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A Bigger House Of Cards

15 September 2010 2 Comments

It’s been clear to anyone who is willing to think for themselves and view the economy through an objective lines that we indeed have an House of Cardseconomy that is nothing more than a house of cards.  In 2008, the house of cards attempted to collapse.  We should have let it collapse and then rebuild with a solid foundation.

Instead, we rebuilt the house of cards even higher.  We built it with government stimulus and even more so, Federal Reserve policies.  While these policies can give the illusion of recovery and fool the masses into thinking that things are on track, there are a ton of cracks in the system that are obvious if you look.

While I’ve been hammering this point for months (and years), let’s briefly look at two of the “cracks” today…

Crack #1 – The price of gold

If we were recovering via real growth, the price of gold would not be hitting new highs.  The problem is that our leaders attempt to bring the illusion of a recovery by producing inflation.  Price inflation does not equal a recovery.  The price of gold is what I like to call the bullshit indicator.  Watch its price.  It will tell you how legitimate our recovery is.  As it hits new highs, it’s screaming “bullshit.”

Crack #2 – Pension problems getting worse

Now, this is crazy.  Stay with me as I attempt to explain this.  As the Fed prints money, they push down interest rates.  Bonds are yielding incredible low yields.  Now, pension funds rely on yield from bonds in order to generate a return and stay sufficiently funded.  With interest rates plummeting, the pensions are not able to generate returns that are needed to remain adequately funded.  The problem here is that pension fund managers will turn to riskier assets to attempt to find yield.  What a disaster waiting to happen.  Pensions are underfunded and allocating more of their funds into riskier assets.  You can read more about this situation here.

Guys, this thing is a mess.  I’m pretty worried about what’s around the corner.  It will be interesting to see how Bernanke and our other brilliant leaders attempt to hold it together, and to see how long they’re able to hold it together.  Even more, when they can’t hold it together any longer, what happens then?

2 Comments »

  • TaJ said:

    Pensions were always a problem waiting to happen, but the prospect of a long period of very low interest rates and Treasury yields will radically shorten the fuse. It's another of the "must/can't" problems that we're facing in the economy. And it's not the only example of problems caused by rigging the whole economy to expect 5-10% year on year returns. Insurance companies face many of the same issues as pensions – the money coming in doesn't necessary cover the expected payouts in the absence of the insurance companies being able to get yield on their money in the bank.

  • David said:

    Gold being high doesn't mean that there's not a recovery – some level of inflation is necessary, and would eventually push gold to new highs. It does mean that we should be more leery of *nominal indicators* of recovery. Stocks are up? Means nothing. Are stocks up or down if we price them in gold? What about median income?