U.S. Economic Policy: The New Definition of Insanity
By Craig R. Smith
Chairman, Swiss America
"Those who do not learn from history are doomed to repeat it."
-GEORGE SANTAYANA, philosopher, poet and novelist
1.15.13 -- Investors should never forget the lessons of the 2008 financial meltdown. But have they already?
Who can forget the anguish of watching the U.S. Fed and Treasury stretching the limits of fiat money creation (and laws of economic gravity) by throwing $1 trillion dollars at the 2008 banking crisis and the failure of Lehman Brothers, a Wall Street giant? After a nearly 700 point drop in the Dow it appeared as though the entire global economic fabric was torn, hanging together by mere threads.
Since then, Wall Street pundits are quick to point out that stock prices have recovered most of their 2008 losses. In fact, last week's market headlines boldly announced, "U.S. stocks enjoy biggest weekly inflow since 2008".
But at what price?
We have now amassed over $16 trillion in government debt and another $16 trillion in personal debt.
We are facing an administration and Fed still hell-bent on increasing the debt further to help speed up a so-called economic and jobs "recovery". A recovery which is not based on any substantial policy changes that would prevent this crisis from revisiting us again in 2013.
Of course stock indexes have risen back near pre-2008 crash levels. How could they not, given that the Fed and Treasury have pumped more fiat (debt-based) money into the economy and banks than ever before in history?
The Fed's first injection of Quantitative Easing (QE1) sent the Dow up 83% from 6,547 to 12,000. Then QE2 pushed the Dow up another 14% to a high of 13,662 in 2012. But today just the opposite is beginning to happen as the Dow has fallen ever since the announcement of QE3.
The law of diminishing returns has already set in, just as it did in Japan over the last two decades. After nine attempts to pump the stock bubble back up (QE9), the Japanese Nikkei index is still off almost 75% from their 1989 high of 38,915.
It appears we have a new definition of insanity; continuing to pump money into failed government economic policy and expecting a different outcome.
Now we are facing another debt ceiling battle. In August 2011 the outcome was a raising of the debt limit accompanied by a slashing of America's credit rating from triple A to double A by Moody's. If we raise the debt limit again without meaningful spending cuts we should expect another ratings cut to either A or triple B. This will raise the cost of borrowing dramatically for both public and private borrowers, something no one can afford to happen in a shaky economy.
I watched a great documentary over the weekend, "The Queen of Versailles" about a billionaire family (David & Jackie Siegel) and their financial challenges in the wake of the economic crisis. The film begins with the Siegel family triumphantly constructing the largest privately-owned house in America, a 90,000 sq. ft. palace. Over the next two years, their sprawling empire, fueled by the real estate bubble and cheap money, falters due to the economic crisis.
Perhaps the most outstanding line in the movie comes from David Siegel's recognition of his downfall; accepting bank cash for expansion of his real estate empire beyond his own reasonable limits. He said he wished he had never acquired all that debt. I believe that same sentiment resonated with millions of middle class homeowners, albeit on a much smaller scale.
The key lesson we all need to learn is that liquidity is not the root problem, confidence in our leadership and their misguided Fed and government policies are the root problem. Sadly we are still rushing in the wrong direction today and I fear another 2008-style market meltdown and banking freeze is facing us in 2013.
While it is true that stock investors have been made whole over the last four years in relation to the U.S. dollar, I will remind readers that the Dow is still down 80% in relation to Gold. Gold is the ultimate world currency and plumb line to measure financial progress, and Gold is saying this recovery is as phony as a $3 bill.
Let's learn from history and NOT repeat it. Instead diversify into Gold and out of the pumped-up paper assets that are just as vulnerable today, and perhaps even more vulnerable than they were back in August 2008.
Will history repeat in 2013? No one knows for sure, but as Mark Twain observed, "History doesn’t repeat itself, but it can rhyme." One of the tasks of wise investors in 2013 is to understand these rhythms and then take action - BEFORE the Obama band strikes up the next debt-crisis crescendo.