-- Posted Monday, 20 October 2008 | Digg This Article
| Source: GoldSeek.com
By: Howard S. Katz
In your face, Paul Volcker. In your face, Ben Bernanke. In your face, Al Abelson. In your face, DeLong, Rogoff and Johnson. In your face, New York Times. In your face, Wall Street Journal. You think you can take us gold bugs down. We have just gotten off the canvas, and we are going to knock you out.
For the past month, the New York Times has orchestrated a mass panic where most people are running around in a state of hysteria. They are not very precise in their description, but when they use phrases such as, “Financial Crisis” (9-15-08) and “Day of Chaos” (9-26-08) and when Al Abelson writes, “Chicken Little was right,” (10-06-08) we get the idea that something is wrong.
And then when the stock market drops 3,000 points (DJI) in less than 2 weeks, we know that a lot of other people have that idea too.
1) Now there are basically two types of thing which can go wrong in an economy. In the first type, there is not enough money. The (per capita) money supply is declining. This causes high real wages (as nominal wages do not decline as rapidly as prices) and is usually associated with above normal real rates of interest (which is very good for retired people). This is bad for the bankers (because they can’t make as many loans) and for Wall Street (because stocks go down). Among modern economists there is a great reluctance to call things by their correct names and words are used for emotive content and political effect. However, at the One-handed Economist we call a thing according to what it is. And this first wrong thing is an appreciation of the currency (an increase in the value of money). A modern term for the same thing is “deflation.” However, this is a strange word because “deflation” outside of economics means a going down (e.g., a balloon), and in this situation the value of the currency is going up.
Most people will describe this wrong as a “recession” or “depression;” however, these words imply a general decline in the whole economy. Why should the whole economy, for no discernable reason, start going down? Take the longest period of currency appreciation in world history, the U.S. from 1866 to 1896. This was a period of repeated “depressions,” including one almost as severe as that of the 1930s. And yet the U.S. emerged from this “bad” period as the richest and most rapidly growing country in the world. I have often pointed out that during the great “depression” of the 1930s Americans switched from margarine to butter, ate more meat and gave more to charity. Is this the behavior of people who are getting poorer? Indeed, there was a popular song, “Tomatoes Are Cheaper,” by Eddie Cantor pointing out that wages had not declined as rapidly as prices; hence real wages had risen; and this was therefore a good time to start a family.
2) The second thing which can go wrong in an economy is too much money. This causes low real wages (hence low unemployment) and low interest rates. Prices of things rise faster than your ability to buy them. But the initial effect of the increase in money is a big boost to the profits of the large corporations and to the stock market. This is a currency depreciation. Two examples of currency depreciation are Germany in 1914-1923 when prices rose one trillion times and Zimbabwe over the past two years. According to the Hanke Index for Zimbabwe, prices rose from an index number of 1 on Jan. 5, 2007 to an index number of 16.1 trillion on Oct. 10, 2008. They have been multiplying by 4-fold per week for each week since Aug. 22, 2008. So they are probably at an index number of 64 trillion right now.
Despite a lot of propaganda to the contrary currency depreciations are a lot worse for an economy than appreciations. Right now in Zimbabwe raising prices is illegal. But the government prints money; so everyone ignores the law. Thus everything really is chaos because one can be arrested for taking simple, everyday actions such as buying food. One law which cannot be ignored because it is strictly enforced prohibits the people of Zimbabwe from taking an amount of money out of their own bank accounts greater than what in U.S. terms would be $1 to $2 dollars per day.
The worst currency appreciation on record occurred from 1929-32 in this country and saw a 30% decline in prices in 3 years. The worst currency depreciation is Zimbabwe where prices, as noted, multiplied by (an estimated) 64 trillion in less than 2 years.
Well, what kind of “financial crisis” and “chaos” is the establishment threatening us with to cause such mass panic? It is not always easy to tell because their language is calculated to arouse emotions not to convey facts or deal with reality. But we can get a clue. For example, Paul Volcker says, “a full-scale recession appears unavoidable. “ (“We Have the Tools To Manage the Crisis,” Wall Street Journal, 10-10-08, p. A-17.)
“Recession” in establishment lingo means “a bad thing associated with currency appreciation.” Evidently Paul Volcker thinks that prices are going to go down.
