Vigilant Investor

“The Federal Reserve as other central banks is obviously taking onto its balance sheet a lot of mortgages these days.” “Well, the creators of the Federal Reserve system would be rolling over in their graves if they knew the Federal Reserve is buying mortgages.”
– Former Federal Reserve Chariman Paul Volcker

Whether or not the creators of the Fed would be rolling over in their graves is debatable in our opinion. Like Andrew Jackson — we believe central bankers have always been dangerous, incompetent meddlers. We feel the Fed should never have been created — and and that it continues to prove itself as bungling as any other central planning committee. But we digress…. That said, the former chairman’s grave concern over the central bank taking on billions of not so hot private debt is quite valid.

Volcker went on to warn that recent intervention by the Fed in securities markets might compromise it’s independence. He went on to say that the Fed’s inability to contain inflation will create a 1970’s like scenario. Again, he’s right there. We’ll also add, it’s too late Paul — the nationalization of the US private debt has begun. When politicians, who’s outlook is only as far as the next election — get involved, the trend will only accelerate. So to will corresponding inflation and Dollar degradation.

Beyond the blatant example of the Fed’s $30 Billion bailout of Bear Stearns — we now see Senator Christopher Dodd proposing the creation of an FHA program to insure refinanced mortgages following partial forgiveness of the loans by lenders. OK, let’s think about this. In an environment where U.S. foreclosures have risen 65% over the past year — and private banks/lenders are preferring to seize homes rather than renegotiate with already defaulting borrowers — the Federal Government is going to step in with money it does not have (but will be all to happy to print) — to back already bad debt.

Also, earlier this month, the Fed agreed to accept securities backed by student loans pledged as collateral for Treasuries the central bank would in turn lend to Wall Street Investment Banks. Let’s analyze that deal. Investors had become far less willing to finance student loan debt at pre-existing prices — due to liquidity issues, the economy, and the fact that consumers (including students) are hurting — and are therefore higher credit risks. The cost to finance such loans would have to naturally go up. Wall Street investment banks (you know, the ones who paid themselves billions in record bonuses over the past year) were less willing to hold onto securities they owned backed by this type of debt. However, if they tried to sell it — they would sell it for a loss. No worry, the Fed would lend/swap them Treasuries for the riskier (and worth far less) student loan backed securities.

Effectively, you have the government, or quasi government institutions backing substandard debt with money it will have to print. That spells one thing — accelerating inflation — and the always accompanying confiscation of private savings. And we’re not talking the low single digit inflation figure the government “calculates” (and bases Social Security payment increases on). We’re talking about the inflation you see in the supermarket ($4 for a handful of blueberries anybody?) — and at the gas pump.

When we hear the Treasury Secretary, or the Chairman of the Fed talk tough on inflation and defending the Dollar — we just smile. When we hear political candidates blaming oil companies and “speculators” for rising prices — we smile again.

We think the next 3-5 years will be quite interesting.

“I think we were really on the verge of a financial collapse of unbelievable proportions that we haven’t seen since the 1930’s.”
– Former U.S. Treasury Secretary Paul O’Neill describing the Bear Stearns bailout in an April 16, 2008 interview on Bloomberg

Read that quote again by Paul O’Neill – because, yep folks, that’s really where things stand. Our financial system effectively patched together by an inflationary, money printing band-aid. And, as the real estate markets in England, along with those in Spain, Ireland, et al. continue to melt down, we maintain our belief that the whole fiasco is far from over. (Our regular readers know we said the same when conventional pundits said the worst was over in 2007).

The interesting thing about economics is that people have been conditioned to believe in the charade that it is a mysterious, complex, science – and to be successful at understanding it, explaining it to the great unwashed, and at running large portfolios – one must be a superior mathematician educated at the most prestigious of universities. As we watch the same geniuses educated at said universities – some of whom had supposedly developed mathematical models which had eradicated risk – continue to drive hedge funds (and at least one major Wall Street brokerage firm) valued in the $ billions straight over the cliff – we say – “oh really?”

