Are We ?Back from the Fiscal Abyss? as Dallas Fed Claims?
Are We ‘Back from the Fiscal Abyss’ as Dallas Fed Claims?
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Home Page > News and Society> Economics> Are We ‘Back from the Fiscal Abyss’ as Dallas Fed Claims?
Are We ‘Back from the Fiscal Abyss’ as Dallas Fed Claims?
Posted: May 21, 2009 |Comments: 0 |
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Richard W. Fisher, president and CEO of the Federal Reserve Bank of Dallas, was once one of the most expressive economist imaginable often usinggraphic and sensationalist words and expressions to get our attention whendescribing the ‘nightmarish predicament’ and‘monstrous challenge’ that has finallyengulfed us. It was only a year ago that he warned that a ‘frightfulstorm is brewing’ – ‘the mother of all financialstorms’ – that could well plunge the U.S. government deeper into a‘fiscal abyss’ causing the country to become submerged in a‘vast fiscal chasm’. Fisher has not always been so dramatic inspite of saying recently ‘I am a Texan and Texans speak plainly and directly’and he is not being very direct these days either.
Fisher once was distracted from the truth but today it would seem that he isbeing compelled to ignore his very own words of warning referring to‘the mess that has soiled the face of our financial system’ asbeing nothing more than a ‘process of creative destruction’that will eventually lead to new levels of prosperity. It would seem thatFisher has gone from being the insightful, plain speaking economist from Texasthat he claims to be to that of a politically correct (muzzled) member of theFederal Reserve embracing the party line as outlined by the ObamaAdministration. Could it be that dissent is being stifled at the highestlevels? Below is a review of his apparent transformation. You be the judge.
From 2005 until mid-2008 Fisher was totally preoccupied with the threat ofrising inflation. The most descriptive he could be about what was developing onthe horizon was a February 2006 comment that the global economy could sink intoa ‘deep funk’ should the countries with excess savings andtrade surpluses fail to create conditions for growing their domestic demandthereby helping alleviate the record U.S. current account deficit of the time.His position was totally defensive blaming the rest of the world for the fiscalproblems at home rather than acknowledging that the real problem was with anAmerican financial system drowning in excessive unsustainable debt.
Interest Rates and Inflation will Increase Over Time
That was then but over time the tenure of Fisher’s words began to change. ByMay 2008 he began to finally realize that the fiscal problems of the U.S. wereindeed home grown. In an address to the Commonwealth Club of California thatmonth he warned that ‘a frightful storm is brewing inthe form of untethered government debt that will beunimaginably more devastating to America’s economic prosperity than thesubprime debacle and the recent debauching of credit markets’ unless Congresswere to take steps to resolve the fiscal imbalances. He went on to say‘such structural deficits will raise long-term interest ratesand, should they careen out of control, create political pressure on centralbankers to adopt looser monetary policy down the road.’ Unfortunately, Fisher was of the opinion that Congress would not face up to itsresponsibilities to resolves these liabilities finding it easier to ignore themthat to take the required action and that such inaction would produce‘the mother of all financial storms.’ That was May, 2008 andthis is May 2009. Has anything changed to make this less true today?
Fisher suggested that if this were to happen inflation would increasedramatically and that ‘inflation is a sinister beast that, if uncaged, devourssavings, erodes consumers’ purchasing power, decimates returns on capital,undermines the reliability of financial accounting, distracts the attention ofcorporate management, undercuts employment growth and real wages, and debasesthe currency.’ We are not there, at least not yet, but it certainly isnot something to look forward to.
You are to Blame
Fisher concluded his May, 2008 address by saying these memorable, albeitignored, words: ‘Will we take the painful fiscal steps necessary to prevent thestorm by reducing and eventually eliminating our fiscal imbalances? Thatdepends on you. I mean “you” literally. This situation is of your owncreation. When you berate your representatives or senators or presidents forthe mess we are in, you are really berating yourself. You electthem.’
The above would be considered very harsh words coming from anyone andparticularly from a sitting member of the Federal Reserve – and they were saidbefore the current administration and the Fed embarked on compounding thesituation by multiplying the debt load several times over. There seems to be nodoubt that high inflation followed by high interest rates is definitely in ourfuture.
Credit Markets Contracted a Hideous STD
Not surprisingly, Fisher was adamantly opposed to the drastic escalating ofdebt, initiated by the outgoing Bush administration (and compounded, in spades,by the current Obama Administration). He warned in a September 2008 speech tothe New York University Money Marketeers Club that such action would put ‘onemore straw on the back of the frightfully encumbered camel that is the federalgovernment ledger plunging the U.S. government deeper into a fiscalabyss causing us to become submerged in a vast fiscalchasm’.
Fisher went on to say in the most colorful words imaginable that ‘theseizures and convulsions we have experienced in the debt and equity marketshave been the consequences of a sustained orgy of excess and recklessbehavior. Our credit markets had contracted a hideous STD — asecuritization transmitted disease — yet I was and I remain skepticalthat lowering the fed funds rate is the most effective antidote for such apathology … Indeed, if this is a DNA issue, perhaps no financial system — nomatter how enlightened it’s central bank or sophisticated it’s regulatoryarchitecture or wise it’s Congress or executive — can prevent nature fromrunning its course.’
It would seem from the above that Fisher does not think the recent action bythe Obama Administration and his very own Federal Reserve is the answer to theproblems we are faced with and may indeed exacerbate the situation. Thatcertainly flies in the face of what Federal Reserve Chairman Bernanke,Secretary of the Treasury Geithner and President Obama are saying. Who isright? Only time will tell.
