INFLATION – REALLY?

Thursday, March 24, 2011

In 2008, my concern over inflation intensified; concern that was more about future rises in prices than about the modest inflation we were currently experiencing.  The evidence that drove my concern centered on the huge, already accumulated national debt, the massive deficit spending that was being scheduled in increasing amounts, the destructive socioeconomic policy of recent administrations, and the political movement ushered in by the election of a president who I believed was determined to do whatever it took to bring our arrogant, imperialistic, poor-country raping United States into his vision of a world order that forces the redistribution of ill-gotten gains.  His stated mission to "transform" our system of government included goals to create a universal healthcare system paid for by taxpayers, shifting the cost of all government programs and entitlements to the wealthy, universal taxpayer paid education through a college degree, converting our energy generation from petroleum to alternatives funded by the petroleum based energy companies (forced through the use of carbon credits) to be passed on to the consumer, and a massive redistribution of U.S. wealth to poorer countries through the use of carbon credits and other strategies; all of which would fuel the destruction of our economy in more ways than anyone could imagine.  He promised his political base he would make it happen, and I believed him. 

The threatened collapse of the U.S. and international financial system, followed by an economic crises still reverberating around the globe, exposed just how far the Progressive agenda had taken the world into financial interdependency.  The tentacles of the financial monster running wild reached into the economies of virtually every country on the planet, and the fear generated by the rhetoric surrounding the financial crises was the final push needed to sweep an effective “progressive agenda” leader into the most powerful office in the world.   He and his team had no problem finding men and women to fill the powerful administrative and agency positions who would advance his agenda, and the first two years were a “progressive’s dream”, which were also a “Constitutional Conservative’s nightmare”! 

We were already in severe trouble as a nation before the financial crises of late 2008.  Subsequent actions of those in power removed all potential that our nation would be able to weather the financial storm already blasting us, and insured a future major devaluation of our currency, and, along with it, the prosperity we have enjoyed for decades.  The events that could push us over the edge have dramatically increased in number.  The domestic events are unfolding rapidly and easy for us to see, as the media feeds us with sights and sounds of the worst case scenario every day.  The events more difficult to see, and even more difficult to understand, are those unfolding internationally, such as the push by an ever increasing number of sovereign states for the IMF to create a form of reserve currency to replace the dollar.  Few Americans understand, or are even aware of, the potential consequences that would visit upon us if that ever occurs.  The use of the dollar as the international reserve currency has been the common medium of exchange that greases the wheels of international commerce.  The dollar has been the primary currency available having the characteristics needed for funding international commerce and stabilizing international currency.  That is still the case today, however, there are major international powers who would love to see the U.S. punished for its arrogance by the loss of the status afforded the provider of the world’s reserve currency.  And, we have a leader who would be just fine with that, as it would go a very long way toward his goal of creating a “level playing field”, and “equality among nations”. 

If you are having a hard time seeing what harm would occur if the dollar lost this status, picture the loss of a need by China, Japan, the Arab Emirates, and others, to buy our debt in order to support the currency they depend on for trading on the world market!  Currently, world central banks hold more US currency and debt than any other denomination, by a wide margin.  There is a practical daily need for a relatively stable reserve currency, as most of the oil and many other commodities are priced in dollars, and dollars are used to purchase those goods.  Many contracts between buyers and sellers of different countries are denominated in dollars.  It is the easiest currency to value, and there is an adequate volume of it to fund world commerce.  Take a look at the Federal Reserve balance sheet and see the totals of currencies other than $US.  If the central bank of Sweden, for example, runs out of $US (which it provides to member banks for exchanging Krona into dollars for their business customers, called a “swap-line”) our Federal Reserve will exchange $US for their Krona to accommodate their need.  Such is only one of the examples of the use of a reserve currency.  The term “reserve” is a misnomer. 

Understanding the need for a reserve currency may help us to understand why it is in the best interest of major economies to support it by lending us money at reasonable rates to help stabilize it.  If that need goes away, or is significantly reduced – well, I think you get the picture.  The interest rates we would have to pay to sell our treasuries would go up, perhaps dramatically.  The value of the dollar to other currencies would tumble until it found an appropriate level, meaning we would be paying more for imports.  Many other currencies would also be crushed as chaos worked its way to order.  Even if we retain reserve currency status (which I think is likely), the dollar is likely to continue to fall to the point where international lenders stop buying at the current interest rates, and to the point where Bernanke and his central market committee finally hit their limit of the amount of dollars they are willing to create out of thin air in an effort to hold rates down.  Then, interest rates will be released to float to the level deserved.  That is also likely to be the catalyst that kicks inflation into high gear, making 5-6% look paltry.  Stocks would crash, gold and silver would initially fall along with the equity markets, then rebound as inflation accelerates.  At least, that is the picture I imagine, and the one I consider probable enough to defend against.  Of course, stocks may enter a decline without an increase in interest rates, although that scenario would require the investment community bailing out of stocks and bonds at the same time, which, although normally short lived and infrequent, is the scene likely when the major treasury buyers give up on supporting low rates.

Yes, I do believe that as the pain hits home for enough of us, changes will occur that will take us back to policies more conducive to financial health.  We are a nation of people who will finally rise up to demand freedom and stability when the pain becomes personal to enough of us.  It is unfortunate that we must wait until the pain is unbearable before we are motivated to take action.  And, even though there will be much gnashing of teeth and demand for heads to role, placing blame on those responsible for the destruction would find nearly every adult in this country culpable to some degree.  The difficulties we will go through will be punishment enough.  There is nothing now that can prevent the collapse of the dollar, which will be the global source of pain for the average citizen, long after those alive today are gone. 

What will the pain look like?  Just keep your eyes on what is happening in civilized areas of the world where they are experiencing “civil unrest”, shortages of food in the market place, a decline in the credibility of their currency, and resulting rising prices.  Envision large sectors of our economy being shut down by striking workers, paid union toughs taking to the street in the destruction of property and throwing Molotov cocktails at the police.  Use your imagination, as that is the only way you will be able to paint a picture of the potential difficulties with yourself in it.  Picture yourself having enough money to buy food, but there being little food for that money to buy, which brings me to the issue I wanted to highlight.

