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    Time to Prepare – Massive Federal Deficits Announced

    by Chris Martenson

    Saturday, March 21, 2009, 2:29 PM

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    Saturday, March 21, 2009

    Executive Summary

    • US federal deficits reported to be $9.3 trillion over the next decade
    • Fuzzy Accounting means these deficits are actually vastly under reported
    • Actual deficits closer to $6 trillion per year, or $60 trillion over the next decade
    • Deficits defined and explained
    • Risk of a dollar collapse only increasing
    • You need to step up your personal efforts at mitigating the potential impacts of a US currency crisis

    The Congressional Budget Office just announced that the fiscal deficits of the federal government are going to be a lot larger than previously estimated. This news was taken in stride by the financial markets, especially the FOREX markets where the dollar is traded, but it will only be a matter of time before these massive deficits are recognized for what they are – signs of terminal illness for the financial prospects of the US, and, by extension, the dollar itself.

    It is vital that you understand the true extent of the illness, and the ways in which we systematically sugar-coat and under report the true magnitude of the situation by the use of Fuzzy Numbers – in this case, more accurately described as Fuzzy Accounting.

    In this report I will explain how to interpret the reported deficit, demonstrate the actual size of the true deficit, and then make the case that you should seriously consider stepping up your personal efforts at preparing for an uncertain future.

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    Where do we go from here?

    by Chris Martenson

    Sunday, March 15, 2009, 6:55 PM

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    Sunday, March 15, 2009

    Executive Summary

    • Hang on, the bottom isn’t here yet…
    • China voices concern over dollar holdings
    • Slump in global trade most severe ever recorded
    • When is a reduced trade deficit a bad thing?
    • US government fiscal deficit explodes
    • Tax receipts at an all time low
    • Print, print, print (Switzerland and the UK)

    Hang on, the bottom isn’t here yet… 

    As I see it, my work in preparing and sending these reports is to provide a different view from the mainstream press outlets, which I frequently regard as being overly optimistic or pessimistic, often at the same time.  For now, there is a lot of talk that "the bottom is in," and I wish to illustrate why I am convinced that the risk for additional downside is much higher than the chance that we’ve bottomed and are now on the road to recovery.   In this report, I will the case that the bottom is not in on the economy, recent stock market action notwithstanding.

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    Too Big To Save

    by Chris Martenson

    Sunday, March 1, 2009, 8:45 PM

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    Sunday, March 1, 2009

    The latest government budget proposal from the executive branch is out, and it’s a masterpiece of fiscal irresponsibility.  Clocking in at $3.6 trillion, it sports a deficit that is 12.5% of the projected GDP for FY2009 (fiscal year).   It also displays no sacrifice in any quarter, as everything is funded, and then some.  Sure, the priorities shifted between administrations, but a lack of spending limits did not. 

    "But this is an emergency!" we are told, implying that it’s not the right time to be pulling in our spending horns.  This argument rests on the assumption that our problems can be fixed through additional deficit spending.  However, the facts suggest that we are suffering from too much debt and too much deficit spending, not the opposite.

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    The Great Asset Bubble

    by Chris Martenson

    Sunday, February 15, 2009, 6:18 PM

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    Sunday, February 15, 2009

    Where are we going, and what lies next? To address these questions, we need to know how we got here in the first place.

    I want to share with you an interesting observation that I think will provide great clarity and insight into our current predicament, as well as indicate that our recovery, such as it is, will be protracted and incomplete.

    It begins with our old friend, the Debt-to-GDP chart (below), with our long-term average circled in green and our recent debt experiment in red. Today we’re going to focus on what happened there in the 1980s, when we began our long climb to our current levels of over-indebtedness.

    Debt to GDP with Reagan box.jpg

    Now, this is not a partisan statement by any means, because both parties played along, but Ronald Reagan’s terms in office (1981-1989) are marked by the blue box.  It was during his tenure that we initially began our experiment with ever-larger piles of debt.  Somewhere in the early 1980s, we clearly broke out of a long-established normal range of debt and into new territory.  Something happened there, but what?

