They Are Printing Too Much Money

They Are Printing Too Much Money

Inflation, Shortages and Starvation

Inflation, Shortages and Starvation

The Biggest Financial Deceptions of the Decade

Enron? Bear Stearns? Bernie Madoff? They’re all big stories about big losses and have hurt a lot of employees and investors. But none come close to getting my vote for the decade’s most dastardly deception…

First came Enron, with $65.5 billion in assets, going belly-up and becoming the largest bankruptcy in U.S. history at that time. Chairman Kenneth Lay said that Enron’s decision to file bankruptcy would “stabilize the company,” but over the next five years the company was completely liquidated. The stock went from a high of $84.63 in December 2000 to a whopping 26¢ one year later.

And what had we been told by the media? Fortune magazine dubbed Enron “America’s Most Innovative Company” for six consecutive years. A well-intentioned friend wanted to give me a gift subscription to the magazine for Christmas; I choked on my cocktail and luckily he assumed my drink was too strong. In the end, you can thank Enron for bringing us the Sarbanes-Oxley Act of 2002, a ghastly financial reporting regulation for which compliance is grossly expensive, and — stop the presses! — hasn’t prevented similar repeats.

Next came WorldCom filing for bankruptcy in 2002, their assets of $103.9 billion dwarfing Enron’s. “We will use this time under reorganization to regain our financial health and focus, while operating with the highest integrity,” assured CEO John Sidgmore. Was his eggnog spiked? Today, WorldCom stock certificates have been spotted as doilies under pancake house coffee mugs signifying it’s decaf.

Tyco, Adelphia, Peregrine Systems… it’s a crowded field around this time. But their stories of fraud and greed and mismanagement get boring after awhile.

Bear Stearns set us all up for the Big Meltdown of 2008. It was B.S. (no, I mean Bear Stearns) that pioneered the asset-backed securities markets, and we all know how that turned out. Later we learned that as losses mounted in 2006 and 2007, the company was actually adding to its exposure of mortgage-backed assets, gearing itself up to 35:1. With net equity of $11.1 billion supporting $395 billion in assets, B.S. carried more leverage than a streetwalker’s push-up bra.

And during it all, Bear Stearns was recognized as the “Most Admired” securities firm in a survey by Fortune magazine (there’s that Lower Manhattan tabloid darling again). Frequent sightings of company executives on country club fairways assured the public that all was well. And CEO Alan Schwartz told us there was “no liquidity crisis for the firm” and insisted he “had the numbers to back it up.” His company was sold four days later to JPMorgan Chase at $10 per share, a 92% loss from its $133.20 high. Perhaps his numbers were prepared by ex-Arthur Andersen employees.

Lehman Brothers, the 158-year-old investment bank, was next and still today holds the title as the largest bankruptcy in U.S. history. L.B. succumbed to 2007’s Word of the Year, “subprime,” and its $600 billion in assets all went poof! In just the first half of 2008, before the meltdown, Lehman’s stock slid 73%.

And what did CEO Dick Fuld tell us in April of that year? “I will hurt the shorts, and that is my goal.” He must have been referring to the attire of his tennis club buddies, because the ones who actually got hurt were numerous other banks, money market funds, institutions, hedge funds, REITs, brokers, private and public trusts, foundations, government agencies, foreign governments, employees, and investors.

Moving on to the largest U.S. government bailout recipient by far, AIG’s troubles spawned my favorite placard of the decade: seen outside their Manhattan offices stood a sign that simply read, “Jump!” Maybe its creator heard what I did from AIG’s financial products head Joseph Cassano: “It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of these [credit default swap] transactions.”

He must have substituted his prescription eyewear with those giant New Year’s Eve glasses, because the government sunk $180 billion into the company and it still had to be split up and the assets sold to the highest bidder. I’m sure that his non-flippant comment had nothing to do with him making CNN’s “Ten Most Wanted Culprits” list in 2008.

