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| Judgment Day --------------------- *** Avoiding the costs of big trouble... parasites and chiselers who benefit from the bailout... *** One thing the president of Iran is right about... deflation is acting like the hair dryer from Hell... *** The jury is still out on who will prevail in this financial war... a few reader comments about our upcoming gift to Congress... and more! Here come da judge... Oh Dear Reader, it may be a cruel, cruel world for some... but it’s a delight to us! Little by little, gradually, haltingly... the commentators are putting two and two together. In just four days, global stock markets lost more than $3 trillion. Then, the fellows who saw no danger at all – Greenspan, Bernanke and Paulson – suddenly insisted that if immediate action were not taken the world’s whole financial system would implode! Meltdown! Collapse! What did that mean, exactly? They didn’t say. But it sounded like big trouble. And people want to avoid trouble at all costs – especially if the costs can be laid on someone else. “The private market has screwed itself up,” explained Representative Barney Frank “and they need the government to come help them unscrew it.” (He left out the extenuating circumstance that the U.S. money supply, the shortest term lending rates, Fannie Mae, Freddie Mac, the Fed, the Federal Housing Administration, the SEC... and a whole plethora of agencies, commissions and meddlers... as well as one out of every 4 dollars spent... were all under government control all along!) And so, Bernanke, Paulson, et al took the witness stand yesterday. They clearly had some explaining to do. But the more they explained... the more we didn’t understand. If government were capable of understanding and fixing the problem... how come it didn’t see it coming in the first place? How come it let it happen? But this morning, we put aside the question of whether the government will unscrew things or screw them up even worse – as it usually does. Instead, we come back to the issue of who will bear the ultimate cost of bailing out Wall Street. No one knows the answer. And no one seems to feel bothered by it – even though the cost will rise to about $2,000 per family. But no one is complaining about the cost. There’s “bipartisan outrage” in Congress, reports the Washington Post . But it’s not about the money. Instead, some argue that Wall Street fat cats getting away with murder. Others want an even bigger bailout – one for the homeowners, too. And others just want to rant and moan for the benefit of the voters back home. But here at the Daily Reckoning mobile headquarters, we are like an old detective with a new clue. As to the issue of who will benefit from the bail out, we have no further questions, your honor. We know the answer already – it will be the usual collection of parasites and chiselers with good lobbyists in Washington. As to the question of who will pay for it, we want a lab report on the blood samples... and a fingerprint match. The measure includes a provision in which the public debt is raised to over $11 trillion. This will put it at about 85% of US GDP. We recall from a couple weeks ago that Louis 16th lost his head after France’s debt rose to about 80% of GDP. The problem is, when you get to that level of debt, lenders balk and the borrower runs room to maneuver. In the modern world, that probably means higher interest rates... and what was once unthinkable, a downgrade of America’s debt rating from AAA to something less than that – and possibly junk. This would be accompanied by a sell-off in the dollar too. In this regard, here comes an insight from the democratically elected president of Iran: “The world,” explained Iranian President Mahmoud Ahmadinejad, “no longer has the capacity to absorb fake U.S. dollars.” Of course, that is exactly what we’re about to find out. Mr. Ahmadinejad has rushed to judgment. We’ll let the court take its time. But we have a feeling that the Iranian president is right about the ultimate verdict. “If the U.S. government were a publicly traded stock,” writes expert witness Chris Mayer, “the dollar would be its shares and the value of the dollar its share price... And this huge increase in money supply is like a massive offering of stock, which dilutes the value of the shares everyone else holds. (Assets stay the same, just a lot more claims on them). “The bailout tab so far could top $1.6 trillion – assuming the new $700 bill happens. Consider that M1 money supply – cash in circulation – only totals $1.39 trillion... Consider that M2 – including certificate of deposits and such – is only $7.72 trillion.” (For more from Chris, including advice on how to get an extra “paycheck” – without getting an extra job, see here .) Economists will tell you that this increase in the supply of “money” is just what the world needs. Deflation is acting like the hair dryer from Hell – liquidity is evaporating fast. The feds are trying to put it back. The feds giveth; the markets taketh. Hallelujah. Hallelujah. Currently, the markets are taking away more than the feds are putting back. But as to who is going to prevail... who will pay court