Sunday, April 06, 2008

A Brief Compendium of Financial Disaster Websites

6 April 2008, 3 April 2011

I am not a general advocate of financial doom scenarios. I believe that humans are resourceful, and that when we experience personal and financial freedom within a lawful and orderly governmental context, the chances are favourable that free and unhindered innovators will discover whatever solutions are to be had in any particular situation.

We are also living in a time of accelerating technological development, and new technologies are likely to aid us in facing up to many of our present crises. I acknowledge the contributions of perhaps today's most eloquent spokesperson for these developments, the very interesting - and optimistic - Ray Kurzweil.

However, we are living as well in a time of extreme, perhaps profound, contradictions, and many among us are concerned about the impact of growing financial and other imbalances on the now widely-acknowledged looming financial downturn.

While I am inclined to be optimistic, I am not interested in burying my head in the sand. I have already written about the decade-long crash of the Dow Jones Industrial Average in gold (and gold stock) terms. Clearly, the crash is already here, and the unwinding is proceeding apace. In my view, these trends are likely to continue for at least an additional decade, if not longer. However, I don't view this as a "doom and gloom" situation so much as a revaluation of financial assets in light of ineluctable fiscal realities. The revaluation of general investments is a cyclical phenomenon, and - because it is driven by human emotion - it is an inherently chaotic and unstable process! (Please note that the $10 million Zimbabwe note illustrated to the left will buy you a loaf of bread, with no change - this week! Then, think again about where the US economy is headed.)

I have written often about two particular imbalances.

The first of these is the present untoward expansion of the global money supply, with a particular focus on the now exponential growth of the presently $14 trillion US money supply.

The second is growing personal, institutional and government debts and unfunded liabilities.

Again, the United States appears to be facing the most serious problems here, due to having long ago passed the point of being able to sustain its energy and resource intensive lifestyle through local production of the necessary resources, particularly energy.

Most of us like to have hard facts on which to base our own decision-making processes, and there are a range of websites where many of these necessary facts can be accessed (and I'm not referring to official government information websites, which are particularly prone to obfuscation and concealment of the most significant of today's trends).

OK, so let's start with the most disastrous information first, and then hopefully close with some more optimistic perspectives.

If you want to know more about accumulating US debt, look no further than the work of Michael W. Hodges. Mr. Hodges has assiduously pulled together everything that an informed citizen would want to know about the unsustainable spiral of total public and private debt in the United States.

Mr. Hodges' updated March 2008 estimate shows the US with a now-accumulated total debt position of $53 trillion - "and soaring." He notes that America's non-inflation-adjusted debt position has grown by a factor of 76 times over the last half century.More meaningfully, that is a growth from 186% of national income to a factor of 470% of national income - a real tripling in relative debt load over the past 50 years.!

America's inflation-adjusted debt per person has grown by a factor of 5.6 times during that same period.

We all know that it is possible to make money by borrowing and investing money. This is why business operations typically take on debt.

More concerningly still, then, our ability to make money with borrowed money is rapidly declining, from a 54% level of efficiency to a present 21% level of efficiency. That is, borrowing money is working less and less well over time as a strategy for generating future increased income.

Analysis of the sources of debt makes clear that in the US, it is domestic financial sector debt that is exploding, from a factor of 5% of national income in 1957 to 140% in 2007, a relative increase of 28 times the rate of national income growth.

Mr. Hodges shows that household debt has risen from about 45% to 123% of national income over that period, resulting in the lowest home equity ratio in US history - and this at a time when many baby boomers are nearing or entering retirement.

Of the $53 trillion in accumulated US debt, $12.5 trillion is not owed to Americans, but to international stakeholders. Should those international entities determine that their US investments are not providing satisfactory returns, then it is possible that a rush to sell US assets could take place, with the result that further damage to the exchange value of the US dollar could occur.

Here is the capper for you. Let's add in unfunded US government liabilities (the government squanders citizen payments against such entitlements as social security and medicare by flowing these funds into general revenues, rather than saving for a rainy day; unfunded private liabilities are not reported, though they are probably also large).

We now have a total US public and private debt and unfunded liability position of $117 trillion (plus uncertain additional trillions for unknowable figures, such as unfunded business sector employee medical contingent liabilities).

By the way, right about now, you may be asking, "How big is a trillion dollars?" Fortunately, I have an answer for you. I'm going to transport you to the year zero, and provide you with $1 million to spend each day from that point forward. I will also allow you to live long enough to do it.

Well, if you started spending $1 million per day on the day of Jesus' birth, and continued doing this through to the present, I have good news for you. You still have another 730 years to live, because at $1 million per day (notice, this is not per year), it takes almost 2,738 years to spend the full amount.

Now, multiply that times $117 trillion!

I don't know who - anywhere - could say that the United States is not moving into deeply troubled financial waters, particularly in consideration of the added costs of the soon to be $3 trillion or more Iraq War (an investment with a far less than 0% rate of return - that is, whether the war is right or wrong, or even some of both, it is clearly going to prove to be unaffordable for the US over the longer term).

I wrote only recently about long-term "secular" economic trends, which tend to play out in full only over the course of a single adult human lifetime. Ian Gordon is probably the best-known present advocate of the Kondratieff ("long wave") cycle. Whether you agree or disagree with the theoretical underpinnings of this work, it is clearly demonstrable that long economic cycles do exist, and that they can be traced back at least for several centuries of western economic activity.

