U.S. Monetary Policy Does Not Make a Strong Dollar

U.S. Secretary of Treasury Timothy Geithner recently stated that: "Given the dollar’s role in the international financial system and the significant impact of the U.S. economy on global economic conditions, we fully recognize that the United States has a special responsibility to play... The policies of the United States are designed to lay the conditions for a strong dollar and more stability in the international monetary system."

Say what, Mr. Secretary?

There is a serious disconnect in Mr. Geithner's reasoning in this statement. Although it is true that the U.S. Dollar has been comparatively strong in recent days, we hazard to say that this is probably a temporary state of affairs. As ShadowStats.com shows, the Dollar has experienced a relative peak, but is is, as of July 6th, in a steep decline. Additionally, deflationary trends to the tune of about 2% has apparently developed, rendering every dollar in circulation slightly more powerful as time goes on.

However, we posit the exchange strength of the Dollar is liminal; the currency markets are probably changing their minds about the relative value of the Dollar. More telling, though, is the continuing growth of the M1 Money Supply - physical cash and currency in chequeing accounts. That section of the Money Supply is increasing at a whopping 18% annualised... and shows no sign of slowing.

It is that growth which will, eventually, kill the U.S. Dollar, and destroy the wealth of any holders of Dollar-denominated financial instruments (be they savings bonds or Treasury Bills). The Federal Reserve is desperate to prevent any deflation whatsoever, as deflation makes debts all the more painful to the indebited - think the U.S. Government. So, the Fed is pumping up M1 as fast as the printers can press new currency, in the attempt to stoke inflation and thus lessen the pain for the indebited.

We have faith in the Federal Reserve. They may be bumbling and rather silly, but we believe they'll get this stoking-inflation thing down pat. The question, in our minds, is not if, but when. When will the inflation rate rise to once again destroy purchasing power at a rate the Fed finds agreeable?

When that finally happens, and happen we think it shall, Mr. Geithner's "strong dollar" talk will at last be seen as the hot air it really is. We suspect that many investors in U.S. Government debt will see the handwriting on the wall at some point, but there will be many, many investors who will be horribly damaged by the looming inflation. We also suspect those investors will be none too happy with the United States, nor with Mr. Geithner. Hopefully he has his ranch in Argentina already bought and paid for...

More Evidence USA Entered Recession in 1999

Some months back we posted evidence that the last 10 years have been a period of recession in the USA, at least for the majority of the population. Today we present more.

In this Clusterstock Chart of the Day, one can see the amount of income that comes from Government Transfer Payments has risen from about 12% of all income to 18% over the last 10 years. This is a 50% increase.

We also offer John Williams' Shadow Government Statistics showing a GDP essentially in recession from 2000 onwards.

As we said before, the US economy is in worse shape than is generally recognised. It would appear the 'recovery' from the last official recession was chimerical. The debt-fueled consumption bubble only set the stage for a stronger crash.

The Clusterstock commentary helpfully points out, "thus the process of household debt becoming government debt takes place." In the debt-bubble, households borrowed money and instead of investing it, spent it as if it were income. Now those debts must be repaid or defaulted upon. In order to prevent a contraction of credit and debt-deflation, the US Government is borrowing enough to keep all debts in the aggregates rising. Among other ways of spending this borrowed money, it is handing out a larger dole - replacing, at least in part, spending money households can no longer borrow from home equity loans and credit cards.

At some point in the future not to distant, we expect the Government's ability to create new credit effectively cut off. At that point the inevitable debt-deflation will come - though we anticipate the debt will not be paid off, but rather destroyed by hyperinflation.

Inflation Coming Soon?

We hold up USA Today as the ultimate sign of what is not, in fact happening. If the rag says to do one thing, we know it's a bad idea; if it says that something is happening, we know it isn't. Which is, as an aside, how we expect to know the bottom of the 2007 Depression is in: USA Today will be screaming that the end is near and everyone is going to die... metaphorically speaking.

That is all a bit arch, of course, but you get the idea. As a for-profit company of popular persuasion, USA Today and other information sources have to amend what they publish in order to maintain mass appeal. The public at large does not want to read or hear especially gloomy news, which is probably why our Depression Gazette will never hit the big time. USA Today, as long as enough people feel it provides the desired style and quality of information, will continue to limp along.