GM, with $91 billion in assets, filed for bankruptcy in the summer of 2009 and is now largely owned by the U.S. and Canadian governments (i.e., taxpayers). The $19.4 billion in federal help wasn’t enough to keep the nation’s largest automaker out of bankruptcy. But don’t despair: the government is pouring another $30 billion into GM to fund “reorganization operations.”

GM shares? Bye-bye. For 83 years GM had been a member of the prestigious 30 Dow Industrial stocks. It managed to survive the Great Depression but not this decade’s Greater Depression. Yet chairman Ed Whitacre had insisted, “I remain more convinced than ever that our company is on the right path and that we will continue to be a leader in offering the worldwide buying public the highest quality, highest value cars and trucks.” I wonder what he thinks now that the stock is named “Motors Liquidation,” trades only on the pink sheets, and sells for about 50¢?

Topping off our list is the infamous Bernie Made-off (er, Madoff), who scammed $65 billion over 20 years from unsuspecting institutions and wealthy investors. But don’t be too upset, because the number is probably half that amount. Hey, the alleged size of the losses comes from his own ledger book, and should we really trust his balance sheet? Dubbed the largest Ponzi scheme ever, I beg to disagree, as you’re about to see…

By now you are probably wondering… what’s bigger than all these? He’s covered the major frauds and scams of the past decade — what could possibly be left?

To quote my favorite sleuth, Hercule Poirot, “When all the facts are laid before me, the solution becomes inevitable.”

Here are a few clues…

Federal Reserve Chairman Ben Bernanke said on July 16, 2008, that Fannie Mae and Freddie Mac are “adequately capitalized” and “in no danger of failing.” Then-Secretary Treasurer Henry Paulson declared on August 10, 2008, “We have no plans to insert money into either of those two institutions.”

■Both Fannie and Freddie were nationalized 28 days later, on September 8, 2008. Ben Bernanke claimed on February 28, 2008, “Among the largest banks, the capital ratios remain good and I don’t expect any serious problems of that sort among the large, internationally active banks…” Henry Paulson added on July 20, 2008, that “It’s a safe banking system, a sound banking system. Our regulators are on top of it. This is a very manageable situation.”
■Since the recession started in December, 2008, 144 banks have failed. Paulson informed us on April 20, 2007, that “All the signs I look at show the housing market is at or near the bottom.”
■The number of foreclosures skyrocketed shortly thereafter and will now any day surpass those during the Great Depression. Ben Bernanke announced on June 20, 2007, that “[The subprime fallout] will not affect the economy overall.”
■Less than one year later, the stock market crashed, losing 53% of its value, and is still down 25% despite one of the biggest bounces in history.
Those in charge of our country’s finances not only failed to see the crises developing and then bungled the handling of the recovery, they’ve deliberately misled us about what they’re doing to our currency. In spite of emphatic promises, flowery speeches, pat-on-the-back assurances, and continual reassurances, here’s what they’ve actually done to the dollar:

■Since September 1, 2008, the monetary base has ballooned from $908 billion to $2.0 trillion. The current monetary base is now equal to bailing out General Motors 23 times.
■Bailout funds in 2008 and 2009 total $8.1 trillion. That’s almost 78 WorldComs. It’s over 123 Enrons.
■U.S. debt has risen sharply, from $6.2 trillion in 2002 to $12.1 trillion today. That’s over $39,000 per citizen.
■David Walker, the comptroller general of the Government Accountability Office from 1998-2008, warned that the U.S. is on the hook for $60 trillion in unfunded liabilities. Independent analysts peg the figure at near twice that. Whatever the number, it is incomprehensibly large. The only way we will meet these liabilities is to print the money and inflate them away.
We’re bailing out corporations that should fail, making financial promises we can’t keep, and adding layers of debt we can’t possibly repay. And the real killer is, if we don’t have the cash, we just print it. It is, by any reasonable account, the “blunder that will plunder” the next several generations. It is changing America permanently, and the problems will persist long after you and I are laid to rest. Bottom line: after all the bailout programs, housing initiatives, rescue efforts, stimulus schemes, bank takeovers, wars, unemployment benefit extensions, and numerous other promises, the biggest financial deception of the decade is what the U.S. government is doing to the dollar. Nothing else even comes close.

