Tag Archives: inflation

Russia, Oil, & The Utah Sound Money Act & Why It Matters

Theresa FlemingIt’s hard to overstate the concern that American families have regarding the economy, but one thing we all need to pay more attention to is the value of the U.S dollar. Imagine, if you will, what would happen to your families’ savings should the U.S. dollar truly crash, especially when unemployment and underemployment are both high. Families, if they can, are already desperately trying to save as much money as possible. But what if the money families have so carefully saved for a rainy day could no longer buy even the basic necessities? This is the reason behind bills such as the Utah Sound Money Act.

Although to some it may seem extreme, we do need to prepare for the possibility that there may come a day that the dollar’s buying power will be drastically reduced. And the truth is, Utah is not alone in their concern. According to State Representative Galvez, House sponsor of the bill, 11 states have either passed currency related legislation or have legislation in process. Other states passing or considering currency related legislation include: Montana, Missouri, Colorado, Idaho, Indiana, Missouri, Montana, New Hampshire, South Carolina, Tennessee, Vermont, Virginia, Washington…

The truth is that with the decline in the value of the dollar and the rise of U.S. debt,more and more countries are becoming concerned about whether the U.S. dollar is a good investment. And unfortunately, Washington’s printing of more dollars will not only not solve the problem , it may quicken the devaluing of the dollar.

For those who do not believe that the U.S. dollar may be in trouble, please consider the following: according to The China Daily, China and Russia have used a number of currencies in the past, but especially U S Dollars for “bilateral trades”. However according to a report in The China Daily in November 2010, “China and Russia have decided to renounce the US dollar and resort to using their own currencies for bilateral trade”. The formal announcement was made by Premier Wen Jiabao and Russian Vladimir Putin.

PutinIn addition, Russia has also been reaching out to Europe. In Putin’s appearance in front of top German industrialists at a business forum in Berlin, he called for closer economic ties between Russia and the European Union. In his speech he outlined his vision for the future and his desire to create a Free European – Russian Trade Zone. However, the most critical part of his speech came when he showed what his true intentions may be towards the U.S. In his speech Putin said, that the “Euro is slightly fluctuating, but as a whole it’s a good , stable world currency that should take its rightful position as the world reserve currency. I think over the last 10 years there has been one wrong aspect that we should definitely eliminate. It’s the excessive monopoly of the dollar as the sole world reserve currency. This is certainly something negative.”

However, whether the dollar remains the world reserve currency is not the only concern at hand. As Senate Majority Leader Scott Jenkins said, a more immediate concern may be the efforts that are being made to decouple the dollar from oil. If that occurs, efforts such as the Utah Sound Money Act may well turn out to produce the solution that we need.

But there is some good news as well…

While news reports by their very nature tend to focus on the negative, there are public servants working hard to find a solution to the problems that we face. Utah Senate Majority Leader Scott Jenkins and State Representative Brad Galvez are working hard to find a solution to protect us, and our children, from the potential fall of the US dollar. As Senate Majority Leader Scott Jenkins said, “inflation is hurting the ability of families to purchase the items that they need. With the buying power of the dollar going down, if we do not act the purchasing power of the American family will continue to suffer. We must begin to study potential solutions and we must act.”

And make no mistake, we can no longer afford to sit on the sidelines and hope that someone else finds the answer. As a country we need elected officials who are willing to act and willing to do the research needed to find the best possible way to protect American families and that is why the Utah Sound Money Act and efforts like it are so very important.

As for the legislation itself, The Utah Sound Money Act will not only allow gold and silver coins issued by the Federal government to be used as “legal tender” in Utah, it will exempt them from capital gains taxes. Although the United States Constitution already allows states this freedom, the Utah Sound Money Act would codify this right in Utah law. The law would not mandate that the coins be used, but simply allows people the choice. The legislation also creates a panel to study how Utah families might use the alternative “legal tender” system for every day purchases such as food or medicine. Since the value of gold and silver constantly fluctuates, a system would have to be designed that would provide a practical way for Utah families to use the new system for daily purchases, which is why the panel is being formed.

As for Utah, there’s a reason Americans may want to start taking a look at how they operate and the recommendations made by their state’s leaders. Utah has been named, “the best managed state in the nation and has been salt lake cityrepeatedly ranked as one of the best states to do business”. And it appears Forbes agree, for in their 2010 look at the Best States For Business, Utah was ranked number one when it comes to fostering growth! Check back for more information on exactly how Utah became the “best managed state in the nation” and what public servants such as Senate Majority Leader Scott Jenkins and State Representative Brad Galvez are doing that is making such a huge difference for their state!

Change is always hard, and sometimes scary, but Utah’s system does not seek to replace our current monetary system. However, what it does do is start the process of designing, and planning for a possibly implementation of a secure money system should the dollar fall. And while, as State Representative Galvaz said, we may not like the changes that have occurred in our economy, our job as parents, and their jobs as legislators, is to do our very best to give our children the best possible opportunities to succeed in the world in which we live. And while many of us, including myself, wish that we could return to a simpler time, the fact is, right now, we can’t. But what we can do, is work together to find the solutions that our children will need, no matter what crisis we face.


Investors Turning Away from U.S. Debt Over Record Deficits

The proverbial chickens.. have come home to poop –  or roost if you prefer. The world’s largest bond investment fund, Pimco’s Total Return Fund removed U.S. government debt from its holdings:

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., eliminated government-related debt from his flagship fund last month as the U.S. projected record budget deficits.[1]

As demand for Treasuries falls, so does the yield. As the yield drops, the bonds themselves become even less attractive.

Bonds are unattractive for two major reasons, the amount of debt we have/will take on and economic outlook.

Debt and Deficits

The fiscal track that four years of liberal leadership in Congress have provided is one of rapidly rising deficits and an unmanageable national debt.

