The State of the States, and our Nation

Greetings! I want to thank the many, many folks who have sent me emails saying: “Brad, where are you? Are you ok? Are you still writing your economic newsletter?”

Yes, I’m still writing. Life has been very busy over the past few months, so I took a break to refocus and recharge.

I’ve been reading the economic headlines with some amusement. Every time the US Dollar Index sinks we see articles begin to come out of the woodwork telling us how everyone is moving away from the dollar and how it will plunge towards final destruction. Have you heard about or read any of these?

I’ll be spending time in this article bringing my thoughts up to date with our current economic surroundings. I will then focus on supporting my conclusions in a few subsequent articles.

Everyone is worried about rampant inflation. The problem is that the public incorrectly perceives an increase in the pricing of some goods and services as inflation. The two are not congruous.

Inflation and deflation are measurements of the level of goods and services available in an economy – when compared against the amount of money in that economy. If the amount of money increases against a fairly set level of goods and services then that will cause inflation. If the amount of goods and services decrease against a level of money then we would also see inflationary pressure. If the supply of money goes down against the basket of goods and services then we have deflation. If the supply of goods and services increases against a certain amount of money then we also experience deflation. That’s it. It’s pretty simple.

Inflation is not caused by grocery items going up 20% in price – or gasoline hitting $4.00 per gallon. We can easily be in a deflationary environment with higher priced products and services. This happens when companies have no other option except to raise prices. This is a final effort to drive their revenue stream or face bankruptcy. We see this work its way up from raw materials, through the factories, to the wholesalers, into the retailers, and finally on to the consumer.

The two questions that everyone should be asking and seeking an answer to are these:

1) Is the money supply of the United States increasing or decreasing?

2) Is the supply of goods and services in the United States increasing or decreasing?

Most people would say ‘vastly increasing’ as an answer to question one. This would be very wrong. The measurement of ‘money’ is very different than the measurement of ‘currency’. Money is most simply described as: “The sum total of claims on the promises of future labor”. This also can be worded as: “The sum total of claims on debt”.

Is the total of claims on debt in our nation increasing or decreasing? It is decreasing. This should give people serious pause for consideration. Please understand that the Federal government is creating more than $1.6 TRILLION dollars of new debt each of the past three years: US deficit is biggest share of economy since 1945. This means that total debt in our economy is decreasing, even WITH reckless government spending in amounts greater than 10% of our nation’s GDP!

Our nation has two choices:

1) Perform absolutely drastic cuts in debt spending. This will immediately launch us into a full-fledged depression, of a size greater than the Great Depression of the 1930’s, or

2) Continue massive debt spending in the hope that international bankers will release the stranglehold they have on the credit system of the entire developed world. This keeps the populace somewhat happy for now, but shifts the performance of the future labor required to pay off all of that debt to our children, grandchildren, and untold generations thereafter.

Our government has chosen option #2. Why? It’s because they are spineless cowards who fear the uprisings of man more than they fear the God who created the heavens and the earth.

Why is the US Dollar dropping???

Many of you might be confused. If what I’m writing is correct, then why in the world is the US dollar dropping in value?

The answer is that it isn’t. Huh??? That’s not what all of the media is saying. That’s not what those wanting to sell gold and silver are putting in their infomercials.

The US dollar value that everyone refers to is known as the US Dollar Index. This index weights the US dollar against six foreign currencies, and has the following formula:

US Dollar Index = 50.14348112 * ((EURUSD ^ 0.576) * (JPYUSD ^ 0.136) * (GBPUSD ^0.119) * (CANUSD ^ 0.091) * (SEKUSD ^ 0.042) * (CHFUSD^.036) )

Please don’t run away having bad math flashbacks from childhood. There are a few simple aspects of the formula that I would like to point out. First, notice the number at the beginning (50.14….). This index was originally weighted to a value of 100, so a constant value more than 50 accounts for over half of the index value – and this number is worthless, except for its value as padding.

Next, notice that the EURUSD exponent value of 0.576 means the relationship between the Euro and the US dollar makes up 57.6% of the remaining part of the index.

Further, we see that the JPYUSD exponent value of 0.136 accounts for 13.6% of the remaining index value. Canada’s currency is 9.1%, with the Swedish krona and Swiss franc being 4.2% and 3.6%, respectively.

Where am I going with all of this? Has anyone noticed how much the Euro currency has been strengthening in value over the last few months? What happens when this occurs? It causes the EURUSD relationship that makes up the largest component of the US Dollar Index to decrease in value – causing the total index value to fall!

We need to ask ourselves whether the result is from a strengthening of the Euro, or a weakening of the US Dollar. We can answer this easily enough by investigating the next largest contributor to the index – Japan. The relationship between the US dollar and the Japanese yen has stayed pretty consistent over the last number of months. If the US dollar was truly falling then the Japanese yen should have appeared to be strengthening – just like the Euro!

No, what’s happening is that Western Europe is going through economic death throes. Their money supply (“claims on debt”) is shrinking at an alarming rate in many countries. A reduced money supply against a relatively equal supply of goods and services results in deflation. Major deflation causes the underlying money supply to appear stronger, since there is less of it.

Make no mistake, deflation is already here in our nation, but it is being somewhat masked by ENORMOUS Federal government spending in an effort to hide it from the population. It will show its face in the coming months and years as the tissue paper façade our government has thrown over it crumbles and tears. Western Europe is a mirror of where we’re headed. We will not see hyperinflation – we will see something much worse… a Greater Depression followed by a major world war.

A warning on precious metals

Many people are flocking to precious metals right now, in an incorrect belief that the US dollar will be destroyed. I fully support 10% of an investment portfolio being used in this type of investment as a hedge, but fully believe that precious metals will take a MAJOR downturn at some point.

I know that there are many who disagree with me on this. My only counsel is to beware. IF this downturn begins then it will be VERY difficult to sell your precious metals. There will be a scenario where precious metals dealers will not accept any metals for purchase until a stable price point is reached. This could take days, weeks, or even months. If one is too heavily invested in precious metals out of a fear of a currency collapse then they could find themselves in a liquidity trap – plenty of gold and silver, but not enough currency to live day-to-day.

Your comments and questions are welcome… or visit www.newfamilyeconomics.com

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