This reckless activity has spooked our foreign creditors, weakened our global standing, diluted our currency, is punishing savers and retirees, and ultimately sets us up for a level of inflation this country has never seen before.

Yet, what is the guardian of our economy and money telling us now?

“Will the Federal Reserve’s actions to combat the crisis lead to higher inflation down the road? The answer is no; the Federal Reserve is committed to keeping inflation low and will be able to do so. In the near term, elevated unemployment and stable inflation expectations should keep inflation subdued, and indeed, inflation could move lower from here.” (Ben Bernanke, December 7, 2009).

This is pure rubbish. If inflation could be controlled by just thinking stable inflation thoughts, then Ben should be able to grow a full head of hair by just thinking scalp follicle thoughts. This is so ridiculous, it’s insulting.

Government actions make a mockery of their words; what they say and what they do are diametrically opposed. It’s clear that inflation is not a question of if, but when.

Any level-headed individual has to conclude that there will be a steady — and likely accelerating — decline in the dollar’s purchasing power. It’s inevitable.

The great masses don’t quite understand it yet, but they will. There will be no escape from the cold, hard slap in the face citizens will receive when a high level of inflation arrives. And when it does, it will make a mockery of any opposing viewpoint.

So the question before you is simple: Will you be a prepared survivor for what lies ahead, despite what our government leaders tell us, or will you be a complacent victim of the biggest financial deception of the decade?

For me, there’s only one solution. Don’t kid yourself into thinking a man-made asset will protect your purchasing power. This is the time to be overweight gold and silver.

Why GOLD really is money

Doug Casey of Casey Research, author of the best sellers Strategic Investing, Crisis Investing and Crisis Investing for the Rest of the 90’s, has lived in seven countries and visited over 100 more. He has appeared on scores of major radio and TV shows and remains an active speculator in the stock, bond, commodity, and real estate markets around the world.


L: Doug, we’ve talked about cars, cows, and cash, but the investment world thinks of you as a gold bug, so let’s give that a go; why gold?

Doug: Sure. First of all, it’s because gold is actually money. It’s an unfortunate historical anomaly that people think about the paper in their wallets as money. The dollar is, technically, a currency. A currency is a government substitute for money. Gold is money.

Now, why do I say that?

Historically, many things have been used as money. Cattle have been used as money in many societies, including Roman society. That’s where we get the word “pecuniary” from: the Latin word for a single head of cattle is pecus. Salt has been used as money, also including in ancient Rome, and that’s where the word “salary” comes from; the Latin for salt was sal (or salis). The North American Indians used seashells. Cigarettes were used during WWII. So, money is simply a medium of exchange and a store of value.

By that definition, almost anything could be used as money, but obviously, some things work better than others; it’s hard to exchange things people don’t want, and some things don’t store value well. Over thousands of years, the precious metals have emerged as the best form of money. Gold and silver both, though primarily gold.

There are very good reasons for this, and they are not new reasons. Aristotle defined five reasons why gold is money in the fourth century BC (which may only have been the first time it was put down on paper). Those five reasons are as valid today as they were then. A good form of money must be: durable, divisible, consistent, convenient, and have value in and of itself.

L: Can you elaborate on that?

Doug: Yes, and from them, we can draw inferences that will help us anticipate the fate of the dollar.

First, let’s take durable. That’s pretty obvious – you can’t have your money disintegrating in your pockets or bank vaults. That’s why we don’t use wheat for money; it can rot, be eaten by insects, and so on. It doesn’t last.

Divisible. Again, obvious. It’s why we don’t use diamonds for money, nor artwork. You can’t split them into pieces without destroying the value of the whole.

