Charles Goyette has spent much of his life thinking about money. He has contemplated how it works, how governments manipulate it, and how it stores value.

Goyette, a radio show host, precious metals pro, and libertarian, shares his views on fate of the US dollar in “The Dollar Meltdown.” In his four-part book, Goyette details where the US economy and dollar are now, how we got here, what might happen next, and how to protect your money.

The topics Goyette presents are necessary reading for anyone wanting a well-rounded perspective on the current US economy. Even if you don’t agree with some of Goyette’s strong libertarian viewpoints, his colorful writing and factual anecdotes make “The Dollar Meltdown” an interesting read.

As its cover might imply, “The Dollar Meltdown” isn’t a gentle introduction to the collapse of the dollar. Libertarians and Austrian school aficionados would feel most at ease with this book. Refreshingly, the nonpartisan author implicates both Democrats and Republicans as fiscal and monetary ne’er do gooders.

Goyette says “the body economic is shuddering from the relentless compulsions of meddlers.” Thanks to government intervention in money and markets, the US faces runaway inflation. Between Sept 2008-March 2009, US monetary base grew 199%. Add the domestic dollar supply to foreign dollar reserves—up to half of US dollar reserves are in foreign hands—and you have a potential oversupply.

The country’s debt situation is making holders of dollars, both foreign and domestic, nervous about the value of their greenbacks. Goyette writes that our national debt adds up to $42,000/person for the bailout (March 2009 numbers). On top of that, China owns $767 billion in US Treasury securities. That’s the equivalent of each individual American borrowing $3,300 from people in China.

If people start dumping dollars, all that extra supply will make it back to the US. Inflation will result. Several countries are already seeking other kinds of reserves—euros and gold, for example—to replace dollars.

Why isn’t the government quaking in its boots? Because, says Goyette, it has always pursued inflation as a policy. Authorities aim for mild inflation as a manageable economic state. The government tries to alter deflationary states into inflation to gain a sense of control of the economy. “Helicopter” Ben Bernanke is doing exactly that right now. Moreover, as the country’s biggest debtor, the government benefits most from inflation. For example, at 4% inflation, a debt of $12 trillion depreciates by $480 billion/year.

Economic gyrations actually work well for politicians, because they can capitalize off the consequences of inflation. They can campaign based on economic woes. Inflation can help them get reelected. It also helps the government increase its own power. After the government produces inflation, it will initiate wage and price controls. It will use inflation as a vehicle to move towards central command (total economic control).

Goyette, a free-market proponent, says authorities can never be one step ahead of the economy. Inflationary policies aren’t good for the economy. “Saying some inflation is desirable is like saying a few termites are a good thing…,” he remarks.

To combat the wealth-destroying effects of runaway inflation, Goyette recommends you put 25% of your portfolio into gold and silver, ideally physically held. He offers expert, detailed advice on how and where to buy it. Goyette’s chapter on buying gold is one of the most cohesive and useful chapters in his book. His expertise in the field shines through.

Subsequent chapters aren’t as well-defined, but do offer detailed background information on each recommended investment. The next chapter talks about silver. Chapters on investing in oil, natural resources, commodities, bonds (using a long inverse strategy), and foreign currencies follow.

Analysis

At times, I found the book dogmatic. For example, throughout the book, Goyette mentions that America is transforming itself into a central command economy. He says command economies produce poverty. Fair enough.

But isn’t China, increasingly prosperous as it is, still a command economy? Goyette addresses this by saying that “as China freed its command economy, growth came.” Yes, but that doesn’t mean China is free from command. Nor does it mean that America won’t stop the top-down action until it becomes the USSA. This tendency to polarize marks some of his claims. What’s more, Goyette later recommends buying an ETN (exchange-traded note) issued by the (socialist) government of Sweden. We hate central command, but we support it when it’s in our own interest?

If you can get over a couple of belief-system rabbit holes, and the occasional divisive language—Ron Paul fans would claim it as fact, but if your belief system lands on the outskirts, Goyette can shock—“The Dollar Meltdown” is a worthy read. It covers a perspective you need to know about in an entertaining, interesting way.

Full disclosure: We were sent a free copy of The Dollar Meltdown.

In 2008, I closely commented on the demise of Lehman Brothers and the hidden cancers on other balance sheets. At the time, the fraudulent real estate bubble found a poster child in Lehman investment McAllister Ranch: a three square mile development in which Lehman dropped a quarter billion dollars of loans … and the mega-community became a ghost town.

