Nobody Makes A Commission for Moving You To Cash

I know, I know...the IER has been dormant since the Seachickens butterfingered their way out of the playoffs, and the vast and loyal readership of the Westsound's premier economic blog have been jonesing for a fix. Here is a little bit of sanity to tide all of you over until the senior fellows can unclog their inboxes and devote the time needed to keep all of us in the right frame of mind.

I am in the finishing stages of a woodworking tour de force, and have been spending my spare time trying to keep all ten digits attached to my hands as I finish off my 13yo daughter's desk.  It has a leather top, 6 hidden compartments, lever actuators, dovetailed drawers, etc.  During the time in the woodshop, I listen to a fair amount of AM talk radio, just as I have for most of my adult life.  I'm starting to understand that the best fade might be the advertisers on AM radio.

In the final stages of the housing bubble blowoff, we had some fiscal menace with a Georgian accent advertising the "biggest no brainer in the history of Earth," which was just a cash-out-refi scheme to use your house as an ATM.  Let the record show that scheme didn't end so well.  There wasn't a commercial on the air that wasn't some form of housing bubble get-rich-quick scheme.  It got so bad that I had to create a "kill switch" for my radio so I didn't wear out the concrete floor of my garage dashing to and fro in a desperate effort not to hear the K-I-E-L Mortgage jingle.

Well, as the vast and loyal readership of Clearcut Bainbridge know, I'm not drinking the goldbug Flavor-Aid, no matter how many times the yellow metal is pimped on the radio.  I lived in a rental during the housing blowoff (and had to endure the unceasing torrent of finger wags from every shoeshine boy/home owner/RE agent in Western Washington) and in a similar fashion, I am in cash during this idiocy.  Apparently, it's finger wagging season once again.  The US dollar is going to be worthless, dontcha know...

OK, let's get on with the facts.

First off, let's bring out the favorite chart of the goldbugs.  Let's talk about how the US dollar always inflates and therefore you must own something "hard" to compensate for the inexorable fall of the dollar.

As anyone who has completed the 5th grade (7th grade if you went to Port Orchard schools) can plainly see, the US dollar is about as hard as the Stay Puffed Marshmallow Man.  Why golly gee...every single year sees the dollar get smaller and smaller, and look at that "hyperinflation" of the 1970s!!!

Never mind that gold got crushed, and I mean CRUSHED, by the Stay Puffed Marshmallow Man from 1980 to 2002, even though the US dollar got weaker every single year.

How can that be?  After all, gold (or any "hard" asset) is a shelter against inflation.  Right?  Mike Medved says so.

Now is the time for goldbugs to go out and Google "cognitive dissonance" and do a 5 paragraph essay on the subject.

In the meantime, let's extend our X axis out to the left a few years.

 I guess we do get deflation from time to time.  The financial crisis of 1920 was very severe, but it was short lived.  The credit expansion for the worst foreign policy in US history was being corrected by the market with a dollar that was RISING IN VALUE.  We then got the "Roaring 20s" and the rest of the excess was removed during the Hoover Administration.  Had it not been for the arbitrary and capricious nature of the New Deal, we likely would have pulled out of the Great Depression with the rest of the civilized world.  We see credit expansion during WW2, and then a general rise of inflationary expansion to the modern day.

It is the IER's opinion that this massive move of credit expansion ("inflation" to you goldbugs) is really nothing more than leverage upon leverage.  We are avoiding credit contraction ("deflation") by force-feeding CREDIT, not cash, into the system.  Let's do that one more time, but with more elan:

Americans are piling on more and more debt of a riskier and riskier nature to prevent the inevitable and mathematically certain consequences of credit expansion - credit contraction.  After all, the best way to avoid hangovers is to just keep getting really, really wasted.  This is exactly what came to pass in 2008.  Hank and Ben moved us to a more reckless position to take on even more debt to prevent the natural consequences of seculum-long debt binge.  Can anyone say that Hank and Ben did anything other than take on more debt to "fix" the financial crisis of 2008?  Anyone?  Sure, they transferred a bunch of it to the US Treasury, but it is still there, just a different bag holder.

Now, for those who don't like the feeling of blood draining out of your head, you might want to skip the next chart.

My, oh my.  What have we here?  It looks as if the natural consequence of credit-expansion is credit-contraction, and the anomaly isn't deflation, but sustained "inflation."  It would appear that the green ink and blue ink are roughly at parity until we get to WW2, when we get a very long credit-expansion boom.

As we say around the IER, "The boom causes the bust."  Now you know why.  The higher you throw the rock into the air, the harder it hits the ground when it returns to parity. Guess how high we have thrown the current "rock" into the air?  Oh, yeah...

Gentlemen, deploy your barf bags.  When Tim and Ben quit their multi-trillion dollar juggling act, the suckmeter is going to be pegged.

As for now, if you are holding cash, you just have to be at peace with the goldbugs having their time in the sun.  Make no mistake, the repercussions of a credit-contraction on this scale will be positively epic.  Picture what happens when Uncle Sugar can't borrow 42 cents of every dollar he spends.  Pax Americana will get cut, but the real bloodletting will be in entitlements, particularly Medicare and Social Security.  Sorry, but the math doesn't lie.  The suckmeter will be pegged, and that is no understatement.  Picture California without welfare checks...Picture Pike Place Market grommet-heads with no trust fund...Methinks granny is going to move back in with the kids and grand kids, and that ain't bullish for housing.

Perhaps if we just allowed the periodical, natural cleansing of credit-contraction to occur when the market dictates, we wouldn't have this problem, hmmm? (done in my best Dana Carvey "Church Lady" voice)  I'd like to think we would all be better off if the suckmeter needle stayed in the green arc on the gauge, rather than blow right through the amber range, the red range, fuse itself to the peg, and have the gauge explode because it sucks so bad.  This is how you teach fiscal discipline to the next generation.  Those that overdo it on the debt binge get taken out, chopped up, and sold to their cash-laden, well managed competitors.

I will say that the "hyper inflation" meme isn't an impossibility.  If the US government prints up strawberry scented welfare checks denominated in $100,000 increments and sends them out to everyone in the US, I'm on board with the whole "inflation" concept.  Granted, that presumes it stays in circulation.  It also presumes that people will just pay $40 for a gallon of gasoline, and that their employer will pay them $200 per hour.  Good luck with that scenario.  My employer can barely make payroll because of high input costs (Jet-A), so that fancy-schmancy 50% pay raise my union is asking for isn't really being taken seriously.

What is the moral to our story?  All these dire predictions of doom and gloom, coupled with "hyper inflation" are just goldbugs trying to sell you something.  Just as the scary prediction of "buy now or be priced out forever" came from Cooki and Candi, the wonder-twin RE agents, because they were trying to sell you something, the same scare mongering about "hyper inflation" is now coming from the metalheads.  Remember, there is no "sell side" analysis on Wall Street because nobody makes a commission for moving your portfolio to cash.

Every time you turn on the lobotomy box, radio, computer, newspaper, etc, you are being sold something.  Someone is trying to separate you from your money.  Cash doesn't have a salesman.  Food for thought.