Apr 27, 2009

Death Of The Dollar

    "You cannot legislate the poor into freedom by legislating the wealthy out of freedom. 
    What one person receives without working for, another person must work for without receiving. The government cannot give to anybody anything that the government does not first take from somebody else. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that, my dear friend, is about the end of any nation. You cannot multiply wealth by dividing it."( - Someone from the austrian school, I can't remember, Perhaps Ludwig Von Mises??)
Oh so true, the current environement are  the bright and happy days relative to what lies in front of us. Though I have tried to think of all the various ways the dollar could survive after the inflation hits, I have come only to one conclusion: it can't!!. A friend broughht up a great idea to solve the debt problem we have with our creditor nations, but the is insignificant and goes far beyond that issue. Yes we could apease our creditors by selling them government land (which could easily cover the 13+ trillion, but there there is no way to resolve the exponetial increase in the money supply since last oct let alone that enormous increase dated back to 1998. 
The most troubling thing is the dramatic increase in deficit spending and the 50T+ of unfunded liabilities we will have in coming the not to distant future. Deficit spending up to date is about 2.9T for 2009 as opposed to 500 billion a year ago. This number is arrived at by adding CBO baseline, Tarp, Stimulus, healthcare, Amt and war (defense).

Past Hyperinflations (Austria, Hungary, Poland, Germany) all had one thing in common: Deficit % of Expenditures hit 50%. These averaged 58% and the next year after crossing this threshold, Inflation averaged 2179%. Guess where we are today? I would have guessed somewhere between 15-20%. Unfortunately as of 2009 we hit 44%!!. Of course I don't expect inflation to hit 1000% next year, mostly due to the preceding countries included exogenous factors. Instead I think this will be identical to pre-revolutionary france, where prices went  up at an accelerarating rate for 5 years until hyperinflation. I'm not a soothsayer, so I'm not saying exacly 5 years but expected it to happen around that time period give or take 2 years or so. But hey, maybe the government will stop running the printing presses 24/7, bailing everyone and their grandmother out, stop deficit spending, let banks fail, Get rid of social security, healthcare,  abolish the fed and return to hard money. I know there are those who argue for healthcare like it is their god given right but lets breakdown the real costs:
Helathcare costs more than housing making up 16.5% of GDP while housing makes up 10.5%. This was measured in Q3 2006. 2007 saw healthcare rise to 18.8%.. The estimated projections see it rising to 22% by 2011 and 30% between 2018-2022. Thats enough of the healthcare talk, as it is often a touchy subject. Bailouts... that's something most everyone agrees is bad: It has reached 11 trillion if you exclude tarp funds paid back but is more than negated by the money wells fargo and others are asking for and will get without a question.

What is most troubling to me is not just the capital injections of more than 800 billion of total reserves throughout the banking system via the federal reserve, but the amount of excess reserves in the system. Obviously some will be used to cover loan losses (which could be as much as 90% inflationary for those familiar with how banks operate) and the rest for new loans  which is the governments strategy to "stimulate" , whatever that means. This will likely be incredibly destructive because any new loans made will have a very high default rate as the economy continues to deepen and more jobs  lost. 

To show the magnitude of this situation, one needs to look only at the ratio of excess reserves to industrial production. This ratio has been at or under .2 since 1943 and peaking before that in 1938 at .8. This time around, this ratio is 35x times larger than the historical average , currently 7.22. 
This is a depressing enough post as it is but I wish to add one more thing. I compile the monetary aggregate (M3) the fed discountinued in 96 (for obvious reasons). As of the first week of April M3= 14.651 Trillion! which excludes the majority of the planned 300 billion dollars worth of Treausry purchases and also assumes those CDS' (1.3 trillion or so) are worth 100% instead of the realistic value of 1%-10%. Is this alot? well in 1990 M3= about 4.2 trillion, So yes I would say so.

1 comment:

  1. You are correct, send this to every paper, TV News channel and put it on GOOGLE and YAHOO for a week, first page, then we can riot like the citizens in Eqypt. The States/ Cities/ personal debt, they are all in the same situation as the u.s. gov't. Buy commidities, gold and silver and head for Equador, Belize or Viet Nam again (the war is over there, it's just starting here)T.P.