Now, a few weeks from the modern space odyssey 2010, video is surfacing that even more costly and extravagant real estate developments in China are following the Lehman model (which was probably 486 Excel sheets built by a 24-year old working 110 hours a week). Welcome to the real, yet imaginary, city of Ordos:

Ordos is a hyper modern city, full of brand new glass walled residential and commercial buildings, yet devoid of inhabitants. In its attempt to present a “growing” economy, and to “invest” its $585 billion stimulus into anything and everything, courtesy of comparable idiocy on the other side of the Pacific, China’s communist party is now ruling over ghost towns. One wonders just how many such “efficient” projects sustain China’s magical 8% growth. (Source: Zero Hedge)

So, there you have it. An entire generation has grown up and been conditioned to believe economics is the fundamental nature of reality, yet the proof continues to mount that economics is simply a wealth shifting game which does not solely enhance civilizations or lives. If the Chinese government eventually pulls a Lehman, the next chapter of history will be messy.

Damien Hoffman is the Editor-in-Chief of Wall St. Cheat Sheet.

The Commerce Department today said the economy grew at 3.5% during the third quarter of this year. This is the first time that gross domestic product (GDP) has been positive since Q2 2008. It is also the fastest rate of growth since Q3 2007. According to Forbes:

Growth was driven by consumption, exports, federal government spending, home building and inventories. Consumption contributed 2.4% of the growth, with a particular boost in autos. Thanks to the Cash for Clunkers program, motor vehicle output added 1.66 percentage points to GDP. But even without this particular stimulus program, consumption improved and the economy grew nearly 2%, a swift turnaround from the first quarter of 2009 when the economy was shrinking at a 6.4% rate.

The U.S. economy grew in the third quarter for the first time in a year as consumer spending and investment in new home-building rebounded, data showed on Thursday, unofficially ending the worst recession in 70 years.

If you’re like me, and you suspect there’s some hot air behind these numbers, you’re not alone (Reuters):

Strip out Cash for Clunkers and 3Q GDP growth came in at 1.6 percent. Also strip out slowing inventory cuts and GDP would have been just 0.6 percent. Then you have a report that the WH has overestimated the number of jobs created by the stimulus.

Barry Ritholz assesses the conclusion that the GDP numbers mean an end to the Great Recession:

We begin looking at the NBER definition (of recession):

Perhaps the bimodal definition the NBER uses is outdated: Read literally, their definition suggests that there are only two options, either the economy is expanding or contracting. It might be worthwhile to consider a third possibility: None of the above. The economy might have reached a state of stasis — a balance where it neither expands nor contracts.

Commenter IvoZ adds:

…if GDP is created by debt, then there are 2 possibilities:

Using GDP to measure economic performance is misleading in itself, even if GDP is properly calculated. Then add all the distortions of how GDP is calculated! Using GDP is like using an earnings or revenue number, while ignoring the balance sheet effects to achieve them.

The Wall Street Journal sums it up:

The economy is about to post growth numbers reminiscent of the good old days, otherwise known as the “old normal.” But a “new normal” of slower growth might be inevitable.

“New normal” might also include putting an end to recovery claims that don’t pan out.

Mr. Williamson’s work focuses on the boundaries of the firm, and the reasons for economic activity inside of firms: Why is there so much vertical integration in the marketplace? Why don’t we all just work for ourselves and sign contracts with each other instead of working together inside of a big company?

Would a third alternative be to outsource negotiations? Also, I’m not sure whether Williamson’s work covered this, but finding clients when you’re working for yourself is another time- and money-suck. The corporation helps in that instance, too.

Elinor Ostrom’s work had to do with group management of common resources. Her findings negate the dominance of socialism or privatization:

Ms. Ostrom’s work focuses on the commons, such as how pools of users manage natural resources as common property. The traditional view is that common ownership results in excessive exploitation of resources — the so-called tragedy of the commons that occurs when fishermen overfish a common pond, for example. The proposed solution is usually to make users bear the external costs of their utilization by privatizing the resource or imposing government regulations such as taxes or quotas.

Ms. Ostrom’s empirical research has shown that this explanation is “overly simplistic,” the prize committee says: There are many cases around the world in which common property is “surprisingly well-managed.” In these cases commons users “create and enforce rules that mitigate overexploitation” without having to resort to privatization and government regulation (which can both pose their own practical difficulties).

