Weimar America: II. O Happy Day, a compromise has been reached (rev.)

Update:  I learn from Rick Moran that the $38.5 billion in cuts weren’t from the quarterly deficit but of the annual budget.  I revised the post to reflect that.

I am as delighted about the compromise arrangement between Obama and Congress as anyone.  You see, my portfolio is 125% hedged against hyperinflation.  Congress has cut 38.5 billion.  That’s seems like a lot of money doesn’t it?  Let’s just all proclaim the victory.  You see, when the US Federal government is spending 1,600 billion per year more than what it brings in, $38.5 billion cuts less than 2.4% of the deficit.

Let’s try to get some perspective on this.  The Federal Reserve Bank is buying most of debt now since Japan is rebuilding in the aftermath of the Tsunami and the earthquake, and the Chinese are rebalancing their portfolios away from US debt while buying into the Canadian resource sector, among other things.  When Ben Bernanke buys the debt, it is called monetization; i.e., the money is created out of nothing and put into circulation via government spending.  This is creating hyperinflation–just look at commodities: gold is at $1475, oil at $113, silver over $40.  Now $38.5 billion savings will mean that the US will only borrow 97.6% of what they were planning to borrow before the compromise.  That’s a big deal.

Imagine your family had too much debt and expenses.  Every year you bring in $100,000, and borrow $50,000 while spending $150,000.  Now, you have a growing debt base, but you are not making a penny of payments on it to reduce its principle, and balance is now at $500,000.  Your payments are 2% interest, and so you are paying $10,000 of that $150,000 just to service the debt.  You’ve got a problem, because in one year that debt could cost you 5%, in which case your debt payments would become $27,500, and so you would have to borrow another $17,500 that next year just to cover the extra interest, so now instead of  borrowing $50,000, you are borrowing $67,500.  This is called a debt death spiral.  So lets say you and your wife compromise, and you decide to reduce your overspending by 2%, i.e., now instead of borrowing $50,000 you only add $49,000 to your $500,000 debt.  So in year two, your interest at 5% is only $27,450, meaning that you will only have to borrow $67,450 in year two.  Wow.  You’ve really made a difference by cutting your deficit by 2%!  Congratulations.

Thanks to the Tea Party we have a cost cutting Congress.  So I am now predicting that hyperinflation will be slowed down by a day or two.

Great job guys!  It makes my job as an investor easy:

Long: Canadian oil & gas sector; long Canadian gold mining companies, physical gold and silver (Sprott Physical Gold and Silver Trusts)

Short: US dollar.

Stuck on stupid I: More education bubble stuff

I saw a young man, whose mother is from Boston, at the US Consulate General in Toronto; the consulate refused to acknowledge his US citizenship and issue him a passport yesterday.  He blamed the Tea Party movement’s influence on Congress.  He is by all counts a East coast liberal, 18-year old brain full of mush, wanting to emigrate to the US, get involved in the Democrat Party and the support the unions.  But is it his fault?  When the smartest people in the world are also stuck on stupid.

Look at Dr. Benjamin Bernanke, PhD.  He says the current inflation is low but caused really by a spike in commodity prices (from Reuters):

A recent increase in U.S. inflation is driven primarily by rising commodity prices globally, and is unlikely to persist, Federal Reserve Chairman Ben Bernanke said on Monday. …

Along the same lines, Bernanke argued that supply and demand factors are driving energy and commodity costs higher, but that these should eventually stabilize, allowing the United States to avoid any inflation troubles.

“I think the increase in inflation will be transitory,” Bernanke said in response to questions after a speech. “Our expectation at this point is that in the medium term inflation, if anything, will be a bit low. We will monitor inflation and inflation expectations very closely.”

Let me see if I understand Bernanke’s logic.  He believes that he can triple the money base in two years, but that commodity inflation is transitory.  Huh???  Get real.  If you want commodities to decrease you have to shrink the money supply.

