-- Posted Monday, 27 October 2008 | Digg This Article
| Source: GoldSeek.com
by Howard S. Katz
A viewer was good enough to write and ask me about my claim that there either has to be currency appreciation or depreciation (deflation or inflation in today’s lingo). Can’t we have something like an inflationary depression? That indeed was what several of the people he regards as authorities are predicting. That is a good question because it leads to some very definite conclusions about whether to buy or to sell here in late October 2008. But first, let us step back and establish some basic ground rules.
- The first ground rule is that you have to pay close attention to your basic concepts. If your basic concepts are false, then it will mess up your entire thinking. When the people of the 17th century explained their crop failure as due to witches, that was a messed up concept because there are no witches. In a similar manner, most people in economics today use false concepts, such as recession, depression, inflation, deflation. Even the concept of economic growth is primarily used to designate periods during which the majority are getting poorer. These wrong concepts simply set them up for error.
- The final test that you have truth is that you can use this truth to predict the future. When Jim Dines, Harry Browne, myself and several other gold bugs predicted a major rise in the price of gold in 1970, the economic establishment, who were Keynesians, laughed at us. The Economist had done a satirical article saying that gold would fall to $2 per ounce. Henry Reuss (Chairman of the House Banking Committee) said that gold would fall from $35 to $6 or $8 per ounce. We were right, and they were wrong. They were wrong on their predictions because their theories of economics were wrong. But that they did not have the integrity to admit.
The United States was a largely free market society from 1788 to 1933, but not completely. One important flaw in the system was that bankers were allowed to create money out of nothing (to a limited extent). Thomas Jefferson and Andrew Jackson fought this and were partially successful, but some degree of banker privilege remained. Commercial bankers would take in gold/silver coin and issue bank notes for the coin. These bank notes substituted for money. Then the bankers would make loans, not with their own money, not with depositors’ money but with bank notes they had created out of nothing. Both money and credit would expand, and the bankers would make big profits. The bankers had learned that they could expand their notes up to about 4 times their gold and silver without having to worry about too many people coming to the bank to demand the gold and silver which each note promised.
However, sooner or later some banker would get greedy and go beyond the 4 times, and he would be hit with a demand to redeem his bank notes. Then would begin a cycle of money/credit contraction. A school of economists then grew up who acted as lap dogs of the bankers. They called the bankers’ money/credit expansion economic growth. And they called the period when the bankers had to contract a depression.
The bankers’ privilege to expand money has been extended in two ways: first, by the creation of a central bank in 1914 and second by the abolition of the gold standard in 1933/1971. In the late 1940s, the bankers bribed several of the top American universities to employ some of their lap dog economists. This kind of wrong thinking then took over American economics teaching with the result that pretty much everyone with a title in economics today has a head crammed with misinformation.
So the reality is that, all that is happening is first an expansion then a contraction of money and credit. The accurate definitions of depression and recession are a severe and a mild contraction of wealth which makes the whole society poorer. However, if we study those periods designated as recessions and depressions, we find that the great majority of the people are better off.
For example, in a typical “recession” or “depression” the first step will be a rise in interest rates. This benefits almost all the retired people. The second step will be a slowing of the increase (or an actual decrease) in the supply of money. This means that wages can catch up with (or actually get ahead of) prices, and this raises the wages of the average worker. To increase the income of almost all retired people and workers is to increase the income of the vast majority of the people. So why do these economists call such periods recessions or depressions?
The answer, of course, is that they are beholden to the bankers (consulting fees and other perks).
So the most important point is that the concepts of economic growth. recessions or depressions are like the concept of witches. All that exist are money/credit expansions or contractions. In the first case, the quantity of money will rise; in the second case it will fall. Prices will then rise (fall) a few years later.
So we can cut through an awful lot of nonsense in economics if we just understand that there are only two things which can happen: expansion or contraction. And if we want to know which, all we need to do is look at the money supply figures published by the Fed. For example, here is the monetary base for the past year.
