Purchasing Power

Submitted by Kurt Brouwer of Fundmastery

China’s economy: #1 or #126?

There have been plenty of reports that China’s economy is overtaking
the U.S. economy and that it may soon outstrip the U.S..  As an example,
in a recent piece, my MarketWatch.com colleague Brett Arends, reported
on a study by the International Monetary Fund on the size of China’s
economy.  The IMF study suggested that by one economic measure China’s
economy would look almost as big as the U.S. economy in a few years.  Of
course, that set off my innate skepticism so I did a little digging.  
In this post, my goal is to cover two questions:

• How big is China’s economy compared to ours?
• And, is it really going to surpass our economy in size any time soon

Want to send the bankers a message and serve up the biggest nightmare possible to bankers? Use the massive dip that they thought would scare all silver holders out of their position as an opportunity to finally extract yourself from the awful possibility that silver and gold paper derivatives such as the SLV, GLD, and gold and silver futures contracts may crash in value in the future. Convert your PAPER silver into PHYSICAL silver now.

It is not easy to destroy the greatest empire in the history of mankind. The 20th Century was the American Century, but as with all empires, the combination of hubris, monetary debasement, imperial overreach and delusional overconfidence have set in motion the inevitable downfall of the American Empire. The policies, decisions, beliefs, and institutions implemented over decades have led the country to the threshold of financial disaster. Based on my observations, a catastrophic combination of demographics, fiat currency debasement, titanic levels of debt, smothering taxation, power in the hands of the few and Wall Street greed have led us to peak Empire. It will be downhill from here as we experience collapse, revolution and ultimately, retribution for the guilty and presumed guilty. I have already addressed the Baby Boomer generation’s contribution to our current plight, to the delight and accolades of Boomers across the land in For a Few Dollars More – Part One. The Boomers were a victim of their size and the timing of their arrival on the scene of empire collapse. Their delusions of debt based wealth and me first attitude could not have been satiated without the creation of the Federal Reserve and the institution of the personal income tax in 1913.

My name is Grant Williams and I’m a precious metals bug.

There. I’ve said it.

It feels good to get that off my chest.

Of course, those amongst you who have been riding alongside me these past few years probably already had a sneaking suspicion that was the case and, I imagine, several more of you are now tutting, rolling your eyes and muttering “I KNEW it. Where’s that ‘Unsubscribe’ button?” (bottom of the last page – no offence taken). Well today, we’re going to talk about precious metals again I’m afraid, but in a broader sense if that helps at all. For readers who are over the whole precious metals thing, there’s a nice cartoon on the last page and you’ll find several stories about alternate subjects scattered throughout pages 7 to 15). For those of you still reading at this point, join me inside the recesses of my mind. Please keep your hands and arms inside the carriage at all times.

Stocks ended the day higher, though off their highs, handily outperforming the HY and IG credit markets as the FX and PM markets exploded in the afternoon around Bernanke’s press conference. Divergence between high and low quality credit and equity suggests releveraging is starting to be priced in.

How much gold would an individual investor need as a hedge against the total depreciation of fiat currencies? Here is a back-of-the-envelope calculation...There are about 5.3 billion ounces of gold "above ground," roughly 160,000 tons. At the current price of $1,500 an ounce, all the available gold is worth about $8 trillion. About half is in jewelry, 10% in industrial uses and 40% as central bank reserves and investment. If gold took the place of fiat currencies as "money," the available gold would have rise to about $140 trillion in value. In today's dollars, that's about 18 times its current price. So $1,500 X 18 = $27,000 an ounce...To hedge $250,000 in paper financial wealth (recall that productive real estate, windmills, factories, etc. would still retain their productive utility value after currency depreciation), you would need 10 ounces of gold, or $15,000 worth at today's prices.

This could get ugly, prepare to go 'old school'!

Maybe it’s all the rain lately but my funny bone is tingling. This week the FOMC conducts a two day meeting whereby Fed officials will clarify intentions regarding the perceived closure (or not) of QE2 and the policy body will also address growing concerns (or not) about inflation. To mark a new era in Fed communications, Chairman Bernanke will hold a press conference at the conclusion of the FOMC on Wednesday. This conference has all the makings of its predecessor, historically volatile semi-annual Humphrey Hawkins testimonies on monetary policy in front of Congress. It’s a good thing since in the past month alone sixteen different Fed policymakers (did you know there were that many?) have given more than forty formal addresses, in addition to television, newspaper and newswire interviews. And Congress isn’t in this week.

