Category: Government
May 6, 2010 ·
“Collectivism is a sociopathic mental disorder of tyrants, dictators and freeloaders. It has caused massive human suffering. It is responsible for the deaths of well over 100 million people. It is responsible for unbelievable environmental destruction. It has destroyed progress and innovation at every level. Collectivism creates poverty in finance, spirit and character at every turn. It creates shortages, black markets, unfairness, corruption and discrimination. It causes famine and sickness. It is dishonest, it is evil and it is just plain wrong.” – Jason Hartman
December 21, 2009 ·
Double Dip Recession
The recent financial news has been abuzz with exhortations over the anticipation of an end to the recent financial calamity. The stock market has already discounted this optimism into its valuation, as current market values represent a multiple of forecasted earnings per share well in excess of historical trends. The conventional wisdom is that the economy will get “back on track” in the next few months and resume its previous trajectory of long term growth. The factor that nobody seems to be considering is the fact that the previous ‘track’ the economy had been traveling down is the express route to collapse that generated this whole financial meltdown in the first place.
It is not a secret that the explosive economic growth experienced during recent years was largely caused by debt financed consumption artificially increasing demand for goods and services. Unfortunately, this debt bubble inflated beyond the capacity of many people and financial institutions to carry. When the bubble eventually burst, it created a cascading devaluation of financial instruments, which triggered forced deleveraging, which further depressed values, which triggered more forced deleveraging.
Now that the government is throwing money away at an unprecedented, breakneck speed there is additional stress on the system since the overspending is being financed with the undertaking of additional debt and monetary expansion by the Federal Reserve. These irresponsible actions will eventually have the impact of raising interest rates, and may push the economy back into recession.
The most likely way that this scenario will unfold is that the Federal Reserve will either contract the money supply in response to inflationary pressure or allow the currency to inflate until investors refuse to purchase bonds at face value and demand higher coupon rates. Thus, the ‘front door’ for interest rate increases is controlled by the Federal Reserve since they can contract the money supply, which will force up short-term interest rates and incentivize long-term bondholders to sell and buy short-term notes with higher yields. The “back door” for interest rate increases occurs when investors lose confidence in the ability of the government to meet its debt obligations without devaluing the currency and refuse to purchase bonds unless they are discounted by the treasury.
These interest rate increases will have two significant impacts on the economy. The first is in relation to long-term interest rates, which serve as the basis for fixed rate mortgages. When mortgage rates are forced up in conjunction with long-term bonds, it will immediately slow whatever housing recovery may be under way as it increases the cost of borrowing to purchasers. This will have the net effect of decreasing the amount of house that can be purchased per dollar of monthly payment. The impact of this phenomenon will be a downward shift in the range of home prices that people can afford, which will ultimately stall the housing recovery.
When these effects eventually spill over to short term rate increases when the Federal Reserve eventually begins a campaign to fight inflation, the impact will travel further downstream in the economy. The reason for this downstream impact is the fact that short term interest rates influenced by the Federal Reserve are the basis for revolving credit account and lines of credit that many consumers have been using to finance their consumption spending. When the short term interest rates increase, it will initiate an upward shift in the amount of interest owed on consumer debt and will also increase the required payments. This will have the net effect of reducing the amount of income available for consumption spending.
As these two effects compound on top of one another, they create a very real possibility of a ‘double dip’ recession that continues downward after a brief period of stabilization. The ultimate reason for this phenomenon is a continued campaign of market manipulation by the government to ‘stimulate’ the economy in absence of market fundamentals that are supportive of sustained long term growth. Unfortunately, this boom-bust cycle will continue indefinitely until the focus eventually returns to creating the necessary market fundamental for long term growth instead of sponsoring government programs to stimulate demand with borrowed money, but make no changes in the incentives that guide investment decisions.
As astute investors, it is important to be wary of market sentiment that amounts to ‘wishful thinking’ for an economic recovery in the absence of supporting fundamentals. Recognizing these boom-bust trends and the propensity for government entities to manipulate the financial markets is a key tool for investors that are looking to protect their wealth and prosperity. At the Financial Freedom Report, we advocate investment in real assets that are secured by fixed-rate debt and rented out to tenants as the optimal strategy for fighting this campaign of market manipulation by the government.
Podcast: Download
December 16, 2009 ·
Economic deliberation with Britain’s financial author and Journalist of the Year – Gillian Tett.
Jason Hartman’s Creating wealth show has had a wide variety of notable guests over the last few months. One of Jason’s recent guests was Gillian Tett, a British journalist, whose recent book Fool’s Gold confronts the current banking and financial crisis. In March 2009, Dr. Tett was named the Journalist of the year at the British Press Awards. During her interview with Jason, she spoke at length about the systemic problems of the current system, and potential solutions.
The principal problem inherent in the current banking system is that free market forces are not allowed to prevail, as demonstrated by the government efforts to bail out failing banks. The problem created by this system is that when financial institutions are protected from failure by the government, it incentivizes them to take extremely large business risks since their upside is vast, and their downside is covered by the government. In response to this upside-down set of incentives, many have called for increased regulation of banks. One of the difficulties discussed was the fact that some of the problems that precipitated the credit collapse were the direct result of regulations imposed on the banks by public authorities.