    Before I explain, let’s make a few additional observations.  What else was in play in the same timeframe that debt was exploding?

    First, we must remember the US personal savings rate, which, as noted in the Crash Course, was inversely correlated (to a very high degree) during the same timeframe.  As debt was climbing, savings were falling in lockstep.

    Note in the image above that the erosion in savings began sometime in the early 1980s, slumping inexorably towards zero the rest of the way.  But I want to be careful here in how I associate the first chart (above, the Debt-to-GDP chart) with this chart of savings.  Certainly, they appear highly correlated, but this is not the same as saying one is the cause of the other.  Correlation is not causation, and we should always endeavor to be careful to distinguish the two. Still, there is a very tantalizing symmetry between the two that bears exploration.

    If I were to speculate, I would guess that the erosion in personal savings was not tied directly to debt, but to a sense of wealth and well-being.  The Fed has produced plenty of research papers investigating something called “the wealth effect,” which is the degree of additional consumer spending that can be estimated to occur as a direct consequence of rising asset prices.

    For example, the Fed estimates that for every dollar rise in someone’s stock portfolio, an additional 7 cents of consumer spending will result.  The idea here is that people who perceive themselves to be wealthier will spend more than people who do not. That seems like a fairly defensible notion.

    The wealth effect is a theory that has its fair share of critics, but it seems possible that people whose assets are rising steadily in price might feel less and less compelled to save money in the bank.  Additionally, we could also consider that people with expanded access to credit for managing their cash flow might perceive less of a need to maintain a cash buffer in the form of savings.  Credit becomes the buffer, especially if it’s ubiquitous and easy to get.

    Taken together, the decline in savings shown by the above chart could be attributed to an explosion of credit and generally rising asset prices.  Perhaps we could also speculate that the federal government set a bad example during this same period of time and thereby laid the cultural foundation for spending and living “in the moment.” Regardless of the reason(s), this phenomenon of zero savings has set the stage for what comes next, and we’ll be tying this lack of savings back into the story a bit further down.

    This next chart of total credit market debt illustrates the rapid and unprecedented expansion of debt over the past 30 years. This chart is really just a means of viewing  the debt portion only of the Debt-to-GDP chart since it’s the same data.   But here it’s easier to see the slight ripples in the data in the mid-1990’s that led Alan Greenspan to panic and open the credit floodgates that are directly responsible for much of the condition in which we currently find ourselves. 

    Credit Market Debt - total.jpg

    Now let’s look at these next two charts, each spanning the last 30 years, with one for stocks and the other for bonds.  In both cases, a rising line means a rising price.  In short, both stocks and bonds entered a sustained bull market in the early 1980’s and remained there for the next twenty years (stocks) to thirty years (bonds).

    SP500 30 year chart.jpg

    Bonds 30 year chart.jpg

    A sustained bull market in both stocks and bonds is one of those things that causes me to scratch my head and want to dig a little deeper. 

    All of these charts collectively encompass my entire experience as an investor, my time as an adult, and even some of my teenage years.  This means that I have spent nearly all of my life, year in and year out, living under a system of ever-larger debts, steadily higher bond prices, and stock prices that rose magnificently until 2000.  If I put housing prices on here, they would look like the bond prices, only steadier in their rise, and steeper, too, as they have doubled and doubled again over the past 30 years.

    How do we explain this?  What can account for stocks, bonds, and housing going up while savings went down?  Can we simply understand this as the natural result of a sustained credit bubble?

    The credit bubble is only a partial explanation.  To complete the story and understand why we face years of readjustment, we have to include the boomers.

    The Baby Boomers

    According to Wikipedia, “Influential authors William Strauss and Neil Howe label American Baby Boomers [as people born between the years] 1943 and 1960.”  This means that in 1980, the youngest boomer was 20, the oldest was 37 and the average was 28.5 (see table below). 