We instead choose to take Harry Truman’s quote — “There is nothing new in the world but the history you do not know” – to heart when we look at economics. History is in fact the study of human behavior – of what has worked, and what has failed. To ignore historical facts one must be either arrogant, a fool – or an arrogant fool. So, as Sir Alan Greenspan and his knights at the Fed Round Table repeatedly cut rates earlier this decade – we warned that the unfolding scenario looked a whole lot like Japan in the 1980’s and 90’s! A Stock market bubble, followed by a stock market crash – and subsequent economic pain. Then came massive interest rate cuts to supposedly “stimulate” – which instead caused a real estate bubble – followed by a real estate collapse, and a severe, prolonged recession.

Sound familiar?

What next? We see the bailouts continuing — simply because the alternative is the severe and necessary corrective pain to clean out the mess and get prices of all things back in line. And what politician, Wall Street banker, investor, or voter wants to deal with that reality? And bailouts spell inflation. Not the fudged low-ball inflation that’s used to calculate Social Security payment increases or “official” economic growth. We’re talking about real inflation. The rapidly rising kind you are seeing at the supermarket and the gas pump on a daily basis. As these inflationary bailouts continue – look for prices of all things tangible to increase dramatically.

Commodities bubble? We think not – because bubbles require excessive stockpiles/inventory/supply – and we don’t see that at all – in anything. And we see inflationary (money printing/bailout) policies accelerating.

Oil at $125 in the near future anyone? $5 Dollar gas at the end of the year? Food prices continuing through the roof? It would not surprise us at all.

We’ve continually warned about the bailout addicted U.S. Another voice of clarity and reason all along has been Bill Fleckenstein. As usual, he nails it in his latest commentary, “Catering to the Bailout Nation.” BTW, Bill’s recently released book Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve – is definitely worth a read! We wonder — has anyone ever been un-knighted? Can they do that?

Any reasonable person knows that bailouts beget more (and larger) bailouts. Like a drunk having another drink, it’s just going to make the hangover (and resulting inflation) even worse.

Also, ask yourself this one – why are big Wall Street banks getting bailed out (with taxpayer money) – when the 5 largest recently paid themselves 39 $Billion in bonuses?

Think long and hard about the answer to that one – because you are paying for it – in overt taxes, and the great hidden tax – accelerating real inflation.

With today’s 75 basis point rate cut – we see continued evidence as to whom the Fed really serves. As we have long said, it’s not you and I – it’s the Big Wall Street Banks. The “Big Rip-Off” of your savings continues. Jon Markman gets right down to it…

In today’s New York Times, Ben Stein writes an article pointing out that Goldman Sachs has sold $ billions in Collateralized Mortgage Obligations (C.M.O.’s) — including during a period where current Treasury Secretary Hank Paulson led the firm. In his piece, Mr. Stein also mentions that while Goldman was selling C.M.O.’s – it was also shorting them through index sales.

We don’t agree with Mr. Stein’s belief that the Fed will be able to save the lending day with injections of liquidity – because (among other reasons) we believe the resulting inflation will be painful and destructive. Also, after raising the “Spock Eyebrow” over the nexus between Treasury and one major investment bank – perhaps he should cast the same discerning gaze towards the Fed and it’s true loyalties.

That said, his article certainly poses quite interesting and intelligent questions — which should make any rational person think long and hard. An interesting read, indeed!

Our long–term readers know we have continually cautioned about serious economic consequences to come. Not because we’re “doom and gloomers” – but because we feel the best way to take advantage of the truth – is to first acknowledge it. Our opinion has been that when these truths gain increasing acceptance – the full brunt of their effect will soon to be felt. While those in the mainstream conventional camp have long been in denial over unpleasant, troublesome, displeasing economic facts (i.e. the truth) – things are beginning to change.

