4/8/2011 11:34 AM ET
A sobering look at federal spending from bond king Bill Gross suggests there are several creative ways to default on our national debt, and we are working toward all of them.
Related topics: spending, financial crisis, Federal Reserve, Ben Bernanke, Bill Fleckenstein
Regular readers know where I stand on the subject of the Federal Reserve's monetary policy. Namely, I believe that the consequences of its quantitative easing programs (the second of which is scheduled to end in June) will be currency debasement and rather high rates of inflation.
Now it seems Pimco's Bill Gross may have joined the same camp, although through different reasoning from mine.
Who owns the Federal Reserve?
In his Investment Outlook article published earlier this month, headlined "Skunked," he details the staggering size of the financial burden of our unfunded liabilities.
As he points out, these liabilities are not some theoretical estimate of future spending, but rather "the discounted net present value of current spending, should it continue at the projected demographic rate." The sum total is around $75 trillion.
Bill Fleckenstein
As Gross illustrates, if you use the CPI plus 1% to calculate the interest rate on the debt (which is the rate he used to discount back the government's future liabilities), interest expenses would equal $2.6 trillion, which is more than 10 times higher than the current level of $250 billion.
The bottom line: He feels that the size of unfunded liabilities (a consequence mainly of entitlements) means we are headed to an increased use of the printing press. Gross suggests that, when it comes to the size of our real off-balance debt, as opposed to the size of the $9.1 trillion on-balance-sheet national debt ($11 trillion-$12 trillion counting agency debt), we are "out-Greeking the Greeks."
He sums up by saying that "the only way out of the dilemma, absent very large entitlement cuts, is to default in one (or a combination) of four ways: 1) outright via contractual abrogation -- surely unthinkable; 2) surreptitiously via accelerating and unexpectedly higher inflation -- likely but not significant in its impact; 3) deceptively via a declining dollar -- currently taking place right in front of our noses; and 4) stealthily via policy rates and Treasury yields far below historical levels -- paying savers less on their money and hoping they won't complain."
And finally, "Unless entitlements are substantially reformed, I am confident that this country will default on its debt; not in conventional ways, but by picking the pocket of savers via a combination of less observable, yet historically verifiable policies -- inflation, currency devaluation and low to negative real interest rates."
/*
In fact, those are exactly the policies we are pursuing now, which is why we are where we are. Inflation has become the order of the day, and it will only intensify. Exactly when I can't say, but it is worth pointing out that after "QE" began, for about eighteen months, the monetary base did not really percolate. But so far in 2011 it has exploded by 20% or so. I think this is a sign that inflation is likely to begin accelerating.
Of course, inflation is affected by expectations. If people think prices are going to climb, they buy in advance, and that in turn can help push up prices. Thus, psychology plays a large role. However, as I pointed out last February in "No such thing as good inflation," the mindset is changing and the genie may be out of the bottle.
Corporations may think they can keep prices the same and shrink the contents of their packages to make people believe nothing has changed. But when the New York Times runs an article about that practice on its front page, as occurred a couple of weeks ago, you can be pretty sure people get the joke, and behavior patterns will start to change.
So if inflation were a stock, I would certainly buy it aggressively, and I would buy long-dated calls on it, too.
Hear Bernanke see no inflationAnd what do the great stewards of the common good at the Fed have to say? While I make an effort to filter out their blathering (because all that matters is what they're going to do, which we already know), I did note what Fed Chairman Ben Bernanke said in his April 4 speech. He reiterated his view that inflation is not going to be a problem: "The increase in inflation will be transitory. . . . Our expectation at this point is that in the medium term, inflation, if anything, will be a bit low. We will monitor inflation and inflation expectations very carefully."
The reason this is important to note is because I think he is telling us what he actually believes, and I can almost guarantee that the Fed will be way behind the curve when it comes to fighting inflation, for three reasons.
First of all, inflation statistics understate inflation. Second, Bernanke has faith in his own ability to stop it virtually at will (as he once stated in a "60 Minutes" interview), though I think he is secretly not even sure inflation can get started. Third, Bernanke has been so certain that he must battle a deflation bogeyman that doesn't exist that he was always bound to be slow in responding to inflationary pressures. What we can expect from the Fed is a whole lot of speeches and chatter about expectations, but action will be tiny, timid and way too late.
It amazes me that people pay so much attention to what any of these Fed heads have to say. We all know where their biases lie, and the fact that markets flinch every time one of them talks tough is almost comical. Recall that it was a little over a year ago when so many were worried about ending QE1 and the withdrawal of liquidity, and what we got instead was QE2.
In any case, it is what it is, and people will focus on what they will.
You won't feel a thingIt is a shame that people like Malcolm Bryan, a former president of the Atlanta Fed, aren't still around. As quoted from a 1957 speech in the latest issue of Grant's Interest Rate Observer, he described the net effect of "premeditated inflation" (his term for a little bit of Fed-induced inflation) on the average money-saving citizen as follows: "Hold still, little fish. All we intend to do is gut you."
