Market Watch: Continuous stagnation

Capital goods purchases by businesses continue to improve. That’s good. Orders for consumer goods, however, remain flat. That’s bad because consumer spending represents about 65% of our GDP. Like the government, consumers are deeply in debt. Many consumers have reached their credit limits, and because they are already having difficulty paying interest and principal on loans, consumer purchases are not growing. Unlike the government, however, which continues to increase its spending, consumers cannot manufacture money with a printing press and use it as legal tender to settle its obligations without going to jail. 

Businesses have cash. Because of their large cash position, businesses are replacing outdated machinery and opting to purchase additional labor-saving devices rather than hire more people. Unemployment remains at 9%. To return people to work and keep up with population growth, 275,000 jobs a month for five years would need to be created. That’s never happened before, and it’s a mathematically impossible demand in an economy structured like ours: too much debt, too much government and too little manufacturing.

The poverty rate 50 years ago, in 1962, was 14.7%, and welfare payments represented 5% of GDP. The poverty rate today is 15.2%, virtually the same, and welfare payments now approximate 16% of our GDP (AIER Economic Bulletin). What’s wrong with this picture? The cost and size of government to administer this is overwhelming us. More importantly, our “war on poverty” is not working. Rather, it is ruining the U.S. economy. What it has established over 50 years is the building up of a huge welfare class, an overbearing government to administer it and thousands of businesses that are dependent upon government for their revenues.
 
Background
The banking crisis in the 1930s started in Europe. The collapse of European banks eventually caused the collapse of American banks, which fostered the Great Depression. European banks had been loaned money by American banks, and those loans could not be repaid. The default on the loans in Europe led to a default of their loans to our banks in America, and 10,000 U.S. banks failed.

Unfortunately, we are looking at a similar situation today. The European banks and European governments are in serious financial turmoil. Many of them are completely broke and held up only by Germany. We learned in December, when Congress forced the Fed to audit its books for the first time in history, that 70% of the meltdown crisis money loaned more than two years ago was secretly loaned to European banks. That’s what happened in 1930 to the failing European banks that borrowed money from U.S. banks to support World War I. European countries tried to print their way out of the obligations created by World War I loans, which created massive inflation in Europe. There is no difference in the structure of the debt today, but there has been a difference in how the debt was created. Eighty-two years ago debt was created as a result of war. Today, it is a result of welfare.

Government’s solution
The politicians and university professors in this country who run The Fed, however, have the European banks and countries exactly where they need them to be. Our government is desperate for cash and wants any excuse to print more money. The European crisis is going to give them their opportunity. Here’s why:

1. There is pressure on Germany by financially broke countries to give the go-ahead to the European central bank to print large amounts of euros and loan that money to European countries to bail them out of their cash binds. Such a move would be inflationary, which would increase the price of manufacturing in Europe, causing the price of their goods to go up. An increase in the price of their goods will reduce the amount of goods they are able to export.

2. Knowing this, and “not wanting America to have an unfair trade advantage over Europe,” the Fed will “recommend” printing more money to bail out our own federal government. Such an action will increase inflation in this country and increase the cost of American manufactured goods.

3. The new “reason” for the Fed to print more money in this country will provide the opportunity for our politicians to continue the pattern of large deficit spending over the next few years. By attempting to bail us out of this crisis, they will be creating a future crisis, again as a result of a crushing debt overload.
 
Conclusion
This is eventually what must happen: The dollar will lose its reserve status; the U.S. will remain in a prolonged slump; there is likely to be a currency collapse because 65% of the world’s monetary reserves are in dollars; this will create a panic for specie (the Constitution’s reference to gold, silver, copper and other forms of hard money); and a new currency will have to be created. The battleground in the future will be the dollar and its reserve status. Without the world’s currency being dollars, U.S. politicians cannot print money to pay bills like the Fed does. Similarly, if the country returned to gold and silver currency, as required by the Constitution, politicians could not print money to pay bills they would be forced to live within tax revenues generated. 

It is a sorry commentary that we, the voters and citizens, cannot catch on to this simple concept: War and public indebtedness are the roots to power for politicians, currently and historically. War and public indebtedness have also sown the seeds of destruction of every great civilization.

There are no bargains on the table in which to invest. Cash pays nothing. Yields on stocks are historically low. Gold and silver are attractive, but it’s inadvisable to have more than 5% to 10% of one’s assets invested in gold and silver. Cash works because with cash, one can find bargains when they become available. AAA-rated stocks that pay more than a 3% yield and sell for under 14 times earnings are about as safe of an investment as one can make in this environment in either the stock or bond markets.

The Standard & Poor Index of 500 stocks closed December at 1,257 points, exactly the same closing price as for December 2010. Because there was no increase in stock prices last year, there is no reason to believe an increase will occur this year. Indeed, both the stock and bond markets remain over-priced, and they’re both positioned to decrease in value.
Caveat Emptor.

George Rauch, Longboat Key, is chief executive officer of Bradenton-based General Propeller and a former Wall Street investment banker.