America’s National Debt rose by another $63.7 billion dollars in the month of February, according to the Bureau of Public Debt*. That currently leaves us with a grand total of $14.195 trillions of debt as of March 1st, 2011.[2]

Institutional investors look at debt to income ratios when purchasing investments. For a government, gross domestic product (GDP) is used as income. Congress holds the purse strings of government spending. The chart below illustrates how rapidly spending has grown under the recent Democrat congress and why investors are starting to balk at the United States as a solid investment

debt-to-gdp 2002-2012

20 Years of Debt-to-GDP (3)

Economic Outlook

The economic outlook for the U.S. can be viewed through a few lenses: Consumer confidence (willingness to spend), spending power (ability to spend),

Are Americans Willing to Spend

As America’s economy is largely driven by consumption, consumer confidence is a key forward-looking indicator.

The Rasmussen Consumer Index, which measures the economic confidence of consumers on a daily basis, fell more than two points on Thursday to 75.4, the lowest level measured since September 2010.[4]

Gallup also released a poll that shows that U.S. consumers expect to have less money to spend due to anticipated fuel price increases.

How high do you think the price of a gallon of gasoline will go in the area where you live this year? March 2011

As Americans lose faith in the recovery, they will start holding on to their money instead of putting it to work in the economy. This will impact business investment and hiring.

Will Americans be Able to Spend

If the recovery continues as a jobless one, there will be no increase in the ability of Americans to spend. If they aren’t working and earning, they cannot spend. Last week’s jobless numbers rose much more than expected. – up 26,000. That’s almost 30,000 more people that have filed for unemployment benefits for the first time. That doesn’t even take into account those that are still on the government roles or have already run out of benefits.

Gas prices are skyrocketing. Some predictions have gas hitting $5 by labor day and $6 by the end of the year. That will more than double the amount of money U.S. families have to spend on getting to and from work from incomes that are largely static. This will drive consumers to focus on things they need to buy and hold off on less necessary purchases. As a Weekly Stadard post put it, “..January of 2009. Hope was in the air, but more importantly, gas was under two dollars a gallon. Since then gas prices, have gone up 67 percent and it’s an ominously upward trend.”

Oil prices also affect other consumer goods as fertilizers used in farming require petroleum distillates, tractors require fuel, trucks need fuel to take the food to market and global food prices were already rising before the energy crisis that is in play.

Commodity prices have been going through the roof for months now. Cotton, lead, copper, oil, gold, silver .. you name it. This will affect the cost of tires, plastics, electronics, jewelry, clothing.. everything.

Lastly, QE2: the Federal Reserve’s strategy to push down long-term interest rates by buying up to $600 billion in U.S. Treasuries (yes, the same investment regular investors are now shedding). If you combine this with over a trillion dollars that was used to by mortgage-backed securities, a ridiculous sum of money has been pumped into the U.S. economy. More dollars chasing fewer goods = inflation.

Some or all of these pressures could create inflation, perhaps on a scale not see since the last truly progressive U.S. president, Jimmy Carter.

The Sum of it All

Investors are increasingly turning their noses up at U.S. Treasury debt. That will ultimately mean that interest rates will have to increase to offer better yields to investors. Those increased borrowing costs will cause businesses to either raise the cost of their goods (inflation) or halt investment/hiring (unemployment). Neither are positive outcomes to our government’s fiscal irresponsibility.

[1] – http://www.bloomberg.com/news/2011-03-09/gross-drops-government-debt-from-pimco-s-flagship-fund-zero-hedge-reports.html
[2]- http://conservativedailynews.com/2011/03/federal-debt-report-feb-2011/
[3] – Chart from usgovernmentspending.com overlays from ConservativeDailyNews.com
[4] – http://www.rasmussenreports.com/public_content/business/indexes/

Here are Your Hope N Change Numbers after 2 years: You do the math.

  I recently recieved an email today that pretty much sums up our country’s status in one simple chart.
(Special thanks to my brother Bernie for the email) 
After two years of Obama…


January 2009
% chg Source
Avg. retail price/gallon gas in U.S.
Crude oil, European Brent (barrel)
Crude oil, West TX Inter. (barrel)
Gold: London (per troy oz.)
Corn, No.2 yellow, Central IL
Soybeans, No. 1 yellow, IL
Sugar, cane, raw, world, lb. fob
Unemployment rate, non-farm, overall
Unemployment rate, blacks
Number of unemployed
Number of fed. employees, ex. military (curr = 12/10 prelim)
Real median household income (2008 v 2009)
Number of food stamp recipients (curr = 10/10)
Number of unemployment benefit recipients (curr = 12/10)
Number of long-term unemployed
Poverty rate, individuals (2008 v 2009)
People in poverty in U.S. (2008 v 2009)
U.S. rank in Economic Freedom World Rankings
Present Situation Index (curr = 12/10)
Failed banks (curr = 2010 + 2011 to date)
U.S. dollar versus Japanese yen exchange rate
U.S. money supply, M1, in billions (curr = 12/10 prelim)
U.S. money supply, M2, in billions (curr = 12/10 prelim)
National debt, in trillions
Just take this last item:  In the last two years we have accumulated national debt at a rate more than 27 times as fast as during the 
rest of our entire nation’s history.  Over 27 times as fast.  Metaphorically speaking, if you are driving in the right lane doing 65 MPH 
and a car rockets past you in the left lane. 27 times faster, it would be doing 7,555 MPH! 
(1) U.S. Energy Information Administration; (2) Wall Street Journal; (3) Bureau of Labor Statistics; (4) Census Bureau; (5) USDA; 
(6) U.S. Dept. of Labor; (7) FHFA; (8) Standard & Poor’s/Case-Shiller; (9) RealtyTrac; (10) Heritage Foundation and WSJ; (11) 
The Conference Board; (12) FDIC; (13) Federal Reserve; (14) U.S. Treasury
   I am a  firm believer in the saying that numbers do not lie, folks. We are in big trouble here and Obama’s recent fake budget proposal could very well finish off Americas economy. Thus the importance of supporting our representatives in Congress and our State Governors, in their quest to install some fiscal sanity into our country today.

