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History tells us that there are definite cycles that our economy goes through. There are times when certain classes of investments are held in high esteem, while others are neglected for long periods of time. This is simply due to the sin nature of man. The old adage of markets being driven by greed and fear is true. The Bible tells us to neither be greedy (1 Tim 6:10) nor to be fearful (Matt 10:22-33). However when the world economic system is controlled by men who are not moored to a Biblical worldview, then greed and fear will drive our economy. The purpose of this essay is not to try to point out all of the historical examples that will support that assertion. There is plenty of information available elsewhere for that. Rather the intent of this essay is to provide the reader with an overview of what is likely to occur over the next 10 to 20 years based on the fact we live under an economic system that is driven by greed and fear. At the end of this essay I will provide a source which will support what I feel is the likely direction the economy will take. With that in mind, let’s get started. Economic Reality Careful review of economic history portends difficult economic times ahead. What are some of the signposts that point to this?
With all of the above occurring, there is a growing possibility that hyper inflation is coming. What is hyper inflation and what will it mean to the economy? Before I answer that question, we must look at money in the 21st century. Its function and form have changed throughout history and it is critical to understand just what money is and how it is used in today’s global economy. What is Money? Today our monetary system is made up of fiat money - money by “decree”, or simply - money printed “out of thin air”. Fiat money has been tried for thousands of years but it has one thing in common. Every fiat money system in the history of the world has eventually failed. This is a very important fact! Eventually ours will be no different! The question is, how long will it take and what form will that destruction take place. Contrast fiat money – created by man - with God’s money which is silver and gold. I believe there is a reason why a limited amount of these “precious metals” have been placed in our earth by our Creator. It was to limit the rate of growth of the money supply, thus helping man keep in check problems with greed and debt. Our founding fathers were smart enough to see that God’s money would protect the people from mismanagement of the country’s monetary system by the government. Unfortunately beginning in 1913 at the creation of the Federal Reserve Bank our country began a long journey from using God’s money – established by the constitution – to our current fiat monetary system – established by powerful world bankers. It may surprise you to learn that the Federal Reserve Bank is not a federal agency, but rather is a private, for profit corporation owned by a consortium of banks, including several large foreign banks! I don’t know about you, but the fact that some of the major stockholders of the financial institution that controls the US currency are foreigners does not give me comfort. If you look in the phone book, the Federal Reserve is not found in the government section, but the business section. This has far reaching implications that are beyond the scope of this discussion. However it is very important to understand that one major implication is that the “Fed” has maneuvered us into a high probability of seeing an inflationary or hyper inflationary economic environment. With a purely fiat money system our government can and will create money to fight any real or perceived problems in the economy. And in fact they have been doing this at an ever increasing rate over the last decade.
The Trap is Set When the NASDAQ market collapsed, the events of 9/11 came on its heels and took the other markets with it. The Fed now had a major problem - how to keep the economy from entering a deep recession. With the double shock of the NASDAQ market collapse and 9/11, how was the Fed able to avoid a major recession and a deflation similar to the 1930’s? The simple answer is – they lowered interest rates to multi-decade lows and printed more money! This was a deadly combination that has led to a bubble in the housing market because as interest rates fell, mortgage payments also fell. People today look at the amount of their monthly house payment rather than the debt they are accumulating, thus they will pay more for a house when their monthly payment fits into their budget. This flies in the face of what God tells us in Proverbs 22:7 – “The rich rules over the poor, and the borrower is servant to the lender.” As Christians, we should be looking very closely at how we are stewarding God’s provision for us, not at what debt payments we can fit into our monthly budget. Unfortunately, that is not the way of the world. This situation has led to what is known as a “liquidity trap”. Unless interest rates stay low, home prices will fall and fall rapidly as monthly payments rise and no longer fit into the household budget and buyers for those homes disappear – thus liquidity dries up. But didn’t I say that the Fed could fight this problem with lower interest rates? The short answer is “no”. While the Federal Reserve sets the Fed Funds rate, it does not control long term interest rates. Those rates are set by the market, and are influenced by factors such as the US dollar value against foreign currencies as well as perceived inflation expectations. And today there are many fundamental factors that point to a weakening dollar and increasing inflation expectations. These factors will increasingly drive the market to raise interest rates – contrary to what the Federal Reserve would like.