This column is a synopsis of Bill Fleckenstein's daily column on his own website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.
RELATED ARTICLES/KWDUS - Currency Exchange Rate Quote for Kuwaiti Dinar to US .../GBPUS - Currency Exchange Rate Quote for British Pound to US .../OMRUS - Currency Exchange Rate Quote for Omani Rial to US Dollar ...DG - Stock Quote for Dollar General Corp - MSN Money/CADUS - Currency Exchange Rate Quote for Canadian Dollar to US .../JPYUS - Currency Exchange Rate Quote for Japanese Yen to US ...VIDEO ON MSN MONEY/* /**/ var scp_UserRating=-1; down_arrow_hover= new Image(); down_arrow_hover.src = 'http://blu.stc.s-msn.com/br/scp/css/15/decoration/toolbar/rating/down_hover.gif'; down_arrow_normal= new Image(); down_arrow_normal.src = 'http://blu.stc.s-msn.com/br/scp/css/15/decoration/toolbar/rating/down_normal.gif'; up_arrow_hover= new Image(); up_arrow_hover.src = 'http://blu.stc.s-msn.com/br/scp/css/15/decoration/toolbar/rating/up_hover.gif'; up_arrow_normal= new Image(); up_arrow_normal.src = 'http://blu.stc.s-msn.com/br/scp/css/15/decoration/toolbar/rating/up_normal.gif'; var scp_thankyoutext = 'Thank you!'; var scp_thankyoualttext = 'You have voted on this'; var scp_votestext = '{0} votes'; var scp_votescount = 64; var scp_errmsg = 'Errors occured while saving your rating. Please try again later.'; var scp_yesvotes = 59; var scp_jsurl='MSNRRV2.aspx'; var scp_jsargs='rrct\x3doE0QuuCFWRgt\x252fxpt\x252fkHSJs57VE1CLazX0d\x252bTwJqkFcI1eTC\x252baGzDueAgMHKEQGOx5mw6kJuSlW0AEpKJrgCVmzk7PRrR1E0Oa00gpziMVgXYYTj\x252fg7bKYPVPOIlpVgip2dT76EViS3ThyTq2DMjHQJteSQ441\x252bc626\x252bojqZiCmRFEd3CIJ\x252bJwZxb7xGsltS\x252f\x26values\x3dshFp7XlTQbexq2I491\x252fdUQ\x253d\x253d\x26rritemId\x3dTZsRd4pyoJ1qQ2wcthY8usmeUnVWQwNcSIZSZkNsO\x252fEoawGIrJ6n904mIEg8NizO6OLa9INcr4lUnRt9IstvVg\x253d\x253d\x26rrpurl\x3dhttp\x253a\x252f\x252fmoney.msn.com\x252fcurrency\x252fthe-nations-75-trillion-dollar-problem-fleckenstein.aspx'; var scp_itemid = 'scp\x3abbcdiscussion\x3acace1817-17d5-4771-a987-06de2a6d2b94'; function BinaryRatingToolBar(ratingValue){scpjs.socialToolbar._handleBinaryRating(ratingValue);} Recommend64 votes92% Rating: You recommend this8% Rating: You don't recommend this ToolBarUpdateRating('scp\x3abbcdiscussion\x3acace1817-17d5-4771-a987-06de2a6d2b94','ratCntrlBinary'); jQuery.async('scp', function () { jQuery.scp.socialToolbar({"partnerId":"e70689f0-2848-458a-b8ae-965c0aac79c8","jsUrl":"http://us.social.s-msn.com/s/js/16/ue.min.js","enabled":true,"previewMode":false,"contentId":"ub0d5407rhyq04v7wx25pyqgf9vbcsi4","boardId":"00000065-02a6-0000-0000-000000000000","threadId":"cace1817-17d5-4771-a987-06de2a6d2b94","urlParams":{"title":"","desc":"","image":"","url":"http://money.msn.com/currency/the-nations-75-trillion-dollar-problem-fleckenstein.aspx","s-url":"http://on-msn.com/giuhbS"},"timesShared":213,"shareCountUrlBase":"http://social.msn.com/boards","settingsCookieDomain":"msn.com","showMiniTb":true,"showRatings":true,"showEmail":true,"showPrint":true,"showIM":false,"imagesDir":"","printUrl":"","sharingSites":[{"id":"1","name":"Messenger","icon":"http://media.social.s-msn.com/images/blogs/Messenger.png","smallIcon":"http://media.social.s-msn.com/images/blogs/Messenger-s.png","urlTemplate":"http://profile.live.com/badge?url=%7Bs-url%7D"},{"id":"2","name":"Facebook","icon":"http://media.social.s-msn.com/images/blogs/Facebook.png","smallIcon":"http://media.social.s-msn.com/images/blogs/Facebook-s.png","urlTemplate":"http://www.facebook.com/share.php?u=%7Bs-url%7D&t=%7Btitle%7D"},{"id":"3","name":"Twitter","icon":"http://media.social.s-msn.com/images/blogs/twitter.png","smallIcon":"http://media.social.s-msn.com/images/blogs/twitter-s.png","urlTemplate":"http://twitter.com/home?status=%7Bs-intro%7D"},{"id":"4","name":"Digg","icon":"http://media.social.s-msn.com/images/blogs/digg.png","smallIcon":"http://media.social.s-msn.com/images/blogs/digg-s.png","urlTemplate":"http://digg.com/submit?partner=MSN&url=%7Bs-url%7D&title=%7Btitle%7D"},{"id":"5","name":"Yahoo