Marc Faber is also a source of information on this view. I have found the best source of his commentaries to be here.

In all fairness, Mr. Gordon has been warning of Kondratieff winter and of a stock market crash for a considerable period of time. He issued a "winter warning" just last week, on April 4, 2008, and advised of a looming stock market crash in 2007, which obviously hasn't happened yet - at least in (grossly inflated) US dollar terms. However, in my view, Mr. Gordon is probably more right than wrong. He is the producer of the most current Kondratieff cycle chart that I published recently.

I suggest that interested readers visit Mr. Gordon's site here.

The US Federal Reserve Board stopped publishing figures for M3 money supply growth just as this critical indicator launched into an alarming parabolic phase of development. For the uninitiated, M3 is probably the best indicator of inflation of the US money supply, so it is not difficult to understand why the Federal Reserve might wish to obfuscate this information. Fortunately, several intrepid analysts have bothered to do the work to reconstruct this figure, with their only differences being in how "Eurodollars" are calculated. offers extensive information about key indicators of inflation in the US money supply, the cause of excess liquidity and of its many insidious and destructive ramifications. I recently published a version of their chart which demonstrates the exponential growth in US M3 money supply, recently approaching a peak 20% rate of annual increase (rivalling that of Argentina in the 1970s and 1980s, coincident with the economic collapse of that country at that time!). Note, however, that the Fed has been easing up on the throttle since about December 2007. It is likely that without an intense rate of continued Federal Reserve money creation, the US will lapse very quickly into recession, as in fact now seems to be the case (such a transient slowdown in US money supply growth last occurred in 2000, prompting our most recent previous recession).

For an alternative view of US government fiscal irresponsibility, visit John Williams' Shadow Government Statistics, an oft-cited source of information for non-adjusted government financial data. That is Mr. Williams takes the manipulated numbers and "unmanipulates" them so that we, the public, can find out what is really going on. Believe me, what the government wants us to think is occurring, and what is actually taking place, are not the same thing at all!

I have already cited Mr. Williams' work on the (true) inflation-adjusted price of gold (most recently estimated by him as having reached an inflation-adjusted current dollar peak of $6030 in 1980). He also demonstrates, for example, that US unemployment is closer to 13% than the officially reported recent (and recently increased) 5.1%; that real US GDP growth has been negative since the year 2000 (with a brief blip in 2004); that consumer price inflation is closer to 12% than the officially reported 4%; and that the financially-weighted US dollar has lost considerably more value than has been officially reported.

Mr. Williams offers a subscription service. I'm not a financial professional, so I don't subscribe, but if you are interested in more detailed information for any reason, you probably need to subscribe to his service to get a better picture of what is really going on in the US economy!

OK, that was probably gloomy enough.

Let me draw to a close by referring, as always, to the work of Bill Fleckenstein. Mr. Fleckenstein's daily market commentary is basically a truthful version (behind the smoke and mirrors) of what is really taking place in the investment world. I do subscribe to this modestly-priced service. I you want to know what is really going on, day-to-day, you had better subscribe too!

I will also put in a plug, as I often do, for the eminent and somewhat unconventional Jim Sinclair, the veteran gold trader and chief executive of Tanzanian Royalty Exploration Corp., who called the top in gold above $800 per ounce in 1980. Mr Sinclair has recently challenged any taker to wager $1 million against his contention that gold will reach a price of $1650 per ounce by January 2011. Also on Mr. Sinclair's website is the daily (one-page PDF) gold market commentary of Dan Norcini, a feature that no gold investor should overlook.

I will end it here with the perhaps not upbeat, but not-so-gloomy views of John Mauldin. Mr. Mauldin is an objective financial commentator based in Texas who simply tells it as it is to the best of his ability. He is to be noted in particular for his willingness to draw others around him to inform his own views and those of his readers. Mr. Mauldin thinks this might yet be a muddle-through recession, rather than a crash.

For all of our sakes, I hope Mr. Mauldin turns out to be right.

This concludes my very abbreviated tour of financial disaster websites. There are many more, and many much more extreme in their views than those I have cited. I have screened and selected these links for credibility and reliability.

My final advice to you is that it is wise to be prepared. In gold terms the crash has already occurred, so talk of financial gloom and doom is not unwarranted in our present circumstances. Therefore, be sure that you are aware of what the financial doomsayers are reporting, and of the facts on which their gloomy outlooks are founded!

We live in a world where things can always get better. But the financial predicament of the United States is certain to grow worse before that hoped-for more favourable turn of events arrives. We must find a way to survive the present winter season, making good preparation for a lengthy period of hardship, but still anticipating that spring will return with certain regularity.

12 April 2008: Please click here to see my addendum to the Compendium, with three additional entries.

11 August 2008: Nouriel Roubini's recent prediction that the current credit crisis will lead t
o $2 trillion of credit losses, a severe banking and financial crisis, a severe US recession and a broader G7 recession qualifies him for honorary membership in the brief compendium of financial disaster websites. Mr. Roubini's mainstream position as Professor of Economics and International Business at the Stern School of Business, New York University should hopefully enable this particular herald of doom to be noticed by some key decision makers!

Also... Read about rising profits in FASB Wonderland and Wimpy's Rule here.

3 April 2011: The National Inflation Association has the most extensive collection of charts related to issues of money supply, "real" inflation and debt I have so far found. Click here to view dozens of relevant charts on one page.