Consider the insightful information gleaned from a recent article in Forbes: 

•  Global food prices (from the UN’s Food and Ag Organization) have recorded consecutive gains for 8 months, passing all-time highs in the recent months
• Estimates of this year’s harvest of rice, wheat, corn, and minor cereals forecast even higher prices – “this year’s 40 million metric ton harvest increase is less than the 100 million needed to maintain the status quo and substantially less than the 150 million needed to normalize markets”.
• The growing global population and rising affluence among the 3 billion people in developing economies is creating more demand for resource-intensive animal protein, but the most important demand trend is in the diversion of crops to produce ethanol.  World fuel ethanol production has tripled since 2004 to more than 21 billion gallons, and in the US, the share of grain production dedicated to fuel ethanol production doubled over the last four years to 28.7%!
• The rising price of oil and the recent government mandate to increase the percentage of ethanol in gasoline to 15% has made grain production even more attractive for farmers.  There have been many studies resulting in proof that ethanol was a very bad idea, due to evidence that it costs far more to produce than it saves, and that it has not contributed to anything other than engine inefficiency, poorer gas mileage, increased food prices, and very happy farmers. 
• The increased demand for crop production fueled by ethanol mandates and population increases, has put a major strain on declining water tables around the world.  As water becomes less available, crops deliver lower yields, water becomes more expensive to extract, and major population growth in areas of declining water cause a shift from local production to imports.  Economies dependent upon grain export will gradually shift to becoming net importers of their basic grains.  “We have recognized 18 countries where water tables are declining due to over-pumping for agriculture, and these include all four of the top producers in the world” (said by a guy named Brown, who I have never heard of and I have not verified the statement), who goes on to say “This is causing bubbles, as countries over-pump and deplete aquifers, citing the case of Saudi Arabia which has depleted their water to a point where they are estimating they might be able to stretch supply to eight years, but could be virtually out of water to irrigate with within 2 years”.  Grain production has peaked, and has begun to decline in the Middle East.
• The article quotes Brown as saying “many experts see problems brewing in China, with one of the two main aquifers in the bread-basket regions close to depletion, “there’s a feeling that before year end China will be entering the world market for massive quantities of grain”.  Brown says the Chinese are waiting for prices to settle, but when they start buying, they will significantly rattle the markets.

The points mentioned from the Forbes article are not new information, however, what is new is the increased financial media attention on the coming food problem, especially from the more credible publications, and in verbal comments being heard from investment gurus who, in the past, would not have given commodities passing mention.  There are, however,  a number of investment managers, such as Jim Rogers and Peter Schiff, who, based upon their first hand knowledge of global conditions, have been ringing the warning bell for years about the coming shortage of food commodities.  Bears on commodities are now in higher demand as guests on prime time financial networks.

I have earlier written about how inflation can exist without corresponding economic growth.  This is a difficult scenario to get one’s arms around, and to make it even more difficult, the financial media has little understanding of the concept, which is evident in their dialog.   However, there is evidence of this condition all around us; in food and energy prices, in the skyrocketing prices of raw commodities, and in inflation rising rapidly in other countries that are in recession or have stagnant growth.    In the U.S., other than the recent meteoric rise in gasoline prices, the evidence of real inflation has been muted, as food and energy is not included in the government CPI-U headline number.  Most Americans never see, nor are interested in, any statistic other than the CPI seen in headlines and heard verbally from many sources.  Is there an adult American alive who does not know that the government says we have had no inflation for the past two years?  How about economic growth – hasn’t the media and government been telling us the economy is growing and we are not going back into a recession?  A modest amount of research debunks the notion that the economy is doing anything other than bottom-bouncing, and that important indicators point to a stagnant economy for the foreseeable future.

Yes, we have had a slight improvement in our economy, however, that improvement has not been driven by a return of a consumer ready to buy on long term credit, and, is mostly in the improvement of bottom lines of the largest companies.  Consumers are saving at a whopping 5.7% rate, with no indication he/she is ready to spend it, rather than use it to pay down debt or increase retirement savings. Prior to retirement, people do not spend money out of their IRA’s and 401k’s to buy stuff.  The companies we read about having over one trillion dollars in accumulated cash have increased hiring only slightly, as they have an obvious lack of confidence that consumer spending will grow at a rate justifying expansion.  Automobile sales are being touted as a major indication of an economy in recovery, although the sale of an expected 12 million units in 2011 is only 66% of the number of cars sold in 2007 and no adjustment is being made for the potential that much of the buying has been a filling of pent up demand from the years of people sitting on the sidelines waiting for better news about the economy.  Small business has increased hiring as well, however, as with large companies, the increase has been slight.  Those whose economic well being is dependent upon selling us financial services are eager to use any sign of improvement to encourage us to “hang in there” and to buy more financial products so we don’t miss out on the great benefits to come.  Government is doing its part by attempting to convince us that, although hiring is slow and will continue to be, everything else is fine – so, all of us with full time jobs (about 80% of us) should take heart, pull out those credit cards, and spend to our heart’s content!  We would quickly discover how much of that 5.7% savings is still around!

Rising food and energy prices, coming increases in the cost of soft goods (already announced by the industry), continued (and accelerating) rises in health care costs, and a continuing crises in the housing market -- all coupled with a government administration that seems bent on throwing up road blocks to recovery, and which has an inability to see the extreme need for taking an ax to government costs, continues to support  an inflation defensive  investment strategy.  In spite of the good intentions and commitment seen in the newly elected conservatives to the House, it is clear they will have only a minor effect on a continued increase in a debt already large enough to destroy our economic future.  The “revaluing” of our currency is inevitable, and as it occurs, food prices will not be the only prices that go up – everything we buy will be affected.

To date, the FFM defensive investment strategy looks more like a successful “offensive” one, as our investment returns have outperformed the stock market without actual inflation justifying the rate of out-performance.   Our returns on investment portfolios have been enviable, but only to those who do not believe inflation and a major upheaval in our economy is in our future.  Those who believe as we do, know any out-performance achieved in these early years of the crises is needed to counter the difficulty in staying ahead of inflation in the future.  I continue to hear the majority of commentators refer to “our children and grandchildren” as the ones who will have to “pay”, implying that we will not, which is one of the primary reasons we have an advantage over the rest of the investment community. 

The emotional (and self preservation) need is to believe that all of the major problems will be so far in the future that those of us alive today will not have to bear the real burden of the sins of the past and the lack of discipline to do what is necessary today.   Not only does human nature drive our lack of interest in taking action to protect against something that may happen in the future, there are business and political self preservation forces that overwhelm any altruistic idea that mankind would be better served if the truth were told.  Just think of the chaos that would occur in the financial markets if it were!  Chaos occurring  could also make a case that the truth would cause more harm than the lie, and that the brilliant people in charge will make decisions in the best interest of the masses.  In fact, it appears the conditions have been created that make the need for control by a few totally necessary.  I only pray that the “few” who end up in charge truly have our best interest at heart.

Bill Fowler

Fowler Financial Management

972-542-0800

bill@ffmria.com

EMPLOYMENT/UNEMPLOYMENT REPORTING:Do they tell the truth?

Bill Fowler
Fowler Financial Management
February 6, 2011

Aside from the confusion created by differing opinions regarding GDP, GNP, and other economic indicators, there is nothing more mind boggling than trying to understand the real meaning of the Employment vs. Unemployment numbers tossed about each week.

      The “unemployment” (Jobless Claims Report) numbers published weekly is designed to inform us of how many new people filed for unemployment compensation in the previous week or month. The report is very volatile and is normally reported as an average of the past four weeks. The headline news last week was that unemployment had decreased by 0.4% (which is what brought the unemployment percentage down to 9%) in January. If “seasonal adjustments” had not been applied, or applied using the same methodology as in prior reports, the percentage would have been higher, not lower. It appears that if there really was a decrease in the number filing claims, the reason is probably due to an easing of company lay-offs, not from an increase in new jobs. Note that the report is on the number of estimated new jobless claims, not the number of jobs gained or lost within the economy, which are reported the first Friday of each month as the “Employment Report”.

