A Return to Financial Sanity?

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by Gary Christenson, Deviant Investor:

Financial sanity and stability may not return, but we can protect our assets and learn from the discussion.

The DOW, S&P500, NASDAQ and other markets sell at all-time highs. However, many imbalances exist within our financial world.

This is not new – things have been crazy before, are now, and will be again. But to regain financial sanity we need:

From “Doug Casey on the New Fed Chair

“In an ideal world there would be some radical changes. The best thing for the US in the (famous) long run is to go “cold turkey.” To abolish the Federal Reserve, fire its thousands of employees with their worthless PhDs. Return to 100% reserve banking with a strict separation of demand and time deposits. Depoliticize money by using gold, not Federal Reserve Notes. And default on the national debt, which is rewarding crony capitalists, and will turn future generations of Americans into serfs. And massively deregulate. And abolish the income tax, while cutting spending 90%. Etc. Etc.

The chances of that happening are exactly zero.”

It’s easy to see there is no chance for a return to financial sanity as defined by Casey.

Doug Casey is not alone in his assessment of the self-created problems in our current financial system. Alasdair Macleod in “Deflation Must Be Embraced” defines what he calls the minimum policy changes required to escape from the credit-fueled merry-go-round that will end up destroying us all.”

CHOICES AND CHANGES

The choices are: continue the insanity and hope to survive the next election/crash/war/disaster, or contemplate the abyss. Macleod’s eleven point plan for change is:

  • “Accept that another nation’s business is not your affair. Cease all military spending, other than required for purely defensive purposes. The resources and technologies released by this move would be redirected by entrepreneurs for the service and benefit of consumers.
  • Stop colluding at the supra-national level to follow common monetary and economic policies. G20, G8 meetings only promote interventionist groupthink, to the exclusion of a proper understanding of policy errors.
  • Embrace the benefits of free trade, removing all tariff barriers. If a foreign manufacturer wishes to dump excess capacity into your economy, let your consumers reap the benefit.
  • Deregulate, making it clear that individuals must look out for themselves. The state is useless at protecting the consumer. Companies that plan to prosper will realize their reputations for fairness and honesty are paramount, instead of hiding behind regulations.
  • Encourage family cohesion, instead of automatically expecting the state to look after your elderly, your handicapped and your children. Socializing family values is not the business of the state, which cannot deliver welfare services effectively.
  • Reduce the state’s role in the economy with a long-term objective of absorbing less than 20% of GDP.
  • The state should be banned from running deficits. Tax must match state spending. Capital loaned to the state will no longer be drained away from productive use in the private sector.
  • Re-introduce sound money, by means of a currency-board arrangement tied to physical gold, which is deliverable on demand to all-comers.
  • Make it clear to the banks and their customers there is no lender of last resort, and no deposit guarantees. Deregulation of financial services and the removal of this safety net will force banks to stop speculating in financial markets and be conservative in their financial gearing, to protect their reputations. Interbank loan rates will penalize financial aggression.
  • Sack all government economists, and close all government statistical offices. At best, they serve no constructive purpose, and at worst they are repositories for bad advice, as growing economic and financial instability attest.
  • Close the central bank, and replace it with a currency board with one purpose: to regulate the issuance of the currency convertible into the national stock of gold.”

Yup, he’s not expecting a return to financial sanity.

“We criticize Venezuela and Zimbabwe, because their mistakes are obvious to us. But we fail to realize the only difference between them and us is the speed of their failure compared with ours.”

Macleod sees “money printing” and inflation in our future – with Zimbabwe and Venezuela leading the way. Oops!

The process and direction are clear. The uncertainty revolves around the timing and degree of the inflationary disaster.

Consumer price inflation is here to stay. Consider prices from 1970 to show how consumer price inflation is “hard-wired” into our financial system.

From Casey on choices:

“It will be a deflationary collapse if the Fed doesn’t continue buying debt and creating new dollars. And a hyperinflation if they do.” … “the government and the Fed will definitely veer towards more inflation.”

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