Posted on 09/28/2005 4:09:54 PM PDT by hubbubhubbub
For over four decades, observant and open-minded individuals have become deeply concerned about the future of our great nation. They refused to accept the rosy official and media testimony regarding our nation's fiscal and monetary integrity. Similarly, they did not believe the negative rhetoric directed towards gold. Just as these independent thinking and far-sighted people recognized that one plus one would always equal two they also knew that no one, nor no nation, could create something from nothing. Throughout this period they witnessed the U.S. government and the Federal Reserve banking system work together to create U.S. dollars from thin air, in order to finance our growing national budget deficits. It was not only obvious to these people that inflation must result from our government's actions, but that numerous economic and financial distortions would occur and likely ultimately spawn a serious economic decline. They had learned from history of the damage that accrued to the lives of the common man, whenever a nation debased its currency.
Stable prices within an economy are produced when there is a balance between the purchasing media in its financial system, and the amount of goods and services offered on its markets. However, when the dollar value of the available items and services remain essentially constant, but a country's money stock is increased, the additional monetary units will over time act to bid up their domestic prices. This is what has occurred in America during the past six decades, since the U.S. left the Gold Standard. It is the underlying cause of the loss of the dollar's purchasing power.
According to extensive research performed by the outstanding American Institute for Economic Research (AIER, Great Barrington, Massachusetts), "For roughly 150 years after the Mint Act of 1792, by which Congress established and defined the Nation's currency, the purchasing power of the dollar fluctuated in a relatively narrow range. At the end of World War II, the price level was close to the peaks (and the purchasing power close to the troughs) reached after the War of 1812, the Civil War, and World War I".
During the preponderance of this period the dollar was defined as being worth a fixed amount of gold. Under the Gold Standard, dollars could not be created unless there was sufficient gold held by our government to redeem them. Further, during most of this era gold and dollars could be readily exchanged for one another by our government. This all changed with the signing of the Bretton Woods Agreement in1944.
After 1944, the dollar's purchasing power began to decline. This accelerated after President Nixon "closed the gold window" in 1971. With the stroke of a pen he severed the final link of the dollar to gold. Later, in the words of the AIER, "By 2000, the dollar had lost more than 90% of its original purchasing power."
The term "doom and gloomers" was likely coined by a member of the Establishment. It was done in an effort to discredit those who recognized this condition as well as their beliefs. This occurred because the "doom and gloomers"recognized early that the excessive issuance of dollars effectively cheapened those that already existed, and would lead to a number of damaging results. First, it would create inflation. Next, the higher prices and inflated money supply would excessively stimulate the economy. These events, in turn, would foster a number of other economic and financial distortions. Businesses and individuals would make poor economic and financial decisions. They would base their actions upon an economy which was artificially stimulated by excessive monetary creation. Their judgements and actions would be predicated upon fleeting, exceptional business conditions that were largely created as the newly issued dollars worked their way through the system. Businesses would expand their workforces, factories and products. Additionally, they and individuals would enter into far greater debt than was truly warranted because they believed that the "good times" would last longer than they should. The excessive monetary creation, in turn, would ultimately destroy the dollar's value on the world's markets, and further exacerbate the price inflation within our borders as the cost rose of imported goods.
Now, conditions have worsened to a far greater extent that anyone could have dreamed possible prior to the 1990's. Each recession since the Great Depression was met with greater amounts of monetary and fiscal stimulus in order to extricate the economy from any economic reversal. Whenever the economy began to flounder, the money supply would be rapidly expanded and interest rates would be cut by the Fed, while the government enacted tax reductions and spending increases. Importantly, during the past several years, the Fed appears to have become hell-bent upon creating as many dollar credits as are necessary. This, in order to prevent the economy from lapsing into any sort of extended or even minor recession, for fear of it snow-balling into something of far greater consequence.
Finally, the "doom and gloomers" are being joined by other voices. However, now they are emanating from the Establishment! Comments and declarations are now being espoused by those who are not only highly respected and authoritative, but who also hold among the most powerful positions in the world's governing and cooperative bodies.
This morning's New York Times contained an article entitled "I.M.F. Warns of Imbalance in World Consumption". The piece contained quotes from a recent IMF report. It began with "The United States is likely to experience slower economic growth next year, and its rapidly rising foreign debt is at the heart of dangerous global imbalances...". The Times then continued and stated, "The fund said that global economic growth had become too dependent on a handful of countries, led by the United States, that consume far more than they produce. That imbalance, it warned in its semiannual World Economic Outlook, could lead to a wrenching correction".
For the International Monetary Fund to use phrases such as "dangerous global imbalances" and "wrenching correction" when referring to the possible outcome of today's global economic and financial condition, is truly unprecedented! They could have used far more subtle terms, as they have in the past to get their point across, if they did not deeply believe that the world's economy was at great risk.
