Inflation Leaning

by | Dec 23, 2008 | Multi Currency Investing

A huge question we must ask is whether we will see inflation or deflation in the period ahead.

Some steps on the part of the Fed, like reducing interest rates to zero suggest deflation. When Japan’s real estate and stock market collapsed in the 1990s, Japan’s Central Bank did the same. Deflation ensued.

However the global government debt suggest inflation to me…especially in the US.

In 1964, the year Lyndon Johnson became President, the total national debt was  $316 billion. By the time, Ronald Reagan left office that debt had climbed to $2.6 trillion.  The interest cost alone was $214 billion.  By 1990 the debt had risen to $3.2 trillion and interest costs for just the one year were $242.9 billion. Interest was the largest single government cost after Social Security, even greater than defense spending.  That was when the economic worries began as US debt moved towards  a precipice where recovery seemed impossible.

Flash forward 18 years with excerpts from a December 2008 Washington Post article.

“President Bush has nearly doubled the national debt during his eight years in the White House.  Mr. Bush is on track to add $5 trillion to the $5.73 trillion national debt he inherited when he took office. According to Treasury Department data, the number was $10.66 trillion at the end of November, and it has been rising at an astronomical rate.”

That’s bad enough…but the future gets worse as the article says that during fiscal 2008, which ended Sept. 30, 2008 the national debt increased by more than $1 trillion, breaking the previous fiscal year record of more than $600 billion.

The government’s debt situation is about to get worse as the Post outlines that
Federal debt should increase by $2 trillion in fiscal year 2009 alone!

Given an average interest rate of 4 percent, that $5 trillion of extra debt requires extra $200 billion per year from taxpayers in interest on that debt – in perpetuity.

The Post article points out,  “During October, the first month of fiscal 2009, the national debt increased by a staggering $549 billion. That was approximately three-quarters of $1 billion every hour of every day, or more than $12 million per minute and more than $200,000 per second.”

Then the news gets worse.

Excerpts from  an August 2009 US News & World report says:  “Welcome to America’s $2 Trillion Budget Deficit.  Barack Obama has already said that America’s “investment deficit” will take priority over its budget deficit.

A rough estimate of the cost of this New New Deal would be close to $500 billion a year, maybe $775 billion if Uncle Sam is to completely offset the drop in consumer spending predicted by Rosenberg. Now, as it is, the government is expected to run a $500 billion deficit next year. So the S&S plan would put that budget deficit at over $1 trillion. And if you tack on a potential $500 billion to $1 trillion bailout of the banking industry, that $1 trillion deficit could conceivably double to $2 trillion.

Now I’m not one to get skittish about budget deficits when they are merely a percentage point or two of GDP, especially since it’s entitlements that pose the truly scary debt issue (some $55 trillion in future liabilities, getting worse by $2 trillion to $3 trillion every year as we do nothing). But a $2 trillion budget deficit would be, like, 15 percent of GDP. That would be the highest level since World War II and more than twice as high as the postwar peak of 6 percent in 1983.

I can’t believe the global bond and currency market vigilantes wouldn’t completely freak, sending U.S. financial markets into chaos. Talk about a worst—though entirely possible—case scenario.”

How much worse could the situation get?

Much worse…because all of these government estimates are skewed

According to excerpts a USA Today article by Dennis Cauchon,  Taxpayers on the hook for $59 trillion   the federal government’s losses would be five times worse if corporate-style accounting standards are used.

The article says:  “Modern accounting requires that corporations, state governments and local governments count expenses immediately when a transaction occurs, even if the payment will be made later.

“The federal government does not follow the rule, so promises for Social Security and Medicare don’t show up when the government reports its financial condition.

Bottom line: Taxpayers are now on the hook for a record $59.1 trillion in liabilities, a 2.3% increase from 2006. That amount is equal to $516,348 for every U.S. household.”

With such fundamentals, it is hard to be anything but pessimistic about the US dollar.  This is why I am leaning towards inflation.

US government debt may have passed the short term point of no return.  Three bold steps were needed two decades ago, a reduction of entitlement costs (Social Security, Medicare, Medicaid, etc.) reduced defense spending and a reduction of the existing debt.  The government moved in the opposite direction.  There are many ill omens as our new government still does not take this incredible problem seriously. The proposed new plans might cost trillions more, that we do not have.

The government’s refusal to create a plan to balance the budge shows no solution is in sight.  It is menancing to see how the government plans to spend more now.

The US Treasury only has a couple of years left and it may be too late.
All these facts are omens of ill winds ahead.  there will be tens of millions of Americans who are already finally wiped out by  inflation combined with massive unemployment and a free for all of the greenback that will affect currencies and investing everywhere.

This leaves me feeling n the right track investing in shares, Bonds that are like shares, real estate and my own business.

Until next message good global investing.


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