Sunday, November 11, 2012

In Uncharted Waters

As I have mentioned before, the United States is in an economic environment we have never witnessed before in the history of our country.  While I have discussed the major economic imbalances in my blog that have developed over a long period of time (such as trade, budget, and currency issues), the necessary economic adjustments remain elusive and obscure.

In my opinion, the world's central banks have printed trillions of dollars of currency and tripled their balance sheets to support the debt currently outstanding around the world.  As the assets that back the record amount of debt continue to deteriorate or are written off in some cases, the debt imbalances will need to be worked out with more consumer, government, and corporate defaults.  With the removal of debt stimulus polices, the potential toxic combination of defaults and budget cuts that have been offsetting the deflationary drain of debt servicing on economic growth now look to be a long-term issue.  The health of the world financial system is at risk.

The developing issue is now governments cannot continue to borrow from bond investors and now subject to the same debt servicing problems as citizens and are subject to further austerity.  Leaders in the United States want to deal with the “fiscal cliff” by announcing budget cuts and tax increases. The combination will detract from any chance of economic growth for the United States near-term. Corporations around the world continue to hoard cash in advance of the potential falloff in economy activity and as a result unemployment remains at crisis levels.  

 The major question of how the excessive imbalances will work out remains. What should we do to protect our own financial future?  One possible answer is I think we need to treat this economic environment as an explorer did many years ago.

As we learned from history books, explorers set out to prove the majority view wrong that the world was round and not flat.  They had vision and wanted to find new lands with potential riches for the Kings and Queens that supplied the necessary financing for voyages.  The explorers “sailed off into uncharted waters” and were very brave and did not want to tell the leaders they failed.  They relied on ships that were supplied with a significant amount of men, food, and the best materials to try to account for any problem along the way.  Still, many died on the voyage to find new lands and riches. While they tried to be prepared for any event, many still lost their lives on the journey.  Those who survived came back heroes and brought back new riches.

Yes, I believe we are in uncharted waters and plan accordingly.