Nov 17, 2008

Drowning In A Sea Of Red Ink

By Todd Strandberg

I’m sure most of you are familiar with the U.S. Government's ongoing plan to save the financial system by pumping trillions of dollars into the banking and credit markets. So much money is being created out of thin air by the Federal Reserve, I believe we are at risk of seeing the dollar suddenly collapse.

This year has seen mind-boggling movements in financial markets. Who would have thought that oil would rise to nearly $150 per barrel and then fall to $54, all in the space of four months? My fear is that we may soon find ourselves marveling over oil prices that are over $1,000, $10,000, or $100,000 per barrel. Hyperinflation is what may cause oil and all other commodities to rise so dramatically in price.

The Federal Reserve traditionally has been very diligent about controlling inflation. In the past, the Fed would risk dragging the economy into a recession to control inflation. The reason for the diligence is the understanding that when inflation gets out of control, little can be done to stop it. Prices rise and people increase what they charge for goods and services in order to keep up with the dwindling value of currency. Of course, this creates a vicious cycle.

Over the past several decades, the amount of money injected into the economy has been increasing at relatively steady rate. In reaction to the financial crisis, the Fed is dumping record amounts of money into the momentary system. It is a very big unknown what will happen with the money supply increase by the scale we see today.

The amount of red ink flowing out of Washington is truly staggering. According to CreditSights, a research firm in New York and London, the U.S. government has already put itself on the hook for some $5 trillion, so far, in an attempt to arrest a collapse of the financial system. The Fed has been guaranteeing trillions of short and long-term bank debt.

This mountain of financial obligation is only from September and October. One can only wonder how large our monetary commitment will be if the crisis continues for a few more months. It’s like the $10 million bridge that ends up costing $100 million. The government has a habit of low-balling the cost of everything. I would think the system would collapse before we reached a $10 trillion tab.

The insurance giant AIG is a perfect example of how this problem is mushrooming. In September, the Fed first provided AIG with an $85 billion loan, then in October it authorized another $37.8 billion. And just a few days ago, the company got an expanded $152.5 billion bailout from the government. The insurer also got access to as much as $20.9 billion from the commercial paper program.

The handing out of billions of dollars to financial firms has other business and labor groups lining up for their share of the bailout package. The auto makers Ford, GM, and Chrysler have warned that they could face bankruptcy before year's end without new government help. The mayors of three major cities have also asked the federal government for assistance.

The Federal Reserve has done its best to hide this huge increase in money supply. The Fed recently said it would no longer publish figures for M3, which had been the best description of how quickly the Fed is creating new money and credit.

The folks in Washington have yet to figure out a way to prevent the shortfall from eventually showing up on our federal budget. The Treasury Department said last week it began the new budget year with a record deficit of $237.2 billion. This is over four times larger than the October 2007 deficit of $56.8 billion.

One can only hope that the economy quickly turns around and this orgy of deficit spending slows. If it continues, we’re eventually going to reach a breaking point where the value of the dollar plunges.

A lot people have asked me what we should do if the U.S. goes into a period of hyperinflation. There is the option of buying commodities like gold and oil. One can acquire them through indexes that trade just like stocks. Two examples are GLD for gold and OIL for oil.

I really think that little action would be required on the part of Christians. There is so much activity related to prophecy, an economic meltdown would cause me to be more concerned about the rapture’s nearness than any monetary fallout. My gut feeling tells me that we as the Church are not going to witness such an obvious warning sign.

Because the day of our Lord’s return is described as being relatively calm, I would not be surprised if men managed to put one Band-Aid after another on this financial mess. Of course, when the rapture finally occurs, there will be nothing to stop total calamity.

"But as the days of Noe were, so shall also the coming of the Son of man be. For as in the days that were before the flood they were eating and drinking, marrying and giving in marriage, until the day that Noe entered into the ark, And knew not until the flood came, and took them all away; so shall also the coming of the Son of man be" (Mat 24:37-39).