    Why is this important?  Because the boomers are the largest single demographics cohort in history, and they have exerted many well-characterized influences on politics and social structure.  I won’t go into any of that here, but will instead focus on what I view as the underappreciated economic and financial impacts of the boomer crowd.

    The relevant detail here is that a person’s income begins at a level of zero, and (on average) rises steadily to a point before declining throughout old age back towards zero.  Where is the peak of earnings?

    Again from Wikipedia, “Two decades ago, the peak earning years were between 35 and 44. Now they occur ten years later. Twenty years ago, those in their peak earning years took home about twice as much as workers between the ages of 20 and 24. Now they earn more than three times as much.”  

    So peak earnings lie between the ages of 35 to 55 over the period we are discussing (1978 onwards).

    This means that in 1980, when stocks and bonds and housing all began their journey into the wild blue yonder, the oldest of the baby boomers were just entering their peak earning years.   What might we predict to be the collective impact of a gigantic demographics bolus moving through its peak earning years?

    Well, accumulating savings and investing in such things as stocks, bonds, and houses are both highly correlated with earning power.   Extrapolating across an entire generational demographic bulge, we might readily defend the idea that rising asset prices were at least partially, if not largely, driven by the rising earning power of the boomers.

    Now let’s take another look at the 30-year stock chart with the boomers’ peak earning years (loosely defined as the time when the middle range of the boomer demographic was between 35 and 50 years old) marked upon it:

    Again, this might be a matter of correlation, not causation, but if the rise in stock prices witnessed over the late 1980s, 1990s and early 2000 timeframe was in large part due to a demographic bulge, then we could readily predict that stocks and bonds (and houses and everything else) will not be a sure-fire path to wealth in the future like they were in the past.    

    However, what goes up must come down. Those who save for retirement must also spend in retirement.  So I invite you to consider the idea that our common experience with paper assets might be explained as  a demographic dividend, as much as by the inflationary policies of the Federal Reserve or the fact that ample oil reserves were available to supply the economic expansion.

    If this thesis holds, then here’s what we might predict:

    Tailwind of boomer investment turns into headwind of disinvestment

    As mentioned in the Crash Course (in Chapter 14 – Assets and Demographics), there seems to be a slight problem in the model where one generation sells off its assets to the generation behind them.   When there are more sellers than buyers, prices fall, and when there are more buyers than sellers, prices rise.  So I must ask the question, “What will happen when the boomers seek to unload their assets to fund their retirements?”  It seems entirely likely that we could see more sellers than buyers for a while.  I am anticipating that this will create a sustained headwind that will grind down asset prices until a more proportional relationship to production is struck.

    The great illusion created by the demographically-driven rise in asset prices was the notion that one could park excess money in some form of paper or housing asset and “get wealthy” over time.  For a while, it seemed so simple.  Buy the right index fund and sit back and wait.  Just buy a house and wait.  Just pick the right stock and wait.  That’s all it took to ‘get rich.’  Right?

    But if you stop and think about it, this is really not possible, at least not in aggregate and certainly not over the long haul.  It is a cheap, temporary illusion.  Real wealth is created by people producing things.  Once a company has sold stock through a primary offering, no new capital is “invested” in the company, by virtue of the fact that people are bidding up its stock in the secondary market.  So all secondary stock-market purchases are really just bets on the prospects of the company to earn future money, not actual capital investment.

    The impact of the failure to save

    Real wealth comes from actual production. Somebody, somewhere, has to turn sand into a silicon wafer, and somebody else has to turn that into a semiconductor chip, which somebody else has to turn into a computer.  That’s creating value.  Along the way, it is vital that the property, plant, and equipment of these manufacturers be refurbished and replaced as necessary.  Unless we want to fund these investments from a steadily rising mountain of debt that will someday collapse on itself, the borrowings must come from savings.

