No Way Out

The American economy continues to crumble, despite now over a year of supposed “green shoots” and hints of recovery.  For a good example of the continued weakness, consider that the latest GDP revision was just revised lower to growth of 3.0% (a very anemic number considering the unprecedented stimulus that was injected into the economy).

The problem here is that there is no solution to our problems, we passed the luxury of having a viable option long ago.  We essentially have two options – print money to inflate our way out or choose austerity and fiscal responsibility.  Let’s look at each option.

Re-Inflate

This has been the official course of action for some time.  Whenever a slowdown occurs, we lower rates and we enact policies to stimulate the economy.  We also have resorted to quantitative easing which is basically printing money to buy financial assets.  These measures are very inflationary.  The problem is that over time, each additional “dose” of stimulus is less and less effective.  The diminishing return on more and more debt and more and more stimulus must be very troubling for our central planners.

The central bankers are essentially trying to outrun the credit destruction and massive debt losses in the economy.  More and more printing of money will be needed to continue to do this.  Eventually, it will turn to a currency crisis which will result in a complete loss of confidence in the dollar.

To guard against this, you should have assets in precious metals and other inflation-hedged instruments.

American Austerity

There are signs of this trend moving forward as well (i.e. the victory of Rand Paul in the Kentucky primary a few weeks ago).  While this would normally be a great sign as Americans move toward deficit reduction and fiscal responsibility, as I said before, we passed up this opportunity long ago.  We can no longer choose this option without massive, massive consequences.  The consequences would be nothing short of devastating.

To enact strict fiscal restraint and essentially cut off all (or most) government stimulus and support of the economy would essentially result in an overnight crash.  Our economy is currently running on this government money.

As the crash would be very painful and even more visible than inflation (people on the streets versus higher priced products), I doubt this movement will gain widespread political adoption.  Politicians always choose the politically advantageous inflationary measures, so I think we will continue to print money in a futile attempt to save the economy.

You Have Time

The good news is that you have time while the government buys us time with their inflation while the deflation counter-acts the results.  You should spend this time wisely.  Make financial preparations.   Make other preperations.  Because eventually, the party will end.  You will want to be ready.