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
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