Thursday, August 11, 2011

My View

Random ruminations from your resident curmudgeon....

The U.S. stock market has been in turmoil for the past three weeks, with the S&P 500 losing close to 17% in value. Many have seen the balances of their retirement plans or personal investments significantly decline in value. Given that we have a debt ceiling/deficit reduction deal in place, shouldn't everything be blue skies and rainbows? Not exactly. Capital- money- goes where the owners believe they will get the best return on their investment. Return on investment has two critical components: that projected return or gain from making that investment; and, well, the return OF the investment. It does an investor absolutely no good to get a great return if they cannot get their investment back and lose their principal. Capital has flowed out of our investment markets over the past three weeks because the concern is that our nation's fiscal policies will impact negatively the value of the underlying investments. Want an example? Former Federal Reserve Chairman Alan Greenspan said this past Sunday on Meet the Press, "The United States can pay any debt it has because we can always print money to do that. So there is zero possibility of default." That statement is stunning in its audacity and disingenuousness. Don't have enough money? Just print more. Can't exercise any fiscal discipline in Washington? Just print more money. Look at the picture below:

This gentlemen is is a citizen of Zimbabwe and he is holding a $250 million and $100 million Federal Reserve Bank of Zimbabwe note. Think he is rich? Because Zimbabwe adopted the same policies that Greenspan advocated- print all the money you want- inflation in that country was annually increasing at 50% or more, and now that $350 million cannot be used to buy a bread for this man's family. In debasing the currency by printing all the government wanted, the currency became virtually worthless.That is why investment capital (money) does not go into Zimbabwe: the country is run so ineptly there is no guarantee that investment capital will be returned. The United States is not there. Yet. Keep printing dollars, and keep the attitude that it does not matter how much we spend because we can always print more dollars, and we will be closer to Zimbabwe than any of us would have dreamed possible.

They say that money cannot buy you happiness. True enough, but it can buy you the type of misery that you would prefer.

On Monday, President Obama defended the recently passed bill to raise the debt ceiling and said this,
"We reached an agreement that will make historic cuts to defense and domestic spending. But there is not much further we can cut in either of those categories." (emphasis mine)
One of the fundamental conceits of those in Washington is that everything they do and everyone there is essential to the welfare of our nation. I beg to differ. When private sector companies encounter a protracted period of financial difficulty, they begin to downsize, as some all too painfully know, in order to survive. When was the last time you heard of a government agency downsizing? And do you really think all those bureaucrats in Washington are essential. You can go here to see a listing of all federal government jobs, and when you can find an opening for an Associate Administrator of Administration position in the Federal DOT, essentially an administrator that helps coordinate the administration of the layers of bureaucracy, that pays between $119-179,000 one has to believe that we can find quite a bit more to cut out of the massive and bloated federal administration. Washington has shown little seriousness in managing the nations fiscal affairs prudently; neither have they shown an ability to trim the fat and waste out of government at the federal level.Until we as a nation begin to demand that Washington operate more efficiently and with less of our resources, we will continue to struggle with the amount of our money and resources that Washington extracts from the economy.

I'm at a point in my life where enjoying a lot of bars means that I have good cell service.

The markets reacted negatively to the downgrade of U.S. debt from AAA to AA, falling double digits over the past two weeks. Here is why the debt downgrade is important to each of us. Until 1972, every dollar that the United States issued was backed by an equivalent amount of gold. In 1972, by signing the Bretton Woods agreement, Richard Nixon took the U.S. off the gold standard, simply meaning that our country could print or issue a dollar without the backing of the precious metal. Instead of being backed by gold, the dollar was now backed by the "full faith and credit" of the United States government. We could get away with this because our government was stable and we exercised fiscal restraint in managing our money. Over time, this fiscal diligence has waned and we have printed an extraordinary amount of dollars and Washington has become ever more dysfunctional. The downgrade by Standard and Poor calls into question the full faith and credit- the ability- of the United States to repay our debts on a timely basis and with a sound currency. What this means is that investors in U. S. Treasuries, our debt, will eventually begin to demand higher interest rates because of the additional risk of investing in  our country. As Treasury rates rise, all of us will be affected. Mortgage rates will rise, as will variable rate debts such as credit cards and home equity lines. This will be a further drag on our economy and slow our return to a healthy and vibrant economy. Standard and Poor is the canary in the coal mine, warning us of higher interest rates ahead and an economy that will grow even more slowly.

The only way my body could be "ripped" is if I tore a muscle.

And that, my friends, is my view.

1 comment:

  1. You have a history of being "ripped" by canines ;)