Thursday, May 28, 2009
The Primary Economic Trend is Not Created by the Government
The government cannot “fix” the economy and has never been able to do so. All the regulations were in place to prevent the mess we are now in but the laws on the books were either ignored, not adequately policed, or revised/reversed due to bribery (i.e. “aggressive lobbying” by “special interest groups”).
Government does have the ability to make things worse by prolonging the economic depression that has already begun, however. In the spring of 1931, very few thought a prolonged economic depression had begun. It is repeatedly stated by those who claim to know about such things that “things are different this time” and “government didn’t do enough last time,” so another depression is not possible. I call bullshit and I have the facts to back it up.
See if any of these things from the last Great Depression look familiar (current thoughts and/or goings on are in parentheses):
• Short sale stock restrictions (fall, 2008 and the battles for more restrictions are ongoing)
• “Conference on Home Building and Home Ownership” (it seems like The National Association of Realtors has one every month and they have been calling the bottom in housing every month for 3 years now. They even got Alan Greenspan to talk about the “seeds of a bottom” in housing at their last big meeting)
• Government aid for low-income housing and government subsidized long-term credit for housing (nothing new here...)
• “National Credit Corporation” to stimulate lending by banks and extend credit to banks created with federal reserve assistance – morphed into the RFC (Reconstruction Finance Corporation), which was a political boondoggle used to pay off debts to bankers like JP Morgan and rife with corruption/theft of public funds to line bankers’ pockets (TARP-o-rama!)
• Federal Farm Loan Board/Bank System made to promise that they would not foreclose on any farm unless the debtor wanted to leave his/her farm (foreclosure moratoria also being used intermittently now)
• Home Loan Bank System created to provide discount mortgages (Fannie and Freddie morphed into monsters this time around!)
• Reform bankruptcy laws to weaken creditors’ position (GM and Chrysler – now, we just ignore the laws already on the books rather than bother to make new laws. Straight government gangsta!)
• Public Works Administration to create jobs and build infrastructure (pending Obama plan)
• Increased taxes including personal income, sales, gasoline, auto, electric energy, toiletries, jewelry, stock, telephone usage, corporate and gift taxes, among others (man, we all know it’s coming much more than we’ve seen so far)
• Emergency Relief and Construction Act to aid states in trouble (California, anyone?)
• Glass Steagall Act, which permitted the federal reserve to accept commercial paper as collateral for its notes and broadened assets eligible for rediscounting (current federal reserve alphabet soup programs)
• Excess reserves build up in banks despite record “money printing” due to a lack of bank lending (happening in spades right now)
• Bank failures at double to triple the normal rate (happening now)
• Hoover angry at individuals and banks that don’t use or give credit and calls them “hoarders” (prudent banks now being singled out as “irresponsible”)
• Unemployment rate at 8-9% in 1931 (ditto)
• Federal deficits explode to new record levels (duh!)
• “Emergency Committee for Employment” (Obama should just re-use this one verbatim, eh? Are you listening, sir?)
These things were all enacted/all happened while Hoover was still in office between 1930 and 1932, before anyone acknowledged there was an economic depression and before the stock market had bottomed, not after. FDR came later and he just went bat-shit insane with taxpayers’ money, but to no avail. Anyone who thinks FDR fixed the last depression or did anything besides prolong it should have their economic credentials revoked.
A secular debt bubble popping / credit contraction cannot be solved by creating more debt. Irresponsibly ramping up public debt in the name of expediency and need for centralized control (i.e. socialism/fascism) can make things worse, though, by prolonging the agony and leaving us vulnerable to a currency crisis. Gold hedges against government policy failure because it is the currency of last resort.
“Gold still represents the ultimate form of payment in the world. Fiat money, in extremis, is accepted by nobody. Gold is always accepted.” - Alan Greenspan, 1999
Gold miners should outperform Gold over the next decade in the Kondratieff Winter that has already begun, but holding some physical Gold as the ultimate form of cash and an insurance policy against the whims of policy makers and the currency markets is always prudent. The Gold sector will be the best place to make money over the next decade and it is not too late to profit at all, particularly in the Gold miners. I believe an intermediate-term top in Gold miners is near, but yet another great buying opportunity in the mining sector should occur before the end of the year. It is also not recommended that Gold purchases be made when the price has risen significantly (like now), but rather when it has made a sharp decline (the whole buy low, sell high thing…). I believe a new nominal price high for Gold is highly likely before Independence Day despite deflation.