Borrowed Consumption: Opium of the Masses
My last commentary touched off a mini-debate between myself and Michael Pento, a proponent of Austrian Economics who gallantly defends his principles against the Keynesian economists and supply-side monetarists when he makes his appearances on CNBC's Kudlow & Company. I too attempt to follow the Austrian economic precepts laid out by Ludwig von Mises and I think that the bone of contention between us, in the "posted comment section" after my initial commentary, boils down to the following von Mises' quote:
"There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved."
I think that Michael would prefer the former--to initiate a dance with the deflationary devil (and take our medicine now before things get any worse)--while I would prefer to tango with the latter, hoping to somehow cheat inflationary death, hoping that the growth of the emerging world might enable us to avoid a "total catastrophe," albeit only after a significant reduction in our standard of living. I concede that he might be correct in that his scenario would ultimately be less harmful and preferable to mine, (though both will lead to enormous financial pain and suffering).
I admire Michael for his ability and willingness to take the Austrian message to the mainstream and to do battle with the prevalent, though failing, forms of economic thought. He is battle-tested and scarred, but remains undaunted. The mainstream remains either in denial or unaware of the magnitude of our plight and that we are fast approaching some form of reckoning which policies will no longer be able to prevent.
The focus of this commentary is intended to be more "normative" than "prescriptive" in analyzing our current economic predicament. I contend, for the reasons I outline under "Point Number 2" in my commentary "Market Changes are Coming Resistance is Futile! (Part 1)" that we are going to choose inflation over deflation, and we have the tools to do it. A common refrain among what I will call the "normative deflationists" is "They can print all the money they want, but they can't make us borrow and/or spend it" to whit I say "sure they can." Money drop 1.0 is scheduled for delivery starting next month. Money Drops, 2.0, 2.1, and 2.2, currently being drummed up, could be in the form of coupons with expiration dates.
Who knows what kind of clever conditions Congress and the Fed will dream up for Money Drops 3.0 and beyond. The Fed and Congress will increasingly be turning to solutions that are more panic-induced than decisive in action. The Congress will likely continue to turn a blind eye to the lengths at which the Fed uses taxpayer money to prop up the system to postpone the inevitable reckoning. Is there any doubt which policy is going to prevail after the Bear Stearns bailout? What is now viewed to be the Fed's crowning achievement might only be the warm-up for what is to come. They will have to pry away the printing press from Ben Bernanke's cold dead hands before the lunacy ends.
Furthermore, because the 1930's Depression is viewed, though falsely, to have been successfully solved through the creation of an alphabet soup of government programs, including the non-discretionary albatross of social security, and because half of the voting population were not around to have a meaningful recollection of the 1970's, the tougher things get, the more we are going to turn to the US government for interventionist and highly inflationary solutions. 68% of the "millennial generation," the group largely unaware of the 1970's experience and who I write about extensively in "Debt Demographics Debasement are Destiny" not only have a positive view of government intervention, but are coming more to rely on it.
To those who might think a McCain Presidency holds hope for towing a frugal fiscal policy, I remind you that it took John McCain less than 24 hours to cave on his initial "tough love" policy for errant homeowners and to offer enough government assistance to at least keep him "competitive" with the Democrats. And it is almost impossible to overstate the government largesse we would see from whomever the Democratic nominee is.
You can debate whether or not it is the elected officials or the citizenry who are responsible for our dire economic circumstances, but it really doesn't matter. We have come so far since the founding of this country...we have already crossed the government dependence Rubicon. Borrowed consumption is the American opium of the masses and there will be no cold-turkey release from our sense of entitlement and government bailouts.
We are not going to willingly choose policies to stop spending, pay down our debt and end the monetary madness. Some of us need to get over "fighting the good fight" and placing our efforts in battling for honest, responsible government policy. This is no longer possible. It is only after our failure that we will be forced into a system-wide cleansing and purging of all of the excesses. Again, this is normative and not a prescriptive call. Your time would be much better spent preparing for and accepting this certain outcome. Just let it go. Those who understand this inevitability and properly arrange their portfolios will be best positioned to provide the capital to a country which will be in desperate need of it when it refreshes and starts anew.
Now, I don't propose to know how many digits of inflation we are going to experience. Let us hope it we don't turn into Zimbabwe. If you believe that we will, then you would be better off piling up survival rations than concerning yourself with building a solid investment portfolio. In past columns I have recommended energy, commodity and other related investments as a way to actually benefit from an environment of increasing inflation and a further decline in the dollar.
One commodity I would currently caution against chasing, however, is oil. The breakaway of its price relative to other commodities is not sustainable. There are other sectors, on the other hand, within the energy complex which still have room to run. In fact, three names I continue to recommend represent an energy source, coal, whose supply has dwindled to less than 12-days in China! So, while I caution against crude in the short run, those proclaiming some sort of bubble in commodities today are way off the mark.
In fact, despite the big run we've seen in most commodities it is still hard to make a stronger case for any other asset class. Blooming investor demand and ever-growing physical demand for anything that grows, can be drilled for, or mined, combined with an inability for supply to keep up and worldwide inflation will suck the oxygen out of other investment sectors and blow it into commodities.
Ignore the bubble talk. The credit pushers will continue to supply our habit, and the opium of borrowed consumption will continue to underpin the commodity bull market into the future.