Ostrom found that some grasslands in Asia’s interior were governed better by groups than socialist or private concerns. One explanation for this could be that governments or companies don’t have an interest in the welfare of the individuals affected by the resource. Thus, they’ll cull it for their own advantage, rather than maximizing its utility–something a group might do to ensure the survival of its community or family.

I wonder whether Ostrom analyzed cases where groups compete over the same resource. I can’t see that competition leading to a particularly peaceful or efficient solution.

In the spirit of the soon-to-be phased out Cash for Clunkers program, Americans have a new incentive to get rid of inefficient resource-suckers. This time it’s appliances. According to American Public Media’s Alisa Roth, Congress included $300 million in the stimulus package this year to use as rebates for consumers who buy new, more energy-efficient appliances.

Unlike the Cash for Clunkers program, you don’t actually have to turn in your old refrigerator or washing machine to receive the incentive. When you buy a new appliance with an Energy Star rating, the EPA and the Energy Department’s highest rating, you can get up to $200 back. Looks like the appliance lobby worked a little harder than the auto industry lobby for this program. Here’s to wishing I owned some GE stock.

Like Cash for Clunkers, Roth says this benefits both he environment and the economy.

So one part is getting people to upgrade to more energy-efficient machines. And the other is to stimulate the economy by encouraging people to buy expensive stuff.

The program should begin in late fall.

I have some old shoes that are letting water in through the sole. This is causing me to have to dry my socks out several times a day, thus using electricity for the dryer. I need new shoes. Do you think my stimulus is coming soon?

Image Credit: infrogmation, Flickr

The Harvard Business Review’s Umair Haque discovered that a Made-in-USA, “fair labor” iPod would cost only 23% more than its Made in China counterpart:

…how much would it cost to produce a “Good iPod”? One not produced in a sweatshop, but under decent labour conditions. Like, for example, one produced in the USA — hardly a paragon of labour standards, but a starting point.

The results are surprising. An American made iPod Classic costs just 23% more than a Chinese made iPod Classic: $58 more, to be precise. The same relationship holds across the iPod family (price differentials in the 20-30% range) The iPod is a durable good, so that’s a difference — but smaller than one might expect.

Haqu claims that charging $58 more for an iPod is not only a reasonable expectation, but necessary to preserve innovation and rebuild the American manufacturing sector. He concludes:

If goods cost what they should, we would consume what we could authentically afford, instead of overconsuming what we couldn’t. If their prices reflected real human costs, perhaps yesterday’s unsustainably large macro imbalances wouldn’t have built up in the first place. And that, from an economic point of view, would be good for everyone.

Not everyone. What about the Chinese supply networks who would go out of business? Or the American consumers who couldn’t afford that extra $58? Or Apple, if it gave up its current competitive advantage by sacrificing a level of affordability?

The bottom line is still, well, the bottom line. Companies should bear responsibility for fair labor practices, but I can’t see Apple, or any other market leader, opting to put itself in second place as a result.

A month or so ago, inflation as the result of quantitative easing was all the rage. More recently, the Powers that Be claimed that jobs data means inflation won’t happen after all.

As someone perched on the hawkish side of the fence, I read about historical cases of inflation whenever I come across them. The excerpt below is from a chapter aptly entitled “Inflation and You,” written by Ludwig von Mises in July 1942:

The most fateful results of inflation derive from the fact that the rise of prices and wages which it causes occurs at different times and in a different measure for various kinds of commodities and labor. Some classes of prices and wages rise more quickly and rise higher than others. Not merely inflation itself, but its unevenness, works havoc.

These victims, by and large, are the same kind of people–roughly, the middle classes–who are injured as creditors through the depreciation of their bank savings, insurance policies, pensions, etc. The salaries of teachers and ministers, the fees of doctors, go up only slowly as compared to the tempo with which prices of food, rent, clothing, and so on, go up. There is always a considerable time lag between the increase in the money income of the white-collar workers and professional people and the increase in costs of food, clothing, and other necessities.

His take on why hyperinflation couldn’t happen in the States:

…the great inflation and the Nazi scourge both derived from the mentalities and the doctrines that long dominated German public opinion. The State, which the German socialist Ferdinand Lassalle had already proclaimed as god, was supposed to be able to achieve anything. The omnipotent State was credited with the magic power of unlimited spending without any burden on the citizenry. Money, said the German “monetary cranks,” is a creature of the State; there is no harm in issuing infinite quantities of paper currency.

Fortunately, such superstitions are strange to the healthy common sense of America.