      The Employment Report distributed Friday of last week was not as uplifting as was the claim of lower unemployment reported in the Jobless Claims Report , which claimed that there was a gain of only 36,000 jobs in the month of January; even less encouraging considering that the number would have been a minus 53,000 jobs if they had used the same formula used in January of 2010! If you think that is confusing, how about this: If the unemployment rate dropped by 0.4% then the number of newly employed should be over 500,000 people, not 36,000! Facts get in the way of reality here; “unemployment” is nothing more than the total of people on the jobless claims roles at a snapshot in time. As people fall off the rolls due to running out of benefits, stop showing up to collect, take a short term part time job, or just stop looking for at least four weeks, the number goes down, even if the actual number of unemployed does not. If the number of lay-offs decreases, thus not adding as many to the weekly new claims, the number goes down. This is why it is so important to keep an eye on the U-6 unemployment number which includes those collecting unemployment benefits, plus those out of a job who want and need one, but who are not collecting unemployment benefits; The latter being people who get labeled “marginally attached”, or “discouraged” unemployed – of course they are discouraged, but they still want and need a job!  Know anyone out of work for more than one year?  Anyone who has been sick or has just taken a break from looking for a while?   They are not counted in the headline report.

      There is a growing awareness of how the Bureau of Labor Statistics “manages” the numbers by simply changing the assumptions. For example: They use something called the “Birth-Death Model” which is designed to factor in new jobs that are created (but not yet reported) by new “start-up” companies that offset the number of jobs lost due to companies going out of business. Since it may take a year or longer for information regarding the opening of a new business, or the closing of one, to become known, the guesswork is more art than science. Since waiting a couple of years for accurate numbers would provide useless information to those attempting to manipulate the economy now, guesses have to be made – right or wrong. An attempt to “smooth” the numbers is made by using data taken from the past 60 month period, which works pretty well when economic cycles are “normal”, but get all out of whack when cycles are deeper and more protracted than they were during the period from which the data was mined. It is correctly assumed that as businesses close and jobs are lost there are also new businesses being opened creating new jobs – providing an offset. The trick is figuring out whether the offset is a net positive or net negative, and by how much. The BLS is very slow to adjust their bias which results in over projecting the number of net jobs that have been created, sometimes in fairly large numbers. They adjusted their bias for this January with an assumption that the economic recovery is becoming more robust so there must be a resurgence of the opening of new businesses and a slowing of the closing of old ones. The difference between a plus 36,000 new jobs and a loss of 53,000 is all in that bias, and, the sages of the financial media world acknowledged that even the plus 36,000 number was disappointing.  On top of this, the rate of accuracy of the reporting model is +- 5%, a whopping 680,000 jobs!

     
      Regardless of the methodology used to guess at these numbers, the truth seems pretty clear: we are far from creating enough jobs to even cover the number of new entrants searching for them—youth ready for permanent work, and the thousands of people finding they need to go back to work after a spouse loses their job, or after discovering a large portion of their retirement nest egg has evaporated! If the real unemployment percentage is close to 17% (U-6), we would have to create approximately 272,000 jobs per month for five years to get the unemployment percentage down to 5%. Unfortunately that number only covers the existing unemployed. We need even more jobs to employ the new entrants to the marketplace. In a normal growth economy the number retiring from the workplace would now be about equal to the number of new entrants, however, baby boomers are not retiring at a “normal” retirement age, since their retirement funds have taken such a hit over the past 10 years. There is an additional number not retiring at a “normal” age due to worry that inflation will eat up what was earlier calculated as adequate savings. These numbers are not measured, only estimated, as accurate data for this category of worker is unavailable. The best source may be tax returns showing “earned” income while also showing receipt of Social Security payments, which is a data source that clearly indicates a group not retiring that probably would have done so if their retirement funds, the economy, and the future looked more positive. That source is not timely, therefore is useless for anything other than making guesses more accurate during a future economic downturn of the same nature. Of course, the statisticians creating these reports will use data from more than one source, all of which require extrapolation and subjective modifying factors, which are put into mathematical formulas that then take on the appearance of “fact”, enhanced by carrying out the results to at least two decimal points.

        There is so much being said and written about the “employment and unemployment” numbers today that it is important to know more about what is behind the numbers. These thoughts are not the whole story, by any means, however, it seems useful to learn enough about how the numbers are produced to be able to make your own “adjustments” to those being headlined. The links below may be helpful in expanding your knowledge regarding these and other economic issues. I encourage you to make this a research project, as the more you know about the information you are fed by the government and the media, the better decisions you will make about managing your life and your assets.

Bill Fowler

Investopedia description of the levels of measurement of joblessness: http://www.investopedia.com/articles/economics/10/unemployment-rate-get-real.asp

Investopedia description of Jobless Claims Report: http://www.investopedia.com/university/releases/joblessclaims.asp

Latest Release Jobless Claims Report: http://www.dol.gov/opa/media/press/eta/main.htm

BLS Birth-Death site: http://www.bls.gov/web/empsit/cesbd.htm

Fowler Financial Management

972-542-0800

Fax 972-542-0801

Email: bill@ffmria.com

Web Site: http://www.ffmria.com/

THE PLAN - EXPOSED?

Daily, the list of “important people” who believe it is now politically acceptable to “tell it like it is”, gets larger. Peter Orzag, who recently resigned as Obama’s director of the Office of Management and Budget, is quoted as saying “we'll likely need another economic crisis in order to rid ourselves of this unbearable political polarization” (he believes the current socioeconomic policies, including the money pump from Bernanke are suicidal), and Erskine Bowles, the co-chair of the president’s Debt and Deficit Commission, and Bill Clinton’s chief of staff during Clinton’s budget surplus years, said this yesterday: "Without tough choices, we're on the most predictable path toward an economic crisis that I can imagine."

These guys are a little more than your average political hack, and their opinions matter in important policy making circles. They are also, Democrats.

The balloon that was sent up yesterday to test the waters regarding the recommendations the “co-chairs” of the Debt and Deficit Commission would like to submit to the president, was a lot more than just a leak. It was expected to cause a major flap, and it has. Their recommendations would gore almost everybody’s ox, and it would appear to take an incredible amount of testosterone and change of ideology for the president to indorse it. However, we should wait a bit before coming to conclusions regarding how the president and other progressives, such as George Soros, will use this “manufacture a crises” opportunity. Yes, we already have a crises in the making if nothing is done, however, this “cut off the leg to stop the gangrene” approach may accelerate the process without careful preparation of the citizenry, rational controls, and orchestrated by people with good intent.

Without the right leadership, no radical approach to solving the problem can have a positive result; positive that is, to you and me. The “wrong” leadership will cause either accidental, or intentional, chaos. The progressive leaders at the grass roots level have been preparing their armies of workers (the unions, the poor, the out of work, and the “disenfranchised”) for just this opportunity. They are itching to take them to the streets in violent demonstrations, and have more than enough soldiers to make our streets look as bad as anything we see on the news in Greece. There would be a loud cry for government protection from these demonstrators, the destruction they create, the rise in crime to small business and individuals, and for relief from the abject fear this would cause. The global response to the sight of the country once thought to be the only remaining hope for the preservation of freedom and democracy coming apart at the seams, would accelerate the devastation of our currency, greatly reduce our ability to influence world affairs, and make us even more vulnerable to attack from virtually every corner of the ideological and power hungry world. Our president needs a major shift in public perception of his competence and ability to run our country without destroying it. He needs an economic event that he can use to gain the support he needs to remain in power and to implement his progressive agenda. An event like the one we had at the end of 2008 would not be enough. Violence in the streets, raging inflation, fear of personal loss and personal harm – would do it.

