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Stock Ideas Investors Daily Edge Will the Government Allow Asset Deflation?
Stock Ideas Investors Daily Edge Will the Government Allow Asset Deflation? 
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| Will the Government Allow Asset Deflation? |
| Tuesday, 09 September 2008 | ||||||||
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I’ve always liked this quote: “Life is what happens to you when you are making other plans.” I’ve certainly seen this in my life. But we keep making plans, don’t we? We can say the same of the governments. They keep making plans, rules, laws and policy. Then the economy happens... While the government talks about releasing the Strategic Oil Reserves, the price of crude goes down on its own. While it lowers the benchmark rate, interest rates keep going up. While it talks about energy independence, our dependence on foreign oil grows. Our oil bill last month was the highest ever. Does it make any difference what the government says ... the plans it makes ... or the policies it implements? I’m not just talking about the U.S., I’m talking about most governments. They’re usually operating under huge constraints which make real change almost impossible. Energy independence, for example, is so far off it’s just a speck on the horizon. If the U.S. government was really serious about it, they’d create an “expedited” approval process for new nuclear energy plants. Even then, at best, real energy independence is decades away. Politicians and government officials don’t even talk about economic independence. That’s a can of worms they’d rather not open. But why talk about energy independence when we have both our hands and feet tightly bound? The U.S. economy is in a heap of trouble. Europe is taking the same dismal path. And governments from both sides of the pond talk about raising (the U.S.) or lowering (Europe) rates, stimulus packages, changes in the tax regime – as if it really matters.
It only matters if you’re satisfied with changes that nibble on the outer-crust of how the world economy operates. Until recently this self-perpetuating machine called the world economy has been the model of simplicity. Asia sells to the West. Asia rakes in the hard cash. Asia is happy. The West consumes more and more. It’s happy. Asia lends the West more money. Asia can afford to. The West increases its consumption. It can’t afford to. But it’s happy anyway. The West no longer makes things. It consumes things. Manufacturing has moved to the south and east. That’s okay with the West. The father of free-market economics, Adam Smith, calls such “division of labor” the main cause of prosperity. Labor does and should move to where it’s most efficient (read: “cheap”). So how does the West pay for those things it imports? First the good news. The West provides technology and services and products at the top of the food chain. That’s where you want to be. Now the bad news. It doesn’t produce enough. The downward spiral begins... The West goes more into debt. And it gets paid with its own weak dollars which are worth less and less (if you like, please see one of a dozen charts on the dollar which Rusty has shown over the past few months). It should be clear to you by now that the only thing keeping Western economies afloat has been loose credit. The combination of low interest rates, the printing of money, and then giving this cheap money to anybody who asks for it (creditworthiness be damned) was bound to lead to several “hot” markets. Indeed it did. Housing got hot and stayed hot. Commodities got hot and stayed hot. Energy got hot and stayed hot. There were other overpriced assets that reaped the profusion of money into the real and fake (surely we know that is exactly what mortgage derivatives were) markets like... CEO’s ballooning salaries ... real estate in formerly cheap places like Moscow and Calgary ... works of art (yes, some managed funds have entered into the art world). Asset inflation has seeped into some unexpected nooks and crannies of our lives. Take baseball and homeruns. Everyone knows by now that the homerun stats from the ‘roid 90’s and early 2000’s are inflated. But for the incredibly inflated salaries offered, maybe you’d go looking for a little artificial help too. Inflated salaries are also behind the greed which led the highly paid management of the two flim-flam twins – Freddie and Fannie – to accept Alt-A “liar-loan” mortgages made primarily to speculators – not the near-poor who really needed them. And, unlike what you’ve heard, inflation has not led to a better standard of living. On the contrary, it has led to the beginning of the end of the middle class. Average household income has gone down during the Bush years. In order to enjoy the trappings of a middle-class lifestyle, these people had to go deeper and deeper into debt. In the meantime, the CEOs and their pals got their inflated salaries which bought inflated assets which helped increase the price of assets even more. It’s been a vicious circle that the rich could afford but the middle class could not. This is what has driven economic growth. It’s all been about inflated assets. China will not protest this world economic order. Nor will Russia. Or Venezuela. Or Iran. These countries have grown strong on the back of commodity and petro- inflation. To kill this insidious asset inflation, global growth will have to take a much longer break – I believe beyond the end of the year. In the meantime, we will feel much poorer. That includes the financial community. We could try to put off this painful day of reckoning. Many from Wall Street are suggesting that’s exactly what we should do. (For a more conventional view of the asset crisis and what the government should do about it, read today’s “Newsworthy”.) It’s a long road. And it’s just begun. Chances are, the government will do everything in its power to short-circuit it. As an investor, your best insurance in case it doesn’t succeed is gold and silver. Invest well, Andrew Gordon P.S. To let me know what you thought of today's article, send an e-mail to: This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
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