By MoneyMorning.com.au
‘I know why confusion in government is not only tolerated but encouraged. I have learned. A confused people can make no clear demands.’ – John Steinbeck
There’s no doubt that in financial terms the world is in a Twilight Zone.
It’s a world where good news is good news (although sometimes it’s bad news), and where bad news is better news (although sometimes it’s bad news too).
If that’s got you confused, you’re not the only one. Even the US Treasury thinks it’s making a profit, and they’re ‘very proud’ of what they’ve done.
Of course, a profit isn’t really a profit if you ignore the expenses. In this case, the US Treasury has forgotten about the USD$2,045,669,033,179.67 (over two trillion dollars) it has paid out in interest payments since then.
We wonder if they’re as ‘proud’ of that record. Probably not. But what does this have to do with you? It simply shows that we’re a long way from being able to trust governments and central bankers to do anything that’s in the interest of the people. We’ll explain why below…
Last week the Financial Times revealed:
‘The US Treasury has sold most of its remaining stake in AIG in an $18bn offering[…]
‘For the US taxpayer, the sale represents an overall $12.4bn profit on the once-vilified rescue of what used to be the world’s largest insurance group.’
At first glance it seems like a slap in the face for critics of government bailouts. Look, the government can run a profitable business!
Trouble is that it’s not true. Because since 2008 the US Treasury has paid out over USD$2 trillion of interest payments as it has printed money and gone into debt in order to try and prop up the economy and bailout companies like General Motors, Bank of America, Chrysler and…AIG.
To put the number in perspective, the USD$12.4bn profit covers just 0.61% of the interest the US Treasury has paid since 2008.
In fact, based on the average monthly interest costs, the government has already consumed the whopping profit on AIG due to the interest the government owes bondholders.
It’s the equivalent of a gambler losing $1,000 at the casino and then cheering because they’ve won $6.10 on the pokies!
That didn’t stop US Treasury Secretary Tim Geithner saying, ‘To stabilise and then restructure the company with a very substantial positive gain for the American taxpayer is a significant accomplishment.’
But the economic Twilight Zone doesn’t end there. As you know, the US government, via the US Federal Reserve, is now the biggest holder of US government debt.
So a percentage of the interest paid by the government ends up back in government coffers anyway.
Are you still with us?
We wouldn’t blame you if you’re confused. But that’s the whole point of government and central bank interference.
Encouraging Confusion
The idea is to make you so confused by it all that you either lose interest or accept the argument that it’s all too complicated for people like you…that you need to trust those who are in charge.
That way they think they can get away with more and more money printing. And the more they print the more it will have an impact on inflation.
Overnight, the Federal Reserve Bank of Dallas president Richard Fisher told Bloomberg News:
‘I do not see an overall argument for letting inflation rise to levels where we might scare the market. We have seen a sharp rise in inflation expectations. If you let this get out of hand, then I think we will have a market reaction.’
But Mr Fisher also mentioned another point:
‘I question the efficacy of these large-scale asset purchases. What we are doing is not having the impact on employment[…] As we saw this morning, the housing market is on the move.’
The truth is the Fed knows it can’t control the unemployment rate directly. Like any government agency, they aren’t entrepreneurial. They don’t know what it means to start and run a business. The only things they know about are printing money, spending other peoples’ money…and inflating asset bubbles.
As we wrote in last week’s Australian Small-Cap Investigator update:
‘The Fed’s plan is to buy USD$40 billion-worth of mortgage-backed securities each month. The idea is that as institutions sell these mortgages to the Fed they’ll use the proceeds as capital to secure more mortgages, this will increase the odds of banks lending money to home-buyers, which should make it easier to buy a house, which will boost house prices…
‘…and cause another housing bubble.
‘OK. The Fed wouldn’t dare admit to the last bit. But that’s really the name of the game. Most in the mainstream still believe house price growth is positive for the economy, and that if it wasn’t for the subsequent price collapse everything would have been fine.
‘Their aim now is to build another price bubble, but this time try to make sure it doesn’t collapse.’
Make no mistake, that’s what Fed policy is all about – doing what’s easy. For them, doing the easy thing is printing money and hoping house prices go up so people can punt on house prices going up even more, which means the banks get to lend more.
Governments and Central Bankers Prefer ‘Easy’
But the Fed (and governments) isn’t so good at doing what’s hard. What’s hard is thinking of a new idea, starting up a new business, and attracting customers.
We know that’s hard because it’s something your editor is going through now as we look to launch a new eletter service next month. It would be so much easier if like the Fed we could just print money.
That way we wouldn’t have to think of new ideas, organise a new website design, get our back office staff to set up a new database, budget for customer acquisition, and so on.
Media owner Steve Forbes put it well in an interview with Bloomberg News today:
‘You don’t know what the currency is gonna be worth in the future, is it gonna be 20 cent dollars in five years, 10 cents, 90 cents, you don’t get the kind of productive investment that you normally get. So instead we focus on things like, should I invest in gold, should I invest in oil, should I invest in sugar, instead of things in the future, the Microsoft’s and the Apple’s of the future.’
Mr Forbes goes on to express a view we share, that the Fed is pursuing a policy that’s the definition of insanity – doing the same thing over and over, and hoping for a different result.
That’s what it comes down to. We’d love to be able to not own gold as an insurance hedge against government and central bank meddling. We’d much prefer gold and silver to just replace the base metal and plastic notes we carry in our pocket.
We’d rather forget about the meddling by central bankers and instead focus 100% on investing in entrepreneurial and productive businesses…both big and small.
But until then, the meddling prevents us (and many others) from doing so. Because we don’t trust the government not to meddle, we have to withhold part of our wealth from the system.
And until we get a clear signal that governments will stop robbing individuals of their private wealth through taxation, and central banks will stop robbing private wealth through inflation, we’ll continue to hold gold, and we’ll continue to recommend that you hold it too.
Cheers,
Kris
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Tradervox.com (Dublin) – The Japanese currency strengthened against its majors despite the Bank of Japan’s announcement of additional stimulus. This was as a result of the market’s doubts on the efficacy of the move to boost economic growth in the country. The yen gained after the BOJ policy makers unexpectedly added 10 trillion yen to the 45 trillion yen bond buying fund. The bank had added 5 trillion in July as the currency strengthened on euro zone crisis concerns. The move brings to a total of 55 trillion yen of the bond buying fund. BOJ is the third central bank to add stimulus following the same move from European Central Bank and the Federal Reserve.