In today’s New York Times, Bob Herbert writes an “on the money” op-ed titled, “Recession? What Recession?” In it he describes increasingly looming economic eventualities we have long warned about – and he does not sound optimistic – at all.

We feel the consequences of unhealthy, dysfunctional economic policies will, for the uninformed – and those in stubborn denial – have sadly devastating effects. One being their savings & purchasing power inflated into oblivion. However, for those who acknowledge the truth – and act appropriately — this is a time of incredible opportunity.

The window is closing. The boat is pulling away. There is still time. Are you prepared?

You know, we’re continually amazed as we witness an extremely interesting phenomena. Really amazed. Turn on any evening financial television show and you’ll hear the pundits demagogue on how Treasury Secretary Paulson must defend the Dollar. Bemused, we ask –“with what?” Today, Mr. Paulson accused the Chinese of unfair competition for not letting their currency appreciate. He also intimated that letting the Yuan strengthen would help stave off protectionist sentiment in the U.S.

The Chinese must be shaking in their boots! A debt addicted, debt laden, cheap foreign import dependent U.S. — much of who’s debt is financed by and cheap goods imported from the very same Chinese, effectively threatens said Chinese with protectionism if they don’t let their currency strengthen further. What?!

Common sense tells any rational person that the Chinese hold all the cards – are playing them well – and evidently intend to continue doing so. The Chinese have sat back silently and watched us bleed money (which we’ve had to borrow) — in Iraq. Just yesterday, they announced they will likely follow supermodel Gisele Bundchen – and begin to divest themselves of the rapidly depreciating Dollars they are awash in. Will they buy Gold? Silver? Agriculture? Oil? Corporations? We think all of the above – and more. China dumping Dollars is bad for the U.S. Soon the world will follow – and a nation addicted to debt will have to raise interest rates to continue to borrow. The last thing any person, business, or country severely in debt wants is the cost of their debt service rising.

And if the Yuan does strengthen dramatically, the cost of Chinese imports will rise correspondingly. What do you think that will do to the price of goods at Wal-Mart, Target, et al? How will paycheck-to-paycheck mainstream America handle that? We think not well.

An ancient Chinese curse states, “May you live in interesting times.” Well this is going to be interesting.

Protect yourself accordingly.

“And you can kiss it Goodbye!”
— Former Pittsburgh Pirates broadcaster, Bob Prince

The legendary Bob Prince would utter that call, as Pittsburgh Pirates hitters of a bygone era would knock ‘em out of the ballpark. Today, you can say the same thing about your U.S. Dollar.

After the drubbing the markets took at the end of last week – things seem unlikely to get better. To be honest – odds are they will get a lot worse. The well-established housing slump continues its nosedive. Job losses seem poised to mount. President Bush has directed the FHA to guarantee loans for delinquent borrowers (a massive bailout). Foreign ownership of U.S. government debt is dropping. Nobody knows what time bombs tick regarding mortgage-backed securities, as massive amounts of adjustable mortgages begin to reset.

And — what we have long warned about – is in no uncertain terms, coming to pass. The Dollar is getting crushed.

The Fed – along with U.S. policymakers are stuck between a rock and a hard place. The lowering of interest rates to re-stimulate the credit based American economy would certainly have an inflationary effect. A bailout of mortgage borrowers & lenders (via money printing) would also. Not only would a further acceleration in price increases be the result of such policies – so would the continued degradation of the value of American savings. Even more disconcerting is the potential that foreign lending to debt addicted America would continue to dry up at an extremely quick pace. (Why get paid back down the road with far more worthless Dollars)? Like all bad creditors – the U.S. may soon be required to pay a higher cost (interest rates) to continue borrowing. And that is never good for the bottom line.

