YOUR MONEY Sept. 14, 2012

Recession, depression and fools – pay the piper

Today, North American financial analysts and stock market investors – read speculators – are overjoyed as Federal Reserve chairman Ben Bernanke announced that  the U.S. Federal Reserve, will ‘pump’ the economy with ‘quantitative easing” aimed at the housing market, and keep interest rates at around 1% prime into 2015. Spectacularly, he promises to buy up to $40 billion in mortgage bonds MONTHLY and INDEFINITELY, until the unemployment rate and economy improve.

Nice, fancy words, but in reality, they stand for a sham, a  delusional shell game of printing money, allowing –supposedly – U.S. home buyers to continue to spend, spend, spend -- while bankrupting pension plans and the savings and living resources of the elderly.

The problem of unemployment and slow economic growth is NOT due to a lack of cash flow to and from banks -- to generate new factories and businesses and construction. 

·        It is due to global outsourcing of jobs and importing of much cheaper products from China to Turkey to Vietnam – the names on the labels of much of America’s favorite products and brands – be it Nike, Hilfinger or  Apple.  Even exclusive, top end European brands such as Escada now do this.                                                                                                                                              

 

·        It is due to GM and Ford and Chrysler (now fallen to Italy’s Fiat) requiring their U.S. and Canadian employees in the upcoming round of contract negotiations to again accept cost cuts in salaries and benefits – to closer match the pay of their workers in Mexico or Eastern Europe or China. Already back from the financial brink of 2008 – with massive government bailouts – the Big Three , all porofitable again, are looking to squeeze out more and more from their employees; put simply, to lower their standard of living for the goal of increased capitalist profit.

 

·        It is due to the high cost of gasoline and diesel on which the U.S.A., Canada and most of the modern world run.                                                                                       

·        It is due to a ridiculous ‘floating currency rate’ system, introduced in the 1970’s, that allows currencies such as the U.S. dollar or Japanese yen or German mark to be held ‘captive’ by derivative funds, investment banks and super wealthy who can speculate on a fraction of a penny to earn millions of dollars!  

Dollars and marks and yen jump and drop in value by the minute on world currency exchanges and at least in Canada our dollar has fluctuated on the last few years between $0.62 U.S. to over $1.12 U.S.  --  affecting the purchasing power of consumers and making life almost impossible for exporters and importers – who need to know their costs and potential profit margins months in advance.

·        It is due to computerized stock exchanges that allow massive speculation and a super-short mindset focusing on instant profit (or loss) -- where holding a share for 2 days seems like an eternity.

Remember the quote from the movie Wall Street  “Greed is good”? .

 

So how does throwing more cash, as Bernanke is doing for the third  time in less than 4 years help?

It won’t.

It won’t do a drop of good for the people in distress.  (But it will boost the stock market, price of oil and gold and raw materials  for the next few days as investors – read speculators – think Valhalla is near!)  It will fail and leave no lasting benefits, like the two previous efforts of Bernanke, or those by the European Central Bank that has bought into the same ‘prime the pump’ delusion.

 

But it will do three things for the long run:  increase government debt; undermine the real value of the U.S. dollar and other currencies; ultimately trigger  stratospheric inflationary; and destroy pension plans, insurance company annuities and the retired and elderly -- who have saved for years and now get no interest at the bank.

In brief, it will perpetuate misery for another decade.

The so-called Great Recession that started in 2008 with a financial bubble crisis is not over, and with this American and European misguided hubris – that central bankers know best and can sway world economies – the ongoing Depression will last much longer than need be.

 Masaaki Shirakawa, the head of the Bank of Japan, finally figured it out in 2011. He said NO to more money printing or ‘financial easing’ as the Japanese central bank and government had done for over 20 years: printing money and keeping the prime rate well below the ‘emergency’ rate of 1% prime for 20 years to no avail!  Japan’s economy has not bounced up as a result but stagnated -- at the extra cost of billions of yen in government extra debt, and depleated pensioner savings.  

Even the justified multi-billion dollar rebuilding of northern Japan after the horrible earthquake and tsunami twin blows of 2011 has not made a difference, Shirakawa pointed out, so why spend – i.e., waste – more money in a futile, fools dream.

·        * * * * *

So what should be done?  What real hope is there?

If you look at the bullets above, there is some light at the end of the tunnel.

ü The U.S. and many other oil importing nations of the world will soon be self-sufficient in oil or natural gas  through new  extraction techniques– because the planet – everywhere - is really awash in oil and gas.

 

So local energy prices will drop and jobs increased in these resource areas.

 

ü Secondly, and most importantly, Globalization will ultimately -- in the next 10 years -- reach its logical outcome:  more or less parity of labour costs across the world; with wages equalizing upward – and  not to the lowest level --  as people in China, India, Vietnam and South America all buy into the American standard of life and expectations.

 

The net result will be a return to localization and self-sufficiency in many regions of the world– in industry and manufacturing to farming.  With wage parity, long distance shipping is not cost effective, so industries and jobs will return home.

 

These underlying realities are beyond a Bernanke’s control or spendthrift ways.

They are the invisible, if long range, hand of capitalism.

 

So say I,  echoing the recent investments and philosophy of that old “wizard of Omaha”, Warren Buffett. 

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P.S.:   My stress on seniors, now that I am 65, is not just personal but a look at the world’s furure. The baby Boomers are aging and into seniors territory. In Japan, as of 2004, 20% of the population was seniors and the percentage is rising with low birth rates and longer life expectancies.

China’s one-child policy is a demographic time bomb that is now reaching its tipping point.

In the U.S.A., as of 2000, there were 35 million seniors (12% of the population0 and this is predicted to rise to 17% of the population by 2040.

In that year, 2040, it is expected that there will be 1.3 BILLION seniors worldwide.