REFLEXIONS
By Robert Ross
The Perfect Financial Storm
Part II

 

 

(Writer’s note — this column is a continuation of the theme  “The Coming Financial Storm — Reflexions column in the September/October 2004 issue of Awareness magazine.)


“In the fall of 1991 an event took place which had never been seen in recorded history. A powerful storm was developing off the northern Atlantic coast. It was a force of nature so intense it  would be unlike anything the present  world had ever known. Nature was about to unleash a force and fury never before witnessed in the collision of three potent storms at one moment in time. The dynamic power of that collision would be propelled by winds of 120 miles an hour, creating waves ten stories high.”
        — From The Perfect Financial Storm series by Jim Puplava

Jim Puplava in his Perfect Financial Storm series (www.financialsense.com) used the  storm off the east coast in 1991 (made into the movie The Perfect Storm) as a metaphor for the possibility of a coming financial crisis; a financial crisis the likes of which this country has never before seen.

In September 2005, hurricane Katrina, scheduled as a category five hurricane, caught the U.S. and gulf region by surprise. Levees broke, bureaucracies were slow to react and many people of the region were caught unprepared for the devastation that Katrina brought. Katrina was quickly billed as the largest natural disaster ever to hit the U.S.

When hurricane Katrina hit the gulf region, figures of $25 billion were initially reported as the costs of repair. That figure, $25 billion, quickly doubled, then doubled again, then doubled again to $200 billion dollars. President Bush’s last word on the clean-up effort and costs were “we will do whatever it takes.”

Jim Puplava unknowingly wrote of storms, weather storms, as a metaphor, a metaphor that is eerily resembling reality. Perhaps we should call hurricane Katrina “storm one” of Puplava’s three storm convergence. Let’s look a little deeper.

As I write this column, in late September, a few weeks after Katrina, hurricane Rita is approaching Texas. A quick check of the internet reveals more than a few challenges facing officials. Headlines read: “Houston-area evacuees face gas shortages,” “FEMA sets up office in Texas as Rita nears,” “Texas faces the largest evacuation ever.”

As Houston begins evacuating, chaos ensues. Motorists report driving twenty miles in twelve hours — gas is in short supply and tempers flare. Rita is approaching land. At this point, the devastation and cost to rebuild and repair Texas from Hurricane Rita are unknown.

Staying with the metaphor theme, let’s call hurricane Rita “storm two” of Puplava’s three storm scenario.

As eerie as Puplava’s writings are, we are not seeing a convergence of three storms simultaneously, as he wrote. What we are seeing though, is a convergence of severe blows to the country’s financial system; a financial system that is highly leveraged and wrought with future entitlements like Medicare, Social Security and the new prescription drug program. These entitlements cannot be met in the coming years, according to Alan Greenspan (Chairman of the Federal Reserve).

In the world of economics, dollar figures are bandied about like hail hitting an aluminum awning during a storm. A lot of noise is heard. A billion dollars, a trillion, five trillion, etc. This noise can sometimes frighten. And this noise can sometimes signal trouble ahead; trouble to our country’s economic foundation — our trade deficit, our national debt and our budget deficit.

When the September/October 2004 Reflexions column was written, the trade deficit (the amount of money going out of the country versus coming in) was $450 billion dollars. One year later it is approaching $700 billion dollars. In September 2004 the National debt was over $7 trillion dollars. One year later, it is approaching $8 trillion dollars. With the cost of Katrina and Rita, the budget deficit (the amount spent above taxes collected), will undoubtedly be far greater than the September 2004 figures.

Over the last few decades we have moved from being the world’s largest creditor nation to being the world’s largest debtor nation. This wasn’t difficult to do. We just stopped producing as much as we used to and started spending more money than we had in the coffers. Translation: we went into debt.

When the U.S. was on the gold standard, going into debt, printing money carelessly, was impossible to do, because each dollar in circulation was backed by gold. So many dollars for so much gold in Fort Knox. Gold was a control mechanism on the government. The country’s money was as good as gold. In 1971, we abandoned the gold standard altogether.

We have reached a point in our culture where long-term, difficult economic solutions are not well received; no more tightening the belt, doing without, planting “victory gardens”, as was the case during World War II. We look to the quick fix. Our political leaders see their roles as Santa Clauses with  bags full of goodies. In this case the goodies, all of the goodies, are money, dollars hot off the printing press. These dollars are backed by nothing, other than an increasing debt.

Katrina and Rita will be severe blows to our economy. Initially, as government money floods into the affected area, it may look like a boom, the Southern economy rolling along — stimulated with the influx of this money. But that money is mere paper, dollars backed by nothing other than debt. Money that will be added to the budget deficit and money that will be added to the national debt. The more debt-ridden dollars put into circulation, the less value those dollars will have.

Where it once took one dollar to buy a loaf of bread, with inflationary dollars (the increase in the dollars in circulation), it will take two dollars, then three dollars and then four dollars to buy that same loaf of bread. Sound familiar? Look at cost of living over the last thirty years, the price of an automobile, the cost of a house . . . the more dollars thrown into circulation, the less value they have. The less value they have, the more dollars it takes to buy the same item.

Jim Puplava was looking at a worst-case scenario, three storms colliding at once, bringing the perfect storm. He applied this metaphor to the economy of the U.S. Rather than a hurricane, it was inflation, an unbacked currency, debt, the trade deficit, and a lack of controls on spending that brought on a financial crisis.  This made for his perfect financial storm.

Jim Puplava is not a prophet, nor a soothsayer. He merely did a little homework and looked at history. History has shown time and time again, that eventually, without controls on spending and controls on printing currency, the currency in question will eventually reach its intrinsic value . . . ZERO!

Robert Ross can be reached at: www.SanDiegoRoss@Yahoo.com    
Copyright 2005 by Robert Ross, all rights reserved


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