06/09/10 Baltimore, Maryland – They fought the correction; the correction won.
We refer to Bernanke, Summers, Obama, Geithner, Krugman – the whole lot of them. They added three trillion dollars to US debt in the last two years. In two more years the debt will be at 100% of GDP. Add in the debts they’ve guaranteed – from Fannie Mae, for example, and state and local debt implicitly backed by the feds – and you’re already at 150% of GDP. Worse than Greece, in other words.
And what do we get for it? A recovery? A healthy economy? A gold medal?
We’ll take the gold medal, thank you. It’s the only one that’s real.
The stock market was ready for a little bounce yesterday. So that’s what it did…a little bounce – the Dow up 123.
Gold kept climbing – to a new record high of $1,245.
If you had asked us 10 years ago which we’d rather have – stocks or gold – we would have said gold. Ask us now. Same answer.
Gold.
There aren’t many times when it makes sense to favor gold over productive investments. But this is one of those times.
Why? Because the world’s monetary system is heading for a crackup. And because the people running it have no idea what they are doing.
Bloomberg:
Pimco’s Crescenzi Sees ‘Endpoint’ in Devaluations
June 8 (Bloomberg) – Nations have reached a “Keynesian endpoint” as exhausted balance sheets leave policy makers with few options to bolster economic growth, according to Anthony Crescenzi, an investor at Pacific Investment Management Co., the world’s largest bond-fund manager.
“Time, devaluations, and debt restructurings might be the only way out for many nations,” Crescenzi wrote in an e-mailed note titled “Keynesian Endpoint” that referenced the Great Depression era economist John Maynard Keynes. Debt-fueled spending programs aimed at combating the global financial crisis of 2008 are among policy tools now “being seen as a magic elixir that has morphed into poison.”
The Obama administration forecast a $1.6 trillion budget deficit, the most ever, in the current fiscal year that began Oct. 1.
You can fight a correction. You can delay it. You can distort it. You can make it bigger and nastier. But you can’t beat it. Eventually, mistakes have to be corrected…one way or another.
Usually, the mistakes take the shape of bad investments or bad loans. You can pretend that they’re still worth what you have in them. You can bail out the lenders and/or the investors. You can default and inflate. But somehow, someone, sometime is going to take a loss.
That’s when you need gold. Every other asset could have bad debt behind it…in it…or standing so close beside it that a blow-up would be damaging.
The correction that began in ’07 was needed to address all the bad debt built up in the bubble years. The feds tried to stop it. Since they didn’t have any money they had to fight it by borrowing more money – that is, by increasing the level of debt!
We knew that wasn’t going to work.
And now, there’s bad private debt…and bad public sector debt too. And now we’re approaching a Keynesian “endpoint” when lenders are growing wary. They’ve already cut off Greece. They’ve warned the rest of Europe. And when they stop lending…then, all your props fall down…along with the economy…and the markets too…
Bill Bonner
for The Daily Reckoning
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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The investing public does need gold. But the governments need it more. So who will win that battle? Bet on the governments and the benefits mob. “Why should speculators and hoarders be allowed a windfall profit when so many are: {pick one or two}: [hungry] [too old to work] [too sick to work] [disabled] [losers of life's lottery] [unemployed due to the capitalist conspiracy to lower wages].
“Keynesian Endpoint” – the corollary to “Mises or Bust”
to Mike in Westerville – please read the essay contained in this link http://mises.org/daily/4466. Hoarding is actually good for the public.
Did it ever occur to you that people are hungry/sick/unemployed BECAUSE OF the government
Re: /daily/4466 essay is possibly the most ridiculous justification of the so called “invisible hand,” I have ever seen. The hand has not worked for sometime now and the only thing that has moved any market lately is the motion of “fear and greed,” along with government intervention and big business manipulation. Those poor “hungry/sick/unemployed and “victims” of government are now totally unable to take any responsibility for their own positions. I guess the devil’s hand has made them the way they are. So much for the “invisible hand.” Of course all we have to do is replace all those rotten politicians and replace them with a new set of rotten politicians.
