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The math just doesn’t add up!

August 3, 2012


Do you ever feel like you are sitting on the sidelines with the rest of the sheep just scratching your head these days?

Here is what I remember from my economics classes… I think? Your credit worthiness, which includes evidence that you do not take on excessive debt, determines what the cost of credit will be to you. In other words, there is a direct correlation between being fiscally responsible and the cost of debt. Conversely, as you show an increased failure to handle or control your debt appropriately, you will pay more in interest on new debt.

The United States used to be a creditor nation — a nation that is owed more than it owes. Unfortunately, we have turned into a rather large debtor nation; other countries own our debt (namely China). While this is not good, it has always been understood that there are at least some parameters that would control us from going “too far” in debt. Back to Econ 101—if we continued to accumulate debt, which we are doing at the speed-of-light-times-ten these days, those who might be in the market to purchase our debt are going to demand interest rates that correspond to level of risk. As we have repeatedly raised our nation’s debt ceiling, now exceeding the 16 trillion dollar mark, wouldn’t one think that our interest rates should be shooting through the roof? There are all sorts of economists who could explain to us that we attract investors to U.S. treasuries because of “flight to safety;” meaning we are a lesser risk than other nations like Greece, Spain and Portugal, for example. I like this explanation better: “The U.S. is the best-horse in the glue factory.”

But what is becoming more apparent is the role we, or at least Wall Street and our politicians, expect the central banks to play in purchasing more debt. As it has become more and more clear that much of our problems stem from too much debt, we have masked over the real supply and demand controls within our debt markets by allowing/insisting that our central banks become the biggest purchasers of our own debt. This has removed the natural economic limits on debt. You see, when a country buys another countries’ debt, it is because that nation has a Gross Domestic Product (GDP) that gives them a surplus. When a central bank purchases its own nation’s debt, the money is not sitting in some vault ready to be spent; no, they create it out of thin air… they print it. When you skew (or should I say screw) with natural economic forces, it is not as if there are no other consequences. In fact, it should be viewed as a sign of desperation and markets should react negatively to such announcements or actions.

Yet, last week Wall Street waited with baited breath to see what Federal Reserve Chairman, Ben Bernanke, might have up his sleeve in the form of more money printing (better known as quantitative easing, operation twist or zero interest rate policy). Then late last week,the head of the European Central Bank announced that they would do whatever is necessary to save the Euro. The markets celebrated for the next two days.

This is where the math should not add up to those of us (sheep) sitting on the sidelines. The central bankers’ massive interventions over the last four years have not had the positive results they expected. In fact, it is questionable if all their intervention is even having a negligible effect. So are we supposed to join Wall Street in coaxing our money changers to turn up the printing presses even more? They have already more than tripled their balance sheet to keep interest rates low, but at the cost of every dollar I currently own and will make in future paychecks. Another very simple concept: as the bankers increase their money supply, they devalue existing currency. And we are cheering them on?!?

Watching this whole thing is becoming surreal. Many years ago (2003), I wrote that a real estate bubble was going to replace the equity bubble that burst in 2000 as a result of our aggressive monetary policy. After that proved to be correct, I wrote that there would be a new bubble created and this one would be in government spending. I believe that is currently proving to be correct and it is all enabled by our central bankers around the world!

One Comment
  1. John permalink
    August 3, 2012 10:44 am

    My advice… Take your money out of US stocks and bonds and start buying gold and silver. 🙂

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