-- Posted Monday, 15 December 2008 | Digg This Article
| Source: GoldSeek.com
by Howard S. Katz
Well, the dollar is going down, and Goldman Sachs predicts $30 crude oil. That makes it a good bet that most commodities are in the process of forming bottoms right now. Gold, of course, bottomed over 7 weeks ago. Get with the program. The Fed is printing money, and everything is going up.
Today I wish to discuss a segment of the gold bug community which is echoing the establishment line that the United States is on the verge of (some say already in) a serious decline in prices. These people usually take things a step farther and predict depression, rather than mere recession. Unfortunately, this merely makes them more wrong, and taking their advice will turn out to be a serious money losing proposition.
These people are generally good people and understand that one cannot get something for nothing (or as the Russians say, “The only free cheese is in the mousetrap.”). They are, consequently, outraged at the current policies of the U.S. Government, both Democratic and Republican. This predisposes them to believe the worst. Therefore, when the establishment “admits” to a recession, they carry it one step further.
These people are correct in that things are indeed bad. From 1972-2002, the real wages of the American worker declined by 18% (as compared with an average 30 year gain of 60% through most of American history). By 2007, houses had become unaffordable for the average person. But there is an intellectual error here which is very important. The period 1972-2008 has been a period when America has followed bad policies and gotten poorer, but it has definitely not been a period of falling prices.
Are prices going to rise, or are they going to fall? That is the crucial thing for you to know.
The proper definition of a depression is a period when the whole country becomes significantly poorer. This is what you and I and all the people in the country think of when we hear the word. But under this definition the worst depression in the country’s history was the period 1942-46. This, however, is not considered a depression by any establishment economist even though it was impossible to buy a new house or a new car and both gasoline and many food items had to be rationed. (The average American’s gasoline allotment was limited to 3 gallons per week.)
No, the periods designated as depressions by the economic establishment were periods such as 1866, 1873-79, 1893, 1896, 1921 and 1930-33. All of these were periods when the nation’s savers (the vast majority of the country) benefited greatly from the appreciation of the currency. (That means that the value of the money went up, and average prices went down.) Further, the period of 1866-1896, which was full of such “depressions,” was – in toto – the greatest period of economic growth both in American history and in the history of any country in the world. Indeed, a chart of butter consumption in the latter 19th century shows that people used more butter per capita in every “depression.” Thus, if there was a single person with a single brain in his head anywhere in the economic establishment, he would at least scratch his head (if he were honest) and say, “I can’t figure it out.”
The explanation is that the periods conventionally designated as depressions and recessions are not such at all. They are (severe and mild) credit contractions. In a credit contraction, wealth flows from the paper aristocracy to the American people. In a credit expansion, wealth flows from the American people to the paper aristocracy.
What then, we may ask, about unemployment in the great “depression” of the 1930s? The answer is that in 1920 the Republicans were confronted with a dilemma. Prices had doubled during WWI, cheating all the savers of the country of half the real value of their savings. To help the savers, the Republicans adopted the policy of “a good 5¢ cigar,” meaning a reduction in general prices to their pre-WWI level. They probably understood that this would require a period of unemployment. But the unemployment was brief; whereas the harm to the savers was long term. The unemployed were, at the worst, 25% of the labor force. The savers were the large majority of the population. Furthermore, the money put aside by the savers of the country went to buy/build machines which increased productivity and made the country richer. When faced with the choice between the savers and the unemployed, the Republicans made the right choice. (And no such choice would have been necessary if the Democrats had not depreciated the currency during WWI.)
This explains the problem. The concepts of depression and recession each have two different meanings. And when you give a concept two different meanings, it messes up your thinking because you can come to two different (even opposite) conclusions. And this is what has befallen these gold bugs. Their thinking has become confused because they have accepted establishment concepts.
For myself, I distinguish between a real depression and a “depression” (meaning a credit contraction. Definitely the U. S. is in a real depression (where the country becomes poorer), but we have been in such a depression since 1972 (because of the abandonment of the tie to gold in 1971). And such a depression is usually marked by sharply higher prices. Up until recently, neither Paul Volcker, Ben Bernanke nor any other establishment economist has objected to this real depression because they are whores for the paper aristocracy and always favor more paper money. When Bernanke triples the U.S. money supply, it will exacerbate the real depression, but it will prevent any “recession” or “depression” (meaning credit contraction).
In the 1930s, it was not necessary for the paper aristocracy to scare people with an imaginary “depression.” All they had to do was to misinterpret the money/credit contraction of 1930-33 as though it was something bad for the whole country. In 1933, they had a 30% decline in prices and an unemployment rate of 25%. Today they have nothing. They have not had a decline in prices in 53 years, and the unemployment rate is 6.7%. So it is necessary for them to manufacture a “depression” out of whole cloth. That is what the media have been doing for the past several months.
Now the media have a great deal of power to cause people to act irrationally. They have created a panic and have caused the declines in the stock and commodities markets. But, as Adam Smith showed, in the long run people act in their rational economic self interest. And that means that all the moves we have seen in late summer and autumn will have to reverse. After all, commodities have been going up for 7 years. You don’t reverse that with an intermediate reaction of 7-8 months.
Adam Smith could not predict just when rational self interest would kick in. For that, we need a tool which focuses on timing. This is provided by technical analysis. And right now this tool is giving us some very juicy information.
In the current One-handed Economist, I present a very interesting technical pattern in the U.S. dollar indicating that the dollar is about to resume its long term downtrend. Also of interest are some patterns in certain gold stocks which point in the opposite direction.
If you want to get a feel for my thinking, then please visit my web site, www.thegoldbug.net, in which I blog about matters of social concern (from an economist’s viewpoint). This week’s blog is about the auto bailout.
Some weeks ago, I predicted that the rally in gold would torpedo the U.S. dollar and that this, in turn, would lead to a general resumption in the commodity bull markets. The first part of that prediction is now coming true in spades. And did you notice that just a week ago, the CRB index (Continuous Commodity Index to the establishment) declined precisely to its 1980 high of 337? This high is important technical support and just might be the level which reverses the downtrend.
So are we going to have a “depression” (credit contraction) implying a decline in all prices? Or are we going to intensity our real depression implying a sharp rise in prices. The answer is in the chart above. Federal Reserve credit is the first step in the money creation process. It has already multiplied by 2.5 in 3 months, and Dallas Fed chief Fischer predicts that by the end of December it will be at a 3 multiple. The monetary base is already up by 71% (closing in on a double). Nothing like this has ever happened in American history.
To justify themselves, the establishment is spouting Keynesian theories which have proven wrong in every case since they were invented in the 1930s. They are going to be wrong again. Prices in America are going to explode. If Mr. Fischer is right, we face a tripling of prices. So the people shouting “depression” in the establishment sense are making a dreadful error, an error which could cause you to make some very wrong decisions and lose a lot of wealth.
Thank you for your interest.
-- Posted Monday, 15 December 2008 | Digg This Article | Source: GoldSeek.com