Buzz","icon":"http://media.social.s-msn.com/images/blogs/Yahoobuzz.png","smallIcon":"http://media.social.s-msn.com/images/blogs/Yahoobuzz-s.png","urlTemplate":"http://buzz.yahoo.com/buzz?src=MSN&targetUrl=%7Bs-url%7D&headline=%7Btitle%7D"},{"id":"6","name":"LinkedIn","icon":"http://media.social.s-msn.com/images/blogs/linkedin.png","smallIcon":"http://media.social.s-msn.com/images/blogs/linkedin-s.png","urlTemplate":"http://www.linkedin.com/shareArticle?mini=true&url=%7Burl%7D&title=%7Btitle%7D"},{"id":"7","name":"MySpace","icon":"http://media.social.s-msn.com/images/blogs/Myspace.png","smallIcon":"http://media.social.s-msn.com/images/blogs/Myspace-s.png","urlTemplate":"http://www.myspace.com/Modules/PostTo/Pages/?u=%7Bs-url%7D&t=%7Btitle%7D"},{"id":"8","name":"Google Bookmarks","icon":"http://media.social.s-msn.com/images/blogs/GoogleBookmarks.png","smallIcon":"http://media.social.s-msn.com/images/blogs/GoogleBookmarks-s.png","urlTemplate":"http://www.google.com/bookmarks/mark?op=add&bkmk=%7Bs-url%7D&title=%7Btitle%7D"}],"locale":"en-us","miniTbPositionRef":"ahead","strings":{"lc_rdcmnts":"Read comments","lc_addcmnt":"0","lc_rec":"Recommend","lc_eml":"Email","lc_shrintro":"I thought you would be interested in this: {0}","lc_im":"IM","lc_mor":"More","lc_ncmts":"{0}","lc_prt":"Print","lc_shr":"Share","lc_shrn":"Shared {0} times","lc_shrt":"Share","lc_vts":"{0} votes","lc_ivno":"You don\u0027t recommend this","lc_ivyes":"You recommend this","lc_yvno":"You didn\u0027t recommend this","lc_yvyes":"You recommended this","lc_ratingadded":"Thank you!","lc_ratingerr":"Could not add rating","lc_alrdyvote":"You have voted on this","lc_defml":"Email program","lc_hotml":"Hotmail","lc_gml":"Gmail","lc_yml":"Yahoo! Mail"},"omniAccount":"MSNPORTALSCP","ratingsControlId":"ratCntrlBinary","ratingsItemId":"scp:bbcdiscussion:cace1817-17d5-4771-a987-06de2a6d2b94","appUri":"http://social.msn.com/boards","pageUrl":"http://money.msn.com/currency/the-nations-75-trillion-dollar-problem-fleckenstein.aspx","ratingTags":["00120065-0000-0000-0000-000000000000","00000065-02a6-0000-0000-000000000000","ART"],"fblkShow":true,"fblkAppId":"","fblkRef":"","fblkTrkName":"","fblkTrkVal":"","twtShow":false,"twtTrkName":"","twtTrkVal":""}); }); /**/ 24CommentsNewestOldestBestWorstControversial12 dendl5 hours agoHello WTO,
I think you are basicaly correct about the debt issue. However, you are very possibly off the mark about stock prices. It is very possible for bonds to get trashed while stocks continue upward. It seems that stock prices are closely correlated to the dollar versus the Euro. Bonds may very well get crushed by a falling dollar while stocks continue their merry way up; if for no other reason than there's so few places to invest.
And the bond market is soooooooo big! I get chills running down my spine when I consider a mass exodus from the bond market.
Chad in CO
1 0ReportSpamspender1015 hours agoAmerica is broke. We could drill baby drill, use coal, streamline regulations and get on track but no one is doing it. We could cut government spending but no one is really serious about it - The republican plan isn't near enough. Welcome to a broke America. 2 0ReportSpamdendl5 hours agoHello JestJack,
You write "Bill Gross stopped buying U.S. Debt." It's worse than that! He sold all his U.S. Debt (I mean all of it, including agencies) over the course of the first quarter. This means that the U.S. Treasury lost one of its biggest and most reliable customers.
It might be wise to ponder just how high rates will have to go before he considers buying again. And also, if treasury rates climb (and prices fall) why wouldn't other debt paper do the same? Consider, everyone, a bond market with few or no buyers!
