Inflation Crash Course by Dr. Martenson

History Lesson from Niall Ferguson

A couple of months ago, Niall Ferguson was asked to speak at the Ninth Annual Niarchos Lecture. Niall Ferguson is a famous historian from Harvard. He has written many books like the following: The Cash Nexus, War of the World, and The Ascent of Money: A Financial History of the World. When he speaks people listen; here are some of the points of interest from his speech (most bullet points taken directly word-for-word from Niall himself):

• There is a suddenness to things when they go wrong in finance
• Canada is one country that is NOT involved with the extraordinary debt increase that most of the rest of the world is experiencing
• Crises of either war or internal politics (sometimes both), drove investors to sell bonds and therefore to drive up the yields on the bonds
• Exploding deficits to pay for the war and surging public debts caused an increase in risk in the eyes of investors
• It is striking the way in which very suddenly confidence can be lost in a country
• Ken Rogoff made the point that 90% debt-to-GDP is the threshold after which public debt tends to be associated with problems of low growth or high inflation, usually both (currently we are at 89% debt-to-GDP)
  
• Italy is much less vulnerable than Greece in the respect that most Italian debt, like most Japanese debt, is held by natives; it's not actually held by foreigners
• In the months ahead, look for debt default synonyms like repudiation, standstill, moratorium, restructuring, rescheduling, etc...Don't be fooled by the language, it still equates to debt default
  
• US treasuries are a safe haven the way Pearl Harbor was a safe haven in 1941; safe but not for much longer
• Favorite cartoon: Chinese sub threatens the US Navy. The Chinese submarine captain is says, "Turn around or we sell all our T-bills!"
• When you're spending more on your debt than on your army or your navy, it's all over as a great power
• It's not a thousand years that separates imperial zenith from imperial oblivion. It's really a very, very short ride from the top to the bottom
  

Economic Indicators

Let's review some important economic indicators, think about some questions, and draw some conclusions. Starting with Real GDP:

Number 1:

Real GDP = C + I + G + (Ex - Im) (Inflation adjusted)
where C = consumer spending - Think consumers are spending?
I = private investment - Think money is being pumped into businesses?
G = government spending - Think the government has blown all the money yet?
Ex = exports - Think we produce much in this country anymore?
Im = imports - Think we buy more US made than Chinese made products?

1st quarter of 2010 Real GDP: 2.7%
4th quarter of 2009 Real GDP: 5.6%
(source: bea.gov)

The Real GDP shows the effects of government stimulus running out. The last time we saw a nearly 3% drop in Real GDP was from the 3rd to 4th quarter of 2008.

Number 2:

M2 - aggregate of money supply in circulation.

June 2010 M2: 8,611 (in billions)
(source: federalreserve.org)

Fed Reserve uses this to determine whether to raise or lower interest rates thereby contracting or expanding the money supply. The more you have of something the less it is worth. A good analogy for those sports card collectors out there is when you open a pack of baseball cards the cards that are most abundant are worth the least (a.k.a. the commons). This is the highest M2 has been in two years, which means that higher interest rates could be coming soon.

Number 3:

Consumer confidence survey - economic sentiment of 5,000 random people
Consumer confidence index - based upon the numbers from the survey

June 2010 Consumer Confidence Index: 52.9
May 2010 Consumer Confidence Index: 62.7
(source: conference-board.org)

The consumer confidence index is used loosely to determine what consumers think of the economy. A higher number means consumers are optimistic, and that they tend to spend more.

Number 4:

Housing starts - indicates housing construction activity on building new homes/buildings, and modifying existing homes/buildings

May 2010 Housing Starts: -10%
April 2010 Housing Starts: 3.9%
(source: census.gov)

Housing starts are a large part of our GDP (about 5%). This indicator is historically volatile, but over the course of six months solid trends can be formed.

Number 5:

S&P 500 index - 500 stocks from a broad selection of industries that gives us a good indication of our economy's overall health

July 16, 2010 S&P 500 Index - 1065 points (downtrend forming)
Mar 6, 2009 S&P 500 Index - 683 points
(source: finance.google.com)

One of the best indicators of the overall economy's current health. The index is off 200 points in about 3 months. All the news about the economy's performance in all sectors and industries is factored into the price.

What are Your Conclusions?:

• What do you make of these indicators?
  
• Where do you see the economy going in the second half of 2010, if there is government stimulus, and if there is not government stimulus? (Two very different outcomes!)
• How can be bring the manufacturing base back to this country?