THE LIBERTARIAN ENTERPRISE
Number 511, March 22, 2009
"The Mother Of All Demos"
Special to The Libertarian Enterprise
One has to be careful when predicting the future. Robert Heinlein noted that it never pays a prophet to be too specific. He also pointed out that Cassandra didn't get nearly as much kicking around as she had coming.
In my last essay on the subject of these horrid companies that have been, absurdly, bailed out with taxpayer money, I asked what had changed, really, that would make the markets rise. My answer then was that nothing much had changed.
Pandit, the CEO of Citigroup, said that he thought the company would post a profit for first quarter 2009. He said it in the most disingenuous way possible, I think, by saying that Citigroup was having its best quarter since the third quarter of 2007. Well, yeah. If you consider that all five of the quarters after that were ones in which Citi posted enormous losses, and that on an average of $21 billion per quarter revenues they were posting $7.5 billion losses, you'd be very worried to learn if they were not having a better quarter than any of those. If you could bring yourself to care, just for a moment.
In spite of the fact that the math works as follows: Citi has had revenues of $19 billion in the first two months of 2009. That means that for the quarter, assuming revenues average the same for the month of March, Citi can expect $28.5 billion in revenues. So they could make a dollar in profit, and that would be a profitable quarter. It would be their best quarter since third quarter 2007. And it would still be a crappy quarterly result, not indicative of any ability to pay back the billions of dollars they were handed from the Treasury by their buddies in the corrupt government.
Yet, without, as far as I've been able to see, anyone in the lamestream media making note of the elementary mathematics I've just reviewed, Pandit said things were bright, and stocks rose. And fell a bit.
I've looked at all these companies from AIG to Citi to Bank of Scamerica to GM to GE and on and on. I've been reading their reports, the news stories about them, watching their stocks, looking at their earnings, and I cannot see anything about them has changed. Nothing in their fundamentals suggests that any of them are worth a good golly gosh darned sock. As if anyone darns socks these days. (Who knows, it may become a valuable skill to know how to darn a sock in the coming Greater Depression.) There is nothing in any resource I can see that shows the least potential for any of these evil, hateful, government-corrupting, miserable, bonus-paying, inept, and trade restraining companies to ever pay back nickel one of the taxpayer money they have been given.
So, you say, now feeling just a little intrigued, what has changed? If nothing changed with these companies, did something change with the government? The answer is yes, after a fashion.
It happened with the government, if you believe that the Federal Reserve is a part of the government and not also partly a private cartel operating in restraint of trade. It is clearly a bit of both. So, yes, the government did a bad thing.
Ed Steer of Casey Research wrote, "Gold did virtually nothing ...in New York on Wednesday morning.Then at 2:15 p.m. the FOMC came forth with their two stone tablets and all hell broke loose."
FOMC is the Fed Open Market Committee (though the C might stand for Communism, the way they behave). The FOMC is the main functioning group that sets actual monetary policy. So, what did they do on Wednesday, what did they change?
"Nobody anticipated the Fed would monetize debt," said Leonard Kaplan, of Prospector Asset Management in Evanston, Illinois. "This is highly inflationary."
As Jim Sinclair, writing on jsmineset.com, exclaimed: "Mugabe is the Chairman of the Federal Reserve. What a horrible mistake this is! Now you can count on Confetti Money."
Huh? What exactly did they do?
Jeannine Aversa, Associated Press economics writer says, "...the Fed will spend up to $300 billion to buy long-term government bonds and an additional $750 billion in mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac."
You might ask yourself, if there were other buyers, such as foreign countries or companies or individuals, seeking to buy long-term government bonds, would the Fed have bought them? I think the answer is no. Same for the securities on offer from the bailed out parts of the government called Freddie and Fanniebecause a cute nickname might make you forget that they are cartels operating in restraint of trade with government sanction.
Where does this $1.2 trillion come from? It comes from printing more money, in the fashion that one prints things nowadays (mostly on computer screens, about as ephemeral a currency as you can get). And the current round of printing is not the first.
The Fed has already more than doubled its balance sheet from less than a trillion to more than two trillion dollars, and is expected to continue doubling for many more trillions, possibly over a very short period of months. Why? Apparently, they think that monetizing the debt, which is to say printing up money to buy the debt, is the only way to keep things from getting worse.
Sadly, the lessons are very clear. The Roman Empire under many different emperors debased their currency, in effect inflating it. The Mongol empire under Genghis Khan created a paper money from mulberry bark and inflated it into oblivion, to the detriment of everyone in Asia who held any of it. The term "not worth a Continental," and the history of the John Law money from Banque Royale, the assignat and the mandat from the French national assembly and directorate, the Confederate currency, the Greenback, the Weimar Republic, Hungary after World War 2, South Vietnam in the 1970s, Yugoslavia in 1993, and Zimbabwe today (where a US dollar buys $150 trillion of their old currencywhich they no longer even try to push on people) are just some of the highlights in the long, boring, stupid history of monetary inflation.
Okay, so they have cried havoc and let slip the dogs of hyperinflation. What can we expect from this change?
We saw the stock market go up, a bit, and the price of gold go up, a lot. We saw the dollar index fall. All on a Wednesday, 18 March 2009.
