Work a lifetime and the Goverment confiscates 90%

"Inflation has now been institutionalized at a fairly constant 5% per year. This has been scientifically determined to be the optimum level for generating the most revenue without causing public alarm. A 5% devaluation applies, not only to the money earned this year, but also to all that is left over from previous years. At the end of the first year, a dollar is worth 95 cents. At the end of the second year, the 95 cents is reduced again by 5%, leaving its worth at 90 cents, and so on. By the time a person has worked 20 years, the government will have confiscated 64% of every dollar he saved over those years. By the time he has worked 45 years, the hidden tax will be 90%. The government will take [in purchasing power] virtually everything a person saves over a lifetime."- G. Edward Griffin

So you have to invest to earn more than an average of 5% a year over you lifetime. Pension funds try for 9% and lately have trimmed that somewhat to maybe 8%. Still pie -in-the sky.
US Treasury bonds pay 3.75% for the privilege of tying your money up for 30 years - a lifetime. All that just to gurantee that the government gets 90% of your earnings. Remember the Feds get tax on the interest they pay you on these bonds!!!

Trichet Challenges Inflationism

The Financial Times published the following article by Jean-Claude Trichet (Head of the European Central Bank)..cut and paste the link into your browser to read the whole story.

http://www.ft.com/cms/s/0/1b3ae97e-95c6-11df-b5ad-00144feab49a.html

Doug Noland at prudentbear.com has dissected it for you 2/3 down in the article linkrd above and the crux of his analysis is:
"Washington – or the states – can’t spend its way to fiscal recovery. Instead, we’re witnessing a fiscal train wreck. Our policymakers, economists, and pundits should read Mr. Trichet carefully and contemplate a course other than inflationism."

Click on the heading above and READ the whole thing...and ponder deeply.

Lessons from History:The Death of Paper Money

From Ambrose Evans-Pritchard of the Telegraph. Click on header for full story. A very interesting read.

As they prepare for holiday reading in Tuscany, City bankers are buying up rare copies of an obscure book on the mechanics of Weimar inflation published in 1974.
Ebay is offering a well-thumbed volume of "Dying of Money: Lessons of the Great German and American Inflations" at a starting bid of $699 (shipping free.. thanks a lot).

The crucial passage comes in Chapter 17 entitled "Velocity". Each big inflation -- whether the early 1920s in Germany, or the Korean and Vietnam wars in the US -- starts with a passive expansion of the quantity money. This sits inert for a surprisingly long time. Asset prices may go up, but latent price inflation is disguised. The effect is much like lighter fuel on a camp fire before the match is struck.
People’s willingness to hold money can change suddenly for a "psychological and spontaneous reason" , causing a spike in the velocity of money. It can occur at lightning speed, over a few weeks. The shift invariably catches economists by surprise. They wait too long to drain the excess money.

Some might smile at the Bank of England "surprise" at the recent the jump in Brtiish inflation. Across the Atlantic, Fed critics say the rise in the US monetary base from $871bn to $2,024bn in just two years is an incendiary pyre that will ignite as soon as US money velocity returns to normal.

Morgan Stanley expects bond carnage as this catches up with the Fed, predicting that yields on US Treasuries will rocket to 5.5pc. This has not happened so far. 10-year yields have fallen below 3pc, and M2 velocity has remained at historic lows of 1.72.

As a signed-up member of the deflation camp, I think the Bank and the Fed are right to keep their nerve and delay the withdrawal of stimulus -- though that case is easier to make in the US where core inflation has dropped to the lowest since the mid 1960s. But fact that O Parsson’s book is suddenly in demand in elite banking circles is itself a sign of the sort of behavioral change that can become self-fulfilling.

U.K. seems to be moving to monetize its debt

What makes you think the Fed (here in the USA) is not doing the same thing? Watch what is done, not what is said.