Sophie’s Choice In this 1982 movie based on a novel by William Styron, a young mother on her way to a Nazi concentration camp had to make a horrible choice - which one of her two children would she send to the gas chamber and which one would she save? This is where the Fed finds itself today. They are on a tightrope between two horrible choices. 1) Raise interest rates to defend the dollar and choke off price inflation. This would likely cause huge problems with the mountain of debt our country has piled on and would burst the housing bubble or 2) leave rates low, knowing price inflation will surface as the dollar falls and all those cheap imported goods and commodities rise rapidly in price (and they still might not be able to save the housing market). This in turn would likely produce a loss in confidence of the US dollar in the currency markets. Either scenario will likely bring about the death of the US dollar as the world’s reserve currency. The first choice involves playing with a deflationary depression similar to that of the 1930’s as the money supply is held in check and debt defaults skyrocket forcing mass foreclosures, bankruptcies, closings of banks, and widespread loss of capital as the stock markets crash. The latter choice would force the government to inflate and most likely hyper inflate the currency - essentially destroying it as they pay off existing debt with dollars worth far less in terms of purchasing power. Based on comments by Fed Chairman Ben Bernanke and current monetary policy, it appears as though the choice is being made to sacrifice the currency. Their policy appears to be one of erring on the side of holding short term interest rates below the rate of inflation to protect the equity and housing markets. Despite the federal funds rate having risen to 5.25% in an effort to “fight inflation”, the real rate of inflation in the country is somewhere between 8% and 10%. The Fed is far behind the curve in bringing interest rates to neutral. This policy will support continued borrowing and increased debt and deficits. As our deficits and cumulative debt grows, the US dollar will continue to fall in value. As the world wide loss of confidence in the US dollar grows, it will likely result in a hyper inflation as the Fed prints money at ever increasing rates in an attempt to forestall the inevitable collapse of the currency. Biblical Worldview This scenario can be quite unnerving. However if you examine these events through a Biblical worldview, you can see how they fit into the progression of events toward the end times predicted in the Bible. Regardless if your view of eschatology is pre millennial, A millennial, or somewhere else on the continuum, there are a series of events that must happen prior to Jesus’ return. The world framework which must be in place includes: 1) There will be a single currency. 2) There will be a single government. 3) There will be a move toward a single religion. Even with the level of globalization that we have seen over the last 20 years, these are still very dramatic changes to the current world order. There will need to be a catalyzing event to move the world a step closer to this world structure. In my humble opinion, these changes will not happen overnight with the rise of a single global leader. There is too much independence and strength in individual countries, particularly the United States. So, with a Biblical worldview in mind, I would propose the following as a possible scenario. I am not called to speak this as a prophetic vision from God. As the US economy goes through economic and the resulting social turmoil, we lose global influence. Politically we are dealing with our own major problems and leave the world stage as a global policeman. Our US dollar is no longer the world’s reserve currency after being destroyed via hyper inflation. It is replaced by a regional currency similar to the Euro, which includes Canada, the US and Central America. The new “Amero” replaces the US dollar, the Canadian dollar and the Mexican Peso. Sound far fetched? Then why was NAFTA (North America Free Trade Agreement) put into place? And what about CAFTA (Central America Free Trade Agreement) and the FTAA (Free Trade Area of the Americas)? (Do a Google search on these and you will see a very deliberate effort to unite the western hemisphere economically) During this time, the same thing happens to Asian currencies – they consolidate. This takes us one giant step closer to a single world currency. The US hegemony is no longer an issue on the world stage and there are 3 or 4 major regional world currencies. It will be much easier to consolidate 3 or 4 regional currencies than dozens of independent currencies with a single “reserve” currency. As currencies consolidate, so will governments. Just witness how the sovereignty of European countries has been destroyed as their governments are slowly consolidated in the name of economic progress. In the end, not only will there be fewer currencies to consolidate, but there will be fewer governments as well. The stage is set for a one world currency and one world government. As painful and unpleasant as it might be to go through, it sounds like Biblical progress to me… Protect Yourself This is a lot to absorb, yes. However, for those in Jesus Christ, this is good news! I believe that God wants us to protect ourselves. Proverbs 22:3 says: “A prudent man foresees danger and takes refuge, but the simple pass on and are punished.” The word “foresees” is an active verb. The Bible does not ask us to passively sit and wait to discover danger as it creeps up on us. I believe God asks us to foresee these types of dangers and to take steps to protect ourselves and our families. This can only be done if we keep long term events in the proper perspective of a Biblical world view. We have history to learn from. The question is will we do it? I do believe the real question is not a matter of “if” these economic events will occur, but “when”. Why? Because it is Biblical! There is no way to know the rate at which they will occur or the exact path. There are two major signposts that you can look at to help you determine progress along whatever road God chooses to take us.
We live in very exciting and historic times! We can live in fear or in anticipation of the events that will bring us closer to the return of our Lord Jesus, whether that is tomorrow or 100 years from now. Dangers exist everywhere – in the culture and the economy. Our focus as Christians has been on cultural dangers. I feel it is necessary to get the word out that there are dangers in the economy as well. Yet these dangers present a possible move toward what the Bible describes our world as looking like when Jesus returns! By foreseeing them and taking refuge, we can protect our families and loved ones during the significant changes ahead. God’s blessing to you! Doug (aka pa30twin) Chart Courtesy: Grandfather Economic Report, Kitco.com, Economagic.com, and StockCharts.com Detail to support this view can be found at www.proverbs22-3.net.
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INFORMATION The opinions of FSU contributors do not necessarily reflect those of Financial Sense. |
Debt
levels of all areas in society are at record levels and are in fact
As
evidenced by the chart to the right, the money supply began to increase
rapidly around 1995. The amount of money created was far in excess of
the growth rate of the economy. Why did this happen? Some believe it was
to inject “liquidity” into the economy prior to Y2K. Whatever the
reason, it produced tremendous imbalances in our economy that led to the
.com bust and the meltdown of the NASDAQ stock market.
