Let’s talk about some economic chaos again.
Most Americans avoid these topics like the plague.
I don’t blame ‘em – it’s dry reading, not that easy to understand, and doesn’t really seem like it impacts your life.
But it does. Worse, it’ll impact your grandkids’ lives, and big time.
I’m getting a lot of these ideas from both Chuck Coppes and Craig R. Smith.
Most Americans avoid these topics like the plague.
I don’t blame ‘em – it’s dry reading, not that easy to understand, and doesn’t really seem like it impacts your life.
But it does. Worse, it’ll impact your grandkids’ lives, and big time.
I’m getting a lot of these ideas from both Chuck Coppes and Craig R. Smith.
#1 The Spending Bill
On March 23, Trump signed the most recent spending bill.
It’s a $1.3 trillion spending bill, which is $300 billion more than the last bill was.
Even before the spending bill passed, we knew that the government would have a $985 billion deficit for fiscal year 2019.
The federal government has $3.4 trillion in revenue, yet is spending $4.4 trillion.
And all of this came about with a GOP House, a GOP Senate, and a GOP White House.
So much for the Party of fiscal conservatism.
And just wait until the Democrats get ahold of the levers of power again. Can you imagine how much higher the deficit would be if Schumer and Pelosi were calling the shots?
The spending bill is a clear sign that another crash is coming, simply because the government has signaled to the markets that it’s not concerned about reining in spending.
That means more debt, which means printing more money (this is called quantitative easing by the Federal Reserve). And an increase in the money supply will produce inflation.
Please realize that our government’s goal isn’t to fight inflation, but to encourage it. It’s the only way the Fed can buy up that debt (something they don’t want to do, but they’re the buyer of last resort).
In situations like this, we know that the Fed will never raise interest rates to 5% as it wants to. That’d create $1 trillion worth of interest payments on our debt.
That’s not even the worst of it. The spending bill only funds the government until September 30. That means in 5 months we’ll see another deficit-busting bill come to Trump’s desk.
Will he sign it this time, or do what needs to happen, which is shutting down the government?
Unless this country gets its spending under control, the children and grandchildren of the people living today aren’t going to have much in the way of a quality life.
#2 The Asian Gold/Oil Bank
It’s called a crude oil futures contract and it’ll operate on the Shanghai International Energy Exchange (INE).
This new trading option for oil in Asia launched on March 26, three days after the U.S. passed its spending bill.
Coincidence? I wouldn’t bet on it.
Asia is the biggest consumer of oil in the world, and this new futures contract will better tie oil prices to the Chinese Yuan, which is backed up by the country’s massive gold stockpiles.
This is a huge blow to the American economic system, which has pegged oil to the U.S. dollar for decades now. We call it the petro-dollar.
For years and years, America would finance its debt with U.S. Treasury bonds, which were pegged to oil. The world really had no choice but to buy these bonds so it could keep getting its oil.
Bonds are nothing more than creating money out of debt.
Now the world has another option, one given to it by China. This is the petro-yuan.
The world wants other currency options – just look at the rise of bitcoin and other cryptocurrencies over the past year.
What effect this will have on the bond market in the U.S. is unclear, but I have no doubt it’ll be disastrous, with years and years of bear markets.
With no one willing to finance America’s debt, the country’s deficits will continue to increase, its spending power will go down as it pays more to finance that debt, and American consumers will see prices for nearly everything go up while at the same time their level of government-provided services (including pensions) will go down.
#3 Housing is Out of Control…Again
In 2007, the average cost for a home in Los Angeles was $530,000.
- The next year that fell to $427,000 and in 2009 it was $394,000.
- By 2011, the average price was down to $366,000, meaning the California housing market had seen prices fall 50% from their March 2007 peak.
- By 2016, however, prices had rebounded to $569,000, though average prices across the state were still over 9% below 2007-levels.
Now, in 2018, the average price for a home in LA is $624,000…or nearly $100,000 over the prices we saw in 2007.
Remember, the out of control housing market was a big reason for the Great Recession.
Now prices are even more out of control, and that’s true all across the country. Here in Missoula prices are $270,000 on average, and that with the average household making $45,000 a year.
What’s even more alarming is that people are beginning to take out a lot more home equity loans. They do this so they have more money to buy more stuff. Sometimes this happens because wages are stagnant though prices across the economic board are on the rise.
These are the house-poor.
Housing prices are at record levels, and the best stocks on the market are homebuilder stocks.
Taken altogether, these are classic signs of a bubble.
#4 The Dow Isn’t a Good Benchmark
The Dow Jones Industrial Average has 30 stocks. It first came about in 1885, having just 12 stocks at that time.
Many of these stocks are big names – American Express, Apple, Boeing, Coca-Cola, Disney, GE, IBM, McDonald’s, and more.
This time last year, the Dow was approaching 21,000 points. Today it’s over 24,000.
But is this a good benchmark for our economy?
After all, those 30 stocks are stagnant or down.
- Coca-Cola is at $43…exactly where it was last year.
- GE was $29 last year, today it’s $14.
- IBM was $160 last year, today it’s $147.
- Disney was at $115 last year, today it’s $100.
Yeah…not all stocks on the index are stagnant or down, but a lot of them are. Despite that, the Dow continues to rise and rise with no end in sight.
Students of history know the ends always come, however. Don’t feel too bad – these always create new beginnings.
Currently the world has $233 trillion in debt, which is three times more than the annual global GDP.
Sustainable? I don’t think so.
The good news is that you can prepare now. Getting your spending under control is a great place to start, as is reducing your debt (student loan and credit card debt are silent killers of Americans and their wellbeing).
And never forget that great opportunities exist in the most miserable of situations.
Back in ’29 there was a lot about bread lines, but those that saw the writing on the wall early bought-up low and stood in the buffet lines.
Where will you be standing when it all comes crashing down?
Conclusion
Short-term and long-term.
It’s hard to say what’ll happen in either, but there are plenty of clues to give us an idea.
Short-term, things will be about the same. I’m sure we have several more quarters of up and up and up.
But in a couple years, the shit’ll hit the fan.
Always does. Happened in ’07, ’20, ’29, ’73, ’79, ’87, ’00, and in ’08.
A hundred years ago we called ‘em ‘panics,’ and the bankers that typically brought them about would either pony up the money to fix the problem or go under.
Today the government has taken the place of the bankers, using taxpayer money to bail-out the banks when the inevitable panics occur. Let’s hope they don’t use bail-ins, which is where the banks take the money you have in your bank account to correct their own balance sheets.
This is perfectly legal, as your deposits are no longer your assets, but the bank’s assets. This came about via the Dodd-Frank bill.
It won’t be pretty when that happens, though many won’t see much impact.
If you’re Jeff Bezos and have $100 billion, what’s it matter if half is wiped out and you only have $50 billion?
On the other hand, if you’re living in poverty and reliant on the government for handouts, your life won’t change much either.
It’s the middle class that’ll be hit, as is always the case. The most honest, hardworking, and patriotic members of society always get it the worst.
And for some reason they put up with this, time and time again. I guess they’re just too busy to care…if they even notice.
Ignorance is short-term, but stupid is forever.
This isn’t the country our Founders envisioned. Here’s how John Adams put it in a 1789 letter to Thomas Jefferson:
“All the perplexities, confusion and distresses in America arise not from defects in the Constitution or confederation, nor from want of honor or virtue, as much from downright ignorance of the nature of coin, credit, and circulation.”