So – will U.S. policy makers swallow the necessary bitter medicine? Will they let more hedge funds sink? Will they not bail out Wall Street. Will they let homeowners who got themselves into ridiculous, unrealistic mortgages either tighten their belts and cut spending in other areas – or become renters again? Will they let home values sink to more realistic levels? Will they watch the cleansing effects of a recession (caused by the artificial bubbles they created) take its course? Will they let the Dollar fundamentally strengthen?

Or will they try to take the easy, short-term solution way out – by greasing the wheels via the easing of credit and printing of money?

We predict the latter. But they are running out of rope.

Kiss that Dollar Goodbye!

Earlier this year, we kept hearing mainstream pundits (typically those with a vested interest in the areas they commentated on doing well) tell us that the housing slump had “hit bottom” — and the sub-prime mortgage fiasco was under control. Well – each day proves them increasingly wrong. As we have continually cautioned, people are almost always bullish on what they are selling. For this reason we have been highly skeptical about realtor association & homebuilder commentary stating that we have seen the worst in the housing sector. Commentary by financial “experts”, analysts, and the Chairman of the Fed stating that the “sub-prime contagion” has been contained cause us to raise the “Spock Eyebrow” and say, “oh really?”

Every ball thrown in the air falls the same distance back to earth. Every return trip is the same distance as that initially traveled. Every bubble deflates to its beginning size. Highly leveraged, overly risky (invested in predominantly sub-prime mortgage backed bonds) hedge funds go bust.

Thus, we agree with the more astutely objective such as Jim Rodgers – who in an interview with Bloomberg today stated that the correction in homebuilders and U.S. investment banks has a long way to go.

The beat goes on.

As the equity markets continue to launch through the stratosphere — we have to step back and marvel. Friday’s Dow closed at 13,556 – posting gains for the seventh week in a row. (Heck, another 400 points or so and the Dow will again reach its inflation adjusted high from 2000)! Fueled by buyout fever, stock markets climb ever upward — and it appears no news is capable of changing their trajectory. Not record levels of debt, record budget deficits, massive trade deficits, negative personal savings rates, a bursting housing bubble, sub-prime mortgage woes, rising real inflation, slowing consumer spending, rising consumer credit, rising energy prices, a slowing economy, weakening dollar, and to quote Yul Brynner from “The King and I” “Etc., Etc., Etc.!”

Is this all madness? It depends on your definition of the word. In our opinion the answer is no. There is a logical and easily understandable explanation. It’s simply massive amounts of liquidity (much of it leverage/debt) being injected into the financial (and other markets). The reason the Dow sits at 13,556 and housing prices skyrocketed until recently — is also why gas, oil, and basically everything else is becoming so expensive. Simply put, if we were all playing Monopoly and decided to inject massive liquidity into the game – the price of Park Place and everything else on the board would soon skyrocket. It would not surprise us to see the markets continue their upward march. 20,000 Dow? Who knows! If the Dow does hit such a level, don’t be surprised to also see a $40 Pizza, $5 Cup of Coffee and $12 Beer.

Continue Reading »

“Praecesserat per multos dies tremor terrae, minus formidolosus quia Campaniae solitus. (For several days before, the earth had been shaken, but this fact did not cause fear because this was a feature commonly observed in Campania).”

— Pliny the Younger — describing events preceding the cataclysmic eruption of Mt. Vesuvius in 79 A.D. which utterly destroyed the cities (and inhabitants) of Pompeii and Herculaneum.

Today, the metropolitan area of the Bay of Naples is packed full of millions of people (all presumably who can read) in the shadow of the still active Vesuvius. In the meantime, experts clearly state that current evacuation plans would fall woefully short when the volcano has another major eruption. This is particularly disturbing since recent discoveries show Vesuvius had an eruption (the Avellino Catastrophe) 4000 years ago, which was far more violent than that which destroyed Pompeii. The Avellino eruption destroyed a swath of territory including the area which encompasses present day Naples. It made the entire region uninhabitable for centuries.

