Today, the U.S. dollar is a true fiat currency (meaning it has been decreed a currency the central government).  It has no backing other than the full faith and credit of U.S. politicians.  Scary!  President Nixon ended the last gold backing of the dollar on August 15, l971.

Now, politicians can expand the total debt of the U.S. to pay for any program or programs they wish without having to worry about draining the gold supply from Fort Knox.  If worse comes to worse (it will), they can always print the dollars to pay for their programs.

How long can this game continue.  Simple—it can continue until confidence in the government’s ability to manage its financial affairs is lost.  Then, the game is over.

I can’t predict when, but eventually the U.S. will have to return to some type of commodity backing of its currency.  The result of this will be deflationary.

Your Dollar is Worthless! is a post from: Business Speaker

Those in power (namely politicians) will say that this time it is different. No it isn’t! Looking back at eight centuries of financial idiocy, the key marker that signals when the game is over happens when the ratio of government debt to GDP reaches 90%. Beyond that point financial instability and a loss of confidence by investors start to take over.

In addition, there will be a dramatic slowing of economic growth by at least one percentage point per year compounded. The ratio for the U.S. in now 92% and still exploding. Once this ratio reaches 100% of GDP (very soon), the United States will, most likely, lose its AAA credit rating. We will become another Greece with all the ramifications. The loss of our AAA credit rating will substantially raise interest rates throughout the economy. The biggest impact will fall on real estate prices—and you thought real estate prices have bottomed out.

If nothing is done to rein-in this excessive and wasteful debt explosion, the next recession will be long and deep. The only glue that holds the U.S. economic machine together is confidence. Take that away and watch out below.

My advice that I have for you is the saying on the bottom of my business card–”Liquidity Is King–Not Elvis.”

Be Solvent & Free,
Sanford Kahn

The Game is OVER! is a post from: Business Speaker

The myth is partially true.  You must ask yourself the question of what is changing rapidly—is it trends or events?  

As Aesop illustrated in one his old and respected fables, every truth has two sides.   What you see on television, hear on the radio, and read in the papers are events, and these change quickly.  Events have always changed quickly no matter what time period you examine.  You might say by definition events change quickly.  On the other hand, economic trends change slowly but take on a life of their own.  They move to an extreme and then reverse themselves.  No trend lasts forever, but they can last for sometime.

An example of this is the very low saving rate of Americans.  This has not always been the case.  In the mid 1980’s, Americans save about 8% of their disposable income.  As the great bull market in stocks roared on into the 1990’s and the housing boom of 1999 to 2007, the saving rate declined precipitously.  This trend has now reversed to where Americans are now starting to save again.  This will have an important impact on economic trends. 

The dominant economic trend now and well into the next decade will be a deflating price structure.  There are a few reasons for this.  One is the increase in competition due to the rapid spread of technology.  This state-of-the-art productive technology allows the small entrepreneur to compete successfully with the large mega corporations.  This more productive technology has also spread worldwide.  Companies abroad, large or small, can now employ this latest technology to compete on the worldwide market for goods and services.  When competition increases prices must come down. 

Secondly, is the increasing saving rate for American households.  Think about it; there are only two things you can do with a dollar.  You can either spend it or save it.  As you start to save more in the margin, you spend less in percentage terms.  Meanwhile the worldwide production of goods and services is still increasing.  So what happens to prices or the pressure on prices when production is still increasing and people are starting to save more?  The pressure is on the downside. 

There is another important force in play that will also put downward pressure on prices and hence the revenue or sales of businesses.  The populations in the major western industrialized countries are aging.  This is especially true in Europe and Japan, but also in the United States.  Where do advertisers in print, on TV, and on the radio direct their advertising?  It is primarily to the population age group between 18 to 40 years olds.  As the population ages, they will tend to spend more on health care and vitamins, but less on other goods and services.  Again, this puts more downward pressure on prices and business profit margins. 