It’s the current policy of the economic establishment never to define any of their concepts. In this way, they can always argue that they were right by switching the meaning of what they say. I remember in the early 1970s when they said that the price of gold would go down to $8 per ounce (Chairman of the House Banking Committee Henry Reuss), and then in November 1979 when they said that the gold bugs (who had been brilliantly right) were a “lunatic fringe.” But back in the old days, when they were just starting out, they slipped up. They actually defined one of their concepts. Arthur Burns, of the National Bureau of Economic Research, defined a recession. as 2 consecutive quarters decline in real GDP.
As we saw above, there is no such thing as a recession, and anyway GDP does not measure a country’s wealth. But Arthur Burns blurted it out, and I’m going to hold them to it. I am interpreting Volcker’s prediction of 10-10-08 as meaning that he expects real GDP to be down for 3rd and 4th quarter 2008.
Well, Mr. Volcker. You’re wrong. You’re wrong. You’re wrong.
Real GDP is a measure of activity not wealth. And since government-stimulated activity is usually waste, it mostly happens that, when GDP goes up, the country is getting poorer. (That is why in the 2nd half of the 20th century Italy could outproduce West Germany in GDP but not in anything else.) In any case, you can closely approximate real GDP by just watching the money supply. By this measure real GDP for 3rd quarter ’08 should be only slightly positive, and it is possible that the enormous panic at the end of the quarter will put it just barely into negative territory. However, the 4th quarter of ’08 is a different story. As we saw last week, Ben Bernanke is printing money as though he were trying to ward off a massive appreciation of the currency. Bernanke always talks about the 1930s “depression.” He is living in that era. It is an obsession. But right now, of course, we are in the middle of a massive currency depreciation. The U.S. dollar has dropped from 120 to 82 on its index. The Commodity Research Bureau index has risen from under 200 to almost 400. And when the history of our age is written, it will look like the 1970s with 2008 taking the place of 1973.
Ben Bernanke is fighting the wrong war, at the wrong place, at the wrong time. He is in an era of currency depreciation, and he thinks he is in an era of currency appreciation. By printing money like crazy, he is throwing gasoline on the fire. So the chances of a down 4th quarter in real GDP are zero.
In your face, Paul Volcker and all the rest of you idiots who are predicting recession or depression. You are wrong, and unlike the past when you tried to weasel out of your mistakes, I am going to hold your feet to the fire.
What is the import of this for gold bugs? It is very simple. Gold has held up well in the general decline and looks poised for another autumn-winter rally. But gold stocks have been carried down by the general panic and by margin selling on the part of conventional investors (to protect their other holdings). Thus the HUI/gold ratio has declined from 0.50 through most of the century to 0.26 on the close Friday (10-17-08).
This is a fantastic buying opportunity. Gold stocks are cheap, cheap, cheap. I have been wrong over the past few months as I did not predict that they would get so cheap. But we will look back on October 2008 as the buying opportunity of a lifetime. The New York Times has done us a favor. They have thrown the nation into a panic and made people believe in a currency appreciation when the truth is that the currency is about to collapse and all prices explode. They are giving us the opportunity to buy good quality gold stocks at half price.
There is a fire sale in gold stocks, and Ben Bernanke is throwing gasoline on the fire.
There is a group of economists who present themselves as gold bugs and use the gold bug forums to insinuate establishment propaganda. These people are now screaming that the country is in a depression. When they prove wrong, they will simply erase this from their minds and go on as before. For shame on these people. There are only two possibilities. Either the currency is appreciating (which has not happened since 1955), or it is depreciating. If you are going to be an economic forecaster, you have to know which. And it isn’t hard. Just look at the chart below of the monetary base. Ben Bernanke is printing money, and I am on the lookout for helicopters.
You are invited to visit my web site, www.thegoldbug.net (no charge). The last few blogs have been devoted to the Wall Street bailout bill and what persons opposed to this legislation can do about it. If you want some good gold stocks to buy and some good explanations for what is happening economically in this crazy world, you are invited to subscribe to the One-handed Economist ($300/year). Subscriptions are available via the website.
Thank you for your interest.
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-- Posted Monday, 20 October 2008 | Digg This Article | Source: GoldSeek.com
