12/07/10 Melbourne, Australia – “A day that will live in infamy…” – Franklin D. Roosevelt
The Dow ended down 19 points yesterday. Gold up $9.
Thanks to the socialist Senator from Vermont, Bernie Sanders, we get to see what the Fed is up to. He insisted on learning where the Fed’s bailout money was going. Turns out, not only did billions go to European banks…billions more went to firms in the US that pretended they needed no help.
Goldman Sachs, for example.
Goldman went to the Fed 212 times between March 2008 and March 2009, according to Fed documents. It collected nearly $600 billion.
Morgan Stanley. GE. Citigroup. They were all in on it.
The Fed put out $3.3 trillion worth of credit, buying up speculators’ bad bets. Not surprisingly, the price of the bad credits rose. So that now the Fed can say it hasn’t lost a penny.
Ha. Ha. What a sense of humor!
Let’s imagine that instead of banking and speculating…Goldman was a cabbage grower. And let’s say Goldman overdid it. It planted far too much cabbage. The price dropped…and Goldman was on the verge of bankruptcy. So, in comes the Fed…and buys cabbage by the boatload. And what do you know? The price of cabbage goes up. So, the Fed then looks in its warehouse and it finds it owns tons of cabbage. It multiplies the price of cabbage by what it has in inventory. Wow! It hasn’t lost a penny!
The feds are supposed to pursue corrupt operators. But now the feds are at the center of the racket. Talk about infamy? Now, it’s right here at home…
How does the racket work? It’s very simple. The Fed hands out money to its powerful cronies. Remember, the Fed is a private bank. It serves what is supposedly a public purpose. But it is neither owned nor controlled by the government. Instead, it’s part of the banking industry. Its official role is to give the US a trustworthy currency…and (more recently) to promote full employment. You can see how well it fulfilled the fist part of its mission. Consumer prices are up about 33 times since the Fed was formed in 1913.
Or, to look at it another way, a $20 gold piece from pre-Fed days – a one-ounce US gold coin – is now worth about $1,450. How’s that for a stable currency?
As to employment… Before 1913, unemployment was virtually unheard of. Why? There was a free market in labor. If you need to work, you took whatever work you could get at the then-prevailing wage. End of the story. There were no subsidies for people who were unemployed. No minimum wages. No safety nets. It was just supply and demand. When demand for labor increased, so did wages. When it decreased, wages went down. Except for brief periods of adjustment, there was no unemployment.
And now? Well, you know the facts as well as we do.
The Fed’s real mission now is to make sure the banks stay in business and make a profit. This it does in the simplest way – by transferring money to the banks. How does it get the money? It just prints it up. Who pays the bill? Eventually, taxpayers and citizens…when this new money reduces the value of their old money.
Neat huh? Who complains? Who has a cause of action? Who even realizes what is going on?
The European Central Bank is duplicating this trick in the other part of the Old World. It is buying up the debt of Ireland and Greece. And what ho! The more you buy…the more the price goes up. Pretty soon, the ECB – with hundreds of billions of this paper in its vault – will be able to announce that it too has made money!
But there’s a strange smell coming from the central bank vaults. Maybe that cabbage isn’t so good after all.
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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Financial Kimchi?
What are you doing in Melbourne Australia?
Do you need a free tour guide? More than willing to help?
Bill- are you on the run or something?
I agree with much of this…
Bill says:
“Or, to look at it another way, a $20 gold piece from pre-Fed days – a one-ounce US gold coin – is now worth about $1,450. How’s that for a stable currency?”
In other words Gold is up 73.5 fold since 1913 when the Fed was formed. Sounds great.
But Bill also says:
“Consumer prices are up about 33 times since the Fed was formed in 1913″
Hmm so Gold is up only 72.5/33 or 2.2 times since 1913. Whee, Gold bugs have doubled there purchasing power since 1913!!
And how have stocks done since 1913?
A lot better. I will post the exact number later tonight.
Hint, stocks have walloped Gold since 1913… stay tuned for the answer…
How did stocks do from 1929 to 1945?
How did stocks do from 1966 to 1982?
Any questions?
Suppose you needed to cash out (retire) in 1982?
People are still looking for some holy grail investment that always works. Pretty funny, actually. Wish it were that easy.
@Investors Friend,
Bedazzle us with your profound analytical skill by posting something more useful, like what stocks have done since 1999, and what an ounce of gold has done over the same period, if your 10-key is still working.
Hint, I’ll trade you all of my Enron and Lehman Bros. common certificates for a single one-ounce Maple Leaf.
what are you all complaining about?! western world has been living for free!
print paper.. acquire resources from poor countries.
enjoy it while it lasts.
Okay, enough suspense.