We now have a Godzilla Economy
The above comments were extremely ominous and contrary and, no doubt, notvery well received by Fisher’s peers and, as such, he adopted a more moderateand optimistic tone in a speech at Harvard’s John F. Kennedy School ofGovernment in late February 2009 saying ‘we find ourselves in these days iswhat might be called the Godzilla Economy (in the classic 1954 film, Godzilladestroyed Tokyo, which then represented roughly a third of Japan’s industrialproduction) and it presents a monstrous challenge.Irrational exuberance has been replaced by irrationalfear — when what was a sure thing yields to uncertainty.
Rube Goldberg Engineering is Required
‘These are complex, trying times’ he continued, saying ‘Our economy faces atough road. We are the nation’s central bank and we are duty bound to applyevery tool we can to clean up the mess that has soiled the face of ourfinancial system and get back on the track of sustainable economicgrowth with price stability … even if we have to deploy a little Rube Goldbergengineering to get the task done … We are navigating uncharted,financially treacherous waters. Our fiscal authorities must carefullyplot a course between the immediate needs for stimulus and the future needs ofour children and grandchildren … It may seem like the stuff of the wildestdreams to imagine our getting ourselves out from our currentnightmarish predicament. But I believe we can and we will’.
The Federal Reserve Failed
Following up on his speech of the previous month in which Fisher said “tothe unsuspecting world, all was well” he finally acknowledged this past March26th in remarks before the Annual Redefining Investment Strategy EducationForum that ‘most of the financial community, including those of us atthe Federal Reserve, failed to either detect or act upon the tell-talesigns of financial system excess’. He went on to say that theaggressive rescue efforts being deployed or in the development stage shouldsoon stem the decline in growth but, that being said, a turnaround would nothappen overnight concluding that ‘We have miles to go before wesleep.’
New Levels of Prosperity Seen – Eventually
As time has passed, however, Fisher has become more of a cheerleader than acritic as almost identical speeches this past April in Japan and Chinarevealed: ‘In contemplating the future of the American economy and our abilityto overcome our current financial predicament, I take great comfort in knowingthat we have faced far tougher tasks and have always accomplished them. It istrue that we Americans often confront storms of our making. Weoccasionally falter and get blown off course but we never give up and alwayscome roaring back stronger, leaner and more efficient than we werebefore. For 233 years, the people of the United States havedemonstrated that they are masters of the process of creative destruction … Asan American, I may be insufficiently humble, but I consider our track recordand our adaptability the stuff of an eventual recovery that will take mycountry to new levels of prosperity.’
Back from the Abyss
Just last week (May 15th) in remarks before the annual convention of theTexas Bankers Association Fisher patted he and his colleagues at the FederalReserve on their collective backs saying that he believed the FederalReserve has prevented America from falling into the chasm ofan economic depression and that their actions ‘succeeded inpulling the financial markets and the economy from the edge of theabyss … If fiscal policy has been properly designed … it should propelthe economy further away from the edge and put us on its way to a new cycle ofeconomic growth … I think we have gotten it right… So much for the Gospelaccording to the Dallas Fed!’ There is nothing wrong with being optimistic inones’ outlook and comments but to me he no longer has the ring of the ‘I am aTexan and Texans speak plainly and directly’ champion of the truth. It begs thequestion: Is he being muzzled?
Where Should we Invest?
I have been reviewing the advice offered by the eminent economists andanalysts as outlined in my 4-part series of articles entitled “Warning!Fiscal Hurricane Approaching! Is Your Portfolio Secure?” and actingaccordingly. I’ve put a sizable portion of my assets in a mix of gold bullion,silver coins, gold and silver mining company stocks and some of their long-termwarrants (a twenty dollar subscription to Precious Metals Warrants will provideyou with specific information and you can also sign up for a free weekly email;another sizable portion in some financially secure, blue chip, beaten downstocks with consistent earnings growth and above average dividend yields andgrowth; the balance (6-months worth of living expenses) in short-termgovernment securities and cash. Everyone has a different sized portfolio,different risk tolerances, different investment knowledge, different financialneeds, different cash flows, and different ages so no one asset allocationapproach applies to every investor. Reflect on your own personal financialsituation, do your research and act accordingly.
Lorimer Wilson is Director of Marketing and ContributingEditor of www.PreciousMetalsWarrants.comand www.InsidersInsights.com.PreciousMetalsWarrants provides an online subscription database for allwarrants trading on junior mining and natural resource companies in the UnitedStates and Canada and a free weekly newsletter. InsidersInsights alertssubscribers when corporate insiders of a limited number of junior mining andnatural resource companies are buying and selling. Lorimer can be contacted atlorimer.wilson@live.com.
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Lorimer Wilson - About theAuthor:
Lorimer Wilson is Director of Marketing and Contributing Editor ofwww.PreciousMetalsWarrants.com and www.InsidersInsights.com.PreciousMetalsWarrants provides an online subscription database for allwarrants trading on junior mining and natural resource companies in the UnitedStates and Canada and a free weekly newsletter The Warrant Report.InsidersInsights alerts subscribers when corporate insiders of a limited numberof junior mining and natural resource companies are buying and selling. Lorimercan be contacted at lorimer.wilson@live.com.
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Lorimer Wilson is Director of Marketing and Contributing Editor ofwww.PreciousMetalsWarrants.com and www.InsidersInsights.com.PreciousMetalsWarrants provides an online subscription database for allwarrants trading on junior mining and natural resource companies in the UnitedStates and Canada and a free weekly newsletter The Warrant Report.InsidersInsights alerts subscribers when corporate insiders of a limited numberof junior mining and natural resource companies are buying and selling. Lorimercan be contacted at lorimer.wilson@live.com.