Paco Alhgrin, Seeking Alpha
Here, I’ll simplify it: your government, through Legal Tender laws, is forcing you to use dollars to navigate the economy in which you reside. It is then printing this currency with reckless abandon. Finally, the same government is issuing more debt than ever before in history, which it will loan to itself (or borrow from itself, depending on how you look at it) by employing the nearly innumerable dollars it has printed.
It used to be that a dishonest person had to rob Peter to pay Paul if he wanted to get ahead in life. But times have changed; the old way of doing things just isn’t sophisticated enough to fool, say, an entire globe. No, these days, apparently Peter must first print a bunch of cash, then borrow it from himself, and finally dump it from a helicopter in Paul’s front yard. Do you still think Treasuries are “risk-free?”
I’m done here. I’m going to go buy some gold.
John Bogle, Index Universe
What we are increasingly seeing is the verification of “the financial instability hypothesis” put forth by the economist Hyman P. Minsky (1919-1996). In 1992, Minsky warned that “capitalist economies exhibit … debt deflations which … spin out of control … [as] the economic system’s reactions to a movement of the economy amplify the movement … . Government interventions aimed to contain the deterioration [are often] inept in … historical crises.”
Minsky concluded that over long periods of prosperity, the economy transits from financial structures that make for a stable system to ones that make for an unstable system — i.e., that “stability leads to instability,” largely through what he described as hedging, speculation and Ponzi finance. In that sense, Minsky was a prophet of one of today’s economic crises.
Another insight was also prophetic: “Institutional complexity [read: today’s collateralized debt obligations and credit default swaps] may result in several layers of intermediation between the ultimate owners of the communities’ wealth, and the [business and individual] units that control and operate the communities’ wealth.”
This separation between ownership and control has now come to pass. In a mere half-century, we have moved from an ownership society (92 percent of all stocks owned by individuals; 8 percent by institutions) to an agency society (24 percent and 76 percent, respectively), a change I’ve described as “a pathological mutation in capitalism.” Does “experimental” economic policy make any sense?
Ted Butler, Investment Rarities
Four traders hold two-thirds of all the true [silver] short positions on the COMEX. That such a concentration equals a control on price should be beyond question. If these four shorts were forced to cover their positions and had to be replaced by many sellers motivated by free market prices, the price would need to double or triple or quadruple. That’s the key question in any manipulation – what would the price of an item be, higher or lower, if the manipulators were removed from the market?
Richard Daughty, Mogambo Guru
Regardless of your motives, gold is always popular at the beginnings of the busts that follow the booms that you get when somebody is stupid enough to use a fiat currency (like the U.S.A. and now all the other stupid countries of the world) that gets multiplied to excess so that inflations in the money supply causes inflation in other assets like stocks, bonds, houses and size of government and, unfortunately, food and energy.
And as the bust continues, gold always becomes MORE valuable as everything else turns to crap and the government starts destroying everything with fits of fiscal madness in its insatiable quest for more money, more money, more money!
But we were not talking about how the socialist-communist/fascist morons running the place have doomed America, but “Why gold?” The reason is that there will be a lot of rich people selling the aforesaid stocks, bonds and houses, as that is how market tops are formed and why prices fall, and then the sellers will have a lot of money sitting there, meaning that now they have to find someplace to put it, and then they notice that everything else is turning to crap, and that is “Why gold”!
Dan Denning, Daily Reckoning
Everyone and everyone’s dog (and everyone’s dog’s feline foes) is calling for the popping of the bond bubble. Every fibre of our contrarian nature says to go against the crowd. After all, it seemed fairly obvious that the Nasdaq was in a bubble when tech stocks were selling at average price-to-earnings ratios of 100. And then the ratio doubled!
The point? A real bubble worthy of the name exceeds your expectations and just keeps going up. This prompts us to conduct a brief thought experiment. What could keep the Treasury bond bubble rising? Fed buying!
That’s right. We know the Fed is trying to bridge the gap between government bond yields and mortgage rates. The Fed wants to make it easier for Americans to refinance into lower-rate mortgages, and thus heal the mortal weeping wound at the heart of the American economy. So it’s been hacking away at the short-end of the yield curve, trying to bring mortgage rates down by proxy.
It follows that if ten-year and thirty-year yields start creeping up in response to the increase in the monetary base, the Fed will kick into action and become a buyer of U.S. government securities. Now we know what you might be thinking. At least we know what that makes US think.