The British government denied that it plans to inflate away debt, but its actions suggest that is exactly what it intends to do, according to The Economist. A program
by the government's National Savings and Investments that paid the rate of inflation plus 1% was closed because of its runaway popularity. Meanwhile, the Bank of England recently bought more than enough debt to fund the deficit for a year, a classic debt-monetization technique that dates back to Germany's Weimar republic, The Economist notes.

Earnest Hemingway on solving our problems

The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists. - Earnest Hemmingway

Obama follows Roosevelt and will devalue the Dollar

By Richard Russell in Dow Theory Letters:

It's clear (at least to me) that Obama is following the path Roosevelt took during the Great Depression.

In 1933, the government devalued the dollar by 41% by raising the official price of gold from $20.67 to $35 an ounce. Devaluation makes debt easier to handle. In a devaluation, the dollar value of debt remains the same, but all other assets would be worth more (in nominal terms) whether it was a house, a stock, a car or an ounce of gold.

How our creditors who own trillions of dollar in their reserves will react to a dollar devaluation I really don't know, but a devalued dollar is a lot better than nothing. The Bernanke Fed is trying desperately to bring back inflation, and devaluing the dollar is the surest and quickest way to inflate.

Learn more about the excellent Dow Theory Letters.

Be long oil E&P stocks

Three back of the envelope fundamental reasons to be long oil E&P stocks.

1. OPEC cuts are more than enough to offset declining demand by the most bearish estimates (and that is assuming less than full compliance).

The International Energy Agency (IEA) forecasts global crude oil demand to decline approximately 2.56 million barrels per day to 83.2 million barrels of crude oil per day. This happens to be the most bearish of the estimates between the major demand forecasters.

Obviously at first glance this is bearish news since reductions in demand are not typically bullish for price action. However, OPEC has taken action to effectively offset this reduced demand via production cuts. OPEC has a quota cut of 4.2 MMB/D. Of course, not all members of OPEC are 100% compliant with this production quota. In fact as of last month there was really only 76% compliance among OPEC members.

While it may appear that 24% is a significant amount of cheating, at a near record OPEC compliance of 76% or 3.2 MMB/D of production cuts, the production cuts more than offset the most bearish forecast for demand decline at 2.56 million barrels per day. This obviously doesn’t mean that supply will run short overnight. What it means is that over time the world will begin to draw inventories down and before you know it we will be in a supply crunch again.

2. The weak dollar doctrine will fuel commodity inflation in the United States

Well, it is official the U.S. is taking a 60% stake in General Motors (GM). It is all over the news headlines and will likely remain there for the next several weeks. It seems clear the Obama administration will do whatever it takes to promote their set of ideals which includes destroying the fiat currency of the world.

Interestingly enough, it is perfectly logical for Obama to follow a weak dollar policy doctrine. Why would I suggest that? The vast majority of politicians currently in power in this country are absolutely terrible people. They won’t stop at anything to gain votes and Obama is certainly not above that. Hence, the UAW gets a substantially larger stake in GM than the bondholders.

But back on point…if you are an extremely liberal President who seems to legitimately prescribe to socialism as an economic system…and you want to change the system in the United States to support your particular ideology…what would you do?

Beyond directly taking over the means of production, he is actually doing that…you destroy the value of your currency! Why would you do that? Because as the USD collapses goods produced in the United States appear more attractive, in terms of cost, for export.

Thus, by destroying the value of the U.S. dollar, Obama will effectively help promote blue collar unionized workers which effectively will keep the far left wing liberal members of the Democratic Party in office. The weak dollar doctrine will have unintended consequences…

So, for the last couple of years the USD and commodities (namely crude oil) have had a rather strong negative correlation such that when the USD falls in value relative to a basket of currencies, crude oil and commodities tend to rise in value. Effectively, with Obama’s weak dollar doctrine he is pursing policy that will directly lead to commodity price inflation.

Oil prices have been on a tear recently-some of the appreciation can be attributed to the deteriorating U.S. dollar and I believe this will be a multi year trend until the policy of the U.S. government changes.

