Richard Martin’s Economic Perspective
Greetings from Singapore
As many of you already know, two months ago my wife, Marlene, and I left Miami and immigrated to Singapore . The decision took a lot of consideration especially since my work which is overwhelmingly US-based meant that I would have to work from 8 pm to 4 am . For several years I had been able to see that the standard of living in the United States was going to decline catastrophically for the foreseeable future, as I have talked about in my TLC articles for a long time.
I spent nearly twenty years in the United States . When I arrived in 1987, it never occurred to me that I might be leaving it for good years later. Knowing that each generation had had a better life than its predecessor, I believed that the tradition was set to continue into eternity.
Nixon's cancellation of the gold standard on August 15 th , 1971 , sixteen years earlier, was the fateful moment of truth for America . It was an act infinitely more injurious to the fortunes of the country than the Watergate affair and it could and should have culminated in his impeachment. The constitution of the United States specifies that the specie of the country is to be based on a mixture of gold and silver.
The effect of his action was to release the dollar's value from any reference to a hard and tangible asset such as gold, giving the green light to the Federal Reserve to print as much money as they pleased. And print they did. The initial purpose of Nixon's move was to fund the Vietnam War which had been hamstrung financially by the need to restrict the money supply to that which would be covered by the reserves of gold at the Treasury.
The consequent explosion of the money supply led directly to the inflation of the 70s which devalued the dollar and, by raising wages and prices exorbitantly throughout the decade, permanently pushed the United States out of the international competition for essential manufacturing, paving the way for the Chinese and others to take up the slack. Most people are not even vaguely aware that President Richard M. Nixon initiated the appalling condition the country finds itself in today.
Much water has passed under the bridge since my last Light Connection article . An epic financial meltdown was followed by a horrendous economic slowdown now euphemistically labeled The Great Recession', to be followed by The Recovery' or The Appearance of Green Shoots'.
We are told that the storm has now passed, the crisis is over, the recession' is at an end
we can now going on living our lives as though nothing had happened. Yes. Prestigious, Nobel Prize-winning economists are telling us this, along with the President, the Chairman of the Federal Reserve, the Treasury Secretary and countless others, all of whom will go down in the Hall of Shame as Pollyanna soothsayers who got it wrong yet again.
The facts: unemployment is at a 27-year high and rising, the debt-to-GDP (Gross Domestic Product) ratio is 375, way above the highest level ever recorded during the Great Depression (250), manufacturing is at its lowest point since the early 1940s, the housing market is collapsing month-by-month with no end in sight, the national debt is increasing to new highs, record numbers of bankruptcies are being published despite 2005 legislation which renders declaration of bankruptcy prohibitively difficult, a deflationary spiral wherein goods and services are falling in price but debt service requirements remain constant. I could go on and on. But for those who should know better to declare that the recession is at an end defies belief!
The essential thing to grasp at this point is that the powers-that-be simply have no idea how to handle the crisis. In many ways one might sympathize. Nobody has any experience at dealing with such a monstrous situation. No historical context is available as a guiding light. Comparisons are often made to the Great Depression but the fact is that what we have to deal with is far, far worse than the situation that led up to the Depression. The amount of debt on the books today puts that which was in existence at the time of the Depression into the shade. More people are losing their homes, both in numerical and in percentage terms, than ever before.
The manufacturing base which was, in fact, quite healthy at the time of the Depression, has been gutted and continues to deteriorate. This, by the way, is permanent. America 's manufacturing advantage that received a twenty-year head start after WWII when the manufacturing facilities of most other industrialized countries had been devastated, will never return.
However, what is profoundly different today from the Great Depression is the incompetence, arrogance, stupidity, deceitfulness and overt corruption that currently pervades the activities of the authorities and large financial companies. Roosevelt must take a great measure of blame for the misguided policies of the government in the 1930s which served to convert and prolong what started out as a fairly mild recession that could probably have been over in eighteen months, into a fully-fledged depression that lasted thirteen years.
But nothing compares to the spectacle of Ben Bernanke and Tim Geithner thrashing around, testing this-and-that theory, pouring more and more money into the pit of an economy plumbing the depths of decline, hoping to stabilize the economy enough to tide it over into some semblance of a recovery and save their own reputations.
There is no recovery. The light you are being asked to see at the end of the tunnel is truly that of an oncoming train. All apparently positive statistical reports that you are reading and hearing about are courtesy of government stimulus.
There is no statistical evidence of any organic growth within the economy. It is truly the futility of trying to plug the holes while the Titanic sinks. For example, it was recently announced that the Fed was purchasing over $1 trillion of agency mortgage-backed securities. At face value, that sounds quite harmless.
However, what is really happening is that you, the American taxpayer, are being forced by your government through the Federal Reserve, to buy over a trillion dollars of worthless paper that had been bought by Fannie Mae and Freddie Mac from banks and which collapsed during the meltdown. It remains worthless. But since Fannie and Freddie no longer have shareholders to answer to and now belong to the government, it doesn't make any difference to them how horrifying the consequences are for you.
In my last TLC article I warned of a potential collapse of money market funds. The oldest fund in existence, The Reserve Fund, broke the buck', trading at less than $1 per share. Now we hear that the FDIC will soon withdraw its support from these funds. The FDIC is already broke, having had to bail out over 100 banks this year, more than in the last sixteen years combined. It does have an open line to the Treasury but drawing down on it will focus attention on how fragile the situation is. The FDIC was last heard stating that it was considering borrowing money from the commercial banks, the very organizations they are supposed to insure! Extreme caution is advised.
The stock market, which has reflected the consensus view that the recession is all but over, is now trading at 139 times reported earnings, a statistic so overextended and out-of-whack as to be all but unbelievable. The market is about to collapse, following the path of the Japanese market twenty years ago and the US market in April, 1930 at the zenith of its first bear market rally (following which it lost over 90 per cent from its 1929 top to its 1932 low).
There can be no reason for you to be inveigled into believing the self-serving lies of the government or the financial services community and investing into a non-existent economic rebound. It is not going to happen. Governments are always trying to get you to spend money. It supports their efforts.
It keeps prices high which is to the advantage of their friends in business. It supports employment which is a key element in maintaining political power even if it puts you even deeper into unmanageable debt. Consider the cash-for-clunkers program where poor people were needlessly being encouraged to destroy their old cars and buy new ones, despite the high risk of taking on new debt that they could ill afford.
This is a time for extreme conservation. Remember that in a deflationary environment money not only holds its value, it gains value as goods and services fall in price against it. We will discuss what comes afterwards in a future article but for now the advice remains the same: liquidate all nonessential assets and keep your money in short-term, federally insured instruments or learn to short the market and invest in the downside of the economy and the markets and make money!
It remains for me to wish you all well in your financial endeavors. Abject ruin, which is the destiny of countless Americans, does not have to be in your future if you protect your assets and ignore the advice of the pundits.
Listen to Richard Martin on Wake-Up Call Mondays and Fridays at 7am Pacific on www. progressiveradionetwork.com. Richard Martin, Senior Vice President, Global Financial Advisory Wealth Design, Sarasota, Florida . Tel: 800-220-0614, ext. 152. Email [email protected]
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