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You Ain’t Seen Nothing Yet

BIA Commentary and Opinion

Originally published on June 13, 2009 –

Last month at a Hollywood fund raising dinner, celebrities paid $34,000 per couple to listen to the President speak. While discussing his accomplishments, Mr. Obama boasted that he would stack up his first four months in office against any administration since FDR, and told Los Angeles that “You Ain’t Seen Nothing Yet.”

Unfortunately, from an economic and investment perspective he may be right.

It is almost hard to believe that just last September the Treasury Secretary from the previous administration told members of congress that we were days away from marshal law and riots in the street. Nine months later, the consensus seems to be that while it may be a bit soon to sing “Happy Days are here Again,” we have at least weathered the worst of the storm and have taken a turn for the better.

Others would say that we are merely sitting in the eye of the storm.

There have been so many extraordinary events and actions taken by the government in the last year that the magnitude and potential consequences of said events have been lost amidst all of the chaos. Here is a little of what may be in store for investors and those looking to preserve wealth.

The Tax Man Cometh

In Obama’s $163,000 Tax Bomb, Michael Boskin writes that the current administration’s fiscal plan will add $6.5 trillion to the national debt over the next ten years. To put that in perspective: it equals about $22,400 for every man, woman and child in the United States. If you are a family of four the bill comes to $89,600. However, as Mr. Boskin points out, only a little over 50% of the population pay the income tax.
That means the bill with interest for the tax paying family of four would be about $26,000 per year for ten years.

Please remember that this is before additional taxes that will surely come with cap & trade, government healthcare, and perhaps your cell phone.

Check Please

At the end of every night out for dinner comes that moment when the bill arrives. According to Bloomberg, the bill for the Financial Crisis bailout could potentially reach $12.8 trillion. “Potential” refers to the amount of money that has currently been spent or pledged in relation to the financial crisis. Of that $12.8 trillion, $4.1 trillion has already been spent. According to our math above that means a potential bill of around
$8.7 trillion has yet to come. That’s $120,000 for our family of four (or $240,000 for the families that are paying federal taxes).  These numbers are in addition to the taxes discussed above.

Will the entire $12.8 trillion be tapped? Hard to say for sure, but this is what can be said.

Unemployment has reached 9.4% , already higher than the current administration told us it would reach if we did not enact the stimulus plan. After watching Wall Street and the auto industry rake in federal bailout money, State and Municipalities are now rapidly making their way to the front of the line for their share ofthe pie.  Strangely absent from recent discussions, are the state of the nation’s pensions and the financial
status of the Pension Benefit Guarantee Corporation (PBGC).  The PBGC is like the FDIC for pension plans, and like the FDIC itself, is woefully underfunded.

Back in 2005 this was a hot topic. Now that markets have collapsed and companies are finding it harder and
harder to fund their plans, nary a word is said on the topic.

Paying this potential – dare we say likely – bill will require either more taxes (again) or……..

$15 For a Gallon of Gas?

As promised, to counteract the risks associated with a financial system meltdown, Federal Reserve Chairman Ben Bernanke has given us the equivalent of the helicopter drop of money from the sky. Base money supply has more than doubled in the last year, an unprecedented event. For now, that money has dropped only into the excess reserves of the banking system; but sooner or later, by hook or crook, that money will find its way into the everyday economy.

During this country’s last bout with significant inflation, the Dow Jones to gold price ratio bottomed at about one to one. That is, on January 21, 1980 the price of gold reached 850, while the Dow Jones closed that day at 872. If that same ratio were to occur tomorrow, gold would have to trade at $8,700 (today’s price of the dow) an ounce, or the Dow Jones Average would have to close at around 950 (today’s price of
an ounce of gold).

That’s either an 815% gain for gold or an 89% decline for the Dow Jones average. For sake of comparison: if the price of gas increased by only half of the price of gold in our example, we would be paying close to $15 for a gallon of gas.

This is admittedly, in many ways a flawed analysis, but the illustration does give some insight into the scope of the threat we are facing.

The Bottom Line

The financial and economic crisis we face today are the result of a massive monetary and credit expansion, made possible by the abandonment of the Gold Exchange Standard in 1971. These imbalances and mal-investments built up over a nearly 40 year period, and are not going to magically disappear in a matter of months.

Government’s reaction to the problem is likely to do nothing but worsen and prolong these imbalances.

The economy will likely deal with these excesses in the form of significant deflation, significant inflation, or a lot of both: significant stagflation.

The threat to investors and those trying to protect wealth has never been greater and unfortunately……You ain’t seen nothing yet.

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DISCLAIMER: Nothing in this article should  be construed as a personal recommendation or advice. Nor should anything in this article be construed as an offer, or a solicitation of an offer, to sell or buy any investment security.  Barnhart Investment Advisory clients and principals may hold positions in any securities mentioned in this article. Investors should conduct their own due diligence and seek the advice of a financial and/or investment  professional before making any investment decisions.

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