Financial Health

“… the strength of the people measures itself in terms of the welfare of the weak ones”
From the preamble of the Swiss federal constitution

“Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.” Ben Shalom Bernanke in Jackson Hole 2002

“We have tried spending money. We are spending more than we have ever spent before and it does not work… We have never made good on our promises…. I say after 8 years of the Administration we have just as much unemployment as when we started, and an enormous debt to boot!”
Henry Morgenthau, Secretary of the Treasury during the New Deal, May 1939

The World after Lehman Brothers

I believe most people dont quite understand how much the Western world is going to change in the next few years. So far, it appears, politicians (and most economists !) have learned absolutely nothing from this crisis. Banksters are betting tax payer money as before while Governments garantee the tax payers bank deposits. The European Bailout Fund is imo nothing but a modern day version of Baron von Münchhausen´s story of pulling himself and his horse out of the mud.

I am also afraid the new found European Austerity will be forgotten as soon as the US economy hits a wall and subsequently the rest of the world will slow substantially.  If this scenario becomes the new reality I expect the Central Banks will be compelled to step in since it will be very unpopular to bailout the banks again with tax payer money and many nations are almost bankrupt already. Inundating an economy with freshly “printed” money had historically always the same effect, sooner or later people lose faith in the Governments “legal tender” and try to exchange their savings for goods as fast as possible.  The result is usually high inflation, sometimes Hyper inflation. Fortunately many Germans have heard of the Weimar Hyper inflation and politicians might change course before its too late. Results of latest European elections give some reason for hope. Only German citizens apparently still believe they can live on everybody else expenses, as the election in NRW had clearly indicated.

Having lived in three countries and travelled the world intensively I am again a believer, no not in God, but in European “superiority” when it comes to issues like education, creativity, ingenuity, Rule Of Law and the enlightenment of the average citizen. After reading the daily European news I frequently get my doubts on the latter,  but most other countries are much worse off, the custodian of democracy, the USA, in particular.

As usual there is a caveat. If European governments keep spending  not under control so that private sectors have room to flourish and if a favorable climate for business, particularly for small business is not restored, the advantages of capital, education and technology will be rendered ineffective, growth will slow further and economic dominance does pass completely to the East.

Albeit, China and India have their own problems. China’s banking system has potentially a massive bad loan problem,  India, like many African nations, elects time and again chronically overspending, corrupt and inefficient governments.

So although I wouldnt want to live there again,  my bet for Number One in 2020 (ignoring oil states) in terms of per capita income would be not China but Germany. The “demographic deficit,” may turn out to be an advantage, as the cost of resources and wages will be kept in better balance.

Until the picture becomes clearer I favor gold and cash as the only safe investments.

“The older dictators fell because they could never supply their subjects with enough bread, enough circuses, enough miracles and mysteries. Nor did they possess a really effective system of mind manipulation.
Under a scientific dictatorship, education will really work – with the result that most men and women will grow up to love their servitude and will never dream of revolution. There seems to be no good reason why a thoroughly scientific dictatorship should ever be overthrown. ”
– Aldous Huxley Brave New World

The four possible solutions

For the management of the debt crisis in principle are four solutions available.
(1) decrease of public expenditures are reduced to sustainable debt level and thus the confidence of the investors into the solvency of the national debtors is restored on a long-term basis.
(2) by tax increases the income situation of the national budget is improved and the debts reduced.
(3) the national debtors stop the debt service and negotiate with the creditors about a payment decree.
(4) the states give on the goal of a stable currency and pursue an inflationist policy, by which their debts are cancelled.
It should be clear by now that all four strategies would have consequences, which are not to be limited to the financial and economic system and very likely will lead in the next stage to more social and political destabilization.

 

Excellent analysis from “Some investor guy”:

What happens if things go really badly …

FOMC meeting 9. Aug. 2011: Its official, the US economy will be weak until mid 2013 ( I wonder how the FOMC figured that out … )

Related articles

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• Magazine Preview: Can Jeremy Grantham Profit from Ecological Mayhem? (nytimes.com)
• The Grantham manifesto (ftalphaville.ft.com)

JEREMY GRANTHAM:We’re Headed For A Disaster Of Biblical Proportions

Days of Abundant Resources and
Falling Prices Are Over Forever

Time to Wake Up: Days of Abundant Resources and
Falling Prices Are Over Forever
Jeremy Grantham
Summary of the Summary
The world is using up its natural resources at an alarming rate, and this has caused a permanent shift in their value.
We all need to adjust our behavior to this new environment. It would help if we did it quickly.
Summary
 Until about 1800, our species had no safety margin and lived, like other animals, up to the limit of the food supply, ebbing and fl owing in population.
 From about 1800 on the use of hydrocarbons allowed for an explosion in energy use, in food supply, and, through the creation of surpluses, a dramatic increase in wealth and scientifi c progress.
 Since 1800, the population has surged from 800 million to 7 billion, on its way to an estimated 8 billion, at minimum.
 The rise in population, the ten-fold increase in wealth in developed countries, and the current explosive growth in developing countries have eaten rapidly into our fi nite resources of hydrocarbons and metals, fertilizer, available land, and water.
 Now, despite a massive increase in fertilizer use, the growth in crop yields per acre has declined from 3.5% in the 1960s to 1.2% today. There is little productive new land to bring on and, as people get richer, they eat more grain-intensive meat. Because the population continues to grow at over 1%, there is little safety margin.
 The problems of compounding growth in the face of fi nite resources are not easily understood by optimistic, short-term-oriented, and relatively innumerate humans (especially the political variety).
 The fact is that no compound growth is sustainable. If we maintain our desperate focus on growth, we will run out of everything and crash. We must substitute qualitative growth for quantitative growth.
 But Mrs. Market is helping, and right now she is sending us the Mother of all price signals. The prices of all important commodities except oil declined for 100 years until 2002, by an average of 70%. From 2002 until now, this entire decline was erased by a bigger price surge than occurred during World War II.
 Statistically, most commodities are now so far away from their former downward trend that it makes it very
probable that the old trend has changed – that there is in fact a Paradigm Shift – perhaps the most important
economic event since the Industrial Revolution.
 Climate change is associated with weather instability, but the last year was exceptionally bad. Near term it will
surely get less bad.
 Excellent long-term investment opportunities in resources and resource efficiency are compromised by the high chance of an improvement in weather next year and by the possibility that China may stumble.
 From now on, price pressure and shortages of resources will be a permanent feature of our lives. This will
increasingly slow down the growth rate of the developed and developing world and put a severe burden on poor countries.
 We all need to develop serious resource plans, particularly energy policies. There is little time to waste.

China’s Share of World Commodity Consumption