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Works of Richard Marsden

The Works of Richard Marsden. Writing and Historical European Martial Arts.

Up up and away?

December 2010

Up up and away?

I’ve not posted much in my economic musings, and for good reason. A year ago I said I was in a holding pattern and for a year straight I have remained there, however happy days are here again- somewhat.

Things are not as bleak as they were and radio commercials are no longer telling Americans to stuff money into mattresses. Companies are selling products again and there is growth. The market bounced around in the 10,000 range since October, but now has moved well into 11,000 and is poised to gradually go up.

Slow Growth is Real Growth

Confusion is rampant though because the economy is not as it was before the housing and banking meltdown. This confusion is entirely misplaced. We cannot say that the market of 2006 was hyper-inflated and a large bubble just begging to be popped and in the same breath whine that our current market isn’t the same as the one in 2006 and therefore is ‘worse’. Slow growth is real growth. Companies are saving money, being cautious about hiring and planning for a rough future. This conservative outlook on the economy is a good thing. Should the great tidal wave of wealth return to America they’ll make money, if a second recession hits they’ll weather the second storm better than their cowboy competitors.

Holding Us Back

There are three factors holding the economy back from making a full recovery.

1 – The Great Inflation. In an effort to reduce debt and make US exports viable, the Federal Reserve has decided to use outright inflation in what it calls Quantitative Easing. This will be the second time they have done this since the Great Recession struck. This is a dangerous game because it largely uses illusion to show growth and encourage trade.

By printing more money the value of money decreases. The Federal Reserve disagrees and Ben Bernanke is convinced inflation is tied into people’s wages. So long as people aren’t making more money then all is well. Am I the only one who finds it unsettling that the Federal Reserve doesn’t believe in traditional inflation AND is actively working to suppress Americans' wages?

Bernanke’s defense of his policy is that inflation has remained steady during the Great Recession despite the creation of more money. There is a fault to his logic though. Because companies are being cautious and investors as well, there is a lot of money sitting outside of circulation. Trillions of dollars are waiting in gold, silver and in the bank, or in foreign markets. That money will not stay there forever. When the nation is more confident about the economy there will be a flight from gold and savings into investments. This torrent of cash will drive the market up, but at the same time inflation with it. I wouldn’t be surprised if the price of gold crashed then picked back up during this time. Meanwhile, companies flushed with cheap dollars will be able to do that which the Federal Reserve fears the most- pay their workers more! Their only defense at that point is to raise interest rates and try and slow lending, but by then it will be too late. The Great Recession becomes the Great Inflation. Hopefully, this impending inflation will be countered by growth. People are not stupid and this potential for inflation is well-known. Gold commercials continue to hammer us every day about it. This impending inflation also makes the future uncertain and unhealthy, a combination the market doesn’t like.

2 – Corruption. If Julian Assange isn’t murdered by the many nations and corporate interests who are out to get him, then I think another factor will arise that hampers healthy growth in America: Wide-spread, outright corruption.

Crackpots often talk about how the government takes tax-payer dollars and uses them unwisely. Largely, these crackpots get ignored, or someone somewhere is able to justify poor spending. The infamous Alaskan ‘Bridge to Nowhere’ had plenty of supporters in Alaska including conservatives such as Sarah Palin.

What if, though, something entirely unjustifiable cropped up? Senators getting insider trading tips or banks taking government bailout money and claiming the majority of it in the form of salary hikes. While both ideas are fairly evident, no one seems to care, but if Wikileaks were to reveal it then national attention would be fixed firmly on the scandal. Assange says in January he will expose information that implicates a major bank. Long before the information has come out, Bank of America’s stock has plummeted. For the true gamblers out there, buy B of A, but for me I’m beginning to wonder what do insiders know that I don’t that has caused them to flee from the stock? While governments can claim the leaking of their secret files amounts to espionage I don’t think companies can do the same if the information leaked reveals criminal activity. Whatever Assange reveals is sure to knock the economy back and rightfully so if what he exposes is criminal, reckless, behavior by our government and banks.

3- Unemployment. Our government tracks unemployment generously. It doesn’t count many unemployed people in order to pad its numbers. Despite this, unemployment is increasing, or at the very best, remaining steady in the 10% range and who knows how bad it is in reality? The issues arising from this are many. Less workers means pension programs, government or private, are at risk. Meanwhile, unemployment insurance continues to drain the national coffers as it is repeatedly extended. Fewer workers also mean less spenders and thus less real growth.

The government has not been idle in terms of unemployment. I firmly believe it tried to create jobs, but that our corruption level is so high that the money slotted for workers was gobbled up by a few experts, studies and government employees.

In Arizona, for example, money was put aside for a ‘virtual’ fence of high-tech goodies to help seal the border. After millions of dollars were spent, no ‘virtual’ fence was created and the project was canceled. No one seems to mind that the money set aside went somewhere, or rather, into a few people’s pockets.

Despite billions of dollars, the President admitted “there are no shovel-ready jobs”. This is a sad state of affairs that our government is unable to build parks, or infrastructure like it did in the 30’s. Like the New Deal or not, it did give Americans schools, dams, bridges, roads and parks all clearly marked with acronyms so the people could see and appreciate the government’s efforts.

Money was spent, unemployment has remained high. I believe corruption is chiefly to blame, followed by the fact that government can’t employ all the people and think it solves anything for long.

The Future!

I think the future will see growth, both real and inflationary in the economy. This means investing is starting to look more attractive. As a dividends investor I’m excited to get back into the market now, while my dollar to dividend ratio is pleasant. Perhaps, some of my dividends may even go up as the battered companies I invest in make a profit, which would be a strong sign of impending growth and a reason to invest.

I believe corruption and over-spending will be the leading topics of discussion in the years to come if we are lucky. If the nation doesn’t address both issues then we will quickly end up like France in 1789. King Louis XVI’s government pocketed nearly half the taxes of France, complex laws stifled business, government projects were never completed (yet someone kept the money), and unemployment remained high while the price of food rose.

France, a super-power of its day, began its violent collapse in 1789. The government’s belief that corruption, starvation, and debt were the norm was rejected by the people. Today, there is another nation treading similar ground, but for the moment its people are aware and its is current government is grudgingly, slowly, addressing the issues at hand.