In my opinion, a radical plan such as the one being tested is necessary for the restoration of a healthy economy. However, in order to pull it off without devastating consequences would require leadership far different than we have experienced since Ronald Regan. In my opinion, there is no hope for such leadership coming from the White House under the current administration, therefore, I pray the “leaked solutions” are shelved until a better day. Whether my prayer is answered will depend on whether the progressives in power decide this is what they have been waiting for to put the final nail in the coffin for the Capitalist/Free Enterprise system, or not. If they get behind this plan, conservatives will embrace it with vigor, and it will be implemented. How could conservatives not support a radical plan such as this, without having to try to educate the whole population on the fact that the president of the United States is a progressive revolutionary, who would use a necessary remedy for the cure for cancer to kill the whole body, either through incompetence, or intention?

So, I suggest we have an important signal to watch for; if the leaders within the progressive movement endorse this plan, (or allow it to become law after fighting vigorously against it, citing Republican partisanship as the reason, even though they still control all new legislation) we can assume the plan will create the devastating environment I described. If that occurs we will need to take a more aggressive approach to self protection. We have received credible warning, backed by credible information that is available to anyone willing to look for it. If you are still having a hard time believing that our personal freedoms and economic way of life are being attacked by very powerful people within our own country, then you really need to consider becoming a student of history, start paying attention to the world around us, and hopefully, wake up. Restricting your educational resources to the mainstream news media will not get you there.

The country will get through this, whatever it turns out to be. However, the quality of life remaining after “getting through it” will be dependent upon individual determination to become informed, and willingness to take action when needed.
Bill Fowler

We are Moving Forward - Toward What?

IS THE ECONOMY ACTING THE WAY IT SHOULD AT THIS STAGE OF THE NON-RECOVERY?

      Yes, it is – although the confusing ebb and flow of daily market activity and headline news would lead many to use the term “schizophrenia” to describe it!

      Have we experienced a “recovery”?  So far we have seen the normal beginnings of a recovery that, in previous cycles, would have advanced to the next stage by now.  Manufacturing is showing signs of improvement due to distribution channels filling the pipeline with orders in expectation of a continuation of growth in sales, which declined in May.  Consumers have fueled the expectation of growth by increasing their buying at levels similar to early stages of prior recoveries.  The increased buying is a sad "head fake" as the consumer is running out of enthusiasm, cash, and credit -- all at the same time.  A small amount of savings and freed-up credit were built up over the past 18 months that has now largly disappeared.    The positive feelings generated by an almost manic campaign designed to convince the public that efforts to stimulate the economy are working, are also disappearing, as more and more Americans are seeking information from channels carrying the truth about all issues.  As they learn more, they spend less, a rapidly accelerating process that will continue to be reflected in the decline in sales of retailers nationwide.

      Most of the consumers who have a job (about 80% of the eligible work force) had been lead to believe the worst was behind us so it was safe to go back to buying as usual.  That sentiment is rapidly changing back to fear born of uncertainty. 

      The worker out of a job has seen his unemployment benefits extended time and time again and is even more convinced now that there is no need to take a job that does not pay substantially more than his unemployment benefits (including food stamps, Aid to Dependent Children, CHIP, etc.).  Taking a pay check for not working is an easy habit to get into.  When reality forces congress to cease extending unemployment compensation limits, the shock of the sudden loss of income may create a large group of very angry citizens, with paid organizers ready to whip them into an effective street mob in virtually every city in our nation.

      The majority of the jobs created to date have been government jobs; jobs that produce nothing, are created to largely restrict and control those who produce, and which must be paid for by those who do produce.  Although, the money from producers for such payrole increases ran out long ago, leaving borrowing or the printing press as the source of money, with a false premise that producers will someday be able to create enough excess from their production to pay for all of this.  For example: Hundreds of thousands of census workers are being paid by money that must be borrowed or printed, in an amount that is ten times the cost of taking the census ten years ago, and that can never be paid back.  Why can't it be paid back?  Because that debt just gets added to amounts that are already too large to pay back (see the debt clock).  They will take the count, absorb over twelve billion dollars, and all be back on the street in the fall -- most to join the unemployed.

      Our economy runs on the backs of small businesses, and, they are not being created at a rate that is keeping up with the number that are failing.  Retail sales had a negative growth rate in May, housing purchases have fallen off dramatically since the end of the home buyer's tax credit, and employment growth outside of government is virtually non-existent.  Liquidity (funds available for immediate use) has been declining rapidly, which in every previous cycle is a leading indicator of a coming recession.

      In my last article, “The Impact of Government Policy On the Economy and Investments” written in September 2009, I laid out the case for there being no logical reason to expect anything other than economic collapse, and a massive devaluation of the US dollar. The fact that Europe is in even worse condition and is facing the same dilemma will just make our situation worse, and emerging countries with fragile economies will collapse as well.  China will continue to emerge as the economic super-power having increasing power over our government policy as they blunt our power to resist their will as a major creditor.  How will it feel, to have our old enemy China's "boot on our neck"?

      I believe we cannot avoid suffering severe consequences created by the current massive debt, future unfunded liabilities (both domestic and foreign through treaties), and from the continuing negative impact of socioeconomic policies already the law of the land, along with additional destructive policy that will be passed before it can be stopped by a change in those in power.  Even a total reversal of governing ideology and policy making would not prevent our having to face extremely difficult  living conditions.     

      Those who see the disaster coming, and are willing to take action, have the ability to not only survive it, but to also prosper from it.  Is the confusion and noise paralyzing you into inaction?    We only have everything to lose, and nothing to gain by ignoring the obvious!

Bill Fowler

THE IMPACT OF GOVERNMENT POLICY ON THE ECONOMY AND INVESTMENTS
By:
Bill Fowler
Fowler Financial Management

The Part History Plays:
Study of the past 110 years of the socioeconomic engineering of our system of government has provided a startling discovery of how that engineering has lead us to the crises we face today. It, in some ways, has been an embarrassing journey, as I have had to face the fact that I have ignored the changes being made in our system of government for far too long.

And, I cannot claim that I did not know.  Since the days of sweating through primary Army helicopter pilot training under the tutelage of an ex-Marine instructor, I have known that there were people who have an agenda for our country and way of life that is contrary to the one established by our Founders. In addition to his task of teaching me to fly a machine requiring the constant use of both hands and both feet, my instructor kept up a running lecture on the assault on our Constitution and how our freedoms were being eroded.  He would punctuate each point he wanted me to learn with a sharp rap on my helmet with his metal pointer – normally at a particularly difficult moment while attempting to wrestle the “beast” to a hover over a mesquite bush on a 100 degree day. I was a young 20 year old with nothing more important to me than just getting through the task of becoming an Army helicopter pilot, yet, Barry Shields’ education regarding efforts designed to take away our freedoms are rooted in my memory. As I look back on those days, I realize – I was warned, and I should have known.