L: If I paid for a new Ford GT with the Mona Lisa, what would be my change – a small canvas by Picasso?

Doug: [Laughing.] That’s right. Maybe you’d get millions of those paintings of Elvis or Jesus on velvet.
Consistent. The lack of consistency is why we don’t use real estate as money. One piece is always different from another piece.

Convenient. That’s why we don’t use, for instance, other metals like lead, or even copper. The coins would have to be too huge to handle easily to be of sufficient value.

Value of itself. The lack here is why you shouldn’t use paper as money.

Actually, there’s a sixth reason Aristotle should have mentioned, but it wasn’t relevant in his age, because nobody would have thought of it…

L: It can’t be created out of thin air.

Doug: Right. Not even the kings and emperors who clipped and diluted coins would have dared imagine that they could get away with trying to use something essentially worthless as money.

L: I think we can forgive Aristotle for the oversight.

Doug: I think so. At any rate, these are the reasons why gold is the best money. It’s not a gold bug religion, nor a barbaric superstition. It’s simply common sense. Gold is particularly good for use as money, just as aluminum is particularly good for making aircraft, steel is good for the structures of buildings, uranium is good for fueling nuclear power plants, and paper is good for making books. Not money. If you try to make airplanes out of lead, or money out of paper, you’re in for a crash.

That gold is money is simply the result of the market process, seeking optimum means of storing value and making exchanges.

But it’s not something that suits governments, because paper money is an excellent means for governments to tax people indirectly, surreptitiously, through inflation. That’s one reason central bankers love paper money, but also, phony economic theories, like those of John Maynard Keynes, hold that the government not only can but should meddle with the economy, and the ability to print paper money gives them a means to do that.

In today’s world, not only do people around the world take it for granted that paper is money, but that it should be so.
But it’s all nonsense. It’s one reason for taking a gloomy view of humanity – people will believe almost any kind of claptrap, if the story is retailed by those in authority.

After the current system collapses, as every paper money system in the past has collapsed, some form of money will have to replace it, and it’s almost certainly going to be gold.

L: There are already experiments with digital gold currencies. E-gold got taken out behind the woodshed by the feds, but GoldMoney.com seems to be doing well. Do you believe those could see widespread adoption, as paper currencies lose their credibility?

Doug: Sure. You know, in the 19th century, the “paper money” you carried in your wallet was called bank notes. Why? Because they actually were notes from your bank representing a specified amount of real money on deposit. People carried these things because they were much more convenient for large amounts of money than chests of gold. Dollars today say “Federal Reserve Note,” not “XYZ Bank Note” on the back, because they aren’t redeemable for anything besides more Federal Reserve notes. That’s why today’s paper money substitutes are called fiat currencies; they have zero intrinsic value and are not redeemable for anything, but are accepted because the government will put you in jail if you don’t. It’s a fiat accomplished by force, not real value recognized by those who accept the notes.

Things like GoldMoney.com are simply modernized, updated versions of bank notes. They are basically transferrable warehouse receipts that represent amounts of gold you have on deposit someplace. I do recommend GoldMoney.com, incidentally, because it allows you to hold your gold in digital form, outside the U.S. And to my understanding, these accounts are not reportable under current U.S. rules. It’s an excellent alternative to storing large amounts of gold in a safe deposit box.

L: But will people believe in them? Will the public accept them so they can be used in everyday transactions, as paper money is used now? Hundreds of years ago, people accepted bank notes because they knew the reputations of the banks issuing them (when you traveled, you went to a reputable local bank, which knew the reputation of the bank that issued your notes, and the local bank could issue you new notes in local currency, etc.). There was no central authority to certify these notes. But today, people don’t think that way. They think it takes a government to assure the value of money.

