Checking on TED

The TED Spread has calmed down. It now sits at about 25 basis points (bps), well below the 100 bps level that triggers alarm in the credit markets, and miles below the 500 basis points that it was a year ago.

I keep hearing people talk about hitting the bottom of this recession, and the bounce back that is happening. Fortunately, here in Austin, Texas, things never got as bad as they did in other parts of the country, like Detroit, or other parts of the world, like Iceland. I guess all economies, like politics, are local. Except when they're global.

As we near the end of the 2009 Atlantic hurricane season, it's hard to know if the storm has blown over, or if we're just sitting in the eye. As I wrote in this post, I keep thinking that confidence has a lot to do with our situation. If people feel like we are in a crisis, we will act like it, which will hasten the crisis, and a vicious circle begins. If we don't, then consumer spending and reasonable saving will continue, and we will avoid, or at least postpone, a crisis.

Either way, there are some fundamental personal risk management strategies we should all consider, such as eliminating all consumer debt, securing a long-term mortgage at a low fixed rate (a great hedge against inflation or hyperinflation), reasonable, though not excessive, cash reserves, retirement funds largely invested in Treasury issued Inflation Protected bonds (TIPS), and perhaps a modest amount in private equities, like stocks. The very best investment, though, is investment in our own personal health and knowledge, so that we can roll with the punches, adapt to whatever becomes the new working environment, and be happy doing it until we keel over, if need be, because there may be no such thing as "retirement" anymore, if the second wave of the storm is lurking.

Free and clear

The solution is now painfully obvious:  free and clear is the only way to be.  Especially in an economic free-fall.

Normally, reading economic reports is something I enjoy about as much as, oh, say, a prostate exam.  Particularly economic reports from conspiracy-theory sounding names like Shadow Government Statistics.

But my colleague Mike (aka "Dr. Nacho") gave me a copy of The Hyperinflation Special Report, compiled by John Williams.  It is a little smug, and certainly dire-sounding, but I have to agree with the paper.

Williams spends 23 pages building his arguments and positing his conclusions, but it's really common sense:  the government has run up it's "credit card" (the national debt), and there is no money to pay it back.  It can keep printing the money, but increased supply of money means the value of it (demand) falls.  This is inflation.  But when it happens on a very large scale, as it has in countries around the world, as recently as two years ago, you get hyperinflation. 

Williams bolsters his arguments with bolstered by some historical research.   It goes back to the definition of "money". Money (actually "wealth") used to be something of intrinsic value, like gold, diamonds, or even animals, food, or spices and incents.  As those things became to bulky to carry around, symbols of that wealth were created: gold or silver coins, usually.  Paper money was introduced as a symbol of a government's wealth, measured in gold (this was the gold standard).  In 1933, President Roosevelt abandoned the gold standard, in an attempt to shake the country out of the Great Depression.  In 1971, Nixon effectively admitted the government was bankrupt, and disallowed the redemption of dollars for gold.  The dollar has been floating on, well, confidence for the last 40 years.  Confidence that the U.S. government would make good on any debts, such as Treasury Bonds purchased by Americans, foreign investors, or other countries.

That confidence is quickly eroding.

The result could well be that, like a professional check kiter, everyone- citizens, foreign investors, banks- stops lending to the government.  Unable to get more loans, the Fed prints money to pay it's debt, but that money is devaluing rapidly.  The chaos and confusion of such rapid devaluation spurs more panic (as with the 11% market drop last week) and soon, you have hyperinflation.

Williams says it might take longer, maybe 2010.  But as government officials try to unravel the subprime/CDO/CDS mess, the scope of the problem may only grow larger.  A similar event occurred when a few minor accounting irregularities triggered an audit which led to the collapse of Enron and Arthur Andersen, and millions of dollars in pension funds and stock options disappeared in just a few short months.

To keep my money in the market, even in U.S. Treasury Bills is gambling.  Period.  The safest bet is to own real assets- house, cars, furniture- free and clear.  No debt.  Then a job is merely used for those monthly variable expenses- food, fuel, insurance, utilities, clothing, entertainment. 

Unfortunately, that's easier said than done.  But it's definitely the direction I'm heading.