Archive for January, 2011

I’ve been inundated as tax season is upon us, but I wanted to quickly blog on a number of economic events that are unfolding.  We are beginning to see the clear effects of Quantitative Easing on the world stage.  We also now see a fast developing global concern for rising food prices and high unemployment.  This week, the Federal Reserve came out and unanimously voted to continue with their QE program and to keep interest rates at zero with a possible QE3 on the horizon.  Benny’s just keepin that money flowing.  In the meantime, states are becoming insolvent in the US, and Europe is treading water with the Euro. 

First looking to Europe, the Euro is still in trouble.  It is in need of $3 to $5 trillion if it is going to be saved.  Germany has stepped in with $1 trillion and is “committed to saving the Euro”, but hasn’t yet put up the additional major financial commitment required.  Germany, France, Holland and Austria are the only solvent nations in Europe right now, and I’m unsure how they will come up with that kind of money even combined, without going bankrupt.  Meanwhile, Greece is still  having problems, Ireland is broke, England is broke and overextended, Italy is on the verge of bankruptcy, and so is Spain.  But it’ll be ok, that printing press is being greased.  Europe is already seeing food price increases as the entire western world seems to resort to QE to solve money problems.  There is far too much corruption in the EU, and excessive central bank involvement in policy which together could eventually end the Euro.  Now let’s look at our own QE. 

I remain puzzled at the fact that the Fed’s justification for QE was to get long term interest rates to fall, yet that has backfired as they have been rising since the beginning of QE.  That’s right, the program has backfired by their own standards- and their solution is “full steam ahead”.  In the meantime, inflation is being seen throughout Europe, Asia, and Northern Africa, mostly because these regions tend to peg their currencies to the US Dollar.  As we print currency, these countries print their own currencies along with the dollar to keep their currency pegged to it for a number of different reasons, mainly export price advantages.  Here in the US recently, we are freely printing dollars at out of control levels- but we are able to export our dollars to the entire world until now, so we are in essence exporting our inflation.  So where is this inflation going?

The news over this past week has revealed some reactions of the worldwide middle class who seem to be on the receiving end of this exported inflation.  We saw last week in Tunisia, massive riots of the people due to rising food prices and high unemployment.  They were successful in overthrowing their government.  Days later, the riots bled over to Egypt where today for the second day in a row riots over rising food prices and dire economic circumstances are in progress.  The people are calling for the president to step down.  There is talk of food riots in Yemen, and there are worries that these food riots will catch on throughout the entire Arabian Peninsula.  China, South Korea, Thailand and India have all recently raised interest rates to try to keep rising inflation under control.  India has raised rates 8 times in the past year in attempts to keep inflation down as they have seen the price of some of their vegetables increase by 300%, and China has even instituted a price controls program to keep the cost of goods down. 

What is more interesting, is that you turn on the news and for the most part are hearing reports of bad weather as being the catalyst for crop failure leading to food shortages and higher prices.  Please understand-this is not a supply and demand problem.  Governments historically try to place full blame of high inflation and price increases on bad weather, and low supply of food/commodities.  In reality, these price increases are coming from our QE program which has more than doubled the money supply of the world reserve currency in just the past two years.  Inflation by definition is simply an increase in the money supply, and the effects of inflation on food and commodities prices aren’t immediate as it takes time for the newly printed currency to find its way into the system.  Only after the new money finds its way into the system, do we see price increases.  In most emerging countries, the money has arrived- hence their price increases/inflation problems. 

Now that this issue of inflation is reaching a boiling point with the middle class in emerging markets, it is only a matter of time before their governments either tighten monetary policies, or risk social upheaval up to and including being overthrown by force.  That means that these other countries that begin to become educated as to what is actually happening, will un-peg from the US Dollar allowing the value of their currencies to act more independently.  The temporary solution to battle inflation used by many of these countries recently- raising interest rates- will fail to lower their inflation, and these countries will realize this fairly quickly.  It is my belief that raising interest rates will make their inflation worse.   In the case of China, should they un-peg from the dollar either quickly or methodically, you will see the Yuan rise considerably over the Dollar.  So what does that mean for the USA?