    When I look around, I see nation that has failed both to save and to properly maintain its core capital stock.  The bridges in my town are all “D”-rated or lower, many towns still subsist on dial-up Internet access, and practically every public building is due for a retrofit.  These are local anecdotes, so take them with a grain of salt, but that’s what I see. 

    On a larger scale, it is certain that consuming more than one produces and failing to save (two sides of the same coin) are a sure path to the poorhouse.  Since the late 1970s or early 1980s, the US has been living well beyond its means, consuming more than it produces.  We call this “the trade deficit,” which is simply the measure of what we export against what we import.  Specifically, imports are subtracted from exports, and a negative number means, “You’re consuming more than you produce!”

    This next chart of the trade deficit is a bit old (it comes from a seminar I gave in 2007), and I certainly should update it, but it would tell the very same story:  The US is on an aggressive path to the poorhouse.  To fund all that excess consumption, the US made the strategy-poor decision to borrow the difference from foreigners, a decision which will either destroy the dollar at some point in the future or cede a form of economic veto power to our future competitors.

    Trade Deficit.jpg

    Along with this foreign borrowing came the migration of our actual sources of wealth generation (production) to offshore locations, which, when you think about it, was a necessary condition, because we were not saving enough to fund the required investments here at home anyway.

    The bottom line of this story is that debt represents a claim on the future, and future cash flows cannot forever be borrowed.  Eventually they must reflect actual production.   That is, future wealth generation must be of sufficient size to support future debt servicing costs. 

    Because the US made the extremely odd conjoined decision to both fund its excess consumption with foreign borrowing and send a large proportion of its wealth generation offshore,  a future consisting of a vastly diminished standard of living is about as much of a sure thing as one can find.

    Frankly, I do not see any possible way for the debt promises (see the Debt-to-GDP chart) to be kept.  I see a future of paper asset destruction that will bring future promises and future production back in line.  I don’t know all the wrinkles and details, but I am thinking that the next ten years will see the US’s debt obligations shrink back to something less than 200% of GDP.  Along with that, the portion of our GDP that was false, because it was inflated by excess deficit spending, will be shrinking.   I think that $25 to $30 trillion of (current value) debt destruction lies along that path. 

    The stimulus package, as large as it is, is merely a down payment. 

    This means that you might need to completely rethink your views on “investing” and how assets behave, along with how you will secure and protect your wealth.

    The notion that everyone can “become wealthy” through entirely passive investments in stocks and bonds is a deep-seated cultural belief that is constantly reinforced by a self-interested financial services industry.  But we each might benefit by asking ourselves, “Does this makes sense?”  And, if it does not, we must then ask, “What might the implications be?”   Whatever answers might develop in your mind, I invite you to trust yourself and to research the matter further if you are not entirely comfortable with them.

    What next?

    My purpose in writing about the true source of material wealth and the impact of baby boomers on stocks, bonds, and housing prices is to prompt you to seriously consider the possibility that the economic activity of the last few decades is misleading. 

    It is this disconnect between “how things were” and “how things actually work” that led me to make serious changes to my life.  It formed the basis for my deeply held belief that the next twenty years are going to be completely unlike the last twenty years.

    If you are like me, your beliefs about “how things work” were shaped during an anomalous period which will not soon be replicated in our lifetimes – if ever.  It comprised a unique combination of demographics, geopolitical circumstances, a politicized Federal Reserve, supportive energy supplies, and corporatized media better suited to reinforcing consumer beliefs than delivering essential context.

    In my estimation, this marks the beginning of a great leveling of expectations between what we promised ourselves and what reality can deliver.  We are in the opening stages of a grand play with many acts and even more plot twists.

    I intend this piece to give you one more tool in your toolbox that you could use in your discussions with your financial advisor, spouse, friends, or with whomever you regularly discuss our future financial prospects.