Limping along, however, does not make what the company prints actually accurate. And in that vein, we present this article from USA Today, which spews some very impressive fallacies about the nature of inflation. We recommend reading the article with popcorn, as it is quite a laugh, but we'll take on some of the most egregious errors.

"If inflation does hit, it won't be this year, barring a major jump in oil prices or a drastic change in government philosophy." We wonder how oil prices cause inflation. Additionally, according to ShadowStats.com, the Federal Reserve is printing physical money (i.e. growth in the M1 Money Supply) with abandon. That trend is about as iron-clad a guarantee of inflation, at some point in the future, as one can get. Indeed, the USA Today writer himself writes "The ultimate cause of inflation is an unwarranted increase in the money supply."

"...Unemployment... [is] 9.4% now and widely expected to break above 10% this year."Again according to ShadowStats.com, unemployment is cooking at well over 20% and rising sharply. We personally expect to see 25% unemployment be a reality sometime very soon, if that level has not been hit already. That's not to say that particular non-fact is necessarily the writer's fault, though: it's an artifact of the purposefully inaccurate and under-reporting nature of Government statistics.

The best part, though, was this:

If you're worried about inflation rearing its ugly head soon, relax... You don't get inflation in an economy that's as slack as this one... Inflation just isn't going to happen in this economy.

"A lot of the worries about immediate inflation are examples of financial illiteracy," says David Wyss, chief economist for Standard & Poor's. "You won't get inflation until the economy gets back, and that's at least five years out."... To get to inflation... you need a humming economy, and the [U.S.] economy is barely breathing.

Oh, where do we start, dear Reader? How do we assail such a monument to stupidity? To say that inflation cannot happen except in a 'humming economy' is like saying... oh gods, we don't know! Words fail us utterly!

So instead, we would like to take a trip to reality for a moment and provide an example: Zimbabwe. Zimbabwe's economy has not been truly 'humming' since it was a colony of the British Crown (pre-1965). In fact, it has been in negative 'humming' since 2000 (source), and official unemployment in the nation is now a horrifying 94%. Yet this nation is experiencing an inflation rate so high it is effectively meaningless: 231 million percent annualised. It is lunacy - or perhaps misinformation - to say that inflation requires a 'humming economy' to take place. Zimbabwe is chilling proof of the total untruth of such an assertion.

These errors we've expounded upon, plus a few more, are shockingly out of character with the rest of the article, which is fairly sober and accurate. The writer seems to be going out of his way to drive home his fallacious definition of inflation, and we can only wonder why. Whatever the case, though, we take this as a sign for the contrarians: inflation this way comes. And soon.

This Week's Herbert Hoover Award

Today, we will give the Herbert Hoover Award to the individual most obviously lying through their teeth. Without further ado, onto this week's winner! Presenting (drum roll):

U.S. Secretary of Treasury Timothy Geithner

Recently in China, Secretary Geithner had the gall to inform the students of Peking University that he "believe[s] in a strong dollar," and that "Chinese [dollar-denominated] financial assets are very safe." Apparently the Secretary hasn't been informed that the term "strong dollar" is now a punch-line. Additionally, reviewing the excellent graphs of John William's Shadow Stats, we notice several disturbing things.

First is the value of the U.S. Dollar: it appears to be taking another little dip. We would like to draw your attention to the last high in the power of the Dollar, as it was in 2002 or so. The recent 'strength' of the U.S. Dollar only reached the purchasing power of 2006 Dollars... nothing to write home about.

Secondly, and this is the more damning graph, is the money supply; more precisely the M1 money supply (i.e. coin, paper money, and the deposits in chequeing accounts). As a general rule of thumb, increases in M1 usually correlate with inflation. So, if M1 is increasing at 16% or so, and the trend continues, one can reasonably expect inflation to be cooking along at a respectable 16% or so. We do hope the Chinese will do more than just laugh at the Treasury Secretary's bold-faced lie... perhaps they might use all their dollars to buy industrial and precious metals?

Congratulations, Mr. Secretary. Your trophy will be on your desk by Friday.

***

Runner-up in for the Award this week was Vice-President Joseph Biden, for stating the painfully obvious. "We know some of this money is going to be wasted," he said recently, referring to the Federal Government's bailout plan. Thank you, Mr. Vice-President, we already figured that one out.

As runner-up, Mr. Biden will receive a red origami crane.