Chad in CO
3 0ReportSpamDialectical solutions7 hours agoThe issues at hand are serious. And in serious times, it seems that we get serious about blaming who ever caused this mess. Effort wasted.
This is the time for different sides to realize that we are all on the same side when it comes to our success as a nation. We must unite to solve problems as opposed to getting caught up in politics.
We must consider that there are truths to both sides of arguments between the republicans and democrats or between government and business and to work together to accept these truths and to synergistically gain what is most effective.
If the Republicans and Democrats cannot make this happen, what are we doing as THE PEOPLE to change this?There is nothing that says that we have to have two parties in our government. In what successful business or organization are there two sides constantly working against each other? The most effective organizations/businesses/governments will focus on the most pertinent aspects to success and work with one another to increase the probability of success. What we are facing is as serious a challenge as World War II. We must unite.
The tax structure needs to be reviewed just as seriously as the expenditures of our government need to be reviewed. We need to make a serious effort right NOW to reduce deficit spending and increase revenue to meet our responsibilities.
The financial stability of our country is the most important goal at this point. Until we regain stability, we need to consider shelving issues of a social nature that are indeed important but only cause division amongst the people we need to work together.
I am tired of hearing about the sky falling if we cut services or if we raise taxes. The sky will fall if we do nothing to work together. Sacrifices must be shared by the individuals across the socioeconomic groups. We must remind corporations that their success is tied to our success. At this point, they seem to believe it is the other way around. Perhaps for obvious reasons, a lot of our politicians think the same.
2 0ReportSpamWTO8 hours agoUnfortunately, it's too late to save the US economy. At 15 Trillion in debt and quickly adding on a trillion more every few months now it's basically impossible to stop the financial collapse of this country. I would be preparing for a 75% decline to the stock market in the next few months as the country struggles with the debt limit issue. Food and Gas prices will double from their current prices within the next several months as the country struggles to finance its massive debt with more debt and more debt on top of more debt. The dollar will decline rapidly. Once Congress raises the debt limit again and makes no real reform to out of control spending the AAA rating will be lowered. Pressure will mount from the IMF and our allies to implement reform measures which will probably be in line with Greece, 25% accross the board cuts to all programs, before the rest of the world bails us out. I would say investing in the US over the next 3 to 5 years is extremely risky. I would getting out of dollar based investments like the plague right now and investing in China. 5 2ReportSpamCR20208 hours ago"Hold still, little fish. All we intend to do is gut you." What's new? And the latest scam is all the screaming about the deficit. Funny how none of the Chicken Littles who are ringing alarm bells had anything to say when Reagan and Bush II ran up record deficits. Remember how the Republican Congress during Bush II spent like drunken sailors? Now that a Democrat is in the White House, conservatives of both parties are trying to claim the mantle of fiscal responsiblity. What a joke. By the way, you don't get runaway inflation with unemployment and underemployment so high. Middle class America, get a clue. Your pockets are being picked by smiling, nicely dressed politicians whose goal is to keep their corporate masters on the public dole. Socialism for the rich, and capitalism for the middle class and poor. 7 8ReportSpamO.B.L19 hours agoHow about learn from the British and Russians. Get out of Afcrapholeistan. Withdraw from Iraqistan. Close 500 of 700 military bases. See if we can do with five rather than 11 Navy carrier groups.And maybe feed our starving seniors and disabled citizens.The divine soul of a country is only reflected in the character in which it treats its weakest members. 32 15ReportSpamld (Agnos) 19 hours agoHold still little fish, all we intend to do is gut you, fillet you to the bone, fry you in boiling oil, munch you as a midnite snack, and throw the remains of your dead carcass out in the back yard for the crows... 11 3ReportSpamjestjack20 hours ago
"...a little inflation can be good"... It really depends on what part of the demographic your talking about. Inflation is really tough on older folks as most times their income is fixed and their costs are not. Just take a look at how even though health care costs have increased dramatically over the last two years....yet there was no increase in SS payments, As a matter of fact a lot of folks lost ground as healthcare premiums went up.
What I find most puzzling is how the government "figures" inflation. Their model does not include fuel and food increases. I wish my budget didn't have to include these cost increases as gas approaches $4 a gallon and a cucumber goes for $1......
22 4ReportSpamErnie (celt33) Sat 7:28 PMOnce again a cogent and pinpoint analysis of what the "Cabal" is up to. Unless all the economic "rules" we have all accepted and have been governed by since the founding of the modern capitalist world are completely tossed, we must implode. They know it, and you know who "they" are. So therefore they will have to "TOSS" the rules and do a cheap magic act with all the tricks Bill has been talking about for years. OR--the nutty "Keynesian" Mike Norman school of "Math doesn't Matter" perhaps will be proven correct. If that were to be the case then GRAVITY does not exist and there are unicorns. 20 5ReportSpam1irishmanSat 6:45 PMWe should all insist that all congress and senate members take a 30% decrease in pay
and no salary increases until they balance the budget.
Put a lock on social security and make the government pay back the money they stole.