3. Demand is stabilizing for some consumer fuels. Global demand growth will set in.

Economic data in certain areas of the globe are showing signs of a rebound. China is of course a huge driver of this and will likely continue to be a huge driver. The ripples of Chinese growth will be felt in many other places.

Of most interest to me are countries within South America such as Chile or Brazil. As China applies their stimulus money efficiently, they will begin meaningful expansion or at the very least they will meet their estimated required growth rate to maintain civil order. This will most definitely support surrounding Asian nations such as Taiwan and Malaysia (namely Singapore).

All of this leads to higher commodity consumption via bunker fuel and other petroleum products.

Disclosure: Long PCU, VALE,

Breakeven on investing activities

On the inflation front, the GDP price index was revised to an annualized 2.8 percent increase in the latest GDP report issued today by the Commerce department.

Factoring these new estimates the following are the Minimum Rates of Return required to Breakeven after Tax and Inflation

In the 35% Tax Bracket -- 3.915%
In the 25% Tax Bracket -- 3.625%
In the 15% Tax Bracket -- 3.335%

This means that if you have money invested and are earning less than 3.3% on it at present, you will be losing purchasing power and will be worse off in the near future.

Translation: you are not earning enough on your money to buy the same amount of goods and services (the things you use to live on)a year from now than it costs you today for those same items.

This is, of course, a moving target. The current economic climate in the USA (and worldwide) will be getting worse from your point of view. The things you need to buy, like gasoline and food, will become more expensive at the same time that governments worldwide will be trying as hard as they can to keep rates of return down as low as they can.

What to do: find someone who can show you where you can earn more than 5% on your money. It can be done. But not by investing with the Government. The Government investments are among the most risky to your purchasing power that you can make now.

This Country Is the World's Most Likely Candidate for Hyperinflation

By Tom Dyson

Mrs. Watanabe is dumping the yen.

According to a story from Bloomberg this week, Japanese businessmen, housewives, and pensioners are dumping the yen against foreign currencies, especially the Australian dollar, the New Zealand dollar, and the euro. Women control the family finances in the typical Japanese household, so the international media has nicknamed the Japanese individual investor "Mrs. Watanabe."

Bloomberg says Mrs. Watanabe is now short 153,326 contracts against the yen. That's 35 times the short interest on March 4, the day the dumping began.


There's so much excess saving in Japan, the country's interest rates are miniscule. Right now, the interest rate on a one-year CD is Japan is 0.25%. Compare Japanese rates to foreign rates: The Aussie dollar yields 3%. The Brazilian real yields 10.25%.

Bloomberg explains Mrs. Watanabe's rush out of the yen as "yield hunting." This explanation makes sense. Japanese investors can make 12 times as much interest in the Australian dollar. Plus, all the foreign currencies made huge falls against the yen last year... The Aussie dollar fell 40% against the yen last year, for example. So to the Japanese investor, they must look cheap.

Here's the thing: The Japanese government is broke and can't pay back its debts. I think the gargantuan fall in the yen comes when Mrs. Watanabe figures out Japan's government will never pay back the $7 trillion she loaned it.

Check out the table from the IMF's World Economic Outlook published last month... It shows the debt-to-GDP ratio for the world's industrial nations. Japan is clearly the world's most broke major government...

(Zimbabwe has the world's most indebted government with a 2008 debt-to-GDP ratio of 241%, according to the CIA World Factbook.)

General Government Gross Debt as % of GDP
2005 2006 2007 2008e 2009e 2010e
Canada 71% 68% 64% 64% 75% 77%
France 66% 64% 64% 67% 75% 80%
Germany 66% 66% 64% 67% 79% 87%
Italy 106% 107% 104% 106% 115% 121%
Japan 192% 191% 188% 196% 217% 227%
UK 42% 43% 44% 52% 63% 73%
U.S. 63% 62% 63% 71% 87% 98%
Euroland 70% 68% 66% 69% 79% 85%
Source: IMF World Economic Outlook, April 2009

Another way of looking at the indebtedness of a government is debt per capita. In the U.S., for example, Uncle Sam owes $11 trillion... $4 trillion more than the Japanese government owes. If you express the debt per capita, the U.S. government owes $36,700 for every American citizen. The Japanese government owes almost twice as much: $70,000 per Japanese citizen.