Unemployment versus Contraction

We were reviewing the statistics at Shadowstats - a service that reports relatively honest economic data for the USA - and noticed a 19% unemployment rate (ouch!) and a 4% rate of GDP contraction (bad, but not that bad). Two points immediately leapt up: one, there is a fairly wide divergence; and two, this is divergence in an opposite direction from the Great Depression.

The divergence points to the chronic unemployment and underemployment that exists in the US. Even at the peak of the economy in 2000, approximately 12% of the workforce was redundant. If GDP is to contract in this Depression as much as in the Great Depression (50%), and unless there is to be 60% or more unemployment, more currently employed workers are going to have to take reduced hours or rates of pay.

The nation is faced with a highly problematic scenario. At some point in the not-too-distant future, the Federal Government will have exhausted its borrowing power to maintain welfare payments and its own operations. We have discussed in prior posts how both welfare payments and government salaries will have to be cut. We expect these to be cut through price inflation.

Many private sector organisations will be facing the task of whether to cast redundant workers into a fraying social safety net, or 'sharing the pain' by cutting hours accross the workforce. Self-employed persons will be facing involuntary 'part-time' status. Price inflation will also deliver pay cuts to the private sector.

The course the nation takes to adjust the population to lower economic output will have a decisive impact on how orderly the adjustment is. The more desperately 'turf' is defended and groups attempt to clutch onto their income, the greater the polarisation of income and the potential for social disruption. If there is a consensus to 'share the pain' - even if through inelegant methods such as inflation and higher taxes on the remaining productive elements - there is less potential for acute stife. Unfortunately, the more coercively the pain-sharing is achieved, the more long-term harm is done to the economy: inflation distorts investment decisions, and taxation inhibits productivity.

Clearly, the nation is still sufficiently affluent to handle some economic abuse - but there is a limit to how much. We are not optimistic that there is any collective will to institute a sounder basis for economic development. Alert individuals, on the other hand, will find even in a less benign environment adequate possibilities of prosperity.

Down and Down She Goes, Where She Stops, Nobody Knows

The numbers are pouring in daily: shipping is down, trucking is down, exports are down, imports are down. Typically these numbers show declines on the order of 10 to 20 percent year over year. Is it naive to suppose that the U.S. economy has declined 10% or so over the last year? Apparently, as the U.S. Government reports that the U.S. economy actually grew by 1.3% in 2008.

Frankly, we just don't believe that number. Mr. John Williams at www.shadowstats.com is reporting a 4% decline in U.S. GDP in 2008, which seems more realistic.

In any case, the decline is accelerating. The fourth quarter GDP numbers would have come in worse if there hadn't been an inventory buildup. As inventories are worked off in the face of collapsing demand, production will fall further.

The 2007 Depression is a new bird for everyone. Nothing quite like it has ever happened before. The last Depression (1929-1939) occurred with a vastly different set of social and economic parameters, and is not really a prototype for current events.

No one can present a formula for making it through the 2007 Depression. Survivors will be relying on improvisatory skills. It will be an era of living by your wits.

Is The Media Crying Wolf?

Since the present epoch is 'The Information Era,' and the economy is the big story of the moment, there is now abundant commentary on the "Deepening Recession." The question of whether the world may be in for a depression has now hit the mainstream.

Given the mainstream media's poor track record of appropriate attention to what is truly relevant, legitimate questions arise: "Is this recession thing just media drum-beating - a 'media event'?" Is the economy even that bad? Or are things actually much worse? Could it just be that it was a bad downturn, but now that it is getting so much press, one can figure the worst is actually over?

Our opinion is that things are actually much worse, and that the bad news will be 'spoon fed,' and not so much as a result of some sinister conspiracy as from the cycle of denial, confusion and slow recognition of conditions as they are.

The essence of the 2007 Depression, like depressions before it, is falling income - whether through pay cuts, unemployment, or lower returns on investments. Falling income sets off a vicious cycle of economic contraction as households spend and save less, tax receipts fall, and organisations invest less - further reducing what will become others' income.

An economist whom we admire, a Mr. Williams, presents a strong case that the USA has been in recession since 2000, and that government statistics to the contrary are unreliable. You may read more about this at his website. If the USA has indeed been contracting economically for the past seven years, then the apparent prosperity was most definitely a bubble. Its crashing down now is only the reality that a shrinking economy cannot support exaggerated consumption.

There is a great deal of productive capacity in the human race and its artifacts. Income is flowing from this capacity, but one must learn to live within and not beyond one's means. When this story is the top of the news, then you will know the worst is over.