Really Pathetic
Bernanke, Summers, Obama, Geithner, Krugman are the headless horsemen of sleepy hollow….
they each deserve the gideon gono prize for advanced f-tarded economics, voodoo edition…
Gold will be for the people that can afford to buy it. But for the rest of us, what will we get? We need some way to exchange things, and there I guess paper money will not dissapear. Is the best way for us, the bottom clases, to continue our economy.
We are more than 6 billion people in the planet and less than 1% can afford gold! What about the other 99%? So paper money is going to stay with us until it is replaced by virtual money.
Gold already has replaced fiat currencies in my life. Money is simply 1) a store of value (Gold has beaten the dollar in maintaining value) 2) a medium of exchange (I have never had a problem exchanging gold for the local currency or even barter but lately have a hard time exchanging dollars overseas) and 3) a unit of account (it is much better to think in gold terms than dollar terms as in “how much gold do I need to retire” rather than “how many dollars do I need to retire.” Paper money has already failed on all three counts and putting your faith in it will only bring you misery.
I read a great opinion piece in the Report On Business section of today’s Globe and Mail by Neil Reynolds that completely supports Bill Bonner’s position.
Please read at (should be available for a few days without subscription):
http://www.theglobeandmail.com/report-on-business/commentary/neil-reynolds/the-hidden-cost-of-stimulus-programs/article1596810/
The title is: “The hidden cost of stimulus programs”.
Mr. Reynolds pokes fun at our equivalent here in Canada of America’s Treasury Secretary.
Our “Minister of Finance” in the Federal Government in Ottawa is Jim Flaherty.
Neil Reynolds in his article writes:
“In short, stimulus impairs the private sector economy that it purportedly seeks to revive.”
Mr. Reynolds quotes a study by “Harvard Business School professors Lauren Cohen, Joshua Coval and Christopher Malloy”.
Mr. Reynolds also quotes a study here in Canada that made the same finding as the Harvard study — and of course our witless Minister of Finance dismissed this local study as “shoddy” and as “poorly done.”
From Mr. Reynolds:
“Consider, for example, Finance Minister Jim Flaherty’s response to Fraser Institute economists Niels Veldhuis, Amela Karabegovic and Charles Lammam – who examined Mr. Flaherty’s $47-billion (Canadian) stimulus package and who dared to conclude (in a report published in May): ‘[It] didn’t work.’”
Mr. Reynolds continues:
“Nor, they said, did stimulus spending do much in other countries. Citing research finding after research finding, Mr. Veldhuis, Ms. Karabegovic and Mr. Lammam declared that the conventional wisdom is wrong.”
“‘A vast body of academic research casts serious doubt on the ability of government stimulus spending to boost economic activity,’ they said. ‘In plain English, increased government spending reduces, not increases, economic growth.’ Canada, using ‘discredited economic assumptions,’ went deeply into debt for nothing – and, perhaps, for less than nothing.”
“For his part, Mr. Flaherty dismissed Mr. Veldhuis, Ms. Karabegovic and Mr. Lammam as ideologues. Yet the Harvard Business School research came to the same heretical conclusion without a hint of ideologic spin.”
“Public sector spending, these researchers conclude, does increase demand. But this demand, they say, is met by a simultaneous and comparable private sector retreat. And this decline persists until public sector spending returns to its usual level. Thus, stimulus spending, they say, “compels” private sector companies either to downsize or to move – either to another state with less public sector spending or to another country.”
Well, Mr. Bill Bonner, you have been writing the same for years now, and it must be heartwarming to see that the academics are coming around to supporting your positions.
Better late than never, I guess.
Too bad the “Bernanke, Summers, Obama, Geithner, Krugman – the whole lot of them” and our dear hapless Minister Jim Flaherty here in Canada have not learned the same lessons.
It appears that they are so wedded to their dear Keynesian School of Ideology (ha-ha) that they cannot consider that they could be wrong.
Perhaps the coming Double-Dip into far worse Economic Territory might wake them up?
That would be too much to hope for — they’ll just INCREASE the “Stimulus” packages.
So sad.
Mike has it right.
99 cent Nation has it wrong.
The invisible hand is the ONLY thing right in this mess. Government interference and central planning is NOT the invisible hand.
