Are We 'Back from the Fiscal Abyss'
as Dallas Fed Claims?

Lorimer Wilson
May 20, 2009

Richard W. Fisher, president and CEO of the Federal Reserve Bank of Dallas, was once one of the most expressive economist imaginable often using graphic and sensationalist words and expressions to get our attention when describing the 'nightmarish predicament' and 'monstrous challenge' that has finally engulfed us. It was only a year ago that he warned that a 'frightful storm is brewing' - 'the mother of all financial storms' - that could well plunge the U.S. government deeper into a 'fiscal abyss' causing the country to become submerged in a 'vast fiscal chasm'. Fisher has not always been so dramatic in spite of saying recently 'I am a Texan and Texans speak plainly and directly' and he is not being very direct these days either.

Fisher once was distracted from the truth but today it would seem that he is being compelled to ignore his very own words of warning referring to 'the mess that has soiled the face of our financial system' as being nothing more than a 'process of creative destruction' that will eventually lead to new levels of prosperity. It would seem that Fisher has gone from being the insightful, plain speaking economist from Texas that he claims to be to that of a politically correct (muzzled) member of the Federal Reserve embracing the party line as outlined by the Obama Administration. Could it be that dissent is being stifled at the highest levels? Below is a review of his apparent transformation. You be the judge.

From 2005 until mid-2008 Fisher was totally preoccupied with the threat of rising inflation. The most descriptive he could be about what was developing on the horizon was a February 2006 comment that the global economy could sink into a 'deep funk' should the countries with excess savings and trade surpluses fail to create conditions for growing their domestic demand thereby helping alleviate the record U.S. current account deficit of the time. His position was totally defensive blaming the rest of the world for the fiscal problems at home rather than acknowledging that the real problem was with an American financial system drowning in excessive unsustainable debt.

Interest Rates and Inflation will Increase Over Time

That was then but over time the tenure of Fisher's words began to change. By May 2008 he began to finally realize that the fiscal problems of the U.S. were indeed home grown. In an address to the Commonwealth Club of California that month he warned that 'a frightful storm is brewing in the form of untethered government debt' that will be unimaginably more devastating to America's economic prosperity than the subprime debacle and the recent debauching of credit markets' unless Congress were to take steps to resolve the fiscal imbalances. He went on to say 'such structural deficits will raise long-term interest rates' and, should they careen out of control, create political pressure on central bankers to adopt looser monetary policy down the road.' Unfortunately, Fisher was of the opinion that Congress would not face up to its responsibilities to resolves these liabilities finding it easier to ignore them that to take the required action and that such inaction would produce 'the mother of all financial storms.' That was May, 2008 and this is May 2009. Has anything changed to make this less true today?

Fisher suggested that if this were to happen inflation would increase dramatically and that 'inflation is a sinister beast that, if uncaged, devours savings, erodes consumers' purchasing power, decimates returns on capital, undermines the reliability of financial accounting, distracts the attention of corporate management, undercuts employment growth and real wages, and debases the currency.' We are not there, at least not yet, but it certainly is not something to look forward to.

You are to Blame

Fisher concluded his May, 2008 address by saying these memorable, albeit ignored, words: "Will we take the painful fiscal steps necessary to prevent the storm by reducing and eventually eliminating our fiscal imbalances? That depends on you. I mean "you" literally. This situation is of your own creation. When you berate your representatives or senators or presidents for the mess we are in, you are really berating yourself. You elect them."

The above would be considered very harsh words coming from anyone and particularly from a sitting member of the Federal Reserve - and they were said before the current administration and the Fed embarked on compounding the situation by multiplying the debt load several times over. There seems to be no doubt that high inflation followed by high interest rates is definitely in our future.

Credit Markets Contracted a Hideous STD

Not surprisingly, Fisher was adamantly opposed to the drastic escalating of debt, initiated by the outgoing Bush administration (and compounded, in spades, by the current Obama Administration). He warned in a September 2008 speech to the New York University Money Marketeers Club that such action would put 'one more straw on the back of the frightfully encumbered camel that is the federal government ledger plunging the U.S. government deeper into a fiscal abyss causing us to become submerged in a vast fiscal chasm.'

Fisher went on to say in the most colorful words imaginable that 'the seizures and convulsions we have experienced in the debt and equity markets have been the consequences of a sustained orgy of excess and reckless behavior. Our credit markets had contracted a hideous STD - a securitization transmitted disease - yet I was and I remain skeptical that lowering the fed funds rate is the most effective antidote for such a pathology Indeed, if this is a DNA issue, perhaps no financial system - no matter how enlightened it's central bank or sophisticated it's regulatory architecture or wise it's Congress or executive - can prevent nature from running its course.'

