|
|||
Money Abuse Is Alarming - It's Hissing And Rocking, And Shaking And---Gary Robertson, CFP Every generation has their problems and every generation has their comforts. We are comforted by our family and friends and another comfort of mankind for generations has been the family dog, another has been the ability to share a good laugh, there is comfort in hard work and, of course, there's a good home cooked meal and also always our personal faith. I refer to these because these are basic understandings of comfort. A dog's comfort isn't always obvious to everyone, but proven once again in the wake of Katrina, people love their dogs so much (we now know) some literally risked their lives because they didn't want to leave their pets behind and that speaks volumes about the loving relationship of man to his four-legged friend. Many know the comfort of owning such a companion but also know the overtone of another verbiage that I will address when we say, "It's a dog." Two of our cliché Old Working Dogs that once used to encourage us Money & Debt are now so abused we wonder how we have kept the lid-on-the-pot for so long. The easy answer (if there is one) we did it because we loved doing it - the shocking result has been inflation. We have not created these dogs without unrelenting inflation and we will live to see the final results. Hard work has been comforting and reassuring to mankind since time began and if that's true we will once again have a chance to prove this point; we will have decades of tough work cut out for us. Comfort as mentioned above also comes through the ability to share a good laugh (after hardship) and this laughter has been a great gift that has been given to man to bring him through difficult times. Allow me to share with you a personal experience and draw the analogy to where I see this tough old world moving. The Pressure Cooker Experience
Oh yes, I put the little rocker on top and turned the stove up I would now begin to read the directions. The instructions, I believe stated, "bring the cooker to 24 pounds pressure." What's 24 pounds of pressure? (Hmm, what's that? I didn't see any pressure gauge.) The little rocker started to rock. It started hissing and rocking and shaking and steam was coming out, and the stove started to shake! I'm looking at the pot and the phone rang - I grabbed the phone and it was my mother and I yelled, "What does it mean 24 pounds pressure?" She asked in a nice serene voice, "What are you talking about?" I screamed, "Mom, I got this pressure cooker on the stove and it's rocking and rolling, and hissing and..." She shouted, "Get it off the stove." I reached for the pot... too late the little safety valve as big as your baby finger exploded to the ceiling, and so did the ingredients -- they went out of that tiny half- inch hole like an oil well popping, the vegetables made it clear through that little opening, as did all the water, tomatoes paste, etc... It was like a slow motion movie, the entire ingredients minus the meat went straight up like a rocket, they went in a straight line like a water gusher and it all hit the ceiling and it crossed the ceiling like a pebble creating waves after being dropped into a lake, it spread immediately in every direction. I had dropped the phone - I stood silently stunned - and the ingredients of my cooker dripped off the ceiling for about a half an hour. Standing there dazed I can still hear my mother screaming over the phone, "Is everything all right?" I don't recall if I ever asked her where she had been calling from - she must have traumatized the people around her. That was my first life experience using pressure. Clean up took a few hours, my poor mother must have thought she had a nut for a son. As funny as that incident was and believe me it was funny it could also have been serious. Today I would say of anyone trying that stunt, "are you cracked?" I just cannot help but wonder what the world's experience will be over the next several years as this money and debt pressure cooker we live in today explodes. I was young and I guess I can look back and laugh at that time, I wonder if we can do likewise about this strange period? The Debt And Money We've Created Today Is NO Joke Today everyone is talking about bubbles; Debt Bubbles, Homeowner Bubbles, Stock Bubbles, Tech Bubbles, Money Bubbles, etc... Everyone sees bubbles - I see pressure. Here is a subject few understand - "We have created too much money." Many are asking, "How in heavens name have we created too much, shouldn't we all have more?" In simple terms, NO! In an ideal world everyone has as much as they want but we all know that too much of anything in the wrong hands leads to disaster. The governments to get elected give too much, they give more to stay elected and they give more and more to get re-elected. Case in point; More food often leads to more weight, too much sunshine perhaps leads to more melanoma, speed can signify more danger, excessive drinking can lead to additional headaches, and my belief, more money being distributed means higher prices and more pressure. The dollar that once had value now, to a few, symbolizes speculation while to many it's still a way to measure the value of goods and while that might be true for years to come the question is how many extra dollars will it take to buy a dozen apples or gallon of gas, or to take that trip? What will it cost to retire? If I have a dozen apples and you have money how much of your money will I be offered for my apples? If we agree on the price we have a deal but what happens if my dozen apples stay constant (a dozen) but your dollar (as a measurement) declines? "The same amount of dollars," you say? I scream, "No deal, I want more dollars." What everyone is focusing on today is the fact that other countries (IE China) have