Highest Ever Gas Prices for January

American Automobile AssociationAURORA, Ill., Jan. 18, 2011 /PRNewswire/ — AAA Chicago’s most recent Fuel Gauge Report estimates that in Illinois, regular unleaded gasoline has increased $.16 during the past month, forecasting an average cost of $3.22 per gallon for the month of January, which is $.38 higher per gallon than last year.

In northern Indiana, gas prices average $3.09, which is up 16 cents from December 2010 and up $.32 from January 2010. Both Illinois and northern Indiana January averages represent the highest prices ever for the start of a new year.

“Oil prices are trading at nearly $90 per barrel, which is having an enormous effect on the price of gasoline at the pump,” said Beth Mosher, director of public affairs for AAA Chicago. “Unfortunately, at least in the near-term, consumers should get used to paying these high prices at the pump.”

In Cook County, Ill., self-serve regular unleaded gasoline averages $3.37, which is up $.18 from last month and $.41 higher than last year’s price-per-gallon.
In DuPage County, Ill., self-serve regular unleaded gasoline averages $3.25 per gallon, which is a 15-cent increase from December and up 39 cents from last year.
In Kane County, Ill., self-serve regular unleaded gasoline averages $3.22 per gallon, which is 16 cents higher compared to last month and $.38 higher than January 2010’s price.
In Lake County, Ill., self-serve regular unleaded gasoline averages $3.20 per gallon, which is 17 cents higher than last month and up by $.37 compared to this time last year.
In McHenry County, Ill., self-serve regular unleaded gasoline averages $3.20 per gallon, which is 17 cents higher than last month’s average and $.35 higher than January 2010’s price.
In Will County, Ill., self-serve regular unleaded gasoline averages $3.23 per gallon, which is 16 cents higher compared to last month and $.39 higher compared to last year.
In Champaign County, Ill., self-serve regular unleaded gasoline averages $3.15 per gallon, an increase of 19 cents from December and an increase of $.38 from last year.
In McLean County, Ill., self-serve regular unleaded gasoline averages $3.11 per gallon, which is 18 cents higher than last month and $.38 higher than last year.
In Peoria County, Ill., self-serve regular unleaded gasoline averages $3.14 per gallon, which is up $.19 compared to last month and up $.39 from January 2010.
In Sangamon County, Ill., self-serve regular unleaded gasoline averages $3.12 per gallon, which is 19 cents higher than last month and $.43 higher than last year.
In Winnebago County, Ill., self-serve regular unleaded gasoline averages $3.12 per gallon, an increase of 15 cents from December and $.33 higher than January 2010.
In Allen County, Ind., self-serve regular unleaded gasoline averages $3.11 per gallon, which is an increase of 17 cents from last month and $.34 higher than January 2010’s price.
In Lake County, Ind., self-serve regular unleaded gasoline averages $3.09 per gallon, a 16-cent increase from December’s average and a $.32 increase from a year ago.
In Porter County, Ind., self-serve regular unleaded gasoline averages $3.08 per gallon, which is 16 cents higher than last month and $.32 higher than last year.
In St. Joseph County, Ind., self-serve regular unleaded gasoline averages $3.14 per gallon, which is 20 cents higher compared to last month and $.39 higher compared to last year.

Fuel prices are posted on-line at www.fuelgaugereport.com, which updates prices daily for unleaded, diesel and E85 blends of fuel.



Web Site: http://www.fuelgaugereport.com

Deflation or Inflation? Yes

Since the beginning of the “Great Recession” that Americans still find themselves in, there have been prognostications of incredible inflation while other “experts” claim that crippling deflation would be the necessary outcome.  Could they both be right?

Perhaps – there are two major forces at play in our economy right now: price inflation and income deflation.

Price inflation

Wheat Prices

Commodities are going through the roof.  Oil is above $90 a barrel, corn is $6.07 per bushel, March wheat got as high as $8.05 a bushel this week soybeans, cotton, sugar .. you name it.

It’s not just food and clothing.  Copper, gold, silver are also much higher recently.  All of these commodities are building blocks for the food we eat, the clothes we wear and consumer items Americans need.

Oil prices hit twice as hard.  Not only is petroleum a raw material for plastics, medicines, food and clothing, but it is also used to fuel the trucks, trains, planes and ships that transport those goods to stores.

Now that the government is pushing to raise the amount of ethanol in gasoline, rising corn prices will also hit Americans in two places.  As a component of E10/E15/E85, it will increase the price at the pump.  As more corn is turned into fuel, the supply-demand curve will steepen and everything that has corn as an input will see raw material prices increase even faster.

Wage/Income Deflation

The American job market has not recovered from the recession and is likely to take several years to do so.  As The Wall Street Journal reports, this recession is already longer than the last wage period where wage deflation took hold.

The only other downturn since the Depression to see similarly large wage cuts was the 1981-82 recession. But the latest downturn is already eclipsing that one. Unemployment has stood above 9% for 20 straight months—longer than the early 1980s stretch—and is likely to remain above that level for most of 2011, putting downward pressure on wages.

With millions more workers seeking jobs than there are available, employers have gained a stronger position in pay negotiations.  The job market is incredibly competitive allowing employers to cherry pick the best talent for the salary dollar.

Another downward wage pressure is that employers do not have to give big salary increases or bonuses to keep talented employees.  A tough job market means fewer employees will be willing to leave and if they do, there is an ample pool of workers ready to take their place – perhaps at a reduced rate.

The Journal post shows evidence that these dynamics are cutting wages for American workers.

Economists had wondered how far this dynamic would go in this recession, and now the numbers are starting to show it: Between 2007 and 2009, more than half the full-time workers who lost jobs that they had held for at least three years and then found new full-time work by early last year reported wage declines, according to the Labor Department. Thirty-six percent reported the new job paid at least 20% less than the one they lost.

Prices Higher and Incomes lower – Inflation or Deflation?

Both.  Production costs are going up, but consumer buying power is falling off.