Evidence also indicates that Vesuvius erupts violently every 2000 years or so. This includes Avellino 4000 years ago. Pompeii — 2000 years after that. 2000 years later – well, that’s now. Actually, statistical tests indicate a 50% chance that Vesuvius will have a major eruption this year – with the probability increasing every year after that.

History is rife with examples of serious (and obvious) warning signs of catastrophic events being ignored – the tremors before Pompeii’s destruction being one of the best known. We ask ourselves – what is it about human nature that causes individuals to dismiss advance warnings, which could prevent experiencing so much anguish? Why do animals listen to their basic instincts – yet “advanced” human beings often override their own (almost always regrettably so)? Why does it seem, the more “intelligent” a being is – the greater it’s ability to go into denial about impending events?

While the reasons for this phenomenon may be complex – we’ll call it the “Pompeii Principle.” It has many parallels, and can most certainly be applied to financial markets and the economy today. Like magma as it builds greater pressure over time while it moves closer to the earth’s surface – the excesses and imbalances in today’s economy and financial markets grow increasingly, grossly distorted. Record U.S. trade & budget deficits; record household & consumer debt; record/massive growth of money supply; plummeting savings; and the housing bubble all factor into the mix. Today, total credit market debt now exceeds 300% of U.S. GDP – a level only rivaled (but not surpassed) by that at the start of the Great Depression. (That’s an eye-popper)!

All rationalized away by the mainstream.

If an event like the Great Depression represents an economic Avellino, or Pompeii – would it not be wise to pay attention to the mounting pressure building beneath our very feet today? We think so. Wise also to not ignore the recent tremors caused by sub-prime lending and housing, along with the 416-point drop in the Dow on February 27th.

If things continue down the same path, something’s gotta blow – and as in Pompeii, it won’t pay to dilly-dally in the Forum.

“History does not repeat itself, but it sure does rhyme a lot.”

– Mark Twain

As the election results are finalized, and we see the Republicans lose both the House and Senate – we muse about what is to come. As to the tenure of Donald Rumsfeld as Secretary of Defense – the musing is over. Rummie is out.

We are constantly amazed at how supposedly “intelligent” and “highly educated” people can make such bad decisions when it comes to matters like war. They are either lacking in judgment, in fact not so smart, or hubris has gotten the better of them. Then again, how smart can you be to let cockiness cloud your judgment? As a wise man once told me – “Only not so swift people get overconfident – because they are not smart enough to realize something can go wrong.”

So Donald Rumsfeld has joined the pantheon of myopic mis-calculators, which includes (among others) former “Whiz Kid” Robert McNamara – one of the architects of our ill-fated foray into Viet Nam. Like Rumsfeld, McNamara had all the educational pedigree you could ask for – and lacked all the foresight you could ever want. We wonder how the Rumsfelds and McNamaras of the world keep missing the point.

It’s not like history isn’t rife with examples of superior armies getting bogged down, confronted, and ruined by unexpected consequences. The Persians in Greece, English in Ireland, French in Spain, English in America — all come to mind.

History shows that initial military victory is also difficult for an invading army to follow up. In 216 B.C. — Hannibal and his Carthaginians inflicted perhaps the most devastating single defeat in military history upon the Romans at the Battle of Cannae. In little more than one day, his army captured or killed 70,000 of the original Roman force of 87,000, which opposed him. Yet Hannibal never achieved complete victory. He and his army traipsed around the Italian countryside for years – ultimately losing the war on the peninsula in large part due to the Roman strategy of attrition. It was the beginning of the end for Carthage.

Leaders have chosen to ignore History’s blatant, repetitive warnings. In 1708, Charles the XII of Sweden marched his feared army into Peter the Great’s Russia with an assault on Moscow. He was confronted by a Russian scorched earth strategy (which included Russian withdrawal and the destroying of anything which might be of use to the invading army) – along with “one of the coldest winters on record.” Charles suffered total and unrecoverable defeat – which marked the end of the Swedish Empire.

