Friday, May 22, 2009
“It was horrible. Horrible! Like lightning it struck. No one was prepared. The shelves in the grocery stores were empty.You could buy nothing with your paper money.
– Harvard University law professor Friedrich Kessler on on the Weimar Republic hyperinflation (1993 interview)
Some worried commentators are predicting a massive hyperinflation of the sort suffered by Weimar Germany in 1923, when a wheelbarrow full of paper money could barely buy a loaf of bread. An April 29 editorial in the San Francisco Examiner warned:
“With an unprecedented deficit that’s approaching $2 trillion, [the President’s 2010] budget proposal is a surefire prescription for hyperinflation. So every senator and representative who votes for this monster $3.6 trillion budget will be endorsing a spending spree that could very well turn America into the next Weimar Republic.”1
In an investment newsletter called Money Morning on April 9, Martin Hutchinson pointed to disturbing parallels between current government monetary policy and Weimar Germany’s, when 50% of government spending was being funded by seigniorage – merely printing money.2 However, there is something puzzling in his data. He indicates that the British government is already funding more of its budget by seigniorage than Weimar Germany did at the height of its massive hyperinflation; yet the pound is still holding its own, under circumstances said to have caused the complete destruction of the German mark. Something else must have been responsible for the mark’s collapse besides mere money-printing to meet the government’s budget, but what? And are we threatened by the same risk today? Let’s take a closer look at the data. (more)
Are you watching the dollar? Maybe the unwinding of the dollar- based paper money system is coming sooner than we expected. Yesterday, the dollar fell again - now it costs $1.37 to buy a euro. And if you want an ounce of gold, it will cost you $937.
It looks to us as though gold is headed to $1,000 again...maybe higher. This is not what we expected... Not yet anyway.
What we still expect is a broad, long rally in stock prices. We think the Dow might go back to 10,000 before it is over. This is the rebound we were waiting for. It should boost asset prices generally - including gold, commodities and oil - as well as stocks.
Oil, by the way, rose $2 yesterday too. It's back to $62.
But this trend is probably a fake out. Underlying the positive market news is an economy that continues to decay, degrade and deflate. Remember, this is a depression, not a recession. The bubble era is over. Because the transmission is broken. The financial industry has blown up. It won't be repaired. Instead, it will be bailed out...nursed along...and mollycoddled. (more)
Meanwhile, here in Australia, while the federal budget deficit looms as a growing threat the structural health of the economy, there are actual positive economic stories going on, mostly in the energy and resource markets.
BHP is seeking permission from the West Australian government to mine the Yeelirie deposit in WA. BHP reckons it's a $17 billion ore body at current uranium prices, capable of producing 5,000 tonnes of uranium a year for 30 years. It says the project would increase Australia's uranium exports by 50%.
You don't have to worry about a uranium supply glut quite yet, though. It's a subject we've been covering over at Diggers and Drillers. There are other, smaller ore bodies that could enter into production if the uranium industry ever gets off the ground in Queensland. And many Australian explorers are active in Africa.
But the big story of the week-the one that's got us really excited-has been under-reported. Norway's largest oil company, StatoilHydro, and Chesapeake Energy Corp. from the States are kicking around Asia and Europe for unconventional natural gas projects to develop. Asia includes Australia, according to the story in Bloomberg. (more)
“The U.S. accumulated $9 trillion dollars of debt in 240 years, and in a mere year and a half, adds another $8 trillion? And for what? The credit markets are still frozen solid,” writes analyst Christopher Laird from Financial Sense. “Over $1,000 trillion of leveraged markets are unwinding, and if you add up all the central bank efforts...it adds up to $15-20 trillion.”
In short, both in the United States and abroad, the so-called “Herculean efforts” to stem the tide of the crises amount to little more than spitting in the ocean.
Credit card defaults are up 44%. With millions out of work already, and millions more to be added to their dreary clique, defaults on credit cards aren’t going to be the only thing rising. Reports emerged last week that currently 25% of all homeowners are “upside down” in their mortgages — that is, they owe more than their house is currently worth.
That is a huge number. Many will try to stick it out for as long as they can. After all, they have to live somewhere, might as well stay put as long as they can afford it. The question becomes, how long will that be? While job losses may have slowed in the last 30 days, they are still skyrocketing. And there is no guarantee that they won’t begin to re-accelerate.
But Americans are used to paying more for things than what they are worth. Frankly, the commonplace use of credit cards has “taught” us that you can pay 30% more for anything you want, and it’s still OK. Of course, that 30% premium figure only applies if you pay off your balance in 12 months. If you carry your debt with the convenience of “minimum payments,” you’ll pay dearly for that expense.
