Scary Article About the US Economy

Scary news all around! Scary graph:

The notion that consumer prices have to fall because of a recession is pure nonsense. This argument is rooted in fantasy and demonstrates a total lack of understanding of how money works. The more money that is made available, the higher nominal prices will go – regardless of economic growth. We have already gotten one stimulus so far in 2008. It is a good bet another will be in place for the critical holiday shopping season. A shopping hiatus during this holiday season will be catastrophic. If you think the number of Chapter 11 filings is high now, wait until after 1/1/2009. In a $13 Trillion economy, 70% of which is consumer spending a mere 10% cutback in consumer spending (we’re more than a quarter of the way there just in October) will amount to nearly a Trillion dollars yanked from the US economy or a 7% contraction in GDP. And that is just the result of a 10% cutback by consumers. These are the unintended consequences of building an economy on consumption. We’ve already got the recession. When the fresh fiat created to fatten bank balance sheets and lubricate credit markets works its way to Main Street, we’ll have rising consumer prices as well.

The upshot?

How does all this play into the Dollar? Quite simply, in the absence of tangible backing, a currency is backed by economic activity or perhaps implicitly by natural resources as in the case of Canada, Australia, and Russia. US economic growth is fading fast, and as for the full faith and credit of the US Government? Enough said. While there is no official measure of the full faith and credit aspect, the willingness of foreigners to buy debt is a pretty good proxy. And during the past two months, foreigners have been less than inspired to take on more US Government debt. In short, there is no fundamental reason whatsoever for the Dollar to gain value. The current situation is an opportunity to get real. Get real assets and buckle your seatbelts because the currencies of the world are about to play a good old-fashioned game of meet me at the bottom. Lucky for us Gold won’t be participating in the game.