As foreign markets become wise to the reasons behind their rising prices resulting in tightened monetary policy- you will see a surge of inflation that will be sent back to the U.S. of record proportion.  Almost everything we buy is “Made in China”, and the cost of all of these goods will soar.  Food prices overseas will remain high, but will stabilize, while food prices here will spiral out of control.  I was extremely disappointed at President Obama’s State of the Union address in how he failed to even mention the main cause of our economic problems, or to have a specific clear plan including massive government cuts  in an effort to save our economy.  After that speech, it became evident that Washington doesn’t have a clue as to what is causing our economic fall, or how to fix it.  They talked more of investment/spending, and education.  Sorry to inform the President, education won’t help us when our economy fails to present jobs and opportunities. 

States are on their own at this point as the Fed “gave em’ the finger”, and some analysts are saying that more than 100 municipalities could stop paying interest on their bonds and approach insolvency this year.  We will get to a point where states will no longer be able to issue municipal bonds, as no one will want to buy them.  The American middle class is being denigrated, but most have no clue it is even happening to them.    

We are approaching a time where the Federal Reserve may be the biggest buyer of US Treasuries through newly printed money from QE.  When you take Medicare, Medicaid and Social Security and add their costs up for the year, all of our tax dollars combined can’t even cover these three programs.  Yet we are poised for investment in new programs and education.  Uncle Sam is broke, and someone needs to break the news to him.  Now you might be sitting there saying, “All of this doesn’t matter so much to me as long as my taxes don’t go up.”  Here is the kicker…what do you think inflation is?  Your dollars are losing their value, and in this way you are being taxed to fund our overdrawn, super-sized government whether you like it or not.  Our standard of living is decreasing every day, as inflation sets in and your dollars buy less and less.  The entire world has been indirectly taxed through inflation to fund the US Government.  My warning-don’t expect this to go on forever.  The world is getting smarter. 

Capitalism in its current form will not survive, as we have been doomed ever since 1971 when we left the gold standard allowing unlimited printing of the dollar.  The credit and debts that have materialized due to this action are simply too big to overcome.  We are looking at a complete overhaul of the world financial system within the next 5 years.  This isn’t a doom and gloom projection, this is fact.  If you don’t believe me, start reading newspapers from other regions of the world.   This is no secret- the writing is on the wall and in publications worldwide. 

President Hu of China in interviews recently has called the US Dollar a “currency of the past”.  China along with Russia, Brazil, Japan, and Iran have all been active in transitioning the US Dollar out of its role as world reserve currency.  The Yuan is creeping into international markets at a record pace.  China is providing bail outs to the EU using US Dollars in exchange for other currencies in efforts to dump our cash.  Our government may be clueless, but you don’t have to be.  Pay close attention as these economic changes unfold, and be very cautious about holding US Dollars.  Gold and Silver took a dip, along with oil prices- all due to speculation over rising interest rates in Asia and the Middle East.  These will all resume their upward trends as central banks using fiat currencies continue with QE.  It is a good time to buy as prices are down.  It would be wise to get involved at the state and local level to reduce spending, and ask your state representatives what their currency back-up plan is should the dollar decline.  Don’t be surprised if they don’t have one, just educate them.  That’s all I have for today, I’ll try to blog again soon depending on time.

-John F. Haettich- 1/27/2011

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It’s Thursday, January 13, 2011 and I have officially lost my voice.  I’m figuring it may be a good time to blog.  I’ve finally had a chance to get settled after the long holidays, and have come across a huge amount of news from China.  I’m guessing that this news is being blasted through the press in anticipation of the meeting between President Barack Obama, and China’s President Hu Jintao on the economy.  In a nutshell, the US takes a position that China is continuing to manipulate their currency (through QE along with the Fed) which is keeping the Yuan pegged below the dollar- giving China an unfair trade advantage as their exports are cheaper than ours.  The U.S. is claiming that this is contributing to the large trade deficit and high unemployment problems we have been experiencing over the past couple of years. 

What’s crazy is that our government wants to see the value of the dollar diminish.  According to their “experts”, allowing the dollar to fall below the Yuan would magically solve our economic problems allowing us to export more and lower unemployment drastically.  I would argue the opposite.  Allowing the dollar to fall below the Yuan would be a precursor to the dollar dropping like a stone. 

