Friday, November 01, 2013

Happy Nov and just think we missed October-crash.  That is good news, although I still feel like the Sword of Damocles hangs over my head. 

Today, one of my very long term friends (I have so few unfortunately), posted an article I sent to him from the NY on his Facebook account.  The gist of the article was more and more Democrats are worried about what ObamaCare's struggles are going to cost them at the voting booth in 2014. 

As wrong minded as I believe ObamaCare is, I don't think it will be repealed (not under this President and any foreseeable mix in the Senate).  The more important point is about all the mandated programs from the Federal Government to the States, the States to the local governments, and bankruptcy pending or on the way in every city. 

The question is how does all that get paid for?  If you are a follower of Paul Krugman, then you know he publishes and shouts and rants the deficit and debt do not mean anything to the USA.  One of my best friends follows Krugman like he was "god" or something.  Krugman considers himself the conscience of the USA.  Of course, the common man cannot possibly understand and rationalize all the violent (in words at least) differences of opinion between Krugman, Rogoff, Thaler, Bernanke and so-on that they hear all the time.  Common sense would seem to say that debt does matter, and it has to be paid.  That any individual who is in debt and wants to get out knows it takes super-human effort to get out. 

I argue that the Tea Party has this simple idea of solving the problem incorrect as well, in that a simple solution will have significant unintended consequences to a barely functioning (from an economic standpoint) political system.  The Tea Party cannot just shut down the country on principle.  They must present a holistic plan that  does not end up with Civil War.

Let me turn your thoughts (all one of you) to currency.  Let me assert that studying currencies, one gets a pretty good idea of what countries are doing well globally, what are just getting by and what countries are disastrous.  Over time, the student begins to observe the relationship between foreign trade, currency and economic competitiveness in the global economy. 

Is the dollar shrinking in value?  Krugman would argue it makes no difference, but the woman in the street would respond with everything is more expensive, and as wages go down the prices go up as well.  Mr. Krugman may be rich, and if so, he just does not feel the problem of the wage earner.

The US dollar has been shrinking in purchasing power ever since the inception of the Federal Reserve.  That is odd because the only mandate (originally) of the Federal Reserve was to protect the value of the currency. 

The Federal Reserve since the problem after the DOT COM bubble burst has been pumping liquidity into the market.  Since 2001 may I suggest we have had all kinds of "bubbly" things, busts and recovery.  All these mini-kind of booms and busts can be traced to an seemingly endless array of borrowing bubbles (Feds borrowing, banks borrowing, corporations borrowing).   In between where is there even one single sign of stable, sustained growth? 

The Federal Reserve (and the Obama Administration) thinks another round of stimulus will solve the problem.  Don't you begin to wonder about that?  (See my post on Abeonomics.) 

All the borrowing the government does to fund stimulus, tax cuts and fund social programs  puts us at the tender (NOT) mercy of foreign investors.  Ask Greece, Argentina, Russia and so-on how that turns out.  If foreign investors slash investment in US dollars, Bonds and Notes, we will have a crash the likes of which has not been observed in this world. (I just know you will argue, that Spain crashed; France Crashed; Italy Crashed; Roman Empire Crashed.  Certainly the USA would not be worse.  Yes it could, because there is technology to destroy this world in 5 minutes, and we don't know the tipping point for using all that stuff to protect national security ahem?!!!)

If you hate what I'm about to say, then please say it better. 

The USA has a trade deficit. The USA produces almost no consumer goods; not autos, not clothing, not trinkets, nearly nothing.  We export military and agriculture.  A trade deficit is caused by chronically high levels of undersaving and underinvestment. 

However, the conundrum is that every single thing the Federal Reserve is doing encourages undersaving and underinvestment.  In essence, taking interest rates to zero is informing you that the Economic Elitists in this country do not believe you know what to do with your money.  You as an individual are too stupid to know what is best for society.  They don't think it is safe for you to simply buy goods and services you want and need.  Only they know what is best. (Central planning at is ugliest, if for no other reason than they don't communicate and sell it to you as a good idea - "trussssst in me" - Remember the Snake In Jungle book?...) 

