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THE GOVERNMENT'S FIGURES ON INFLATION ARE AS QUEER AS A HANDFUL OF THREE DOLLAR BILLS (Oct. 23rd 2007) There's more confusion than normal as to what's happening with the economy. As mention over the last year in this column, the slow-down comes as no surprise to me. In the October 2006 issue (over a year ago) in American Firearms Industry, on page ten, I wrote, "America has profoundly serious big systemic problems:The matrix of lies keeps telling us that America's massive debts at every level don't mean anything because of 'wealth creation' in the stock market and housing prices. In reality, wealth creation through asset over inflation is a Ponzi game. To me America's housing bubble/inflated assets looks a lot like the real estate bubble Japan had in the early 1990's." In the November 2006 issue (one year ago) in American Firearms Industry, on page 30, column three, I wrote, "There's a recession out there somewhere, perhaps as close as 2007." Last week the Federal Reserve lowered interest rates a half percentage points and the stock market exploded upwards. What was not reported in America is that immediately after the Fed lowered rates by 1/2 of 1%; the prices of basic metals in dollar terms went up by 5%. The message was that the world is NOT going to play the Fed's old game in the same old way. The money that drove America housing boom over the last five years was NOT coming from the Federal Reserve (Fed). It was NOT coming from American savings accounts in American banks. The billions of dollars came mainly from the Arabs and the Chinese. A big part of America's economy is out of control. For example, longer-term the Fed's rate cuts will NOT turn around the housing decline. Home prices (in non-inflated 2006 dollars) are going down by 20% regardless of what the Fed does because the housing-bubble-money wasn't coming from the Fed, it was coming from the overseas Arabs and Chinese, and America does NOT "control" them, thus, we are "out of control. " The head of the Federal Reserve, Mr. Bernanke, said that the current financial problems are, "Due to excessive savings." To me, that was a frighteningly lawyer-like, or weasel-like statement coming from the head of the Federal Reserve. Yes, America's current real estate-bubble problems ARE due to excessive savings, and to excessive money trying to find a place to land. However, the money is "excessive savings," or more accurately excessive U.S. dollars, by the Arabs and the Chinese, NOT by Americans who are eyeball deep in debt. For a quarter century America has been living beyond its means, and borrowing the difference. America has flooded the world with U.S. dollars. This is the "excessive savings" of Mr. Bernanke. If the government were honest, "excessive savings" would be called "excessive spending." Washington D.C. is the fantasy capital of the known universe, and one of the many fantasies is that the 12 trillion dollars that America has already borrowed overseas will in some magical way never distort America's domestic markets. A significant part of the America economy is like a person who has 40 credit cards, and has run them to their maximum limits, and sincerely believes that there will always be new credit card issuers to give him more credit cards. Then, he'll put the interest payments from the old cards on the new cards, and use them to buy things, and so-on and so-on forever. The grand-strategy picture is this: total U.S. economy spending has exceeded total domestic output for over 20 years. The difference is currently running about $900 billion a year, and the accumulated total is about 12 trillion dollars. The above borrowing is NOT sustainable forever. Yes, the government DOES have a "cure," and both the Democrats and Republicans are accomplices. The "cure" has been, and will be, to deliberately under report real world inflation by 200% to 300%. When the government says inflation is 2%, it's really 6% - 7%. Most Americans are naive, and refuse to see the everyday price increases that are in front of them. When gasoline at the pump is $5 a gallon, when ground-beef is $8 a pound, and when it takes two U.S, dollars to buy one Euro. The government will still be telling us that inflation is only 2% and most of the voters will still believe them. Both the Democrats and Republicans have, and will in the future continue to lie about inflation. They will continue because at the end of the day they have no alternative. The government honestly reported inflation back in the 1970's, and that destroyed hundreds of Savings & Loans, and bank, and ending up costing the government over 200 billion dollars in 1975 dollars. Likewise, America's "growth" has been over estimated by 50% for years. I ran the official "growth" numbers from 1975 to today, September 2007. If the official "growth" numbers had been real the Dow Jones average today would be around 32,000. It is NOW under 14,000. The difference is official numbers BS. However, the government had no choice. A strong economy pulls in capital faster than the U.S. current account is deteriorating, so the government made sure the numbers represented a strong economy. The Arabs and Chinese were dumb for a long time, but they're becoming smarter. They figured out that an "investment" in America that gives them 6%, when real inflation is 7%, means they're losing 1%. So, Wall Street started bundling real estate packages that paid 7% or 8% for sub-prime. The Arabs and Chinese went for that because 1% or 2% above inflation is better than minus 1%. Washington D. C. deliberately ignored the open fact that a big part of the real estate industry was (is) riddled with crooks. Real estate is big in Florida, and it was known to EVERYONE that thousands of "approved" loan applications were bullshit. The salesmen at the mortgage companies were falsifying the loan documents. Mortgage company salesmen who were high-school dropouts were making $250.000 a year in commissions. It wasn't the mortgage company's money, it wasn't Wall Street's money, it was Arab money, so who cared? NOT anyone in Washington D.C. or Wall Street. If I were the Arabs I'd be pissed. I'd slow down oil production, drive the price of oil up to $120 a barrel, and keep it there until I got all of my money back. When the real estate scam was in high gear EVERYONE in Miami knew what was happening. Everyone understood the scam. So where was the Federal Government? What happened to the bond rating companies? Where were the Wall Street regulators? To NOT know what was happening, you'd have to be living on a different planet. The truth is that didn't say anything because the government, and everyone else made tens of billions of dollars. Everyone understood that it would eventually be the sucker Arabs and Chinese who took the biggest