GOLD 0.16% $1,339.2 gold futures

An economic summary and gold

  1. 672 Posts.
    Hi all,
    This summary is my interpretation and summary of the challenges facing the US. Right now the treasury sells bonds. Buyers include the fed, the social security branch of government, and foreign central banks who are facing the very same problems as the US. Once the government is cashed up from bonds it carries on a two pronged approach to stimulus. It maintains a high level of spending, which creates jobs, and then it flattens interest rates to encourage others to spend, which also creates jobs. Now some people say that the final tool the fed has is psychology and the fed explained on the record that they would rather fight inflation down the track than see unemployment rise. This stance is confusing to most people because the US is printing money so initially this attracted many to gold including naive me. However, Ben has gone on the record to say that the US is borrowing money and then printing the borrowed money. A slight but pivotal variation to what occurred in Austria at the turn of the century, which bore the Austrian school of Economics.

    Yes, printing money creates inflation, however by borrowing money first and doing so by selling bonds and printing that borrowed money the inflationary effect is delayed or limited to the maturity length of the bonds when the government either pays back money that is the product of economic activity or prints to pay it’s debt. The former would just keep the economy plodding along as it had been while the latter would create an outright inflation hamburger but that point is far away. I have no doubt that at the back of Yellen’s mind she would love it if America had to enjoy inflation soon after winding down QE to offset the US’s debt obligations. After all, if they owed a dollar and suddenly the value of a dollar dropped and businesses are running as usual selling the same products for 10 dollars instead of 1 dollar then there is no risk of the currency defaulting without straight out printing money which is Greenspan’s logic when discussing the possibility of America defaulting. The road to inflation is a mine field that threatens to undo the progress thus far. I doubt whether they will get that far relatively complication free. The first complication is the debt level that has fuelled this recovery. Austrians say one cannot spend one’s way out of trouble while Keynesians say whatever the situation calls for.

    Yellen, a Keynesian, has fronted the fed and stated it wants to begin raising rates making credit more expensive and normalising the economy in order to begin rewarding savers. While I do not doubt that this is partly the reason I doubt that they would have the courage to bring up debt in detail at a press conference or in a statement. The very reason there has to be a raising of rates is because their stimulus approach is totally unsustainable. Debt is climbing and the US are swamped by it. The government owes foreign central banks trillions of dollars, us households on average spend 100% of their income on servicing their debts, the government owes it’s own people trillions as the social security fund was plundered at a time when the biggest generation the world has ever seen, called the baby boomers, begin retiring. No one ever took the US’s credit card away and cut it up and maybe it was justifiable. I say maybe because the growth thus far has come from credit and government spending. The private sector are showing a real reluctance to follow suit. While business spending grew at 1.9% government cuts to spending equalled 2.2%. If the private sector does not take on the burden of spending either upfront or with credit then once quantitative easing winds down a vast hole will be left in the economy, one which the ‘bazooka’ has made when it back fired, the bazooka being what the bankers call quantitative easing.
    The next complication is one on the nature of credit. We are beginning to see the phenomenon of yesterday’s debt paid for by today’s prices. As we all know now that when a share doubles in value it goes up 100% but when it goes down the same amount it only decreases by 50%. The reason I am saying this is because if we go by this logic we can say that yes if we take the starting reference to be January 2014 we can say that inflation increased by 0.756%. However, on a by monthly basis we can in fact say that deflation gripped the US’s CPI at a rate of -0.567%, a watered down figure that would appear double on the way up. Now some people say that the final tool the fed has is psychology and they explain and shrug off this figure as the oil glut which is good for business or the bad weather which will pass. I say that that is contributing to the deflationary forces but it cannot take all the credit. Europe has been fighting deflation even while oil was peaking at above $110 and who has ever watched a home alone movie and never saw snow. Bottom line is that global consumers are not spending as much and the euro zone deflated by  -0.6% for the month of December. Japan, one of the biggest buyers of US treasury bonds deflated by -0.386%. China is the only other major bond holder that appears to be doing fine with a state reported figure of inflation at 0.297%. A well known and commonly trusted dishonest figure that “cannot be fudged” (Alan Koehler on ABC news) by the state is China’s electricity output, a figure which proves that people are using electricity in industry and in the many new buildings that were built at such a prosperous not preposterous time in human history, are unsubstantiated. Call me a conspiracy theorist but hear my bear roar with the Economist who reported
    A divergence between resilient economic growth and the much slower increase in electricity output over the past year has fuelled suspicions that the government is again playing games, since electricity used to be a close proxy for the economy as a whole. But that is an outdated way of looking at the Chinese economy: as the services sector grows more quickly and heavy industry weakens, slower electricity output is to be expected. A2013 survey of Chinese statistics by Carsten Holz of the Hong Kong University of Science and Technology found no proof of falsification. That said, he also noted that a lack of transparency made it impossible to double-check final data.