I have the data… The total return dividends plus capital gains on stocks is tracked by Ibbotson and I have their 2009 annual yearbook with data to end 2008.
And the answers are… drum roll please…
Stock total return index start of 1913 was 3.39, start of 1926 was 3.82. Not much of a gain just a factor of 1.13.They start a new index 1926 at 1.00, end of 2008 it was 2049.4. Now add 37% for 2009 and 10% for 2010 and we are at $3156 for $1.00 invested in 1926 and (times 1.13) $3567 for $1. invested in 1913.
So according to Ibbotson stocks were up on a total return basis from $1 to $3567 in the 97 years from 1913 to 2010.
Now that works out to 8.8% per year on average.
Gold meanwhile, Bill tells us went from $20 to $1450, turning $1 into $72.50.
For Gold that works out to a return of 4.5% per year.
Stocks beat Gold by 4.3% per year but compounded for 97 years that means stocks beat Gold by a factor of 49 times!
Now admittedly the stock index ignores taxes and teading costs. So the severe beating that Gold was handed was probably not really 49 times.
But without a shadow of a doubt Stocks beat Gold handily.
I want a job with Goldman Sachs. A position where I do nothing, which means I do nothing counterproductive (unlike the rest of the firm). I want the government to subsidize my employer so that they may provide me with a 1.6 million dollar Christmas bonus. I promise, double-promise, no, TRIPLE PROMISE not to mess up the economy any more than it already is. As for the earlier comment about stock market returns, since GE is the only stock from 1929 that is still part of the DJIA, seems to me the actual return may well be negative once all the “hedonic” nonsense is factored in.
Someone asked what did stocks do 1929 to 1945
Stock total return index August 1929 (peak month) was 2.933, at end 1945 the stock total return index was 3.965. That was some 16.4 years later so that was just 1.9% per year and that assumes no taxes an no trading costs. So, point taken for the unlucky person who invested at the very peak in 1929 the return to 1945 was pretty poor, barely positive and that included dividends.
The InvestorsFool…
Maybe you are (not) aware that US citizens were prohibited from owning gold for 40 of those 97 years? It’s specious to calculate a return on something illegal to own.
You need to invent some new numbers.
Sigh… everytime I read something written by Investors Friend concerning gold, one has to sigh.
A precious metal (PM) like gold and silver is money (a medium of exchange). As such, it should be seen as a component of currency (a system of money). Think of it like another currency (Euro, Yen, Yuan etc). A key purpose of money is to act as a store of value. By this standard, gold has maintained an unparalled ability to maintain its purchasing power throughout the ages. All the others have declined since it required larger amounts of the currency (like USD) to purchase the same amount of goods.
An example would be setting aside a thousand USD in 1930 and then using it to buy goods today as compared to keeping a thousand-USD equivalent in $20 gold eagles then (50 pieces) (approximately $69,750).
Unlike what some might think, gold is not an investment. So, comparing it with a stock (an investment vehicle) is to mistake one of gold’s key purpose. Its like comparing apples to oranges. A more appropriate example would be to compare investing in stocks or bonds. (Purists might disagree on this but the concept of an investment vehicle is one that promises a return in exchange for capital).
So, because its nature is commonly misunderstood, detractors of gold mistakenly mock that gold provides no returns. Of course it does not. It only shows how misunderstood or confused the concepts of money and investment have been mixed up (or has it been delibrately so?).
Like the above example, why not keep a stack of three thousand USD and 2 oz of gold side by side and lock it up for the next 25 years. Open them up then and see which is more valuable? That is why you see the wealthy always going to gold because for them, its the preservation of wealth that is of the most concern.
Another line of erroneous argument is that you can not eat gold, then again can you eat a dollar? Which brings me back to the first point about gold being a medium of exchange. You can always exchange gold into any fiat currency to get your goods (since the powers that be have made by law that fiat currency is legal tender).
Also I tried to post the answers to the other questions but I think the system cut me off for too many posts.
Roughly total return on stocks from peak 1929 to 1945 was just under 2% mostly from dividends so not a good return.
1966 to 1981 was actually around 6% per year counting dividends but that was a bad return given high inflation
Since 1999 stocks gave only an average 0.9% per year counting dividends. Terrible! Gold beat that hands down.
But Bill was talking since 1913…
He talked of the horrible inflation but the inflation only amounted to 3.6% per year comppounded and Stocks beat that by more than doulble.
Now if you will excuse me I have some money to count (gains from stocks ya know).
In between crying fits about how worthless the U.S. dolalr is, Bill jets around the world spending his loot.
He has done okay by the ol paper-green-back.
He managed to become a multi-millionaire despite all that inflation too.
Apparently full time sobbing and whining pays awfully well!
Do you ever post something relevant ?