-- Posted Monday, 26 January 2009 | | Source: GoldSeek.com
by Howard S. Katz
Happy day, gold bugs. Gold broke out on Friday, and the February contract briefly touched $900. Agnico Eagle Mines broke out, and many of the better golds are developing volume, suggesting a breakout to come this week. But the really important technical action can be seen if we step back from the chart a bit. As the dollar rallied from mid-December to this past week, gold held steady. We all know that it is normal for gold to move inversely to the dollar, and a strong dollar rally, such as we have had over the past month, should have put gold sharply down. It is like one stock which can hold steady when the general market is declining. That shows great underlying strength, and it will rally sharply when the market bounces back.
But gold bugs are not happy. They are not happy because they are confused. Sadly, there are people in the gold bug movement who are sowing discord. These people are preaching depression. “A depression is coming, as big as the Great Depression” they shout. “Sell all your assets and hold dollars. The U.S. dollar will rally strongly.”
Now gold bug readers are not stupid. They know that, if the dollar rallies, then gold will go down. How can you be a gold bug advisor and tell people that the dollar is going to rally, and almost all prices will go down? Listening to nonsense like this is a good reason to be confused.
First, the field of economics today is divided into two parts: establishment economics and alternative economics. The establishment is rigidly controlled. The people in power teach courses and hand out titles. If you parrot everything they say, then they give you a title (such as a bachelor of science in economics). Great importance is placed on such titles in establishment economics. Alternative economists, on the other hand, acquire their economics on the basis of freedom. They study it on their own. They visit libraries and hunt down the best writers via small out-of-the way publishers and bookshops. Their highest value is the judgement of their own minds. In our day, establishment economists preach garbage and are almost invariably wrong. Alternative economists preach a wide variety of doctrines, and a few of them have a record of being usually right.
Second, what are you, the seeker after economic truth, to do in this situation? First, you must completely ignore all establishment economists. When you are first starting in the field, you will naturally check them out. But after a little study you find that they do not know anything, and their predictions are notoriously wrong (the New York Time’s and Wall Street Journal’s support for “Dow 36,000” back in 1999 to take one embarrassing example – said objective to be achieved by 2002-2004, “The Great Depression of 1990” to take another example). Further, these establishment economists are not at all deterred by their repeated failures. Such failures roll off their backs. This is because they are not searching for truth. They are searching for the approval of authority. So they are not the least put off that they have not found truth.
When you have assigned the establishment economists to that great garbage dumpster in the sky, you must turn to the alternative economists. That is probably what has brought you to this web site. But here your search is not ended. Indeed, it is just begun. Because alternative economists have many different points of view. As I indicated above, some of us believe that the big threat to your economic well-being is a sharp rise in prices (what is generally but incorrectly called inflation). But here today I want to discuss those who believe that the big threat is a sharp decline in prices (generally but incorrectly called deflation).
If you went to think clearly about economics, it is important to keep these two possibilities in your mind. They are opposites. If you have one, you can’t have the other. And when completely understood, they cover all possibilities. In the language of the mathematician, they are mutually exclusive and exhaustive.
What has happened is that the government has acquired control over two aspects of our economy: money and credit. Instead of money being created by the people (which was Thomas Jefferson’s intention when he recommended a money system for America in the 1780s), today money is created and (occasionally) destroyed by the government. With the creation of the nation’s 3rd central bank (also against Jefferson’s intention), the government also controls the level of interest rates and the quantity of credit. It is government manipulation of money and credit which causes the big economic movements in our society. This is what makes the stock market go up and down. This is what moves commodity prices and consumer prices. This is what causes the prices of housing and commercial real estate to go through their fluctuations.
The first thing you need to understand is that, in the long run, money and credit move together. If the central bank wants to ease credit, the only mechanism it has is to buy U.S. Treasury bills (or related instruments). Since the central bank has no savings and no earnings, then, when it buys T-bills, it pays for them by counterfeiting the money. Thus an easing of credit is accompanied by an increase in money (2008 being a good example). The period of the 1930s was just the opposite. Credit tightened, and the money supply dropped by 30% from 1930-33. It is possible to have minor discrepancies for short periods of time. For example, Greenspan kept on easing credit in the late 1990s, but the private banks fought him by offsetting his increase in the money supply, and the net money supply for that period was flat. But such discrepancies between money and credit are rare and not of long duration.