Consumer debt has climbed to $2.6 trillion — up 24% from 2004. A good part of that is new spending. But the ever-increasing portion is the service on the debt. That’s the “secret” to banks getting rich, the miracle of compound interest. Of course, it is only a benefit as long as the debt does not compound faster than the ability to pay it. After that point, the borrower has the lender by the nose, and he begins to be a double liability.
The first is that he owes the money; the second is the increased likelihood he will not pay. Because truthfully, when the borrower must decide whether to buy food or to pay his MasterCard, food will always win. So will shelter.
But even though Americans have grown steadily more and more comfortable with the idea of paying too much for things, that is ready to change. I reported to you a few weeks ago that people were paying down credit card debt and increasing their savings.
Don’t expect it to last, though. I doubt that both can exist simultaneously for very long. Debt will cease to be serviced as savings grow. There is also another corollary to that statement. Spending will cease (or at least dramatically slow) as savings increases. Americans do not have enough to do both.
As the citizenry, so is the government. The United States is bankrupt. Is there any feasible way to deny this? We have seen dollar strength in the last year as financials around the world have unwound their positions and brought their money back to the U.S. “safe haven.” But watching people flock into Treasuries is like watching people board the Titanic. It was said that “God himself could not sink this ship.” But I remind you, “Do not be deceived, God is not mocked.” What we are doing nationally is wrong. Inflation is theft. God judges theft. Period.
And that’s not all. One of our nation’s founding principles was “No taxation without representation.” But we are taxing our children and grandchildren while they have no say in the matter. They have been disenfranchised before they even had a chance to vote! Imprudent. Insidious. Immoral.
The Fed finally released the results of the “stress tests” on U.S. banks last week...what a crock! Of 19 banks, only 10 of them need additional capital. Well, isn’t that nice? And they only need to “raise” $75 billion. But how? Additional stock offerings? Bank of America would only need to find buyers for 2.6 billion shares at the current price. Citi would only need just under two billion shares sold. And GMAC? Only a paltry 958,000,000. (Maybe they should think about selling bonds...)
Here’s the skinny: These three banks, and seven others, will be “required” to raise this capital. But “required” is a funny way to phrase it. It implies consequences. But what is the penalty for failing to raise the capital? And just as importantly, where is it going to come from?
Well, the government won’t let the banks fail. So it will threaten a takeover if the banks don’t raise the capital independently. Once they cannot raise it independently, they will sidle up to the public teat for more taxpayer milk, and the government will effectively own them anyway. There’s no such thing as a free lunch. And when the government gives out free money, you can bet there are enough strings attached to tie down a herd of wild elephants.
We also saw the jobs report last week, which we commented on briefly earlier. And, yes, the numbers showed improvement. A forecast of 600,000 was eclipsed by a loss of only 539,000. Still above a half million. For those keeping score, that should put us above the three million mark for 2009. Do you still think consumer spending will continue to increase?
All of this debt, both public and private, puts unrelenting pressure on a currency. Add that to external pressures we have recently discussed, like the China/Argentina $10 billion currency swap. This is the sixth nation with which China has initiated such an action. Its impact? Just this: For all the trades taking place between these two nations, no money has to be converted into dollars. Lack of dollar buying means the dollar grows weaker yet. Because, honestly, much of the dollar strength we’ve seen in the last year has been the unwinding of positions that eventually required “parking” wealth into U.S. dollars.
But without that support, combined with the Treasury’s commitment to unlimited printing of money and the administration’s commitment to unlimited spending of money, the dollar is going to be in real trouble. Even now we are starting to see other currencies flex their muscles a bit.
The Commodity Dollars — currencies in countries where natural resources dominate the GDP — were going to be the strength of the currency bulls going forward. One such commodity that requires a good look is silver. Often called the poor man’s gold, silver is a precious metal that is only fractionally the value of gold, $10-15/ounce, versus $900/ounce. But that view may one day change. Did you know that 90% of all the silver that has ever been mined no longer exists? That’s because it is a lot more versatile than gold in many industrial applications. The downside is that it gets mined, used and lost.
So, that naturally limits supply…and sets it up for just as much of a percentage increase in value as gold.
In the event of currency default, which is not out of the picture, although I know it sounds drastic, silver coins are much more easily used as currency than gold, simply because of the relative value. Think of it like this: If a society abandons its currency for hard money, which would be easier to spend on a week’s worth of groceries...a $50 silver eagle or a $4,000 gold Krugerrand? Of course, you could clip the coins as necessary, but if you have a $25 bill, good luck clipping its value out of the Krugerrand! Besides that, silver is currently cheaper and easy to acquire.
But we’re talking about a day that has not arrived yet and may not for some time. I just want you to know that when it comes, you’ll have many ways to play it. Like, for instance, with metals producers like Canada and Australia.