Subsidy of Debt: The Broken Business Model

Remember when “flipping” houses was the hottest investment around.  Just go down to Florida and buy a condo, put it back on the market at a higher price and wait.  If you had a good credit score and reasonable cash flow, you could leverage up dramatically thus generate much greater profits.  60 Minutes interviewed a young man who did that in Phoenix.  He had in excess of 10 houses and he had no true prior business expertise.  After a short period of time, he was a millionaire on paper.  All that is history now.  The Federal Government is now subsidizing a broken business model of debt and leverage.  Ben Bernanke is prepared to take interest rates “negative”.  That means you will pay to keep your money in the bank and that is a scary thought.  The longer the government subsidizes the broken business model, the worse the outcome.

We do not have a free market but an interventionist market instead.  When you have this type of market, you can throw out most of your economic assumptions and past comparisons.  The intervention perverts the normal technical analysis of markets.  The Fed and others thought we could borrow our way into perpetual prosperity.  Wrong!  There are now doubts about the fiat currencies’ continued viability.  The issue with fiat currencies is that their problems are serious and complex.  Nobody is certain about the total liabilities tied to these currencies.

We are now moving into the endgame and it is high risk.  The potential of the destruction of currencies is real and the probability is rising rapidly.  The destruction could occur within a few weeks’ time and the Central Banks’ balance sheets could balloon by a factor of 20,30, even 50 times the current size.  At that point, the currency is “toast”.  Interest rates would rise dramatically and bust the bond market where investors would lose billions if not trillions in value.

The subsidy of debt with fiat currency is forcing all fiat currencies downward relative to the price of commodities, specifically gold and silver.  This is why both metals are achieving fresh highs in their prices.  For the gold & silver prices to fall, the central banks would have to get religion and increase interest rates substantially to prop up their currency.  Don’t expect that to happen soon with the sustained unemployment numbers.  If China revalued their currency by 20%, millions of Chinese workers would lose their jobs and their central government will not take the risk.

There are no consistent rules in today’s economy.  The savers are “loaning” banks money at virtually 0%.  Does that mean that their money has no value? Preposterous!  The banks are turning around and loaning that money at 6%.  Whose interest does the government have at heart?  What “public” are they serving?  Someone is living a lie and it may be the entire American structure.

The average investor incorrectly thinks we are a capitalistic country.  In the U.S., we operate as socialism at the top where interest rates dictated and the government intervenes in the markets.  At the bottom, we have fierce competition for jobs.  The socialistic top structure will fail.

The U.S. has sent low paying manufacturing jobs overseas over the last 30 years which converted us to an asset based economy.  Those low paying jobs are now developing into middle class jobs but they are not here in the U.S. but in China and other developing countries.  Our productive capacity continues to decline thus our future value will decline as well.

We don’t know what would have happened in 2008 if there had not intervention in the financial markets.  GE would have probably bit the dust.  Several large banks would have evaporated.  As long as there is intervention by the Fed, we will not go through deflation because their mandate is inflation.  This is the reason you are seeing new highs in gold and silver almost on a daily basis now.

Comments are closed.