Our foreshadowing of the past several months has been cast along the lines of probability and events have been unfolding largely as expected. We are now well established in the next phase of a global deflationary decline: competitive currency devaluation. Even mainstream publications have referred to the dollar as a weapon of mass destruction, and the weak dollar "policy" as a war on the Euro. Perhaps the mad are regaining their senses. Or perhaps there is just a reporter or two reading Obscene Prophets and becoming mad in a different sort of way.
Blue Skies Shinin' On Me
Tactically, the American efforts at reflation (see Refault) have been reasonably successful (see False Dawn). The stock market is up nicely. Perhaps a bit overbought, but instilling confidence if not complacency in the masses. Bonds are solid, as interest rates don't look to be heading up anytime soon. Housing in most major markets is excellent, although there are many worries and local instances of a bubble. Gold shares are generally down in the past few months, but physical gold remains surprisingly resilient. The false dawn is playing out; but there is haze in the sky.
Mortgage Backed Dollar
And now Greenspan continues to unveil, albeit through several obscure layers of indirection, more plans to subsidize the economy by using the housing market. While not announcing that the Fed is buying mortgage backed instruments, this may be inevitable (see Tiny Bubbles). So front running the mortgage market remains a viable strategy for many of us. And the Fed wants to make that point increasingly clear. Especially for residential real estate.
While Greenspan likes a gold cover clause to protect against deflation, maybe he likes housing more. A housing cover clause? Might work for a good little while. Besides, we need to bail Fannie Mae out of its derivatives positions at some point before interest rates are allowed to rise. So where will this end up? At that point where the Fed buys sufficient mortgage backed instruments so that the directional interest rate derivatives position in these instruments is unwound or netted out.
So the squillion dollar question is what is this point? Does the Fed have the power to pull this off? Will the new gold standard be housing? Or will Mr. Market intervene and cause interest rates to run away from the Fed before they net out the one-way bets in the other direction? It seems unlikely that the world will accept a housing-backed dollar. At least right up front and at current prices. Exorbitant prices relative to much of the rest of the world. I wish I could just print money, and by this virtue alone, become the owner of the vast bulk of residential real estate in America. Nice passive income. But Mr. Market, being particularly global on the long end of the interest rate curve, would never let any private player even make an attempt at this, unless they had the leverage of the world's reserve currency. And government sanction. And popular support.
This will be interesting to watch. And watch we will. When a currency is in its death throes, or at least having pulmonary problems, there is nearly always an attempt at resuscitation by the monetary authorities. A typically half-baked attempt that does not recognize and deal with the heart of the problem: excess money. Historically, this has been when the authorities discover their limitations. The current cohort will be quite disappointed to find that they too are mere mortals. Mortals with a maelstrom on their hands. A maelstrom that can only be calmed by the discipline of gold.
Slow Leak or Blow Out?
The obvious weak spot in the reflation effort is in job deflation. Unemployment is less than rosy. Underemployment is becoming a cliché. The new crop of jobs is paying less. Skills are being under utilized. And it is these high salaries that make housing payments, that support housing prices; and that I expect will someday back the dollar. So job erosion is a weak spot not only for short term reflation (read re-election) efforts. It is also the weak spot in any attempt to use a "housing cover clause" to put a floor under the dollar.
So this weak spot may be the point of unwinding of the Fed's plan. And an interesting contradiction. One where global hegemonic ambitions are subverted by necessary interim policy. Where the current administrations break from the new world order indicates a key reversal in policy and politics. And, in my opinion a natural consequence of the Kondratieff Winter. And as such, a consequence that will continue and grow for many years. Even with a new administration "in charge," America will become increasingly nationalist regarding financial matters.
As income levels globalize, housing prices will globalize. The pure logic of the situation indicates a major discontinuity downward in the dollar. Under the ideals of globalization, all wages prices and currencies "equilibrate." The dollar loses its reserve status. So to achieve a homogeneous global state, there are issues.
Before such end states are obtained, compensatory mechanisms come into play. As American wages drop many of the imbalances begin to correct. Fewer jobs are exported. Even the hint of terrorism and epidemics will erode the globalist agenda and cause borders to tighten. Trade wars erupt driven by populist politics. The culture may even shift to one where wealth is disdained. We have already seen pre-cursors in the Wall Street perp walks. So again the big question is when does the populist ground swell force issues and circumstances to protect America's inflated job market? At some point housing and the dollar, or what it becomes, will find a balance at some unknowable major equilibrium point. But almost assuredly, gold will need to provide the third leg of this stool.
Many, whose skills are being underutilized, find other things to do. Like plant a garden. While this may seem trite, the Liberty Garden provides stark contrast to the populist entitlement mentality. Where something as simple as growing you own food supports liberty.
Self-reliance and initiative will be needed to protect your assets should deflation follow its historic sequence of events. You may need to use gold to serve as your own central banker (see Personal Central Banking). And you may well need to serve as your own employer to protect your assets. So use the Liberty Garden as a metaphor. To find your own escape from the populist trap. Where you can be productive. Where you can be self-reliant. Where you can contribute to your community. Become more entrepreneurial. One small step at a time. But make each step definite. The biggest mistake in planting a garden is making it too large. At least to start.
And when you sell your first vegetables, use those proceeds to bury a few silver coins in the corner. There may be more than a few like-minded individuals that have skills to barter.