Consumers have to pay home heating costs, put gas in their cars, buy clothes and food.  If all of those things cost more, and consumers are making less money .. there is less consumer potential in the market place.  Welcome back the nemesis from the late 1970’s and early 1980’s: stagflation.

Remember the “misery index” from the 1976 and 1980 Presidential election?  The misery index is computed by adding inflation to unemployment.  If both are high, a stagnant economy and high inflation are present.  Stuff gets more expensive to make, but no one can afford it so the economy stagnates.

Jimmy Carter holds the current record of 21.98, but Obama’s current term is on a run taking the misery index from 7.73 at the beginning of his Presidency to 10.94 in November.  The current numbers are deceptively low for two reasons: the federal reserve inflation rate and bureau of labor’s unemployment numbers aren’t telling the whole story.

Anyone that has been to the grocery store or filled their car up with gas knows that things are much more expensive lately.  Because the government’s inflation measure does not include food and energy, it doesn’t take into account the very things that Americans simply must buy.  The incredibly low inflation rate reported by the fed is a sham and does not truthfully report the increase in living costs that Americans face.

The unemployment numbers are also portraying a false positive.  BLS statistics do not include those that have simply given up looking for work or have run out of benefits.  Unemployment is a measure of first time applications.  After 20+ months, not many first timers left to apply.  As this article from the Associated Press states, 9.4 is not as good a number as the President would have America believe (emphasis mine).

The unemployment rate did come down, to 9.4 percent from 9.8, but that was partly because people gave up looking for work.


All told, employers added 1.1 million jobs in 2010, or about 94,000 a month. The nation still has 7.2 million fewer jobs today than it did in December 2007, when the recession began.

Producers have been eating the increasing costs of their raw materials and transportation.  That practice is ending as margins have been squeezed as tightly as possible.  The cost to the consumer is going up, but the consumer now has less money to spend.  Stagflation, again..  oddly enough, under another progressive Democrat President that has been listening to Paul Volcker for economic advice.  Same players, same results.

Economist Survey Finds Slow Growth Ahead for 2011

BNA LOGOARLINGTON, Va., Jan. 3, 2011 /PRNewswire-USNewswire/ — The recovery will pick up steam in 2011, but growth will remain moderate, according to the consensus forecast of 25 economists surveyed for legal and business publisher BNA’s annual outlook on the U.S. and international economy.

Both inflation and the Federal Reserve’s target interest rate are expected to remain low. A self-sustaining expansion will hinge on increased job growth, consumer spending, business investment, and exports, as government stimulus continues to fade.

U.S. Economy

  • The 18-month-old recovery will gain strength in 2011, although the pace of growth will remain moderate compared with that of prior rebounds.
  • Key underpinnings of growth include business and consumer spending, U.S. exports, and increased hiring; with additional support provided by the federal tax cut package enacted at the end of 2010.
  • Major risks to the economy could develop if energy prices jump, business remain reluctant to add workers, or the European debt crisis becomes widespread.

Labor Markets

  • Employment gains will average 156,000 jobs per month in the first six months of 2011, accelerating to 193,000 jobs per month in the second half.
  • The unemployment rate will decline gradually during the year but remain high, averaging 9.5 percent in the first half and 9.2 percent in the second half.
  • Private sector workers’ total hourly compensation will grow 2.2 percent in 2011, up from a 2.0 percent hike in 2010, as of the third quarter.

Monetary Policy

  • Inflation is expected to stay tame, well below the Federal Reserve’s preferred rate of about 2 percent.
  • The Fed is expected to complete its planned purchase of $600 billion of Treasury debt by June 30, but is unlikely to expand the program.
  • The central bank is likely to maintain its historically low, near-zero federal funds rate target for all of 2011.

World Economy

  • The global economy is expected to continue expanding in 2011, although at a moderate pace in most countries.
  • U.S. and European economies are expected to show more momentum and build on growth in 2010.
  • Analysts see potential for surprises on upside with possibly higher than expected growth in some economies and higher inflation in emerging markets.

Dems’ Gas Tax Hike Would Fuel Tea Party Anger

The average price of a gallon of gasoline is $2.87, a number which will continue to climb as the Federal Reserve’s “quantitative easing” scheme lowers the value of the dollar. That’s a 50% increase from only two years ago; in the weeks following the presidential election, the average price was about a dollar lower. But according to some Democrats, today’s price isn’t high enough.

Senator Thomas “Tom” Carper (D-DE) wants to raise the federal gasoline tax by twenty-five cents over a period of two years, increasing the current rate—18.4 cents per gallon—by 136% to 43.4 cents per gallon. The last time the tax went up, in 1993, it was increased by a mere 4.3 cents.

Has Carper filled up recently? Does he drive? Or are his vehicles powered by pixie dust and wishes?

The senator travels to Washington, D.C., by train regularly, so perhaps he can be forgiven for apparently forgetting that most Americans are already feeling pain at the pump, and will continue to struggle to afford fuel even without a mind-blowing 136% tax increase.

Then again, he might not be forgiven. With the exceptions of Wilmington, Dover, and a handful of overdeveloped beach towns, Delaware is a rural state. It’s not uncommon for residents to drive twenty miles to work, and in many cases “work” consists of serving summer visitors, as tourism is vital to the First State’s economy. One could almost believe that Carper is intentionally trying to anger his constituents, who will have an opportunity to reelect or fire him in less than two years.

Democrats defend the proposed increase by arguing that revenue must be generated somehow, somewhere, so why not at the tens of thousands of gas stations across the United States?

Their feeble argument reflects their thorough disconnection from the people they pretend to serve. The T-E-A in Tea Party stands for “Taxed Enough Already,” and the results of the recent election can only be interpreted as an unsubtle backlash against big government and tax-and-spend policies, yet still Democrats (and, curiously, some Republicans) insist on raising revenue to fund a predetermined budget. While working families scrounge and cut back, the government spends their hard-earned wealth freely—which is one of several reasons that the country entered a recession in the first place.

