The British prime minister has a monetary message for Germany…
Nov 16
Surely Germany knows it’s on the hook for the debt crisis. So why would it want to get in even deeper…?
Nov 24
Hyperinflation is not simply inflation times 10. In fact, it’s when real prices fall…
SO the FEDERAL RESERVE’s second-round of quantitative easing, announced on November 3rd, was a shoo-in – a fait accompli – already decided when the policy team first sat down the previous day, writes Adrian Ash at BullionVault.
How come? As the minutes released this week show, Brian Sack – manager of the New York Fed’s System Open Market Account (SOMA) – opened the meeting. And asked to judge the matter, he told the 64 other policy-wonks gathered in the Eccles Building that his team "could purchase additional longer-term Treasury securities at a pace of about $75 billion per month while avoiding disruptions in market functioning."
Moreover…
"Implementing a sizable increase in the System’s holdings of Treasury securities most effectively likely would entail a temporary relaxation of the 35% per-issue limit on SOMA holdings under which the Desk had been operating."
Hey presto! The following day, and after apparently intensive debate, a monthly target of $75 billion in Treasury bond purchases – plus a relaxation of the 35% limit on Fed holdings of any particular bond issue – was announced.
Does that make the Fed meeting a sham? No matter. "It’s not as if the Fed is doing anything radical," says Princeton professor Paul Krugman. It’s simply looking "to boost the flow of economy-wide spending by changing the mix of privately-held assets," agrees Berkeley professor Brad DeLong.
"It buys government bonds that pay interest in exchange for cash that does not. That is totally standard."
But totally standard where, exactly?
Sure, buying and selling government debt in the open-market is how central banks control short-term interest rates. That’s why the Fed Funds rate is a target, and the actual outcome in the marketplace is instead known as the Effective Fed Funds. Bidding short-term bills higher (or lower) in price, the New York Fed thus pushes down (or up) the interest rate paid on those bills. But stuffing the market with money, in contrast, is a very different aim. Not least when you do it by buying longer-term bonds. And by only buying, rather than fine-tuning purchases with sales. And by doing it amid the heaviest net issuance of government debt in history. And by doing it so hard that, despite that record issuance, you still need to break your own limit on the proportion of any individual maturity-date you’re allowed to own.
So again, we ask here at BullionVault: Where in the world is such money creation "totally standard"…?
"I think using quantitative easing is a perfectly legitimate thing to do. And for heaven’s sakes, it’s not as if we’re in any danger of inflation any time soon."
– White House advisor and former director of the Congressional Budget Office, Alice Rivlin, speaking to CNBC on 15 November 2010
"We have no ‘dangerous flood of paper’…On the contrary, our paper [money] circulation, though it shows a terrifying array of billions, is really not excessively high…"
– Vossische Zietung newspaper, 16 August 1922
"Several [Fed policy] participants saw a risk that a further increase in the size of the…monetary base could cause an undesirably large increase in inflation. However, it was noted that the Committee had in place tools that would enable it to remove policy accommodation quickly if necessary."
– Federal Reserve minutes from 3 November 2010
"Even if the quantity of money were three times its present size, it would constitute no real obstacle to stabilization…"
– Berliner Börsener newspaper, 18 August 1922
Okay, so pasting a couple of quotes next to each other doesn’t mean the United States is headed straight for wheel-barrows and stormtroopers. Like everyone agrees, 1,000,000% inflation looks a long way off right now. But no central bank ever began a hyper-inflationary policy because it feared inflation. Such disasters always come because of vanished credit and economic depression. And whether in Germany nine decades ago, or in Argentina twenty years back, or in Robert Mugabe’s Zimbabwe around the turn of this century, stuff actually gets cheaper – not more expensive – in real terms during hyperinflation. It’s just that the local currency falls in value faster still, turning the "money illusion" we’re all prey to into a livid nightmare.
