-By Dan Scott
Now that Pelosi, Obama and Reid got their so-called Economic Recovery Plan passed and signed into law what’s an investor to do? That depends upon whether you think the plan will work or not. If you don’t believe it will work as advertised then you know the economy is about to enter a period of high unemployment and high inflation in what I would call the Carter follies redux. At this point even some in the liberal MSM don’t believe it will either.
Analysis: Stimulus won’t jump-start economy By Jeannine Aversa / Associated Press
No, the big stimulus plan won’t “save or create 3.5 million jobs,” as the president and congressional Democrats claim — at least not this year.
The economy will remain feeble through 2009, analysts warn, and businesses will keep shedding jobs, though not as many as they would have without the $789 billion boost._Advertisement
The stimulus agreement, heading for final votes in the next day or so, goes to the heart of President Barrack Obama’s strategy to revive the economy and will go far in shaping how Americans view his economic leadership.
What it won’t do is quickly snap the country out of the painful recession, now in its second year.
It should provide some relief, economists say, though some argue it won’t plow enough money into the economy to prop it up.
So already the liberals are back peddling by blaming Bush for a year long recession, when in fact it’s only been 6 months or 2 quarters of negative GDP, they admit their pump priming of the economy with deficit spending isn’t going to work as advertised.
The Real Stimulus Burden
The nearby chart shows how the bill will increase the 2009 budget deficit, which is already the largest in modern history. Perhaps you recall the deficit wails from the Reagan years, but the peak deficit was only 6% of GDP in 1983. In the Clinton years we were told taxes had to rise to reduce a deficit of merely 3.9% of GDP. CBO estimates the 2009 deficit will reach 8.3% of the economy, not including the stimulus or bank bailout cash. Toss in those, and analysts at the Strategas Group estimate the deficit could hit nearly $2 trillion, or 13.5% of the U.S. economy.
There are other nauseating tidbits in the article as well, so be warned if you read the whole thing. The projected $2 trillion federal deficit for 2009 represents an ($2T/$10.8T) 18.5% INCREASE in the National Debt in just ONE year. Now I ask you, is there $2 trillion in the entire world available to lend to the US government in just one year?
Let me pose another question, what happens if no one wants to buy those bonds to enable Congress to deficit spend? The Federal Reserve has to buy those bonds with freshly printed money. How will this affect the exchange rates and therefore the price of oil? Because I assume the oil producers are not going to stand by while their product value is lowered via exchange rates by leaving oil denominated in dollars. They will move more to the Euro and Yen in order to support the value of oil. Once this happens, the value of the dollar will plunge further as a glut of dollars will be on the market, a currency which no one will want to lose their principal. As the dollar devalues what foreigner would want to hold US bonds, denominated in US dollars? For them it is a double whammy, lose via the exchange rate and lose principal via an inevitable rise in interest rates since the Fed and Treasury will no longer be able to control the secondary market sales driven by deep discounts to get out of bonds before they lose even more. Foreigners investing in US bonds should expect to lose up to 50% of their principal when these two things happen.
Is this scenario possible? Let’s look at what’s happening in the market. Germany failed for the second time to sell it’s bonds, indicating there are few buyers of government bonds, which implies the Fed must buy US bonds when the US Treasury auctions them. In fact, the Fed has been buying US bonds recently. The Chinese, as the one of thee largest buyers of US bonds, may well be forced to reconsider their position of buying only to lose more money in doing so, they are extremely unhappy at the fiscal irresponsibility of Congress.
Mr Luo, whose English tends toward the colloquial, added: “We hate you guys. Once you start issuing $1 trillion-$2 trillion [$1,000bn-$2,000bn] . . .we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.”
At some point the Chinese will come to the conclusion that losing 50% of their money buying US bonds is not the only game in town. In terms of devaluing the dollar how can one estimate the inflationary impact of so much money over a short period of time? I assume a quick increase in the money supply would be reflected in the foreign exchange rates. If money creation only proceeded at the rate of GDP growth, if all things are equal the value of dollar would not change. If money creation exceeds GDP growth, the dollar must devalue. However all things are not equal, if the GDP shrinks in theory one can increase the money supply at twice the rate of deflation to hold the value steady, i.e. not strengthening the dollar to keep it neutral.
If the annual US GDP is $13 trillion and the government increases the money supply by $2 trillion in one year then rate of inflation roughly speaking will be (2/13) 15.4%. Why would the government increase the money supply? If the Treasury can not find buyers for their bonds, the Fed as purchaser of last resort must do so. If the
CPI-W (conservatively speaking) is -0.5% from Dec 07 to Dec 08. Let’s assume the Fed is forced to buy all $2 trillion this year. That means we should see inflation this year ramping up to (15.4 – 1) roughly 14.4% by December 2009.
Let’s ball park estimate the impact on exchange rates. There is about $829 billion dollars of U.S. currency in circulation; the majority is held outside the United States. ($2 trillion+$829 billion /$829 billion) is a 341% increase. We should expect to see the value of the dollar drop ($829/($2 trillion + $829 billion) to 29% of it’s value, basically a 2/3rds drop. So if the Euro (assuming they don’t massively print money also) equals a $1.28 now, then the dollar would devalue to $3.80 to the Euro or so. By implication due to exchange rates, the price of oil will triple to more than a $100/barrel since the oil producers will immediately move to price all oil trades in Euros or Yen to preserve it’s value. That is where hyper-inflation and depression occur at the same time.