Stay with me here; I am not going to try to make a case against Democratic or Republican Party politics, as I am concerned here only with financial survival and the strategies required to achieve it.  Some of the words I will have to use in developing this case are also used in ideological debate, and, since national socioeconomic policy, springing from ideological beliefs, absolutely dictates the direction of our financial future, there are no adequate substitutes.  It is probable that past and current policy has already taken us to the point where, even if there were a sudden reversal of destructive policy, it is too late to avoid severe consequences for our national and world economies.  It is not too late, however, to take personal action to protect our assets from the effects of such policy, and, even to prosper from it.  In order to be able to accomplish this, an understanding of how such policy impacts our basic financial structure is imperative; without that understanding, we will not have the knowledge or the courage to take the action necessary to protect our assets and to prosper. 


History proves that political ideology, and governing policies supporting it, will have a direct impact upon the economy, both nationally and personally. There is no such thing as “policy” that has no economic impact. Unfortunately, the average citizen has little interest in the potential impact on the economy of the myriad of bills and other decisions being made daily by legislators and administrators. For the most part, policy is created and implemented without our even being aware it has happened. For example: Recently, our UN ambassador signed a treaty(9) obligating the United States and its citizens to abide by UN rules governing the treatment of our “disabled”. I saw no announcement of this in the press, although the impact economically is likely to be far greater than the “Americans with Disabilities Act” we are currently under. A committee of political appointees from the nations of the world will decide how we are to treat our own citizens who have been disabled; how they are defined, and every aspect of their lives within our own country, including how much money we will give to them to insure they have a lifestyle that is “equivalent” to “others” within our society. The “treaty” is available on the Internet for anyone to read (see footnote 9). It must be ratified by our Senate, however, is anyone going to take notice of the Constitutional violation represented by giving up our sovereignty in such a treaty? How many treaties have already been signed that have the same characteristics? We may, indeed,  want to contribute from our own personal financial resources to help others, such as the disabled, but do we want someone from India or France making laws forcing us to abide by their ideas of justice for our own people?   How much financial impact on the economy and our lives do such treaties represent? Is this a socioeconomic policy that will affect our financial lives?  How can we plan for financial debits to our resources when we do not even know they are coming?

Research into history always leads to personal discovery of things others have already known, however, are true revelations to the discoverer. For me, each “that really happened?” discovery has lead to more research in an attempt to prove it up or refute it, which, has lead to more such dramatic discoveries. Knowledge gained from the task has created a passion to know more, however, there is something else it has created; a real fear of what is ahead! The focus of my research has settled on what I believe to be the subject responsible for the economic conditions we find ourselves in today, as well as what will be responsible for our future financial well being and life styles -- SOCIOECONOMIC POLICY; how it has developed and been implemented, the effect of such policy on our economy, and how the resultant economic conditions can best be countered, or, taken advantage of, in the context of management of client assets that have been entrusted to me.

Learn the Rules and Keep it Simple:
Our most important decisions should rest on global truths we can rely on as anchors from which all other decisions are made; concepts that are supportable by credible evidence to the point they can safely be considered a “rule”. For example, here are two such rules that underly all wise action related to “financial planning and management”:

• “taking more out than is put in will eventually empty any account” no matter what (or who) is the source of the "put in" side of the equation -- Simple rule? All the most important rules of life can be simply stated; most just incredibly difficult to live by! There are many areas of life governed by this basic rule, including finance and energy. If we live our lives respectful of this one rule, we will never run out of either one.
• Another “global concept” I believe safe to consider a truth or a “rule”, is that “government socioeconomic policy controls the direction of the economy and, ultimately, the quality of life”.

The first “rule” is irrefutable and belief in it requires little knowledge. The second rule is perhaps not too difficult to believe, however, extremely difficult to understand how it works, which is why our country is so polarized over that very issue. And, since, in my opinion, investment strategy should always reflect conclusions formed based upon these "rules" as it's foundation, it is important to have an understanding of the factors considered, how they have affected (and will affect) our economy, and, therefore, our ability to maintain a desired life style. This then -- the ability to maintain a desired lifestyle during a period being characterized as the "period of fundamental change"-- is the primary motivator for digging deeper than normally required in order to identify the unique drivers of the economy and to create strategies that reflect the findings.

GOVERNMENT SOCIOECONOMIC POLICY – HOW IT AFFECTS US:
According to data presented by David Walker, President of the Peter G. Peterson Foundation(1) (also known as I.O.U.S.A) and past Comptroller General of the United States (our nation’s chief accountant), our national debt will climb at an incredible rate starting in just a few years, due to the cost of entitlements exceeding revenue. The projected increase in debt due to these entitlement programs, over a short few years, dwarfs the huge borrowing to cover deficits we are now experiencing. Taxes, both direct and indirect, are being raised (and must be raised much higher) in order to attempt to pay for new spending and to service the debt from excess spending already on the books. An easily confirmed fact(3): There is not enough money in the total income of our citizens, if it was taxed at a rate of 100%, to pay back what is already owed in the form of treasury debt (over 12.1 Trillion Dollars), and more debt is being piled on every day. To be clear about this debt: it is the kind of debt with which each of us is familiar, borrowing that has already occurred to pay bills that have already come due, to the tune of over 100% of the total annual output of our economy. The 12.1 Trillion does not include all of the debt owed trust funds that was supposed to be saved for obligations already incurred for the future, nor does it include all of the trillions of dollars promised as future guaranteed payments to the normal annual addition of the many thousands of new entrants to the entitlement system in all of its variants.  Nor does it include the impact of the millions of people who will become enrollees of all of the  new entitlement programs being added to the burden on those who will have the ability to pay additional taxes, by the legislation being passed and implemented.  As if these mind boggling facts were not enough to insure collapse of the economic system, an extremely high inflation would be excess nails in the coffin; an inflation that our Chairman of the Federal Reserve says he can control through the withdrawal of money from the system at a rapid rate, in sufficient quantities to stem any inflation threat. One could only hope he can do so.

Of course, we will stretch out the payment of our debt like we stretch out the payment of our home mortgages, but this will not come close to providing a solution. In order for our citizens to be able to pay it back over multiple generations we would have to never add another penny to the current national debt, never increase the national budget, the economy would have to have strong growth, providing for ever increasing incomes, along with a very high tax rate – sound possible? Perhaps you did not take into consideration the fact that the 11.9 trillion is not all that has to be paid back; plug 55 trillion into the calculator as that is the 11.9 trillion already borrowed plus current unfunded liabilities coming due in the near future (that will have to be borrowed). And that number only includes entitlements to which we are already committed, not just those likely to be added over the term of this administration, nor does it include the cost of inflation beyond the low past average used to calculate growth of cost of entitlements. Try this: Add another 45 trillion over the next 20 years for all of the unfunded liabilities, including interest, that are currently projected making a grand total current and projected debt of over 100 trillion dollars! How does that knowledge affect your view of what is possible and what is not? Do you find yourself challenging whether it will really be that much? So, knock off a few tens of trillions and see how much that helps. We are not replacing ourselves by procreation so will be dependent upon immigration to provide a source of income to sustain those on welfare and social retirement and health care benefits. When I try to get my mind around this I feel like I have just been “beamed down” into an alien world with no clue as to what to do next. Then I realize everyone must feel this way. It is why our legislators and administrators are not only not taking action to solve the problem, they, with our consent, continue to push us into a deeper hole. It is so “otherworldly” that rational thought rejects the probabilities it suggests. Yet, “rational thought” is the root process by which we must grapple with this problem.