In 1812, Napoleon marched his unbeatable army into Russia – with an assault on Moscow. He was confronted by a Russian scorched earth strategy – along with “one of the coldest winters on record.” Napoleon suffered the loss of most of his army – and all of his Empire.

By now, the average Joe would sense a pattern here. (Note to self: Don’t invade Russia – especially in winter)! However, in 1941, Adolf Hitler (ignoring the well established precedent of successful military tacticians meeting their doom by invading Russia) — invaded Russia. He was confronted by (you guessed it), a scorched earth strategy – along with “one of the coldest winters on record.” The German army bogged down outside Moscow – and was ultimately destroyed. Like others before him – defeat in Russia cost Hitler his entire short-lived Reich, or empire.

Mark Twain certainly hit the nail on the head.

We at Vigilant Investor are not cocky. We know History rhymes – and we take it’s valuable lessons seriously. Which is why we raise the “Spock Eyebrow” when certain “learned” economists tell us record levels of debt, along with an exploding money supply do not matter – and that we can borrow and spend our way into prosperity.

Ten American Panics and Crashes before the Great Depression tell us otherwise.

But that is the subject of another post!

With the latest economic data showing a rapid cool off – especially in housing and consumer spending, we are somewhat bemused at the puzzlement which abounds at still rising prices.  Amid hopes of a “soft landing” and the Fed ending rate hikes, we wonder why the pundits don’t seem to “get” the underlying problem.

The fact of the matter is that prices are unlikely to ever go down.  Why?  Because amidst perhaps one of the most massive, continued increases of the money supply in history – prices can only go up!  The only way for prices to go down meaningfully is to contract the money supply and credit – for real — which is something the Fed and Congress have noooooooooo intention of doing.  Let alone the guts.

Why?  Well for starters, with the savings rate of Americans below –1%, if that rate ever hit anywhere near the historic level of +10% — the economy would suffer a massive slowdown.  So tied is our economy to borrowing – that if US citizens ever pulled 10% of their income out of it in a relatively short period of time – the results would be predictable.  Even though Americans need to save far more – we will continue to be induced to borrow and spend.  The key question is – how much more in debt are Americans willing to go?

On the comical/pathetic side, was the recent Bernanke testimony before Congress.  In the same session, Congressman harangued the Fed Chairman for rising prices (in goods and services) – and declining prices (especially California real estate) and slowing real wages.  As I listened to the demagoguery – the thought occurred to me that our representatives in Congress either do not understand our economic system, or they are choosing not to.  For Americans – that is supremely sad.

Now it all gets really interesting.  So wed is the American economy to debt – that any turn towards fiscal responsibility & savings will be extremely painful.  We have also entered a period where costs are still rising, while the economy is slowing – and the dreaded word “stagflation” is being used more and more frequently.  In our opinion, the most likely path chosen by the Fed and Congress will be the easiest one – with a primary focus on today, with getting elected – giving little weight to long term consequences and economically sound policies.  Why do we think this?  Because it has always been this way.

Knowing this – we prepare for the inevitabilities and plan to take advantage of them.  You should too.

Today’s live, call-in podcast is scheduled for 12:00 p.m. (New York Time), hosted by our friends at TalkShoe.com.

Our headline topic is “Wal-Mart: Villain or Scapegoat?” We’ll broach some issues on a variety of fronts, using the highly politicized subject of Wal-Mart as our center point.

Also, today we’ll discuss some of the major topics making the rounds the past few days. Those include:

• The housing market slowdown
• Congressional pandering to voters regarding the economy
• Senate debates energy bill
• A market roundup

And

• A credit bubble survey
• and more!

We hope you tune in! Call-in questions are welcome!

Of course, if you miss us live, you can always listen to prior shows just like any podcast!

If you are new to Talkshoe, allow yourself a few minutes in advance to downlaod their web interface.