As a businessperson or entrepreneur, coping in this type of environment will require that you devote more of your energies and capital in building market share even at the price of a little lower return-on-investment.  On an individual or personal level, you should be focusing your attention on investments that are both liquid and safe.  The important question to ask yourself is how easily is it to exit this investment if I wish to?  Avoid investments that are both illiquid and difficult to exit. 

The old saying that cash is king is not completely true in this environment.  The correct say is that LIQUIDITY IS KING.

Is it TRUE-We live and work in an economy that is changing very rapidly? is a post from: Business Speaker

1. By paying it back

2. For governments–inflating it away

3. For both governments and individuals–outright default.

For the U.S. Government, its debt is increasing far faster than the rate of growth of the economy.   When the level of this debt gets close to or exceeds the level of GDP (gross domestic product), the temptation will be strong for the government (politicians) to inflate it away.  This can happen as early as 2012-13.

Using the monetary printing press to inflate this debt away will be ruinous for the American middle class.  Standards of living will decline.  

This is one reason why gold is increasing in value.    In over 5,000 years of human history gold has served as a substitute for money.

Debt-No Free Lunches is a post from: Business Speaker

When the economy starts to recover from a stiff downturn, people are understandably doubtful about the tenacity of the young expansion.  They hold back on their discretionary spending and their use of debt.  As the upswing continues to gather force, people tend to become less risk averse.  You might say that the greed factor becomes more prevalent.  

As the upturn ages, people become more confident and think that the expansion will last indefinitely.  (This has a similar ring to peoples’ recent attitudes towards real estate)    Business people take on more debt to leverage their profit margins.  The consumer will also be increasing their debt burdens to finance their growing consumption habit.  This increase confidence of consumers is also reflected in their disregard of saving.   Soon a point of no return is reached where the cost of servicing the debt is growing faster than consumers’ income.  This scenario also holds true for over-indebted businesses.   

Now the expansion starts to stall because businesses and consumers can not sustain this level of credit expansion.  A period of credit liquidation ensues and a new downturn begins.  The severity of the downturn depends on several factors.  These include the oversupply of goods and services, the level of debt buildup, and government economic policies (namely tax and trade policies).

The business cycle will always be with us.  You might say it is the result of the genetic make-up of mortals.  No government policy or regulation can abolish it. 

For argument purposes, let’s say it is possible to eliminate the business cycle.  Then the question is— what is the price to be paid.  What price you ask!  Yes, there is always a price because the cardinal law of economics is— there is no such thing as a free lunch. 

The price paid is lost opportunities and slower long-term economic growth.  Downturns, recessions as they are called, have a beneficial purpose.  Their purpose is to provide renewed liquidity to the business system.  Think of it as the catharsis of the economic system.  Recessions cleanse the system of marginal companies and transfer their resources to stronger more productive enterprises.  They also force consumers to start saving more to pay-off some of their massive debts they have accumulated during the expansion.   This sets the stage for the next upward expansion.   Without recessions there would be stagnation. 

Recessions can be painful for most, but a time of great opportunity for some.   Downturns provide the opportunities for those clever individuals, who have the wherewithal (the liquidity), to purchase assets on the cheap.  These assets are then transferred into more productive hands, and the economy benefits. 

No matter how many rules or laws politicians put in place, the business cycle is here to stay.  Your goal is to take advantage of swings in the cycle to gain market share.  

Profiting From the Business Cycle is a post from: Business Speaker

We all try to divine the direction of the economy whether for business or personal gain.

Friedman’s Law, named after the late Nobel economist Milton Friedman, can give us a reliable tool for gauging the economy’s direction.  It states that when the size of government is growing faster than growth in the economy, the national economy at best will stagnate and at worst will decline.   Why?  Government spending extracts real resources from the productive private use and puts them to unproductive public use.

With the latest stimulus package that Congress passed, government spending will be growing at strong double digit rates.   Meanwhile, the economy is heading south.

Don’t expect any miracles.  The business economy, at best, will just limp along.  The real danger coming up is substantial tax increases.

Where Goes the Economy—Friedman’s Law is a post from: Business Speaker