When the Treasury issues bonds, it’s borrowing money from the world’s savers. That crowds out private investment, but is not really money printing. True, it steals from future income and sends interest and principal payments to bondholders outside the U.S. But that is a kind of monetary time travel, rather than monetary alchemy.
If the Fed, on the other hand, moves to keep a lid on Treasury yields by buying them in the open market, it will likely do so with money in wishes into existence. There’s no place like credit! And don’t think this will go unnoticed by the precious metals gang loitering on the corner, and its leader, Gold. Here’s a prediction for you: gold and its precious metals brothers in arms (silver, platinum, and palladium) will absolutely ambush the dollar this year if things keep playing out the way they are.
John Doody, Gold Stock Analyst
One thing I think readers should bear in mind is that gold mining will be one of the few industries doing well in 2009. Their key cost is oil, which is about 25% of the cost of running a mine. Oil’s price, as we know, is down about 75% in the $147/barrel high last July. At the average $400 cash cost per ounce mine, that’s a cut of about $75/oz off their costs. That result alone is going to give them an uptick in future earnings versus what they showed for third quarter 2008.
Something else people may not recognize is that currencies are also falling; many are down 20% to 40% versus the U.S. dollar. All the commodity nation currencies — the Canadian dollar, the Australian dollar, the South African Rand, the Brazilian Real, the Mexican Peso — they’re all down 20% to 40%. When your mining costs in those countries are translated back into U.S. dollars, they’ll be 20% to 40% lower.
So, the miners are going to have falling cash costs and even if the gold price remains exactly where it is now profits are going to soar. This will be unique in 2009. I can’t think of any other industry in which people are going to be able to point to and say, “These guys are making a lot more money.” I think the increasing profits will get the gold mining industry recognition that it isn’t getting now. Of course I’m a bull on gold because of the macroeconomic picture. When you put falling costs of production together with a rising gold price, you’ve got a winning combination for the stocks in 2009.
Martin Hutchinson, Great Conservatives
There are two reasons why the United States is likely to appear a much less safe haven by the end of 2010: monetary policy and fiscal policy. The current disasters may have come as a complete surprise to the Great Depression expert Ben Bernanke, but they would not have surprised a greatly superior monetary manager a century before the Great Depression, Robert Jenkinson, Lord Liverpool, Britain’s prime minister 1812-27. Liverpool took over a country with a national debt of 270% of GDP – and figured out how to get the debt down to a manageable level. “There is no surer source of commercial distress,” said Liverpool in April 1820, “than the creation and extension of fictitious capital; and of an appearance of prosperous trade without the reality, which is the inevitable consequence of a paper currency.”
No better description of the Bush/Bernanke bubble could have been written – “fictitious capital” sums up the whole mania. Now by reducing interest rates far below zero in real terms, by doubling the monetary base and by blowing up the Fed’s balance sheet to three times its normal size, Bernanke has rendered capital even more fictitious – and the United States will shortly reap the appropriate reward in an uncontrollable upsurge in inflation.
John Kemp, Guardian
The United States and the United Kingdom stand on the brink of the largest debt crisis in history.
While both governments experiment with quantitative easing, bad banks to absorb non-performing loans, and state guarantees to restart bank lending, the only real way out is some combination of widespread corporate default, debt write-downs and inflation to reduce the burden of debt to more manageable levels. Everything else is window-dressing.
Rob Kirby, Kirby Analytics
Some central banks (those of China, Russia, Iran and Venezuela) are actually buying physical gold to bolster their reserves. Perhaps you will take notice that countries that have a penchant for gold coincidentally are not viewed as America’s best friends. Ever wonder why?
Fondness for gold makes the dollar look bad. If you are America and are in the business of printing dollars to buy whatever you want, folks buying gold are raining on your parade, and if they do too much buying of gold, dollars can become worthless and not welcome in exchange for goods and services. (I would suggest that this is happening right now.)
JPMorgan Chase is the Federal Reserve in drag. It is Morgan Chase’s job to make sure that gold remains viewed as an unworthy means of wealth preservation, so that the biggest Ponzi scheme in the world stays viable — the U.S. government bond market.
But in the end, just as physical shortages of staple goods – in the face of limitless money creation – will push prices higher; it will be the same where gold is concerned. This process is now underway with the fraudulent futures [paper] price of gold already decoupled from the cost of buying physical ounces. Continued fraudulent interventions only ensure that this sordid perversion ends sooner rather than later.
