October 9th 2010
Welcome to the Surreal World
Things are not going well in the world. Some folks would have you
believe that we are out of recession and that things are slowly getting
back to normal. That is not so. The real problem is that we live in a
surrealist world run by lunatic governments.
Let us have a look at a few of the problems and the way they are being
treated.
The first problem is that the developed countries have run up too much
debt. You will note that the American government chose to treat this
very serious problem by running up even more debt. It doesn't take a
child of six to work out that that is idiotic in the extreme. However,
we have nobel prize winning economists telling us that is the answer.
We have even just had one such strange person claim that going to war
and killing lots of people is one way of sorting out the current
economic mess (Krugman).
I dont know how one deals with this sort of thing. When supposedly sane
intelligent people are lauded because they speak unbelievable claptrap,
we have a serious problem.
What people with any grasp of sanity would agree with a peace prize
being awarded to someone who is running two wars and is threatening a
third?
What is happening here is that we now appear to inhabit a world similar
to the one Alice found at the bottom of the rabbit hole. We now have a
problem with language, meaning and sanity. If we are to survive we must
learn to cope. We must start to use language in the way the folks
behind the Iron Curtain had to back in the dark days of the cold war.
We must adopt a form of translation so that we can understand the
surreal-speak used by our totally mad politicians. In short, we now
need to start reading a subtext into any (mis)information we are given.
This is all very distressing. What can I say to a visitor lately
arrived from foreign parts? "Welcome to the surreal world"? "Welcome to
the rabbit hole"? "How do you like my new home, in a tent in the
grounds of the local lunatic asylum"?
I shall try to remain sane. Who knows, if we try hard, maybe we will
come through this.
* * * * *
Let's look at the USA. It is still the biggest economy on the planet.
It is still a bastion of innovation and development. It still runs the
world's reserve currency. But it's star is on the wane. It is busy
destroying itself. It may take five years, it may take fifty, who
knows? One thing is for sure, the future lies elsewhere. One thing is
for sure, investing in the USA in any shape or form could well be a big
mistake.
Let's just look at a few salient facts.
The current government deficit has topped $13 trillion. That is a vast
sum that can never be repaid. I dont even know how many noughts that
needs, but it sure is a hell of a lot. I cant even imagine one
trillion, let along 13 of them. Not satisfied with that, the government
is thinking of taking on even more.
The Bush administration spent more money than every preceeding
administration added together. That's insane. The current
administration has already exceeded that insane amount after only two
years in office.
The current economy is running on the equally insane system which
requires an expenditure of $2 to create $1.
The combined liabilities of the US government, which includes the
future care for the old and infirm, runs to nearly $70 trillion. I'm
sorry guys, but all of this has to be untrue. It has to be some silly
nightmare story invented by someone with a very black sense of humour.
But no, it is true. Ha ha. (Sorry about that hysterical laughter.)
Real unemployment in the US is over 20%. Allowing for under employment
would take the figure even higher. The official stats say it is about
9.4%. Ha ha.
Official stats say inflation is on the floor. But then, official
inflation does not include basic things like food. Unfortunately, food
prices in the US have risen on average about 30% over the past year.
Official figures do not include real prices of consumer goods. They are
"adjusted" for so-called improvements. Some wonks in a government
office somewhere in Maryland are employed to work out what the new
improvements would have cost in some pre-cock-up currency value, and to
subtract that figure from the real cost, and prove that the item for
sale costs less than it would have done some years back if it hadn't
been improved. That new figure then proves there is no inflation.
Come on guys, I couldn't make up this stuff, could I? And dont ask me
if that white rabbit that just went by looking at his watch was real.
Of course, US real estate is still on the way down. The figures dont
show the true picture because in no less than 22 states the banks have
stopped foreclosures, so the figures dont actually look so bad. Instead
the houses are now simply on the zombie list. After all, you cant have
monsters about. So let's hide them under a convenient stone.
Despite all that house prices are still going down.
But the recession is over. Ha ha!
* * * * *
Sure, the recession is over. Go tell that to the yankees whose income
has gone down over the past year for the first time since the Great
Depression. Mind you, if you factor in inflation, wages in the US have
been static for the past forty years. Hey, that's some success story!
I wont bore you with a whole heap of seriously depressing statistics,
but they aren't good. But the really bad news is yet to come.
The dollar has been steadily falling in value for a very long time. It
is falling at the moment. It will probably bounce up when the euro
starts crashing again, but we'll get into that one next week. The real
problem is that so many sources are complaining about the dollar being
the currency of last resort. It has too many liabilities to be able to
support the world economic system. It cant help but implode somewhere
down the line, and I guess we are talking about sometime during the
next ten years. The alternative is a basket of currencies and
commodities. Perhaps. Who knows in a surreal world?
The thing is, what we have at the moment is the Federal Reserve
creating electronic money, which can be done with a few keystrokes on a
computer, and using that money to buy up bundles of debt. It buys the
debt of bankrupt companies like AIG and General Motors. It buys up the
bonds of collapsed banks with toxic debts on their balance sheets. It
buys up government debt in the form of Treasury Bonds. And there is
talk of them buying shares to keep the stock market bouyant.
This sounds to me like the economics of a Harry Potter story. You have
no money, so you wave your magic wand and create some. You then use
that invented money to buy worthless businesses that dont have a hope
of recovery. You then need more money, so you invent some more, and
lend it to a government that wastes it in more idiotic schemes to get
people to buy more junk they dont need with money that doesn't really
exist.
Yeah, I know. I saw the white rabbit too. And sooner rather than later,
Humpty Dumpty is gonna fall right off of that wall.
All this is fine and dandy until someone wakes up. If you remember the
story, Alice did wake up, and the pack of cards just floated away and
vanished. "Why, you're nothing but a silly pack of cards." Reality hit
the scene. That reality may have been boring, but it came back with a
bang.
The US of A will wake up one day when the whole financial structure
collapses. HD will undoubtedly fall off the wall, and it wont be a
pretty site, and we'll all be up to our knees in yuck.
What does that mean in hard financial terms?
It means the value of phony money will evaporate. The cost of real
money will go through the roof, and we will all feel seriously poor.
Dont believe me? Well, just take a look at the value of the dollar.
Look at a ten year chart. Look at a thirty year chart. Look at the ten
year chart of gold, and silver. Look at a ten year chart of the major
US stock markets. Gold has gone from $300 to $1300 over that period.
That's some jump. The S & P index has gone nowhere. The $ index has
gone down. And we haven't really started this thing yet. And look at
the commodities index. It is going through the roof.
We have one hell of a debt bubble. Someone has to pay it, or renege on
it. One way or the other money has to be paid, or lost. Either way that
makes a lot of people a lot poorer.
Put this another way. After a hell of a party there is always one hell
of a hangover. Here it comes.
Next week I shall explain how it is going to come, and what it is going
to do. But I shall go back to Europe for my examples. In the meantime,
sweet dreams. Have them while you can.
john
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