costs...and who’s going to jail... the jury is still out. But we know one thing for sure... during periods of uncertainty, it’s best to be prepared. Make sure you know how to protect yourself from what’s coming around the corner... take advantage of the Strategic Financial Survival Library . *** Long time DR sufferers may recall that it was around this time three years ago that we sent a copy of Empire of Debt , written with Addison Wiggin, to all 537 members of Congress. Well, Addison is gearing up to release his latest book, written with Kate Incontrera (aka “Short Fuse”), which is a companion to their documentary, I.O.U.S.A. Yesterday, we asked you to write and let us know what you thought of their plan to send the books to D.C. As always, you didn’t let us down. Here are a few of the responses we received: Writes reader Allan Gregory, “I think you’re wasting your time and energy. There is an old but very accurate maxim that says, ‘Belief is held more strongly than fact.’ “Unfortunately the U.S. Government and its bureaucrats (and other national governments) believe they can solve the ‘problems’ they perceive. “Freaking unbelievable!!! Yikes, I’m getting like The Mogambo Guru!!” “I wish they would watch it, and become educated by it,” chimes in another jaded DR reader. “But, they have the excuse that they are ‘busy’ saving the US economy. (Excuse me a minute, I have to barf.) Ok, now I’m back. “With them it’s all farce & illusion (delusion???), smoke & mirrors. Please don’t confuse them with reality or facts! “Go ahead. Give it your best shot. At least you will be able to say you did everything you could...” Finally, one reader writes: “In the words of a very wise DR writer, we are ‘freaking doomed’. Send the book to the Congressmen, and maybe a few will read it during their ‘recess’. They all talk a good schtick until they have been in Washington a year or so, and then are ruined by the establishment. Most are so out of touch that they don’t have a clue what the average citizen is going through. Guess what? Things are going to get a lot worse. “I am a retail jeweler who sees people selling their wedding rings (not because they don’t like each other any more), but to buy gas, groceries, and essentials for their children every day. Not really what I signed on for when I became a jeweler back in the ’80s, but this is the way our country is heading. “Congress had better pay attention real soon as they should have been doing a few years ago. However, most think that everything can be solved by running the printing press at the mint. Yes George, you are causing inflation already and the people are growing very restless. Foreign investors holding U.S. debt are not going to wait very long either. As the dollar does not inspire much confidence these days, they will soon start dumping it. “Buy GOLD & SILVER. Also, don’t start any more wars, as we can’t afford the ones we are already paying for with our worthless fiat currency. I could go on and on...” Keep your comments coming, and we’ll be sure to keep you updated on the responses (if any) that we get from Congress. Send your comments to Short Fuse at kincontrera@dailyreckoning.com Until tomorrow, Bill Bonner P.S. And we couldn’t agree more with the last reader comment: buy gold. We believe that even with the precious metal sitting around $900 an ounce, it’s still undervalued. And if you think $900 is a lot to pay for gold, never fear: you can still buy gold for just a penny per ounce. See how here . |
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| The Daily Reckoning PRESENTS: Where has all that newly created money gone? It’s lurking out there, somewhere in this world. And that new money could show up at any moment, bidding up the prices of whatever happens to be the “big thing” on any given day. Byron King explores... FROM THE GOLD PAN... INFLATION, DEFLATION AND PRECIOUS METALS Have you followed the recent rise in value of the U.S. dollar? Through late summer, the dollar increased in value against the euro, as well as the yen and numerous other currencies. Also, as August rolled on, gold fell from a price over $900 to under $800 per ounce. And oil tumbled from a price point near $145 to $111-115 per barrel. This is quite a drop. And a lot of observers credit the drop to the strengthening dollar. So what’s going on? Usually, a currency strengthens when there is some sort of good news about the underlying economy. But is this the case for the U.S. and the dollar? The banking crisis is still with us, as is the ongoing housing meltdown. And many insiders say that there are still more tough innings in this game. So where is the good news? Indeed, Kenneth Rogoff, an economics professor at Harvard and the former chief economist of the International Monetary Fund, recently predicted that there is still more bad news to come from the worldwide credit crunch and financial turmoil. According to Rogoff, “The U.S. is not out of the woods. I think the financial crisis is at the halfway point, perhaps. I would even go further to say the worst is to come.” Rogoff added an ominous prediction, stating, “We’re not just going to see mid-sized banks go under in the next few months. We’re