hit. Some of the payments for the above mortgage scams are guaranteed by the seven Federal government-housing agencies: Freddie Mac, Fannie Mae, Ginnie Mae, HUD, FHA, RHS and NCSHA. The taxpayers (i.e. YOU) will eventually pay for part of the theft. The big brokerage houses used real estate fraud and scammed the world for hundreds of billions of dollars. So now that their con game is coming apart, they plus the Treasure Department are all scrambling to find new con games so they can blaming the ordinary workers for what's happened, and push the loses onto the ordinary working tax payers. When the con game was in full flower and the Wall Street crooks were making hundreds of millions in fees, buying a new Lamborghini or Ferrari every other month. Buying million dollar yachts and jet airplanes, flying to Las Vegas every other weekend and getting $5000 a night whores. During those days it was all about them. But now, Wall Street and Washington are fabricating reasons for why it was the ordinary worker's fault, and why the ordinary taxpayer should bale out the crooks. In my opinion, EVERYONE in America with two honest brain cells to rub together knew that the mortgage racket was a crime. High school dropouts were making $250,000 a year writing 30 year mortgages, as fast as they could write, to "sub-prime" people who could barely speak English, had no verifiable income, and who are genetically incapable of thinking two months into the future. Wall Street told their overseas investors that this army of bums was a good investment. If I were an overseas investor in the sub prime scam, I'd start to sue the banks and Wall Street companies that sold me the trash. I'd sue the rating companies that said the trash was something other than trash, and I'd sue the American government agencies that were supposed to be watching. In my opinion the government was a willing accomplice in the mortgage crimes because they too made tons of money. The government was supposed to be the watchdog, but the only thing they were watching was the money rolling in from everything connected to real estate. Out of all the tens of thousands of mortgages that were falsified, how many people has the government charged and arrested? Not many. The real estate bubble is over - that's gone. In non-inflated dollars, home prices could stay flat for years. However, with real inflation at 7% - 8% per year some real estate might go up in current dollars. Real estate and all the things that go with moving into a home is a major part of the American economy. It's not just the home: it's new carpet, curtains, lawn-hose, grass-seed, new TV, paint, major appliances, and dozens of other things. There are people at the Fed who said that the slow down in everything connected to real estate is NOT going to lower the future growth numbers of the economy. That's absolutely true because the growth numbers, like the inflation numbers, are as queer as three-dollar bills. Mr. Bernanke can fight the weakening economy by lowering interest rates, but that will accelerate the dollar's fall and increase the rate of real-world inflation to 9%, (the officially figures for inflation will always be between 2% and 3%). Or, he can raise interest rates and slow the fall of the dollar, but then slow the overall economy. However, with the dollar going down the toilet, the Arabs and Chinese who financed the real estate bubble will NOT come back into the market, and that will slow the US economy even if the Fed lowers its rates. My guess is that the economy will slow down all through 2008 and 2009. Perhaps it will not fall off a cliff, but it won't be strong. At the end of the day, you can only build a house of cards so high. Don't you love it when Washington talks about "core inflation only being 2%" What does "core inflation" really mean? If you live in a cave in the woods, eat the wild animals in the woods as your main food, and if you use no petroleum products, THEN your "core inflation" is 2%. So, what does all this mean for the firearms industry? I think that our firearms industry will be in a better area than many American industries. As pointed out last month, the next generation of consumer, the ones coming on-line now, are very pro-firearms ownership. Also, general anxiety produces more gun sales; it always has and always will. In 1994 I was in Brazil during one of Brazil's especially bad periods of inflation. I was in a bar having drinks with my old friend Luciano Rossi, who ran (still runs) Rossi Firearms. I believe Rossi had about 450 employees at the time. I knew that serious inflation would someday come to America, so I asked Luciano, "How do you run a manufacturing company when you have high inflation?" He said, "You absolutely must NOT have other people holding either your inventory or your money." Rossi had big semi-trailer trucks. I have a picture of myself in front of one of them. Big 60 feet long trailers with the name Rossi and a revolver painted all along the side. Rossi would send their trucks, with their driver and an armed guard, on the road around Brazil and deliver their guns to the gun stores. They'd collect cash or a check, and immediately deposit the cash or check into a branch of their bank. Luciano went on to say, "At the other end, never pay for anything with cash - always write a check. " And in fact, when he graciously paid our bar bill, he paid with a check. Here's a question for your Congressman. If inflation is only 2% like the government says than why are the banks via their credit cards charging 21% for unpaid balances? Why - because the banks know that the 2% number is bullshit. How we get to what I've been warning manufacturers about for a long time. How a lot of their inventory and money is in somebody else's warehouse, and somebody else's bank account. I believe that real-world 20% inflation in America is only a question of "when," and not a question of "if." Back in the 1970's when the government's figures were honest we had 16% inflation. So if you're a gun maker with a 15% markup on your guns, and 20% inflation arrives (it will be hidden in the government's BS, but will be real). If your inventory and payments are in somebody else's hands for nine months, that means in reality YOU ARE MADING NOTHING on your sales. And, because the true inflation is hidden in government lies, you'll end up paying tax on inflated income, which means that in non-inflated dollars you'll be making less than nothing. One Friday you'll walk into your office and there will be NOTHING in your bank account for payroll, and nothing to pay FICA, and nothing to pay the Federal Excise Tax. The time to think and act on the above scenario is NOW. In the future, it's going to be what Luciano told me, "It's all about cash flow. " Andrew Molchan American Firearms Industry Magazine www.amfire.com |