The debt is NOT the invisible hand.
Fannie Mae and Freddie Mac are NOT the invisible hand.
Government takover of the auto industry, the mortgage industry, the insurance industry, the health care industry is NOT the invisible hand.
Medicare and Social Security is NOT the invisible hand.
Take away all of these things and only then might you see what a world of free iindividuals making mutually agreeable in trades in all manner of goods and services – would provide. It would be a better world than this. THAT is the invisible hand.
HA HA HA HA to all the Bill Bonner/free-market doubters… BB is a prophet, he is telling you how to protect yourself when everything goes bust… if you are counting on the government & worthless dollars to help you in a true crisis (not the fake one that occured in 2008) then you deserve to suffer with everyone else… so go ahead and blame the Bill Bonner’s of the world when our living standards drop to a 3rd world country and BB is still living the good life and the “hoarders” are “taking advantage of people” because they SAVED for the coming rainy day.
Socrates said that 99 cent Nation has it wrong then said,
Take away all of these things and only then might you see what a world of free individuals making mutually agreeable in trades in all manner of goods and services – would provide. It would be a better world than this. THAT is the invisible hand.
I said:
“The hand has not worked for sometime now and the only thing that has moved any market lately is the motion of “fear and greed,” along with government intervention and big business manipulation” We actually said the same thing. Perhaps “Socrates,” needs to stick to philosophy.
like .99 cents is so much lower than $1.00. Pathetic.
BB does it hurt to be a linear man in a spherical world?
From Tom Weiss: “Paper money has already failed on all three counts and putting your faith in it will only bring you misery”.
I agree with you, but there is many people that cant turn to gold. We are the mayority. So my question is, what is replacing paper money other than gold as a medium of exchange?
Not as a store of value. We, the simple, the little, the ones that have no hope, we need a medium of exchange, and paper money is easy for us. Because we know how to use it. Until virtual money displace paper.
to Bernardo – you need to expand your mind to what “money” really is…
we “little people” will still use some kind of paper money, in fact, everyone will use paper money once things are sorted out after the crisis
Here’s a possible scenario: there is another financial crisis and this time there is no one to step in and “save the day” because it is first world countries that are insolvant, not private “too big too fail” institutions… so, there is a bank holiday and no one has access to funds for a few days, after the holiday it is announced that the currency is devalued or there is a new global currency to be put in place… the $10,000 you saved up is now worth $1000 or $100…. OR there is mass hyperinflation (see Germany post WWI)… same difference, there is loss of value in dollar buying power
Here is where Gold steps in… if you have $10,000 worth of gold then you will be able to go and trade in your gold for $10,000 worth of the new currency and your wealth is not stolen from you via devaluation or hyperinflation
its been said that for hundreds of years 1 ounce of gold has been able to buy a finely tailored man’s suit… in other words, history is on the side of gold not fiat currency
But, this will never happen, right?
i dont care if you blame the “evil” capitalists or incompetant government it is our future
Gold has risen and the dollar declined based on the mass trust placed in the capability of each to store value. Put your money into that which you can exchange for what you need, whether that is gold, silver, food, lead, brass, mercury primers or gunpowder, and be prepared to defend it (from your government)…
Bernardo Quintanilla:
My advice is to buy food and water for storage. Buy a walter purification system. Don’t buy many new things, instead, work down your debt.
If things go the way many of us expect, you won’t need to buy as much food, as you will have it in storga enad you can use THAT as a medium of exchange.
P.S. Don’t forget the munitions.
I guess banks and other financial institutions who leveraged the “toxic waste” into desaster are NOT the invisible hand. I am further guessing Standard & Poors, Fitch and Moodys which provided lots of wrongoing in painting lots of lipstick on the pig of financial instruments (hahahaha, intruments, right, but for whom) are NOT the invisible hand. I also guess the gazillions of mortgage brokers who sold the crap in the first place to John Dumb and Jane Silly were NOT the invisible hand. And finally I guess Socrates is not a very special kind of idiot.
But then, maybe all my guesses are wrong. Probably they are.
Angelique Wow:
Great comment!
I will be laughing all day when Gold comes down falling like a stone.
Try to time this day. Good luck.