How will this massive problem affect us, our children and grandchildren? What affect will it have on our way of life? Any solution with a goal of meeting our obligations without default would require taking action that, today, is politically impossible (such as: an immediate moratorium on increased spending, a roll back of all unnecessary spending, elimination of whole agencies of government, a willingness of leadership to accept the massive unemployment and economic depression the solutions would create, and, leadership that has the courage demonstrated by those willing to die for a cause). If that is an accurate statement (absence of political will to implement solutions), what then, will life be like on the way to, and after, the disaster of default? And, by the way, we hear many comments about how we are mortgaging the future of our children and grandchildren, which of course, is true.  Those of us who have them love them dearly and do not wish them difficult lives.  However, what evidence do we have of past willingness for a body politic (large number of people) to voluntarily make huge personal sacrifices only for the good of those coming after them?  Even those battling for our independence at the beginning of our nation were fighting for their own self interests; only a few courageous men were actually willing to die for the future well being of others. Where will those courageous people come from to fight to save our country from an enemy that does not march down our streets in red coats, when the real pain is only a projection greatly debated, and the source of the problem difficult to see and even more difficult to understand?  Rational thought, anybody?

OUR FINANCIAL GURUS (Treasury Secretary and Fed Chairman) ARE BIG BOYS AND REALLY SMART – THEY WILL GET US OUT OF THIS MESS:So, let’s get started with some rational thought: How about our ability to borrow and print money to cover the shortfall until a miracle of some sort occurs that allows us to pay back our debt out of real income. Will there be an adequate supply of cash from fixed income buyers to buy it all? No problem, when the buyers run out of money (or don’t want to lend to us anymore) we can just print it and loan it to ourselves, like we have been doing to the tune of an approximate 1 Trillion dollars since the end of 2008, with even more to come as committed by our Fed Chairman (4) (when money is printed in excess of replacement of retired currency, it is called “expanding the balance sheet” of the Federal Reserve(2)). As long as we do not run out of paper and ink, we should be OK.

How about the lenders, they should have enough money they would be willing to lend us, right? China has a lot of money -- about a trillion dollars in reserves that they could loan us. Japan has been our second largest foreign lender, maybe they have some dollars left over after fighting the economic crises they also are in (if they don’t have dollars we can just do a “swap” with them and give them some of our printed dollars in exchange for Yen, which would expand the Fed balance sheet, – then they would have the dollars to lend us!). And, all the rest of the countries in the world might be able to match what we could borrow from China and Japan, collectively. That might cover several trillion of the over 55 trillion we will need. Ooops -- forgot, most of the other countries (except the mid-eastern oil countries we send our dollars to) do not have any reserves to lend us either. Of course, China, India, Russia, North Korea and Iran will soon be taking over as world powers with lots of money (from somewhere, and in currencies we do not take in purchase of our debt, yet) so maybe they will loan us some more as they grow their economies from such new sources as the fees they will charge us for “protection”. I hear that will be a growth industry for the “new military powers”. We can pay them for “protection” and they can lend it back to us at high rates – good deal. Oh, I forgot our banking industry – they can lend us money too. They have an unlimited amount they can borrow from the FED (printed money) at very low rates, which they can lend to our Treasury at higher rates! A really good deal! And, what about all the other money sitting around in checking accounts, money markets and savings accounts – last count it had exceeded one trillion dollars – there is another trillion of the 55 trillion needed, if the owners can somehow be encouraged to throw it in the pot. Hey, I almost forgot – the 11.9 trillion already borrowed will have to be paid back (with money we will borrow or print) and when we do, that money will surely go right back into buying more of our treasuries (at a higher rate, but, no big deal)! Whew, I think we have come up with at least a fourth of what we will need. Something will surely come along to cover the rest – like a booming economy that will fund 70% tax rates, it always does!


REALITY – WHAT A BUMMER!
Let’s look at some sobering reality. No intelligent buyer of sovereign (government) debt will want to continue to buy or hold our treasury debt as a safe haven investment without a risk adjusted return (a return that keeps up with the declining value of the dollar plus a real return in excess of that), something like a TIPS does now (treasury inflation protected security). Or, alternatively, have a compelling political reason to hold an investment that otherwise should not be owned, priced as a risk category far better than it deserves. The debt will continue to be held, however, by someone or some entity, and at some price. There is no other place to go! There is a lot of talk about China moving its money into hard assets, such as real estate, gold, and other commodities. This attempt to find safety or a protection against inflation (or revaluation) can only go so far, as liquidity is a primary need for all major holders of cash assets. They can only tie up so much of their assets in illiquid investments. So, what will purchasers of our debt, such as China, do? They, and other buyers, will have to demand higher and higher interest rates on new debt purchased in order to attempt to keep up with the destruction of the value of the principal it lends.

Why will sovereign governments and others continue to invest in US Treasuries? The billions to trillions of currency assets that must go into the safest fixed income securities has few alternatives, other than US Treasuries – no matter how much they would rather invest in something having a more stable value. All other sellers have either too little volume of borrowing and/or, are in even worse condition than we are. The EURO is in trouble as a viable international trading unit due to many problems related to member country unity and individual country economic and political problems. Our treasuries are dollar denominated only, which means China or any other county must first have dollars in hand before they can buy them. The EU has huge borrowing needs of their own, and Great Britain has experienced the first ever failure of an auction to sell its bonds. We are lending large amounts to the IMF and to individual nations, not the other way around. As I have mentioned, enough supply (that comes from some place other than the printing press) to meet our increasing demand is a problem.

It seems a safe conclusion that any sovereign debtor whose currency value over the long term has no direction to go but down, is one whose debt should be considered high risk and treated accordingly. There is widespread belief that our currency fits that category. There are reasons, of course, why such an obvious conclusion has not resulted, as yet, in interest rates higher than they have already gone; reasons that are extremely complicated, full of international economic and political implications as well as domestic. In my opinion, regardless of complication and the power governments have to dance around the issue and to delay the consequences, the end result will be a revalued US currency worth far less than it is today. Consequences for us? It is well beyond my knowledge to be able to list them all; however, one consequence should be obvious: extremely high inflation that would be destructive to our way of life. That “high” inflation will be the consequence of our current and past actions is not refuted by anyone, including our own Chairman of the Federal Reserve (although he asserts that he will do his best to hold it to a minimum). The unanswerable question is – when?