The federal government does not have a revenue problem. It has a spending problem. In the real world, a household earns a certain amount, and bases its budget on that income. Why should Congress be above such a common-sense approach to handling finances?

The Democrats’ gas tax hike is not only utterly unnecessary; it will harm a vast majority of Americans, stifle the recovery and growth of businesses big and small, and possibly derail efforts to rejuvenate the economy.

Americans expect to see unfeigned efforts to cut spending, eliminate unnecessary agencies and programs, and reduce the seemingly infinite reach of the federal government, and while only an imbecile would believe that this can happen overnight, the average voter is not so naïve as to be fooled by half-hearted attempts to alter minor details of the progressive agenda, like rearranging the deck furniture on a sinking ship. Fundamental, far-reaching reform is craved, which is why a proposal to do the opposite—to raise taxes for no reason—seems more like a poorly-timed joke than a serious suggestion.

Obama said that electing Democrats would be like putting a car in “D,” to drive forward. He just neglected to mention how expensive driving would be with his party behind the wheel.

Fed Proposing Carter Era Inflationary Policy to Fix Economy

You’d think Paul Volcker was in the driver’s seat again.  While he’s no longer running the Fed, perhaps his leadership as the President’s chief economic advisor is giving him more of a voice than any of us want.

In his turn at the Fed, it was Volcker that pushed for the massive and crippling inflation that many of us remember having lived through.  Many in the Fed are considering giving that strategy another shot.

The Federal Reserve spent the past three decades getting inflation low and keeping it there. But as the U.S. economy struggles and flirts with the prospect of deflation, some central bank officials are publicly broaching a controversial idea: lifting inflation above the Fed’s informal target.

The rationale is that getting inflation up even temporarily would push “real” interest rates—nominal rates minus inflation—down, encouraging consumers and businesses to save less and to spend or invest more.[1]

Didn’t we learn anything from the move in the 80’s to end the inflationary mess?  Do they really think that consumers and businesses are holding on to their money because %1.36 interest on a CD is an amazing way to grow money?  From what planet do these ridiculous, Keynesian, demand-side retards come from?  The Fed is trying to fix a problem over which it has little power.  Consumers aren’t spending because they are worried about the jobs situation and business are holding on to extra cash because the regulatory and tax situation are still in-limbo.  Tack on Obamacare, looming EPA craziness, and an anti-business administration in Washington D.C. and you have the perfect recipe to paralyze an economy.

Don’t forget that the interest rates that the Fed controls would also push up lending rates on the second mortgages, lines of credit and credit cards that small businesses and consumers use to fund a portion of their spending.  If more money goes to paying the interest, less will go to actual spending.

The loonies in the Fed need to sit tight and we the people will help in November.  Getting a pro-business Congress that secures the Bush era tax cuts for the near future, slaps some limits on Obama’s czarist regulatory agencies, and puts real stimulative legislation in-play are the real solutions to our current economic situation.  Paying $5.00 for a loaf of bread will simply move the spending from non-essentials like T.V.s and travel to well ..bread.

[1] Wall Street Journal -“Fed Officials Mull Inflation as a Fix”http://online.wsj.com/article/SB10001424052748704689804575536391713801732.html?mod=WSJ_hpp_LEFTWhatsNewsCollection

Economy Nearing Carter-Era Catastrophe – Volcker Present Again

Jobless RecoveryInterpreting the latest unemployment report could make one’s head spin, but there is valuable information in it other than the tragic 10.2% unemployment rate and the fact that the economy has shed an additional 190,000 jobs in the last month.  Yahoo news points at a separate survey that shows 558,000 more people were unemployed in October than September.  This discrepancy is due to the fact that once someone gives up looking for a job or runs out of benefits, they are not longer technically “unemployed”.

Paul Volcker, the President’s chief economic adviser, and others are pointing to the idea that perhaps this is a jobless recovery.  To be a jobless recovery – first, one would expect a recovery.  If the economy were recovering, credit wouldn’t be shrinking, banks would be mending, and consumers would be spending.  In direct contradiction to a jobless recovery:

5 banks failed this week, 121 for this year alone:

United Commercial Bank, San Francisco, CA
Gateway Bank of St. Louis, St. Louis, MO
Prosperan Bank, Oakdale, MN
Home Federal Savings Bank, Detroit, MI
United Security Bank, Sparta, GA

Consumer spending dropped by the largest amount in nine months:
Consumer Spending Falls In September, Biggest Drop In Nine Months

Consumer confidence drops in October:
Consumer Confidence Survey

Real incomes flat and spending drops relative to inflation:

Income Flat, Spending Falls as Consumers Stay Wary

The sources vary, but are consistent.  We are not experiencing a jobless recovery, we are heading into a jobless stagnation.  This is exactly where we were during the Carter years, we are following the same actions under some of the same people, and are expecting a different result.

Many credit Volcker’s fed for ending inflation during the Reagan era by invoking a recession to reign-in out-of-control inflation.  The problem being, we don’t have any inflation.  With real-incomes dropping, consumption dissipating and credit drying-up, there is not way for producers to raise prices and expect anyone to buy much of anything.  So is the recent push of massive government spending an attempt to re-ignite inflation so that Bernanke and Volcker can work together to end it and save us all?

Carter era gas lines

Carter era gas lines

During the early 80’s, Volcker created a recession on purpose by tightening monetary policy.  His Keynesian theory then was that it was more important to reign-in inflation than save jobs.  This measure was actually needed only because of  failed Keynesian thought that continuing inflation was good for the economy.  Using monetarist policies, he corrected what Keynesian thought had brought about.

The problem now is that we don’t have job growth and we don’t have inflation.  The massive amounts of cash being poured into the economy by the Fed are not inducing price increases, it’s just watering down the money supply.  Money is being dumped into the stock market at alarming rates, mainly because there’s nowhere else for it to go.  Buying bonds is self-defeating considering the Treasury rates, investing in business at this time is suicidal.. Bernanke is using failed tactics probably at the behest of Obama’s chief adviser on the economy.  Monetary deflation with no corresponding economic inflation.