Formerly with the Obama administration’s brain trust but now back in academia, Dr. Christine Romer, PhD, fears that there will be no QE III, for QE II worked so handsomely to get things going again.  Be careful with this video interview of Dr. Romer with my favorite Yahoo personality, Aaron Task: it can cause brain freeze, incredulity and a desire to throw things at your computer monitor.  Dr. Romer believes the best way to solve unemployment is through debauching the currency.  Of course, for the last two years, that’s exactly what the Fed has done, and the employment rate is pretty pathetic.  So what do you do when a policy doesn’t work?  Well it is obvious that you didn’t do enough of it.  So QE II is faltering because Bernanke hasn’t yet promised QE III.  Amazing.

Weimar America: I. It’s starting

I have been flabbergasted by the lag between the price of crude oil, now at $108, and the cost of certain Canadian junior and intermediate oil companies, whose share prices have not kept up with commodity prices.  The market seems to be saying, “Hey, I’ve seen this trick before.  I buy the oil companies, thinking I can take advantage of oil prices, and then the price goes down and I am left holding a bag of money-losing companies.”  Well that could be true.  But then again, this could be the start of Weimar America.

In Weimar Germany, when hyperinflation started, people initially slowed down their buying of consumer goods because they felt that the prices weren’t normal, and that they should soon fall back to some level of sanity.  But instead, prices continued to rise.  Thus, they were forced to pay higher prices.  They soon learned that the time to buy was immediately after receiving money.  One of my professors who was a boy during Weimar Germany recounted how, the moment his parents were paid, he had to rush with their money to the market before the prices went up.

Now this is happening all around us.  I know that Ben Bernanke is saying that high prices are due to commodities, and that they will come back down.  But I doubt that you can come up with a single time that he’s ever made an accurate prediction. Here are some signs that Weimar America is now here.

(1) Car prices:  I bought a RAV4 in February because the price hadn’t changed in over a year and because Toyota Canada offered me free 36 month financing.  I felt that car prices would be going up because of commodity prices.  The earthquake in Japan has shut down parts factories and now production will cease in Toyota’s North American plants.  Similar shut downs will likely occur to other manufacturers around the world who depend on parts from Japan.  Supply will go down and this will cause car prices in the near term to increase steeply.  But don’t expect prices to go down once those Japanese factories are back online.  This is a catalyst for pushing prices steeper, where they must go.

(2) Oil prices:  The crisis in Libya and in other oil producing countries has lead to $108 WTI and $121 Brent.  The crises are not going away, because many are caused by instability due to food inflation.  Don’t expect crude to come back down in price.

(3) Precious metal prices:  Despite those who call gold a bubble, gold seems to have found support at $1400.  Silver has been experiencing unreal gains.  Investors who want to have some exposure to physical metal would do well to establish a starting position lest prices don’t come back down.

(4) Flight of capital:  Wegelin & Co., a Swiss bank that caters to wealthy clients with beaucoup bucks to invest is leaving the United States and has written up a eight page, double column, writ of divorce, entitled, “Farewell America“, explaining that the new bank regulations that the Obama led government has put into place are not worth the trouble.  Besides, they say, the USA is now in a major debt situation that it can’t get out of because (1) Foreign creditors are now decreasing their net debt to the US; (2) the US is running its entitlement programs as a ponzi scheme; and (3) Federal Reserve Bank is monetizing the Federal debt.  They are recommending that their clients completely leave the United States.  They won’t be coming back until things are fixed, if then.

Here is a salient excerpt from “Farewell America”:

The sensibilities of their own capital market: this is what the smart guys in the IRS have very probably failed to take into account. Their onesided regulatory proposals, focused on maximizing the tax take, are based on the entirely unproblematic and undisputed attractiveness of the USA as a place of investment for investors from all over the world. We believe this assumption to be utterly wrong. Why?

