I truly believe a year from now we’ll have many of the answers we’ve all been waiting for. I choose a year from now because once this Presidential political distraction is over with, and we’ve had another year of the continued crack up from the sub-prime mess and more bank failures, and more fed intervention (GM, Ford, possibly the airlines, state bailouts, followed by the bailout of the Pension Guaranty Association to name a few), we should have a good idea of what is left in the Fed’s magic hat they keep pulling rabbits out of.
If not one year from now, I suspect it will be soon thereafter. The bottom has to come in order for the recovery to begin.
What makes the Fed think that by buying everything they will stave off a recession? The answer is they know we’re in a recession (unlike George Bush) and are trying to stave off a depression IMO. All the Fed is doing is guaranteeing a depression with their continued actions.
I’ve said this many times…the only place the money will come from and continue to come from is either through higher taxes or higher inflation. Either way, the People lose.
How can Bernanke think that what the Fed is doing is not inflationary? I guess they think like GM.
GM thinks that if people keep buying their junk bonds, which go to pay employees and retirees pensions, and keep selling a few cars and trucks, that they’ll be OK. What happens if no one is buying cars and trucks? Will people keep their GM bonds if a company is on the verge of bankruptcy? Is there a reason why GMAC bonds have lost double digits each of the last two months? I’m not sure how much of the 25 billion given by congress has helped GM, or where exactly this money went to, but I’ll bet that a good portion of it went to current expenses, not innovation as the intent.
Translate the GM situation to the U.S. financial balance sheet and I think it might show us what will happen next.
If no one wants GM bonds (or GMAC which is 100% owned by GM), then any amount of interest paid isn’t going to make them attractive because the investor knows that he may not get much of a return if any when GM goes belly up. The investor would also have to sit out a lengthy bankruptcy just to get their money back (if awarded any assets).
While the Fed has stepped in and helped GM with billions of dollars, who will help the Fed when they have no place left to turn to in getting capital? Answer: Inflation or higher taxes via We The People. The only other possibility is to sell government land and buildings (one that I’m in favor of).
But the problem here is that if GM got rid of the UAW and paid their employees less with fewer benefits, they could possibly turn things around. The Fed however, is taking more and more from the labor of the People to try and turn around their mistakes. These are two entirely different situations.
If you take into account inflation over the last 6 years, coupled with taxes, the government is already taking about 50% to 60% of our income, give or take (dollar has fallen about 30% during this time coupled with a 20% to 30% tax – or more if you’re wealthy). How much more can they take from us? Answer: During WWII and through the late 60’s, top income tax rates were over 90%.
Eventually when the dollar starts to slide again it will cause the U.S. Treasury holders to start to redeem their holdings as they can’t afford anymore losses to principal. This has been happening to GM bond holders once their credit rating went down to junk status. The U.S., to counteract Treasury redemption’s, will raise the interest rates driving them eventually hit double digits just like during the Carter years.
Hey…it worked for Volcker right? GM bonds are paying double digits now. At some point U.S. Treasuries will too. Foreign investors will demand it.
The old saying used to be, “As GM goes, so goes the country.”
GM is on the verge of bankruptcy.
The U.S. isn’t too far behind.
Doug Eberhardt
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About Doug EberhardtDoug Eberhardt is a 28 year financial services veteran and precious metals broker selling gold and silver at 1% over wholesale cost. Doug has written a book to help investors understand how gold and silver fit into a diversified portfolio, how to buy gold and silver, and what metals to buy. The book; “Buy Gold and Silver Safely” is available by clicking here Contact phone number for Buy Gold and Silver Safely is 888-604-6534
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