The argument that our currency is not as weak as the currency of other countries is largely true, and the citizens of those countries will suffer the same consequences we will suffer, or worse. However, between now and the completion of a global revaluing of currencies, there will be many efforts made to avoid that set of events, including printing masses of money, borrowing and lending to each other, moving debt from one distressed entity to another in hopes of finding a solution before it all falls apart. An example: Bernanke admitted in recent hearings that the Federal Reserve has been (and continues) lending money through “credit swaps” (swapping US dollars for their local currency) to central banks of other countries in order to shore up the strength of their economies – he could not remember all of the countries loans are being made to, just that it is “quite a few”(6). In addition, the Fed Chairman has publicly stated that the goal for buying treasuries (monetizing the debt) in 2009 is 300 billion, which has been exceeded. What he does not publish, however, is the amount of printed dollars he uses to buy treasuries from primary dealers soon after they have fronted the purchase, such as occurred when dealers purchased over 40 billion in seven year treasuries from dealers who had purchased them on July 30th,, then 10 days later sold them to the Federal Reserve for a 15 basis point (15/100s of one percent) profit. This transaction did not show up as a Federal Reserve purchase at the treasury auction which is publicized and widely disseminated. No one has kept track of these types of purchases, so we have no way of knowing how many dollars have really been printed for the purpose of buying our own debt!(10)

POTENTIAL CONSEQUENCES INCLUDE A RISK TO OUR NATIONAL SECURITY:In addition to the aforementioned problems I believe we can expect from the crisis we are in, our government debt has become a manipulation tool in the hands of many countries that are unfriendly to our way of life. Our Treasury Secretary has already had to make a trip to China and other countries carrying a message of “don’t worry about the stability of our currency – and we are good for our debt”. For most of us this information created little more than mild interest, perhaps irritating, but not a major event. For those watching closely for signs of significant problems, the response from the Chinese to these words (that were designed to increase their confidence in our currency) was humiliating to say the least, and scary beyond description at the worst. Of course, the derisive response of the Chinese was a mixture of smug enjoyment from watching our Treasury Secretary humiliate himself (and us), and, a sincere belief that what he was saying was untrue. The fact that he and our administration believed his message would be received in a more positive light reflected an arrogance born of the heady power being wielded by men who believe they are so powerful that no one can refute whatever fabrication they decide to declare as truth.

We should watch for concessions to countries that we normally would not make. Are we likely to have our new Secretary of State speak of human rights violations to the Chinese leadership who are holding the purse strings on over one trillion of US debt (treasuries plus other debt such as Fannie and Freddie mortgage bonds), and who we believe to have another trillion dollars in reserves we desperately need? Would this be the right time for China to move against Taiwan? Does China have the power to demand concessions that we would otherwise never grant? Will we go against their will in our dealings with North Korea? When Israel is forced to go it alone in the fight with Iran to prevent their annihilation, will our “best interests” be served by backing them? Iran, regardless of the smoke and mirrors of sending radioactive materials to Russia, must know we have an administration that is willing to allow them to have nuclear weapons rather than to risk alienating our ideological enemies who might not lend us money if we get too “involved”.

China has capabilities to deal with their recession that we do not have, which are being used to make their recovery occur much faster than can smaller, or democratized nations. As they continue to recover at a rapid rate, their economic power sources shift and they gain more strength with which to negotiate with their trading partners. Economic and military strength have been our protectors for over 100 years; strengths which are rapidly declining. Now, we have little room to “wiggle” as our economy is weakened and will be slow to recover, making it very difficult to appropriate funds for strengthening our military, and we are locked into a era of leadership that seems determined to weaken both our military, and our economy, even further. Are you uncertain about whether the two go hand in hand – military strength and economic strength? Or, whether it is really important to have a strong military for any reason? It would be wonderful to live in a world where military strength is totally unnecessary. Perhaps North Korea, China, Russia, Iran, Venezuela, Al Qaeda, the Taliban, most Islamic countries, and, the Islamic terrorists in training, will all have a change of heart soon. Think world economic policy and shifts in military power are unrelated to our financial security? I wish.

WHERE WILL THE MONEY COME FROM?:A sustained large increase in tax receipts will be seen as absolutely required to remedy the financial problems we face due to the condition we are already in, and those increases will first be applied to the 51% of those who file a return who actually pay income taxes – the vast majority of which will come from the top 5% of taxpayers(5) (40% comes from the top 1%). The majority of tax increases will have to come from levying taxes on the whole population through payroll taxes, sales taxes, use taxes, and other fees not yet created. In fact, no amount of increase in taxes will solve the problem, so at what level will increases stop and how long will it take for us to wake up to the absolute need to sweep in a whole new set of legislators who have the will to turn us back to the values and policies required to even begin making repairs to our economy? I believe it will be long enough for those currently in power to finish the job of causing severe long term damage to our economy through international and domestic policy; international policy (mostly by way of treaties) that will be almost impossible to reverse.  Again, although the previous statement is clearly an opinion that is typically heard in the context of political debate, it is an opinion of a condition that, if I am correct, would have severe consequences for those not aggressively defending against it financially.

THE RULE RULES!
Although the problems may seem incredibly complicated (and they are), and it may seem that such complication demands more educated and smarter people than ourselves to come up with solutions to the problems, the real danger to our future and to future generations is that we actually leave the solutions to those so-called “smart people”.

Back to the easily understood simple RULE: “If you take more out than is put in, you will eventually empty the account!” Tax receipts are generated by taking money from those who produce goods and services; the more taken away the less money left over to produce, or to buy what is produced. The more our government spends, the more it must take of the money required to produce more tax receipts, which works fine until what is taken out exceeds that going in without cyclical recovery that is able to generate enough new receipts to pay back what was borrowed. A practical example of the financial model represented by our government is to view the government as if it were a typical car battery; a car battery has no capability of generating electricity, it can only store it and then distribute it to something in the car that uses it, such as providing heat to cause explosions in engine cylinders, provide lighting, and power other devices. For the battery to be able to provide power to run the car, it must receive replacement electricity from an electricity generator. That replacement electricity must be at least equal to the amount taken out of the battery by the various users. If the amount going into the battery is less than being used, it will eventually become a dead battery – then the car becomes useless until the generator (alternator) is fixed and the dead battery is recharged or replaced.

Like the car battery, money taken from producers of it, over time, has to be no greater than the amount of money being produced – otherwise, like the car, the services would eventually grind to a halt, as the cost of servicing the ever growing debt gets closer and closer to equaling or exceeding the amount of money available from the only source it can come from. Sooner or later, the source either runs out of money to be taken, and society crumbles, or the source says “I am not going to live like this anymore” and affects change that allows the economy to rebuild.

WHY IS IT TAKING SO LONG?
There are those who say, “Wait a minute, our government is different from us (and batteries), it can create money out of thin air, and get away with it”! This is true, with clear limits. Excess printing of money can be benign (although most economists are convinced it is necessary for smoothing out the cycles), as long as such printing is followed by economic growth that absorbs the excess. In other words, if the entrepreneurial spirit within a free enterprise system is not hobbled and blindfolded it will produce financial growth beyond any other system times 10, which will cover up most mistakes made through attempting to control the economy. And, although disincentives to this spirit have been steadily added over the past 100 years, up to now, that spirit has managed to appear to triumph in spite of the attempts to shackle it to a post (with an eight year reprieve during the Regan era). I said, “appear to triumph” because in fact it has not. The now infamous “national debt” fueled by massive never ending entitlements guaranteed to constantly increase in cost, was set in motion in a manner that would destroy the value of our money, many years ago. Incredibly, additional excess government spending has continued to run rampant by those blinded by personal greed for power and money, fear of losing a position of influence, or who are either stupid or ignorant. Even the few years when a budget surplus was declared, there was no real surplus, as the “trust fund collections” (Social Security, Medicare, and others) that were in excess of distributions were not deposited in the trusts, but used to fund the national budget, artificially creating a “surplus”. No matter the cause, this is like a jet engine with an uncontrolled leak of fuel into the burner cans that just spins faster and faster until it flies apart!