A glance at the USA’s debt situation suffices to show that apart from oil, there is really only one element of strategic importance that the USA will need in the coming years: capital. The (declared) public debt – national, state and community – amounted to some 70 percent of GDP in 2008. With the absorption of further debt in the wake of the financial crisis, by 2014 the level of explicit debt is likely to be significantly above 100 percent of GDP. By then the interest will have doubled from around 10 percent of total public revenue to around 20 percent, on moderate assumptions.

This is generally well known. What is generally less well known is that in the USA too, as in so many ailing European states, this explicit perspective reveals less than half the truth about what has been implicitly promised by the state in the way of future benefits. Correctly accounted – that is, as probable future payment flows discounted to present values – the picture would look a good deal bleaker. There are studies, such as the one by the Frankfurt Institute in November 2008, that reckon with a total level of debt for the USA of up to 600 percent (!) of GDP.

April 7 is my “Farewell America” date.

The Secret of Oz: Anti-central bank, anti-gold standard

This film was certainly interesting and well-made.  It is in favor of fiat money which is controlled not by central banks but by democratic government.  The title is based upon Hugh Rockoff’s allegorical interpretation of the 1900 children’s book Wizard of Oz, setting the story in the political controversies at the time of the author, L. Frank Baum (1856-1919).  According to this interpretation, the silver slippers are representative of silver money in competition with the gold standard, the Scarecrow, who is actually smarter than people think at first, is the American farmer who is destroyed by deflation, the Tin Man is the American industrial worker, who is in need of liquidity (oil), who comes along side the farmer in common cause and the cowardly Lion is William Jennings Bryan who was in favor of silver money and the US government issued greenback.  The wicked witches of the East and West were two major banks, and the water that kills the witch is the easy liquidity of the government’s own ability to create fiat currency which is not debt-based.

In my opinion the films successfully show how the gold standard can be manipulated by big banks and can have depressive effect on money–which can (1) stifle the growth of an economy and (2) create serfs out of people who cannot pay back their debts because of inadequate liquidity in the system.

The film fails to show how giving control of fiat currency to government can stop the government from politicizing the money supply and ultimately from creating hyperinflation.  The film also mistakes fiat money creation for wealth creation:  While it is true that wealth creation requires liquidity, it is a mistake to confuse wealth creation with the creation of fiat money.

I would conclude that restrained form of monetarism could be the best system in that it would grow the money supply in conjunction with economic production–but that all systems of money are open to manipulation and greed–and this is why the Austrians point out that all paper currencies eventually become worthless.  The advantage of a system of money which is based on precious metals is that neither a central bank nor a government can steal people’s wealth through the excess creation of money.  A stable currency would also encourage saving, as currency would be store of wealth.  The disadvantage of the gold standard is that liquidity can be dried up and there can arise situations in which money becomes too scarce.

Hyperinflation is now here: throwing gasoline on the fire

Kapitalcon cited my post discussing the $223 billion dollar US Federal deficit in February, and then went further to predict QE III:

Important to note is the Federal Reserve’s recent announcement that it may have to begin its third round of QE in response to sky-rocketing oil prices.  Atlanta Fed President Dennis Lockhart stated at the National Association of Business Economics in Arlington that “If [the rising price of oil] plays through to the broad economy in a way that portends a recession, I would take a position we would respond with more accommodation.”  As oil increases, so too does the cost of most, if not all, goods and services. This includes anything that requires petroleum in the production process, not to mention increased transportation costs for moving the product to market.  Such is the rationale for QE3.

Do I fear my commodity stocks going down like they did in 2008-9?  Not with people like Mr. Lockhart running the Federal Reserve Bank.  The problem of the commodities is too much liquidity chasing too few goods.  If the Federal Reserve Bank’s solution is to just throw more fuel on the fire, then I’ve nothing to fear.  QE, which I affectionately call the Bernanke Put, will be the ultimate cause of hyperinflation.  It is as though they are trying to fulfill this prophetic video that the National Inflation Association created a few months ago: