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The Daily Reckoning Friday, December 4, 2009 Markets off to the races on misleading unemployment stats, Feds shrug their shoulders: Dude, where's my multiplier effect? Gold as an historical store of both wealth and power and more... Joel Bowman, reporting from Taipei, Taiwan... We've never met a statistic without split-personality disorder. Viewed in one light, for instance, losing 11,000 jobs in a month is relatively dandy for the US economy. It looks, prima facie, as though her job(less) market is bottoming out...that things could soon be on the mend. And lo, her unemployment figure even dipped, down from 10.2% to "just" 10%. But wait just a minute, we hear those skeptics say. How could this be? How might an economy lose jobs and simultaneously witness a fall in the unemployment rate? Well, those figures don't allow for the people who are simply "defined" out of the workforce. For instance, the number of "discouraged" workers - literally people who have given up looking - increased by 53,000 to 861,000. In other words, more people "left" the official unemployed pool than joined it...even though they didn't actually find a job. Incidentally, that's the most "discouraged" workers since the recession began...which is pretty discouraging. But why would people stop looking for a job when there's a recovery underway? Don't they watch the news? Good question. Maybe they went home for the holidays to sleep on Ma and Pa's couch...or maybe they're waiting until after Christmas to renew their efforts...maybe they're just fed up with getting knocked back... Or maybe it's all of the above... According to the Department of Labor report, the number of long-term unemployed (those jobless for 27 weeks and over) increased by 293,000 over the past month to 5.9 million. Two in five unemployed people now fit into the "long-term" category, up 2.7% from last month. Statistics, you see, are rarely as straight-faced as they first appear...particularly when they end up on websites ending in "dot.gov." To underscore the point, we begin today's issue with a few observations from The 5-Minute Forecast's Ian Mathias, who unpacked yesterday's jobless claims data for us... Initial claims for unemployment insurance fell to their lowest level in nearly a year last week. The Labor Department proudly announced that "just" 457,000 Americans filed for their first week of unemployment benefits. That's the fifth straight week of decline, the lowest number since September 2008 and the second consecutive report under half a million...a sort of "Dow 10,000" headline grabber. It would appear that the jobs scene has suffered its worst: But what how does this same employment environment look through the lens of history? A bit more interesting... We celebrate the jobs scene stepping back from the brink, but there must be some merit in noting that our current state of jobless claims "recovery" is at the same level of the worst - the absolute peak - of the last two recessions. We're also not even halfway back to the pre- crisis norm, nor are jobless claims below a level that would disqualify a double dip, as illustrated in the early '80s. --------------------------------------------------------------- And over to Bill Bonner, reporting from London, England... What have we got today? The Dow fell 86 points. Oil slipped to $76. Gold rose $5.30. Does gold do anything but rise? It goes up when the news is bad. It goes up when the news is good. When doesn't it go up? The prevailing opinion of the smart money is that gold is a one-way bet. As long as there seems to be some kind of recovery, inflation rates will rise and gold will rise too. If the recovery stumbles, the feds will rush to pick it up with more stimulus. This will lead to even higher rates of inflation...and gold will rise. Here at the Daily Reckoning headquarters we admit; we're unreconstructed gold bugs. We own gold. And we're not going to sell it until we can buy the entire list of Dow stocks for less than 2 ounces worth. At the same time, we're suspicious of one-way bets. They have a way of going the wrong way... Meanwhile, the big emerging markets seem ready to add to their gold supplies. As a nation becomes rich - from the time of Solomon - it seeks to increase its gold supplies. Gold is wealth. Wealth is gold. In the old days, gold was taken as war booty. Troops in the medieval world, for example, were given 3 days to loot a city. They didn't waste their time looking for paper. Especially not the paper issued by the people piled up outside the city walls. They wanted gold. Gold was real money and everyone knew it. Not only was gold wealth, it was also power. Remember the golden rule; he who has the gold makes the rules. In the old days, it was more obviously true. Time and time again, kings washed up - not because their soldiers were bad - but because they ran out of money to pay them. Charles V almost lost his fight against the French in Italy when he ran out of money; though he was the protector of Western Christianity, at one point he only kept his soldiers going by promising to allow them to sack Rome! Now, the days of rape and pillage are mostly in the history books. Nations build their gold supplies by buying it. Even central bankers are beginning to wise up. For the first time in a quarter century, central banks are net buyers. India just made a huge purchase of IMF gold. And China is such a major buyer it alone could take up the entire world's production for years. For 38 years, the world has operated on the dollar standard. Foreign nations rested their own money on a foundation of dollar reserves. The US offered its full faith and credit to back its green paper...which had been, up to then, almost as good as gold. But between 1971, when Nixon broke the last link between the dollar and gold, and today, a lot of water has gone under the monetary bridge. Even in the '70s, investors were scared to death that the US might let the dollar go down the river. Only after "Tall Paul" Volcker stiffened his back and hiked rates up to 18% did speculation against the dollar stop. Until that happened, gold had raced up to $850 an ounce. At $850 per ounce, the US had enough gold in Fort Knox to back 100% of every dollar of its monetary base - and more. Since then, the money supply of the US, as measured by Austrian economists, has gone up 5 times. Gold would have to go over $2,000 to equal its inflation- adjusted price in 1980. By another calculation, the price of gold would have to be over $6,000 to back-up the US money supply to the same degree it did in the '70s... ..So, central bankers are beginning to wonder if the US can pull off "another Volcker." Even Paul Volcker himself, who is still alive, doubts it. Today, too many people owe too much money and too many political favors. Put up rates to 18% today? Unthinkable. Cut 10% off government spending? Impossible. But don't worry about it. Now, we're not threatened by inflation...but by depression! It's fighting the depression that makes people worry. Smart investors and shrewd central bankers are afraid the depression-fighters will go too far...that they don't really know what they're doing. Ben Bernanke is up for re-appointment. "Bernanke fights for 2nd term," says The Wall Street Journal. Does he know what he is doing? Well, no. He was wrong about the biggest single event in recent financial history. He thought the 2004-2007 super bubble was actually a period of "great moderation" brought about by his own superior monetary policies! He was still patting himself on the back when it blew up in his face. And now, he still thinks the way to solve a problem caused by too much debt is to offer more debt. Of course, it didn't work for the Japanese. It won't work for us. But what we don't know is HOW it won't work. That is big question. Will the feds simply retard a real recovery...with their bailouts and boondoggles...causing a long, slow motion depression, a la Japan? (In this case, gold may not be the one- way bet the smart money thinks.) Or will they tip the world into a hyperinflationary catastrophe, like the Weimar Republic in the '20s or Argentina in the '80s? We don't know. No one knows. We wait to find out... --- The Agora Financial Reserve is Officially Open --- We'll Pay You $5,909 to Cancel Your Agora Financial Subscription Right Now We know it sounds preposterous, but it's true. Not only that... If you act now* you'll receive every one of our elite publications... And that's in addition to the nearly $6 grand we just mentioned. Just give us 10 short minutes out of your day, and we'll explain everything. *The doors to the Agora Financial Reserve are only open a few short weeks out of the year. We suggest you take advantage while you can. --------------------------------------------------------------- Cont. ..They lit the Christmas tree at Trafalgar Square last night. A taxi driver ripped us off coming across town... Remember the world's tallest office tower, in Dubai? Economist Andrew Lawrence came up with the Skyscraper's Index. Apparently, the buildings go up in bubble economies. Then, the bubbles explode...leaving the buildings standing. The owners and builders typically go broke in the aftermath. Note the last line of the chart. Most of world's most popular undertakings are mostly giant frauds. Hitler said his people needed 'living room.' Besides, the Germans were the people who were supposed to unite Europe against the Bolshevik/Jewish menace. Would the typical mitteldeutschelander be better off as a result? There was no reason to think so; it was just a popular flimflam. The Russians supposedly rose up in 1917 to create a 'workers' paradise.' The Chinese followed suit 30 years later. Did the workers get a paradise? Quite the contrary, they got Hell on earth. Towards the end of the century came the promise of technology...which blew up in 2000...and then the War Against Terror in 2001. And now, there's a war against depression, similarly hopeless, futile, and expensive. And, of course, there is the campaign to control the world's climate. We hadn't kept up with the battle to control CO2. But it has suddenly burst into the headlines, see below... Is the planet heating up? If so, is human activity the cause of it? No one knows. But thousands...millions...of people make their reputations, their careers and their fortunes by promising to do something about it. Al Gore, for example, has made millions of dollars by promoting his alternative energy investments. "Anthropomorphic Global Warming," is just a hypothesis. It is also a scam, says The Daily Express: All of a sudden, global warming is getting bad press. Why? Some of the top scientists pushing global warming were caught in flagrante delicto...apparently ready to bury data that didn't agree with them and shun unbelievers. One of them has since resigned. "Climategate," the press is calling it. More in tomorrow's Weekend Edition...for now, here is today's essay... --------------------------------------------------------------- The Daily Reckoning PRESENTS: The Fed is again pushing easy money onto the streets, in an effort to keep the nation's Gap-junkies well fed and at the malls. But the money isn't making it to the shoppers. Consumers - whether by choice or not - are saving. Instead, the