Market Watch - December 19, 2010
There is no particularly good economic news to discuss in this month's Market Watch. More importantly, there continues to be no reason to invest in the stock or bond markets. In the last 21 months the Federal Reserve System (Federal Government) has issued $2.5 trillion of new money (QE1 and QE2). That new money has been successful in keeping government employees employed. It has further been successful in increasing the number of federal employees; it's bailed out the banks, and the big money interests that support leading politicians. This is European politics and economics at its best, and it is a perfect example of what the Founding Fathers didn't want to happen in America.
The "common man", this was to help, hasn't seen a dime of "stimulus" money. The significance for the "common man" is that increased government deficit spending has added thousands of dollars per capita to what each of us owe as our share of the public debt. The government continues to mire us with debt and take away our liberty through taxes and forced programs most of us do not want. There is only one problem in this country that has created every problem we have, and that is the increasing size and power of the central government. We will have a stagnant economy until the public re-educates themselves and realizes that most of our elected officials care more about getting re-elected than they care about following The Constitution's instructions on how they should represent their constituents. Following The Constitution would result in a drastic reduction in the size of the Federal Government and a disbursement of un-Constitutional centralized powers.
Government spending accounts for more than 40% of GDP, and while that sounds great, the problem with government is that it produces nothing that lasts and goes back into the economy to aid future growth. Government takes and spends, and has produced nothing in this country over the last 50 years but more debt, and war.
Here are some historical examples of governments that have behaved like our government behaves.
In 1763, after the 7 Year War with France, King George III of England needed money to pay off his quadrupled national debt. He turned to the richest people in the realm, the Colonists, and taxed paper, glass, paint, lead, land deeds and tea. The result was the American Revolution. Louis the XVI of France did the same thing in 1889 as the French national debt had grown ten-fold under the opulence of his grandfather, Louis XIV. The church and nobility, previously exempt from taxes, refused to pay the new taxes, resulting in the French Revolution. In the 1920s in Germany, the Weimar Republic did not meet the debt obligations imposed upon them by World War I's Treaty of Versailles. The resulting inflation wiped out the middle class and gave rise to a dictatorship headed by Adolf Hitler.
Rome fell because she could not contain her boarders. War was everywhere. Taxes to pay for wars drained the populous of cash and increased Rome's financial obligations beyond their ability to meet them. This permanent state of war in Rome, and debt incurred by empires like England, Germany, France and Spain over the decades, is pretty much what the U. S. has been doing for the last 100 years.
Question: That's great history, but all of that is 100s of years old. Isn't there some new thinking that applies to these times?
Answer: No, there is no new thinking. All of the things that are being done today have been done in history, and all of them have failed. The size and power of the government always coincides with debt, war, and currency debasement. We are taught to think that government will help us, but that's theoretical and misplaced thinking. The power of politicians and those close to them, affects most men and women adversely. Rather than accepting power humbly, as a politician with a spirit willing to serve, our politicians are treated like royalty and given privileges that exceed those "granted" to "We the People".
Many great thinkers warned us about outsized central governments, including our first president who advised in his Farewell Address, "to be a friend of all nations and an enemy of none, and to stay out of all European entanglements". Eisenhower said in his farewell speech in 1960, "In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential of the disastrous rise of misplaced power exists and will persist. We must never let the weight of this combination endanger our liberties or democratic processes. We should take nothing for granted. Only a learned and knowledgeable citizenry can compel the proper meshing of the huge industrial and military machinery of defense, with our peaceful methods and goals, so that security and liberty may prosper together". President Eisenhower points out in this single paragraph all we need to know to start righting our ship of state.
Our politicians did not pay attention to the above. Furthermore, there is no indication that they will. There's no plan to reduce the size of government, no plan to stop borrowing money by the central government, no plan to quit making money out of nothing, no plan to reduce the debt, no plan to disburse the power of government back to the people, and no plan to start any plans.
Question: Why does Market Watch think government debt is wrong? The government points out that we owe it to ourselves, so what's the big deal?
Answer: The government doesn't want to cut back on expenditures because that would mean a reduction in the size and power of government. Here's a statistic that is amazing and was printed in USA Today in 2005. The average household's share of the government's debt was $473,500 in 2005. According to several new studies, the most prominent of which was cited in last month's Market Watch by Professor Warren Koplikoff (Boston University), each household's share of the public debt now is probably not the $473,500 shown in 2005 by USA Today, but rather, at least 5 times that. These are astounding numbers. To think that each family in this country is obligated for $2 million, plus, of U. S. government debt and obligations is absurd. It's not only unacceptable, it's untenable and these obligations can never be met.
Question: If obligations cannot be met, then the entity that cannot meet the obligations is bankrupt. Is that what Market Watch is suggesting?
Answer: Yes. Our Federal Reserve System is bankrupt, and hence, the federal government is bankrupt. They have ruined the money of this country. The dollar, once a standard of excellence, is now being rejected around the world in settlements of debt. Since the founding of the Fed in 1913, the dollar has lost more than 98% of its purchasing power. Yet, for 125 years, from the coinage act of 1792, until the founding of the Fed in 1913, the U. S. was on the gold and silver standard (commodity money) required by The Constitution. Consequently, the dollar was stable at $20 an ounce of gold for 125 years. Imagine our Founding Fathers being bright enough, and well educated enough, to write a document that would lead to stable purchasing power for 125 years! Imagine, also, the price of gold moving to $1400 an ounce, from $20 an ounce in less than 100 years. How can this be allowed by educated people?
Question: What does Market Watch suggest?
Answer: Patience can yield great opportunities for investment. Build cash. Use it to pay off debt (when rates will go up), or buy gold and silver. Real estate is cheap. But the stock market remains overpriced. The 30 year bull market in bonds is over as interest rates begin to increase, and both the stock and bond markets are priced to cause investors to loose money.
Conclusion:
What moves the stock and bond markets up and down is supply and demand. If demand exceeds the supply of stocks and bonds, then those markets will increase in value, and similarly, if supply exceeds demand, price will go down. Current increases in stock and bond market prices are a result of cash (demand) exceeding supply. When "stimulus funds" run out, there will be no cash to support the markets at these levels. Inflation will set in and cause interest rates to increase. Interest rate increases cause bond prices to decrease. As interest rates increase, banks will see their notes paid off by lenders who have been accumulating cash and who do not want to pay the higher interest rates. The wise and judicious investor will ignore the "cash is trash" talk and maintain healthy balances of liquidity.
Caveat Emptor
George Rauch
December 19, 2010
