Global flood of credit makes owning stocks worse than crapshoot, II

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The debt in pictures

(Please read Part 1 of this essay here.) Look at “Chart 1, U.S. Government Debt vs. Household Debt, 1996-2013.” Notice how households went on a borrowing spree beginning about 2001. When consumers began paying down debt in 2008, government borrowing kicked into high gear to make up for the lost spending.

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Now look at “Chart 2, Government + Household Debt vs. GDP.” From 1966 debt and Gross Domestic Product track very closely, but then about 1987 it takes more and more debt to keep GDP rising. More and more dollars must be borrowed to produce another dollar of GDP.

Don’t miss the chart, “Chart 3, U.S. Government debt as a % of GDP.” From 1966 to 1984 it bumps along in a range of 30 – 40%. In 1984 – during the Reagan era – it begins to climb. During the Clinton era (!) debt as a percentage of GDP dropped, but beginning in 2008 it rocketed upwards, to 105% of GDP today. Whoa. This doesn’t tell half the story, because it shows U.S. government debt at $16.8 trillion as of 1 January 2013, and ignores the unfunded liabilities.

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“The actual liabilities of the federal government — including Social security, Medicare, and federal employee’s future retirement benefits — already exceed $86.8 trillion, or 550% of GDP. For the year ending Dec. 31, 2011, the annual accrued expense of Medicare and Social Security was $7 trillion. Nothing like that figure is used in calculating the deficit. In reality, the reported budget deficit is less than one-fifth of the more accurate figure.” ( 24127887323353204578127374039087 636.html, 26 November 2012.)

So total U.S. government liabilities as a percent of GDP is not 105%, but 550%. It is pointless to object that those unfunded liabilities are not “debt,” because they must be paid, just like debt, and they are already baked into the future.

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Now look at “Chart 4, Govt. + Household debt as a % of GDP.” That adds up to 185% of GDP. Maybe you would feel comfortable earning $100,000 a year while owing $185,000. I wouldn’t. Notice, too, how the graph keeps on accelerating (red arrows).

Finally, glance at “Chart 5, All U.S. Credit Market Debt as a % of GDP.” That says U.S. borrowers owe 3.56 times what the U.S. earns. If you earned $100,000 a year, would you feel comfortable owing and paying the interest on $356,000?

U.S. borrowers owe 3.56 times what the U.S. earns. If you earn F$100,000 a year, would you feel comfortable owing and paying the interest on F$356,000? (The Moneychanger newsletter)

Credit Market debt peaked in April 2009. That raises another bothersome question: What happens in a credit addicted economy when credit shrinks? Not a boom. That probably reflects the banks’ unwillingness to lend.

Many economists argue, as if struck by a bolt of stupendous intellectual lightning, that “We can carry even more debt.” This is on an intellectual par with FDR’s quip that the federal debt doesn’t make any difference because “we owe it to ourselves.” Just like that pack mule, you can keep loading an economy with debt, but at some point its knees buckle.

In 2008, the debt and the speculation that the Fed’s easy money had blown into a bubble, burst, along with the consumer’s ability to carry more debt. The economic mule’s knees buckled. And what drives any sane person to pull out great hanks of his hair is that the Fed and the Obama administration claim that doing more of the same thing that landed the U.S. economy in this mess will somehow boost the economy out of this mess. Yet that only creates even more bubbles and misdirects more capital and sustains more unprofitable enterprises, instead of cleaning out the bad debt and corrupt corners of the economy and starting afresh.

Meanwhile, the stock market

Meanwhile, Lucky Ben Bernanke has been living in the best of all possible worlds. Without igniting terrible price inflation, he has inflated the money supply enormously, driving up the stock market without noticeably damaging the dollar. He has conjured the public into believing that a rise in the stock market equals an economic recovery.

But it’s not. While stocks are rising on inflationary hot air, the economy is not recovering. The so-called housing recovery is smoke and mirrors, riding on zero interest rates. Copying Lucky Ben’s “success,” central banks around the world are running the printing presses around the clock. That raises sovereign debt levels, already at historically unimaginable heights, even higher around the world.

All the same, Lucky Ben has staged a propaganda triumph, keeping the public and the markets off balance and deceived about the eventual outcome. Whoops. Then came June 19, and the FOMC meeting. The FOMC’s announcement was bland and noncommittal, pointing only to more bond buying, but Bernanke’s press conference statements were interpreted as not showing clear commitment to keep on buying bonds. Bernanke hinted that the Fed might back off the accelerator by late 2013, and stop altogether by mid-2014.

As might be expected, volatility increased, faster than you can say, “Sell!” Hearing that the Fed would stop buying bonds, the bond market tanked. With U.S. interest rates rising because of people selling bonds, the dollar rallied. At the prospect of no more hydrogen in their Zeppelin, the Dow tanked 206 points, then lost another 354 on June 20. That’s

a 3.7% loss in two days. Those who live by inflation will die by inflation. Maybe Ben ain’t so lucky after all. Maybe gravity still works.

By meddling with markets, suppressing interest rates, and flooding the world with liquidity, central banks have only made markets much more volatile, and increased the chances, nay, the certainty, of another global financial catastrophe.

Gold and silver

I’ve taken a lot of heat for the terrible performance of silver and gold this year. As of 20 June 2013, gold has fallen 32% from its 2011 high, silver 60%.

The correction has lasted longer, and hurt worse, than I expected, thanks in large part to Lucky Ben’s willingness to inflate. Now either we are nearing another financial panic like that of fall 2008 which will take down every asset, or we are nearing the bottom of this correction. That bottom ought to be seen by June’s close. And hard as it may be to swallow, silver & gold will resume their rise. In price terms, the bull market is not even half-way finished.

But that leaves another question open. Given the financial system’s instability, given the volatility of all markets, given the messes in Japan and Europe waiting to explode, would you rather have gold and silver in hand, or electrons in a bank? (And with all this overhanging, Obama picks now to involve the U.S. in the Syrian civil war, just to add another dash of instability and anxiety.)

Gold bears are betting that the Fed can and will taper off its Quantitative Easing. June 19 and 20 prove that it can’t. Interest rates have headed up, which will hit the housing market hard, blowing up the housing recovery myth. Falling stock prices will also force more QE. The Fed can’t stop inflating, because QE is the economic recovery. When the illusion wears off and the world figures all this out, they’ll be rushing to buy gold.

In view of the risks and consequences, I’ll have to stay with silver & gold, and say, “No, thank you” to stocks.

Used by permission. Subscribe to the Moneychanger’s daily commentary by dropping your email address at Franklin’s website, Franklin Sanders is publisher of The Moneychanger, a privately circulated monthly newsletter that focuses on gold and silver and the application of Christianity to economics, culture and family life. We have subscribed to this newsletter for more than 20 years, and consider it a must read. F$149 a year. Franklin is a trader in gold and silver (he’ll swap your green Federal Reserve rectangles and give you real money in return). He trades with savers and investors outside Tennessee. F. Sanders, The Moneychanger, P.O. Box 178, Westpoint, Tenn. 38486 Tel. 888-218-9226.

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