Follow The Bottom Violation
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Dec
21
Fire Burn and Cauldron Bubble…
What does your government do? I will tell you:
Your government is a bubble machine, printing cheap money, which causes inflation — either in certain sectors, or even economy-wide.
Witness:
1. Medical subsidies (from cheap money), and the resultant increase in the costs of healthcare (inflation).
2. Student loans (from cheap money), and the resultant increase in the costs of tuition and books (inflation).
3. Last, but certainly not least, the government’s encouragement and guarantee of inexpensive money for mortgages (from cheap money), through Fannie and Freddie. The result? Astronomical housing prices (inflation).
Yep. It’s a bubble factory.
When the government provides cheap money, it creates artificial demand, and artificial demand creates inflation. This process is only amplified when the government increases the money supply in order to fund certain sectors — or even more dangerously, the economy as a whole.
The Fed has increased its balance sheet exponentially in recent months to increase spending — whether through bailouts, buying long-term debt, or pumping money into spending programs.
And this is just how bubbles are created; we’re already witnessing a bubble in bond prices — yields have collapsed, while prices have hit historical highs. What is happening is unprecedented, and it’s dangerous.
Contrary to almost everything I’ve ever done in business, I find myself shifting my philosophies dramatically. I’m afraid that the only way to navigate the foreseeable future is to identify the bubbles our government so wantonly creates and exploit them. I don’t see how the economy can have any sustainable growth, going forward, if the government continues to create financial bubble after financial bubble. The only bet at this point is against bonds, against the dollar, and for commodities.
Can that be right?
In inflationary periods (and despite the clamorous outcries of the dangers of deflation, I’m hard-pressed to see how we’re not headed toward massive inflation), real assets — commodities, real estate, and other tangible, sustainable assets — are the only things that do well.
The more research I do, the more it seems like real wealth-creation in the foreseeable future isn’t going to come from betting on certain things, but rather it’s going to come from betting against certain things…
Finally, I want to address the most perilous part of all of it: the ultimate catastrophe arising from government investment and currency-creation is that managers get cheap money, and they invest in absurdly inappropriate projects — projects that wouldn’t otherwise be considered… the viabilities of which don’t exist, except for the fact that risk is mitigated by the existence of very cheap money.
So here we are, in the worst economy in 80 years — caused indisputably by many decades of irresponsible monetary policy. And how is our government going to deal with it? By printing more money, of course, and making it as cheap as possible! And what will the result be? Managers will invest in unviable projects, and the whole process will start over.
There is only one thing certain about this cycle: the magnitude of every subsequent bubble will be worse than the last, until the whole system collapses.
Our problems aren’t the result of capitalism. No, quite the contrary; our problems are the result of irresponsible government intervention. Despite what I’m seeing around me, Keynes is more dead than ever, and while this disease is going to drive us close to extinction before we awaken, collectively, I’m somehow optimistic that this will be the last time we will fall for this ruse.
If you’re anything like me, you’re wondering if maybe Discipline isn’t so implausible after all. Watch the dollar in the coming months.
I know I will be.
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Disclosures: Paco is long TBT, UCO, and gold. He also holds U.S. dollars by necessity, pending the advent of private gold-backed currencies.
You can buy his novel Discipline wherever books are sold.
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