One expert’s money opinion

With GM appearing to be on its way to bankruptcy, the Dow Jones dropping again and the local housing market in tatters, everyone seems to have an opinion — whether they’re qualified to or not.

So the Independent decided to seek out one of the most respected local experts, Chief Economist Michael Pento of Huntington Beach-based Delta Global Advisors. Below, Pento offers his take on current events — and future prospects.

What’s your take on the rhetoric coming out of the G20 summit? Do you think world leaders have adequately defined the new rules of the road to get us out of this mess?

Most of the rhetoric coming out of G20 has to do with regulating Wall Street and banks. In embracing the belief that increasing government control of the private sector will engender stability and growth, they miss the key point. It was the abrogation of the gold standard that allowed excessive credit and risk to exist. It was the global acceptance of a fiat currency (which is backed by a government, not by tangible commodities like gold or silver) that allowed interest rates to fall below the free-market rate provided by savings. Thus, we suffered a series of rolling asset bubbles. More regulation will lead to more corruption of market forces and will stifle growth but will do little to prevent the boom-bust cycle.

There seems to be a major economic paradigm shift based on technological advancement, so the old ways to solve bubble bursts and recessions may not apply today. Has the world truly “flattened,” as author Thomas Friedman would say? And does our approach to handling economic decline therefore have to change as well?

In an ordinary recession the Fed lowers rates and the cost of money falls as its availability rises. Consumers begin to borrow and spend more and the recession ends. This is not an ordinary recession. It looks more like a depression. A depression is caused by excessive debt (total debt as a percentage of GDP is currently 358%), and bringing down the cost of money while the consumer is choking on debt does little to increase borrowing. It is reducing debt that is their paramount concern. Artificially reducing rates and debt service provides temporary relief, but since debt levels remain high, no viable healing in the economy can occur.

People are wading through a lot of information on the best ways to ride out the recession, and not all of it is helpful. What should people do with what money they still have? Should they find a safe place for it, or consider the “bargains” that have been thrown around, like plummeted stocks or real estate foreclosures — or even look at the much-hyped gold market?

Since Treasury, Fed and the Administration have made it abundantly clear that they are seeking inflation as the way out of our malaise, I would start to accumulate those stocks and commodities associated with the reflation trade. Precious metals, base metals, energy and agriculture look good here. Of course, inflation does not resolve economic problems — it causes them. Therefore, in the long-term avoid those sectors dealing with consumer discretionary purchases.

How should the government handle the dire straits of major banks, or the domestic auto industry? Don’t bankruptcies and bailouts affect taxpayers the same way in the end?

I believe in Joseph Schumpeter’s creative-destruction theory. We must allow businesses to fail in a free-market economy. We cannot punish (tax) those that are successful in order to keep alive those companies that have proven insolvent and obsolete.

Can you look into your crystal ball and estimate how long it will take the country and world to get out of this morass?

It is my contention that all we are doing (massive increase in Federal debt, zero-percent interest rates, huge increase in money supply) will exacerbate the problem. Therefore it is too soon to talk about healing because in the long run things will get much worse than today. There may be some period of what looks like ostensibly a better economy. But that should be short-lived. It was inflation and debt that took us to the brink of disaster. You cannot escape from that by doing more of the same.

And finally, what’s your forecast for the local Huntington Beach economy?

We see increased foreclosures and more stress in the local economy. Things are not catastrophic but not showing any signs of improvement either.