been buying the American debt to support the American dollar and Americans are using that newly created money to buy goods from China and they say that is what is keeping the dollar alive. I might appear daft to ask but are they supporting the dollar for them or for the U. S. and why? U. S. debt is used to buy their goods. The more dollars the U. S. prints the more inflation and the pressure just keeps growing. You can hear it hissing, and rocking and shaking, and... it doesn't look like a bubble to me. If money and debt are our food and we keep jamming more and more into the old pressure cooker I suggest to you there will be enough heat at some point and that little valve will release and when that little pressure valve lets go it could be inflation the likes of nothing we've ever witnessed before. A few of us, not many, wonder how long this party can last. We ask what happens if the belief in our measurement (the dollar) weakens? Some believe the party goers will go home with a lot of memories and a few headaches - others believe we will have had a great party and extremely unfortunate reminders of the good times and also have humiliating crushing debt. We're all at the same party. When the party is over (and I assure you all parties end) the many countries (if not all) not just the U. S. will be among those with the many headaches and bad memories and more unfortunate times ahead. As an investor the one thing that you will need now is discipline. You need discipline because our leaders lack it. What some of us find interesting is the fact that the measurement of money keeps changing! It is a tragedy. If you weighed a pound of bacon you'd know that it was one pound, a yard of cloth is one yard of cloth, and if you walked a mile you would have walked 5,280 feet. Wouldn't we be alarmed if we were planning to drive from Boston to Las Vegas (Boston to Las Vegas is about 2,750 miles) and we discovered they changed the distance on the same roads to 3,750 miles? Now wouldn't that be a real surprise? How many trips would you make if every year they upped the distance from 2,750 miles the first year and 2,850 the next, and the subsequent year it jumps to 2,950, and so on. Did you know that a pound of
bacon a hundred years ago weighed the same as a pound of bacon
today? It doesn't weigh about the same, it doesn't weigh 2 ounces
less or 5 ounces more it weighs exactly the same! We don't expect
the measurement to change -- it is a constant measurement. Why
is it that we keep changing the measurement of the dollar? Does
it have to be that way? The answer is (unfortunately) yes because
unlike any other measurement you can use; it's not fixed. Think of my stupid incident and how I asked myself the question, "How do we measure the pressure if we don't have a gauge?" Well the answer is rather simple if you don't have a gauge, and no one has the intelligence to turn down the heat the safety valve explodes. The U. S, currency used to have a pressure gauge it was called gold. Below is an example; a ten-dollar United States Note with a stamp upon it that states; "Gold Certificate!" You can see the reference to gold left of the center.  Gold Certificate - 1928 Does that mean I can take my $10.00 bill to the U. S. government and they will give me the equivalent of $10.00 of gold in 1928 money? No, not now money is not backed by gold anymore. It was but that's history. At one time currency was fixed to gold but the government fixed the system (no pun intended) and allowed the dollar to float. So by allowing the dollar to float (away from the gold fix) what happened? It floated away - that's what bubbles do, they float. If I was measuring anything for you and I refused to use a scale and I just kept decreasing the amount what would you say? Well that's what is happening to the currency. This is the picture of a U. S. dollar now and you'll note no gold seal!  No reference to gold now. It's interesting to note the last time the U. S. spent within its income was in 1969 (which coincides with less than a year and a half before they de-pegged the dollar to gold). Since then, the country has spent more money each year then it collected in revenues. (The difference between what the government takes in and what they pay out is the money that the government must borrow to bridge the gap annually - called the budget deficit.) In March 1971, the Federal Debt Ceiling was understood to be frozen at $ 400 billion however by late 1982, U. S. funded debt had tripled to about $ 1.25 trillion (three times as much), and yet the understanding of the preset Debt Ceiling still stood at $ 400 Billion. Sounds all to familiar; the debt ceiling increases between 1971 and 1982, a ceiling that had been officially designated as temporary and yet increases were ignored. In late 1982, realizing that the charade could not continue the U. S. Treasury officially changed the wording to correct the blooper between a temporary and a permanent debt ceiling. This cleared the way for the subsequent explosion in U. S. debt and since the U.S. dollar was the world's reserve currency this also set the stage for a debt explosion right around the globe. Obviously the stewards of the world's reserve currency were poor stewards at that. Their debt ceiling reminds me of my ceiling and the mess that dripped after the pressure released. In economics the requirements of a reserve currency are a large economy, open and deep financial markets, low inflation and confidence in the value of the currency. The U. S. now fails to meet the standards. The National Debt was increasing by approximately one billion dollars every working day in 1994 and the National Debt stood at approximately $4.7 trillion (December 31, 1994). Which breaks down to roughly $47,000 of debt per American family of four and over $l6,000 of debt