-- Posted Monday, 10 November 2008 | Digg This Article
| Source: GoldSeek.com
by Howard S. Katz
11-10-08
A self confirming theory is one which, when a group of people believe it, causes them to act in a way that makes it seem to be true (although it is not). The current establishment predictions of some kind of economic crisis have the character of a self confirming theory, at least for the short term. Do not be deceived by this self confirming aspect. Members of the economic establishment are very stupid, and if you follow, they will lead you to economic perdition (losing a lot of money).
As I have argued, the present crisis began Sept. 15 when the New York Times began a campaign to convince the nation that we were in an economic disaster described as “chaos,” or “crisis.” The rest of the media obediently picked up on this and propagandized the American people. The result was that in the 7 trading days from Oct. 2 to Oct. 10 the DJI lost 3000 points.
Right now the stock market has to be front and center for all markets and is the number one issue for gold bugs. This is because the decline in all commodities has gone beyond a normal intermediate correction and has to be ascribed to the panic created by the media. And this panic had its first, and most important, effect on stocks.
The panic attack is now over. The media will never admit that they are wrong, but the period of the relentless scare headlines and the enormous level of fear is now over. The purpose of the panic was to ram through the Wall Street bailout bill of Oct. 3, and this has now been done. The normal function of markets to correctly value goods will now take over and restore more reasonable price levels. For example, the stock market dropped from 11,000 to 8,000 in those 7 trading days. In a matter of weeks, it will be back at 11,000.
There is a well-established pattern whereby the media moan and groan about how bad the economy is and how the country is in a recession or depression. Do you remember The Great Depression of 1990? by Dr. Ravi Batra? The establishment really went with that one. Well, if you bought stocks in November 1990 and held to the end of the decade, your money multiplied by a factor of 5. That was some depression. This fear of a recession/depression is then used to pressure the Fed into a massive easing of credit, and this credit easing causes the stock market to go up. First, everyone becomes very bearish on stocks. Then the market explodes to the upside, leaving them on the sidelines.
When the media first started to shout “crisis,” they had no evidence. “Evidence” is now starting to come in, in the form of the rise in unemployment, and reported slow retail sales. The point which has to be understood is that this is an effect of the media propaganda.
We all know that the crisis of 9-11-01 caused a drop-off in retail sales for the remainder of September 2001. But this bounced back sharply in October. People need goods. They have money. They want stuff. So it has always been.
All of the money in the country currently buys all the goods produced in the country over a 5 week period. That is, an average dollar circulates about 10 times a year. The concept that people are somehow going to just stop spending (for no discernible reason) is insane. Such a thing has never happened.
There were only two “depressions” (the correct term is credit contractions) in the 20th century: 1921 and 1930-33. In both of these, people did reduce their spending, but this was not due to a public mood. The Government at that time had a policy to reduce the money supply. This was expressed by the Republicans slogan, “What this country needs is a good 5¢ cigar.” Since cigars had gone from 5¢ to 10¢ during WWI (and all other items with them), this was a policy of reducing the money supply so as to restore the price level of 1914. And indeed, this was achieved in 1933.
But in these cases people did not simply spend less because a mood struck them. They spent less money because the money supply was being reduced, and there was less money to spend.
Is the money supply being reduced today? Consider the chart below:
This is a chart of Federal Reserve credit, which is used to create the monetary base, which in turn feeds into the money supply proper. In the past 2 months, the Federal Reserve has increased its credit by 131%. That is, the U.S. money supply is going to double in a very short period of time. Just to put this number in context, the worst year for money creation since WWII was 1986 when the money supply increased by 17%. I don’t know how long the above insanity will go on, but clearly the Fed is going to blow the 1986 figure out of the water. There was no crisis when this started, but our Government, to fix the “crisis,” is destroying our economy. The sad fact is that both Democrats and Republicans are fully committed to printing money. After all, the Republican slogan since Reagan has been, “Let us have a tax cut like John F. Kennedy,” meaning a tax cut without a spending cut. Such tax cuts are financed, not by borrowing from the people, but by printing money out of nothing.
So the important thing for you as a gold bug to understand is that this is not a “deflationary” crisis. There is no decrease in the money supply, and the general public has never just stopped spending on its own without such a decrease. I hereby challenge all of the idiots who are now screaming “deflation,” “depression,” “recession” to find me one such period in American history where there has been a significant decline in prices without a corresponding decline in the money supply. And if you object to being called “idiot,” then simply apologize to Jim Dines, Harry Browne and the other gold bugs of the 1970s and admit, “The gold bugs were right.” That shouldn’t be too hard to do. After all, gold started out in 1970 at $35/oz., and by 1980 it was $875/oz. It must have gone up. If you don’t know the difference between up and down, you can not object too strongly to being called an idiot. And speaking of up and down, last week’s propaganda was “the biggest 2-day decline since 1987.” Of course, for the past week the DJI declined 3%, not exactly a big deal. More importantly, it closed almost 14% above its Oct. 10 low. There is that nasty difference between up and down again.
And you, the individual gold bug, how can you deal with this crisis? Well, the people of this country have just voted for the Demopublican candidate for President, and he is pledged to a program of printing money to “stimulate the economy.” You have got to make a decision. Is the establishment right in predicting “deflation” (appreciation of the currency), or am I right in predicting “inflation” (depreciation of the currency)? Because, if you make the wrong decision, you are going to lose big time. And in this case, guess what? It is the establishment which will wind up with your wealth. This is because they were given the privilege, along with the Fed, to create money out of nothing.
Did we see an increase in unemployment over the past month? Yes. Many employers, reading in all the papers that there was an economic crisis, decided to lay some people off. Many consumers, reading in all the papers that there was an economic crisis, decided to postpone their normal shopping. This gives the establishment papers grist for their mill and another opportunity to propagandize you. But these are things which have happened because people believed the establishment theory. They do not prove the establishment theory correct any more than the stock market decline proves it.
One by one, as the panic subsides, all of these indicators will go the other way. The stock market seems to have bottomed on 10-10-08. Gold stocks were hit hard in the general decline. Quasi-establishment types sold them to meet margin calls on their conventional stocks. Between end July and Oct. 24, the HUI/gold ratio fell from 0.48 to 0.23. That ratio will be reestablished (which implies at least a doubling for gold stocks). And we should have a nice move on top of that because gold is the most bullish acting of all the commodities. I believe that both gold and gold stocks bottomed on Oct. 24 and that autumn/winter will see a nice rise.
So I do not ask for much, only your soul. Either believe me, or believe the establishment. If you go with the establishment, they will eat you up. If you go with me, I will make you money. They have never been right. I’m not perfect, but I am right most of the time.
So I spit in the establishment’s face. I say to Paul Volcker, “There ain’t gonna be no recession.” I can tell the difference between up and down, and I have never been counterfeiter-in-chief for the Government. So I am two up on you.
Gold bugs are invited to read my blog, www.thegoldbug.net (no charge). This is a commentary on political and social issues from an economist’s perspective. If you want some of the good stuff that can contribute to your bottom line, then you are invited to subscribe to my fortnightly newsletter, the One-handed Economist ($300 per year). Here I analyze specific areas of the economy and make specific recommendations.
Thank you for your interest.
-- Posted Monday, 10 November 2008 | Digg This Article | Source: GoldSeek.com
