The messiah is leading us to a golden age (part-II)

Seeing the lone response to my last post, I am tempted to clarify my stand. Yes, it's true that I am cynical about the entire hype surrounding the massive positive change that President Obama is supposed to signify. Clearly, in comparison to the last 8 yrs of mis-governance that US citizens have suffered, even Mickey Mouse would appear a sane alternative. But my concern centres primarily around the way the current administration is bungling up the one fantastic opportunity it has, to make a clean break & start afresh. So much for change-we-can-believe-in!

Obviously, this is not the most unique bust-up in financial markets that has ever taken place. Nor is it unique that the malaise has spread to affect Main Street as well. What is unique, though, is that because the household economy is hyper-leveraged, any stimulus in the form of tax breaks, rebates & the like will only go toward paying down debt (in my view, the savings rate for the US households bottomed out in 2007 at around -4%). This is exactly in line with previous recessions which occurred on account of corporate hyper-leverage, and in which extra money was ploughed to pay back debt instead of completing investment plans. Further increases in savings by households are inevitable; you may as well perish the thought of stimulating consumption by doling out checks. The worst-case scenario is a debt-deflation spiral!

The other disappointment is in the sphere of the financial sector clean-up. Instead of a ring-fencing of dodgy assets (to be dealt with, independently) to permit otherwise-healthy banks to continue lending to keep the economic engine moving, an extremely dangerous dithering on policy direction has not only exacerbated the situation for corporates but also spilt over into EM currency & debt markets. IMHO, a rigged financial system with a "No Bank Left Behind" approach is doomed to fail in a societal context that adheres to Darwinian laws related to survival. The icing on the cake is a dangerous obsession with superfluous issues. Senator John Kerry's attack on banks that spend money on clients (as last evidenced in the Northern Trust Corp case) appears extremely short-sighted & seems to borrow a leaf from the books of some glorious Indian TV news channels (viz. India TV, Aaj Tak, I could on & on!). He is wont to call business promotion expenses "idiotic". Why Congressmen should be permitted to stand in judgment of how businesses should entertain clients, foster stronger relationships & subtly ferret out cues for the next opportunity, I will never quite gather. If anyone were to ask me (which is the pity really - no one ever does!!), I'd say one man's idocy is clearly another man's business investment.

Yet, the biggest crisis facing the world may not turn out to be the US consumer. Nor even the US Dollar. In spite of a now-certain blow out in deficit spending & government borrowings on the anvil, the USD appears to be winning the battle of lousy currencies. It has come to resemble a beauty pageant featuring butt-ugly naked women! The bigger crisis concerns the future of the Euro - as evidenced in sky-rocketing sovereign spreads for Greek, Italian, Spanish & Portuguese bonds. By corollary, this can be expected to have immense bearing on potential defaults by East European countries. This will likely be the next shoe to drop in the race to the bottom! (more on this in another post, I guess)

In case anyone ever wondered about the title of the last post & this one, the context is precisely this: are we headed back to the Gold standard for currencies? The recent tear that Gold has been on (and has since marginally corrected) would, on the face of it, appear to be a natural reaction to fears of inflation taking root for the long-term, fueled by the super-cheap money binge that the messiah's administration has embarked on. But then, one look at TIPS blows that hypothesis to bits. According to last trades, long-term inflation expectations implied by TIPS prices suggest that the market does not expect inflation to average more than 1% over the course of the next 10 years. Hardly hyper-inflations, wouldn't you say?

My take on this is the exact opposite: I suspect more folks just want to hoard Gold to protect themselves from all-round asset deflation, instead of hedging against inflation. After all, it's the only form of currency not contaminated by credit, spending binges, outright monetization & dubious stimuli! In sum, maybe we go back to proving our forefathers (Who used gold as the prime currency for international trade) right....the messiah is leading us back to the golden ages!!

p.s : This is not to say that I am in favor of using the gold standard, but more on that later.