Inflation Addicts

The reeling US economy is the result of a large and ongoing reset of US residential real estate prices. What happened is that for 20+ years, the US government did everything possible to keep inflating the prices of US residential real estate. The congress supported lending to anyone with a pulse and financed much of it through two entities – FNMA and FHLMC with the implicit understanding that the credit of the US would backup their direct borrowings and their securitized packaged mortgage loans.

Everyone loved it. Builders, bankers, Wall Street, retailers and, most of all, taxing authorities at local, state and national levels. It was the garden party of all time bought and paid for by the US government. So, when the bubble burst the USTreasury and the Federal Reserve who both stood by silently as the bubble built (actually the Fed did its part by recently keeping interest rates so low that in effect a borrower was being paid to borrow versus the fundamental of having to pay for borrowing) stepped in with cash, more borrowings, printed currency and electronic currency to stand behind all the bad assets created in the process and even the so-called derivatives based on the bad assets. They had no choice. This debacle was made in the US of A and the fingerprints of several white house(s), congress(es) and so-called regulatory agencies were all over it. Everyone knows it. And the people with the bad paper now know that the US of A is quite capable of managing its economy with the same promiscuity that 3rd world countries (aka banana republics) have done for years.

That is why the US taxpayer is on the hook for all the bailouts. Your country created the mess and must fix it or it will be a long time a coming before anyone offers your country any more credit. That, folks, is what happens when politicians have access to the paper money machine of any country. Locate one politician, besides Ron Paul, who grasps much less will take responsibility for the mess.

So, what is happening now? The residential real estate bubble has burst. Things are getting better by the day. Right? Wrong. The US congress and its active enablers at the Federal Reserve and the USTreasury are supporting massive bubbles in health care services, government services and education services in the 50 states. These bubbles are ongoing inflation schemes that are every bit as attractive to the politicians and special interests as was the residential real estate bubble. The thinking now is that if the US government can keep the cash machine printing and the borrowing machine borrowing that these bubbles can be sustained. The hope is that this ongoing inflation scheme will settle down while other countries inflation machines will gradually catch up and then the US will not be hung out to dry again. Good luck. Just take another look at the recently displayed (see TheFundamentals, September 24, 2009) massively higher health care costs per capita in the US versus all the other developed countries. This is a bubble. What happens to bubbles?

This is the game being played. The stakes are very high. The politicians and special interests would not like to go through an adjustment period similar to the deflation of the residential real estate market. Can you imagine what happens if health care workers, education workers and government employees have to look for real jobs in wealth creating ventures? Inflation addiction. Where is the twelve step program for this ailment?

You live in a country addicted to the need for ever rising prices and tax revenues. Substitute “prices” for “account balances” and “tax revenues” for “investor’s cash” and it reminds one of BMadoff’s scheme. His scheme lasted for 20+ years too. His scheme failed when the flow of incoming money slowed and the requests for redemptions rose. Doesn’t take twelve steps in the real world; just two.