Doug: You’re quite correct on that – a sea change in thinking will have to take place. Of course, anyone in Zimbabwe can tell you a government’s guarantee is not necessarily worth anything. A collapse of the dollar – the worlds’ de facto reserve currency – could spark such a change in that way of thinking. With GoldMoney.com or the Perth Mint – another worthy alternative – it’s a question of predicting the solvency of an actual company, and we have tools for that. I believe this is exactly what is going to happen in the future. As far as I’m concerned, either of these outfits is more reliable than, say, Citibank. And gold is far more desirable than the dollar. So I’d rather have a thousand ounces of gold stored with GoldMoney.com than a million dollars deposited at Citibank.

The dollar will be phased out of the world economy, because everyone can see that it’s a hot potato. This Chinese have two trillion of them. They want to get rid of them because they aren’t stupid, and they can see what the ultimate fate of the dollar is. This is true of every country around the world at this point; their central banks know they are sitting on hot potatoes, and they are going to want to unload them.

What’s going to happen is that one or more countries are going to institute a sound, stable, gold-backed currency. Ten years ago, Mahathir Mohamad of Malaysia tried to get Islamic countries to return to hard money, adopting the gold dinar and the silver dirham, which are defined in the Koran as specific weights of gold and silver. It didn’t work because of mistrust between the players; the governments of Muslim countries are, as a group, almost universally corrupt. But I think it’s entirely possible, nonetheless, that something like that might arise in the Islamic world. After all, they believe that the Koran is the actual word of Allah, and there is a resurgence of Islamic fundamentalism everywhere.

According to press reports, the Chinese government is actually encouraging Chinese people to accumulate gold at this point. They might go for a gold-backed yuan – it would put them on the map as an international monetary leader. The press also reports that the Russian government has been consistently buying large amounts of gold. We might even end up with a gold-backed ruble.

Meanwhile, the U.S. government is creating trillions more dollars per year. This could result in the entire world monetary system being overturned. But there’s no reason for anyone to trust any of these other governments more than they trust the U.S. government. And rightly so; they shouldn’t trust any currency that doesn’t come with a guarantee of redemption for something specific. And as Aristotle and history have shown us, gold is the best choice.

L: So the question now boils down to, what is gold really worth in terms of today’s dollar? How do we compute that?

Doug: Well, aside from a few Spanish galleons at the bottom of the sea and dentures returned to the earth after a lifetime of use, pretty much all of the gold ever mined and refined is still sitting on the surface of the earth somewhere. Nobody really knows how much that is, but the most reasonable estimates I’ve seen are something like six to eight billion ounces. That happens to work out to about one ounce of gold for every human being on the planet at this time.

Out of this, the U.S. government reports that it has 265 million ounces of gold in its treasury. If we divide the money supply by the number of ounces the U.S. could back its paper with – and here we’d have to decide what measure of money supply we want to use. Nobody, including the Federal Reserve, actually knows how much money they have floating around out there. It would seem that there are about six trillion dollars outside the U.S. alone. Let’s estimate that M0 in the U.S., the narrowest measure of money supply that consists of just notes and coins, amounts to one trillion. So, 265 million into seven trillion gives you about $26,420 dollars per ounce of gold.

Now, if we add in the total obligations of the U.S. government, which it will either need to print more money to meet, or it will have to default on – that’s about 100 trillion. If those dollars are printed, that would give us $377,430 per ounce. The same ratio for M1 would give you about $6,226 per ounce and M2 would give you $31,320 per ounce.

All of these numbers are far, far above the current level of roughly $1,000 per ounce. And that’s the answer to the question you started this interview with. Why gold? Because it’s got only one way to go: up. It seems to me that everyone should have a very significant portion of their wealth in gold.

That’s not just for safety, security, and prudence, though those are reasons enough, but because gold is cash in its most basic form. Better yet, even though it’s quadrupled since its bottom in 2001, it’s also still an excellent speculation. I can see somewhere between three and ten times your investment in current capital. And there’s no limit to the upside in dollars, depending on how rapidly the government destroys the currency.

To my view, that offers an exceptional combined opportunity; by buying gold, you protect your wealth but also have enormous speculative upside.