Steve Saville, Speculative Investor
Determining whether a nominal gain translates into a real gain is often not a straightforward matter due to the impossibility of measuring the economy-wide change in a currency’s purchasing power. In fact, there is no ideal way of measuring the real performance of any investment; at least, none that we know of. We have found, however, that an investment’s long-term performance in gold terms is a reasonable proxy for its real long-term performance. We therefore consider that for something to be in a long-term bull market it must be in a long-term upward trend relative to gold.
This prompts the question: which of the major markets are presently in long-term upward trends relative to gold? The answer is: none of them. Over the past decade there were multi-year periods during which various markets trended higher in gold terms, but the relative gains achieved by these markets rapidly evaporated last year.
To put it another way, a good case can be made that gold is the only long-term bull market ‘on the go’ at this time. Moreover, based on the information presently at hand we suspect that this will remain the case over the coming decade or until there’s an upside blow-off in the gold price.
Peter Schiff, Euro Pacific Capital
The grim reality is that when the real estate bubble burst the Government was able to “bail-out” private parties. However, when the bond market bubble bursts, it will be the U.S. Government itself that will be in need of the mother of all bailouts. If U.S. taxpayers or foreign creditors are unwilling or unable to pony up, and if the nightmare hyper-inflation scenario is to be avoided, default will be the only option. If misery really does love company, Bernie Madoff’s clients might finally find some comfort.
Eric Sprott, Sprott Asset Management
The Gold Report: What’s your view of the U.S. dollar? What do you see in ’09 for the dollar?
Eric Sprott: The rally in the dollar, in my mind, was totally anomalous and totally had to do with repatriation. In fact, we can even see it in global offshore funds. These offshore hedge funds, which are owned by international financial institutions, have their own issues. So there have been redemption issues in hedge funds. I can tell you from experience, if we had X dollars of redemptions in November, we have one half of X in December, .1 of X in January, and none in February. In the business we’re in, the repatriation is done.
Anything we might have had to do — in other words, sell a Canadian resource stock, convert it to U.S. — it’s over. So the worst of that might be done. The dollar really, in my mind, shouldn’t have rallied; in fact, it should have done the reverse because the obligations that the U.S. government’s taken on here have been immense and I think beyond the scope of what they obviously can pay for, even though most people haven’t gone there yet. So I don’t hold out a lot of hope for further dollar strength.
TGR: But isn’t the dollar the best of the worst?
ES: You might have a point there. It might be the best of the worst and that’s a very challenging discussion. To know what is the best of the worst — and I don’t pretend to know exactly how strong the UK economy is or the EU or the Canadian (I guess the Canadian government I have some sense of) — but for me to analyze each one of those countries and decide who’s the worst? That’s a tough thing to do and it is sort of ironic that that would be the discussion. If that’s the discussion, just buy gold and forget it.
Eric deCarbonnel, Market Oracle
Most commentators misunderstand the true moral hazard of bailouts. While bailouts might have an adverse effect on the future actions of individuals and businesses by encouraging risk taking, the real problem is their effects on future actions of the government. Specifically, each bailout makes it harder to say no to the next bailout. This pressure to fund future bailouts is made far worse if those receiving bailout money are truly undeserving. After all, if the government is going to give $45 billion to Citigroup (one of the banks responsible for our current mess) and insure $306 billion of its riskiest assets, then how can it say no to bailing out the state of California or South Carolina?
This “me too” phenomenon will get much worse after the Treasury market collapses, and the Fed starts monetizing the Treasuries that were sold to fund the current bailouts. If the Fed printed money to bail out the banks, why shouldn’t it print more money to fund unemployment benefits? Politically speaking, you can’t bail out the irresponsible and then let the responsible sink, which means congress isn’t going to be saying no to a lot of the bailout requests this year. Unfortunately, these bailouts will become increasingly meaningless because, when you bail out everyone, you bail out no one as you destroy your currency.
Michael Pento, Delta Global Advisors
But the most egregious aspect of our current economic condition is the buildup of potential inflation. Non-borrowed reserves sitting on the Federal Reserve’s balance sheet has jumped from under $2 billion in August of 2008 to over $774 billion as of December 27, 2008. Read that again.
All this high-powered money that’s piling up has the potential to be loaned out over 10 times its nominal amount, and presumably it will–eventually. To put that into perspective, the M2 money stock is now only $8 trillion. Gold prices are trading at nearly $900 per ounce. And even with oil trading down over $100 a barrel since this summer’s high, Consumer Price Inflation was still up 1.1% Y.O.Y. in November. Since another 72% drop in oil is unlikely, imagine how high C.P.I. inflation will go once banks start lending out their excess reserves.
