Weekly Article 08-28-2018
Is the economy really as good as people think? In this weekly article, we’ll take a look at debt and how this is affecting the economy. If you have questions about how to handle your own credit card debt, student loans, or vehicle debt, get in touch with a financial planner in Pocono Summit today.
I have been writing about the economic weakness for quite some time now that we see across the globe. While many country’s problems are clearly evident by looking at their currency markets and/or stock markets the USA has been best at disguising the true state of our economic reality.
I have had a few people tell me that they are seeing a lot more economic activity now than they have seen in the past and many business owners are telling them that they are busier than they have been in years. We also have our President telling us that the economy is “as good as it gets”.
While I have to admit that in some places there are pockets of strength, overall our economy is anemic at best and that is with record amounts of debt being created out of nowhere to give the illusion that there is demand for products and services that probably couldn’t be afforded if interest rates were anywhere near normal.
A few points- Americans have historically high debt on credit cards, student loans, autos, and because it appears that these forms of debt are maxing out it was reported that personal loans are making a comeback. City, state and local governments are drowning in record debts as well as many suffering from underfunded pensions that are at precarious levels with stock and bond markets also at all-time highs. We also have a federal government that admits to over $21 Trillion in debt, has another $21 trillion “missing” from HUD and the Department of Defense, and unfunded liabilities (promises made with no money put aside for them) that some believe could be as high as $200 Trillion.
If the debt is truly not a problem why shouldn’t we use Generally Accepted Accounting Principles when telling the American public about our deficit. Many are upset that this year it will be around a trillion dollars for THIS YEAR. This is, however, like most government numbers- greatly massaged. If you go to USdebtclock.org you can see using GAAP accounting the US deficit is over $6 trillion- for this year!
When I talk about the “illusion” of economic recovery this is what I am actually talking about. I have to admit that there is more activity taking place in many areas probably because interest rates are ridiculously low and you have a government that is making it easier to do business by reducing regulations. This, however, is likely nothing more than a debt-fueled binge that probably will not stand the test of time. I say this because “printing” money out of nowhere is not a new discovery It has been tried hundreds of times in history and has led to the destruction of the “printed” currencies 100% of the time.
The only difference THIS time is that this is truly a global experiment and this is why it is likely that this is taking so long to play out. When you have currencies that are compared to other currencies that are being devalued at the same time the comparisons don’t look too bad. I believe this is why gold in particular, and silver also, are being manipulated lower in the paper markets as I have written about in numerous prior articles. Again, to create the illusion of strength in paper currencies and their viability going forward.
The illusion isn’t that there is more business being done here and there but that the false signals being sent out by low interest rates and monstrous amounts of debt being added daily that makes entrepreneurs believe that they can build new businesses, high-rises, etc, and that things will remain about the same into the future allowing them to generate huge returns going forward.
There are many people, in my opinion, who are making decisions to go into debt and create new enterprises that will be stunned when the liquidity (funding) fountain goes dry. Particularly those who are leveraging their assets for greater gains as the spigot remains open and may get wiped out when it snaps shut. Actually, many household-name large companies may actually fare worse because if a new business creates a revenue stream- that revenue stream can pay off that existing debt and they could be ahead of the game.
The problem for many existing large enterprises is that over the past 10 years or so they have issued a lot of non-productive debt that has gone to buy back shares- many times at historically high valuations, to pay dividends and pay large bonuses to the regime running the company at that time. In other words, the “money” was squandered and the company (shareholders) are left to pay off the debt which will likely greatly reduce future earnings.
As I have written many times “every fraud has the seeds of its own destruction built in”
I will let you decide if it is a fraud when:
A central bank creates “money” out of nowhere and not only charges interest on it but also uses it to buy assets like stocks, bonds, and other assets. Therefore, becoming the “markets”.
Large banks can manipulate virtually all markets for their own benefit and get slapped on the wrist (if billions in fines are a slap on the wrist- which I believe it is if you made trillions) and no one is held accountable.
When major banks can sell paper gold and silver in the market, reduce the price and buy the real stuff for themselves on sale. It is possible countries are doing this also but the banks themselves have admitted in court that they have done this. (Deutsche Bank) Others, like Ted Butler has followed JP Morgan’s manipulation of the silver price and their stacking of what he believes is 675 million ounces of silver.
If economic numbers are made up to tell a story rather than reflect the true conditions of the economy. (Like the 96 million people conveniently not counted as part of the lowest unemployment rate in history) USDEbtclock.org Or inflation being low as everyone in the middle class is seemingly getting squeezed in every area of their lives like at the gas pump, grocery store, paying taxes, health insurance, prescriptions, doctor visits, education- you name it.
If pension funds projecting 7-8% returns in our current environment is realistic. If not, pensions are FAR more underfunded than reported.
If Chicago proposing to issue $10 billion in new bonds to pay into a pension fund that is $28 billion underwater already- hoping to out-earn the bonds they issue today in the future. (Fox Business) I wrote an entire article about the Chicago Transit Authority trying this years ago with disastrous results. If I remember correctly they issued bonds at 6% expecting to earn 8% going forward- in 2007! Guess what happened next!
When we are all told that more debt will “fix” our problem of too much debt. Think Turkey, Venezuela, Argentina, and many many more!
We all have SHORT, SHORT memories don’t we?
If you believe that these type of actions will not have any negative effects going forward then, by all means, hold on to your traditional assets and let it rip. If you believe a bit of caution may be warranted going forward you may want to add other assets to your portfolio that may trend in the opposite direction of the financial assets that most of us hold. In other words, it may make some sense for most of us to have at least some exposure to REAL stuff rather than paper promises.
Mike Savage, ChFC, Financial Advisor
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