economy

Christianity, the apocalyptic, and the economy

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The world-wide economy is in terrible shape.  Charles Hugh Smith provides a glimpse of the situation in four chart of four different economies:  (1) A Healthy Economy; (2)  A Speculative Economy (bubble); (3) A Hangover Economy (post-bubble); (4) A Default Economy (the tyranny of debt).  A healthy economy has high interest rates, high productivity, low debt (private and government), and high individual net worth and a low debt to equity ratio on real estate.  A default economy has low interest rates, high government debt, next to zero equity in real estate, and zero net worth.  Currently, the majority of people have negative equity and the government debts are piling higher and deeper.  A bad economy is a sign of bad times.  It can be the first birth pang of the apocalyptic: war, famine, and mass death–Doomsday, if you will.

I suppose this post will cause some people to see me as a crack pot, a crank and a doomsayer.  So be it.  But I think that Christians, of all people, should be prepared to face apocalyptic times, partly because our hope does not rest upon on this earth, for we are just sojourners here, but also because our faith was born in apocalyptic times.  Jesus himself predicts  birth pangs (Matt 24.6-8; ESV):

And you will hear of wars and rumors of wars. See that you are not alarmed, for this must take place, but the end is not yet. For nation will rise against nation, and kingdom against kingdom, and there will be famines and earthquakes in various places. All these are but the beginning of the birth pains.

He predicted the destruction of the Jewish Temple in Jerusalem, a devastating war and tribulation such as the world had never seen (see ch. 24 of Matthew’s Gospel).  He said that this would all happen within one generation.  And indeed, within the lifetime of some of hearers, a mere forty years, all of these predictions took place.  The false messiahs had led the Jewish people in rebellions against the Romans until all-out war broke out between the two nations in AD 66.  By AD 70, the Temple was destroyed, millions of Jews were dead, others sold into slavery, and only a remnant remained to pick up the pieces.  The Jewish historian Josephus chronicles the events that fulfilled Jesus’ predictions in his book The Jewish War.  A couple years ago, we visited Rome and saw Titus’ Arch of Triumph celebrating the devastating defeat of the poor Jewish nation who unsuccessfully rebelled against Roman rule.

As a result of their awareness of the coming events, the community of Jesus’ followers in Galilee, Judea and Jerusalem fled.  Jesus had instructed them to do so.  They left, scattering throughout the inhabited world, some to Pella in the Transjordan region, others to Syria, Asia Minor (Turkey), and beyond.

Today, awareness of the precariousness of our current economy seems pretty limited.  I follow a fair number of blogs which discuss investments, and few people, with few exceptions (Monty Pelerin, Marc Faber, Peter Schiff, etc.) seem to be aware that we are headed toward the destruction of our economy as we know it.  It is not business as usual but economic default.  Yet as Charles Hugh Smith explains, situational awareness and collective awareness is dangerously low.  Jesus says:

But concerning that day and hour no one knows, not even the angels of heaven, nor the Son, but the Father only. For as were the days of Noah, so will be the coming of the Son of Man. For as in those days before the flood they were eating and drinking, marrying and giving in marriage, until the day when Noah entered the ark, and they were unaware until the flood came and swept them all away, so will be the coming of the Son of Man. Then two men will be in the field; one will be taken and one left. Two women will be grinding at the mill; one will be taken and one left.  Therefore, stay awake, for you do not know on what day your Lord is coming. But know this, that if the master of the house had known in what part of the night the thief was coming, he would have stayed awake and would not have let his house be broken into. Therefore you also must be ready, for the Son of Man is coming at an hour you do not expect.

English Standard Version. 2001 (Mt 24:36–44)

Jeremiah says that false prophets predict peace when there is no peace.  What came instead was war, death and exile for the people of Israel in Jeremiah’s day.

But Christians, of all people, should be aware and prepared for the worse.  Why?  Because we know that mankind is sinful and incapable of creating heaven on earth.  Sinful and selfish human beings are easily capable of screwing things up.  It’s only a matter of time before our human inventions, systems and economies end in collapse and misery.

Over the last decade I visited Africa many times.  Every single time I returned home to Canada and thanked God that I lived in peaceful, prosperous country in which freedom reigns.  But two events have shaken my tenuous optimism.  The first was 9-11-2001  The second was the economic collapse in 2008.  Now, I read a lot about the state of the economy, partly out of curiosity but mostly because of my employment as a portfolio manager.  Here are my observations and predictions.

