At times, there can be a great deal of confusion surrounding what is happening in our financial markets. And the remedies proposed by Congress, the US Treasury, and the Federal Reserve rarely do anything to clear up the confusion. It is my intention to try and help explain the mess we find ourselves in, offer insights (read: predictions), offer solutions, and most importantly, to arouse poignant thought and questions regarding the validity of the actions taken by specific parties. Though, as with anything else, I must add this disclaimer: The views reflected in the articles you will read are not necessarily those of your elected board of directors, nor the editors of this newsletter. This is simply meant to be an opinion column, and is not intended to be investment advice. 

What on earth is going on? The stock market fell and is fluctuating wildly. Your home may be worth less today than it was a year ago. You hear about a new bailout for some company or other every few days. Your portfolio might be decimated. You might be having a tough time getting a loan for, well, anything, unless you have stellar credit. You could be afraid of losing your job, in the wake of the news you’ve heard. The Federal Reserve bank continues to lower interest rates, and just about everyone got a stimulus check last year, but nothing seems to work. Why?

The answer is plain and simple: We must purge the excesses out of the system before we can have any hope of recovery. This is one of the foundation pillars of Austrian Economic Theory. Consumers, companies, and governments have gotten in to debt far over their heads, and now the debt must be repaid, or simply wiped off the books, in order to begin anew. Ludwig Von Mises (the father of Austrian theory) said in no uncertain terms that once an economy becomes laden with excessive debt, that a downturn is inevitable. And doesn’t it seem natural? You understand that in your personal finances, there is only so much debt you can take on. There are of course, non debt consumables (food and utilities) that figure into your monthly budget. But the majority of what you have to pay out every month is financed by debt. A mortgage, a car loan, a credit card, student loan, et al. Most of us understand that you can only rack out those credit cards so far before you find yourself in the precarious position of not making a bill. And that is scary. You know the answer is not taking on more debt, you simply can’t afford it. If you understand that, you understand the basic principle of Austrian economics. If it were not for this principle, we could all live on $5 an hour, and live in $1 million homes. You say that is preposterous, but that is the direction our Congressional leaders, Treasury, and Reserve Bank are taking us in.

I’m about to make a connection here, and I hope the light goes on. This is precisely why bailouts, stimulus checks, and other forms of interventionalist handouts don’t work. There are two ways that the government (at the Federal level) can get money. One is to collect taxes. The second is to issue debt in the form of US Treasury securities (T Bonds and T Bills). Does anyone remember when Dick Cheney uttered the phrase several years ago that deficits don’t matter? Though many thought it was a ludicrous statement, it never got the attention or questions it really deserved. This is why he thought they don’t matter. He thought that the US Treasury could “expand their balance sheet” by issuing Treasuries ad infinitum to the Federal Reserve (and others) in exchange for Reserve Notes (cash – not the paper kind anymore, it’s all done by a simple computer keystroke). Note that I don’t call this “money” for a very important reason that I’ll get to another time. That’s how Congress and our Executive branch thought they could deficit spend, by taking on debt. In their minds, the debt was only temporary, and when it came time to pay on the debt (the maturity or redemption date), the money would be there. Problem is, they keep piling it on. You know that you can only spend to a certain point that you just can’t afford any more, and that nobody will issue you any more debt. That is what is already happening with the US Government. Recently, the Treasury found that fewer and fewer buyers were showing up at Treasury Securities auctions (usually institutional investors and foreign governments). Now, they are becoming increasingly reliant on the Federal Reserve to buy up their securities. There is an even bigger problem here that I cannot go into detail in this month. I just don’t have the room. But the point is that we are no longer a creditor nation, we are a debtor nation, and the breaking point is soon approaching.

A point will come – again, soon – where the US Government will no longer be able to meet its debt obligations. You may not want to hear this but, GM, Ford, and Chrysler bankruptcy possibilities are merely a blip, and the USA may have to declare bankruptcy. Though this will not be official, and normal bankruptcy proceedings will not ensue. What will happen is, the Federal Reserve will try to “print cash” like there is no tomorrow. The situation we find ourselves in now is peculiarly similar to that of Weimar Germany in the early part of the 20th century. Consumable goods are likely to rise significantly in relation to the value of everything else you own. Think of it as stagflation of the 1970’s on hyper drive. You may think I’m old fashioned, and hopelessly out of touch with this one but, gold and silver will be the shining stars in the midst of all of this. I will go into greater depth on the merits of these real, hard currencies in coming months.

But the downturn is a good thing, and is absolutely necessary to cleanse the system. I’m not all doom and gloom. I’m absolutely exultant that things will one day be better, as I have utmost confidence in the human spirit and his resiliency. Everything in life, everything around you, operates in cycles. The sunrise and set, the lunar phases, the tides, seasons, birth to death. The fundamental laws of nature most certainly apply to financial markets as well. Nikolai Kondratieff discovered the cyclical nature of economies in 1928. He predicted the crash of 1929 and the ensuing downtrend commonly referred to as the Great Depression. Again, here is another subject on which I will enlighten you in coming months. Tough or not, we will get through this, but we have to take our medicine now.