This looks like an orchestrated attempt to cause inflation so that we can do the same things that we did before.  Dump trillions into the economy and eventually producers will raise prices… well..  what if they don’t?   What if we just end up with a dept to income ratios (debt-to-GDP) rate of 70%+ (we’re at 66% by the way)?  We could easily end up spending everything that comes into this country to just service debt.  The Japanese have lost a decade of growth to thinking like this.

It’s time to cut spending, quit dumping money into the economy, let the pain correct the bubble that exists and move forward.  The Fed created the near hyper-inflationary mess that cost Carter his Presidency, made a mess during Bush’s stay, and is trying to put us in a place where they have any clue of what to do.  I am fairly certain that they don’t know how to get us to that place or a healthy economy.

While Obama is busy blaming bush, he has kept on the one person probably the most-responsible for the mess we have – Bernanke.  The President has also brought Carter’s Volcker back into the mix and Barack is egging them both on.  One can hope this is more due to nativity than purpose.

Rebuilding a House of Cards

Many of us have done it.  We’ve gathered a few decks of cards, built it up as high as we could, then watched it fall to the ground.  Of course, we would then re-build just a little higher only to have it also collapse due to its unsupportable architecture.  The only difference being that the second, larger card house, made for a much larger mess when it collapsed.

In 2009, the government is rebuilding the poorly-supported house-of-cards that caused the current recession, and of course, building it bigger.

By over-extending loans to those that could not afford them at housing prices that were unrealistic, the government put the entire economy at-risk.  In order to even come close to servicing the risky loans the government regulators forced upon bank, they had to re-package them into complicated mortgage-backed securities.

These risky loans actually only achieved one thing – creating a bubble in the housing market.  The prices of houses became artificially inflated due to unsupportable demand.  When all those loans defaulted, the financial institutions that held the notes also collapsed.  Then, a correction started to occur.  A naturally-occurring oscillation in the market, but the government could not let that happen.  Bring on… bubble part 2: going for broke.

In a post on Hot Air we see that in August, we watched as sales of existing homes drop by 2.7%.  Experts were expecting an increase.  Due to the fact that 30% of all home sales this year were by first-time home buyers, the National Association of Realtors has begun a campaign designed to influence congress to put more taxpayer subsidies into the housing market.  They correctly believe that once the $8,000-$15,000 tax credit disappears, so will the buyers.  But by stopping it, they are only delaying and magnifying the inevitable – the true correction of the market.  Those subsidies basically inflate the market by the value of the subsidy.  When the subsidy goes, those houses suddenly correct to their actual value – the government creates another wave of people who will be upside-down in their mortgages.

We can already see what happens when the government issues its short-term subsidy/stimulus programs.  Cash for clunkers artificially increased durable goods manufacturing in July.  August tells an entirely different story.  The manufacturing sector is no correcting longer and deeper than it might have if the government had just stayed out.  The 2.4% reduction in durable goods orders is right after the 4.8% increase due to the governments car program.

The FDIC is already holding dangerously small reserves and is considering borrowing from taxpayers to survive the bank bailouts that are already occurring.  The new round of defaults that are incoming will force that action.  More liquidity will be needed in the economy, more money will get “created”, and inflation will result.

In short, we have more vulnerable home owners with upside-down mortgages, a declining manufacturing sector, rising unemployment, an FDIC teetering on the brink, and the knowledge that at some point the subsidies must end or hyper-inflation will take hold.

If we put all of this together, it’s easy to see that we are rebuilding the same house of cards that got us here.  This time we’ve decided to build it higher, in the middle of a storm, with flimsy cards.  Prepare to pick-up the mess.

Adjustible loan disaster looming for California

Members of Congress, the President, and anyone else with an opinion is still blaming the recession on greedy corporations.  This article isn’t about rehashing the debate, but… what about the greedy government elitists?  What about us?

The government needs us to borrow more to feed the partial-reserve economy system we have.  To get us to borrow more, they need us buying cars and houses, and not the cheap ones.  ACORN was out rioting against banks and threatening bankers to force them to give loans to people that could not afford them… ever.  Barney Franks fought against controls in Fannie Mae and Freddie Mac that would have prevented many of the bad loans that greedy wall street corporations then had no choice but to repackage, resell and pray.  God never answered.

The government has done everything it could to keep home values at ridiculous prices and had failed.  Bubble: Part Two, has been setup by the Obama administration and Franks.  Once all the liquidity they are creating has its effect, inflation will follow.  Next will be interest rates that will make the 80’s look like a picnic.

Inflation is hard enough, but what about all those homeowners  that have adjustable loans, on property that is now mortgaged at 125% of actual house value, and they’ve been making minimum payments.  Once the interest rates skyrocket and those ARMs reset… their payments could increase by up to 75% – they will have to simply walk away and leave the bank holding the bag.

According to the most-recent “Negative Equity Data Report” from First American Core Logic, California had 43,000 home owners recently slide into negative equity positions (the house is worth less than the mortgage).  Overall, California has 723,000 properties in a “severe negative equity position” (a.k.a. in real trouble).  Nearly one-third of all mortgages in California are under-water.

18% of interest-only loans are currently 60-days and Californian banks will be stretched to cover loses of that magnitude.  There are those that argue that the ARM catastrophe isn’t that bad and that it will only affect high-end states like California and Florida.  Unfortunately, when those golden and sunshine state banks fail in record numbers…wait for it…  the FDIC is already running out of money [link].

The FDIC will be awarded larger and larger lines of credit to cover the bank failures.  That credit comes from the treasury which gets its money from – the Fed.  Of course the Fed gets money from thin air – aka “printing it”.  Interest rates will go ever higher and now middle-value loans start getting affected.