Hence the daily flood of French citizens across the border at Strasbourg each day during the early stages of the Weimar madness, emptying the stores with their highly-prized Francs. Hence the real-estate bargains snapped up by wily speculators during Argentina’s last-but-one collapse. Hence the zero-change in inflation – net net – for US Dollar earners during the early phase of Zimbabwe’s hyperinflation, followed by massive a deflation, in US Dollar terms, even as prices in the local currency soared.
On the ground, amidst these crises, it was monetary contraction – not soaring prices – that most worried policy-makers. "The lack of money [now] has a worse effect than the devaluation itself," said one Berlin newspaper in summer 1922, as the Weimar Republic began to run the presses 24/7.
"The government printed notes to satisfy everyone," writes Adam Fergusson in his history of the disaster, When Money Dies, "telling itself that as the granting of credit…had so greatly decreased, the actual currency in circulation had to be so much greater."
But let’s not get perverse. The latest flat-lining in America’s official Consumer Price Index does not mean that hyperinflation is in fact underway. The critical factors to watch out for remain a collapse in tax revenues, plus demands for immediate payment from foreign creditors. It bears repeating nevertheless, however, that – contrary to the worldview presented by academic economists and professional wonks – demand-push inflation is not how hyperinflation begins. Real values in fact fall as a genuine currency crisis takes hold.
And the fact that the Federal Reserve is so dead-set on its "emergency" response that it scarcely needs to meet to agree it, doesn’t mean the Fed actually knows what it’s doing.
Ready to Buy Gold today…?
Oct 02
Forget mining and
central banks. Here’s the single most important gold supply issue today…
SO IT WAS TOUGH yet
again to meet any gold "bears" at the London Bullion Market
Association’s annual conference last week, this year hosted in Berlin’s Hotel
Adlon.
The bullish arguments you know already no doubt. Low-to-zero
Western interest rates…plus a growing clamor to buy gold amongst Chinese
households (the Middle Kingdom’s demographics are more bullish still, as
Mitsubishi’s Matthew
Turner showed)…make a compelling case for rising gold investment demand,
even without the risk of government-bond defaults, rising inflation or
continued losses on "mainstream" financial assets.
The Berlin conference had plenty more to say on those
stories too, as we’ll see below (and as you can see on the slides now freely published
on the LBMA’s
website). But first, what of supply?
Well, all the gold ever produced in history came from a
mine, as Paul Burton of GFMS World Analyst
reminded the conference. But in the last decade, gold mining has failed so spectacularly
to meet the surge in demand, he could only question its "relevance" to
the market’s net outlook. Dollar gold prices quadrupled from
2000 to 2009, another speaker noted, yet annual mine output rose just 1%. And allowing
for the intervening slide in output, said Burton, gold mining output is now so
price inelastic, it took eight years of rising prices to produce any meaningful
blip in output (2009′s year-on-year increase of 7%).
Further output gains look unlikely, Burton went on, thanks
to the gold mining
sector’s "production lag" – both because of an "exploration
lag" (new investment only turned higher in 2003) and because new
discoveries of 1-million ounce deposits have collapsed regardless. The five
years to 2009 saw record-high levels of exploration spending, perhaps totaling
the previous 12 years added together (at least on BullionVault‘s skew-eyed reading of
Burton’s chart from the conference floor. See what you make of it on page 9 here). Yet
all told, GFMS’s best forecast is now for annual gold mining production to
decline by 13% between 2012 and 2019.
That other constant drip-drip of gold supply – the
"official sector" of central banks and outfits like the International
Monetary Fund (IMF) – also looks irrelevant for now, as Burton’s GFMS colleague
Philip Klapwijk
showed in his speech. European states are now holding, not selling their
reserves, but emerging markets (for now) remain mere ankle-biters compared to
the weight of private investment or jewelry demand each year. So net-net, said
the GFMS chairman, central bank activity looks "neutral", despite the
bullish picture for emerging-market demand he also laid out. More notably, and
"something we haven’t seen before", private-sector investment
holdings now outweigh central-bank gold reserves overall. Making investor
sentiment a key plank of any longer-term forecast.
