Agora Financial’s Rude Awakening

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Laguna Beach, California

• Financials go belly-up and the U.S. enters “stag-flagration,”
• Hey mate, can you spare $9.5 trillion to cover the national debt?
• And Agora Financial’s “Big Budget” movie to hit cinemas next month…  

Joel Bowman, reporting from Dubai in the Persian Gulf…

“Hey mate, can you spare 9.5 trillion dollars?”

That’s the question (perhaps without the Aussie colloquialism) that politicians should be asking their voters as they gear up for this year’s presidential elections.

What’s so special about $9.5 trillion? According to the Bureau of Public Debt, that’s how much the good ol’ U.S. of A. is in the red for. To bring this lofty figure a little closer to home, that’s about $31,666 for every man, woman and child in the country. If you’re part of a household with a couple of kiddies, imagine more than $126,000 worth of debt hanging over your roof.

And this is ON TOP of your mortgage…the falling value of your home…your wasting currency…bulging energy and food bills…imminent recession…the list goes on…

In anyone’s language, that spells deep trouble for the Empire. Faced with such a potentially crippling dilemma, you’d think the federal debt would be the number one topic of debate going into the presidential race. Sadly, this is not so…yet.

Over the past year or so, Agora Financial’s Addison Wiggin and Kate Incontrera have been busy crunching numbers and interviewing the likes of Alan Greenspan, Paul Volker, Ron Paul and Warren Buffett for their “Big Budget” movie, I.O.U.S.A. After a successful round of screenings at the Sundance Film Festival, Agora’s fiscal documentary de force was picked up by Peter G. Peterson, co-founder of the Blackstone Group, who has determined to use it at the center of his $1 billion effort to bring the issue to the fore of public debate.

“You can buy a lot of airtime” with $1 billion, Mr. Peterson told the New York Times in an interview about the film yesterday. “People are going to hear from us.”

Attendees at this year’s Agora Financial Investment Symposium in Vancouver will be the first to see the finished product. Your editor was fortunate enough to grab a look at the preview, which Addison screened for the Society of Austrian Economic Thought in Vienna during our trip there last week. Even in a room full of econ. PhD’s, this movie drove home the hard message.

If you are unable to make it to Vancouver this year, be sure to catch I.O.U.S.A. when it is unveiled in over 400 cinemas across the country next month. Details here. And, unless you mate can pony up $9.5 trillion to get us out of this mess, you might want to tell them about it too…

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Unfortunately, the national debt is not something that has simply cropped up overnight. Many politicians have spent a good deal of effort sending the U.S. down the wrong path for some time now. Three years ago, with these issues in mind, Doug Casey, founder of Casey Research, penned a cheery little essay entitled, “Profiting from the End of Western Civilization.”

In that article, he wrote…

“Of particular importance is that the U.S. dollar has been used as a gold substitute for decades by other countries. This has been very convenient for the U.S. – we can create almost infinite numbers of greenbacks and give them to people in other countries in exchange for real wealth. Idiotically, central banks abroad have been holding those dollars as backing for their own currencies.

The amounts involved have grown so immense, and the eventual grim fate of the dollar has grown so obvious, that foreign central bankers are now looking at each other, trying to figure out who will head for the exits first. Many are ‘diversifying’ from dollars into other currencies – which are themselves backed mainly by other paper money, mostly dollars. At some point there’s going to be a panic out of U.S. dollars that’s going to dwarf any financial event in history.”

Fast-forward to the present, the unhappy scenario Doug foresaw is now unfolding. Doug’s colleague, David Galland, examines the gruesome forensic evidence in the column below…

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Scorched Earth Economy
By David Galland

The U.S. economy is now entering the “Scorched Earth Phase” – or what I like to call, “stag-flagration.”

Consider the U.S. financial firms, the single largest component sector of the S&P 500. During the last year, the losses to those firms are approaching half a trillion dollars.  And the odds are high that the ultimate losses will grow much larger. So far, most of the big name financial firms have been able to
cobble together the billions of dollars in additional capital needed to shore up their balance sheets. But they are quickly running out of rope. This sad truth becomes very apparent when you consider that many of their major revenue centers are now either severely wounded or in the morgue.

Last quarter alone, Morgan Stanley saw its investment banking fees fall by half and its toxic paper sales (ah err, I mean “fixed income”) sales and trading revenue collapse by over 85%. And this at a time when these same firms are being forced by regulators to repatriate their off-balance sheet assets back onto their balance sheets.

Sovereign Wealth Funds (SWF) to the rescue? Not anymore. Those that initially rushed in were seriously burned and many are now staying on the sidelines. Any that might wish to take a second roll of the dice, will only do so if they get much better terms, which would be dilutive to existing shareholders.