Anyone receiving government money can't give dominations to any party'
Throw out all lobbyists.
Anyone working of the government cannot go to work for companies receiving government contracts
68 1ReportSpamb (samestuffdifferentday) Sat 6:32 PM
Beck II
One thing I can Say about The Phony Republican ( hate The ILLEGAL Racket ) !
'
Debbie Riddle GOP===State Of TEXAS Proposed BILL 2012 UnDocumented !
Maids, LawnKeepers, Caretakers!
''
The GOP Blamed LIBERALS for DECADES & DECADES for Illegal SERVANTS !
''
There is The PROOF why the NATION has a Illegal AND a CRAPPY Wage PROBLEM !
''
All These DRASTIC BUDGET Cuts From GOP Don't EVEN touch the National DEBT !
''
This Statement Above is from the--CBO-- The GOP Would LOVE to ELIMINATE This REASON!
''
The Budget CUTS are a SCORCHED EARTH POLICY for The PEOPLE Only !
'
FOX Fake NOISE Alway's CLAIMS ( FAIR & BALANCED ) ???
''Where are CONGRESS CUTS ??? & WEALTHY Contributions ????????
''
The GOP did The EXACT Same thing in 1995 ( Contract with Corporate America ) !
'
This is EXACTLY The SAME !
'
If you Noticed GOP ==Vilinized UNIONS ( Just SOME ) TEACHERS MOST==
''
Texas has a 2 Year $ 27 BILLION Deficit with GOP Control ! Less Than 2% Unions !
''
Look Up GOP in Texas ( There is The COUNTRIES FUTURE ) !
12 31ReportSpamdendlSat 6:26 PMHey Getting Scared,
"Isn't it strange how Wall St. turned on a dime......" Actually it's not strange, nor even mysterious. Consider for a moment, Mr. Scared, the horrific consequences of a collapse of stock prices. There are about 50 million 401 (k)'s, millions of annuities, hundreds of thousands of insurance company invetments, and millions of IRA's all tied to stock prices. Or, as they say in the casino - "we're all in."
In other words, everyone, we are all held hostage to stock prices. Wall St. has us by the short hairs! If at the completion of QE2 stocks start heading south, well then bet on QE3. And forget all illusions that stimulus money will ever help any average joe American. Nope! The money goes directly to Goldman Sachs, et. al.
Chad in CO
39 5ReportSpamjestjackSat 5:37 PMGood article and this may explain why Bill Gross stopped buying US debt some time ago. I am bewildered at how no one seems to understand how this debt will eventually consume our Nation. The really sad thing is that when they tried to reduce the budget less than 1% no agreement could be reached AND the Goverment was set to shut down. BUT I bet Congress as well as Mr. Bernanke will get their pay checks. Tis a sad situation.... 46 0ReportSpamanothernameSat 4:10 PMThe only place where there’s no inflation is at the federal reserve.
Don’t forget the government introduced an alternate inflation reality when they enacted the recommendations of the Boskin Commission. They now use pseudo-science to manipulate the CPI into showing inflation much lower than it really is.
32 0ReportSpamGlen Beck IISat 1:19 PMThe super rich just want all of the middle class 401k money and savings, then they will take away all social safety nets like SS, medicaide, Medicare, then for a final blow they will import even more illegal aliens to bring down the wage structure even lower than it already is.
The Republican party and the Nazi propaganda ministry run by corporations will see to it that this happens. The satanic Republican party is the biggest danger this country has ever seen, they will sell all of the middle class into slavery for a buck and destroy the country in the process all to feed their green god of greed. All of the deficits the Republicans ran up where deliberate schemes to bring down all social programs and destroy the middle class under the guise of 'fiscal responsibility', which they only seem to care about when a Democrat is in office. I am only 15 but even I can see what the satanic Republicans are up to, why can't anyone else?
