I have blogged several times before about the money game going on in the world today. I have called it a currency crisis, a shell game, and a ponzi scheme. It is every bit of all three.
The currency crisis, of course, began with fiscal irresponsibility by governments in the form of prolonged annual operating shortfalls – a.k.a. fiscal deficits. Deficits have continued only by the grace of central bankers around the world – all players in a money game that is costing taxpayers more than their children can ever pay back.
Fiscal deficits create more debt and, in essence, more money which is originated by the Federal Reserve, America’s central bank. Like with anything else, an increase in quantity (Supply) will ultimately cause a reduction in value. Imagine if Vincent van Gogh created 21 thousand original paintings rather than the 21 hundred he produced. Each one would be less special, less valuable.
The same is true with money.
When monetary supply is consistently expanded without substantial economic growth, currency has no choice but to lose value. Weak currencies create inflation, as more dollars are required to buy the same amount of goods. In other words, economic growth should provide the impetus for an increase in money supply – not the other way around. The reason for this is simple: more money cannot provide economic growth – fiscal deficits, yes; but not Real growth.
For proof positive of this look no further than the so called "green energy investments" made by the U.S. government over the last several years. In just two1 of these transactions American taxpayers lost more than $700 million of their hard earned money – or even worse, they lost their children’s hard earned dollars.
Remember, during the time these investments were made the U.S. government was running trillion dollar fiscal deficits. As such, the government had to borrow the money in order to make these ill-conceived "investments." So to say the American people lost only $700 million on these two transactions is a complete misnomer. Indeed the $700 million initial cash outlay is lost, but the country continues to pay interest on the principal until that debt is repaid. Who knows what the total loss will be.
Governments create markets like the green energy market because they are part of their political agendas – not because there is a legitimate possibility to make a return on investment (ROI). That is the problem with "government investment." They have little chance to profit because profit isn’t their objective. Political success is.
And as long as the U.S. Federal Reserve is more than willing to employ monetary shell games like Quantitative Easing and Operation Twist to cover irresponsible fiscal policies, Congress can continue to throw around freshly printed and newly borrowed money like it grows on trees. It creates more fiscal deficits and weakens the value of the U.S. dollar – and it has global effect.
When the U.S. consistently devalues its currency it throws currencies of emerging markets out of whack. Other countries respond by making their own monetary moves to win the shell game – or at least to remain competitive in it. The important thing to note here is that for each U.S. monetary move there is a countermove, with each country, each government, doing what they believe is in the best interests of their respective countries, cultures, and people. And right now the U.S. is leading the world into another fiscal calamity.
The world is being run by a bunch of academic knuckleheads that think they can out-smart and out-maneuver history. In recent days, the International Monetary Fund (IMF) urged Europe’s central bank (ECB) to start bailing out failing nations in the 17 member Euro Zone – Greece, again, is on the verge of collapse. Ditto for Spain, Italy, and France, and Ireland, etc. etc. The Euro has proven that socialized money doesn’t work – yet American officials look too incompetent to notice and too weak to oppose it.
While the IMF was pushing the ECB to print more money, and thus further devaluing their currency, U.S. Fed Chairman Ben Bernanke was bullying governors of emerging markets to let their currencies appreciate – in other words, to make their goods more expensive in the U.S. and U.S. goods cheaper in their countries. Why would they do this? That’s not in their best interests – it’s in the U.S.’s best interest. Why should emerging markets put their citizens at a competitive disadvantage?
Ben Bernanke should mind his own business and begin focusing on strengthening the U.S. dollar. It’s really hard to believe that American governors are preaching weakness and failure, consolidation and dependence, to all markets across the globe. America should never lead the world in lowering the bar. But that is what’s happening right now.
Chairman Bernanke, an academic too smart for his own good, has no intention of stopping the printing presses or discontinuing U.S. dollar devaluation. He will print as much money and debt to cover any Congressional shortfall. Restraint is not found anywhere in the entire U.S. Government – and they want the world to follow.
What an embarrassment.
Let me ask: How could a rag tag collection of thirteen colonies beat the mighty British Empire in the late 1700’s?—with no central government, no national or trained military, and no common dollar. How could such a small collective beat such a dominant world superpower?
Persistently poor economic and fiscal conditions have ruined many a dominant power throughout history – Greece, Rome, and the former Soviet Union, to name a few. Did those governments expect to crumble? Of course not. They, too, were too smart for their own good.
To grasp the peril of such a condition it is helpful to think of owning a home, or living in a rental apartment. Imagine the financial independence you would feel should there be no mortgage or no rent – you owned the property outright. Think of the extra money; the things you could buy and the vacations you could take – think of the money you could invest. Think of how hard you would work for the pleasure you desire.
Then think about choking on a mortgage or struggling to pay the rent. Think of constantly asking your landlord, a rich person or banker, to borrow money so that you can make ends meet. You are now working to pay them back plus interest. In essence, you work for them even though they might not employ you. They lend you the money because you say you will pay them back, and they believe you. Perhaps they even like you.
So they lend you money, consistently, for a prolonged period of time – but now your rent has tripled. Things are so tight you don’t have the cash for gas in order to get to work. So your car sits in the driveway or out by the curb, collecting dust and pollen.
In your local area there are no jobs to be had. High unemployment not only surrounds you but engulfs you. You now must beg your creditor, or its government, for food and drink. Your market has collapsed, and you are dependent on the State.
That is anti-the American ideal -- yet it mimics current U.S. government policy.
And it is also what prompted Margaret Thatcher to denigrate socialism by highlighting its major flaw so profoundly, "Sooner or later you run out of other’s people money."
Success is not an entitlement. It is earned, not borrowed; and there is no easy way to attain it. In the same vein, it is impossible to spend your way into prosperity, to devalue yourself into success, and to fool yourself into believing that history doesn’t repeat itself even when the same stupid things are repeated.
Unfortunately the U.S. government and its central bank have chosen these ill-conceived conditions. This is not good for Markets, business and investment – but you can’t tell that from the stock market. See below.
In the face of financial and economic weakness across the globe, an endless game of devaluing money, earnings shortfalls and company failures, not mention warlike conditions throughout the Middle East and Africa, the stock market Average is up 11% for the year. Stock market strength has gained 39% and gold is up just 11.5%.
Don’t let current valuations confuse you. Market condiitons do not warrant these levels: Stocks remain extremely over-valued.
The road to financial independence.™
1. Solar cell maker Solyndra lost $535 million and A123 electric car battery maker lost $249 million.