For most of the past two weeks I visited in Washington D.C., primarily to see family and friends, but also as a simple reconnaissance of the current status. Apart from Saturday night mayhem after the bars closed, I saw and heard no riots. Most of the tourists appeared to be from the nearby suburbs and other mid-Atlantic locations. Beggars, street lunatics, consultants, and lobbyists abounded.
Except for taxi fares, prices were quite high. Private businesses of which there are still a few, were staffed almost entirely by middle easterners and central Europeans except in the lower echelons. At the public interface level, institutions seemed nearly entirely staffed by Afro-Americans whose speech was nearly unintelligible to me.
The apex of the Spring cherry blossoming was past but there were still many blossoming trees and spring bulbs flowering. "Downtown" Washington between the Capitol and White House and north of and including the Mall is more attractive than ever with facelifts of many historic buildings as the Federal Government buys up as many buildings as they can for ever more commissions and "study groups". The many parks are better planted and maintained than I remembered.
Museum clutter has filled in every Mall space and much of downtown with multiple single ethnic group or voting block museums: the United States of America has become the Diversity Groups of America. Of the new museums the National Museum of the American Indian is far and away the best and it featured a major show of Fritz Scholder's work, even larger and more representative than his show seen last year at the IAIA in Santa Fe. Scholder's estate and his relatives are liquidating, and the public is the beneficiary of these showings.
The very worst museums on this visit were the Corcoran and the Hirschhorn, the latter extremely disappointing given its historic sponsorship. It was practically filled with a massive and vulgar exhibit of Louise Bourgeois who by her exhibit themes appears to have been a distant cousin of the Marquis de Sade. The Corcoran's permanent collection was absent and another of those massive shapes collections posing as sculpture shows was featured. The National Gallery and National Portrait Gallery remain the best, although it struck me how small the National Gallery's wall exhibits are for the massive size of the place. Perhaps that speaks to the status of the government which runs them: "big hat, no cattle" as they say in the southwest U.S. I didn't see the Phillips Collection.
Being away from the markets and hearing almost no one refer to them was refreshing. Markets aren't really of any interest in Washington now anyway, even though corporate income taxes received for the January-March 2009 period are said to be down 90% from the preceding year. It all made me wonder if the nation is now like a wealthy old man who is self-liquidating at last after a lifetime of earnings and savings which have now stopped coming in. Where this analogy breaks down is that the wealthy old man has savings and no debt to service, while the U.S. has no savings and already amazing and rapidly growing debt.
I've read almost twenty multi-page analyses of where the current economic, financial and political vortex leads. Mostly they come down on the side deflation for a long time or on the side of deflation for a short time and inflation for a long time. An economics professor at Auburn University posted a simple but effective slide show on the question from the perspective of MV = PQ and two different ways of interpreting it. http://www.auburn.edu/~garriro/monet1.ppt It's good to look at this a few times, unless you have a PhD and a job in economics. In my view "V" is the wild card as it is overall public sentiment which is not as predictable as the equation suggests.
Thinking of the Federal Government as a retired old man living on his assets made me think of my own case. I've spent a lot of time here at the blog thinking, writing, and planning about investing "IN" retirement as opposed to "FOR" retirement. Depending upon one's lifetime skills, and even more on luck of all kinds, one arrives at retirement with investments and savings and/or pensions sufficient to live on, and hopefully debt-free. In the 19th century and up to 1913, one could safely put one's savings into government bonds secure in the knowledge that the low rate of interest would be enough to live on and not be ravaged by inflation. Actually that's been true for the past year as well, and was the main reason such a policy kept me from losing capital, if just barely. For the past twelve months the total returns of three government bond funds I own are 8.3% for VFIJX, 6.6% for VSGDX, and 3.7% for VWSUX (municipal and the taxable equivalent to ~5%). At the same time most but not all consumer prices have declined. If this state of affairs were to last for a decade, it would be a good thing for well-prepared retired people: 3-4% interest on government bills/notes/bonds and no inflation is the dream of retirees.
Since the 1970's when the US and Europe finally went off any connection to gold as currency backing, two things have worked against a prudent saver. First the volatility of all assets, including bonds, has increased dramatically and so has the average rate of annual inflation. That's only about 38 years of high volatility and inflation, but it's not at all clear that current conditions will result in a permanent trend reversion to a safe and strong dollar and little or no inflation. Governments everywhere, whose poorest voters are responsible for their current majorities in legislatures and at their heads, are fearful of riots or at least of losing their offices. So they are sending money to their poorest supporters and begging them to spend it, although no savings and too much spending got them where they now are. Nor do we yet know whether the "V" of MV = PQ will respond and go up. Many still working are said to have less than one month of cash assets to pay bills, so reducing expenses and paying down some debt weighs increasingly on decisions on spending the "stimulus" cash. People with no jobs and no money and whose unemployment benefits payments have expired have no choice, but such subsistence spending is not sufficient to "grow the economy".
The second chart is the monthly prices of the US Dollar Index and of Comex gold futures. Bear in mind that in 1949, just sixty years ago, one US dollar would get you 4.375 Swiss francs. On this past Friday the dollar was worth only 1.138 Swiss francs. Nor is the Swiss franc what it once was. In 2000 required gold reserves were cut in half to 20% of total Swiss central bank reserves. Nevertheless, the Swiss franc still compares favorably to gold as it always has since the 19th century. The Swiss were the last major nation to devalue their currency in the 1920's and 30's (1936), and they devalued 30% compared to 59% for the US. http://en.wikipedia.org/wiki/Swiss_franc
Currently I have 25% of assets in gold and other inflation "beneficiaries" (energy-related) and 75% in US cash (up to 91 days) and near cash (up to two years duration). I see myself possibly going to 80% gold and only 20% cash and near cash depending upon conditions in the US and elsewhere. As I have said here before, you don't buy gold to get rich, you buy it to stay rich (preserve value) during inflation. That is extremely important for nations as well as retirees. The last chart I have shown previously. It proves that gold is really "insured cash" over long periods of time. If you had 80% of assets in gold and 20% in cash you would take 80% of your monthly budget requirement out of the gold assets and 20% out of the cash assets each and every month.
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