Even without the end of central-bank sales, however, or the
failure of mine output to rise, "The single most important gold supply
issue is scrap," as John Reade of Paulson Europe said in his conference
summary. Re-selling unwanted jewelry "has gone mainstream" noted Jeffrey Rhodes,
CEO of INTL Commodities DMCC, becoming "socially acceptable" in a way
that using pawnbrokers to raise cash never was. Throw in gold coins, dental
bridges, bonding wire from microchips and any other supply "not from a
primary [ie mining] source", and scrap gold matched more than one fifth of
global gold mine output last year, up from just 7% a decade ago. Turkey has
overtaken India as the No.1 source of scrap gold supplies (217 tonnes in 2009,
equal to almost a tenth of world mining supply), but the most dramatic change
has come in the developed West, where "sophisticated electronic assay
equipment has seen the captain’s ball at your local golf club replaced with
gold buying parties," as Rhodes said.
Since 2005 alone, US scrap supply has more than doubled
according to data from GFMS Gold Survey, taking United States’ re-sales from fifth
to second position worldwide in 2009 with 124 tonnes. Italy’s re-sale market
moved from seventh to sixth with a tripling to 78 tonnes of scrap, and the UK
& Ireland have leapt 1505% from virtually nothing a decade ago to nearly 60
tonnes in 2009, bagging the world No.6 slot in the first-half of this year.
Throw in Germany and France, and four European nations make the top 10 scrap
supply nations by growth since 2000. In the first six months of this year,
scrap supplies from each of the US, Italy and UK & Ireland had all outpaced
India (the former No.1, remember), enabling scrap to become the "only
credible counter to investment buying." But should these massive supplies
of scrap in fact be overwhelming investment pressure on prices?
Since "investment buyers and scrap sellers are driven
by the same motivation of price expectations" as Rhodes reminded the LBMA
conference, this price-elastic source of supply could threaten "a perfect
storm of selling once sentiment changes," he believes. But first, that
would require higher prices again, because (for now) even scrap-gold merchants
have turned bullish, he reported, capping flows to refineries in anticipation
of stronger gains ahead. And second (and more critically given the source of
the last few years’ real jump in scrap supplies), "Is the drawer
empty?" as Paulson Europe’s John Reade
wondered in his quick-fire recap before the conference adjourned.
Cash-strapped households, remember, can only sell their
unwanted gold bracelets once. How high would prices need to go before more
cherished pieces could be sent to the smelters? Apply the same question to
private gold investments in fact (ETF holdings have proven notably
"sticky", if not yet as "long-term means forever" as gold
coins), and you get to the nub of the "bubble or boom?" debate.
Because at some point, according to pretty much every speaker, the circumstances
now boosting global investment demand will recede – and with them, therefore,
the gold price will fall back as well. As we’ve already seen (in Part I),
the bubblicious frenzy needed to mark the top of spike remains plainly absent.
Leaving only the circumstances behind this current boom to consider.
"The current bull market has much deeper roots than the
credit crisis," the LBMA was reminded by former Blackrock head of natural
resources Graham
Birch (now a farmer). Pointing to gold’s nadir of 1999, "continuous
disinvestment" was needed to keep prices down, and when Europe’s big
central banks agreed to cap their sales that September, it marked the start of
this rise. Roll on 11 years and 350%, however, and "Just because gold’s a
safe haven doesn’t mean it’s a cheap safe haven," Birch warned Berlin.
Which raises the question of cost and utility for new buyers today.
"I think people long gold should not be concerned
reading this slide," said John Reade in his summary, pointing to slide 14
of William White’s opening
keynote speech. Chairman of the OECD’s Economic & Development Review
Committee, White had prefaced his 20 minutes of gloom-and-doom (salted with
uncertainty, fear and doubt) by saying that the OECD itself would certainly
disagree with everything he was about to say. Reade reminded the delegates that
White’s copyrighted sales-line should be "Scaring investors since
2003," as he accurately picked the shape of the bubble well ahead of
schedule, and hasn’t been proven wrong yet.
