Much of a Good Thing Is Not a Good Thing
by David Galland: The
Greater Depression Is Upon Us
I am beginning
to feel a bit like one of the French unfortunates stumbling through
the fog in the Ardennes, circa 1914. Except that, instead of Germans
full of deadly intent coming at me in the gloomy forest, it is a
flock of black swans.
As it was for
the French in the Ardennes, the number of problems then Germans,
now black swans is becoming overwhelming.
a little of what we as investors, and as individuals looking forward
to retirement in accommodations more commodious than a shipping
box, must contend with:
Euro-Stone. Despite all the bailouts and bluster flying about
Europe, the yields in the wounded piiglets of Greece,
Portugal, etc. have failed to soften to more tolerable levels.
Worse, yields in the fatter PIIGS of Spain and Italy are hardening.
This is of no small import to the German and French banks, which
together are owed something like US$2 trillion by the porkers.
At this point, it is becoming clear that the eurozones systematic
flaws doom the euro to continue trending down until it ultimately
takes its place in the pantheon of failed monies.
Yen Has Lost Its Zen. This week the Japanese government again
began intervening in currency markets because, remarkably, the
yen has been pushed to highs against the dollar. This in a nation
with a government debt-to-GDP ratio that is better than twice
the also horrible ratio sported by these United States.
ensures that Japans long struggles will continue, burdened
as it also is with the aftermath of the deadly tsunamis and the
ongoing drama at Fukushima. Adding to its woes are the commercial
challenges it faces from aggressive neighbors, and maybe worst of
all, the demographic glue trap it is stuck in, with fewer and fewer
young to pick up the social costs of the old. Toss in the waterfall
plunge in Japans much-vaunted savings rate formerly
a big prop keeping Japanese interest rates down and the picture
for Japan is anything but tranquil.
Crucible. There are many reasons for being optimistic about
the outlook for China, including a large and hard-working populace.
But there is one overriding reason to expect a big bump in the
path to Chinas emergence as the worlds reigning economic
its a capitalistic country with a communist problem.
Now, in the
same way that some people believe in leprechauns or any of dozens
of other magical beings, some people believe that an economy can
be successfully commanded just as a captain commands the crew of
a Chinese junk cruising along the coast. Its a fantasy.
While the comrades
in charge have done quite well largely by getting out of
the way of natural human actions they are fast reaching the
limits of their ability to navigate the shoals. As I dont
need to tell you, China is a massive country, with hundreds of millions
of people capable of every manner of human strengths and frailties.
But if they share one interest, it is in a job that allows them
to keep their rice bowls full and a roof over their heads. Said
jobs dont come from government dictate at least not
on a sustainable basis but rather by the messy process of
and the more free-wheeling, the better.
In the July
edition of The
Casey Report, guest contributor James Quinn discusses the
very real challenges facing China, not the least of which is that
in the latest reporting period, official Chinese inflation popped
up to 6.4%. Even more concerning was a 14% rise in the price of
to keep employment high while also keeping inflation low, the Chinese
government is throwing all sorts of ingredients into the mix
building ghost cities, raising interest rates, stockpiling commodities,
clamping down on dissent, hacking everyone but in the end,
the irrefutable laws of economics must prevail. And so the Chinese
government will have to atone for the massive inflation it unleashed
in 2008, and for the equally disruptive misallocations of capital
that are the hallmark of command economies.
While the blowup
in China will wreak havoc in world markets, including many commodities,
a bright side for gold investors is that the countrys rising
inflation should help keep the wind in the sails of monetary metal.
Its no coincidence that the World Gold Councils latest
data show investment demand for gold in China more than doubling
in the first quarter of this year.
Scam. Then there is the United States. Casey Research readers
of any duration know the fundamental setup
avarice that dominates both parties
The fear and greed of
John Q. Public and his steady demands that the government do more
The scam being run by the Treasury and the Fed to provide the
funny money to keep the government running
The cynical attempts
by certain politicians to stoke a class war
full of toxic paper at the nations financial institutions
The outright corruption and deceit of the various government agencies
as they twist and torture the data to fool the people into supporting
them in their scams.
a growing problem: An increasing number of people and institutions
are coming to understand just how intractable the problems are.
