Dear Diary,

Still in those lazy, not-so-hazy days of summer. August 15 marked the 43rd anniversary of that fateful decision by the Nixon administration to end the direct convertibility of the US dollar to gold.

It came and went without much fanfare. Nobody cares.

Thanks largely to this new easy-money regime, credit creation replaced capital accumulation as the main driver of economic growth. Credit in the US expanded 50 times between 1964 and 2007, far more than the economy that supports it.

Today, few people have any real money. But almost everyone has credit. At today’s ultra-low interest rates, they can own stuff they don’t need with money they don’t have.

That is why Janet Yellen tells the world not to expect “normalization” of interest rates anytime soon. She knows there will be hell to pay when people have to pay higher funding costs.

All of a sudden, all that “stuff you don’t really need” will be stacking up in warehouses and on retail shelves unsold. Then the people who make the “stuff you don’t really need” will find their hours cut back. And the economy will shrink.

The nation’s politicians know, too, that easy credit makes it possible for them to borrow cheaply… and use the money to buy votes.

A New Model of Government

That is another way to understand how modern government works. It has abandoned the old “invade, conquer, steal” model in favor of the “print, dupe, transfer” model.

Yes, dear reader, you want a quick description of human progress in the art of government?

Here is it: Chicanery and fraud have replaced larceny and brute force.

The feds tax as much as they can get away with – about 50% in the world’s most advanced democracies. Meanwhile, the Fed’s cheap credit boosts the total tax take by pumping up sales and profits. It also helps finance the rest of Washington’s transfer schemes.

Thus is wealth transferred from the people who earn it and own it… to zombies. Taxes allow government to transfer today’s output. But credit allows it to transfer tomorrow’s output: It takes from future generations of taxpayers to buy off present generations of voters and chiselers.

Trouble is, the model works only as long as the productive part of the society is expanding fast enough to fund the whole scheme. Alas, Japan is already shrinking. The European economy is dead in the water. And the US has grown at only 0.9% a year on average over the last five years, as its public debt has grown four to five times as fast.

When the zombies multiply faster than the people who produce real goods and services, it is just a matter of time before the entire system collapses.

And what’s this? From the Richmond Times-Dispatch comes a report, telling us that the number of people needing food assistance is on the rise:

The number of people who each year turn to food pantries and meal service programs in a large swath of Virginia served by the FeedMore food bank has topped 212,000, according to a report released last week by FeedMore and Feeding America.The study, “Hunger in America 2014,” tracks hunger relief efforts across the country and shows a growing number of people relying on food banks or agencies for help.

In FeedMore’s service area, which stretches from Richmond north to the Northern Neck and south to the North Carolina line, about half of its participating agencies reported an increase in the number of clients and a third reported not having sufficient food to meet demand.

The report finds that, in the past year, 70% of households needing help had to choose between paying for food or utilities, 60% had to choose between food and transportation, and 57% had to choose between food and housing.

Thicker Than Flies in a Feedlot

Meanwhile, Mike “Mish” Shedlock reports that zombies in America are already thicker than flies on a feedlot. Welfare recipients outnumber full-time jobholders by 6.5 million people.

From his blog, Mish’s Global Economic Trend Analysis:

As a result of Obamacare Medicaid expansion coupled with means-tested Obamacare assistance, I estimate welfare rolls expanded from 35.4% of the population in 2012 to about 40% in 2014.Let’s go through the math to see how I make that estimate.The latest welfare statistics are from year-end 2012. Those figures show 35.4%: 109,631,000 on welfare.

109,631,000 living in households taking federal welfare benefits as of the end of 2012, according to the Census Bureau, equaled 35.4% of all 309,467,000 people living in the United States at that time.

When those receiving benefits from non-means-tested federal programs – such as Social Security, Medicare, unemployment and veterans benefits – were added to those taking welfare benefits, it turned out that 153,323,000 people were getting federal benefits of some type at the end of 2012.

Subtract the 3,297,000 who were receiving veterans’ benefits from the total, and that leaves 150,026,000 people receiving non-veterans’ benefits.

The 153,323,000 total benefit-takers at the end of 2012, said the Census Bureau, equaled 49.5% of the population. The 150,026,000 taking benefits other than veterans’ benefits equaled about 48.5% of the population.

In 2012, according to the Census Bureau, there were 103,087,000 full-time year-round workers in the United States (including 16,606,000 full-time year-round government workers). Thus, the welfare-takers outnumbered full-time year-round workers by 6,544,000.

More credit leads to more zombies, which leads to less real output per person.

Inevitable conclusion: disaster.

Regards,

Bill

Market Insight:

Yellen Pours Cold Water on Rate Hike Worries

From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners


At the recent central bank confab in Jackson Hole, Wyoming, central bankers continued to fret about jobs.

Janet Yellen tried to explain why, even though the official unemployment rate is now below the Fed’s original 6.5% threshold for raising interest rates, Mr. Market needn’t worry about that happening anytime soon.

And her soothing words seem to have had the desired effect. Investors sent the yield on the 10-year Treasury bond back down below 2.4%. And they pushed up the S&P 500 to just one point below the 2,000 mark.

Meanwhile in the futures markets, investors have repriced the odds of a Fed tightening by mid-2015 to 50-50 from the 60-40 odds in favor of tightening we saw as recently as mid-March.

Of course, nothing is written in stone. And as former Merrill Lynch chief market strategist Bob Farrell reminded us in rule #9 of his “10 Market Rules to Remember”:

When all the experts and forecasts agree – something else is going to happen.

So, what should you do when faced with the uncertainty over whether interest rates will rise or not?

We recommend that you keep an eagle eye on valuations…. and try to follow the simple rule of buying low and selling high.

That’s not easy right now with US stocks hitting all-time highs… Treasury yields near all-time lows (yields move inversely to prices)… and even junk bonds, which recently took a big tumble last month after hitting a seven-year high, in rally mode again.

Where’s cheap right now?

You’re probably not going to like this. But on a quick and dirty screen of international stock markets by trailing P/Es, the standouts are China (on a trailing P/E of 7) and Russia (on a trailing P/E of 6).

Of course, these are two countries that everybody is fearful of right now.

But if you have a long enough time horizon – and we’re talking three to five years… or even longer – keep in mind that, over time, good things have a habit of happening to cheap stocks.