The recession is not over, and it wasn’t caused by some CEO’s greed.  It was caused by the greed of the average citizen doing what their government wanted them to do – borrow more than they could afford to pay back.  That way, we could look just like them.

FDIC May Resort to Treasury Borrowing to Avoid Collapse

On September 18th,  the FDIC announced two more bank closures that would require funds from the insurance corporation in-order-to protect depositor’s money.  This month alone there have been ten bank failures and the month isn’t over yet.  There were fifteen closures in August and  at the current pace, it’s entirely possible that September will have between 14 and 20 closures. The second quarter’s failure rate was the fastest since the savings and loan crisis in the early 1990’s, and it’s not slowing down yet.

FDIC Reserve Ratio
While the fact that banks are failing is disconcerting, the real alarm that is silently going off is that the FDIC is running out of money to cover the deposits of banking customers. The FDIC is required by law to keep an amount equal to 1.25% of covered deposits on-hand.  Currently, the insurance fund contains a ration of less than .22%.

Despite the fact that at the end of June financial institutions were forced to pay a special assessment of 5-10 basis points of deposits (not including their mandatory reserves), the drain on the the insurance fund continued.

Bank failures are cited as the major reason for the collapse of the fund, but looking ahead, there is growing concern over banks that are teetering on the edge of collapse.  The number of “problem institutions” is increasing and the rate-of-increase is also quickening. Problem institutions are not yet failed, but have financials that show that they are in-danger of failing soon. In fact, roughly 13% of banks on the problem list have historically failed.

The deposit fund lost $2.6 billion in the second quarter which leaves just over ten billion dollars available to cover deposits in failed banks. At the current rate, there is just over a year’s worth of coverage in the fund, but with the rate increasing, it is more-realistic that it will run out of money in less than a year.

The FDIC is considering tapping U.S. Treasury to re-stock the fund. On Friday, Sheila Bair, FDIC chairman, indicated that the FDIC may consider borrowing money from the Treasury when it meets at the end of this month. The FDIC could borrow up to $100 billion under the Helping Families Save Their Homes Act. Congress also has the option of allowing the FDIC to have access of up to $400 billion more by temporarily increasing the ceiling of that line-of-credit.

The only other option left to the insurer is to increase fees or levy additional assessments against financial institutions. Banks argue that this might raise the risk of failures for institutions on the edge. Those banks need access to as much liquidity as possible to work through the recession. The debate over who should replenish the fund is then between taxpayers and financial institutions.

Barney Frank, Chairman of the House Financial Services Committee believes that the FDIC should go straight for the Treasury loan. While this reduces stress on the banking industry, it is more “money from nowhere” ending up in the economy. The Treasury money is simply money that the Fed “printed” to buy Treasury Securities. That liquidity would then be put into the FDIC. We would be propping up our banking system with little more than thin air and increasing the risk that we will head into a severe bought of inflation reminiscent of the 1970’s.

See Also: Inflation and How it May Affect You

Inflation and How it Might Affect You

Due to current government spending policies, the fastest growing deficit in history and an administration that is printing money out-of-nowhere in an attempt to keep artificial asset prices (housing bubble) inflated, there is a real possibility that we may enter a period of severe price inflation. Some respected economists, such as Mark Faber, PhD, are even concerned that hyperinflation similar to Zimbabwe’s fiscal catastrophe are not only possible, but assured.

If the U.S. enters a prolonged period of inflation, as was felt during the term of President Jimmy Carter (1977-1981), what will it mean to the average citizen. That may well depend on how well you have prepared your assets and finances for the possibility.

Inflation occurs when an increase of prices on goods and services across a broad section of the economy is experienced. In plain English, everything costs more.

The price we pay for goods and services can be driven up from two basic sources – supply or demand. If the inflationary pressure is supply-side, prices are being driven upward by an increase in labor costs (wages, benefits, etc) or by the rising costs of raw materials. If inflation is caused by the demand side of the curve, it’s simply that more-and-more people want goods and there are not enough to go around.

We hear a lot about how monetary policy can cause or ease inflation, but with the explanation above, how is that so?

To cause inflation, one thing that can happen is too much money is put into the economy. The United States operates on a fractional reserve system. Basically, it means that a bank can can loan out $100.00 for every $10.00 that it actually has in its reserves. That’s how money gets created. To over-simplify a bit, banks borrow $10.00 from the central bank, then loan out $100.00 backed by that $10.00. $90.00 just came out of nowhere. That’s added liquidity or adding money to the money supply.

Typically the Federal Reserve will lower rates to pump liquidity into the market. This makes money cheaper to loan/borrow so more borrowing happens which puts more money into the marketplace to buy goods and services.

Once interest rates get at or near 0% and the economy is not growing, extreme measures are sometimes taken. Quantitative easing is just such an extreme tactic. The Fed can no longer lower interest rates, so they start creating money out of thin air. Sometimes called “printing money”, it’s actually done by creating credit in the central banks own accounts (from nothing), and using those non-backed assets to purchase paper (bonds, loans, etc) from other banks – now those banks have the money from nothing.

Seems harmless, right? Why can’t we all just credit our accounts with money from nothing and use that to buy whatever we want? We can’t do that because it would lead to inflation – a lot of it. As more money is created, each existing dollar becomes worth less and less. If a dollar became worth half it’s current value, the face value would still be $1.00, but it would only purchase 50 cents worth of goods. You would then need two dollars to purchase that soda that cost a buck prior to the free-for-all printing fest.

So what should we do? The best course of action is of course to get the government to stop “printing” money, but with the debt loads the United States is taking on and is planning on bearing, there is not much likelihood that it will stop any time soon. Next, we as individuals would do what we can to protect our own assets and finances.

There are varying theories that run the gamut from hoarding precious metals to getting a gun and living in the woods. I think there are some things we should be doing to prevent last-ditch tactics like those from being necessary.

First, own hard goods. Things that have value and you own outright. That’s a house without a mortgage, cars without loans, land, real estate.

