Wow – “Zero Hour” and Inflation Is Screaming

We are getting to the point where adding debt to our economy will add ZERO to our gross domestic product(GDP). Bill Fleckenstein shared an incredible post today in his daily blog.

“Fleck,” as he is known to his readers, made some great points and follows up on ideas that I have shared with you for months now. Here is a summary of his points (my effort here is a bit scattered but you’ll figure it out):

1. “In a social democracy with a fiat currency, all roads lead to inflation.” basically, the Fed is an arm of activist government policies to try to juice the economy. Adding all of this liquidity (cheap money at low rates) is fueling a worldwide economic boom that can only end in pain. he quotes 2 very smart people – Jim Grant who mentions that the benefit of globalization of labor is coming to an end as the 3rd world develops – and Marc Faber – who believes we are in the tail end of an economic boom as other countries follow our lead by flooding the market with cheap credit.

Summary (as quoted in Fleck’s blog) – “Combining Jim and Marc’s view, we see that the first decade of the global economic boom and the attendant expansion in the labor force, held inflation in check.”

2. Quoting Faber – “Central bankers have become hostage to inflated-asset markets. Tight money will be difficult to implement.” His point is that the Fed, which is supposed to be independent, is increasingly coming under the influence of politicians, and if I could add my own 2 cents, having Fed policy under the influence of approval-seeking government pension hopefuls (aka Congress), and “socializing” monetary policy, we risk an inflation blow out as the Fed tries to cure all ills with cheap money. But as I mentioned above, quoting Faber, this monetary policy will soon add ZERO to economic growth.

3. Fleck points out that Faber educated him on an interesting and criminal omission in our nation’s inflation calculation. Not only does the government use substitution and other “tricks” to keep inflation low, it also only counts “8%” from food in CPI (consumer price index). Other countries use food as a much higher percentage (e.g. Japan 18%) and therefore rising food prices affect inflation calculations more strongly. Conveniently, in the USA, we don’t do that even though according to Fleck, the entire population, except the top 20% in income, spends 20% of their income or more on food. Makes CPI adjustments in social security and pensions much lower doesn’t it?

4. the entire world is in the late stages of an economic boom according to Faber (interestingly, you can read his similar comments in Barron‘s this past January) . He told Fleck that the world is experiencing a capital expenditure boom and is due for a worldwide correction – a “colossal bust.”

Faber’s conclusion: debt markets will crack (here’s an interesting article on that and another from the same fellow right here on debt problems) and commodity prices will temporarily correct.

In summary, this is all a big mess and when it all hits, we are going to feel some pain. Inflation will spiral and asset values will fall as the debt-induced inflation of asset values begins to lose air. I have been thinking about this issue and I feel the best strategy one can do, is to LOWER FIXED COSTS. Returns on assets may not thrill you over the upcoming years and if interest rates rise and inflation spikes, you may pay more for credit card payments, variable mortgages, ALL of your utilities, and gas for your car.

What can you do specifically? I know I will get laughed at for some of these since they sound like “hide in the bunker with 10 years supply of canned food” type stragies but here we go:

1. consider paying off debt or consolidating to fixed rates

2. drive an efficient car or find a way to live closer to work (not kidding see THIS ARTICLE on oil prices)

3. consider installing solar heating and/or electricity

4. consider a wood stove

5. consider creating a well water source

6. Consider eating cheaper, healthier foods (see THIS POST of mine or THIS ARTICLE on saving money on food)

Find other ways to lower fixed costs. Perhaps at some point, due to inflation, rates will rise to 12-16% as they did in the 1970’s and early 1980’s. Then maybe you can buy a 15% treasury bond. In the meantime, I feel that returns on assets will be lower than we have gotten used to. Now is the time to take action. I hope you won’t learn this too late…

resources to explore:

Bill Fleckenstein’s Daily rap Site

Marc Faber’s Gloom, Boom, and Doom Report

Jim Grant’s Interest Rate Observer

Report on Hyperinflation from Shadowstats.com

One more note:

Japan’s social security system may ‘blow up’ someday. According to a news update from the SSA (USA), Japan’s population over age 65 will almost double to 36% of the population from the current level of 20% by 2050 (see report here and scroll down to Japan) . Today, I heard from a Japanese friend who informed me that Japan will now start making retirees pay in some way for their retirement. I am not sure what the exact issue is, and I am searching for news on it but as of yet, can’t find any.

If this is true, it is to be expected. Social security, in and of itself, is a Ponzi scheme. It requires more younger workers to fund retirees. If the population does not continue to grow, and a population continues to experience expanding life expectancies, then the cost to fund retirees increases. Any plan that requires those “down the line” to pay for those “up the line,” is a Ponzi scheme and bound to fail once those upline outnumber those downline. Basically, social security in Japan, due to shrinking population and increasing life expectancy, is suffering from growing numbers of takers and fewer donors.

A similar problem could exist here in the US. A system based on life expectancy of age 65, with a large number or takers in the near future (boomers), and a much smaller group of donors (workers paying taxes) , is certain to feel pressure and stress. The result in this poor planning has been increasing taxes over the years both on a percentage basis AND increasing wage base that is taxable (most self employed people never look at the indexation of the social security wage base as a large tax INCREASE) and increasing retirement age (65 to 67).

Our possible solutions are simple:

1. scrap the system

2. raise taxes ridiculously and/or raise the retirement age

3. let in a flood of new immigrant workers (new “donors”)

Let’s start being honest about this topic can we? It’s straightforward math so pick the equation that works best for you.

Chris Grande

5.9.08

back to home page