for every man, woman and child in the U. S. That was about 11 years ago today (October 9th, 2005) the National Debt stands at approximately $7.9 trillion - the estimated population of the United States is 297,261,000 so each citizen's share of the National Debt is now $26,575.00 or just over $106,000.00 per family of four. The U. S. National Debt has continued to increase at an alarming (average) of $1.62 billion per day over the past twelve months. What does all this mean? Who knows we've never witnessed anything this alarming in our lives before? It brings about scary thoughts. Money And Debt Are They The Same Thing? Yes, and no. Paper Money (currency) is most certainly debt but debt (lets call it money-debt) is not necessarily money. How much would you give me if I took a $100.00 American dollar bill to you - I would expect $100.00 worth of goods. How much will you give me if I take $100.00 Statement of Account to you for a debt that you owe me? It depends upon whether you have the money to pay or even want to pay. Two different dogs! Is it possible to abuse money, what happens if you do, who ultimately pays the price? When do you know that money
has been abused? (Answer) When you create so much of it that
it becomes worthless. When you span nearly 100 years of abuse of money you are not talking about one political party messing up therefore all had a hand in baking the pie. Money has been abused and there isn't an easy answer. Some believe we will inflate while others believe we will deflate. Economies around the world could crumble under the weight of debt. One side of inflation that everyone likes is the fact that we can repay debt with "cheaper currency" so as we print more and the value of the money printed actually drops therefore we are paying back cheaper dollars. That works as long as you can put your money to work and earn a return on your investment. And, as long as you don't owe too much and the interest rate on your money is higher than what you are paying to borrow the money. The low cost to borrow is destructive. It's like turning up the heat on the stove while the pressure cooker is sitting on it. This is one reason why debt is so prevalent today. Low interest rates invite(s) everyone to the party. Unfortunately, this is a dangerous poison because it educates us to feel good about beating (one might say cheating) others. Money I've always thought has to be repaid. In the past a man's honor was tied to his ability (and desire) to repay his debts but today inflation has taught us that it is fair to try to beat the banker. This has led to a higher rate of bankruptcies and if the trend of low interest rates continues it could lead to the breakdown of commerce. So let's ask the question, what happens when a country is locked into such stupidity? Isn't a countries honor tied to its ability to repay? Once lenders can't be assured of getting repaid or they see the value of the currency they are owed is going down the tubes they will stop lending (or will charge exorbitant interest rates), or will demand to be repaid in another currency (maybe gold) and if any of these things happen the economy grinds to a halt. The advantageous side of inflation is really corrupting the economy in the long run. Inflation What is inflation? Inflation
is a persistent, substantial rise in the general level of prices
related to an increase in the volume of money and resulting in
the loss of value of currency. What cost $100.00 in 1905 would now cost $2052.36 in 2005. Barely any change for 100 years and then a 2000% increase in the next 100 years. That's alarming but (you are saying) who cares about 100 years we live today. So let's shorten the time frame to 30 plus years a period from 1971 to 2005, a period that is more meaningful. What cost $1000.00 in 1971 would cost $4757.24 in 2005. That $4757.24 at that rate the same goods would cost $18,837.41 in 30 years (if we could be so lucky). That's scary because if it persists we all could have a bleak future. But it has to go one way or the other we can't stand still. The U.S. abandoned convertibility of the dollar into gold in August 1971. It is interesting, and I don't think just fate, that the 10-year compound annual rate of growth in the CPI was 8.7%, and that occurred in the 10 years following the severing of the U.S. dollar to the gold link. To go one way we just keep doing what we are doing, it doesn't require any attention, we can just keep-on keeping-on, we can just run up the debt, keep printing the money and we move off the base $1,000.00 in 1971 to $4,757.24 in 2005 and reach $18,837.41 in 2035 (likely more) however to go the other we have to start doing something. What are the odds that the governments will do anything before something breaks? I don't know the answer to that question - neither do you. You can assume they are in control of the pressure gauge, that they will know when to turn down the heat, or when to get the pot off the stove. I can believe they are out of control and that they are not focusing on the gauge and the pressure is mounting. Do I believe the world is going back to a gold standard? I don't know, nor does anyone else. We are so far along this unproven path that one has to wonder what wind will blow us where next. What to do? A person should keep their debt low, diversify their investment portfolio, and (in my opinion) own some gold or gold related investments. Gold may be screaming buy me I'm on sale. Why? Money abuse is alarming. Does this mean that gold is going to go up like a rocket? I doubt it. You should seek financial counsel, study the various ways to invest into precious metals, and know why you own the investments you do and how to own them. Study other sector investments and understand the economy and enjoy the future. Gary Robertson, CFP
321gold Inc |