Now it’s time to start discussing investing in a high unemployment and high inflation environment. So where to park my money? Any suggestions? Gold bullion, real estate, stock market, anything that might hold it’s relative value by keeping pace with inflation. Let’s look at the options.
Personally, I think it is already too late to be investing in gold bullion. The price of gold is soaring indicating a bubble is being created. Bubbles are like ponzi schemes, the last to buy is the one holding the bag when the bubble bursts. Plus if history is repeating itself you will only be holding that gold for a very short time, Obama like FDR in 1933 may make it illegal to own gold bullion. Remember Obama believes FDR’s policies were successful, they weren’t financially but certainly politically. There was a 20 year prison sentence for those who didn’t give up their gold. Not until Nixon in 1975 did Americans regain this right. If you do buy gold bullion you may want to consider holding it outside the US in a place like Switzerland.
If you are one to hold most of your assets in CDs and bonds, keep your maturity values very short on the order of 3 to 6 months because when the hyper-inflation episode begins those with long term CDs and bonds will actually be losing money. Those with bonds will see a major loss of principal since their low interest instruments will have to have their interest rate adjusted to the market.
For those with the financial means, investing in real estate may be a safe haven to hold the value of your money, however this is fraught with extreme risk. Buying houses now while they are cheap on the surface is a good idea except a few things. Property taxes, maintenance and insurance payments will be a cost center unless you either have a renter, a secure job or have the deep pockets to wait five years or so until the housing market recovers. There is about a one year inventory of houses on the market, unless a whole lot of people buy houses this situation will take years to balance out. The other alternative is to refinance your existing loans taking advantage of the low current rates, when hyper-inflation kicks in you actually will be making money off the difference between inflation and the mortgage interest, i.e. home equity. If you cannot refinance to a lower interest rate due to your credit rating consider paying down your high interest loan IF your home equity exceeds the market price of the property. The point here is to park your money in something you are not likely going to lose and in five years will get your money back. The good deal about home ownership is up to $250,000 of your capital gain will be exempt from income tax. When you sell the property, you don’t have to buy up so you can have cash gain available for another investment later.
Buying REITs (Real Estate Investment Trusts) is also a risky proposition since commercial properties are dependent upon leases by businesses. The other shoe may be ready to drop in the commercial lending market as more small businesses cut costs or go out of business. Even those who do their homework may lose their shirts on that avenue of investment as what happened during the S&L debacle back in the early 1990s. Those who profited were the ones who bought up the carcasses.
Stocks maybe the way to go if you believe the bottom has been reached here at 7600 on the Dow. PE (price to earnings ratio) multiples are looking good, but that’s completely dependent on what you believe is the minimum consumer spending. If consumer spending continues to drop or not reach bottom, the price of stock will continue to drop. Generally, sticking with indexes is the most diversified and safest approach to investing in stock.
On a sector basis, given the government’s subsidies and tax breaks to alternative energy, a potentially risky route to follow are companies who will benefit directly from feeding at the government trough. There is long-term risk since what is fashionable today may not be in five years. Find out what companies Pelosi, Obama and Reid (including Schumer, Rangel, Dodd and Frank) are investing in these days since they are not going do anything that hurts their personal net worth. Pelosi has repeatedly introduced or voted on legislation that potentially benefited her and her husband’s investments. Contrary to popular belief, Democrats are not Socialists, they are a group of self-serving politicians who take maximum advantage of every situation. Socialism is merely a ruse for the public to rationalize policies that hurt everyone else but themselves. They in effect are a very successful organized crime syndicate.
Since Obama has promised to cut the defense budget by 10%, defense contractors may not be the investment of choice. Health Care companies will also be a dicey proposition if universal health care comes into being. Profits will be squeezed by ham handed government meddling demanding ever-decreasing reimbursement to hold the line on exploding federal outlays. See California and Massachusetts for a heads up on how well this policy is going to work. The entertainment sector did well during the Great Depression as people needed an escape outlet from the dismal atmosphere. However, be careful, Hollywood these days has had a lot of bombs at the box office due to engaging in liberal propagandizing. Certainly, do not invest in the newspaper industry as they are on their death knell due their liberal propagandizing.
All in all, choose your poison wisely.
References
Highest Paid Investment Adviser: US Faces-Hyperinflation or Depression
http://www.dreamteammoney.com/index.php?showtopic=44214
Hyper Inflation Where, Why and When
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Dan Scott calls himself a “Member of the Global Capitalist Cabal preaching Capitalism and personal responsibility as the economic solution to world poverty.” He is also a member of the 14th Amendment Society — victimhood is a liberal code word for denying the civil rights of others. He is also a proud member of the Global Warming Denier Cabal, insisting that facts not agendas determine the truth.
Dan can be seen on the web at http://www.geocities.com/fightbigotry2002/ as well as http://www.geocities.com/dscott8186/saidwebpage.htm, And can be reached for comments at dscott8186@yahoo.com.
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