The reasons it has taken so long to “fundamentally transform” our country are many: the most powerful reason is that our country has its roots deeply embedded in a philosophy of individual responsibility, and freedom for the individual to become whatever he has the will and ability to achieve; a force requiring generations of patient determination to stamp out. The spirit behind that force is far from dead, however, is steadily being overwhelmed. There has always been an almost effective “checks and balances” that would pull us two steps back for the three steps being taken toward the environment we find ourselves in today. “Two steps back for three forward” left a deficit that only insured we could not overcome the persistent determination of the agents of change; a change to the antitheses of the original ideas and ideals of our Founders. It can take a very long time for the inevitable catastrophic result that comes from the simple formula demonstrated by the story of the battery.

Is the terrible condition I have described as "the one likely to be our financial future", really going to happen? Of course, I don’t know for certain – it is in the future. However, I have no choice but to act as if the future I described will be realized and continue to pray that it isn't.

And, it should be noted, that it would be difficult to find mainstream economists who publicly agree with my conclusions. The Art Laffer’s(7) of the world would agree; however, they are “Friedman”(8) economists with “conservative” viewpoints. Laffer served on President Regan’s Economic Council. It would be even more difficult to find investment managers, mutual fund spokespersons, CNBC talking heads, or anyone within the current administration who would agree with me regarding the effects of current and planned socioeconomic policy on the economy.  If the investment industry believed what I believe, all but a few would have to find other lines of work. Therefore, unless you are a client (who has, obviously, made the decision long ago that my strategy fits your beliefs), you should make no investment decisions based upon my comments without first conducting your own research into these issues. The footnoted research sites should be a good start on developing a basis for your own beliefs. Now, back to what I believe.

WHAT FUTURE CONDITIONS DO WE FACE?

• Future high interest rates driven by abnormal national borrowing needs competing with other sovereign debt offerings, with domestic corporate and municipality borrowing needs, and a declining value of the dollar
• Eventual inflation at very high rates is inevitable, driven by excessive increases in the money supply that cannot be absorbed by demand and is likely beyond the ability of the Fed to timely withdraw, acting to destroy our ability to sustain our standard of living unless we position investment portfolios to benefit from inflation*.

*Inflation for 2008 increased to almost double the average inflation of the past 10 years, and, the effects of conditions that cause inflation have only begun to be felt. Also, inflation of prices of consumables can occur during times of flat or negative economic growth (1933-1937), although is unlikely during this cycle. CPI-U for the fiscal year 2009 is a negative number. Slight improvement in the economy that brings the GDP above zero will probably be all it takes to kick off rising inflation.  If the massive oversupply of money is somehow controlled in a way that keeps the excess out of the economy, inflation may rise more slowly and take longer to reach very high levels -- but, get there it will.  The money is residing in the nations banks earning low treasury bond rates, creating large cash reserves that will pour back into the economy when the demand increases.  Then inflation will have its open window.

• Current socioeconomic policy is antagonistic to economic growth – new business will continue being created, however, such growth will be sharply curtailed as an environment negative for economic growth continues to exist, due to withdrawal of capital from the private sector (increased taxation, removal of incentives for credit providers to lend) and other disincentives for entrepreneurial business creation
• In spite of a potential long term stagnation of the economy, the stock market, in the short run, and periodically, is likely to perform as if the economy is going to improve in the foreseeable future, and it will improve -- for short periods and in small increments, creating typical short term corrections that then reverse for further loss. This should continue until economic policy is changed to one favorable for sustainable economic recovery. 

There is always reason for hope that conditions as have been presented here are exagerated and, if not, can and will be prevented by the ingenuity and determination of the American people and our leadership.  There is no doubt in my mind that regardless of the outcome created by the current conditions and future actions, the never-ending results will ebb and flow through bad and good.  A people living in a relatively free society will always adjust to any conditions as long as they remain just under the threshold of acceptable pain.  And, acceptable pain levels increase under long term gradual incremental increases in pain afflicted.

Research Resource Footnotes: (1) http://www.pgpf.org/ (2) http://www.federalreserve.gov/newsevents/speech/bernanke20090403a.htm (3) http://www.usdebtclock.org/ (4) http://www.reuters.com/article/bondsNews/idUST25028320090603http://www.ntu.org/main/page.php?PageID=6 (6) http://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab9http://online.wsj.com/article/SB124458888993599879.html (8) http://www.google.com/search?q=Milton+Friedman&ie=utf-8&oe=utf-8&aq=t&rls=org.mozilla:en-US:official&client=firefox-a (9) http://untreaty.un.org/English/notpubl/IV_15_english.pdf (10) http://www.ny.frb.org/markets/pomo/display/index.cfm?showmore=1&opertype=orighttp://www.treasurydirect.gov/instit/annceresult/press/preanre/2009/R_20090730_1.pdf match cusip # of Treasury auction results announcement in second URL to Fed purchase list in first URL
(google “Bernanke Commitment to Buy Treasuries” for many articles and his speeches referring to the amount he is prepared to buy in an attempt to hold rates at a low level) (5) (7)
Suggested reading:
1. The Constitution of the United States and its Amendments (until known by heart!)
2. American Progressivism by: Ronald J. Pestritto and William J. Atto
3. The Forgotten Man: A New History Of the Great Depression by: Amity Shlaes
4. New Deal or Raw Deal? How FDR’s Economic Legacy Has Damaged America by: Burton Folsom, Jr.
5. Crash Proof by: Peter D. Schiff (Owner and president of Euro Pacific Capital)
6. Glenn Beck’s Common Sense (the Case Against An Out-of-Control Government – inspired by Thomas Paine) by: Glenn Beck
7. The Bible (highly recommended as primary reading – contains all the answers for combating the current economic crises!)

Do we not know that those who ignore history are doomed to repeat it? Although, an understanding of history does not, in itself, insure wise action in the present; we must be able to accurately relate the history we know to the present, then, must have the courage to act.


Bill Fowler
Fowler Financial Management
972-542-0800 Fax 972-542-0801
Email: bill@ffmria.com

Democracy VS: Republic

I have, for many years, taken the position that our founders created a Republic, not a Democracy. Many of us seem to not know the difference between the two and, for the most part, believe they are really the same concept. Actually, they are not even close. Here is a video presentation that very clearly describes the different forms of government and, I believe, our whole nation should be required to view this so they, as informed people, can then enter into the debate: Which form of government is best? Which form are we going to chose to live under?

Only an informed people should make that decision, otherwise, others will make it for us.

If you decide to watch the video (about 10 minutes), you will at least be in a position of knowledge when the subject comes up. I suspect it will at least whet your appetite for further research. I highly recommend it.

http://www.wimp.com/thegovernment/

Bill Fowler