One of the least talked about – yet most profound factors affecting the economic future of the world is the declining birth rate of developed nations.  In Japan, disconcerting news was just released from the Health Ministry that the country’s fertility rate has hit a new low of 1.25 children per woman.  Japan’s continually declining birth rate has caused the population to drop for the first time since the end of World War II.

Considering the fact that the replacement rate (resulting in 0% population growth for developed nations) is 2.1  — what is happening to the fertility rate of these countries is alarming.  The U.S. rate is 2.1 children per woman.  Germany — 1.39.  France — 1.84.  U.K – 1.66.   Spain — 1.28.  Italy – 1.28.  Sweden – 1.66.   Norway – 1.78.  Finland – 1.73.  Russia – 1.28, etc. 

In most of Europe, populations are declining.  In the US, the population is currently remaining stable due to the fact that there are a disproportionately large number of women of childbearing age relative to older people.  So, for the time being the death rate continues to be relatively low – allowing the lower birth rate to produce enough children to offset population loss.  As the Boomer driven aging population increases – women of childbearing age will grow older and be replaced by a smaller population.   Most likely, the birth rate will then be unable to keep up with an ever-increasing death rate.  Europe and Japan are prime examples of this phenomenon.

Declining birth rates profoundly effect overall economic activity, since it has been proven that an aging population spends less.   

As importantly, developed nations with declining birth rates are also those offering the largest social benefits to their citizens.  And – as we know, social benefits offered by welfare states are primarily funded via deficit spending.  At best – a situation occurs where this year’s taxes (largely paid by the working/younger)  — are used to buy this year’s benefits (largely utilized by the non-working/older).  At worst – a charade leading to disaster. 

For example – let’s consider Social Security in America.  Today there are over 3 taxpayers per retiree.  (50 years ago – there were about 16 taxpayers per retiree).  With a massive amount of Baby Boomers heading towards retirement – and a declining amount of working Americans – there are projected to be less than 3 workers per retiree in 2018 – when the program will begin running a deficit (i.e. less Social Security taxes collected than benefits paid). 

To ostensibly combat this actuarial inevitability — in the 1980’s Congress raised the Social Security tax to a level significantly higher than that needed to pay current benefits — with the extra proceeds supposedly going into the “Trust Fund.”   These extra proceeds are supposed to make up for the shortfall projected to begin around 2018.

If you are thinking that this sounds far too responsible for Congress – you are right!  Here’s the rub.  Federal Law enacted way back in 1939 requires Social Security to invest its surplus assets in Treasury Bonds.  Yes – the government is conveniently required to lend the money to…itself!  (Congress knew this all along)!  These proceeds are then immediately spent on other programs when the budget is in deficit – and used to pay down the debt when the budget is in surplus.  They are not set aside for Social Security benefits to retirees!  When 2018 rolls around – and it’s time to cash in the Bonds – the Government won’t have the money set aside to pay them off – and to provide the funds for the Social Security shortfall.

Does this really surprise you?

So, demographically speaking – with all social benefits in reality paid only by current taxes – and lower birth rates resulting in a greater burden on a smaller taxpayer base — there are but few options.

Women can have more babies.  Yet, decreasing birth rates are the norm as a country’s population becomes more educated.

Immigration policies can change.  Regardless of political demagoguery – we would not be surprised to see large numbers of immigrants granted amnesty/citizenship over the next decade to help increase the number of younger taxpayers in the United States.  Yet this has met with great outcry from the populace, unions, and media.

In the end, there is only one politically expedient way to pay for the impending shortfall in social benefits…Printing money.  The massive inflating of the money supply – and the continued degradation of the US Dollar by its own Government. 

We believe the Dollar’s decline relative to its present value over the next decade or two is inevitable – and could be unprecedented.  A similar fate likely awaits the currencies of most developed nations.  While everyone else focuses on the Dollar’s value relative to money printed by countries who have committed the same gross mistakes as the US — we prefer to focus on the mega trend.  The fate of all paper.