Ultimately, the principal source of the problems for financial institutions is the fallacious notion that risk can be eliminated. By perpetually shifting risks onto counterparties, the financial world devolves into a large game of ‘hot potato’ where everybody tries to toss the hot potato to somebody else before the timer expires and the ticking bomb explodes. An example of this phenomenon is the practice of securitizing mortgage products into collateralized debt obligations. As these products were combined with one another, it became more and more difficult to ascertain the risk profile of a given security. When the credit crisis emerged, these became ‘hot potato’s’ as investors tried to offload the securities onto one another before the values collapsed.
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October 29, 2009 ·
The Bottom Line: Current Investment Outlook
As with all difficult times, it can be very hard to see glimmers of light in the midst of economic freefall. With the current trajectory of job losses, economic contraction, and government intervention into the economy, there are many people who are on the verge of giving up hope for a brighter future. The most important point to consider in this situation is that national policy is not within the circle of influence for most individuals. What this ultimately means is that we must focus our energy on the things that we can do within the political environment we live in.
Thus, our attention must shift away from the speed in which the economy is being nationalized and move toward the ways we can position ourselves to avoid personal financial disaster from said circumstances. We must proactively direct our focus off of the way financial markets are being manipulated, and shift in the direction of learning how we can structure our portfolio to avoid the market manipulation entirely.
Make no mistake that there are very difficult times ahead. The generations that were swept to wealth on the bull market of the last 25 years will soon realize that the fundamentals driving previous market rallies are no longer present. The notion of comfortable retirement may extend out of reach for ordinary workers who follow the dogma of savings and investment in the stock market, as returns disappoint and consumer prices skyrocket from government monetary policy.
As proactive, astute investors, it is the responsibility of all of us to structure our finances in such a way that our future is not dependent on the actions of a political movement. At the Financial Freedom Report, we recommend accomplishing this goal through investment in rental real estate located in sensible markets, financed by high- quality, long-term debt. By maintaining a keen focus on the actions that are within our sphere of influence, each of us can create a financial future that remains bright in the midst of chaos and uncertainty in the marketplace.
Podcast: Download
October 5, 2009 ·
We don’t mean to scare you – well, actually we do. The words above were spoken by President Obama at a recent press conference. Ouch. Does that mean the U.S. economy is a car with a bone-dry gasoline tank still rolling slightly from 233 years of inertia?
Maybe?
A better analogy might be the economy is a car with a bone-dry gasoline tank still rolling slightly from 233 years of inertia heading off a cliff! What can we, as law-abiding citizens, expect when our government continues to bankrupt itself and devalue our currency? Seriously. The federal government is a Ponzi scheme that makes Bernie Madoff look like a piker.
Here’s a glimpse into the future after the dollar collapses:
1. An explosion in prices as Americans scramble to buy basic necessities.
2. Sparse grocery shelves and long gas lines.
3. Failed businesses and a breakdown in commerce as long-term transactions vanish due to worthless currency.
4. Rampant crime and unemployment.
5. Disappearing government services.
Sound like fun? What can you do to protect your wealth? The simple answer is to own income- producing property. It’s the only investment liable to have any value when the fiat currency collapses.
The time to act is now. There may still be time before the greenback dies as the major player on the global currency market. But there may be less time than you think. Wall Street is already coming apart at the seams from greed and incompetence. Make it a point to explore history’s best bet when it comes to investing. Platinum Properties Investor Network offers free educational services for any investor interested in weathering the coming storm. Check us out at www.JasonHartman.com.
Podcast: Download
October 1, 2009 ·
Within the lexicon of business terminology, there is a popular phrase entitled “too big to fail” that is frequently used to describe large industry players that are kept afloat by the government when they are faced with financial ruin. The theory behind these bailout initiatives is that liquidating a major industry player will result in a total market collapse. These claims are very difficult to substantiate, since the government frequently uses this rationale to justify its arbitrary actions, but never seems to allow one of these failing ventures to go into liquidation like a normal business.
In practice, the “too big to fail” phenomenon exists to perpetuate vested interests by artificially maintaining the status quo. Unfortunately, this phenomenon also applies to political movements as well. When individuals or movements are viewed as “historic” or “symbolic,” there is frequently a sentiment that it is “too big to fail” and that any level of incompetence or power obsession must be overlooked to avoid failure for the favored parties.
What we have seen is that attempts by government to manipulate the market frequently create much larger problems than those that were originally set to be “solved.”
In these situations, there is an endless litany of excuses that serve as the convenient justification for the expansions of government power that are necessary to protect businesses and individuals that are deemed “too big to fail” by the powers-that-be. Ultimately, we will find that the price of this massive government power grab is paid by the producers that make the country run. As these initiatives compound on top of one another over time, the ranks of the producers will contract as fewer people find it profitable to engage in business. Similarly, the ranks of the idle masses will rise as the number of people seeking free entitlements expands.
It is inevitable that a ”breaking point” will be reached at some time in the future where the burden foisted on the backs of the producers will be too great for them to bear. The optimal situation would be for a political reversal to happen before that point comes, so that the wanton damage being inflicted on the country by the power obsession of its leadership is stopped. In the interim, prudent investors should seek to pursue strategies that will allow them to profit from the government irresponsibility so that their wealth will not be totally destroyed before control of the government is returned to more responsible hands.
Podcast: Download