    The final act in this play, I suspect, will be the destruction of the dollar, along with many other fiat currencies, as stores of wealth.  You still have time to begin maneuvering your wealth out of fiat (paper) currencies and into tangible expressions of wealth, but in my experience, most people won’t, until and unless their beliefs are in alignment with the necessary actions.  For most people, most especially me, sawing at the rope that anchors our beliefs in the past is a slow process, with progress being measured by the breaking of each individual strand.

    Conclusion

    Most people cannot imagine a future any different from the present.  For many people, the coming changes will bring unexpected shock, inconvenience, trauma, or worse.   By thinking about these possibilities now and reshaping your expectations of the future, you will be far better prepared for the ride.  Some people are already experiencing unexpected and perhaps unwelcome challenges in their lives due to the economic transition that is already beginning to play out.  At this point, not many are expecting change to be imposed upon them, and even fewer have thought about where this change will carry them.  But some have thought about it, and making even simple changes to how you think about the future can be…well, a sound investment.

    A recent comment left at the site captures this dynamic perfectly, and I am pleased beyond words that Becca and I have been effective in achieving our goal of helping others to benefit from changing their thinking:

    My partner and I attended the Feb 2008 Rowe workshop and owe you an overdue THANK YOU for what you taught us, how you reinforced our trust in our own judgment and urged us to act based on our knowledge and judgment.  When we got home from the workshop we started with the simple things (food stores, changes to 401K positions) and over the past year have done more. 

    Four months after the workshop I was told that my job was being cut and owing to the insight and learning I got from you, I was in the right frame of mind to act quickly and benefit from what most would see as a disaster.  My job was in a large city, distant from our primary home and we owned a small apartment where I lived during the work week.  Within two weeks of getting the news that my job would end I put the apartment on the market and was able to sell it within 8 weeks (using Craigslist and pricing to sell).  We used the proceeds from the apartment to pay off our primary mortgage and other debts.  We are now debt free and, overall, better positioned to weather coming events.  I attribute much of this to the two of you and your dedication to getting this information to out to others.  You may also be interested to know that I have been distributing your first DVD to friends and have gotten very positive feedback and appreciation from those who’ve viewed it.

    Our lives are a lot simpler, happier and we are excited about the future.  I have become more involved in our local community and a couple of days ago I received an email asking if I would be interested in becoming the manager of a local farmer’s market.  Don’t yet know if that will work out, but if not that, something else will.

    Again, many thanks and warm regards.

    And that, right there, exposes the primary purpose of the Crash Course, this article, and many other resources linked and posted at PeakProsperity.com: Opening up your mind to the possibility of a future quite different from the past so that you can enjoy the luxury of a gradual process of adjustment where others might experience a wrenching transition.  I invite you to give this some thought.

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    Banks on the Brink

    by Chris Martenson

    Tuesday, February 10, 2009, 8:43 PM

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    Tuesday, February 10, 2009

    The impact, and probable purpose, of this buying is to drive up the price of stocks and to ‘rescue’ the market from a technical failure that would have ensued by a breach of the November lows.

    A belief I hold, formed from watching this same pattern play out dozens of times, is that such upthrusts in the price of stocks do not reflect a change in their underlying fundamental prospects, but rather are mere technical affairs driven by a few interested parties, who have the ability, and the deep pockets, to horsewhip prices off of key technical points.

    But that is merely my belief, as I have nothing to go on besides having watched the futures premium (for the S&P 500 contracts) perform some very odd and very bold departures from the cash market at key moments.

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    Biting the Hand that Feeds

    by Chris Martenson

    Monday, January 26, 2009, 8:47 PM

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    Monday, January 26, 2009

    In this report I explore a troubling (to me) set of statements made by Treasury Secretary nominee Timothy Geithner about China being a “currency manipulator” and the possible impacts of adopting that stance.

    I think the worst is yet to come. I think we are only steps away from a major currency and banking crisis. I think that your opportunities to position yourself for that outcome are shrinking rapidly. I say much of this based on the alert I sent out earlier that focused on the troubling stock price performance of the biggest banks that head up the list of those institutions holding the largest derivative positions.