L: Plus, as you like to say, gold is the only asset class that is not also simultaneously someone else’s liability.

Doug: Absolutely right. And in a world as financially unstable as today’s, you just don’t want to hold on to someone else’s liabilities any more than you have to. Especially if that’s a liability of an entity like the U.S. government.

L: Got it. You should own gold because it’s money, because of its security, and because it’s an excellent speculation. In our publications, we’ve been telling readers that they should have as much as 1/3 of their portfolio in gold, 1/3 in cash, and 1/3 in investments that could do well in times of crisis, including gold stocks, commodities, certain kinds of real estate, etc. Do you think those are still the right proportions? That worked out very well for our readers last year. Those who actually followed our advice would have had 1/3 in gold and 1/3 in cash, so even if they lost 50% of their remaining third, they would still have only been down 16.67% by the end of the year. But that was then, and there were signs of short-term price deflation, and now things are different. How should we be deployed today?

Doug: That’s still a good balance, but if you start really thinking of gold as cash, and the dollar as a merely temporarily fashionable means of exchange, you’ll find yourself loading your portfolio with much more gold and gold proxies. That will protect you against the very rapid loss of value the dollar faces in years to come. Inflation is going to truly get out of control.

The only reason to hold any dollars at all right now, other than what you need for a few months’ living expenses if you live in the U.S., is that there is still a possibility of a very short-lived but catastrophic deflation. That could make the silly things worth more in the short term and give you liquid capital to deploy quickly into other asset classes. But certainly within one year, I would start moving more money out of dollars and into gold and other investments, possibly including well-positioned real estate and stocks that could benefit from the destruction of the dollar.

And once again, I want to emphasize, especially for Americans, that it’s not just a question of what you have and what you’re doing in the market, but where you’re keeping these things. Everyone, not just Americans, should try to have half of their gold, cash, and investments outside of their countries of citizenship and/or residence. You don’t want all of your assets within easy reach of whatever government considers you its milk cow.

L: Good reminder. Well, we’ve talked a long time again, but briefly, what are the best ways to own gold?

Doug: I prefer gold coins to bars. They are more recognizable and convenient. You can walk into a coin shop in many places around the world, and they will recognize your Gold Eagles, Krugerrands, Philharmonics, etc. Dealers, or the public, may not recognize the hallmark of some bars.

For larger amounts, I like GoldMoney.com, as I mentioned above, and I believe Kitco offers secure and convenient accounts accessible online. I also think highly of the Perth Mint Certificate program, especially for those who feel more secure with some sort of government backing (though government involvement is a reason to run in the opposite direction, in most cases). And, of course, there are various banks that will store gold for you in vaults in London or Zurich, that sort of thing. We cover these sorts of things in Casey’s Gold and Resource Report.

L: Okay, then, one last question: how about the gold stocks – where do they fit into this picture?

Doug: That’s a whole new conversation. For now, I’ll sum it up with three words: leverage to gold.

Ultimate form of insurance

Gold makes an ideal "mattress" investment and is the "ultimate form of insurance" against financial disasters, an expert has said.

Rachel Benepe, co-manager of the $1.84 billion (£1.15 billion) First Eagle Gold Fund said putting money into the precious metal is a good way for investors to insulate themselves against risks such as inflation, deflation, currency debasement and "geopolitical concerns", International Investor reports.

She recommended allocating between five and ten per cent of a portfolio to gold investments in order to fully protect against these and other potential problems.

Ms Benepe noted that despite gold prices reaching record highs in recent months, the fundamentals of supply and demand remain positive heading into 2010.

Earlier this month, Ted Scott of F&C Investments said the case for investing in gold "remains compelling" as it is both a safe haven from economic turbulence and a good store of value.

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Four reasons hyperinflation hasn't hit the U.S. economy yet

Everything we know about classic economic theory suggests the U.S. economy should be experiencing Zimbabwe-like hyperinflation right now, thanks to the nearly $2.2 trillion the U.S. Federal Reserve has pumped into the system.

