Catastrophe Insurance

“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

The Daily Reckoning