    But the rest centers on an especially troubling statement made by the Treasury Secretary nominee, Timothy Geithner, between his confirmation hearings. He said, “President Obama — backed by the conclusions of a broad range of economists — believes that China is manipulating its currency.”

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    It’s Simple: Trust Yourself

    by Chris Martenson

    Sunday, January 18, 2009, 10:11 PM

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    Sunday, January 18, 2009

    I was recently asked how it was that I knew to sell my house prior to the bursting of the housing bubble, why I sold out all my stock holdings in favor of gold and silver long before that was an obviously sensible move, and why I am convinced now that the recent actions by the Fed and the Treasury Department are likely to fail.

    But most of all, how did I get it right, when so many others missed it entirely?

    While I do root around in masses of complicated data, the answer to these questions is surprisingly simple: I trusted myself.

    More specifically, I trusted myself enough that when I saw something that didn’t make sense, something that just “felt wrong,” I took actions accordingly.

    • It didn’t make sense to me that a nation could consume beyond its means forever.
    • I was stumped by how an economic system predicated on continual expansion of credit would make a graceful transition to a no-growth environment.
    • I didn’t understand how people making $50k per year could buy $500k houses with no money down and have any hope of paying that back.
    • The concept of turning a bunch of subprime loans into higher grade securities, while extracting money along the way, puzzled me deeply.
    • It didn’t seem possible to me that money could continue to expand faster than the economy, long-term.

    My work and my passion are centered on helping you spot these same sorts of disconnects listed above, so that you can see things more clearly and with less confusion about the direction of things.

    Trust yourself

    The key to navigating during moments when the dominant story is ‘wrong’ is to consciously block out the ‘programming’ that is constantly reinforcing the status quo and to examine each assertion made by authorities (and by advertising and journalists, and any and all experts, myself included) as though it were possibly a live hand grenade.

    While you may ultimately end up agreeing with the assertion or claim, your first instinct should be one of suspicion. Often my first clue that I need to do more research into a particular assertion is simply a gut feeling that “something is not right here.” Even when I cannot quite articulate why, and maybe have almost zero hard data on the matter, I have learned to trust my instincts for when a story just doesn’t add up.

    This principle can be applied to the Bernie Madoff swindle. Many investors have recently described that they had suspicions and concerns over the years about the steadiness of Bernie’s investment returns. Yet they kept their money with him. If they had simply trusted themselves and decided to move their money to an institution where they did not have these gut-level concerns, they’d be in infinitely better shape right now.

    Here are examples of recent assertions that have sent up my warning flags:

    • Stocks always go up over the long haul.
    • Hydrogen is a suitable replacement for oil.
    • Our economic health depends on “unlocking the credit markets.”
    • There’s “cash on the sidelines” waiting to go to work. (Which of course, as we know, will drive up prices).

    Taking responsibility

    I want you to take full responsibility for your future. Heck, I want everybody to take full responsibility for their futures. This begins with educating ourselves about what’s really going on in our world, which you are already doing.

    One of the main impediments to this, as I see it, is that we have long been trained to trust authorities. We are constantly told, in ways both direct and subtle, that our job is to carry on while the big players take care of things. Our schools teach us that the right answer comes from the front of the classroom, and our jobs often reinforce the value of keeping one’s head down and one’s opinions to oneself.

    But now that the track record of our authorities reveals that relying on their competence alone would be a bad strategy for us, how do we break out of our longstanding habits and forge off on our own to make our own decisions?

    The key, again, is to begin by trusting yourself and then acting on what you know to be true, beginning with small steps.

    Economic disconnects

    So here, in January 2009, are the three major economic disconnects that I am focusing on:

    1. How is it possible for an insolvent nation to borrow money from an insolvent financial system to bail out insolvent financial institutions?

    This is the biggest of them all. It is the primary disconnect that makes me go quiet when someone expresses their hope that “Obama will fix things.” While I also carry the hope that smarter decisions will someday soon be made in Washington DC, the disconnect emerges when I compare the enormity of the task against the abilities of a new administration, let alone one man.