If only von Mises were alive today…

The federal government is ramping up the food stamp program by $20 billion. Now known as the Supplemental Nutrition Assistance Program, the expansion amounts to about 13 percent. This increased spending is hoped to stimulate the economy, but who will it really benefit?

Emory University finance and economics professor told NPR:

“This injection of funds ends up being spent on food, and that has a multiplier effect through the economy. As more people are employed in grocery stores, more people are employed to make the food, more people are employed to grow the food as a result of that stimulus.”

Will Increased Food Spending Really Help the Economy?

Economists say that every dollar spent on food will create a ‘multiplier effect’ resulting in $1.50 to $2 in stimulus. Experts, including Mark Zandi, chief economist with Moody’s Economy.com, agree that while it is difficult to measure the effectiveness of the plan, the food stamp increase is a good way to nudge the economy.

I’m no expert. But it doesn’t make a whole lot of sense to me.

• People receiving food stamps are presumably getting enough to eat, whether the food they consume is purchased with the federal benefits they receive, picked up at a food bank, or purchased with cash.
• I’m not saying increasing the benefit won’t make lives easier, but will increased spending really create jobs?
• With a limited food budget, there’s not much room for convenience foods. If you’ve only got a few bucks, you’re going to opt for the dry beans versus the cans. And forget about prepared chili.
• More to spend on food means more convenience foods. Therefore, forget the beans – go for the chili. Does the processing of convenience foods create more jobs? Maybe. 
• I wonder if instead of stimulating the entire food industry, there are certain large companies that stand to benefit from this particular stimulus.
• I also wonder how much better off we’d be if we taught people to grow some of their own food. But that wouldn’t stimulate the economy. Or would it? Seed sellers, home improvement stores, and natural food cookbooks would surely benefit.

On the other hand, maybe given more money to spend on food, people will actually eat more, and the whole scenario will play out as the economists predict. Either way we’ll probably be fatter. Then we can spend our money on healthcare. And that’ll create jobs too.

Image Credit: KitAy, Flickr

For some reason, the mainstream media has thus far avoided calling the current recession another Great Depression. Today, however, the Financial Times took a leap to the dark side with an article entitled “The recession tracks the Great Depression.” Here’s what they had to say:

Two economic historians, Barry Eichengreen of the University of California at Berkeley and Kevin O’Rourke of Trinity College, Dublin, have provided pictures worth more than a thousand words (see charts). In their paper, Profs Eichengreen and O’Rourke date the beginning of the current global recession to April 2008 and that of the Great Depression to June 1929. So what are their conclusions on where we are a little over a year into the recession? The bad news is that this recession fully matches the early part of the Great Depression. The good news is that the worst can still be averted.

Third, despite the recent bounce, the decline in world stock markets is far bigger than in the corresponding period of the Great Depression. The two authors sum up starkly: “Globally we are tracking or doing even worse than the Great Depression … This is a Depression-sized event.”

More

Bravo to the FT for tearing the verbal padding off the current situation. I’ve caught slivers of comparisons with the Great Depression in the MSM, but haven’t yet seen an article this bold. I wonder if other outlets will take the dialectical leap from “such-and-such is the worst since the Great Depression” to “the whole economy looks like it’s experiencing another Great Depression.”

“All of our money is backed by nothing. That’s what we have our faith in,” said Shelley Buonaiuto, a Fayetteville artist. “Money’s not real wealth. The real wealth is our resources and our community interdependence.”

And before you go making jokes about Arkansas, they’re not unique. Groups around the country are printing currency in an attempt to help small businesses withstand the recession. The currency’s value is generally base on labor. In some towns $10 in local money is worth an hour of labor. Other places trade ‘real’ cash for the local currency, often at a discount.

In the Berkshires region of Massachusetts, for example, people trade $9 of U.S. currency for $10 worth of the local currency “Berkshares” at local credit unions, essentially providing a 10-percent discount when the money is spent.

The currency also helps barterers without direct trades to exchange the widely recognized currency for future trades. I suspect the IRS might not like this. Remember, bartering income is taxable.

The concept works well in Ithaca, New York, where they’ve been using “Ithaca Hours” since 1991.

“We have significantly affected shopping habits so people are more able to rely on one another in the community than automatically going to the mall,” said Ithica’s mayor.

The success of local currency is sketchy and anecdotal at best. As someone who grew up near the Canadian border and lived in a ‘multi-currency’ economy, I get that there are incentives when the values differ, but I’m not sure anyone needs another layer of complexity in the financial realm these days.

What’s your take on local currency?

Image Credit: Christina Snyder, Flickr