The second thing you need to understand is what is happening in the immediate future. Is credit easing and money going up, or is credit tightening and money going down? These are directly opposite economic events. The first case is bullish for gold; the second case is bearish for gold (and most other goods). You cannot protect yourself from both events at the same time. So you have to know which is coming.
The problem is complicated by the fact that establishment economists speak with forked tongue. Instead of calling a contraction of money and credit what it is, terms such as “deflation,” “recession” and “depression” are used. These terms are not well defined, and the intention is to arouse your emotions, not to appeal to your reason. You can see this when you are in a discussion with an establishment person, and he says to you, “Don’t you have any concern for the unemployed?” He is trying to make you feel ashamed because you are not a person of love. It is a blatant appeal to emotion and an attempt to embarrass you. And it has nothing to do with economic truth. In essence, “deflation” and “depression” refer to a money/credit contraction. “Recession” is an inbetween state best defined as a mild depression.
What is happening right now is that the establishment is screaming at us: “RECESSION,” “DEPRESSION,” “DEFLATION.” But the only evidence they can offer us are economic statistics which are the result of their (earlier) screaming. The New York Times told us that we were in a recession. So retail outlets which normally advertise in the Times cut back on their advertising, and the Time’s ad revenue fell. Concurrently, the price of the Times’ stock fell from 16 (in mid-Sept.) to 5¾ (on. Jan. 23), thus “proving” that they were right
In contrast with what the establishment is saying, we get a completely different picture when we look at what they are doing. Below are two pictures, each of which is worth (more than) 1000 words.
Starting in September (about the time that the Wall Street bailout bill was working its way through Congress), the Federal Reserve started to create money, in the form of Federal Reserve Credit. At this time, the level of Fed credit has multiplied by 2½. Much of this has already flowed into the monetary base, and this has doubled during the same period. From the monetary base, the money will next flow into the money supply proper. We can thus be fairly well assured of a doubling in the U.S. money supply, or worse, and this only if the Fed does not further increase its credit.
To put these numbers in context, the U.S. money supply more than doubled during WWII between 1941 and 1945. It almost doubled during the Reagan Administration (1981-89). Here we are threatened with a doubling of the money supply in approximately 1-2 years time. This is the worst money infusion in American history. Such events have always caused a corresponding increase in prices.
The second picture is a chart of U.S. interest rates since Jan. 2007 (below). While the media scream about a credit tightening, interest rates have fallen sharply, from 5% to 0%. In a credit tightening, rates go up. If rates are going down, then credit is easing. A credit easing has an additional effect on certain credit-sensitive goods, such as housing and stocks. The sharp rise in housing prices from 1997-2007 was caused by the Greenspan easing of 1994 2004.
So the establishment is doing what it did in 1982, in 1985 in late 1987, in 1990 and in 2002. It is bad mouthing the “economy” and shouting “recession.” In 1990, it shouted “depression.” And it is printing money and easing credit to beat the band.
For what they say,
And this is true,
Is far removed
From what they do.
The members of the gold bug community who have embraced the “depression” theory of the media are basically a decent sort because they understand that one can not get something for nothing. But they have succumbed to the pressure of the media. They do not have independent minds, and when people all around are saying the same thing, they feel that they must agree. This social pressure is so great that it overcomes their logical thinking. As a group, the alternative economists are better than the establishment economists, but unlike the establishment economists they have many diverse opinions. Selecting the self educated group of economists is your first step on the road to truth, but selecting the few economists who have the truth is the final step. You must listen to their arguments and then test each against reality. “By their fruits ye shall know them.”
I call myself the one-handed economist after Harry Truman’s complaint against the economists he inherited from F.D.R. I don’t hedge my predictions, and I give you advice on which you can trade. You can get an idea of my thinking by visiting my blog, www.thegoldbug.net (no charge), which gives a weekly comment on social issues from an economist’s point of view. This week’s blog is about the inauguration of Barrack Obama and is entitled, “THE HISTORIC MOMENT.” The One-handed Economist is a fortnightly newsletter which analyses the financial markets and makes specific recommendations on what to do. A one year’s subscription is $300. (Purchasing the New York Times for one year at its newsstand price costs $728, but this is because they have to pay all those salaries of the establishment economists who are continually wrong.)
Thank you for your interest.
-- Posted Monday, 26 January 2009 | Digg This Article
| Source: GoldSeek.com
