Photo By Vaughn Larson | Army Brig. Gen. Gregory Zanetti, Joint Task Force Guantanamo deputy commander, draws...... read more read more
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By Sgt. 1st Class Vaughn Larson
GUANTANAMO BAY, Cuba – Army Brig. Gen. Gregory Zanetti, the Joint Task Force deputy commander, shed some light Tuesday night on the current economic crisis that has Wall Street reeling and the Bush Administration asking Congress to pass a $700 billion rescue plan to stave off a mortgage meltdown and banking collapse.
Zanetti, a member of the New Mexico Army National Guard, has been a professional money manager since 1986, and owns a financial advisor/stock broker business.
The culprits, Zanetti explained, are inflation, debt and the historical pendulum of the markets. These all affect consumer confidence in the value of the U.S. dollar, which is the basis for many global markets.
Inflation occurs when the volume of currency exceeds the treasure that backs the currency. Imagine a glass half full of juice – adding water will increase the amount of drink, but the drink will be weaker. This is significant, Zanetti noted, because of how the U.S. will likely come up with the $700 billion emergency funding plan, commonly referred to as a "bailout."
"Have you heard anyone say they will raise taxes?" he asked the capacity crowd at Bulkeley Hall auditorium. "Have you heard anyone say they will cut government programs, like Social Security?"
Inflation has three factors: volume, or the amount of currency produced; velocity, or the amount of inflated currency in motion; and distribution, or where that inflated money goes. The more inflated currency is put into consumer goods, for example, the higher inflation rates climb. This was demonstrated in the late 1970s when inflation was in the high teens.
The national debt today is around $10 trillion, Zanetti said – unless unfunded liabilities are factored in, at which point he estimated the debt swells to somewhere between $60 trillion to $99 trillion. The debt can be retired by raising the income tax by 44 percent and cutting government spending by about 40 percent – neither of which is likely.
"You can't tax enough to pay for it, you can't cut spending enough, so what's the third option?" he asked. "Print it."
The markets typically experience a 16-to-18-year cycle between two sources of wealth, Zanetti said. One source, real assets, includes precious metals, energy, water and commodities. The second source is paper assets such as stocks, bonds and mortgages, among other financial devices. Since 2000 the stock market has plateaued, while real assets such as oil have gained in value, suggesting that the U.S. is roughly halfway through a cycle favoring real assets. When trust breaks down, he explained, people tend to invest in gold and other tangible commodities – until the practical value of such investments is questioned, prompting the pendulum to swing the other way.
The tipping point, Zanetti said, is reached when the Dow Jones average exceeds or falls below five times the price of an ounce of gold.
But while the U.S. has been printing more money, the inflation rate has not exploded – yet. According to InflationData.com, the inflation rate for August, the latest month available, was 5.37 percent – among the highest in eight years, but still lower than in the late 1970s. Zanetti said this is because much of that new money went into reservoirs such as retirement accounts and real estate rather than into consumer goods. The inflationary growth was seen in the stock market and then real estate prices. But now money is leaving both the stock and housing markets, and if it enters consumer goods, then Zanetti predicted that the price of such goods will go up. He argued that inflation is really closer to 8-12 percent, despite official ratings, saying the rise in the stock market did not reflect an increase in wealth of the average person.
The current crisis is more than just sub-prime mortgages, Zanetti said. Mortgages made to consumers with good credit are beginning to fail, meaning that up to $1.6 trillion in mortgages could be at risk.
The inflationary crisis of the late 1970s – sparked by abandoning the gold standard and subsequent measures to control the currency's value – was reversed by raising interest rates, which in turn curbed spending. While these steps increased the value of currency and slowed the velocity of that currency, it also led to the worst recession since the Great Depression.
Zanetti predicted Congress would pass the $700 billion request, but he was not confident it was the right remedy.
"If [Congress does not] do a bailout, you will see massive financial disruption," he said. "It's still coming down the road, but if they don't do it, it will happen sooner rather than later. I'd rather have it happen and get it over with.
"Have we been through this before? Yes," he told the crowd. "Will we get through it? Yes, and we will come out better for it."
| Date Taken: | 10.03.2008 |
| Date Posted: | 10.06.2008 09:56 |
| Story ID: | 24570 |
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| Web Views: | 231 |
| Downloads: | 215 |
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