This has resulted in a steady move into tangible assets gold,
especially that are not the obligation of any government.
And its not just individuals and money managers moving into
gold, but central banks as well. That is an absolute sea change
from the situation even a few years ago.
with the Treasury unable to borrow since May, a backlog in government
financing needs has built up. Which begs the question: With the
Fed standing aside (for the moment), where is the government going
to find all the buyers for the many billions of dollars worth of
Treasuries it needs to flog in order to keep the scam going?
If I were a
conspiracy theorist, I might look at the sell-off in equities this
week, triggered as it was by nothing specific, and see a gloved
hand operating behind the curtain. After all, nothing like a good
old-fashioned stampede out of equities to send billions chasing
after safe Treasuries
which has been exactly the
case this week.
with the crossroads for hard choices now behind us, the global economy
finds itself at the top of a long hill
with no brakes.
From here on,
it will increasingly be every nation for itself meaning a
return to competitive currency devaluations and, in time, exchange
and even trade controls.
And we will
see a return of the Fed to the markets. On that topic, I will once
again trot out a chart from an article by Bud Conrad that ran in
The Casey Report a couple of years back.
I do so because
it shows what I think is a very strong corollary between what occurred
in Japan after its financial bubble burst and what is now going
on here in the U.S. (and elsewhere). As you can see, as a direct
result of the Japanese central bank engaging in quantitative easing,
the Japanese stock market bounced back strongly. But then, when
the quantitative easing stopped, the market quickly gave back all
on image to enlarge)
If I had the
time and the resources to whip up a chart overlaying the quantitative
easing here in the U.S. of late versus the equity markets, I would.
But I dont, and so will delve into that fount of all information
the Internet and grab a chart constructed by someone
else (in this case, Doug Oest, managing partner of Marquette Associates
As one can
readily see, the Japanese experience is indeed a corollary to whats
happened here, with QE pushing the stock market higher. Conversely,
until the Fed comes back in, equities could be in for a rough ride.
Likewise, when the Fed returns with the next round of QE, stocks
could put in a very nice rally.
on image to enlarge)
Fed will have to roll out another round of quantitative easing.
And it will likely have to once again provide swap lines to
the European central banks as it did in 2008 though this
time around, a belligerent Congress is watching the Feds
every move, so it may not be able to move as quickly as it would
have otherwise. In the end, however, given there is less than
nothing being done on the front of fiscal policy, it will fall
to the Fed to once again ride to the rescue. But it will do so
on a lame horse.
- A delay
by the Fed to act could help the Treasury, at least temporarily.
Per above, the U.S. government has to move a boatload of paper
by the end of this year. If it wants to avoid the dire consequences
of having to pay out higher yields in order to attract sufficient
buying, it will have to find a lot of demand in a hurry. Should
the Fed sit on its hands a bit longer, especially in the face
of the escalating euro crisis, the resulting turmoil in global
equity markets could provide the necessary demand to clean up
the backlog and keep the U.S. government operating.?(In Julys
Casey Report, Bud Conrad dissects the situation and comes to some
and an emerging profit opportunity.)?
return of the Fed may signal the beginning of the end. In
the face of broad weakness in the global economy and in most commodities,
the fact that gold has held up so well is a clear indication that
there has been an intrinsic change in the gold market. Barbarous
relic no more, it has clearly been returned to its longstanding
role as sound money unique and increasingly valued when
compared to the fiat competition.
This role will
only become more crucial as the worlds desperate nation-states
fire their currency cannons in the war to remain viable. The Feds
return to Treasury markets will be, in the rear-view mirror of future
history, seen to be a seminal event the beginning of the
end of the current fiat monetary system.
too much of a good thing is too much of a good thing. And make no
mistake, the decades of operating under a fiat monetary system have
been a very good thing for the political classes and their pandering
times are coming to an end.
can still make money in a crisis
often the returns are even
greater when times are tough. Learn all about the smart moneys
way of crisis investing and Bud Conrads profit opportunity
mentioned above with a risk-free
trial subscription to The Casey Report.
August 15, 2011
is the managing editor of Casey
© 2011 Casey