After a weekend full of empty (or not) Chinese posturing, Marketwatch's Brent Arends has an interesting tidbit to add to the China vs US debate. "The International Monetary Fund has just dropped a bombshell, and nobody noticed. For the first time, the international organization has set a date for the moment when the “Age of America” will end and the U.S. economy will be overtaken by that of China." The year? 2016. So perhaps having a 5 year head start in selling the bonds of what will soon be even an official former superpower is not such a bad idea. "It provides a painful context for the budget wrangling taking place in Washington, D.C., right now. It raises enormous questions about what the international security system is going to look like in just a handful of years. And it casts a deepening cloud over both the U.S. dollar and the giant Treasury market, which have been propped up for decades by their privileged status as the liabilities of the world’s hegemonic power." And here's why pretty soon America may be left without presidential candidates: "According to the IMF forecast, whoever is elected U.S. president next year — Obama? Mitt Romney? Donald Trump? — will be the last to preside over the world’s largest economy." Oh well, it was fun while it lasted.

Would you like cheese with that burger? Ok, sir, that'll be $5.00...

Hosed by Ben and Timmah, Bammy and Congress ...

The most exciting episode of the neverending (and always distracting from far more important matters) political soap opera is without doubt the ongoing debate over the debt ceiling (which may legally be breached as soon as the week of May 1). For what it's worth, this is a complete sideshow as i) the ceiling will be raised, ii) both parties will blame each other for this outcome while shaking hands behind the scenes in expectation of more "gifts" from Wall Street and iii) the world will realize just how broke America is now that its debt ceiling, which we believe will be raised by just over $2 trillion to last the country until after the next presidential election, will for the first time ever be greater than its GDP, an event that has never before occurred. And so the distraction will shift to another even more meaningless debate. In the meantime, few ask themselves the key question: why is there government debt? In that regard, many have made the point against government debt, but few have done so as successfully and as succinctly as Bill Buckler does in his latest issue of the Privateer. In the below segment, Buckler does the definitive and most commonsensical reduction of the "government debt" issue and why what America is doing is nothing short of allowing itself to be hijacked on the road to a dictatorship.

Taking over the private sector also occurred in the US monetary system with the US Federal Reserve allowing Wall Street to dish their junk debts onto its balance sheet in a kind of “cash for trash” program where Wall Street sells crap no one wanted for 100 cents on the Dollar to the Fed… and then the Fed doesn’t try to get its money back… EVER. Doing this had a profound psychological impact on the financial world. By swapping US Dollars for trash assets, the Fed sent a clear signal to all of us that cash was in fact becoming trash.

There are two economies--the real one, which is in decline, and the "let's pretend" one touted by the State and corporate propaganda machines. Children love to play "let's pretend." Let's pretend the economy is "recovering." Why does this "recovery" remind me of an addict who's conning his caseworker? (Yes, I'm really in recovery--those aren't tracks, they're insect bites....) Let's play pretend that jobs are really really coming back...Let's pretend that households, corporations and government are reducing their debt...Let's pretend that wages are rising...Let's pretend your purchasing power isn't in a free-fall...Let's pretend unemployment is falling...Let's pretend corporate profits are the most important metric of our financial well-being...Let's pretend those great profits trickle down to the greater good...Let's pretend the corporate profits trickle down via the "wealth effect" to pension funds that benefit workers everywhere...How much longer are we willing to play "let's pretend"? Eventually we'll have to return to the grown-up world and deal with reality.

If the US were a company, it’d be spending more in salaries than it makes in sales. Aside from being unprofitable, it’s also got a MASSIVE debt load. And it’s current policy of paying out more than it makes only increases this debt load… which begs the question… who’s going to pay the interest payments on the debt? Now, about those payments…More than half of all Americans (59%) receive a Government payout in one form or another. This is not a sliver of the population… it is endemic to the system.