The welfare of humanity is always the alibi of tyrants.
– Albert Camus
Before I get into this note, I want to take a couple of lines to explain the primary purpose of this piece going forward. These emails will be entirely dedicated to my macro musings and there will be little if any mention of individual stocks and securities. This is simply due to the fact that I am going to be trading and investing more of less full-time and to recommend or disparage individual names on a frequent basis may just cause more problems than it is worth. That said, I will be commenting on sectors and subsectors of stocks on a regular basis. Now that I am on my own I will also pull less punches than I did before and as such the commentary may be more politically charged. Some of what I say may prove objectionable to some on the list and I am entirely cognizant of this fact. This list is very extensive at this stage and I fully expect it to be whittled down as time progresses. Please do not hesitate to request your removal from the list. I will not be offended. I am not trying to please anyone, rather my intention is to provide as intellectually honest a macro perspective as I can from my worldview. I hope that you find my commentary useful and entertaining but more than anything else I am writing all of this because I am deeply concerned about the future. I see extraordinarily dangerous times ahead if we do not reverse the course our current set of global leaders is on before it is too late. So without further ado…
It’s the End of Currency as We Know It
Exactly one year ago I wrote a piece titled “The End of Fiat Money.” It was March 2009, the stock market was basically at its lows and the deflation camp was feeling extremely confident in its prognostications. At that time, I stated clearly that the end result of the credit and money binge we had experienced is a massive deflationary spiral; however, that the situation needs to be viewed in the context of the global monetary and financial system that exists. This system couldn’t be more different from that which existed during the Great Depression of the 1930’s when we last had a long deflationary bust. In addition, I mentioned that you have to look at the mentality of the players that control the destiny of the monetary and financial system. The most important player in this regard is Ben Bernanke who earned his nickname Helicopter Ben for good reason (I prefer Banana Ben but that’s just me). He earned that name from a 2002 speech entitled Deflation: Making Sure “It” Doesn’t Happen Here where he stated (http://www.federalreserve.gov/boardDocs/speeches/2002/20021121/default.htm):
Each of the policy options I have discussed so far involves the Fed’s acting on its own. In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman’s famous “helicopterdrop” of money.
Whether we should give credit to Bernanke for this thought process or to Robert Mugabe or to Rudolf von Havenstein (the Prussian central banker that set up the Weimar hyper-inflation) is a choice I will leave to the reader but the conclusion is clear. When Bernanke talks about “stable prices” do not for one second think this means stable price increases going forward. This means that prices should never go down and when a natural deflationary bust takes hold after the credit binge, any good central banker will print infinite amounts of money to make sure prices go right back to where they were. Make no mistake about it, Bernanke wants residential real estate and commercial real estate prices right back to the bubble levels and that is what he is trying to achieve although he will never say it publicly. Whether he will achieve this goal or not is a matter of whether sanity ever takes over and he is stopped before it is too late. What I mean by this is that were Bernanke to achieve this goal, he would completely destroy the purchasing power of our currency in the process. I fundamentally agree with Austrian economics patriarch Ludwig Von Mises’ observation that: “There is no means of avoiding the final collapse of a boom brought on by credit and Fiat monetary expansion. The only question is whether the crisis should come sooner in the form of a Recession or later as a final and total catastrophe of Depression as the currency systems crumble.”
Ok, so here is where things get tricky. A credit boom always ends in a deflationary bust as will the current one. Nevertheless, the question is what does the road to deflation look like. Zimbabwe ended in deflation too where the currency was destroyed and people started using U.S. dollars and other items in transactions. This begs the question of if all Western fiat money is destroyed (including the dollar) then what will be used in transactions? My answer is that it will be gold and silver as well as other “hard assets.” I believe the monetary masters of the universe are aware of the inflationary holocaust they are about to give the world, which is why there is so much chatter about the super fiat currency the IMF’s SDR. To me, any moves to an SDR should be rejected vehemently. Think of the power that is given to an authority like the Federal Reserve in the U.S. that is able to print the reserve currency of the world. They essentially run the world via the printing press. The power to create and grant money and credit at will to whoever they want is the ultimate power. You can buy oil, military equipment, loyalty, etc. Too few people still have an understanding of the power that central banks in a fiat money system have. They are in total control.
So imagine a world where the IMF is given the power to create and control the issuance of a fiat global currency. That is the end of the sovereignty of the United States of America and all other countries on earth. All I am asking my readers here is to think about this and whether you want that kind of a world for your children and grandchildren. IMF bureaucrats deciding the distribution of money and credit with a simple computer entry. I bring this up know because it seems clear the printing of money is not and will not cease. After the Massachusetts elections where Scott Brown won, the market sold off as many believed some sort of discipline would return to D.C. Clearly this has been a total bust and Obama is back to pushing healthcare and the Volcker Rule received two seconds of fame before the bank lobbyists destroyed it because free money coupled with prop trading is worth fighting to the death to preserve.
Hyper-Inflation is Not Inevitable
At this point I want to make several things clear. I do not think that the hyper-inflation scenario that is followed by a global fiat reserve currency is the inevitable conclusion to the current predicament we find ourselves in. The reason I mention it is because if we continue down this path much longer that does become one of the more high probability outcomes. I truly hope it never comes to that since I would not want to live in such a world. At this point I want to briefly discuss what could happen along the way to avert what would be a most unfortunate outcome. Commodity prices are the big thing. Gasoline prices on the wholesale level are only now breaking out of a trading range to the upside. With 17% U6 unemployment levels, oil has no business being up here for fundamental reasons of supply/demand so what we know is that it is really a function of too much money printing. If we get any further economic growth in the world from here I believe money velocity will start to kick in and oil will explode, potentially right back to $150/b and perhaps quicker than most expect. This would probably be accompanied by food inflation and we would see riots and social unrest all over the world in relatively short order. It would make the protests we see now in Greece look like child’s play. Evidence of this would first be seen in emerging market countries and later on in OECD. My hope would be that the social unrest and potential successful revolutions in many countries would lead to policy changes before it is too late. The most important of these by far is China allowing the yuan to appreciate. The yuan peg is essentially the source of a lot of the imbalances in the system and an appreciation, while tough to swallow for many industries and special interests in both China and the United States, would be a huge long term positive for the global economy as it would allow for a healthy and market based rebalancing of the relationship between the U.S. and China where we would consume less and export more over time and they would do the opposite. Unfortunately, Chinese and U.S. leaders instead seem intent on consolidating state power at the top and are aggressively furthering a destructive system that F.A. Hayek would derisively refer to as “planning.” As Hayek stated, “the more the state plans the more difficult planning becomes for the individual.”
So to sum it up the worse possible long-term scenario is for China to do nothing with the peg. This is the hyper-inflation/complete social chaos scenario since it will not allow other emerging economies that depend on exports to strengthen their currencies as much as is necessary. That said, not matter what happens one thing is inevitable. That is that the currencies of the West, especially the United States, the U.K. the Euro and the yen must depreciate massively versus many of the emerging nations in Asia as well as the commodity countries (Brazil and Australia come to mind). Either we continue to have all global currencies devalue versus everything or we stop pretending and devalue the currencies of the West to Asia and get on with it. Either way, it is a good scenario for commodities, with my favorite area far and away precious metals.
Have a great weekend,