Debt, Inflation, Recession, Depression?  Finding some truth!

How blessed we are with almost instant access, via the Web, to mind-numbing amounts of information.  So, for example, it was easy to check the origins of the quote that forms the subject line.

Yes, the saying is at least five hundred years old, and probably a century or two could be added to that, for it must have been long been in use to have been recorded in 1546 in John Heywood’s ‘A dialogue Conteynyng the Nomber in Effect of all the Prouerbes in the Englishe Tongue.’ He wrote ‘Plentie is no deinte, ye see not your owne ease. I see, ye can not see the wood for trees.’

From here.

Anyway, to the substance of this Post.

The policies of western governments, especially the USA and UK, has been to inject vast sums of public money into their economies.  While the declared objective of these strategies is to ‘kick start’ the economy through lending and the availability of cheap money, the undeclared objective may be to force a significant rise in inflation.  Debt can only be reduced through two means; default and inflation. Inflation may be more politically acceptable than defaults.

The problem for the average man in the street, the average Joe, is trying to sort out the truth of what is happening.  Not in the sense of an absolute truth but in the sense of who do you trust to provide the best information upon which one can make sensible decisions.  Because making the wrong decisions in this environment could hurt!

• If inflation is hovering in the wings, then any form of fixed interest investment, such as Government bonds  (unless they are inflation proof) is going to be disastrous.
• If inflation gets out of hand (many are talking of US hyper-inflation) then the US dollar could collapse.
• If debt continues to grow then this recession is running a real risk of turning into a depression.
• If things are not getting any better then layoffs and increasing unemployment will continue wreaking havoc with ordinary citizens.  The present ‘strength’ in stock markets would be a joke!

So many of us will turn to those who claim to have an insight into where markets and the economy are heading.  Let’s sample a few.

1. John Williams of ShadowStats appears to be a well qualified economist.  He has a report that implies that the US will not avoid debt-based hyperinflation.  John’s thoughts captured on a couple of YouTube videos, here and here.
2. Nicolas Taleb of Black Swan fame is betting on inflation as per a quote in the online version of the Wall Street Journal of June 9th, 2009, “Mr. Taleb said any deflation would be matched by an aggressive move by governments to stimulate their economies, leading inevitably to an uncontrollable surge in prices.” See the full article.
3. Chris Martenson says in a client report “Prepare now for upcoming destructive inflation.”
4. David Rosenberg, chief economist at Gluskin Sheff, a Toronto wealth-management firm, believes inflation won’t take hold until consumer spending rebounds, which he thinks could take years. Says Mr. Rosenberg: “Not until the household sector expands its balance sheets are we likely to see the re-emergence of inflation on a sustained basis.”
5. In the Financial Times of 27th July, there is an article describing the danger of ever increasing credit card defaults. (You may need to subscribe, free, to access the link.) An extract reads, “The International Monetary Fund estimates that of US consumer debt totalling $1,914bn, about 14 per cent will turn sour.” That 14 per cent is the equivalent of 268 billion US dollars!  To put that into some form of context, IBM’s turnover for the first quarter of 2009 was $21.7 billion.
6. Martin Weiss’s newsletter of the 27th July has a screaming headline saying, “5-Week Dow Rally Just Beginning!” (The Dow ended the day at 9108.51 and the UK FTSE at 4586.13.)
7. Ben Benanke, during a recent public talk, said, “Looking ahead he said he expected inflation to remain low for some time, but that once the economy improved it would be crucial for the Fed to raise interest rates.”
8. Karl Denninger of Market Ticker (see Blog Roll) is robust in his disgust at US economic policies.  In a recent post he said:

Folks, we went from a personal deficit of $200 against roughly $8,600 in per-capita income (a 2.3% deficit) to over $4,000 against roughly $25,000 in per-capita income, or a 16% deficit.

We managed to do this through debt.  That is, we promised to pay in the future, $4,000 more than we made in 2005 on average, and that number went from a tiny percentage of our income (2.3%) in 1981 to a very significant percentage (16%) in 2005.

Folks, it should be obvious that this deficit cannot continue to grow forever.  Eventually you must spend less than you make and pay down that debt, or you will get into a situation where you are unable to make the payments and default.

And on and on, each commentator claiming to have the answers and that everyone else is wrong!  How on earth are people able to protect themselves in the midst of such a cacophony of advice?

There are no easy answers but some things seem clear.

• Western governments should be much more honest about their relationships with ‘big’ finance so citizens have a better idea of who is being motivated by what.
• There seems to be an appalling lack of interest in educating people about financial and investment matters, especially taking into account the degree of financial risk that so many are exposed to.
• Governments should care much less about the “too big to fail” organisations and much more about the millions of individual casualties facing a loss of job or home or both.

There seems to be a massive lack of integrity and balanced argument.

By Paul Handover

Disclosure: Heavily invested in US long-dated Treasuries on the premise that deflation and depression is a much more likely scenario than anything else in the medium term.  This does not constitute investment advice in any shape or form.

• Core thought