    Until and unless I gain an appreciation for how we can borrow our way out of this mess (and I must confess that this completely eludes me at the moment), I will maintain a hyper-protective stance on my financial holdings.

    Remember, the point of a bear market, and we are in the beginning stages of what will probably be the largest one on record, is to destroy everyone’s wealth. In 1929, it was said, people lost money. In 1930, the smart people lost their money. In 1931, the really smart people lost their money.

    At times like these, when I have very large questions about the overall solvency of the entire system, I strongly resist any and all calls to “get back in the pool” and buy stocks “before they go up” because “they always go up over the long haul” and “there’s money on the sidelines.”

    If you are hearing any of these sorts of urgings from your friends, family, or broker, just ask them the question in bold above.

    Because I am stumped as to how an insolvent system can borrow from itself I remain deeply skeptical of any and all claims that we’ve seen the bottom in the market.

    2. How are we supposed to return to a renewed period of economic growth predicated on more consumption, when baby boomers (the wealthiest generation) have seen their two primary forms of wealth, stocks and houses, fail in the same decade?

    The near-desperate maneuvering by the federal government and the Federal Reserve are aimed squarely at returning our economy to a position of growth. Growth requires consumers to spend more money on more things going forward.

    But our consumer landscape is still dominated by a demographic feature (anomaly?) known as the “baby boomer bulge.” As Bill Bonner wrote in Financial Reckoning Day, “Older people down-scale their lives, cut back on their spending, pay down their debts, and add to their savings. As people move from middle age into old age, they increasingly save for retirement and sell any stocks they had during their middle age.”

    The outlandish spending of the 2003 – 2007 period, which our authorities are now attempting to resuscitate, faces two powerful headwinds:

    1. People’s asset-based wealth has been mauled, and will have to be largely rebuilt before the “wealth effect” kicks back in to support spending based on a restored confidence in asset-based wealth. This will take years, if not decades, and boomers will be selling their assets into any attempts to reinflate the housing and stock markets (bubbles).
    2. Much of the recent spending boom was supported, not by assets, but by credit and by spending beyond our means. While the desire to spend beyond one’s means is an ever-present human condition, the desire to lend is a more fickle sentiment. It will take a while (years?) to revert back from saving to borrowing and spending.

    I see many commentators already calling for a bottom and searching for signs that a recovery in consumer spending is happening. In many cases, these folks are drawing upon historical examples of recessions that have typically lasted about as long as our current recession, implying that this one may already be drawing to a close.

    The danger here is failing to appreciate the extent to which our recent excesses were simply over the top and are very unlikely to be repeated any time soon. The greater the excess, the larger the hangover.

    3. How can US dollars be considered a “safe haven,” given how many of them (trillions and trillions) are being newly created out of thin air?

    In a luncheon speech (Jan 15th 2009) in San Francisco recently, Janet Yellon of the Federal Reserve had this to say about the Fed’s actions:

    Yellen said the Fed is already buying mortgage-backed securities and has begun a program to do the same for bundles of “auto, student, credit card, and…Small Business Administration loans – sectors where the issuance of new securities has slowed to a trickle.”

    She said this novel pump-priming tactic has already helped push down the rates for 30-year, fixed-rate mortgages.

    As for where the Fed has gotten the cash, Yellen said it’s simple.

    In a sense we are printing money,” she said, adding that she is not worried about inflation right now but the reverse – falling prices that make it harder for businesses to boost sales, prompting more layoffs and causing the downward spiral called deflation.

    Let me shorten that up for her. What she meant to say was, “We are printing money.”

    While I recognize that other countries are doing the same thing, the US is the most indebted country and is printing the most (by far). Sooner or later, investors and countries will lose confidence in a currency that is printed with wild abandon whenever the mood or circumstance strikes. After all, fiat money is founded on confidence, which can evaporate rapidly if the motives and/or competence of the managing authority are called into question.