Looking to China- in their own words, in an article from the Chinese Global Times entitled “US Pressure on Yuan ‘Distracting From Cooperation’”, Zhang Yesui, the Chinese ambassador to the US is quoted as saying “The trade imbalance between China and the US has primarily resulted from the structural difference between the two countries’ trade and investment, and is an outcome of industrial division and transfer against the background of globalization.”  In other words, the US is inferior in their trade and investment policies when compared to China, and due to globalization we have lost or “transferred” our industrial/manufacturing sector overseas.  Without that sector, we don’t have exports.  He went on to say that any currency move by China won’t significantly change our problems of too few exports and high unemployment in the US.  Finally someone said it!  We made a bad move with NAFTA.  If we were playing chess, over the past two decades we’ve backed our king into the corner of the board.  Through globalization, we have lost our manufacturing sector- the sector that in the beginning of our rise- made our country great. 

While all of this is happening, the Yuan has been stealthily creeping into the international market.  China announced today in the Global Times that “Yuan Trade is Now Available in US”.  They are now allowing customers of China’s fourth largest bank to change as much as $4,000/day into Yuan at locations in New York and Los Angeles.  The general manager for the Bank of China, Li Xiaojing is quoted as saying “We’re preparing for the day when the Renminbi becomes fully convertible.”  The bank’s goal is to become the Renminbi clearing center in America.  

Yesterday the Yuan hit a new record high against the dollar at 6.6128 per USD.  This came after news that the dollar fell against the Euro yesterday.  The dollar seems to be losing, and losing, and losing some more.  The World Bank is now also making moves toward China.  Yesterday, the World Bank issued its first Yuan-denominated bonds in Hong Kong in a move that will help China increase its currency’s role in international markets.  A representative of the World Bank in China, Gu Xiaoming is quoted as saying “The move presents more of a symbolic value than a practical one and signals a strong interest by the World Bank in helping a wider use of the Chinese currency in global markets.”  More and more commercial banks are moving to issue Yuan Bonds as both the dollar and the Euro are showing continued signs of weakening. 

China was also ranked the “World’s Freest Economy” yesterday by the US Based Heritage Foundation.  The US has now fallen to number 9 on the list as a result of increased government regulation in the economic sector.  On top of this, according to a PricewaterhouseCoopers report yesterday, China is set to be Number 1.  China will overtake the US as the world’s largest economy as a huge shift in economic power unfolds by the year 2018.  This is only 7 years away. When will our government realize that free markets and free economies equal success and growth?  We are moving backwards while China is moving forwards.  This economic upheaval in the world is unraveling at record pace, and things are about to change for everyone worldwide. 

Meanwhile on the home front, new unemployment claims remain over 400,000/week, at 445,000 for the week ending January 8, 2011.  Couple our extremely high unemployment with a dollar that seems to be losing to every currency in the world, and we may be seeing some problems soon.  We still have record debt and deficits as well, be assured they haven’t gone anywhere.  Reports in the US media continue to be optimistic, but are overshadowed by numbers and facts that don’t support their reports.

Commodities are continuing to rise, and gold and silver have resumed their upward journey.  Oil prices are going up as well, but here’s an interesting fact.  When you compare oil prices in terms of real money- meaning gold (not fiat paper currencies), oil prices have actually fallen.  The price increases that we are seeing in oil and gas at the pump are actually inflationary.  No one has realized it yet.  We are beginning to see the effects of massive quantitative easing, but this is just the beginning. 

I maintain the opinion that if you still hold US Dollars in cash, savings, etc., now would be a good time to dump them and buy hard assets.  If you hold a 401k or retirement fund that relies on the stock market or mutual funds backed by the US Dollar, move the money to commodities or foreign currency backed investments- or pull the funds out, pay the taxes and invest on your own.  If you hold municipal bonds or US Treasuries, take a loss and get out immediately.  These bond markets are volatile and on the verge of default at any sign of interest rate increases.  There still hasn’t been any solid move by the Federal Reserve to discontinue quantitative easing, or by the government to rein in spending.  The country needs a quick and complete change in direction immediately- which I personally feel will not happen.  For you and me, that means protect your assets until the storm is over.  

For some, this will be a trying year, and for others- it may be a year that you make a fortune.  Everything depends on what you do to act on the economic data that is right in front of your face every day.  Many have already made moves for protection of assets and preparation.  Many more have continued sitting on the couch day after day, watching the same meaningless television shows, playing the same time consuming video games, without a concern for their future, or the future of their families.  My advice- start paying attention to what is happening in government, and the economy.  Couch potatoes won’t really care much about all of this, until they no longer can afford potato chips.  Then Houston, we have a problem!  Don’t wait to make preparations, do it now, and educate your family and friends too.  That’s all I have for today. 

John F. Haettich-  1/13/2011