(1) The US Federal government is insolvent and will default.  This default will occur in one of two ways.  (i) Honest default:  the US defaults on its debt and it lays off people, reduces social security, welfare, food stamps, etc.; (ii) the US continues to create new fiat money and devalues the currency to the point where no one will accept it anymore.  Honest default will be lesser of two evils, but either scenario is dire for many people.  But the second scenario is hyperinflationary and will rob many people of their savings before ultimately leading to the same conclusion.

(2) The US will implement serious military cuts and will have to pull back from the world.  Pax Americana is about to become a thing of history.  This will lead to the rise of new powers, to increased thuggery and chaos in the world, and to great suffering.  Already, much of the world (e.g., central Africa) is experiencing a period of chaos reminiscent of the Dark Ages.  As the US military might withdraws, that chaos will only increase until some other powers fill the vacuum.

(3) If the US continues down the inflationary route, then expect commodities to continue to rise in price vis-a-vis the US dollar.  Only high interest rates and the end of monetization of debts (a.k.a. quantitative easing) will save the dollar now.  Only this and an honest default by the US government can end the rise of gold and silver.  But it would result in further mortgage defaults and government layoffs and the inability for the government to pay welfare and food stamps.  Either way, people will suffer and there will blood and rioting on the streets.

(4) Financial markets will experience extreme volatility as excess liquidity tries to find a resting place.

So Christians, are we ready for this?  What are we doing to prepare for the apocalyptic events which are coming in our generation?

Gold has intrinsic value

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Another blogger makes the claim that gold has no intrinsic value and gives his post the title, “All That Glitters Is Not Gold“.  So I responded:

Gold has great intrinsic value, especially when you compare it things like dollar bills which are printed on paper. So here’s a question. If gold has no intrinsic value, then why don’t we print (i.e., mint) the US dollar on gold instead of paper?

The US dollar will succumb to the law of supply and demand

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I have a simple mind and I believe most things actually conform to simple principles.

The law of supply and demand can be stated as simple ratio:  p=d/s where p=price of a commodity; d=demand for the commodity; s=supply of the commodity.  This can be extended to the exchange of two commodities thus:  d1/s1=p=d2/s2, where the supply and demand of the first commodity determines how much of it is necessary (p) to barter for the second commodity.  Money is also a commodity likewise subject to the law of supply and demand.  So if dollars are few, and there is large demand for them, then they will have great buying power and p will be small.  But when there is little demand for dollars or a large supply, then they will have diminished buying power and p will grow.

We had a situation where a large number of dollars was created through credit expansion.  But credit expansion can result in bursting bubbles and credit shrinkage.  In response to the credit deflation called the sub-prime mortgage crisis and its aftermath, Bernanke has created a new supply of dollars in process called QE, quantitative easing–not newly expanded credit, but dollar dollars.  So now we have new money which can’t deflate.  And this has greatly reduced demand for it–because now the Chinese, et al., who have plenty of dollars, are seeking new ways of divesting themselves of dollars.  Not only so, but interest rates are almost zero for holding money in a savings account: which means that there is next to no incentive to holding dollars–this keeps the demand low.  So now US dollar supply is up while the demand for dollars is down.  So guess what? The prices of basic commodities are all up.  This trend will continue, with great volatility in the financial markets, until Bernanke stops creating new money and allows interest rates to rise.

Commodity inflation is caused by monetary inflation

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Cullen Roche of the Pragmatic Capitalist in his Dec 23 blog (via the Business Insider) made the claim that the rise in commodity prices has nothing to do with quantitative easing (emphasis his):

Well, I think it’s becoming pretty clear where the commodity price inflation is coming from – China and genuine economic strength.  The entire inflationist argument in the United States has been pretty much dead wrong for over two years running – whether you believed in hyperinflation, high inflation or default due to “money printing” you have been well off the mark.

Yet the inflation markers Roche is looking at exclude explicitly food and energy prices.  As one commenter on Gonzalo Lira’s latest blog points out, the media and the Federal government are lying:

Further the media and the FED are blatantly lying about inflation. Look at this CNN article that uses the slight [sic] of hand approach when talking about China’s inflation problems [Chinese inflation spikes on food costs].  After talking about the dangers China faces with it’s inflation it states in the article “Compare that with the United States, where the CPI has been sluggish for months. In October, the U.S. CPI increased a modest 1.2%, according to the Bureau of Labor Statistics. Excluding the volatility of food prices, the U.S. CPI rose 0.6%.”

