-- Posted Monday, 29 December 2008 | | Source: GoldSeek.com
by Howard S. Katz
12-29-08
Below you see the chart of the U.S. money supply for most of the last 2 years. It has risen by 16% in just half a year. To put this figure in context, the worst year for money creation since WWII was 1986, in which the money supply grew by 17% for the full year. To make matters worse, the monetary base, which is a good predictor of the future money supply, has almost doubled over the same period. Federal Reserve Credit, a predictor of the monetary base, is up by a factor of 2½ times, and Richard Fisher, the Dallas Fed chief, has given us his opinion that, when the final numbers are in for 2008, it will be a factor of 3. (Source Federal Reserve release H.6.)
What will happen to all this new money? What will become of it? Well there is in some very influential quarters the view that it will simply disappear. It will be hidden in mattresses, stuffed in wallets and purses, buried in tin cans or squirreled away in home safes. But used to buy things? According to these influential people who would ever use money to buy things? Banish the thought.
This idea, that money will simply disappear into a huge black hole in the ground, is discussed in the 12-26-08 issue of the One-handed Economist. It is called the theory of the liquidity trap. And there I explain why there never was a liquidity trap and never will be a liquidity trap.
The theory of the liquidity trap was invented by John Maynard Keynes as his explanation for what was called the Great Depression. (It was great, but it wasn’t a depression, and this also is explained in the 12-26-08 OHE.) Keynes was not much of an economist. He was too smart to have ever believed Keynesian economics. But he was one of the world’s greatest confidence men. He saw his path in life as kissing up to the rich and powerful and helping them to get richer by stealing from the poor. The idea was that they would throw him a few crumbs from their table, and this is how he would make his way in the world.
Subscribers to OHE know that the reduction in the money supply of 1930-32 was a deliberate policy of the U.S. Government, and it was open advocated by the Republicans of that day. In fact, believers in the Keynesian theory of the liquidity trap are so stupid that I challenge them as follows: Find even one case where there was a significant increase or decrease in prices in United States history which was not preceded by a corresponding increase or decrease in the money supply, caused by the Government. So if you think that all of the money now being created by Don Quixote Bernanke is going to disappear into a liquidity trap, then you are in for a painful surprise.
Here is the way it is. You have worked hard for many years and have accumulated a small stack of wealth. All of the nation’s media, and everyone to whom you talk, tell you to be part of the flight to safety. “Sell what you have. Turn it into cash. The U.S. dollar is going to be king. Everything not dollars will go down in relation to dollars. Sell your stocks. Sell your commodities. Sell your rare coins and objects d’art. And by all means sell your real estate. You know what is happening to real estate.”
And against this enormous weight of opinion, all that stands is the One-handed Economist and a few dedicated gold bugs. What to do? What to do?
But as long as we are actually on the subject, do you really know what is going on in real estate? Let us take a peek at the Census Bureau’s index of median home prices in the U.S.
These figures may be checked at www.census.gov/newhomesales. Note that median home prices bottomed in January 2008 and have been flat so far this year. There are a few other home price indexes, but they all pretty much tell the same story, and this is one of the most respectable. Look at this index. Home prices hit their low in January and have been essentially flat for the year 2008.
But you know what the media have been saying. Every month they scream at you that housing prices are falling, and this is a disaster. Now if the Census Bureau’s figures were wrong and if housing prices were falling, the media never explains how it would be a disaster. After all, from 1997 to March 2007 the median home price doubled in real terms. A house to live in and bring up his family became unaffordable to the average American worker. This was a disaster. The American people got a lot poorer in the period 1997-2007, and a return of housing prices to their 1997 levels would definitely be a good thing for the country.
But leaving aside the effects of a housing decline, let us just stick to the factual issue of whether or not there is a housing decline. Every month for more than a year, the media yell at you in the most colorful language that real estate is going down. And yet the simple, official figures show that it is not going down. Are the media lying? Well, they are not literally lying. But they certainly know how to spin the numbers and lead you to a false conclusion without technically saying anything false.
For example, in April of this past year the median home price was sharply up for the month and sharply up year-over-year. Yet all the media articles on home prices were shouting ‘”DECLINE.” The median home price for April 2008 was $246,100. The median home price for March 2008 was $227,600. And the median home price for April 2007 was $229,100. How could the April ’08 figure be described as down? The answer is that the media suddenly switched to reporting the 3-month average year-over-year. And the 3 month average for Jan. through March 2008 was below the similar average for ’07. The technique is that they keep 17 versions of the same indicator, AND THERE WILL ALMOST ALWAYS BE ONE WHICH IS GOING DOWN. So they can always say “down” whatever is really happening.