    With prices dropping and GDP of many countries contracting there is something that is still climbing higher and higher... Fiscal policy irresponsibility.  Since Regan came in the government, the government has been leaning towards the Austrian principles of deregulation and free markets. The perversion of these principles came when there was a reluctance by the government to allow the market to correct itself. Monetary policy accommodated fiscal policy and the final Austrian principle of allowing the fittest to survive instead of the biggest corrupted the Government. Since then fiscal policy has been wishy washy. One day Obama signs another free trade agreement and the next he puts up a tariff to protect American tyres. The result is that fiscal policy is at a sketchy position in time. With Obama a lame duck with the almighty ‘VETO’ stamp and the Republicans controlling the houses, nothing is being done to correct the one thing that could possibly create a resurgence in inflation that Yellen craves. America’s fiscal policy is paralysed until the next election while America has the greatest trade deficit in the world. Created money used by consumers to spend goes to foreign companies. Already China has more US dollars than the entire US. Perhaps this can explain that while employment is rising wage growth is stalling. Perhaps this is why we are seeing the GDP growth figures of 2.4% disappoint as compared to the 1990’s figures of 3.5%. Perhaps this is why the dow plummeted before the fed made their statement and before and after the GDP figures came out.  What if the GDP figures begin going backwards after interest rates are raised? We know that once interest rates are raised then consumers will not have access to credit and will not spend as much. Either the private sector picks up the ball or the government goes back to big spending. But this next complication is the point of no return complication.

    In the event that more stimulus is needed to fuel spending the US cannot put out more bonds once interest rates are raised without disrupting capital markets and freezing lending. Bonds with higher yields devalue older bonds in terms of the sale of the bonds and in terms of using the bonds as collateral when borrowing. How many people would see their balance sheets drop? How many countries would see their balance sheets drop? How many companies would see their balance sheets drop?

    Europe is currently pumping up it’s balance sheet. The increased liquidity and flattened interest rates will see the European bourses either fire at once creating a strong rally, which threatens and competes with America’s assets or it will fizzle out because of the reluctance of many countries to repay their old debt with today’s prices. Investors follow the money or use the principle of opportunity cost to decide where to put their money. With the Americans winding down their stimulus and cutting back on leverage/lending being used to invest, we may see margin calls being made and stop losses being triggered on investments as money flows out from the dow and into the European bourses. Hell, even if the rally fizzles out the raising of interest rates will be an event I wouldn’t want to miss. Less credit to invest means that assets would no longer be as popular since there won’t be a next schmuck to come along with a loan to invest.  

    This is the most excitement I’ve had in a long time and I feel this is an exciting time for goldbugs. With the threat of bonds with higher yields looming, the bond market will not be competing like it once did when people sought safety. The ozzy dollar and swiss franc may see decent rises. But gold will emerge a clear winner, which will only be amplified each and every time bonds mature and more and more US dollars are released into the global economy. The race is on to get more and more exposure to gold. Good luck. PS don’t use leverage or margin lending yet. If the European rally takes off then gold will be subdued for the duration.
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