So when it’s in China it’s inflation and when it’s in the US it’s not.  I’m not making this up.

But the fact is that somewhere around QE1, the Chinese stopped buying US debt and have been diversifying their holdings.  They are, for example, investing in oil companies in Canada.  This has resulted in a tremendous dilemma for the US.  How can they keep the behemoth of the US government running without that the Chinese invest in the Federal debt with their US dollars, made through the trade surplus with the US?  The answer is QE2, and Gonzalo Lira estimates that 60% of the new US treasury debt is now bought by the Federal Reserve.

And now, the problem of food inflation is much worse than ever.  Today, both the Financial Post and the Globe & Mail have prominent articles on the recent food inflation numbers.  Of course gold is holding around $1375; oil around $88; but these may end up skyrocketing in price soon.  Blame it on speculators if you like.  But this has everything to do with QE1,2 … infinity.  For the Federal government is now monetizing its debt and there is nothing even the newly elected Congress can do about it.  Even if they refuse to raise the debt ceiling, the government will just borrow the money from the Social Security and nothing will stop Bernanke from monetizing old debt as it expires.  When a government does this, they can expect commodities to increase: heating fuel, food, gasoline, textiles and eventually electricity.  These are the very things that we eat, wear and burn to live.  Now it’s happening and all over the media there is denial–not just the Pragmatic Capitalist, but all over the major media, even smart smart people like Niall Ferguson are still claiming that deflation is the problem.  But excuse me, when people can’t afford to eat anymore, that’s a problem isn’t it?  Are they stuck on stupid?

What happens during hyperinflation?

1.  Commodity prices, especially food, soar

In Weimar Germany food inflation was severe.  A bag of potatoes could buy a grand piano.  People used all of their disposable income just to put food on the table.

2.  Financial markets are highly volatile

The stock market in Weimar Germany would soar and plummet.  But in the end, shares in stocks lasted while the Weimar mark became worthless.  Commodity prices, though in a secular bull market, will remain volatile with huge swings as it rises steadily upward.

3. Gold and silver retain their value

In Zimbabwe, everyone who is able is a gold panner so as to buy food, for it is now possible to buy food with gold dust.

4. More stable currencies are desired

Many countries around the world use US dollars because their own currencies are so unstable.  Apparently US dollars are now legal tender in Zimbabwe.  In Weimar Germany, it would have been useless to own the likewise hyperinflated Austrian kroners instead of marks, but useful to own US dollars or Swiss Francs.

5. Real estate is uncertain asset

It may be worthwhile to own real estate debt just before an hyperinflationary period, for the value of that debt will plummet faster than interest rates can rise.  But it is also probably true that rental income will not keep up with inflation.  I read a story about hyperinflation in Chili in which a man was offered a condominium for his car.  The condominium, according to the author, is now valued in the hundreds of thousands, while the car sits in a junkyard.

What to do?

Perhaps it’s a good time to hoard large stores of food before the prices get completely out of hand.  Either that or an investor must have something that can be used to barter for food, such as wine or precious metals (in bullion–bars or coins), gold and silver.  In my view, the Canadian loonie may serve the role that the Swiss Franc did in Weimar Germany.  It is true that the loonie has suffered laughable interest rates, but the Canadian economy is resource rich and those economically healthy parts (e.g., China) of the world are pouring their money into the economy up here and are abandoning US debt.  So it might be good to have some Canadian money or some Swiss Francs.  I wouldn’t bother with the Euro at this point.

Memo to President Obama and Chairman Bernanke: A solution to the budget deficit

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Dear Mr. President, and Chairman Bernanke:

I discovered a solution to the problem of the Federal budget deficit.  The deficit stands at roughly 1.5 trillion.  The solution is to print 300 billion 100 trillion dollar bills.  Obviously such notes would eventually be worth nothing in terms of currency, as was the experience in Zimbabwe.  But I’ve now learned that the 100 trillion Zimbabwe dollar note is selling to tourists at $5 US as a souvenir. 300 billion 100 trillion dollar bills at $5 each would be worth 1.5 trillion and you could sell them to collectors, tourists and speculators alike.

Just a thought.

Have a great day.

The Righteous Investor