Not only has the Japanese government built the world's largest and growing debt, but its ability to collect tax income is about to take a big hit. Japan is in a deep recession, and its businesses aren't able to sell goods abroad right now. Plus, Japan's population is shrinking and aging at the same time. Tax revenues will plummet just as the government's social security liabilities are ramping up. The Japanese government is in a hopeless situation.
Because the Japanese government is broke, I think Japan is the world's most likely candidate for hyperinflation. When Mrs. Watanabe realizes her government's credit is irreparably damaged, she'll dump her government bond and currency holdings and seek tangible assets...

Mrs. Watanabe's yield hunting could be the trigger that sets off the inflationary fireball in Japan. Consider shorting the yen ETF (FXY) to play this trend. Also, don't expect inflation in America until you see it in Japan first. After 20 years of deflation, Japan is much closer to the turning point than America is...

Big Inflation coming

I am more convinced than ever before that the government's efforts to stimulate the economy have gone way too far.
There will be a period of rampant inflation.
There will be price controls.
There will be currency controls.
There will be shortages.
You would think the wealthiest nation on Earth would understand the basics of economics and avoid these pitfalls… but politics rule our country, not economics.

It will be a long time before policymakers react appropriately by raising interest rates significantly.

This gives us plenty of time to rack up very large gains in equities.

I hope you've taken my warnings seriously. It's coming.

Jim Rogers' prediction is coming true...

Master investment gurus Warren Buffett, Jim Rogers, and Marc Faber all went on record recently to say the U.S. government would start buying its own debt... which would stoke inflation down the road. And now it's happening...

The Federal Reserve just announced it would buy $300 billion of long-term Treasuries to keep interest rates low and help along the economic recovery. Of course, no real work or toil will create the money it takes to buy the debt. The money will be created at the stroke of a computer key. Short-term, it will boost a lot of assets. Long-term, it's going to be a disaster... so own gold, real assets, and bet on higher rates.

Inflation coming?

OK... I've been reading a book that was written some time ago, by Christopher Wood, called the "Bubble Economy"... Sounds like he was writing about the U.S. eh? I'm afraid not! He was writing about Japan in the 90's... And you know me, I've been writing about how we are following Japan's footsteps to their disastrous decade of the 90's, so I just had to pick up this book and read it, to see what other comparisons could be picked up... And half way into the book, I found it... OK... Now that I've already told you that this is Japan in the 90's, you are aware that it's not the U.S. now... But... I'm sure you'll see what I'm talking about here... So, here's Christopher Wood... "Debt Deflation" was a term used by American Irving Fisher, a Yale economist, in an article written in 1933 at the nadir of the Great Depression. The Debt Deflation Theory of Great Depressions, was revolutionary. It identified two stages on the road to depression. First, too-high levels of aggregate debt depress economic activity because of all the money spent servicing that debt. (paying interest) Fisher termed this debt deflation. This is what Japan has suffered in their property markets as asset values have collapsed and debts have gone bad. Fisher argued that debt deflation only leads to general depression when there is a fall in the general price level. Just as a bad cold leads to pneumonia, so over-indebtedness leads to deflation." Now... Doesn't that sound exactly like what happened here in the U.S.? I'm turning Japanese, I really think so... OK... Enough of that... How about mixing in some Warren Buffett to my story about how that on the other side of this deflationary asset price scenario that's going on right now, is soaring inflation? Well... Warren, welcome to my wagon! Let's listen in to Mr. Buffett... Billionaire Warren Buffett, whose Berkshire Hathaway, Inc. posted its worst results ever in 2008, said the economy "has fallen off a cliff and that efforts to stimulate the economy may lead to inflation higher than the 1970's."

