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Tuesday, September 18, 2012

Albert Einstein said "Insanity:  Doing The Same Thing Over And Over Again And Expecting Different Results".

I am firmly convinced that Ben Bernake, Paul Krugman and every other macro economist I have ever heard of is both Insane and Utterly Stupid.

Here is the deal.  Official unemployment today stands at just over 8%, but if you include the people who have quit looking, the number is well over 10%

Bernake is trying to bring down this rate by printing more and more brand new $100 bills.  He calls it Quantitative Easing.  Each time, he prints $1 Trillion in new one hundred dollar bills (that we know of since the Fed is notoriously secretive).

He has now done that twice with absolutely no measurable results.  Last week, he announced he was going to do it for a third time.  He said he is going to print $40 Billion new $100 bills every MONTH!! until the jobless rate comes down to some unspecified number.

The rationale he, and every other macro economist, uses to support this action is that it will make it easier for borrowers to get loans.  O.K., lets look at the facts about borrowing in the U.S. economy.

1) The Wall Street Journal says U.S. corporations have almost $2 Trillion in cash on hand in banks right now (an all time record), and have absolutely no need to borrow anything.  (In addition, in the past couple of years, productivity has increased so much in large corporations that they can now do the job of three people with just two employees.)  They are firing (see HP, Northup, et al).

2) Small businesses are starved for cash income, i.e, customers, and they are going out of business at a record rate.  Business Week says the share of the GDP generated by private companies, i. e., small businesses, has shrunk from 48% in 2002 to 44% in 2010 (latest numbers available).  I have worked in a couple of small businesses, and, trust me, you don't need a loan to go out of business.  So, ask yourself, why would a shrinking business need more employees?

3) Private citizens are paying off their huge personal debt exactly as they should be doing, and they certainly don't need to go to the bank to borrow more money.  They have paid down their personal debt from $1 Trillion in 2008 to $850.7 Billion in 2012 according to Forbes.

4) And then there is using new loans to refinance homes.  The Los Angeles Times has some interesting facts about this possibility.  They point out that with home loan rates at all time low levels, e.g., well below 5%, here are the important facts;

All Home Mortages;
Loans with rates above 5%.......................69%
Loans with rates below 5%.......................31%

So either most home owners with loans are incredibly stupid, or the banks won't refinance their mortgages.  You decide.

So if you and I know these simple facts, why don't those a...holes in Washington know them?  But if they do know them, why don't they act on them?

O.K., so why do you care about any of this?

Well, here is why boys and girls.  That $3 Trillion is now parked in a bunch of Wall Street Banks.  (If you would like to know what just one trillion dollars in $100 bills looks like, try the last page of Section One, "The Great Recession Conspiracy".)  And, unless, Bernake actually lights a huge bonfire and burns every damn  one of those bills, he will have to release it into the economy.

Now you know the definition of "Inflation", e.g. too many dollars chasing a fixed amount of goods and services, so what do you expect will happen when Bernake starts releasing all those $100 bills.

Exactly right!!  Prices will go up, and up, and up.

So what should you being doing?  First of all, do not be a land lord because your tenants will be paying you off with cheaper and cheaper dollars, and you won't be able to raise rents fast enough to keep even.  And there is not much point on stocking up on canned goods and supplies because this inflation will out last the storage capacity of your garage.

Stocks are probably a good idea since companies can, and will, raise their prices, but not every company will be in a position to pass on cost increases so your job will be to figure which ones they are.   And good luck with that!!

Inflation protected bonds are probably the best place to park your long term savings, but I am not an investment adviser so feel free to ignore this advice.

I lived through the last big inflationary period (the one Paul Volker ended with stunningly high interest rates), and I am telling you, it ain't fun!!  There is only so much Spam you can eat and even the toughest jeans wear out sooner or later.  

I wish there was something I could suggest we do about this to head it off, but, sorry, I have no ideas.  Bernake will have his job for a couple more years and there is nothing anybody can do about that.  All those talking head economists have tenure so they have jobs, and talking platforms, forlife.  And both Obama and Romney have gathered the dumbest of the lot for advice. 

It just ain't looking good now!!!!!

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