cash is caught between the Feds and their pimp middlemen, the banks. So where to now for Helicopter Ben, and how might this all end? Badly...at best. Bill Bonner explains... Slow Motion Depression By Bill Bonner London, England Early this week, the world's largest central bank, the Federal Reserve, announced plans to exit its monetary stimulus efforts. It unveiled a new tool - reverse repos - to help speed the work. The term, "unintended consequences" was probably invented to describe such tools. Give the feds a saw and they will cut off their fingers. Give them a pistol and they will blow off their toes. Give them a chainsaw...please! The private sector debt crisis of 2008-2009 will almost certainly lead to a public sector debt crisis sometime between now and eternity, if not sooner. In the standard narrative, governments must stimulate their economies out of the slump. Leading economists propose it, then defend it...and then, when it doesn't work, they call for more of it. Now those economists are claiming victory and many are calling on the Fed to withdraw its monetary stimulus before it shows up as consumer price inflation. They're hoping the Fed can head it off by sopping up the surplus liquidity before it is too late. Optimists expect mild inflation in a decent recovery. Pessimists fear the feds may have waited too long; they think they see higher rates of inflation coming. Here on the back page we see no recovery...nor any inflation. At least, not yet. Instead, we are blind. We see nothing. But as for what is coming...a slow motion depression wouldn't surprise us. Neither would the collapse of the public debt market There is always a wide gap between the feds' reach into the economy and their grasp of what they are really doing. When the Fed increased reserves in the banking system, the idea was simple enough. More reserves would allow the banks to lend more. In turn, more credit would allow consumers to spend more. Ergo, the recession would soon be over. But the more reserves the Fed pumped into the banking system, the more reserves the bankers didn't lend out. In 24 months, excess reserves (beyond what was needed for loans) expanded 500 times from the level they had been for the previous 30 years. If the banks chose to lend these reserves they could multiply them into another $10 trillion to add to the money supply. Instead, in the third quarter, the US suffered a record contraction of bank lending, according to the Federal Deposit Insurance Corporation. Lending to households and business is in a steep decline. Nothing like it has happened since WWII. Total credit outstanding is falling too. The banks are barely even lending to the US government from which they got the money in the first place. "Banks, in aggregate, just absorbed the additional reserves by allowing their ratio of reserves to deposits to balloon," reports Charles Goodhart in The Financial Times, "...so the multiplier collapsed to zero... Why?" Quantitative easing had "unintended consequences." Bankers competed for yield with the deepest pockets in the monetary universe - the central bank itself. When the feds bought Treasury bills they drove yields down to such skimpy levels that the incentive for risky private loans was nearly lost all together. Better to leave the money on deposit at the Fed. No loans, no multiplier. No multiplier, no recovery. Instead, the feds take a dollar's worth of supposedly "idle" resources out of the private economy (actually, savings that people hoped to spend or invest later); squander it on bribes, bailouts or boondoggles; and get 90 cents worth of 'recovery.' Then, when a real recovery doesn't come, they spend two dollars. Where this will end up? With the multiplier out of action, consumer price inflation - and a recovery - seem far away. And the feds are helpless. What? What about more government spending? Or dropping hundred-dollar bills from airplanes? But those tools have self- mutilating effects too. They jeopardize governments' access to deficit financing. "Britain risks becoming the first country in the G10 bloc of major economies to risk capital flight and a full-blown debt crisis over coming months," said an article in Tuesday's Daily Telegraph. Sooner or later, lenders will worry about inflation and the risk of default. They'll demand higher interest rates. Treasury bond yields will rise, in real terms, even in a deflationary world. These higher rates affect public finances like a cold draft on a pneumonia patient. As governments pay more to borrow, their condition deteriorates. The odds of default increase. Some, like Dubai World, will be forced to postpone payments. Others just shake and shiver. The slow motion depression continues. If we are lucky...and nothing goes wrong. Regards, Bill Bonner, for The Daily Reckoning --------------------------------------------------------------- Joel's Endnote: Finally today a quick reminder that our exclusive interview with Dr. Marc Faber will be pulled form our site at 5pm today, EST. And, along with it, the half-price special to The Richebächer Society will disappear too. If you're interested, here's the link you can use. Aside from that, don't forget to tune in tomorrow for The DR Weekend Edition, when we relax a little and ponder subjects deemed unfit for polite company. Until then... Cheers, Joel Bowman Managing Editor for The Daily Reckoning joel@dailyreckoning.com   The Daily Reckoning - Special Reports: Gold: The Truth About Gold Fiat Currency: Using the Past to See into the Future "THE GREAT AMERICAN RECOVERY RP-OFF" Brace yourself for what's about to go down as the BIGGEST FINANCIAL SWINDLE in world history.