessor as Fed chairman Alan Greenspan and President Bush did with help from the publicm, and now Obama and the Congress are pouring salt in the wound.
The policies the Fed has pursued under Bernanke's leadership have arguably avoided a depression, but the fact remains these policies will likely lead to accelerating inflation in the future.
But why are there few signs of inflation at this time?
Before inflation shows up as a result of the inflated money supply, the massive equity loss in real estate, lost wages, etc.--deflationary events--has to be absorbed. The government can increase money supply, but if people are unwilling to spend it, and save or pay off debts instead, deflation can occur because the money in circulation can drop even while the money supply is increasing.
In other words, the global economy has been deflating, and when this process is complete the opposite will take place. With the unprecedented expansion of the money supply, there will inevitably come a time when the velocity of money will come back and cause greatly accelerated inflation.
And, despite what Austrian economics tells us, I believe there is a way to predict the timing. The markets will tell us when this transition is taking place, and most likely the markets will anticipate this change.
Which markets? Certainly gold and long-term Treasury bonds as well as a host of commodities.
Here are specific plays that make sense to me for the longer term.
The charts below are weekly charts, meaning each bar represents one week's price action. The blue line on each chart is the 52-week exponential moving average (EMA), a one-year moving average that represents the major trend.
If the market is trading above the blue line, the assumption is the longer-term trend is up; if it's trading below, this indicates the longer-term trend is down.
Buy Gold on Strength
Weekly Gold, 2007-Present
Source: Commodity.com
Despite all the deflation, gold turned above its 52-week EMA in January and has remained above since then. The pattern could be described as sideways, which is truly a sign of strength in the face of International Monetary Fund gold sales and the deleveraging of the economy.
The near-term trend could remain sideways, however a breakout to the upside, above the $990 level indicated on the chart, would constitute a very bullish development, a sign the inflation is coming, and project much higher gold prices.
Buy the Canadian Dollar
Weekly Canadian Dollar, 2007-Present
Source: Commodity.com
This year the Canadian dollar has already reversed trend from down to up, as indicated on the chart above. The current level, 92 to 93, appears to be a pivot point. If the loonie can remain above the 92.5 level over the coming month or so, my projections are much higher levels, above par to the dollar, like it was trading during 2007.
Sell Treasury Bonds
Weekly Treasury Bond Futures, 2007-Present
Source: Commodity.com
Higher inflation leads to higher interest rates, and long-term Treasury bonds will break down as interest rates go much higher.
Higher interest rates theoretically should support the dollar, but the dollar will weaken in relation to the "commodity currencies," notably the Canadian and Australian dollars, although it might appreciate versus the Japanese yen and the euro.
Note how the 30-year bond futures broke below the 52-week EMA in May.
Buy Select Commodities
Weekly Cotton, 2007-Present
Source: Commodity.com
When gold breaks to the upside, the Canadian dollar breaks to the upside, and Treasury bonds head south, all the pieces of the puzzle will be in place for more inflation.
The place to be in this case will be commodities in general, those commodities that China imports in particular--cotton (depicted in the chart above; note how cotton broke above its 52-week last month), soybeans, copper, coffee and sugar.
These are all markets I trade and we follow with specific recommendations for my subscription-based trading service Futures Market Forecaster.
Former La. Congressman Convicted of Taking Bribes
Jefferson Found Guilty on 11 of 16 Counts
Former Congressman William J. Jefferson was convicted of corruption charges today in a case that featured $90,000 in bribe money stuffed into his freezer and a legal battle over the raid of his Washington office that reached the highest levels of the U.S. government.
Federal jurors in Alexandria found the Louisiana Democrat guilty of using his congressional office and staff to enrich himself and his family, offering and accepting hundreds of thousands of bribes to support business ventures in seven West African nations. The eight-woman, four-man jury convicted Jefferson on 11 of 16 counts that included bribery, racketeering and money laundering.
The verdict in U.S. District Court in Alexandria culminated an investigation that alternately fascinated and horrified much of official Washington. Jefferson is a former co-chairman of congressional caucuses on Nigeria and African trade who in 1990 became the first black congressman elected in Louisiana since Reconstruction.
The low-key legislator burst into public view in 2005 when the FBI raided his Capitol Hill home and found the $90,000, wrapped in foil and stashed in Boca Burger and Pillsbury piecrust freezer boxes. Prosecutors told jurors during the seven-week trial that the money was to bribe the vice president of Nigeria to secure his help with a telecommunications venture. Defense lawyers said Jefferson had been "stupid" and shown "awful judgment" in agreeing to make the payoff, but he had not committed a crime. The money was never delivered.
Jefferson, 62, could spend the rest of his life in prison. Judge T.S. Ellis III allowed Jefferson to remain free on bond until his sentencing.
He lost his re-election bid in December after initially winning another term while under investigation.
Beyond the money in the freezer, which defense lawyers acknowledged in closing arguments made Jeffferson something of "a national joke," the case was best known for the controversial FBI raid on Jeffferson's quarters in the Rayburn House Office Building. The May 2006 seizure of his computer hard drive and office files was the first time federal agents raided a congressional office, and led House leaders to assert that the documents were privileged legislative material not subject to search.