Meanwhile, the housing meltdown persists and will continue for at least another year or two. Unless, of course, the government gets serious about “doing something”… in which case the downturn could last 5 or 10 years. Why do I say that? What the market needs most of all right now is for house prices to fall, as quickly as possible, to a market-clearing price. Let the brush fire burn, as painful as that will be.

But as I don’t need to tell you, “doing nothing” is not a concept that politicians in an election year are very comfortable with. And so, like trained seals leaping after vote-fish, the politicians will jump though any number of hoops to keep people in their homes, no matter how little they can afford them. Such rescue efforts only prolong the pain and increase the government deficits that are at the core of the current crisis.

So, we have a collapse in the largest component of the stock market, the financial sector, coinciding with a collapse in the largest component of people’s net worth, their homes.

And we aren’t even warming up yet.

For a more complete accounting, you also have to add into the mix the intractable problems unfolding in the energy patch, including the near-certainty that Mexico, the 3rd largest source of imported oil for the U.S., will stop exporting said oil within 4 to 6 years… max.

Rather than rushing ahead with emergency initiatives to open up new energy sources, the U.S. Congress just passed “emergency” legislation to prevent so much as exploring for uranium anywhere near the Grand Canyon. Congress is also actively thwarting oil exploration in any of the areas in the United States where large reserves are known to exist – namely the Alaska National Wildlife Refuge and the coastal waters of California and Florida (But please, no drilling in Laguna Beach! Let’s call that a “National Lifestyle Reserve.”) It is this delusional perspective that assures that the cost of what energy is available, will only get more, not less, expensive. Of course, as energy is required in the production of, well… everything, so the cost of everything will go up.

And that includes, food. Sure, opportunistic new plantings will help, over time, to moderate the higher food prices… but not overnight. Meanwhile, the cost of filling the old tractor and shipping food to market will keep going up.

So, to the list of serious problems for the economy, we have to add persistent high energy and food prices.

But even these problems fall short of the Big Kahuna: The collapsing fiat monetary system that revolves around the U.S. dollar. In other words, the extraordinary privilege that Americans enjoy – printing the currency in which it incurs its debts – seems to be slipping away.

While the average American is, sad to say, almost completely ignorant of what a fiat monetary system is, the same cannot be said of the foreign central banks and private investors who hold a staggering $6 to $7 trillion dollars of U.S. bonds.

The foreign holders are watching the moves of the Fed very closely. Trying to avoid that scrutiny, the Fed, like a curbside Three-card Monty dealer, has come up with some clever sleights of hand, including lending directly to investment banks and swapping Treasury bills for toxic paper. But that trick has accomplished little more than buying some time; it does nothing to resolve the “rock and a hard place” dilemma.

If the Fed raises rates to prevent a selloff in dollars, it would crush the highly indebted and already struggling populace and, in so doing, unleash a serious economic crisis. But if the Fed keeps rates where they are, or even lowers them, it would trigger a dollar sell-off and unleash a serious economic crisis.

Either way, the story ends the same: a serious economic crisis.

At this point, our bet remains that the Fed will crank up the printing presses into the red zone, letting the dollar move ever closer to its intrinsic value: zero. That they’ll follow this route is suggested by two inputs. First, a depreciating dollar means a reduction in the real cost of trillions of dollars in obligations now owed by the U.S. government. And, secondly, foreign holders don’t vote.

So, we are calibrating our investments toward a serious economic slowdown, but with high inflation. Some people would call that Stagflation. But given the severity of both sides of that formula, the situation may be better described in terms of Scorched Earth. Or, because people seem to find concepts ending in “flation” handy, “Stag-flagration.”

How to Play It?

We put our trust in hard assets of one kind or another. Gold, to be sure, as well as other commodities. It’s worth noting that the last major bull market for tangibles, back in the 1970s, occurred against a backdrop of double-digit inflation. Oil was the best performing investment, followed by gold, U.S. coins, silver and stamps. Today the range of investment vehicles you can use to make the trend your friend is greatly expanded a wide variety of specialized ETFs.

Whatever you do, don’t be complacent at this point.

[Joel's Note: David Galland is the Managing Director of Casey Research, LLC., publishers of Doug Casey’s International Speculator which provides unbiased research and recommendations on the highest quality junior exploration companies.

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[Rude Endnote: If you would like to comment on an issue of concern from the good ol’ I.O.U.S.A., please send us an email at the address below. And don’t forget to catch the Big Budget movie when it opens next month.

Until tomorrow…

Cheers,

Joel Bowman
Rude Awakening

aussiejoel@the-rude-awakening.com