So with your precious little store of wealth at stake, what are you going to do? Are you going to believe the media, or are you going to believe this small group of gold bugs (and not even all gold bugs are sticking together in the face of this media onslaught)? Well, you might give some consideration to the 1970s. At that time gold started out at $35/oz. All the weight of society was against us. Henry Reuss, Chairman of the House Banking Committee, predicted that gold would drop to $6 or $8 per ounce. The Economist ran a satirical article saying that gold would, in the future, be $2/oz. The New York Times hired George Goodman (who had adopted the pen name Adam Smith) to dump on Harry Browne for lacking compassion. Imagine that! Mr. Browne was supposed to be wrong in his prediction because he lacked compassion. At this time, all the people with fancy titles, all the people boosted by the media were not merely wrong. They were disastrously, humiliatingly wrong. AND EVERYONE WHO TOOK THEIR ADVICE SUFFERED TERRIBLE LOSSES. But never, in all the years since, has any one of them uttered an apology for all the people they hurt.
What was the establishment’s advice in the early 1970s? Buy and hold good, sound stocks for the long pull. What are they saying now? Buy and hold good, sound stocks for the long pull. From 1966 to 1982, the real value of the DJI (corrected for the depreciation of the currency) declined by over 70%. From 1970 to 1980, the real value of gold multiplied by a factor of 12.
There is a saying, one man plus the truth is an army. Truth is not determined by having lots of people on your side. It is not determined by people with long, impressive titles. Truth is correspondence to reality. And the person who can shape his mind to be in accord with reality is the one who will get truth.
So you think there is going to be a liquidity trap? You think that all the money Bernanke is now creating will simply disappear and not cause any rise in prices? I have been telling you the opposite. Prices declined over the summer/autumn of 2008 because of an intermediate move by speculators (foolish speculators who let themselves be influenced by the media). Such intermediate moves interrupt pretty much all long term advances. Commodities have been in a 7 year move (which I am predicting is part of an approximately 20 year move). You don’t call an end to that because of an 8 month decline.
You think that commodities are going down because of a liquidity trap? Let’s take a quick survey. Cocoa has a double bottom and is acting as well as gold. Gold also has a double bottom and has already regained half its summer/autumn loss. Silver and platinum have just broken out of rounding bottoms. (By the way, I think that gold will continue to outperform silver for a while. The silver bugs will have their day, but it will be some time down the road.) Coffee has a possible head and shoulders bottom. Corn has an actual head and shoulders bottom. Cotton has a possible double bottom. Lean hogs has a head and shoulders bottom. And the background to all these formations is a possible head and shoulders bottom in the CRB index. (I am talking the real CRB index, -- which is now being called the CCI by another group of establishment idiots -- not the modern Reuters-Jeffrey index) And overshadowing the entire economy is a mean and nasty head and shoulders top in the U.S. dollar index. (This was featured in the 12-12-08 OHE.)
Let us fast forward to the year 2020 (when, I presume, we will all have perfect vision) and speculate on what we will see (sort of like fast forwarding to 1980 from the year 1972). I had previously thought that gold would make it to $3500. But with Bernanke tripling the U.S. money supply (and price level), I now think that $10,000 would be a better estimate. My estimate for the CRB used to be 1200, but now 3600 looks more reasonable. All of the foolish people who believed the establishment in 2008 will have lost their money. They will be packing shopping bags at the supermarket and sleeping on the park bench. They will look up to the sky and cry, “My lord Keynes, my lord Keynes, why hast thou forsaken me?” In the year 2020, the declines of summer/autumn 2008 will appear as minor blips on the long term charts (akin to the gold decline of 1975-76).
This is your choice. You have to perceive reality with your own mind. You are going to suffer if you are wrong, and you are going to prosper if you are right. I can lead you to the truth, but I can’t make you drink.
For more of my writing, visit my blog at www.thegoldbug.net (no charge). I blog weekly on political and social events from an economist’s perspective. This week’s blog is on AIDS, and you will be surprised to see that a similar establishment to the one which is creating economic hysteria and lying to you today created a general hysteria about AIDS and lied to the people of that day. My fortnightly newsletter, the One-handed Economist, is available through the web site (for $300/year). It is a good investment which will tell you about other good investments.
Thank you for your interest.
-- Posted Monday, 29 December 2008 | Digg This Article
| Source: GoldSeek.com
