RaboDirect E-Zine - April 2009

Posted by Jill Kerby on April 01 2009 @ 21:24



You want straight talking?  About your money?   Really?  


Don’t you prefer the curlicued talking (and writing) that fills our airwaves and other media from morning ‘til night about how “everything is now being done to reverse the effects of this recession” on the US or global economy?   (As if an economy is just another machine covered in levers and buttons that, if you follow the manual properly, can be adjusted and pushed and tweaked to get it working again.) 


There isn’t much straight talking going on at the moment because it’s much easier to report  - and believe -  what politicians and central bankers, to whom we have given a mandate to repair the damage that they inflicted in the first place, are spinning at us. 


For this reason you should take what you hear and read with a proverbial grain of salt, and perhaps consider a few economic truths before you run out and buy that first home, or pour all your money back into financial or retail shares, or expect unemployment to reverse anytime soon. 


Surely the time has come to challenge the warped thinking that is being endlessly presented on our morning (and evening) news broadcasts, by Keynesian economists and desperate politicians-in-chief and their Merlin-like central bankers.  So here goes:



The consequences of nearly four decades of cumulative deficit spending by the United States in particular, and pretty much by every other major western economy cannot be halted or reversed.  No matter how much more debt and credit is laid on future generations or cash is printed out of thin air, it will not solve the problem. It will only postpone it.



An insolvent bank, or motor industry, or sub-prime mortgage holder only stops being so when their debt is paid off or written off.  Shifting this debt to the taxpayer and their grandchildren and great-grandchildren will only make them insolvent too.



Governments and politicians do not create wealth. They only redistribute our wealth.  When they do try to run businesses or even public services they don’t usually do it very efficiently.  Aside from the bad resources allocation decisions they make (just think of the health service), they lose track of a lot of the money; they don’t account for it very well; they give it to their friends, and they don’t seem too pushed about the lousy return.  That’s why millions and billions and soon, (maybe even trillions) of dollars, and pounds, yen and euro is going to keep disappearing down dark financial holes. 


A 5% rise in house sales in the United States and a bear rally on Wall Street are not genuine signs of recover in either the property market or financial markets.  In the former case, it is a consequence of massive foreclosure sales and the auctioning off of the inventory of bankrupt property developers.  In the latter, it is a bear rally by traders who do what they always do – take advantage of any upward movement caused by government interference in the price of money or assets.  The same thing happened  in 1932 and it crushed investors who got sucked in. 



I could go on, but I hope you are getting the picture.  


We are not in the throes of an ordinary business-cycle recession in which, after an overheated economy slows down, the politicians and their creatures, the central bankers step in to yet again manipulate interest rates and pump a bit of extra currency and credit back into the flagging financial and consumer spending markets. 


This time the mistakes – the decades of manipulating the money and credit supply to encourage reckless lending, the vast deficit spending on imported goods, the unfunded wars, the uneven tax systems that have favoured the rich and the unfunded social programmes have caught up with the United States and the rest of the world.  


‘Things fall apart; the centre cannot hold’, wrote WB Yeats.  No kidding. 



It is reckoned that about 50 trillion dollars worth of (albeit inflated) private wealth has been lost so far in world-wide property values, pension funds and other assets.  



The Obama mega-bailouts have one goal – to inflate away the debts of  America, which are too great to pay off in any other way.  But it will be at the cost of anyone holding US bonds, dollars, property and other US dollar denominated assets and who believes that the value of these assets will return to pre-2008 prices in their lifetimes. 



Once those billions and trillions of new, devalued dollars trickle out into the wider marketplace, you should expect consumer prices to rise. This is because the early money (that is still worth something) will pour into oil shares, precious metals, arable land, commodities (especially food), water shares and essential consumer durable shares represented by companies with huge positive balance sheets and world class management.  


This is the stuff that we should all be buying. 


*                         *                        *


So much for straight talking.  Now you have to do some straight thinking.  



If I had a crystal ball, I would gladly tell you when, or even if, any of this is going to happen.  The only thing I am certain about in my own head, is that whatever he outcome, it’s going to happen sooner than we expect. 



And that’s because the law of exponential growth is now in play. 



This is where an event or an action keeps expanding – like the money supply or credit – at a pace at which it eventually reaches a tipping point, a point of no return.  No matter what you might do to try and stop the expansion, it doesn’t work. 



For example, it took 350 years – to 1973 - for the United States to produce the first trillion dollars in its money stock, that is, all the money in its bank accounts, money market funds, collaterised debts, etc.  Now, a trillion dollars is literally being created overnight at the touch of a computer key. 


The exponentially growing financial system and the economies it corrupted finally hit its immoveable object last year when ordinary consumers were unable to pay off or take on more debt. The hundred of trillions of debt created in the last decade in particular, began to unwind.


The current, unprecedented debt inflation effort is expected to result in price inflation…probably hyper-inflation, that will also run its course, despite the central bankers saying they will be able to turn off the tap in time. 


Can the centre hold?  Will things fall apart?   


I’m not sure WB Yeats knew much about complex recapitalization programmes, but I think I did read somewhere that he led a relatively modest life without much debt hanging over his head.  He owned his house.  Maybe a few decent shares.  He wasn’t a particularly big spender. Mostly, he made do with what he had. 


It’s as good a place to start as any.  Just do it quickly. 

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