The Times article went on: "In an evident reference to the United States, with its big budget deficits and relentless consumer spending, the I.M.F. warned that the world's consumption is 'fueled by increasingly unsustainable fiscal stimulus, as well as housing prices that are ignoring the laws of gravity".
With these strong statements of concern, if not outright fear, I believe that the IMF is sending a scathing message. It is not only to the United States but to the rest of the world, that the worst fears of the "doom and gloomers" not only have validity, but that they may come to fruition if major structural changes in the U.S. do not occur. This stern warning was for the United States to limit its dangerous monetary expansion, increase its taxes, and force its consumers to reign in their wonton spending. Or, not only the U.S. but the world would suffer the consequences.
These alarming statements by one of the world's preeminent organizations followed a similar statement by the president of the Federal Reserve Bank, Alan Greenspan. In a recent speech, Mr. Greenspan discussed the historical precedent that resulted whenever investors became overly excited about certain investments. This occurred when buyers threw caution to the wind and ignored the risks produced by their actions, by driving prices to unsupportable high levels. He stated , "Thus, this vast increase in the market value of asset claims is in part the indirect result of investors accepting lower compensation for risk. Such an increase in market value is too often viewed by market participants as structural and permanent. ... But what they perceive as newly abundant liquidity can readily disappear. Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher asset prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums."
Greenspan, with his statement, "vast increase in the market value", is referring to the current enormous overvaluation of the housing market and, I believe, stock prices. He appears in total agreement with the IMF statement that, "housing prices that are defying the laws of gravity". Do you remember Greenspan's famous 1996, "irrational exuberance" speech regarding the stock market? At that time, the Dow Industrials were in the mid-6000 range. Do you believe that he views the market as being less overvalued and less dangerous with the Dow today in the mid 10,000's?
Greenspan's reference to "history has not dealt kindly with the aftermath of protracted periods of low risk premiums" is his "fed-speak", sugar-coated fashion of addressing the likely severe and damaging economic fall-out when price levels return to normal.
I believe that these unnerving observations by Alan Greenspan and the IMF are likely the tip of the iceberg! As time passes, I feel that similar statements will be espoused by more and more conventional economists and government officials. They will be preparing the world for a potential economic melt-down that was created by our nation's prolonged, egregious, deficit spending campaign, and the creation of the enormous amount of dollar credits that they fostered.
The voices of the "doom and gloomers" will be increasingly joined by those emanating from mainstream America. They will be vindicated! However, just as all Americans benefited from the higher standard of living generated by the decades-long artificially induced boom, we may all have to suffer the consequences when the business cycle turns down, and the contrived boom turns to bust.
I realize that my analysis of the comments by the IMF and Alan Greenspan are disconcerting. However, I believe that it is better to face the reality and truth of a situation and prepare for its consequences, than to put one's head in the sand and ignore its reality and its potential damaging effects. My hope is to help the reader recognize our nation's precarious condition, and prepare for the difficult times that lie somewhere ahead.
No, I would not try to manage the money supply nor would I tell people what they and may not use as a means of exchange. You want to electronic uranium backed credits, fine. Electronic commodities bundle, fine? Just don't give the government the power to control the medium of trade. That sort of power is far too dangerous to be trusted to governments.
Are you saying M3 growth equals (true, Adam Selene, not fake politburo)CPI growth?
There is no way to predict the consequences of currency debasement. Nor is there any such thing as a general price level.
Doomers regularly cite Japan's high personal savings rate as an example of what we should be doing oblivious to the the fact that we possess tremendous liquid wealth.
we have lots of 401K chock full of "high quality" Fannie Mae bonds, money market funds full of Fannie repos, and stock in Fannie's derivative counterparties like Citigroup and JPM.
So now accounting woes at Fannie Mae are going to bring down our economy? $11 billion in accounting errors, (smoothing) to ensure maximum bonuses were earned, is going to bankrupt the system and kill originations? Well, like you say, time will tell.
We have massive equity in homes whose value is inflated by GSE money pumps.
Only 20% of our net worth is in our homes. Do you totally ignore the demand side of the equation when looking at the housing market? When was the last time the housing market in this country showed a year over year decline in aggregate values?
Hey, when was the last time FNM posted reliable earnings?
All those years will be restated and some will show profits and some will show losses. This house will get cleaned but it will not create the disaster you portend.
And when do you reckon commodity prices are going to stop rising?
You, being ahead of the curve, should know this. Individual commodities are extremely volatile and bull markets come in short durations. Better hope your crystal ball is working.
Many think that demand from China will continue to drive this but you know that even in a long term bull market there is significant down side risk.
Commodities bottomed out around 2000 and hit their lowest point, adjusted for inflation, in our history. I'd say they were long overdue for an upward run.
Do you think this will mean a return to the 70's when commodities rose and financial assets dropped? Do commodities always trend inversely to equities? There's always the possibility that rapidly rising commodity prices will lead to that historically proven war cycle. Nothing like a lot of world tension and unrest to send Gold skyrocketing. Once again, time will tell.
So if there is no general price level, why do you complain that CPI under counts housing inflation?
"In constant dollars our family income purchasing power is less now than 50 years ago. That's why husband and wife must both work."
Color me skeptical. While I was growing up (I'm 45), our family income was above average with just my dad working - when my mom worked weekends (she was a nurse), it was higher still. But my hubby and I have more kids and more stuff, and are living in a bigger house, even though he's the only one working and our family income is a touch below average (while we sometimes charge up a bit and pay it off in a year, generally our only debt is the mortgage, which was my parents' position as well). Our siblings who're married where both spouses are working are living way better than our parents did, even though both our moms worked at least part time.
If we're below average income now, living better than above average income thirty years back, in what way have things gotten worse? Plus now there's more stuff available at cheaper prices - not just a wider variety of fresh fruit and vegetables, but things like computers, DVDs and VCRs that weren't even around when I was a kid are easily affordable. And heaven knows the cars today are generally more powerful and nifty. Except for the fact that it can be hard to get a stick shift, which is sometimes annoying...
I cannot see any possible way that your statement can be true in any practical sense. My money goes way further than my mom's did when I was a kid. If I got on the Internet and made more of an effort to track down sales, it'd go further still. Modern poor people in the U.S. are living considerably better than my grandparents did. Our income hasn't gotten worse; our expectations have gotten higher.
First, never trust an article that flatters you in the first paragraph and basically says someday you'll agree with us in the last.
Second. It could happen. It might not. Predicting the future is a really, really risky business to be in. Optimist OR Pessimist.
OK, risk is part of life. We don't know what's going to happen-- maybe Martians will invade and maybe owning gold will be profitable. Reasonable people see what has been and accept the fact that Martians and gold are not important.
We can observe the fact that we are so much better off than our grandparents were even as they enjoyed so many advantages that their grandparents didn't have. By studying how that happened and by looking at how things are now, it makes sense that our grandchildren will have it better than us and that doomers are idiots.
Which means that it essentially measures nothing. Food, energy, and housing should be among the first three items on the CPI list.
Note to self: read up on this a bit more.
This is true. My rent is cheaper than it was 5 years ago for roughly the same size apartment in roughly the same neighborhood.
As they say: Bulls make money, bears make money, pigs get slaughtered.
Wouldn't it be something like 8% minus the rate of growth of the population (including illegals, of course)?
And don't forget the underground economy. It has been estimated to be about 10% of GDP. So our GDP growth is probably understated by something like 10%. IOW 3% growth should be 3.3%
The government calculates CPI numbers that include food and energy as well as the core rate which omits food and energy. Housing is included in both measures.
From the BLS website:
"The CPI represents all goods and services purchased for consumption by the reference population (U or W) BLS has classified all expenditure items into more than 200 categories, arranged into eight major groups. Major groups and examples of categories in each are as follows:"
"Also included within these major groups are various government-charged user fees, such as water and sewerage charges, auto registration fees, and vehicle tolls. In addition, the CPI includes taxes (such as sales and excise taxes) that are directly associated with the prices of specific goods and services. However, the CPI excludes taxes (such as income and Social Security taxes) not directly associated with the purchase of consumer goods and services."
It's probably a good idea to question the motivations and the information being disseminated by the doom and gloomers who want us to believe that our eyes are deceiving us and the worst economy since Hoover is just around the corner.
It's so easy for some to just say that inflation is high and real wages are lower, as well as just "say" that 2+2=5. I get tired of arguing that 2+2=4 but that's no excuse; we still have to restate the truth when others speak fantasy.
I was doomed yesterday ,today Im alright
So, if you think the economy hasn't grown over the last decade, then Adam is correct and inflation is 8%. If you understand that 10 year treasuries are yielding 4.25%, you'd realize that inflation is nowhere near 8%.
Ahhh, perhaps that's a better definition as GDP grows through other factors besides population (or at least working population).
It's probably a good idea to question the motivations and the information being disseminated by the doom and gloomers who want us to believe that our eyes are deceiving us and the worst economy since Hoover is just around the corner.
I won't approach the point of saying that the economy is horrible, or even weak, though I'm not certain that it is flourishing as much as it could or should be. Anyway, I believe, based on my own purchasing power, that the CPI does understate things a bit. No, we're not in an 8% inflationary situation, but the 3.3% figure isn't accurate IMHO.
BTW, want to buy some gold? ;)
Yes. Here is the theory, if GDP grows at 3%, money supply must grow at 3%. If money supply grows more slowly, you get deflation. Too many goods chasing too few dollars. Good for consumers but bad for businesses. Profit squeezes will cause business failure. It's been happening in Japan for the last few years.
If money supply grows faster, the extra money fuels inflation.
Read the OFHEO systemic risk report.
When was the last time the housing market in this country showed a year over year decline in aggregate values?
Just before FDR created the GSEs.
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