Tuesday, April 19, 2011

The Libyan Fiasco

Despite all the presidential huffing and puffing, the feckless launch of a hundred or so cruise missiles, and the expenditure of several billion dollars, Col. Qaddafi is still alive and his people increasingly are not. Mr. Obama sent our military to Libya on a humanitarian mission to protect the Libyan people from genocide, but was inexplicably punctilious in assuring the chief genocider that he was immune to attack. We had few qualms about killing off his military minions, and even some civilians, but the man who was pulling the strings and giving the orders was, for reasons not clear to anyone outside the White House, safe from our bombs.

Mr. Obama heeded the advice of the "chick hawks" in his administration (Hillary Clinton, Susan Rice, Samantha Power), gave the order to lob a few munitions at Libya, and promptly traipsed off to Rio to vacation.

Upon his return, however, the Libyan leaders were still not truckling to Mr. Obama's demands that they relinquish power. After a week or so of playing Commander-In-Chief with nothing to show for it except a couple hundred dead Libyans, President Obama was anxious to get back to his golf game, so he decided to turn the whole mess over to NATO, and pretty much walk away from it.

Ever since, the insolent Col. Qaddafi, in defiance of Mr. Obama's clear and unambiguous order to say "uncle" and step down from his office, has been revivified. His troops are everywhere on the offensive, the rebels are in disarray, the genocide that Qaddafi promised seems to be occurring unabated, and with the abdication of American leadership, the NATO coalition is falling apart.

The President hasn't had much to say about all this of late, preoccupied as he's been with calling Paul Ryan a coward for coming up with a plan to rescue the U.S. from bankruptcy, but one wonders if it all couldn't have been averted had he had the common sense to realize that if you're going to go to war, the best strategy is to end it quickly by decapitating the leadership. Had we done this at the outset Mr. Obama would be free to play an entire round without having to be interrupted by those pesky calls from Robert Gates at the Pentagon.

Maybe, though, that's just not the sort of thing one learns to do in the faculty lounge at Harvard Law School where Mr. Obama prepped for being President and where such extreme tactics are deemed warranted only if they're to be employed against Republicans.

The Gathering Economic Storm (Pt. I)

My brother Bill has for years been studying the fiscal insults our politicians have inflicted upon our nation's economy and has concluded that we've come to a point where all the evidence points to a very serious economic and social crisis looming in our near future. This is a prognosis shared as well by a lot of professional economists and others who have an interest in fiscal policy, so Bill's is not a fringe opinion. Recently he shared the reasons for this gloomy assessment with me, and what he said, discouraging as it is, makes a lot of sense. I've split it into two parts. Part I is below. Part II, in which he makes some practical suggestions as to how to prepare, will be up tomorrow:
Ten years ago I thought it good to begin suggesting that people who wanted to preserve their wealth consider purchasing gold and silver because the US dollar was going to eventually depreciate in value. At that time gold was selling for $265 per ounce and silver for $4.00 an ounce, and those that acted have been handsomely rewarded. Yet today, given the fundamentals of the US economy and the dynamics of current events, both metals are still relatively “cheap”.

For those who are either well-positioned in the metals or simply not interested, I suggest below another way to protect against the price inflation that is here today and destined to get far, far worse regardless of whatever political party is in the White House.

Several years ago I explained how to identify the “canary in the coal mine” which would signal the beginning of the end of our economy and our country, as we know it. It would be when the Federal Reserve begins to purchase US Treasury bills in an outright monetization of the national debt. When governments spend more than they take in, they must make up the shortfall by selling bonds (debt). If the marketplace is not willing to purchase said debt, the government prints their currency, bringing it into existence out of thin air, to finance the gap.

Unfortunately, the canary started to chirp its warning when the US Federal Reserve initiated what it refers to as Quantitative Easing, a euphemism for monetizing the debt, or simply the printing of money with which to purchase US Treasury bonds that the Treasury then uses to finance the debt incurred by Congress. Understand that each new dollar printed devalues each dollar already in existence.

In the beginning, it was called QE 1, under the guise of needing to stimulate the economy after the 2008 financial crisis. Once QE 1 ended it was apparent that there was no improvement in the economy so we began QE 2 for a period of six-months until this coming June, but QE 2 is open-ended, meaning it could go on indefinitely. So QE beyond June should be considered QE 3.

Today the risk of purchasing the US debt is so high and the interest paid on it is so low that no entity, national or private, is interested in such an investment.

We are truly at a fork in the road. If the Federal Reserve discontinues their policy of printing money there's hope for the US although the consequences of doing so would plummet the US into a severe recession, if not outright depression. However, we would ultimately emerge better, stronger, and healthier as all of the mal-investment that has been allowed to persist would finally be purged from the system. All it would take is political will and strong leadership from our administration. Lacking that, should the Federal Reserve, for whatever reason, introduce QE3, it’s game over ... time to hunker down. The average individual, will be decimated. This will be the ultimate event to watch for.

The issue is simple. The US spends more money than it takes in via taxes and so the difference is made up by selling bonds (loans). As an aside, note that even with the historically low interest rates today, the US pays $500 billion in interest on its debt annually. Should the interest rate increase by only one or two percent, the interest burden of the US debt would double to $1 trillion per year.

China and Japan were the two largest purchasers of US debt. They have been financing our profligate life-style spending for years. China has become concerned about the ability of the US to pay, not only the interest, but also the principal of its debt and has scaled back to where they are purchasing little if any more of our debt, and Japan is currently in no position to be making further investments in US debt.

The only thing worse for the US than these two countries not continuing to finance our debt would be if either of them (or both) begin to sell the US Treasuries they currently hold. While China is sitting on the fence regarding the issue, Japan will almost certainly be compelled to sell their US Treasuries in order to raise Yen to finance their reconstruction given the earthquake, tsunami, and nuclear disasters they've recently experienced. Should Japan begin to do so, it will cause the value of the US Treasuries to plummet and China will most certainly begin to sell as they won’t want to be holding US Treasuries that are dropping in value due to the Japanese sale. It will be a race for the exits for all holders of US Treasuries.

This comes at the worst possible time for the US and rather than a conclusion of QE 2, it is more likely we will be seeing QE far beyond June as the Federal Reserve will be forced to print ever more dollars to finance the gap in US debt purchases. It’s known as a debt trap and it eventually goes exponential, inevitably leading to hyperinflation.

During an inflationary period, the velocity of money accelerates. That is to say that when one gets a unit of currency, they rush to convert it to a good or service because the purchasing power of the currency will be less in the short-term future. As the crisis intensifies the decrease in the purchasing power accelerates to where nobody wants to hold on to the currency for any length of time.

I’m reminded of a passage about an interview with a German lady who was asked how she could possibly have supported someone like Adolph Hitler. The German Weimer Republic had just gone through a hyperinflation and she responded: “when you’re reduced to eating rats that you might catch, you’ll vote for anyone who promises anything better”. Understand that we‘re at the beginning of such an event.
Bill offers some advice in Part II about how the average person can prepare for this debacle.

Meanwhile, check out these links to other articles here and here that elaborate on the problems Bill describes above.

Have a nice day and stay away from high bridges and razor blades.