We then have the Federal Reserve creating huge sums of money.  The problem for Janet Yellen and Paul Krugman is that money is a form of asset, and if the supply increases faster than demand, the value of the dollar will drop.  Well it has been dropping.  You as a consumer see it even if the Federal Reserve is telling you there is no inflation.  There are at least two ways the dollar can lose value:

1. 1.      Inflation means there are too many dollars trying to purchase too few goods.  This supply/demand equation drives up prices... Each dollar buys less and is devalued.  The reason this is not happening at the moment, is because a vast majority of Fed money is not going into the hands of the wage earners.  It is paper wealth diverted into asset purchases as investments; not spent by the people creating demand.  The stock market goes up, but the wage earner has no money to participate in that rise.
2. 2.      The other way the dollar loses value is via its exchange rate to other currencies.  Foreign holders of dollars seeing no end to deficits, spending and Federal Reserve purchasing may come to the conclusion their dollar holdings (and bond holdings) are being diluted too much.  They may then sell their currency in the currency market (bonds in the bond market), and the dollar will fall.  Since the USA is an import-dependent country, domestic US prices will rise as a result of currency devaluation. 

Can we observe the dollar falling in relation to all other currencies?  The answer is yes!  This is observable in the Dollar Index (published by any number of free charting packages).  

Can't insert image as Google won't let me.  Go to www.stockcharts.com and enter $USD.  http://stockcharts.com/h-sc/ui?s=%24USD  Set the parameters for monthly and scroll until you can see 2001.  

Since 2001, the dollar has gone from 1.20 to .70 (approximately).  That is a loss of 60% in the value of the dollar.  The dollar has gained a small amount since the government shutdown, but in context not much.  However, since 2008 the dollar has stabilized, and I suspect (but cannot prove) that our prices at the consumer level have stabilized. 

One does not have to observe history since Bernanke took over that the Fed track record shows the only thing they can really do (besides destroying the value of the dollar) is to drive the stock market higher.  We heard Dr. Bernanke talk about the virtuous cycle of driving the stock market higher. (And there is truth to that. Think about how anxious you feel if the stock market crashes even if you do not have anything invested in it.)  

The People, struck a devil's bargain with the creation of the Federal Reserve.  Central bankers (here and abroad) hold all the power over our money.  We then agreed to quit the gold standard, removing the only objective way to determine the value of cash. 

Why did we do either of those things?  Because my ancestors were told that the central banks would increase stability in markets, and that they would stabilize currency value without gold.  That vigilance from extremely smart people would keep the value of the dollar steady in the world market place. How is that working out?

Before Nixon removed the gold standard and after the USA became the reserve currency of the world, we had an economic crises every decade.  After 1971, we now enjoy about two crises per year.  Is that fun?  Well, we can't go back.

The appearance (to the world) of any domestic inflation on top of the falling exchange value would cause investors to get out of dollars (and US sovereign debt).  That is not an upward virtuous cycle, but an downwards vicious cycle.  Unlike Greece, there is no one coming to rescue the USA when this happens. (Not if it will happen, when it happens.)

Dr. Klugman is a demand-side economists.  These economists have dominated US economic policy no matter what party (since Reagan) has been in power.  The rational is that fiscal policy can only impact aggregate demand.  For example of demand-side, economists believe to stimulate you give the people a tax break, and they will spend thereby increasing aggregate demand.  On the other side of demand, if you hike taxes they won't spend.  Supply then is a passive responder to aggregate demand. 

Krugman would then seem to argue that all Republicans (except George W. Bush) are bad for the economy, and all Democrats are good.  Democrats stimulate the demand side through tax reduction (although ObamaCare is raising taxes on an unprecedented level).  Republicans do not seem to have a good convincing speaker for the other side.  Then we can now show that stagflation under Mr. Obama and Dr. Bernanke is FAR more devastating to the working class than the rich.

The good news is Mr. Obama is figuring it out.  The bad news?: he is very likely incapable of changing course, as the bankers and investors would not allow it.  The threat?  Change course, and we will collapse the stock market and the bond market.

If that does not make you think "slavery" to the bankers, I do not know what will.

Here is a secret: NO ONE in charge wants sound money - and most definitely not the big banks of the world (or the USA).   The turnover in the foreign exchange market is around $4 Trillion dollars per day.  Who wants to lose all that?  Not one of the big banks would support any action that would stop the liquidity in the FOREX markets.

Would you like to continue on the journey with me down the currency education for the common person?  Then ask your friends to join my blog.  If I don't get more people, I will discontinue it again, and concentrate on investment research.

Have a great week end.  :)