It would seem from the above that Fisher does not think the recent action by the Obama Administration and his very own Federal Reserve is the answer to the problems we are faced with and may indeed exacerbate the situation. That certainly flies in the face of what Federal Reserve Chairman Bernanke, Secretary of the Treasury Geithner and President Obama are saying. Who is right? Only time will tell.

We now have a Godzilla Economy

The above comments were extremely ominous and contrary and, no doubt, not very well received by Fisher's peers and, as such, he adopted a more moderate and optimistic tone in a speech at Harvard's John F. Kennedy School of Government in late February 2009 saying 'we find ourselves in these days is what might be called the Godzilla Economy (in the classic 1954 film, Godzilla destroyed Tokyo, which then represented roughly a third of Japan's industrial production) and it presents a monstrous challenge. Irrational exuberance has been replaced by irrational fear - when what was a sure thing yields to uncertainty.

Rube Goldberg Engineering is Required

'These are complex, trying times' he continued, saying 'Our economy faces a tough road. We are the nation's central bank and we are duty bound to apply every tool we can to clean up the mess that has soiled the face of our financial system and get back on the track of sustainable economic growth with price stability even if we have to deploy a little Rube Goldberg engineering to get the task done We are navigating uncharted, financially treacherous waters. Our fiscal authorities must carefully plot a course between the immediate needs for stimulus and the future needs of our children and grandchildren ... It may seem like the stuff of the wildest dreams to imagine our getting ourselves out from our current nightmarish predicament. But I believe we can and we will'.

The Federal Reserve Failed

Following up on his speech of the previous month in which Fisher said "to the unsuspecting world, all was well" he finally acknowledged this past March 26th in remarks before the Annual Redefining Investment Strategy Education Forum that 'most of the financial community, including those of us at the Federal Reserve, failed to either detect or act upon the tell-tale signs of financial system excess'. He went on to say that the aggressive rescue efforts being deployed or in the development stage should soon stem the decline in growth but, that being said, a turnaround would not happen overnight concluding that 'We have miles to go before we sleep.'

New Levels of Prosperity Seen - Eventually

As time has passed, however, Fisher has become more of a cheerleader than a critic as almost identical speeches this past April in Japan and China revealed: 'In contemplating the future of the American economy and our ability to overcome our current financial predicament, I take great comfort in knowing that we have faced far tougher tasks and have always accomplished them. It is true that we Americans often confront storms of our making. We occasionally falter and get blown off course but we never give up and always come roaring back stronger, leaner and more efficient than we were before. For 233 years, the people of the United States have demonstrated that they are masters of the process of creative destruction As an American, I may be insufficiently humble, but I consider our track record and our adaptability the stuff of an eventual recovery that will take my country to new levels of prosperity.'

Back from the Abyss

Just last week (May 15th) in remarks before the annual convention of the Texas Bankers Association Fisher patted he and his colleagues at the Federal Reserve on their collective backs saying that he believed the Federal Reserve has prevented America from falling into the chasm of an economic depression and that their actions 'succeeded in pulling the financial markets and the economy from the edge of the abyss ... If fiscal policy has been properly designed it should propel the economy further away from the edge and put us on its way to a new cycle of economic growth ... I think we have gotten it right ... So much for the Gospel according to the Dallas Fed!' There is nothing wrong with being optimistic in ones' outlook and comments but to me he no longer has the ring of the 'I am a Texan and Texans speak plainly and directly' champion of the truth. It begs the question: Is he being muzzled?

(For all Fisher's speeches see www.dallasfed.org/news/speeches/fisher.)

Where Should we Invest?

I have been reviewing the advice offered by the eminent economists and analysts as outlined in my 4-part series of articles entitled "Warning! Fiscal Hurricane Approaching! Is Your Portfolio Secure?" and acting accordingly. I've put a sizable portion of my assets in a mix of gold bullion, silver coins, gold and silver mining company stocks and some of their long-term warrants (a twenty dollar subscription to Precious Metals Warrants will provide you with specific information and you can also sign up for a free weekly email, The Warrant Report); another sizable portion in some financially secure, blue chip, beaten down stocks with consistent earnings growth and above average dividend yields and growth; the balance (6-months worth of living expenses) in short-term government securities and cash. Everyone has a different sized portfolio, different risk tolerances, different investment knowledge, different financial needs, different cash flows, and different ages so no one asset allocation approach applies to every investor. Reflect on your own personal financial situation, do your research and act accordingly.

Lorimer Wilson

321gold Ltd