    Without mincing words, the Fed is now “monetizing debt” and runs the very real risk of a massive devaluation of our currency. Of course, I would strongly suspect that this is actually the goal of the Fed, although they will not come right out and say that. Competitive currency devaluations have been a feature of every global financial crisis and are the preferred way of relieving the strains built up by the past periods of excess.

    What should you do about this?

    Trust yourself, and take actions accordingly. Take responsibility for your actions by educating yourself well about issues that you do not fully understand, and do not trust or assume that the authorities know better than you do. Listen to your instincts, act on what you know to be true, and steer clear of the things that don’t make sense to you.

    As you gain comfort with this material, the actions you will need to take in your own life will become evident.

    It’s really that simple.

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    Is the medicine worse than the illness?

    by Chris Martenson

    Saturday, December 27, 2008, 1:29 PM

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    Saturday, December 27, 2008

    In this report, I explore a remarkable article by Mr. James Grant that appeared in the December 20th edition of the Wall Street Journal.  This article is remarkable because Grant correctly identifies the Fed as the source of current economic troubles and makes the case that, under a gold standard, we might have a different set of troubles, but we wouldn’t be facing an extinction-level event for finance.  With the deft use of historical examples, he makes a strong case that our current ills stem from very common mistakes that have plagued central banking ever since it was first invented.  I expand on several of his arguments to steer towards the conclusion that inflation lies in wait.

    James Grant writes The Interest Rate Observer, a financial newsletter with an $850/yr subscription price. If you are not impressed by high numbers, then you might care that James Grant has been in the business a long time and has been especially good about providing a conflict-of-interest-free newsletter since 1983.

    I always enjoy his commentary and consider him to be one of the best in the business.

    Imagine my surprise to see him openly discussing the abolishment of the Fed in a Wall Street Journal editorial last week. And extolling the virtues of a gold standard. You could have knocked me off my stool with a feather.

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    The Zero Bound

    by Chris Martenson

    Wednesday, December 17, 2008, 3:48 PM

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    Wednesday, December 17, 2008

    This report looks at the latest move by the Fed to drop interest rates to zero and to print massive amounts of money as part of a quantitative easing effort. It looks at the most recent Fed statement that accompanied the rate decision in some detail and closes with an exploration of what this could mean to the dollar (hint: not good) and our financial future.  I offer my view on the dollar, stocks, bonds, gold, and real estate.

    Welcome to a brand new world. Today the central bank, stewarding the world’s reserve currency, took a step so bold and so fraught with danger that it is difficult to envision all the possible ramifications. The US now has an official interest rate of zero and a strongly worded promise from the Fed that monetary printing (a.k.a. “quantitative easing”) will now begin in earnest.

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    A Crisis Is A Terrible Thing To Waste (Part II) – Quantitative Easing

    by Chris Martenson

    Sunday, December 7, 2008, 8:58 PM

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    Sunday, December 7, 2008

    The Fed has begun a very aggressive program of money printing (that goes by the fancy name “quantitative easing”) and shows every indication of continuing this program into the indefinite future. Chances are that the Fed will err to the inflationary side with this program, raising the prospect of serious inflation emerging at some point over the next year.

    As we discussed last time, the Federal Reserve is taking heroic (foolish?) steps by essentially becoming the credit market. Where private participants have stepped away from lending and borrowing in anything remotely close to prior quantities, the US government and the Fed have stepped in to plug this hole.

    If this was all that the  folks at the Fed were doing, it would be risky enough, but they are doing something even riskier, and for which there is precious little history or precedent to guide them. This goes by the name “quantitative easing.”

    You should care about this arcane-sounding economic term, because if the Fed gets this wrong, they will ruin the economy for many years (decades?) to come and quite possibly ruin the dollar along the way. Understanding this dynamic will be essential to answering the question, “When will deflation turn into inflation?”

    We will get to that question soon.  But first, what is quantitative easing?

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