Agcapita Update

November 2010
Agcapita Update

It is axiomatic that central banks can control interest

rates or exchange rates - not both.  As of late, they
are falling over themselves to signal their willingness to
sacrifice exchange rates.  Let there be no doubt on this
point - central banks have an unblemished track record
in only one area and that sadly is currency devaluation. 
The US dollar has experienced a 97% loss in purchasing
power since the inception of the Federal Reserve and
the Canadian dollar a 95% loss since the inception of the
Bank of Canada.

Official wisdom seems to be that a devaluation driven by

enormous increases in the money supply is necessary
for the US to grow out of its recession. Unfortunately, the
US is pursuing this policy at the same time that the over
90 countries that run a current account surplus with the
US are trying to maintain export competitiveness via their
own fledgling devaluation programs.  ZIRP is a global
phenomenon.

A new area of mercantilism and competitive currency

devaluations is clearly upon us and the consequences will
be a global loss of purchasing power.  US policy does beg
the simple question - if people could be made wealthy by
debasing the currency wouldn’t the Argentineans and the
Zimbabweans (fill in your favorite currency failure here) be
the richest people on the planet?

Now to the unintended consequences.  We are witnessing

something akin to a positive feedback loop in the global
monetary system.  With each massive injection of
freshly created money, the system becomes increasingly
unstable.  The end result is that every effort to fix the
problems with more of the same QE merely creates
another larger problem, hydra like, elsewhere.  In turn,
each new problem is attacked with a larger dose of fresh
money and so on and so on... repeat until bankrupt or in
stagflation.

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Agcapita Update (continued)

state pension obligations by the Kellogg School of

This brings me to the main point of this letter - and Management reveals the magnitude.  By performing
I promise there is one.  ZIRP is effectively throwing independent calculations on governments’ raw
pension plans and savers onto the bonfire of the numbers, it was concluded that the unfunded
banking system.  What I mean by this is that low obligations of municipal pensions were more
interest rates have created a huge stealth subsidy than double the officially reported figures. By the
that is being donated to the banking system.  municipalities’ accounting, they had a total of $190
billion in unfunded obligations while the study put
How are pension plans being effected you may ask?  the actual amount at $383 billion.   But wait it gets
The issue arises because a significant number of much worse.  The second Kellogg study found a
pensions assume annual returns in the range of 8% state-funding gap of $3.2 trillion - for a grand total at
when they are planning how to meet their obligations.  the municipal and state levels of around $3.5 trillion -
As a large portion of pension portfolios are in fixed more than the banking bail-out to date. 
income securities that are now yielding a fraction of
that number, these return assumptions are aggressive Retirees who have been promised benefits are going
to put it mildly.   The longer ZIRP continues the to exert powerful political pressure to be paid in full.
worse the problem will become.  Ultimately, benefits Unfortunately, it does not appear that there will be
will have to be reduced and/or large amounts of enough cash to pay them and stay solvent.  Once
additional capital in the form of higher contributions again, the federal government is likely to step in and
will have to be collected.  Barring this pensions will go bailout the pension system with more freshly printed
bankrupt.   money - QE 3 and 4 anyone?

Just how serious is this funding shortfall problem?   Kind Regards

A recent pair of US studies on municipal and
Stephen Johnston - Partner

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