09/15/11 Baltimore, Maryland – “Retail Sales in US Unexpectedly Stagnate,” says a Bloomberg headline.
Unexpectedly? Guess they don’t read The Daily Reckoning. Stagnating sales are what you get in a Great Correction. We’ve been saying so for the last 4 years.
In an expansion, well…everything expands. Why make it complicated?
In a contraction…everything contracts. What do you expect? That’s what it’s all about. That’s how it works.
And when you have a consumer economy, what contracts most? Consumer spending, of course. Simple, huh?
And when consumer spending contracts, business sales go down. Eventually profits go down. And eventually investors realize that holding stocks is not going to be profitable. Then, stocks go down too.
And here’s another Bloomberg headline:
Wholesale Prices in US Are Little Changed as Energy, Vehicle Costs Drop
Surprise, surprise! The feds pump in trillions in cash and credit. Still, they can’t get prices to go up significantly
Contractions are deflationary.
That’s why we don’t expect the price of gold to rise.
And now that Germany and France have gotten together with China and all have agreed that they aren’t going to throw poor little Greece off the Euro-Bus…gold has nothing to do but go down. No crises on the horizon. No inflation either.
So who needs gold?
Well…. We all will. But maybe not just yet…
“Gold fulfills the functions for which money is used better than any other type of money,” wrote Lord Rees-Mogg in his introduction to “The Case for Gold” — a three volume tome rehearsing the history of the yellow metal.
But if gold is the best money, how come we don’t use it rather than dollars?
Lord Rees-Mogg explains: “The problem for gold is not that it doesn’t work, but that it works too well…it imposes limits on human behaviour, and those limits can be resented and rejected. Indeed, it can become impossible for a government to maintain the discipline of gold…”
Ah yes….
Limits. There are always limits. You can ignore limits. You can reject limits. You can pretend they don’t exist. But you can’t ignore the consequences of ignoring the limits.
Right now, the economy is in a major contraction. As long as this phase continues, you only need gold as insurance against a catastrophe. But what would cause a catastrophe? The feds, of course.
In a contraction, the market itself imposes limits. It forces asset prices down. It undermines businesses. And it drives debtors and creditors into bankruptcy.
The feds don’t like limits. And they don’t like contractions. Especially not when an election is coming up. Maybe they’ll keep their nerve. Maybe they won’t. They could do something reckless and desperate…in an effort to overcome natural limits. That’s when the merde will really hit the fan… That’s when you’ll need your gold.
Here’s an interesting item.
In July, consumer credit rose. This was much applauded and much discussed. Analysts said that the $12 billion increase proved that the credit expansion of the last 60 years was not over. They thought it meant that recovery was just around the corner. Consumers were borrowing again they said…so they must be spending too.
But it turned out it wasn’t exactly consumers who were doing the borrowing. It was students. And they weren’t borrowing to spend. They were borrowing to pay the high costs of education.
Real consumer credit went down, as expected. Credit card debt, for example, fell some $4 billion.
And guess what else. Many of them will never pay the money back.
Government-backed student loans have risen from less than $100 billion in ’08 to about $400 billion today. We don’t know why. But we smell a zombie.
The default rate is rising. And we suspect that many ‘students’ are actually people marking time in universities because they can’t find a good job in the outside world.
Speaking of which… Senate GOP leader Mitch McConnell describes Obama’s jobs plan as a “re-election plan, not a jobs plan.”
But it’s so easy to criticize! Give the prez credit. At least he’s trying.
At least, he’s trying to get re-elected, that is.
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.
The Daily Reckoning is your premier source for making sense of the news Washington and Wall Street generate. Each business day, The Daily Reckoning calls on its stable of world-class writers and thinkers to show you how to get ahead.
Start your 100% FREE subscription to The Daily Reckoning today and you’ll get a free research report, “How to Survive the Fall of Social Security.” Simply enter your email address below to get your free report and join over 495,000 worldwide Daily Reckoning subscribers!
We Respect Your Privacy and We will
Never Share or Sell Your Email Address
When the EU starts allowing currency controls [forbiding private citizens from taking their money out of the country] you will know the whole system is broke.
I expect within a year or so Greece will enact currency controls.
I’ve gathered from many sources that gold is a general hedge against monetary problems, no matter which direction they might take: either inflation or deflation.
I believe historic charts would show that gold has risen even during deflationary episodes (deflationary in paper-currency terms).
I’m not sure whether this rise of gold in deflationary environments is simply due to fear: deflation fought with inflation – and the fear inflation might get of control, or fear of banking collapses OR due to some other reasons recently espoused like: in deflationary environments there are not enough good assets to invest in, and some part of the money (there are many who are not indebted) will flow towards gold.
Anyway, you seem to be advocating using gold as insurance right now. However, if you see a return of the gold standard (as a solution for monetary recklessness), wouldn’t you advise someone that has enough liquidity to invest in gold more than the small share (5-10%) that would be required as insurance? This means seeing gold as an investment, expecting it to be revalued. Then again, I’m talking about people with enough liquidity and enough patience to wait for this to happen. And by the looks of things, it will not be long before such an investment will come to fruition.
You say,
>Contractions are deflationary.
>That’s why we don’t expect the price of gold to rise.
Huh?
I have seen this kind of faulty reasoning and conclusion many times on the internet.
A little later you say,
>“Gold fulfills the functions for which money is used better than any other type of money,” wrote Lord Rees-Mogg
>But if gold is the best money . . .
Now let’s see:
1) you seem to concede that gold is money.
2) and you say that we are in a depression.
3) and in a depression money–that middle term that people exchange for things they want–increases in value relative to things.
So, you should be saying that gold’s value ought to rise, relative to things. (including that thing called a dollar–a very flawed measuring stick of value/wealth.)
Ayn Rand’s ghost must have been hovering over your laptop when you typed that, Bill.
“But what would cause a catastrophe? The feds, of course.”
By now it should be obvious the ‘feds’ ARE a catastrophe.
Gold has declined recently expressly from extremely deep pockets (Central Banks/Governments/TBTF) shorting it.
Look at the charts, the timing and other data, anyone with any experience can see this isn’t “the market”. No, it’s an attack from the central planners.
You go into length ‘railing’ against zombies. In reality, they are just the symptom to the underlying disease of the ultra wealthy controlling the big & central banks, sitting on the boards of the major corporations and buying off politicians. The latter being the best ROI on the planet.
In the event of a real catastrophe, opposed to a rigged one, the only insurance will be your skills to survive. Your pile of shining tokens won ‘t be worth anything.
Sadly, the coming catastrophe will be fake. The good lord William Reese Moog and his friends will impose limits on all the zombies running amok.
The good lord William Reese Moog giveth and the good lord William Reese Moog taketh away.
I didn’t think that students in the USA could default on their loans. They can not discharge them by bankruptcy.
Tax the rich.
Put America back to work again.
Tax the rich.
Let Uncle Sam pay your bills.