Inflation? bond traders bet on it

Bond traders are making bets the inflation is coming to the U.S.

The yield on a 30-year bond has risen to 3.6% today, about 100bps higher than all-time lows set in late 2008. Might not seem like much, but it’s pretty breakneck for the bond world… economists polled by Bloomberg didn’t predict yields that high until 2010.

Another argument for higher interest rates

This is a little technical, courtesy Niels Jensen , Managing Partner of Absolute Return Partners based in London, courtesy of John Mauldin. Thanks John, your work is much appreciated:

"So when we are told that the bailout cost, although large, is still manageable, it is only half the story.
The loss of tax revenue is another nail in the coffin and could lead to a dramatic – and unpredicted - rise in public debt. Have you heard any mention of that from your government?

At this point I need to introduce something as alien as the "flow-of-funds accounting identity"3:

Δ(G-T) = Δ(S – I) + ΔNFCI4

I rarely throw formulas at you for the simple reason that it scares many readers away. I urge you to stay with me for a bit longer, though, because this formula is critical in order to understand how the government response to the current crisis is likely to impact interest rates longer term. The equation states that any change in fiscal stimulus (Δ(G-T)) must equal the change in private sector net savings (Δ(S-I)) plus the change in net foreign capital inflows.

Translation: If our government stimulates the economy through public spending, as it is currently doing in spades, we must either save more or we have to rely on foreigners being prepared to invest in our country. There are no exceptions to this rule.

The key question, as our economic adviser Woody Brock points out, is what will cause this equation to hold true? It is quite simple. We will save more if we get paid more to do so (through higher interest rates) or if we are so scared of the future that we stop spending and start investing instead.

Foreign investors are no different. Now, with the trillions of dollars being spent around the world to shore up our financial system, the fear factor alone is not going to be enough. Higher – possibly much higher - interest rates will be required to ensure sufficient savings.

Obviously, there is another option at the government's disposal. The central bank can monetize some or all of the deficit by buying the bonds issued by the government. This line of action will keep Δ(G-T) down; hence the need for increased private savings (and/or capital inflows) drops accordingly. The problem with this approach, as an old Danish saying states, is that it is like wetting your pants to stay warm. Monetization executed on a big scale is highly inflationary in the long run, inevitably driving bond yields higher.

The good news is that we are very unlikely to loose control of inflation in the short run. The economy is simply too weak for that to happen.

Gold & Commodities, encore comment

Market focus has shifted almost completely to the size and impact of the U.S. fiscal stimulus package currently under construction.

Few are considering the consequences of such reckless spending, least of all how it will be paid for.

The unspoken truth is that the Fed may eventually "monetize," or print new money to finance the Treasury Dept.'s funding needs, if necessary.

I think the assumption that this new government spending will debase the U.S. dollar at an accelerating rate is going to become apparant by year-end.
The rush to inflation hedges like gold and oil, should likewise accelerate before the year is out.

Inflation IS coming, house values still decline

The Fed's FOMC meet's next Wednesday... I don't expect the Fed to reduce rates the remaining 25 Basis Points (1/4%) to zero.

It's been my position, that it's not a case of the cost of credit causing the credit crisis, it's a case of the lack of liquidity causing the credit crisis... and the resulting decline in value of residential/commercial property.

What lender in his/her right mind would lend against collateral that is declining in value! Politicians and Government..wake up! The problem is the value of every American home is declining.
Stop that decline by giving the Federal Reserve Bank the mandate to buy the mortgage on every residents primary residence and replacing it with an affordable mortgage at a 4% rate for 30 yrs based on the owners ability to pay, and you have a chance of stopping this death spiral.

So... In my mind... I didn't see the need to cut rates all along, and especially not to near zero!

But, the longer we're here at near zero, the better the chance is for soaring inflation by 2010!