"Investors should be positioning for ‘tail
events’," White concluded. "But which ones?" Somewhere between
deflation, slow growth, de-coupling of Asia from the West, or a lurch into
rapid hyperinflation or a new series of bubbles fed by ultra-loose monetary
policy, "Is there room for gold in a world like this?" asked the former
Bank for International Settlements forecaster.
"The answer has got to be yes. But quite what
role…well, that’s for you to decide!"
A handful of private investors have begun to make that
decision, as Wolfgang
Wrzesniok-Rossbach of the Heraeus refinery showed in detail. But the real
weight of money – the institutional mandates caring for your insurance and
pension savings – has scarcely bothered to buy gold ’til now, a point made at
length by both Shayne McGuire and Graham Birch on Monday morning. Across in
Asia, "People don’t need convincing on gold," said David Gornall of
Natixis, noting that 81% of global "bar hoarding" demand comes from
Asia, with buying amongst the "traditional buy-side countries" such
as India and Thailand – as well as the fast-growing world No.2 for gold demand,
China – continuing to grow despite record-high gold prices.
Even there, "the emergence of retail physical gold investors has resulted
in structural changes in distribution, product and buying behavior," as
Sunil Kashyap, managing director of Bank of Nova Scotia-ScotiaMocatta
explained. Yet all told (and absent the "bubble" idea which the
conference demolished time and again), what looks like a new paradigm might in
fact mean more a return to old patterns – globally – of gold buying and
hoarding…with a little "mobilization" thrown in by the scrap market
when times get tough.
India and Turkey, after all, have long been both top buyers
and scrap suppliers to the international gold market. Rising investment demand
here in the "rich West" (which, to repeat, remains well off a
"bubble" today) represents a simpler, unleveraged way of retaining
your savings than most Western households have grown used to. But gold was a
core chunk of private wealth holdings not so long ago, back before the
debt-fuelled boom we’ve enjoyed since WWII began – a boom which must now end
with "rebalancing" between the world’s debtors and creditors, as George Magnus of
UBS made plain Monday morning. The kind of dislocation required won’t be much
fun for either, which again looks good for gold demand, if not necessarily
prices.
All told today – and seeing the world’s fastest-growing
economies continue to buy and hold ever more gold as their wealth increases –
maybe US and European savers are only just getting back to the future. Either
way, that "bubble in gold" doesn’t exist. Not by a long way just yet.
The safest gold at the lowest prices – start with a free gram of Zurich bullion right now at BullionVault…
Sep 23
Don’t say "we" when you mean "the government" and the massive debt it’s created…
WITH THE WESTERN WORLD sinking deeper into what Doug Casey calls the Greater Depression, he now sees default on the US national debt as inevitable – albeit probably in the guise of currency destruction.
Chairman of Casey Research – and one of the world’s most respected mining-stock analysts – Doug speaks here with The Gold Report about why Gold Mining juniors might "go up by an order of magnitude or more, even while most other stocks are going down…"
The Gold Report: Doug, at a recent conference you said that the US ought to default on its national debt now. Why that rather than letting it play out?
Doug Casey: Several other things almost equally radical should be done besides defaulting on the debt. I recognize that an outright default is most unlikely, but the national debt should be defaulted on for several reasons.
To start with, once the US government defaults on its debt, people will think twice before lending it any more money; giving politicians the ability to borrow is like giving a teenager a bottle of whisky and the keys to a Corvette. A second reason is that the debt is an albatross around the necks of the next several generations; it’s criminal to make indentured servants out of people who aren’t even born yet. A third reason would be to overtly punish those who have been lending money to the government, enabling it to do all the stupid and destructive things that the government does with that money.