President George W. Bush sealed the seized documents, and the dispute caused a lengthy delay in the case. Jefferson sued the Justice Department, and an appeals court ruled that he could review the documents before investigators did, to highlight those connected to legislative activity.
Jefferson was eventually indicted by a federal grand jury in June 2007, the first time a U.S. official had been charged with violating the Foreign Corrupt Practices Act, which bars bribery of foreign officials. He was acquitted of that charge. Prosecutors, who presented more than 40 witnesses at the trial, told jurors the attempted bribery of the Nigerian official was part of a pattern of illicit acts in which Jefferson used his position to direct about $400,000 in bribes, relating to business ventures he helped set up in Africa, to companies he set up in family members' names.
The bribery schemes unfolded in meetings in Northern Virginia and Maryland, New York, London and Africa and included telecommunications deals in Nigeria and Ghana, oil concessions in Equatorial Guinea and waste-recycling systems in Nigeria, prosecutors said. They said Jefferson directed his aides to send letters on congressional letterhead promoting international businesses he profited from, without disclosing his financial stake.
Defense lawyers, who presented two witnesses, said the business dealings might have been unethical but were not criminal because they were not part of Jefferson's official congressional duties. They said the government had tried to stretch what amounted to congressional ethics violations into criminal acts.
Jefferson, who did not testify, is the third person convicted in the investigation. His former business associates Vernon L. Jackson and Brett Pfeffer -- a former congressional aide -- pleaded guilty in 2006 to bribery and are serving time in prison.
By Caroline Salas and Beth Jinks
Aug. 5 (Bloomberg) -- Trump Entertainment Resorts Inc. bondholders plan to reject Donald Trump’s attempt to take control of the bankrupt casino company because it would leave their securities worthless.
Bondholders, who are owed $1.25 billion, say Trump’s deal undervalues the company. Trump and an affiliate of Beal Bank Nevada agreed on Aug. 3 to invest $100 million in the company. Beal would extend the maturity on a $486 million loan until December 2020 from 2012.
“The plan proposed by Beal Bank and Donald Trump is not capable of confirmation for many reasons,” said Kristopher Hansen, co-head of the financial restructuring practice at Stroock & Stroock & Lavan LLP in New York, who is representing bondholders. “The stories of Mr. Trump’s regaining control of the debtors are simply inaccurate,” Hansen said in an e-mailed statement.
Trump is attempting to retake control of the company he founded after the three casinos it owns in Atlantic City, New Jersey, wound up in bankruptcy protection a third time.
Any value above the Beal loan, which ranks first for repayment, should go to bondholders as equity, according to people familiar with the thinking of the bondholders. Shareholders would also get nothing under Trump’s offer, which requires court approval.
‘Too Low’
Bondholders are considering putting up additional money to help repay the loan to Beal Bank, according to the people, who declined to be identified because the creditors are still formulating their own plan. That amount may be between $50 million and $100 million and Trump would get no equity, one of the people said.
Trump’s plan puts “too low” a valuation on the company and we “suspect bond holders, who are second lien but are being offered nothing in this plan, will object,” Barbara Cappaert, an analyst at high-yield research firm KDP Investment Advisors Inc. in Montpelier, Vermont, wrote in a report yesterday. “This will likely delay an eventual reorganization for several more months.”
Atlantic City-based Trump Entertainment filed for Chapter 11 bankruptcy in Camden, New Jersey, on Feb. 17, days after Trump quit as chairman and said he was severing ties. At the time of the filing, the company listed assets of $2.06 billion and debt of $1.74 billion as of Dec. 31.
“The filing of a bankruptcy plan is standard in the restructuring process and signifies the start of a many months long process that guarantees no certain outcome,” Hansen said.
Tom Hickey, a Trump Entertainment spokesman, declined to comment beyond the Aug. 3 company statement.
Bondholders will “have a very hard time proving” the casino company is worth more than $500 million in court, Trump, 63, said in a telephone interview yesterday.
Additional Capital
“They appointed most of the board of directors and this was already sent to the board,” Trump said. Bondholders have failed to reach their own agreement with the board, he said.
Additional capital from bondholders would be too expensive, and under any plan other than his own, Beal Bank may not let Trump Entertainment extend the maturity on the loan, Trump said.
In exchange for extending the credit line, Beal Bank would get an interest rate that is 5.75 percentage points more than the London interbank offered rate, Trump Entertainment said yesterday in a filing with the U.S. Securities and Exchange Commission. That’s up from a spread over Libor of 3.2 percentage points previously, according to an earlier agreement.
Three-month Libor, a borrowing benchmark, was set at 0.47 percent yesterday.
‘Needs Leadership’
Bondholders “want to invest money with a large amount of interest on that money, and that doesn’t work,” Trump said. “These people have been running the company for the last three years. They put the board on, they hired everybody and look what happened. I haven’t been involved in management in a long time. This is a company that needs equity investment and needs leadership.”
Trump Entertainment’s $1.25 billion of 8.5 percent notes maturing in 2015 last traded at 12.25 cents on the dollar on July 23, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The securities traded as high as 103.375 cents as recently as June 2007.