40 91ReportSpamIrishLeftySat 1:12 PMI thought that this was a pretty good look at things, but I'm still a bit disappointed in it. Every commentator on our economic future talks like they know what's going to happen. It reminds me those prognosticators who disappear from the scene for a while when they are proven wrong, and the ones who jump up and down with happiness when they guessed right. When hundreds or thousands of "guessers" voice their guesses, some of them will be right. That does not make them someone that you should listen to and bet your money on. Nobody KNOWS the future, but a lot of people are paid to guess at it. 25 7ReportSpamsolightSat 12:11 PMGreat article! I recently had a conversation with a friend who is inheriting his grandfathers wealth and was asked by an attorney to meet with a financial adviser to decide how he would invest his new found wealth. My suggestion to him, along these same lines, was to invest in metals due to some of the facts you listed in your article. The fact that will continue to allow this economic delusion stand it course was something that Michael Lewis touched on in "The Big Short", that people have a difficult time imagining 'massive change', and the facts shouldn't be ignored regardless of the impending contradiction to our best sense of hope. It might actually make a big difference if people considered the evidence before the curve instead of relying on Ben Bernanke's credentials. In late 2006, when the foreclosures first began, even the SEC wouldn't consider evidence that had been brought to their attention regarding the CDO CLO, Asset backed Security acronym challenges that deeply blurred the understanding of the core of the subprime market deceptions that were being written by all the winners (TARP Fund recipients) in the fallout and bailout that followed. Eventually, behind the curve as you suggested, The Fed Chief after claiming he saw no foreseeable recession, turned to congress and the magic printing press to try and fill the void that these toxic notes left in their wake, only to postpone the problem. While we ate smaller boxes of Oatmeal and fork out the last of our savings to fill our gas tanks, continuing to hope that soon things will be on track. And in the shadows, the indexes of our life's blood form the classic head and shoulders of that systems doom. Of course my friend went with the advisers his lawyer offered and I was labeled a Cassandra with no real sense of economics. Hmm... Ironic I thought and doubled my investment in silver futures options! The whole experience made me realize that he along with everyone else who has an impossible time imagining "massive change" are actually helping me to retire way before I thought was ever possible, so thanks! 24 5ReportSpamdwizzle630Sat 12:05 PMBill Fleckstein's article has some sound economic principles, namely the use of the Fischer equation to incorporate people's expectations of inflation. Yet, for some reason, he fails to mention that inflation benefits consumers, as it creates a redistribution of wealth through debt payments. As the real value of the dollar falls, so does the value of the dollars paid on debt. A great example of this is post-WWI Germany. After they experienced massive hyper inflation, most German's who had a mortgage owned their own home. Since debt contracts are typically written in nominal terms, a little bit of inflation can actually be good for the consumer. 15 38ReportSpamgetting scaredSat 10:52 AMHow much longer do we put up with Bernanke and the Fed? How can they say there's no inflation? I know their "Core" doesn't include energy and food, but why doesn't it? IMO we are not far from becoming a third world poor debtor nation.
Our main faults have been letting this go on. The Fed is for the banks, and Wall Street. The stimulus bailed the banks out and they have cash laying around making more money on Wall Street now. First, the Fed bailed out the banks, they still give them money for basically nothing, and isn't it strange how Wall Street turned on a dime with QE2?
Clearly, they think we are dumb. It's not that we are dumb, but powerless. Unless we start rioting in the streets as in the Middle East, there will be no changes. The Good Ole Boys will line their pockets at the expense of the working class and laugh all the way to another country to do business and deposit their money. As for Congress....what a total joke! They don't care about the people, they care for their ideologies and pet projects according to their parties sentiments. The Tea Party was a good beginning. Where are they now?
There is no way to save enough to retire. Inflation is going to eat us alive. Devaluing the dollare will and is eating us alive. Little if any interest on investments is killing the senior generation. This was all spelled out in the article but I believe totally true and happening as we speak. It's time to dismantle the Fed. Put term limits on Congress. Put regulations back in place. There is no foreseeable FDR around the corner. The guy in office evidently just doesn't get it. He is in over his head. Maybe 2012 is the end. At the rate things can happen it is making me wonder.
