The Keynesian Solvency Standoff

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The Keynesian Solvency Standoff“Markets can remain irrational longer than you can remain solvent.”

— John Maynard Keynes

What, exactly, constitutes “solvency?” I am no fan of Keynes, but why should I be? He even loathed himself by the time he stood before his maker. His theories are preposterous, and he knew it! And with every day that passes, we get ever closer to the inevitable collapse of the American empire, caused by decades of reckless abuse of the financial system by the federal government — all justified by Keynesian theory. The evidence abounds:

1. In real (yes, I said real) terms, the U.S. has
more outstanding debt than any empire in history. This includes such famous examples as Rome, Britain, Spain, Portugal, and the USSR — among so many others. These empires mismanage their currencies, and they failed.

2. The American consumer has  fueled the U.S. economy for decades. His wealth came primarily by borrowing against his home. That is no longer sustainable. The American consumer is facing massive unemployment, salary reductions, and bonus evaporations. He isn’t spending now, and he won’t be anytime soon. Thus the primary driver for the U.S. economy is no longer a substantial factor in that economy.

3. On one hand, the government blames Wall Street. And yet, the government controls the money supply and dictates to Wall Street what it can and cannot do. It was not Wall Street’s fault the government created artificial entities and interest rates to ensure so many unqualified housing loans. The U.S. government was clearly pandering to its democracy; Wall Street was merely the vehicle.

The government has at least admitted that the housing bubble existed, and that it was caused by the fact that unqualified borrowers were buying real estate — at absurdly low rates, for decades. And now the government’s response to this debacle is to take interest rates to the lowest levels in history, and leave them there.

So which is it? Was the housing crisis a mistake or not? Do we stop the abuse of unified, monopolistic currency manipulation, or do we try something new? We can’t have it both ways.

4. The United States is issuing debt in record amounts to support quantitative easing (see the previous point). This means the government is using borrowed money to buy its own debt, in order to keep interest rates artificially low. If you are confused, you are not alone. Here is how it happens:

Imagine you borrowed money against your house, then borrowed money from your credit cards to pay the mortgage on your house. Your salary isn’t enough to cover all this debt, so you keep borrowing more money from more credit card companies, in order to pay your previous credit card debt. And your house payment. And so on. And so forth… This is what your government is doing. Pundits are welcome disagree with me until pigs start driving trucks, but they cannot change the math.

5. The Dow Jones Industrial Average seems to want to be somewhere close to 10,000. I believe monetary policy and inflationary pressures are going to push it higher. But what about gold? In 1999, the yellow metal hovered between $200 an ounce, and $300 an ounce. And back then the DJIA also hovered between 10,000 and 11,000! Gold is currently well over $1000 an ounce, making record highs. But why this is important?

Gold is the ultimate harbinger of coming inflation. Markets are smart. When rates are about to skyrocket, gold is the place investors go. Normally, during strong economic periods, gold prices collapse as investors anticipate low inflation, and strong asset-growth over the long-term. Stock prices soar, as investors anticipate expansionary boons.

But that’s not happening. Today, gold moves higher with stocks. Why? Because stocks aren’t really moving higher at all, in real terms — they’re simply increasing in value to account for inflationary price increases.

6. People claim we are in a deflationary period. Just look at housing, right? But that is not the only metric of rising prices… Have you been to the grocery store lately? The gas pump? Yes, the government wants you to believe that falling housing prices are the ultimate indication of our inflationary (or lack thereof) condition. But didn’t we just establish that the American consumer has been the ultimate driver of the U.S. economy — for decades?

If that’s true, then why are we looking at housing as the metric for price acceleration (or deceleration)? Shouldn’t we be looking at the goods and services affecting the consumer most? Energy? Commodities? Of course, the American consumer is dead (see point two, above), so these price increases are only further damaging our already fragile economy.

Let’s return to the main point of this article. If your only source of income is the rate of return on your investments, then you (and Keynes) are correct: markets can remain irrational longer than you can remain solvent. And in the context of shorting Treasuries (which I’ve been doing since late 2008), that would certainly be a frightening prospect. But I have to ask this question: didn’t Keynes have an alternative source of income? Don’t most of us? In light of that probability, I’m going to modify  his famous quote to suit a more realistic context:

Markets can remain irrational (and they certainly have for the last two years). But I have a job, and I have disposable income. The more Treasuries rise, the more I’m going to short them. If I lose my primary source of income, I’ll re-evaluate. But for now, I intend to remain solvent until market irrationality ends, and I intend to profit handsomely from the ignorance and folly that have brought us to this point in history. It may take years, but again, I am patient. And you should be too.

People can point to empirical evidence ad nauseam. I encourage them to stand up straight, place their hands over their hearts, and sing the National Anthem with boisterous, enthusiastic pride. Meanwhile we should all be aware that the U.S. dollar has lost 96% of its value in the last century, and this means — without dispute — that the government has been systematically stealing from its own population for over a hundred years.

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