-- Posted Monday, 16 February 2009 | | Source: GoldSeek.com
By Howard S. Katz
Here is the chart of gold from the 2001 low to Feb. 13, 2009. In the debate which is now going on in economic circles, I would like to ask: Looking at this chart, do you see prices going up or down?”
It is one part of the very low state to which the science of economics has fallen in our day and age that this debate is framed in terms of inflation vs. deflation. An economist prior to the Civil War would not have described a general increase in prices as inflation. He would have described it as a depreciation of the currency. Conversely, a general decrease in prices should not be called deflation but rather an appreciation of the currency. The point is that nothing is happening to (thousands and thousands of) goods to make them go up. But something is most definitely happening to the currency to make it go down. It is being increased in supply.
So even the basic concepts in terms of which the debate is being framed are wrong. However, looking beyond that, does the above chart indicate to you that a general decline in prices is now engulfing the economy? Of course not. I have been telling you in these pages that the commodity decline of the past few months was a mere intermediate correction for most commodities, that they would turn and go to new all-time highs and that gold would lead the way.
Well, this past week gold hit $950 (April future). It is leading the way, and it looks like a very good bet to challenge its all-time high at $1040. It is true that other commodities are just beginning to stir, and crude oil is flat on its back (although still holding its Dec. 26 low on the continuation chart). The explanation is that they are a bit slower in coming around. But their declines are measured in months while the advances are measured in years. That is one of the big things wrong with the currency appreciation argument. The people making it all have their heads in the sand (like an ostrich). For them the world began back in March or July of last year. Before that is the distant past, of which they have no concept. Their economic opinions are blown around by the most recent intermediate trend like leaves before the wind. When one stands back and looks at their long term record, it is a joke. For example, consider the New York Times. It reported on Feb. 9:
“The company’s [i.e., the Times’] clearest and biggest mistake, analysts say, was spending $2.7 billion to buy back its own stock from 1998 to 2004 despite historic high prices.”
Richard Perez-Pena, “The Times Seeks Opportunity
Despite Toll of a Recession,” NYT, 2-9-09, p. B7.
The Times’ stock averaged about 40 between ’98 and ’04. It closed Friday at 4.05. To tide itself over, the Times borrowed $250 million from a gentleman named (I am not making this up) Carlos Slim.
So if you and I are looking for economic advice, does it not seem more reasonable to get it from Carlos Slim than from the New York Times? Mr. Slim did not recently blow the greater part of $2.7 billion.
When you have a group of (the same type of) economic goods, and one of them is far more bullish than the others, what does the technician tell us? He tells us: go with strength. Don’t buy weakness, buy strength. Assume 2 goods have been trading between 50 and 100 and a bear trend in the general market knocks them both down near their lows. One sits on its low, like a dazed prize fighter (e.g., crude oil); the other rebounds and before you know it is challenging its high (e.g., gold). Thus the good technician tells you to: buy high, and you will be able to sell higher.
Now I do not expect any of the “depression,” “recession” crowd to admit that they were wrong. The rebound in gold is the first such event since the autumn decline. Even after almost all other commodities have rebounded to new all-time highs and the stock market is challenging 14,000, I do not expect them to admit they were wrong. After all, the economic scare stories which have dominated the media for the past 5 months were designed to build political support for a government program to rob from the hard working people of the country and give to a group of useless bankers and Wall Street brokers. That legislation was enacted this past Friday. It was necessary for the (more intelligent of the) pessimists to try to scare the pants off of you, but now their credibility is on the line. However, they have learned that, if they just keep quiet and never admit that they were wrong, you will forget and be ready to believe them at the time of “the Great Depression of 2020.” After all, they have very impressive titles. Did you notice that Henry Kaufman had an Op-Ed piece in the Wall Street Journal commenting on the current “crisis” this week? The Journal is not ashamed to publish this fraud. It believes that your attention span is short and that you have forgotten that “Dr. Doom” had egg all over his face in 1982. If you are one of these people, then do not read any further. You will have no interest in the One-handed Economist.)