going to see a whopper. We’re going to see a big one - one of the big investment banks or big banks.” So if the U.S. financial system is in such a precarious state, is the rise in value of the dollar really justified? Will it be good for the U.S. economy to have a major bank failure? Or on the other hand, will it be good for the economy if the U.S. government has to step in to bail out a large bank? It all seems like a “lose-lose” proposition. Another well-respected commentator, Richard Russell, who has published Dow Theory Letters since 1958, believes that we are on the eve of world deflation. According to Russell, the big problem facing the world economy is not inflation, but deflation: “From what I see, the markets are telling us to prepare for hard times, and a global spate of the worst deflation to be seen in generations. This is why gold has been sinking, this is why stocks have been falling - big money, sophisticated money, is cashing out, raising cash, preparing for world deflation.” According to Russell, “Smart money is selling into the stock market, day after day.” People and institutions are raising cash. When deflation rules, this will usher in a strong dollar. Russell offers an illustration for why people are raising cash: “Look, if you have $5 million and you are receiving only 2% in interest on your money, that’s only an income of $100,000 on your $5 million. Big money realizes that in a deflation, you need a mountain of cash to keep up your lifestyle.” So Russell anticipates an era of deflation, accompanied by low interest rates. Hence the need to raise cash to support an income stream over time. Then again, what if the markets are anticipating an increase in interest rates over the medium to long term? Could this be prompting a rise in the value of the dollar? Think of how much new “money” is floating around out in the world due to just the recent creation of credit as the Fed has bailed out insolvent banks and investment houses. Where has all that newly created money gone? It’s lurking out there, somewhere in this world. And that new money could show up at any moment, bidding up the prices of whatever happens to be the “big thing” on any given day. Thus, while Richard Russell thinks we are on the eve of deflation, we are also confronting the specter of inflation. The last historical experience the world market has had with high inflation rates and stagnant growth was back in the late 1970s and early 1980s. To combat inflation, then-Fed Chairman Paul Volcker increased interest rates to double-digit levels. High interest rates hit the economy like a ton of bricks, but that was the idea. High interest rates broke the back of inflation for a generation. You have to look back even further, to the 1930s and the time of the Great Depression, to find the last long-term era of deflation. What do you see? The price of gold and gold mining shares actually increased during the 1930s. The key to the rising price for gold in the 1930s was the effort by President Franklin D. Roosevelt to raise the nominal price of gold from $20 to $35 per ounce. It was still - in many respects - a gold standard world back then. But in raising the gold price, FDR also indirectly spurred the market capitalization of much of the mining industry. One thing to keep in mind is this. We know a few things about inflation, both practically and from economic theory. We don’t know nearly as much about deflation. If deflation shows up at the door, will anyone really know what to do about it? So this prompts the question. Where are prices for precious metals headed? If we encounter deflation, will we just retrace the run-up of the past six years or so? Will we see gold back at $300 per ounce, and silver at $3 per ounce? I doubt it. I think that we will look back at the summer of 2008 as a time when precious metals had a correction after a relatively quick move upward. To put it in terms of technical analysis, the prices “outran their support.” It’s like the tanks of Gen. George Patton outrunning the fuel trucks in the closing days of World War II. Patton had to stop advancing, while the trucks caught up. When the dollar strengthened in mid-2008 - for a variety of reasons - it prompted a pullback in prices for precious metals and the related mining shares. If you are cautious, you will hold cash and sit it out. If you are bold, you’ll look for bargains and buy shares. Long term, I don’t think you will get hurt by buying into share price weakness. Over the long term, precious metals and the mining shares should still continue to rise in a market in which dollars are getting cheaper and things of real value are becoming scarcer. Regards, Byron W. King P.S. We’re thinking the price of gold still has quite a ways to rise...and you could cash in. See how here: Editor’s Note: Byron King currently serves as an attorney in Pittsburgh, Pennsylvania. He received his Juris Doctor from the University of Pittsburgh School of Law in 1981 and is a cum laude graduate of Harvard University. Byron is also co-editor of Outstanding Investments , and editor of Energy & Scarcity Investor . |
Thursday, 25 September 2008
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