Cappaert recommends investors “hold” the securities because “bondholders deserve and will earn a level of return consistent with current bond prices,” she said in the report.
By Matt Townsend and Fabio Alves
Aug. 5 (Bloomberg) -- U.S. stocks fell, dragging the Standard & Poor’s 500 Index down from a nine-month high, after reports on job losses and service industries were worse than economists estimated. Treasuries and the dollar also declined.
Procter & Gamble Co. slid 2.8 percent after profit fell on lower sales of higher-priced skin care products and detergents. Electronic Arts Inc. sank 6.8 percent after reporting a quarterly loss. Declines were limited as financial shares rallied after mortgage insurer Radian Group Inc. posted better- than-estimated results and commodity producers gained as aluminum and copper rose to the highest in at least nine months.
The S&P 500 fell for the first time in five days, slipping 0.3 percent to 1,002.72 at 4:07 p.m. in New York. The gauge climbed yesterday to 0.1 point below its close on Nov. 4, the day President Barack Obama was elected. The Dow Jones Industrial Average dropped 39.22 points, or 0.4 percent, to 9,280.97.
“Data is less bad, but it’s still going to be weak,” said Tim Hartzell, who manages $300 million as chief investment officer for Houston-based Sequent Asset Management. “The talk is all about the smaller companies that are now into that next phase of downsizing. That’s what we have to go through. There’s going to be some smaller and midsize companies that have to go out of business to reduce capacity.”
Yesterday’s advance pushed the valuation of the S&P 500 to about 17.5 times its companies’ earnings over the past 12 months, the highest level since May 2008, according to daily data compiled by Bloomberg.
Historic Rally
Since reaching a 12-year low of 676.53 on March 9, the S&P 500 has rebounded 48 percent, the steepest rally over the same number of days since the Great Depression. The S&P 500’s 14-day relative strength index, a measure of momentum, rose to almost 76 yesterday for its highest level since October 2006. An RSI above 70 is typically a sell signal to technical analysts.
Benchmark indexes opened lower after data from ADP Employer Services showed companies cut 371,000 workers from payrolls in July, more than the average estimate of 350,000 in a Bloomberg survey of economists. The figures from the world’s largest payroll processor have shown declines in employment since February 2008. The number of lost jobs has dropped each month since April and fell in July from 463,000 in June.
“I don’t think the lessening of the recession will carry weight much longer,” said Ron Kiddoo, who oversees $500 million as chief investment officer for Cozad Asset Management Inc., based in Champaign, Illinois. “It helped for the past few months, but it’s not going help forever.”
Equities extended losses as the Institute for Supply Management’s index of non-manufacturing businesses, which make up almost 90 percent of the economy, fell to 46.4 from 47 in June. Fifty is the dividing line between growth and contraction.
P&G Slumps
Procter & Gamble lost 2.8 percent to $53.91, leading a measure of consumer-staples companies in the S&P 500 down 1 percent for its biggest decline in a month, after saying fourth- quarter net income dropped 18 percent to $2.47 billion.
Electronic Arts, the world’s second-largest video-game publisher, sank 6.8 percent to $20.40. EBay Inc. dropped 1.1 percent to $21.61 as gauge of S&P 500 technology companies lost 0.9 percent.
Emerson Electric Co. fell 3.6 percent to $34.83 as industrial shares in the S&P 500 snapped a four day streak of gains. The maker of electronic products was cut to “neutral” from “buy” at FTN Equity Capital Markets Corp., which said fiscal year 2010 earnings may continue to be hurt by lower volumes.
Bond Drop
Treasuries declined for a third day after the U.S. announced it will sell a record $75 billion of notes and bonds at next week’s auctions and Goldman Sachs Group Inc. boosted its forecast for U.S. economic growth.
The yield on the 10-year note rose seven basis points, or 0.07 percentage point, to 3.76 percent at 4:16 p.m. in New York, according to BGCantor Market Data. The 3.125 percent security maturing in May 2019 fell 18/32, or $5.63 per $1,000 face amount, to 94 27/32.
Thirty-year bond yields touched their highest levels in a week as the government signaled it’s considering the introduction of 30-year Treasury Inflation Protected Securities and ending 20-year TIPS as it finances unprecedented budget deficits. Goldman Sachs, one of the 18 primary dealers that trade with the Federal Reserve, said GDP will grow at an annual rate of 3 percent in the second half of 2009, an increase over its previous forecast of 1 percent growth.
The dollar traded at $1.4423 per euro, compared with $1.4408. It touched $1.4447, the weakest level since Dec. 18.
The Dollar Index, which tracks the U.S. currency against six major counterparts, fell 0.3 percent to 77.745.
Crude oil futures expiring next month rose 0.8 percent to $71.97 a barrel on the New York Mercantile Exchange, the highest settlement since June 27.
A U.S. government report showed that fuel demand climbed 3.1 percent to 19.3 million barrels a day last week, the highest since the week ended Feb. 27. Supplies of distillate fuel, a category that includes heating oil and diesel, fell 1.14 million barrels to 161.5 million.
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