All of the above sets the stage for a protracted period of inflation and economic turmoil unless the U.S. abandons its pursuit of a centralized command and control economy, and decides that savings and production will stem this tide, not more spending and debt. Against this backdrop, it is hard to conclude that the fundamentals for gold are anything but wildly bullish.
The only thing we should envy about any banana republic is its climate, not its economy. Until our politicians show signs of understanding this, keep your focus on hard assets.
Darryl Robert Schoon, www.survivethecrisis.com
When wagon trains would come under attack, the wagon masters would “circle the wagons” for protection. Such is happening today as capitalism itself is now under attack.
What Americans are finding out, however, is that only the bankers are currently inside the circle — bankers are now the only ones being protected, the very ones responsible for the crisis in the first place. Observers and especially Americans might believe that something is wrong with this picture.
What they do not understand is that the picture is a perfect reflection of the power dynamic underlying capitalism. Bankers could not have accomplished their nefarious ends had they not first secured the full cooperation and protection of government.
This they did in England when they promised King William they would extend all the credit he wanted to wage his wars. This was replicated in the US when private bankers staged a midnight coup by passage of the Federal Reserve Act in 1913 which illegally transferred the right to issue money from government into the hands of private bankers.
This is the reason the US government has first protected the bankers, not the public, in this crisis. Bankers give government the unlimited credit that governments overspend, thereby indebting the nation and future generations into perpetuity. The US government bailout of bankers, TARP, is “owe-back” time.
James Turk, Freemarket Gold & Money Report
It is foolhardy to think that the federal government’s resources and borrowing capacity are unlimited.
They are not, and more to the point, they have already been exceeded. It’s just that too few people today recognize this reality, which is what always happens in bubbles. People accept certain conventional wisdoms without question or even any cursory analysis. For example, consider the following.
Circa 2000 – It doesn’t matter that Internet stocks are trading at multiples of revenue because ‘these companies are going to change the way we do business’.
Circa 2005 – It doesn’t matter that people are borrowing 125% of the home purchase price because ‘the price of homes always goes up’.
Circa 2009 – US government ‘T-bills and T-bonds are risk free’, so the federal government can borrow unlimited amounts of money. This example of bubble-mentality thinking not only ignores the defaults by countless governments, it also ignores the history of US sovereign defaults (gold in 1933 and silver in 1967) as well as the continuing debasement of the sorry US dollar from inflation.
In short, the biggest bubble of them all – that the US dollar is ‘money’ – is about to pop. The US dollar is on the path to the fiat currency graveyard, and will soon get there.
James West, Midas Letter
So let me see if I have this straight. The Fed prints money based on the sales of United States Treasury bills, which the U.S. Treasury sells to investors so it can write checks to the Fed so the Fed can print money. If the Fed is the buyer of T-bills, then isn’t that like kiting a check to yourself from your own account at a different bank? Is this how the debt/money supply thingy works?
If I did that, at some point I would get a visit from a gentleman wearing a uniform who would be determined to stop such behavior by depriving me of my liberty. I think it’s called “fraud”. The trigger for that would be when the bank cashing the check realized that the signature on the back of the check was the same as the one on the front. Bernie Madoff was recently deprived of his liberty for just such an offence, with minor variations.
Now I imagine if I was as highly organized a criminal organization as the United States government/banking cartel that I would employ a vast empire of minions, all of whom would be tasked with generating scads of complicated and contradictory data, so that the sharper tacks in the crowd wouldn’t be able to call “Bulls**t” on my little ponzi enterprise. And obviously, since this criminal organization also happens to be the government, this ruse would have the veil of respectability afforded by official sanction. I would call these data avalanches “statistics”. I would feed them to a perception management apparatus, and call that “media”. The statistics could then be rendered meaningful in “headlines”
Jim Willie, Golden Jackass
The penalty suffered is a wrecked nation, and inevitable lost sovereignty. When foreigners own over half the national debt, and the USEconomy is in tatters, and the US banking system is both dysfunctional and in failure mode, foreigners have the right to take control. They will do so. The arrogant will be swept aside as thoroughly as the billionaires will be ruined. If you think such words are wild and silly, just wait and watch! Receivership committees are being formed in foreign lands, but they must contend with military threats. Numerous bilateral trade agreements are being hammered out, designed to circumvent the corrupt paper price systems in US & UK control. Times are changing, and the door is open for some degree of colonization. Wealth will flow in the direction of those prepared. Owners of actual gold & silver, as well as crude oil & natural gas, will lead the next era.