by Scott Causey, GWP Resource Correspondent
The Western World’s economic policies are destroying any hope of a real recovery. More importantly, I fear that it is completely intentional, as most things with government and big business are. Think back 10 years ago, and how you viewed the world then, as opposed to now.
How would Germans react 10 years ago to being told that, largely, it was their “responsibility” to carry the majority of the financial problems of Southern Europe. How would a wealthy French businessman react to what amounts to a 75% hate tax? What about someone in California paying $6 dollars for gasoline? On the surface, this might be seen as completely unrelated events. Nothing could be farther from the truth.
The European continent’s and the United States’ economies, combined, make up slightly more than 50% of global GDP. Twenty years from now, that will shrink tremendously, and here is why. The battle has been “won” and it’s not going to be pretty. For the foreseeable future, the State is in control. Collectivism is the religion, and all others are useful targets. Truth is only marketable and valuable to those who ascribe value to it. The Western economies of the world are in a massive game of chicken, betting that they can pull off renewed economic growth before either debt collapse or hyper monetary inflation occur. With stakes that high, you can bet the proverbial kitchen sink will be thrown at perception management.
Recently, a friend who leans left asked me to review Michael Moore’s 2009 documentary, “Capitalism: A Love Story”. In the film, Mr. Moore makes it a point to paint Republicans as evil capitalists. Throughout the production, he shows many families devastated from the financial crisis; people who have lost homes, airline pilots making less than 20,000 dollars a year and subsisting on food stamps, and GM factory workers being laid off. In particular, the film is critical of these industries: automobiles, airlines, banking, and insurance. The general tone is “if only” more regulation had been in place, then the labor unions and government could have saved these poor hapless people from the tyranny of Capitalism! This is akin to seeing so much violence in Detroit, that you choose to appoint Genghis Khan police chief.
For quick review, “capital” is nothing more than producing more than you consume and saving the difference. “Capitalism” is to risk said “capital” for the rational purpose of hoping to show a profit. Back to the four industries mentioned in the film one by one. How many times through the years should General Motors have already gone out of business by 2008? How about American Airlines? How about Citigroup? My insurance representative is hard to choose. All insurance companies are massively regulated by government and always have been. They basically provide fraud coverage for a market that has long since ceased to have anything “free market” about it. All of those particular companies and many more in those industries exist solely because of government rescue packages.
I’m not talking only 2008 either. Those companies, and others like them, are the bedfellow of the United States’ government. In any traditional sense of the word, you cannot go “bankrupt” with a printing press at your back. Moral hazard seemingly no longer exists. People have not gone to jail. Leverage to a large extent in banks has not been lowered. Airlines lose more money than ever. American automobile manufacturers, almost exclusively, still uneconomically produce cars for a 5 dollar plus gas world. Insurance companies still write “coverage” on exotic financial instruments they neither understand nor care to. Why would they? If it all goes wrong, the printing press has my back just like last time right? Or does it?
If you always take things at face value, you’re bound to overpay. A European Union makes no economic sense. Trillion dollar U.S. deficits as far as the eye can see don’t make sense either. People will only accept wholesale sweeping change and sacrifice if they are fearful. On that count, how do you think leadership is doing so far? This is a game of chess, not checkers, and the economic “wars” will be won with incremental-ism until the next Holy Sh** moment becomes a useful tool towards greater global economic integration. You can stand around thinking capitalism is evil. You can believe collectivism for the “greater good” is your patriotic duty. You can even believe someone in government has an answer, when the math says that it is impossible.
In my view, we have been in the eye of a massive hurricane for the past 3 years. Paper money has bought time and it has bought votes. It will not, however, repeal the laws of financial physics or solve structural problems. Capitalism, as the world once knew it, is dead. High frequency trading does not create prosperity for the broad economy. Manipulating the cost of fiat currency the world over through LIBOR is good for the Goose, but not the Gander.
I wouldn’t hold your breath for a Christmas card from Barclay’s, thanking you for your servitude. Stamping AAA on a bond does not mean your debtor will have the funds to pay anymore. Only two ratings agencies have had the balls to downgrade American debt so far; Egan Jones, which is currently being sued by the United States Government, and S&P, whose CEO was “rewarded” by being asked to leave the company. Without a free market interest rate, and no integrity left to pricing true risk to sovereign bonds, what the heck are you left with?
History has shown time and again that you can lose everything, holding a piece of paper that, one day, people have faith in, and the next, they don’t. JP Morgan famously said, “Gold is money. All else is credit.”. The Federal Reserve holds approximately 8000 metric tonnes of gold. The European Central Bank has 10,000 metric tonnes. Where it all starts to get interesting is when you begin to understand the math in gold simply does not add up any better than an Enron balance sheet. For most of the last decade, gold has been in a mining supply deficit. Official gold demand numbers are double what mining production is.
I say “official numbers” because that is the picture painted by the World Gold Council. An organization with close ties to major mining companies, such as Barrick Gold and the Bullion Banks. The Bullion Banks are then owned and controlled by the big money center banks; U.S. and European. The money center banks provide the financing for new exploration projects that Barrick is constantly searching for. Without financing and expanding reserves, Barrick’s share price would fall. If Barrick’s CEO was openly honest about how expensive it is to mine gold, the stock price would also most likely fall. All of which is to say that the World Gold Council has a vested interest not to upset the apple cart too much.
Chinese holdings of United States Treasuries is down again this year. What is not down is their interest in gold. In the first 6 months of this year alone, China imported more gold than the entire stockpile of the Bank of England. Britain may not be what it used to be, but London is still hugely important to world markets. Chinese imports of gold from Australia are up over 900% YOY. Central banks’ gold holdings are rarely, if ever, audited. Furthermore, they do not have an obligation to report what they hold. The last time China reported Central Bank gold holdings was in 2009. They had just passed 1,000 metric tonnes at the time. The next time they report, it is going to shock most of the world. The part of the world most shocked will be the largest debtor nation in the history of the world. The United States. For decades, the privilege of the world’s reserve currency has allowed our number one export to be paper money. In hindsight, that was a pretty sweet deal, don’t you think? We run trade deficits bigger by the year and all our fellow world citizens foot the bill. That is a game that has nearly run its course.
On average, new currency regimes occur roughly every 40 years throughout history. The current iteration of the United States’ dollar began in 1971, with the ending of the Gold Standard. By the time Nixon closed it, US gold reserves had already fallen by more than half. Dick Cheney was wrong. Deficits do matter. Whoever has the gold does matter. Surpluses matter and capitalism matters. You can extend it, pretend it, massage it, but you can’t make a red number a green one. Governments are dangerous, precisely for the same reason that many hate capitalism. Governments have no profit motive.
Many seemingly think that is a good thing. Just look at all the great things no profit motive has accomplished; Amtrak, USPS, Social Security, Medicaid, Medicare, public housing projects, and two thirds of the land west of the Mississippi that is off limits to oil and gas drilling. Capitalism creates real wealth. Government misallocates it to bottom feeders. If you want a country run by bottom feeders, then keep the same policies in place.
Keep believing inflation is 2%. Keep believing unemployment is 7.8%. Keep ignoring people like Jack Welch, who built General Electric into an infrastructure juggernaut. Keep electing lawyers to construct the economy. Evolve or die. That is the Western World’s choice. What they have chosen is to print and hold interest rates at 0% for years and have promised to do it for years to come. The only reason that’s believable is because it’s the only thing they can do short of default. It’s best, then, to not overthink this. Buy the f**king dip in precious metals.