Normally, when I am bullish on gold, I am bearish on stocks. But this market period is an exception. I have never seen a Fed so irresponsible as the Bernanke Fed. Below is the chart of the U.S. money supply for the past 2 years. In the last 6 months, it has grown by 12%. That compounds to 25% over 1 year. And this, as you know if you have been following my articles, is only a small portion of the money now being created by the Bernanke Fed. This 25% compares with the greatest peacetime money growth in American history, 1986, which was 16.9%. That monetary stimulus was not very good for the economy, but it certainly did bull the stock market. I expect that this stimulus will do the same.
Also, I expect that you have heard of the credit crunch being talked about in the newspapers. A credit crunch means that credit is less available, either because the banks are refusing to lend or because they are lending but only at higher rates of interest. You know what has happened to rates of interest recently. They have gone to 0% on T-bills, and they recently dipped below 1% on the commercial paper market. So in terms of rates, we do not have a credit crunch. But what about quantity of credit? Below are the figures for the past 8 months from the Federal Reserve:
These are from Federal Reserve release H.6. Where is the credit squeeze we are seeing in the newspapers? Outstanding bank credit is higher now than it was in June. More loans are being made, and they are being made at a lower interest rate.
The actual explanation for the “crisis” is that Wall Street and the banks got soft in the easy credit period of 2002-04. When Greenspan lowered short term rates to 1%, the money started pouring in to these people. They were always stupid, but in ’02-’04 they got fat. Then in ’05-’07 things began to return to normal. This was a crisis to Henry Paulson and his Wall Street buddies, but it was a good thing for the country. What should have been happened is that a number of these institutions should have gone bankrupt. An economic institution which is losing money is (normally) destroying wealth. It is essential for an economy that wealth-destroying institutions be put out of operation ASAP. To save them is to deal a serious blow to the economy. But to Henry Paulson, Wall Street is his world. Therefore, we have a world financial crisis. Paulson convinced Bush (who knows nothing about economics).
Former President Bush then declared a financial crisis (telling voters that the Republicans had destroyed the economy just 2 months before the election). And the New York Times, which always pretended that President Bush was stupid, bought his line. All the effects you are now seeing in the economy over the past 5 months are, therefore, false. Such is the unwillingness of people in this culture to think for themselves that all the papers in the country followed the Times. Businesses are cutting back advertising because the media have told them that we are in a “recession.” They are laying off workers for the same reason. If you study a real economic contraction, such as the early 1930s, you get a completely different picture. At that time both the money supply and the price level fell by 30% in 3 years. (Nominal) wages did not decline as rapidly as prices, leaving real wages too high. This is what caused the unemployment of that period. Wall Street was hurting and could not generate sympathy for their own problems; so they pretended sympathy for the unemployed. But the unemployed of that era were the only class (besides Wall St. and the banks) who were worse off. The rest of the country prospered. The value of the dollar was restored, and savings were made whole. (They had lost half their real value during WWI.) What we are now going through is a shallow imitation of that period. The real factors which caused it do not exist. Indeed, as the money supply chart shows, the real factor in the economy, which caused the early 1930s, has now reversed, and money is expanding rapidly. Thus the correct model for our present economy is the 1970s. People who think we are in the ‘30s are giving you the wrong advice. These people are destroying the country (because the majority have listened to them). Don’t let them destroy you personally. You have to see reality as it is, or else you cannot take the actions you need to take for your economic survival.
Even if you are not economically oriented, you will want to check out this week’s blog at www.thegoldbug.net (no charge). It is about a special program that Tom Daschle snuck into the Obama “stimulus” bill to reduce health care costs by killing those people who are expensive to treat. If you can still focus on economics in the face of an enormity like this, then I would like to recommend my newsletter, The One-handed Economist ($300/year), which will help you make sense of this crazy world and tell you what actions you should take in the financial markets (so that you have enough money to pay for your own health care and can hopefully avoid the current system).
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-- Posted Monday, 16 February 2009 | Digg This Article
| Source: GoldSeek.com