62 7ReportSpam12 Add a commentReportPlease help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.CategoriesSpamChild pornography or exploitationProfanity, vulgarity or obscenityCopyright infringementHarassment or threatThreats of suicideOtherAdditional comments(optional) 100 character limitAre you sure you want to delete this comment?jQuery.async('scp', function () { jQuery.scp.comments({"partnerId":"e70689f0-2848-458a-b8ae-965c0aac79c8","jsUrl":"http://us.social.s-msn.com/s/js/16/ue.min.js","strings":{"lc_shw":"true","lc_dtf":"%M/dd/yyyy %h:mm tt","lc_dtf2":"ddd %h:mm tt","lc_gmt":"-5","lc_erg":"Comments are currently unavailable. Try again later.","lc_det":"Comments are unavailable on this page.","lc_pgf":"{0} of {1}","lc_1ach":"Comment","lc_ach":"Comments","lc_newm":"Newest","lc_oldm":"Oldest","lc_bestm":"Best","lc_worstm":"Worst","lc_mixedm":"Controversial","lc_prv":"Previous page","lc_nxt":"Next page","lc_pageNumTooltip":"Enter a page number, and then press the Enter key","lc_first":"First page","lc_last":"Last page","lc_rpl":"Reply","lc_rbs":"Report","lc_edt":"Edit","lc_del":"Delete","lc_pstthanks":"Thanks for posting to","lc_pstand":"{0} and {1}","lc_seemore":"More","lc_seeless":"Less","lc_rpttxt":"Thank you for reporting.","lc_msg2mod":"Send note to moderator"¦","lc_cc0":"Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates the","lc_cc1":"Code of Conduct","lc_cc2":"please use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.","lc_cat":"Categories","lc_spa":"Spam","lc_che":"Child pornography or exploitation","lc_pro":"Profanity, vulgarity or obscenity","lc_cor":"Copyright infringement","lc_har":"Harassment or threat","lc_usrpic":"Inappropriate user picture","lc_oth":"Other","lc_abc":"Additional comments","lc_opt":"(optional)","lc_atl":"100 character limit","lc_rep":"Report","lc_1hourm":"1 hour ago","lc_1minm":"1 minute ago","lc_recomm":"You recommend this","lc_recomdontm":"You don\u0027t recommend this","lc_voted":"You have voted on this","lc_suicide":"Threats of suicide","lc_joi":"Be the first to comment","lc_shwm":"Show comments","lc_hidem":"Hide comments","lc_hourm":"{0} hours ago","lc_minm":"{0} minutes ago","lc_secm":"{0} seconds ago","lc_add":"Add a comment","lc_dmg":"Are you sure you want to delete this comment?","lc_dok":"Delete","lc_dca":"Cancel","lc_pna":"There\u0027s a problem creating posts right now. Please try again later.","lc_clt":"This discussion is closed. New comments cannot be posted.","lc_fta":"Be the first to comment","lc_fsg":"Be the first to add a comment. To add a comment, please","lc_sgn":"sign-in","lc_lnk":"Read comments","lc_spell_gen_err":"Could not check spelling. Please try again later.","lc_spell_no_mist":"No spelling errors found.","lc_spell_num_mist":"Spell check detected {0} mistake(s).","lc_spell_in_prog":"Spell check in progress...","lc_spell_check":"Check Spelling","lc_post_gen_err":"There's a problem creating posts right now. Please try again later.","lc_post_long":"Post cannot be longer than {0} characters.","lc_post_empty":"Your post cannot be empty.","lc_cmnt_day_max":"You already reached the daily limit for posts today. Please post again tomorrow.","lc_post_prog":"Post in progress...","lc_post":"Post","lc_save":"Save","lc_not_auth":"You are not signed in.","lc_no_suggest_paren":"(No suggestions)","lc_ignore_paren":"(Ignore)","lc_insrt_emot":"Insert Emoticon","lc_cancel":"Cancel","lc_ok":"OK","lc_fmt_quote":"Format as Quote","lc_incr_indnt":"Increase Indent","lc_decr_indnt":"Decrease Indent","lc_bullets":"Bullets","lc_numbering":"Numbering","lc_italic":"Italic (CTRL+I)","lc_bold":"Bold (CTRL+B)","lc_post_dirty":"Edits you have made to your post will be lost.","lc_rte":"Rich Text Editor","lc_ip_banned":"The computer or device you are using is temporarily banned from posting on this site. People or automated programs have recently used this computer or device to create unwanted posts. You may still browse the site and read other people's posts, but you can't create, edit, or delete posts.","lc_chk_msg_spell":"Check message for spelling errors (F7)","lc_post_msg":"Post this message (CTRL+ENTER)","lc_perm_ban":"This Windows Live ID was banned for violating the Code of Conduct. You may still read other people's posts, but you can't create, edit, or delete posts.","lc_temp_ban":"This Windows Live ID is banned from posting on this site until {0}. You may still read other people\u0027s posts, but you can\u0027t create, edit, or delete posts.","lc_also_pst_fb":"Facebook","lc_also_pst_wl":"Windows Live","lc_also_post_to":"Also post to:","lc_idnt_settings_err":"Could not save your settings. Try again later.","lc_idnt_nick_prohibited":"The nickname you requested is not allowed. It may contain a reserved name or profanity. Please enter another nickname.","lc_idnt_nick_unavail":"The nickname you requested is not available. Please enter another nickname, or select one of these suggestions:","lc_idnt_nick_empty":"Nickname cannot be empty","lc_idnt_nick_max_len":"Nickname cannot be longer than {0} characters","lc_idnt_nick_allowed_chars_err":"You nickname may only contain letters, numbers, hyphens, underscores, and periods. Please enter another nickname.","lc_idnt_lnk_msn_wl":"Link your MSN posts to your profile on Windows Live","lc_idnt_posting_name":"Now when you post with your \u003cstrong\u003ename\u003c/strong\u003e, all of your past and future MSN posts link to your profile on \u003ca href=\"{0}\"\u003eWindows Live\u003c/a\u003e so your friends can read them.","lc_idnt_posting_nick":"If you keep posting with your \u003cstrong\u003enickname\u003c/strong\u003e, your posts aren't connected to your profile on Windows Live.","lc_idnt_name_nxt_psts":"The name you choose appears next to all of your past and future MSN posts.","lc_idnt_post_w_name":"Post with my name","lc_idnt_kp_post_w_nick":"Keep posting with my nickname","lc_idnt_chs_name":"Choose the name that appears next to your posts","lc_idnt_name_lnk_wl":"If you post using your name, your posts link to your profile on \u003ca href=\"{0}\"\u003eWindows Live\u003c/a\u003e so your friends can read them.","lc_idnt_nick_no_wl":"In fact, those are exactly the policies we are pursuing now, which is why we are where we are. Inflation has become the order of the day, and it will only intensify. Exactly when I can't say, but it is worth pointing out that after "QE" began, for about eighteen months, the monetary base did not really percolate. But so far in 2011 it has exploded by 20% or so. I think this is a sign that inflation is likely to begin accelerating.