Let’s see. The monetary base has increased by 35% in the past 6 weeks. This does not look to me like a contraction. It looks like the biggest expansion in U.S. history. And if you just cut through all the nonsense, the answer is obvious. The “depression” of the 1930s was caused by a 30% decline in the U.S. money supply (over 3 years). It was this factor which was responsible for the high unemployment. Anybody who can look at this chart and conclude that we are going to have a depression has his head screwed on backward.
But what about an “inflationary recession?” Haven’t we had such phenomena? Well, in today’s intellectual climate where most people run around shouting slogans and trying to create the greatest panic, almost anything can be alleged. There will be a period when money/credit is expanding. This will cause prices to rise. Then the rate of increase in the money supply is reduced. We would expect prices to continue to rise but at a slower rate. And the slowdown in growth of the bankers and their associated vested interests (the paper aristocracy) might be called a recession by the banker economists.
However, this case simply does not fit the facts of today’s situation. The money supply was flat for a few years up to September ’08. It has not reduced its rate of expansion. It has sharply increased it. So the “inflation” (currency depreciation) part of the prediction is correct, but the “recession” part is all wet.
By the way, outside of economics an inflation implies a going up, as in inflating a balloon. Why use this word to indicate a going down (depreciation) of the currency? I guess these banker-economists just don’t know up from down. But in predicting the markets it is very important to know up from down.
So the idea of a mysterious force from outer space which comes out of nowhere and causes a general fall in wealth in a free economy is nonsense. (This idea, by the way, came from Karl Marx.) Read Adam Smith. He taught that economics is the science of stability. High prices cause increased supply and cure themselves. Low prices cure themselves. Whenever an economic system is destabilized by an outside event (like a hurricane, a war or a Federal Reserve chief), it moderates the destabilization. It bounces back like one of those round-bottom dolls. Whenever you knock it down, it springs back.
So I say again to Paul Volcker in regard to his 10-10-08 (WSJ) prediction that “a full-scale recession appears unavoidable,” IN YOUR FACE PAUL VOLCKER, IN YOUR FACE.
Over the past two months virtually every good that is traded has gone down: stocks, crude oil, precious metals, the grains. And all this selling is due to stupid speculators who believed the media reports of recession/depression. Gold is a good example. Every measure of fundamental supply/demand shows that demand is far outstripping supply. The coin shops are no longer selling gold coins because they simply cannot keep up with demand. The U.S. Government has failed to keep up with demand for the American Eagle coin (although it is mandated to do so by law). The only reason that gold has been down is a large number of stupid speculators who have been selling it based on idiotic comments like that of Volcker. This surely is one of the great buying opportunities for gold and gold stocks that gold bugs will ever see.
I am confident because I follow my principle 2 above. I use my theories to predict the future, and my predictions work. I was one of the early gold bugs (right behind Jim Dines) in the late 1960s. I turned very bullish on the stock market in 1982. Then I predicted Black Monday 1987. I turned bearish on gold in January 1980 but turned bullish again at the end of 2002 and have been bullish ever since. Do you remember what the establishment has done over this time? They ridiculed the gold bugs in the late ‘60s. They tried to scare people away from the stock market (by citing Dr. Doom) in 1982. They turned very bearish after but not before Black Monday 1987. They were shouting “Dow 36,000” in early 2000. And some of you people want to believe Paul Volcker here in 2008? Well, if you want to throw your gold stocks out the window, we at the One-handed Economist, will be taking the opposite side of every trade you make.
I invite interested parties to visit my web site, www.thegoldbug.net, (no charge) which discusses social issues from an economist’s viewpoint. This week’s (10-27-08) blog discusses the rational way to vote in the coming election if you have reservations about both of the major party candidates. You are also invited to subscribe to my fortnightly newsletter, the One-handed Economist ($300/yr.), available through the website. This discusses the different markets and makes unhedged recommendations about how to best invest your money.
Thank you for your interest.
# # #
-- Posted Monday, 27 October 2008 | Digg This Article | Source: GoldSeek.com
