7/11/2011 Portland, Oregon - Pop in your mints…
Investors woke up today and wasted little time in marking down Italian sovereign debt, along with Spanish and Portuguese debt issues. Why? The story of the Italians is eerily similar to that of the Greeks, the Portuguese, and the Spanish. Their government spends more than it takes in.
At this point, all readers of The Mint know that it is impossible for any Government to produce value. Yet somehow, in our upside down, insane monetary system, it has become acceptable for the western governments to run a reasonable deficit to help pay for their role as the Robin Hood in the current welfare state model. The European Union even went so far as to attempt to define what constitutes a reasonable deficit as 3% of a nation’s GDP per year.
Now if the government takes in 25% of national income in the form of taxes, which is not an unheard of (if anything it is a low estimate) and then borrows an additional 3% (which has proved an elusive target), then 28% of the welfare state’s economy is devoted to income “redistribution.”
While the term “income redistribution” does not fly well with most voters, the Government’s "investment" decisions are cleverly disguised as Social Security, Health Care, Defense, and Education. Most will recognize that these are important investments, which leads us to the logical question:
Why leave these investment decisions up to the Government?
This question is rarely asked, and most seem content to let the Government continue in their collective role as Robin Hood. It should come as no surprise, then, that a great deal of time and what would otherwise be productive energy goes into influencing Robin Hood’s decisions as to whom the poor are at the moment. Bill Bonner at The Daily Reckoning calls this outsized effect of Government in the economy a “Zombie Takeover.”
With the Zombies creatively destroying a minimum of 28% of GDP in a modern welfare state, perhaps it is a testament to the resilience and productivity of the citizenry that any real progress can be made under such circumstances.
Fortunately (or unfortunately for those in the zombie class) the insanity is coming to an end. As the government’s destruction of wealth accelerates, even elected officials will have to admit that the bad decisions that all of this accumulated debt represents do not go away just because one denies that they exist.
In fact, attempts to solve the problem of too much debt by creating more currency are futile, as each unit of currency creates a unit of debt which must be dealt with at a later date. This is the glory of modern monetary theory. It binds the world together in slavery. It is also its Achilles heel, which is now exposed, waiting to be stricken.
How and when will this finally occur? It will be like the man with back pain who finally goes to visit the chiropractor. The gradual spinal realignment that he had hoped to achieve by doing simple stretching exercises (austerity) is not taking place, in fact, his back problems have gotten worse. Once in the exam room, he will be laid down swiftly on the chiropractor’s table.
Then chiropractor will move into place, interest rates will rise, and a series of pops will go off in the patient’s spine. Naturally, the popping sounds are the troubled EU nations defaulting on their sovereign debt in unison, which is what is about to occur.
Will the patient then get up and go on his way, sore but better off for the treatment? Or perhaps the better question is; do zombies even use chiropractors?
Meanwhile in the US, the political theater that is the debt ceiling negotiations may be the catalyst that sends the US Treasury market into a much deserved tailspin. We have speculated about this almost incessantly and still cannot believe that it may happen.
But while the EU goes to the chiropractor, the US may prefer to rely on the prescription drugs of fiscal and monetary stimulus for as long as they appear to work in a futile attempt to reassure the zombies that all is well.
The US will simply destroy the value of the currency, completely and irreversibly. Why else would they pick a fight with Iran at this point?
That makes each dollar that one holds like holding an M80 firecracker with a lit fuse.
How long will you hang on?
P.S. For more ideas and commentary please check out The Mint at www.davidmint.com
Key Indicators for July 11, 2011
Copper Price per Lb: $4.32
Oil Price per Barrel: $94.99
Corn Price per Bushel: $6.81
10 Yr US Treasury Bond: 2.92%
FED Target Rate: 0.07% JAPAN HERE WE COME!
Gold Price Per Ounce: $1,554 PERMANENT UNCERTAINTY
MINT Perceived Target Rate*: 2.00%
Unemployment Rate: 9.2%
Inflation Rate (CPI): 0.2%
Dow Jones Industrial Average: 12,506 TO THE MOON!!!
M1 Monetary Base: $2,020,000,000,000 RED ALERT!!!
M2 Monetary Base: $9,112,300,000,000 YIKES!!!!!!!
*See the MINT Perceived target Rate Chart. This rate is the FED Target rate with a 39 month lag, representing the time it takes for the FED Target rate changes to affect the real economy. This is a 39 months head start that the FED member banks have on the rest of us on using the new money that is created.