Is this a good time for gold?
Not much market movement Tuesday. Dow basically flat. Gold rose $30. Gold investors don鈥檛 seem to be able to decide. Is the economy good for gold鈥r bad?
Here鈥檚 our opinion: This is a good time to own gold. But it won鈥檛 seem like a good time. Not now. Because the Great Correction just gets worse and worse. And as the correction bites the economy, the dollar goes up against almost everything.
鈥淕old is not going down,鈥� says David Rosenberg. But we鈥檙e not so sure. Gold investors bought gold to protect themselves against the dollar. But in the short and medium term, they won鈥檛 need protection against the dollar. They鈥檒l need protection against everything else! They鈥檙e likely to be disappointed with gold and drop it as this period of de-leveraging drags on.
Yesterday, we promised to explain what was really behind what Tyler Cowen calls 鈥淭he Great Stagnation.鈥� We haven鈥檛 forgotten. We鈥檒l come back to it. Just hold on.
First, let鈥檚 look at how this world economy is slipping into a worldwide depression.
Just check out the container shipping volumes at California ports. They鈥檙e down nearly 10% from a year ago. That鈥檚 a big drop in world trade. What happened? Did Americans finally get enough gadgets and gizmos from Asia? And what does it mean for the Asian exporters? Their economies depend on buying from overseas. They鈥檙e export economies. Of course, it is true that local demand is increasing. Eventually they鈥檒l adjust to fewer exports and more domestic consumption. But adjustments take time鈥nd are usually linked to major financial crises. What will happen?
Here鈥檚 an answer from Britain鈥檚 Telegraph newspaper:
China 鈥榝aces subprime credit bubble crisis鈥�
Monetary tightening in China threatens to pop the $1.7 trillion (拢1.07 trillion) credit bubble in local government finance and expose the country鈥檚 simmering 鈥渟ubprime鈥� crisis, according to the Communist Party鈥檚 economic guru.
Mr. Cheng said China is entering a 鈥渧ery tough period鈥� as growth runs into the inflation buffers, threatening the sort of incipient stagflation seen in the West in the 1970s and leaving the central bank with an unpleasant choice.
鈥淭he tightening policy is creating a lot of difficulties for local governments trying to repay debt, and is causing defaults,鈥� he told a meeting at the World Economic Forum in Dalian. 鈥淥ur version of subprime in the US is lending to local authorities and the government is taking this very seriously.鈥�
鈥淓verybody assumes that they will be bailed out by the central government if they default, but I disagree with this. It means that the people will ultimately pay the bill for it all, at a cost to the broader welfare.鈥�
Meanwhile, in Europe, Italy got downgraded by S&P. Angela Merkel lost a critical vote. And Greek bankruptcy is right around the corner.
And back in the US the typical American is suffering. He had equity of 61% in his house back in 2001. Now, he鈥檚 got a paltry 38%. And he鈥檚 lucky to have that. There are 11 million homeowners who have less than zero equity. They鈥檙e 鈥榰nder water鈥� and still sinking.
One in four young people is jobless鈥ith sentiment among the youth at a record low. The old people may be optimistic, but not the young.
And 15% of the population 鈥� a record number 鈥� is now below the poverty line. That鈥檚 46.2 million people living in poverty in the richest nation on earth.
But don鈥檛 worry, dear reader, president Obama is on the case. He says he has a solution to the US debt problem. He says he鈥檒l cut expenses and raise revenue. Why didn鈥檛 we think of that!
A quarter of the cuts are supposed to come from the military budget. But they鈥檙e totally fraudulent. The feds don鈥檛 really know how much their wars will cost. So when they talk about 鈥榗uts鈥� and 鈥榮avings鈥� they are talking about reductions in projected costs, not real costs. They鈥檙e made-up numbers, in other words. Even they admit that the savings are 鈥渋llustrative鈥� 鈥� rather than real. And there鈥檚 no way these illustrative savings will turn real 鈥� not as long as America stays on the imperial path.
Obama also wants the rich to pay more in taxes. Heck, Warren Buffett is on board. And so are most of the voters.
Of course, most of the voters don鈥檛 pay taxes at all! Not net. About half of the people eligible to vote get more from the feds than they pay in taxes. That leaves the 鈥渞ich鈥� shouldering an outsize burden. Already, the top 1% pays 30% of the taxes.
But if you鈥檙e rich, don鈥檛 expect any sympathy from us or anyone else. The rich have rigged the system in their favor. Everyone else has gotten poorer while they鈥檝e gotten richer. Voters will be happy to soak the rich. Heck, they鈥檇 drown them if they could get away with it.
But let鈥檚 go back to the big picture. Tyler Cowen thinks the US enjoyed the low-hanging fruit. Fertile farmland, cheap energy, abundant water, easy credit鈥etting rich was a piece of cake.
He mentions too that investments in health care and education seem to have reached points of diminishing returns. The US spends far more on both than other countries鈥nd gets no extra benefit. Our schools are not better. And Americans don鈥檛 live as long as people who spend only half as much on health care.
Can we fix this problem, asks Mr. Cowen? Wasting no time answering his own question, he responds that we just need to boost the prestige of scientists鈥nd count on human ingenuity and innovation to come up with a solution. Heck, even Thomas Friedman could have come up with that! In other words, he thinks the system can heal itself.
But the real problem is not a 鈥榣ow hanging fruit鈥� problem. It鈥檚 a declining marginal utility problem. And a zombie problem.
As a society ages its institutions become brittle and inefficient. They are no longer dynamic and productive. And, they become nests for dead-head zombies. The two things go hand in hand. On the one hand, declining marginal utility undermines the productivity of future inputs. And the zombies take over鈥aking it impossible to direct inputs elsewhere. The zombies protect their turf; they make sure they get more resources, not less.
Take education, for example. A little of it goes a long way. When a person learns to read and write, the whole world of ideas and information opens up to him. Whether more inputs of formal education actually pay off or not is open to question. Clearly, beyond some point, they don鈥檛. Americans spend twice as much per student as they did 40 years ago. The educational attainment results are about the same. Which suggests that the marginal utility of investment in the education industry declined to zero 4 decades ago.
Most the world鈥檚 great ideas鈥reat books鈥nd great inventions were produced by people who spent relatively little time in formal school settings. But now, every goofball and half-wit is expected to have a college degree. What do you expect? A college degree isn鈥檛 really worth very much.
But the zombies want their children to go to college. And the zombies want cushy jobs as 鈥榚ducators鈥� and educational administrators. (They don鈥檛 want to teach鈥hat鈥檚 too hard!) And children are no dopes either; they know it鈥檚 a lot more fun to spend 4 years at Party U., at someone else鈥檚 expense, than 4 years out in the real world. Especially now, when it鈥檚 hard to get a job. That鈥檚 part of the reason student loans have quadrupled since 鈥�07.
Obama promised to bring 鈥榗hange鈥� to the nation. But change is the last thing the zombies want. And it鈥檚 the last thing that Obama would want to give. The voters wouldn鈥檛 stand for it.
Instead, we have a Great Stagnation鈥n economic deadend鈥here further inputs into traditional, zombie-controlled institutions no longer pay. More credit? More military spending? More Medicaid? More Social Security? More education? More consumer spending? More hiring? More capital investment? More energy consumption? More programs? More unemployment compensation? More taxes? More laws? More regulations? More lawyers? More educators? More security guards?
Will they pay off?
Not a chance.
Tune into tomorrow to find out how to really fix the problem.
Regards,
Bill Bonner
