Thursday, February 26, 2009

The Conundrum

By Joshua E. Stone

Imagine it is the year 2016, Obama is finishing his second term, and the economy has recovered….just two little problems remain: inflation and debt. This is the optimistic scenario. Being ever the optimist, I can do this. But it has to mentioned here, that to put just the unfunded National debt into perspective, it would be as if you had spent one million dollars a day for the last 2000 years and you would still need 700 more years to spend one million a day to pay it all off. Or another way to put it would be as if you had annual income of just 26k and a debt of 120 million dollars.
So now what? I wonder how good the recovery will really be, and who it will really recover for. One thing is for certain: you will certainly need to be making a lot of money in order to afford the prices for everything from gas and food to recreation. You also better not be in debt, or making your money from some sort of loan origination.
Without going into a huge history lesson, it is a fact that money returned on debt has been negative since sometime in the 1960`s. In other words, you can not possibly get a positive return on your debt, and have not been able to for decades. If by chance you think you have done this, it was more like an illusion than reality. If you look hard enough you can find that you have really lost money over the long run by operating in debt. To me this explains perfectly why major companies in debt like the auto industry are having such a hard time surviving, while smaller companies who have not taken on debt seem to be doing well for the most part. (I speak from experience here being the owner of a small wheat farm).
As far as going into debt for a home or real estate, all the level heads have always said to limit this only to your primary residence and not to take on loans for a house that will take you 30 years to pay off. Is it any wonder then why we have had such a crash in real estate, despite the fact the politicians did everything in their reach to enhance that crash, to help them gain power in the years and even decades preceding the 2008 election.
By the time 2008 came along too few knew to little and too many voted out of frustration and ignorance; much to the delight of the premeditating politicians who gained so much power in that year.
Assuming the politicians do manage to tame the budget and deficit, it begs the question: why the massive inflation? This is quite a conundrum we will find ourselves in.
There is a chorus of contributing factors of course, but at the end of the day it all comes back to the energy policy of the corrupt politicians in the USA. With the Recovery and Reinvestment Act you can find out very quickly what the priorities of the politicians are: Tax Rebates is number one, and the last on the list is Energy. They have it backwards. You can see this for yourself at
So imagine again we are in the year 2016 with still no feasible energy policy for the USA. Just think back to eight years earlier in the summer of 2008 when all was well except for that pesky gas price at the pump. Will the successor to the current Administration have the wisdom to do something like President Bush did in lifting the ban on offshore drilling to help pop the oil bubble? I for one as a small wheat farmer that grosses less than 20k a year was saved by that action.
Exposure to gold and silver in your investments and trading are the best way to deal with this manufactured crises. Look for a bottom in consumer confidence and the existing home inventory to fall lower over the next ten months to start looking for a bottom in stocks. But the stock recovery will be a long haul to put it mildly. Gold is falling at the time of this writing, at about 941 currently bouncing off the support in the 936 area. I am looking for a fall to the 901 area maybe 898 if we are all lucky, to buy some more gold. Silver is undervalued to its production costs, so that’s a no-brainer at anytime as long as you have the margin to survive the swings in price. I think silver is a good buy in the 12 dollar handle and for those with less margin/smaller accounts 10.50-12 dollars should be a fine range to buy it in 2009. Silver costs about 20 dollars an ounce to produce and gold about 300 dollars and ounce. And that was a few years ago.

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