And we can expect more of these same things. Gold and silver will rise in price now that everyone understands that the intention to inflate the money supply is coordinated with the intention to spend dollars that the government doesn't have and cannot earn. Monetary, fiscal, and in short order I expect trade policies are aligned for inflation. War is very inflationary, and that policy has not changed. Indeed, the war in Afghanistan is being escalated.
What would be an inflationary trade policy? Tariff and non-tariff barriers to imports combined with capital controls should be expected.
Why would stock prices rise? Well, what are you going to do with dollars today that are going to be worth less tomorrow? How much less? Well, before they stopped using it, the Hungarian currency in 1946 or so was doubling prices every 15.6 hours. Inflation in Zimbabwe was clocked at five sextillion percent before they reverted to US dollars and South African rand.
Now, the USA dollar is the world's reserve currency. Lots of people have it. They say that more $100 bills circulate in Russia than in the USA. Many places where inflation has been terrible have seen people use the USA dollar as a way to avoid inflation in their own currency. Now, all those people are going to see the erosion of their wealth. And they are going to want something for their money.
What can you get with dollars? Stocks, bonds, and exchange traded funds. These are potentially capable of earning a return on investment. And when the whole world wants to turn its dollars into something that earns a return, the stock market may zoom to new record highs, in current dollars. In dollars adjusted for inflation, the markets won't be up by much at all, though.
Why did gold and silver rise, and should we expect more of the same? They rose because the dollar became worth less, and one way to measure the value of the dollar is to look at the price of gold. Yes, we can expect more of the same, possibly all year long.
There is usually a Summer doldrums in the markets for gold and silver. An exception was the inflation year of 1979, when the prices just kept going up. The price of gold rose from the first of December in 1978 straight through to 21 January 1980. There's no reason to suppose that what has happened was a one-time thing. What has happened is possible, and could happen again.
As long as the government's response to the financial crisis is inflationaryto spend dollars they don't have and have no ability to generate except by printing; as long as the Fed's response to the crisis is to print money and monetize the debt; as long as trade policy remains inflationary (protectionist); as the government reacts more and more to apply capital controls, to tax, to prevent money from leaving the country, and to regulate business into higher pricesas long as these trends continue we can expect higher and higher prices for gold and silver.
The dollar has dropped dramatically on the dollar index, which is a basket of world currencies, in just a few days. Why? Because the Fed is inflating, and now everyone knows it and sees it.
There is still bad news to come. Tens of thousands of retail stores have closed so far this year, and perhaps hundreds of thousands more are going to close in the next few months. Commercial real estate is dropping like a sick bird, and the related foreclosures and defaults are not going to be pretty. Many companies are going bankrupt, and many will not emerge from bankruptcy. Many more foreclosures on homes are inevitable, and will be perceived in a few months. So, stocks could collapse dramatically again later this Spring. Source.
The recent rally in stocks could continue for a few weeks. Inflating dollars are going to be shed by people all around the world. But the bad news that is still on its way is going to cause people to sell. (Buy the rumor, sell the news, is a very old saying in stock trading.)
At some point, possibly this year, the price of the Dow as measured in ounces of gold is going to be less than three. Whether that means a 15,000 Dow and a $5,000 price of gold, or a 2,700 Dow and a $900 price of gold, I'm not sure. But this re-set value seems to be the way the markets generate a secular low in stocks, as adjusted for inflation.
If there is anything left of the publicly traded, government regulated stock markets, that would be the time to begin buying in earnest. Until then, all stock market gains should be viewed as short term, in my opinion.
And there is the potential for complete collapse. The fiat money system could crack up and go boom, as envisioned in J. Neil Schulman's 1979 novel "Alongside Night," and as recently happened in Zimbabwe with their dollar. In a collapse, the powers that be will seek to protect what remains of their interests by imposing martial law, by attacking demonstrators, by using state-sponsored terror to keep people in line, and none of that will work.
The good news, and you've been waiting for some, is that there is a sea change happening. Media companies like Reader's Digest and various big city newspapers are going bankrupt. News aggregation services like Rational Review News and Liberty News are growing and thriving. Old style manufacturing companies are going out of business while the makers of online games such as World's of Warcraft are doing very well.
I believe that when people look back on recent decades from the future, they'll see that the old style state-based system reached its zenith in 1969. People walked on the Moon for the first time that year. They don't do that any more. People flew in supersonic transport planes that year for the first time. They don't do that any more.
Another thing happened in 1969. The Internet was conceived. A few years later, public key cryptography introduced a new era in cryptologythe open source era. New crypto systems would be published because secret codes are weakyou don't know when a workable attack has rendered your secret code obsolete. Open source code for crypto has spread to every corner of the software industry, and is becoming standard practice in many aspects of publishing. Copyright and patent companies are, actually, dinosaurs.
Internet companies, open source software companies, and small scale, on demand production and manufacturing companies are parts of the new era. It is becoming increasingly easy to add value without government sanction, and less obvious what the state offers except brutal over-reaction. Surplus order may have been tolerable when patents and licenses could effectively limit competition and secure market share but they cannot do those things now. Bit Torrent is simply a harbinger of things to come.
Welcome to the era of hyperinflation. It won't last. Safeguard yourself and your family by growing your own food, stockpiling food and ammo, training with your favorite weapons, and have inflation-proof money such as gold or silver.
Be happy that the old system is being swept away. The dinosaurs will make way for the mammals. Soon: hominids.