Some would argue that having debt is perfect for inflation as the debt would require less money to service. Hogwash, you’ll be paying so much for gas and groceries that you’ll still not be able to pay those reduced-value debts. Then you lose your house, cars, land… all those hard goods that would have been better to own during inflationary times.

While gold is a hard asset, I have one basic concern with owning gold as a hedge to inflation. If gold becomes a better currency than paper money, the government could do what it has done in the past – take it from you. In 1933 President Roosevelt forced citizens to sell all of their gold at a price that had not adjusted for inflation (roughly $21.00/ounce), once the government had all of the gold, they re-adjusted it for inflation and deemed it worth $35.00/ounce. Gold did not function well as a hedge in that case, and I believe a liberal government would do the same thing again to increase the money supply if all else had failed (which it would have if we were relying on gold as currency).

Let’s say the government doesn’t make owning gold illegal (again). If you owned a few plots of land or houses as assets (no liability against them), someone with a lot of gold might purchase them from you – and now you would have the amount of gold (or dollars in a more realistic case) equal to the inflation-adjusted worth of your property. The difference being, you bought the land with pre-inflation dollars and are selling the land once the currency has normalized. This makes sure that you come out of an inflationary period with the same or better net-worth than you went in with.

Second, get into securities that invest in commodities. Exchange-traded funds (ETFs) that concentrate on commodities simplifies this play. As inflation makes those commodities rise in price, your investment should reflect that change. This is not a cure-all, be wary of what commodities your actually investing in. Gold looks to be severely over-priced and if the price begins to drop, the Chinese will do what they always do – dump, dump and dump.

There are also inflation-protected bonds available from the treasury known as TIPS. These securities are designed to protect investors from inflation. Not only do you benefit from the bond yield, but your base investment will adjust for inflation. These investments do not fair as well in normal times due to lower yields, but in a pro-longed inflationary period, this is a good play.

So with inflation, horde assets and protect your net worth.

Experts Concerned on Coming Depression

In a recent Telegraph article, it is suggested that President Obama is making some historic mistakes in the handling of the American economy.  The author goes so far as to say that these mistakes are the same as those made by leaders just before and during one of the darkest financial times in U.S. history – the Great Depression.

The basis for this concern is that Obama’s belief that Keynesian economic policies will return the U.S. economy to growth by printing money and stuffing it back into the economy.  Short-term this will create false and unsustainable spikes of growth.  If the economy doesn’t grow organically, it will have no support.  This creates a spiral of out-of-control spending to prop-up the false economy with more printing and spending. It is precisely these policies that made the depression longer and deeper in the United States than in other countries where they took more of a laissez-faire approach – most of which had come out of the depression by 1931.

As a side-effect, the dollar will drastically weaken as an oversupply of money is created.  This will inflate the cost of goods as it will take many more dollars to purchase commodities.  High inflation will suppress demand and increase the velocity of the economic death-spiral.  Of course, Keynesians would print and spend more to combat the ever-decreasing G.D.P. which keeps this whole circle of ineptitude going. (print more money->spend it->weakened dollar->inflation->decreased demand->increased unemployment->rinse and repeat).

Many economists also point at Hoover’s mercantilist trade policies as a factor in worsening the depression in America.  The Smoot-Hawley tariff act was a protectionist law that raised tariffs on 20,000 imported goods.  In a move showing a naivety of economic history, President Obama is suggesting a 55% tariff on Chinese goods.  When taken with Obama’s anti-free trade rhetoric, striking similarities to President Hoover’s errant thinking become evident.

Let’s not forget the draconian tax increases that come with the Keynesian belief that the government must stabilize demand during times of economic trouble.   By the end of 1931 President Hoover recommended a gigantic income tax increase in an effort to save the country from skyrocketing deficits.  Marginal rates rose by as much as 38% to a high of 63% on taxable income and the effect on household spending was dramatic.  Barack Obama is already floating trial balloons on the subject of middle-class tax increases to pay for all the entitlements and other government spending he is promoting.

Some argue that we are not heading into repeat of 1929-1937.  In Steven Levitt’s article, This is Not Another Great Depression, Levitt makes the case that we are not on the road to a depression because G.D.P. has not changed when evaluated between Q4 2007 and Q4 2008.  But what about the 4 successive declines1 from Q3 2008 through the second quarter of 2009 – a total drop of almost 3% and a trend that has not yet reversed.

Unemployment statistics are also in stark disagreement with Levitt’s assertion.  Since the start of the recession near the end of 2007,  unemployment has gone from 4.9% to its present 9.7%.  During the height of the depression era, unemployment swelled to over 20%, but if we look at 1930 when the depression was beginning to take hold, the unemployment rate was only 8.9% – nearly a point lower than today.

Today’s employment numbers are also less accurate than those kept during the depression.  Currently, if a worker becomes discouraged and just quits looking, he falls out of the statistics.  That person is no longer unemployed.  Some estimations2 put the disparity due to this difference in accounting at somewhere between 5% and 10%.  That would put our current unemployment rate, adjusted for the rules used in the depression, at between 14.8% and 19.8% – much worse than during the start of the depression and approaching dangerously close to the worst numbers achieved in the 1930’s.

Just prior to the Great Depression, Russian economist Nikolai Kondratiev made the case that economies had super-cycles of roughly forty-to-sixty years.  With the darkest days of the 1930’s roughly seventy years behind us, Nikolai would say we are due.

Looking at history, the assertion could be made that our leaders should consider doing less, spending less, and printing far less money if they truly wish to avoid an economic disaster.  The interventionist attitude of the current administration is already showing itself to be repeating history.  Canada is already adding jobs3 to their economy while losses mount-up in the United States.  Canada and other countries that are taking far more hands-off approaches, are already coming out of their recessions while we appear to be going deeper into the abyss.

1 – www.bea.gov – “Current-dollar and ‘real’ GDP” report
2 – WikiAnswers – “What was the unemployment rate during the Great Depression”
3 – www.BloggingStocks.com – “Canada posts first job gain in four months”

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