But we’re not…yet.

Classic economic theory says that money supply can be used to stimulate the economy and our central bankers seem to agree. That’s why they’ve pumped more than $1 trillion dollars into the economy, engineered countless bailout bonanzas for zombie institutions, put Detroit on life support, and delivered a bunch of financial Band-Aids to the trauma ward — all in a desperate bid to make Americans feel better about the global financial crisis.

To their way of thinking, the trillions of dollars have been a success. That’s why any meeting of the Group of Eight (G8) nations looks more like a mutual affection society with central bankers anxious to claim credit and backslap each other in congratulations for having avoided the “Great Depression II.”

But by taking the Federal balance sheet to more than $2 trillion from $928 billion 2008, they’ve created a situation that should have resulted in an epic inflationary spike to accompany the 137% increase in liabilities.

Yet that hasn’t quite happened.

Core inflation — which denotes consumer prices without food and energy costs — has actually decreased from 2.5% in 2008 to 1.5% presently. And that has many investors who have heard the siren call of the doom, gloom and boom crowd wondering if they’re worried about nothing.

So what gives?

Well, there are four reasons we haven’t yet seen hyperinflation:

Banks are hoarding cash. Despite having received trillions of dollars in taxpayer funded bailouts and lived through a litany of shotgun weddings designed to reinvigorate the shattered lending markets, most banks are actually hoarding cash. So instead of lending money to consumers and businesses like they’re supposed to, banks have used taxpayer dollars to boost their reserves by nearly 20-fold according to the Federal Reserve. The money the bailout was supposed to make available to the system is actually not passing “Go,” but rather getting stopped by the very institutions that are supposed to be lending it out. Three-year average annualized loan growth rates were 9.6% before the crisis; now they are shrinking by 1.8%, according to Money Magazine.

The United States exports inflation to China, which remains only too happy to continue to absorb it. What this means is that low priced products from China help keep prices down here. And this is critical to something that many in the “China-is-manipulating-their-currency” crowd fail to grasp. If China were to un-peg the yuan and let it rise by the 60% or more it’s supposedly undervalued by, we’d see jump in prices here in everything from jeans to tennis shoes, toys, medical equipment, medicines, and anything else we import in bulk from China. Chances are, the shift would not be dollar-for-dollar or even dollar-for-yuan, but there’s no doubt it would be significant. Many economists I’ve talked to privately think 25%-35% is probable. So the next time you hear a “Buy American” extremist, you might want to share this little inconvenient truth.

Consumers are still cutting back. Therefore, the spending that normally helps pull demand through the system is simply not there. I don’t how things are in your neighborhood, but where I live, people are still cutting back. Indeed, data from the U.S. Department of Commerce and the Federal Reserve Board shows that consumer spending growth averaged 1.4% a year prior to the crisis and is now shrinking at a rate of 0.7%. What this means is that people have figured out that it’s more important to save money than it is to spend it. And, given that consumer spending makes up 70% or more of the U.S. economy, this is a monumental change in behavior that all but banishes the last vestiges of the “greed is good” philosophy espoused by Michael Douglas as Wall Street pirate Gordon Gekko in 1987.

Businesses continue to cut back rather than hire new workers. Therefore, wages and wage inflation figures are lower than they would be if the economy was truly healthy and the stimulus was working. This is especially tough to stomach because it means people are still being marginalized, laid off and “part-timed” instead of being hired. And that means that most of the earnings growth we’ve seen this season has come from expense reductions rather than top line sales growth — and those are two very different things. But while this is tough, it’s also helped keep inflation lower than it would otherwise be. Prior to the financial meltdown, job growth averaged about 1% a year over the last three years whereas now it’s falling by 4.2%.

The upshot?

Any one of these factors could change at any time. And that means investors who are relying on the Fed’s version that everything is okay and that the government is managing inflation may be in for a rude awakening.

The only thing the Fed is doing is managing to manipulate is the data, and even then, not very well.