Of course, inflation is affected by expectations. If people think prices are going to climb, they buy in advance, and that in turn can help push up prices. Thus, psychology plays a large role. However, as I pointed out last February in "No such thing as good inflation," the mindset is changing and the genie may be out of the bottle.
Corporations may think they can keep prices the same and shrink the contents of their packages to make people believe nothing has changed. But when the New York Times runs an article about that practice on its front page, as occurred a couple of weeks ago, you can be pretty sure people get the joke, and behavior patterns will start to change.
So if inflation were a stock, I would certainly buy it aggressively, and I would buy long-dated calls on it, too.
And what do the great stewards of the common good at the Fed have to say? While I make an effort to filter out their blathering (because all that matters is what they're going to do, which we already know), I did note what Fed Chairman Ben Bernanke said in his April 4 speech. He reiterated his view that inflation is not going to be a problem: "The increase in inflation will be transitory. . . . Our expectation at this point is that in the medium term, inflation, if anything, will be a bit low. We will monitor inflation and inflation expectations very carefully."
The reason this is important to note is because I think he is telling us what he actually believes, and I can almost guarantee that the Fed will be way behind the curve when it comes to fighting inflation, for three reasons.
First of all, inflation statistics understate inflation. Second, Bernanke has faith in his own ability to stop it virtually at will (as he once stated in a "60 Minutes" interview), though I think he is secretly not even sure inflation can get started. Third, Bernanke has been so certain that he must battle a deflation bogeyman that doesn't exist that he was always bound to be slow in responding to inflationary pressures. What we can expect from the Fed is a whole lot of speeches and chatter about expectations, but action will be tiny, timid and way too late.
It amazes me that people pay so much attention to what any of these Fed heads have to say. We all know where their biases lie, and the fact that markets flinch every time one of them talks tough is almost comical. Recall that it was a little over a year ago when so many were worried about ending QE1 and the withdrawal of liquidity, and what we got instead was QE2.
In any case, it is what it is, and people will focus on what they will.
It is a shame that people like Malcolm Bryan, a former president of the Atlanta Fed, aren't still around. As quoted from a 1957 speech in the latest issue of Grant's Interest Rate Observer, he described the net effect of "premeditated inflation" (his term for a little bit of Fed-induced inflation) on the average money-saving citizen as follows: "Hold still, little fish. All we intend to do is gut you."
This column is a synopsis of Bill Fleckenstein's daily column on his own website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.
Hello WTO,
I think you are basicaly correct about the debt issue. However, you are very possibly off the mark about stock prices. It is very possible for bonds to get trashed while stocks continue upward. It seems that stock prices are closely correlated to the dollar versus the Euro. Bonds may very well get crushed by a falling dollar while stocks continue their merry way up; if for no other reason than there's so few places to invest.
And the bond market is soooooooo big! I get chills running down my spine when I consider a mass exodus from the bond market.
Chad in CO
Hello JestJack,
You write "Bill Gross stopped buying U.S. Debt." It's worse than that! He sold all his U.S. Debt (I mean all of it, including agencies) over the course of the first quarter. This means that the U.S. Treasury lost one of its biggest and most reliable customers.
It might be wise to ponder just how high rates will have to go before he considers buying again. And also, if treasury rates climb (and prices fall) why wouldn't other debt paper do the same? Consider, everyone, a bond market with few or no buyers!
Chad in CO
The issues at hand are serious. And in serious times, it seems that we get serious about blaming who ever caused this mess. Effort wasted.
This is the time for different sides to realize that we are all on the same side when it comes to our success as a nation. We must unite to solve problems as opposed to getting caught up in politics.
We must consider that there are truths to both sides of arguments between the republicans and democrats or between government and business and to work together to accept these truths and to synergistically gain what is most effective.
If the Republicans and Democrats cannot make this happen, what are we doing as THE PEOPLE to change this?There is nothing that says that we have to have two parties in our government. In what successful business or organization are there two sides constantly working against each other? The most effective organizations/businesses/governments will focus on the most pertinent aspects to success and work with one another to increase the probability of success. What we are facing is as serious a challenge as World War II. We must unite.
The tax structure needs to be reviewed just as seriously as the expenditures of our government need to be reviewed. We need to make a serious effort right NOW to reduce deficit spending and increase revenue to meet our responsibilities.
The financial stability of our country is the most important goal at this point. Until we regain stability, we need to consider shelving issues of a social nature that are indeed important but only cause division amongst the people we need to work together.
I am tired of hearing about the sky falling if we cut services or if we raise taxes. The sky will fall if we do nothing to work together. Sacrifices must be shared by the individuals across the socioeconomic groups. We must remind corporations that their success is tied to our success. At this point, they seem to believe it is the other way around. Perhaps for obvious reasons, a lot of our politicians think the same.
Read Full Article »