The debt will be defaulted on one way or another. The trouble is they’re almost certainly going to default on it through inflation, by destroying the currency, which is much worse than defaulting on it overtly. That’s because inflation will wipe out the relatively few people who are prudent in this country, those who are actually saving money. Because they generally save in the form of Dollars, they’re going to wipe them out financially.
It’s just horrible. Runaway inflation will reward the profligates who are in debt – people who’ve been living above their means. And punish the producers who’ve been saving and trying to build capital. That’s in addition to the fact it will destroy millions of productive enterprises. A runaway inflation is the worst thing that can happen to a society, short of a major war. They just should default on it honestly, as it were.
TGR: But your belief is we’ll try to inflate our way out of it to pay for it…
Doug Casey: Don’t say "we". Say "the US government". I don’t consider myself part of the problem. Americans have to learn that the government isn’t "us." It’s an entity that has its own interests, its own life, its own agenda. It views citizens as milk cows – or perhaps even beef cows – strictly as a means to its ends.
TGR: Whether it’s overt or by default, doesn’t that end up in the same place down the line?
Doug Casey: There are two ways they can default – one by saying, "We don’t have the money and we’re not going to pay you," and the other by continuing to print up money and giving people the number of Dollars that they’re owed, except the Dollars are worthless. The first alternative is by far better, for many reasons we can’t fully explore now. But it’s going to be traumatic either way.
TGR: But the assumption that we could actually just print more Dollars and pay off the debt implies that somewhere the debt will stabilize.
Doug Casey: Oh no. It doesn’t have to stabilize. To pay interest on the national debt, and to pay for additional spending, all the Federal Reserve has to do is buy bonds from the US government. It doesn’t have to stabilize at all. The government is most unlikely to cut back on its spending, most of which has become part of the social fabric – Medicare, Social Security, unemployment benefits, food stamps, corporate bailouts, continuing foreign wars, domestic "security"…These people are crazy enough that it could get like Germany in the ’20s or Zimbabwe a few years ago.
TGR: At what point do we tip over and turn into a situation such as Zimbabwe or the Weimar Republic?
Doug Casey: At the moment we’re in an economic twilight zone or, if you wish, the eye of a hurricane. There is apparent stability in the economy. The stock market’s high. The bond market’s high. Only the real estate market is in visible trouble. Retail prices are level; they’re not going up and maybe they’re even going down in some cases. This is a temporary situation. We will inevitably – and soon – hit the other side of the storm. At some point those trillions of Dollars created by the US government – and many other governments around the world have created trillions of currency units – are going to have an effect. When will that be? The timing is uncertain. But I think it’s going to be soon.
TGR: Will it be rapid?
Doug Casey: If these things were perfectly predictable, it would be easier to dodge the bullet. This is an almost unique time in world economic history, and I think we’re not only going to have economic consequences, but social and political consequences, and very likely military consequences. So hold on to your hat.
TGR: To protect what individual wealth we may have, you’ve recommended selling real estate and renting, holding assets outside the United States, Buying Gold, etc. When we’re out of the eye and in the thick of this economic hurricane, what types of equity investments should people be holding?
Doug Casey: Now is a very bad time to have most kinds of equities; stocks in general are very overpriced, by almost every parameter. I’m not looking to sell my gold until I can buy solid blue chip stocks for dividend yields in the 8% to 10% area. That’s after they cut their current dividends. Although it’s certainly not the bargain it was 10 years ago. Nonetheless gold will go higher. Stocks will go lower. I don’t know exactly when I’ll sell my gold and buy stocks, but it will be when there’s a panic into gold and when stocks are bargains. I’m sure I’ll be afraid to make the trade when the time comes – but good trades almost always run counter to your emotions. Perhaps the tip-off will be when Newsweek or Time – if either still exists then – run a front cover with a golden bear tearing apart the New York Stock Exchange.
I think it will be a generation before American real estate is a solid buy again. And the world at large will likely have quite a different character then.
TGR: I take your point about equities in general, but are you also staying away from Gold Mining equities? Or do you maybe see an opportunity there?
Doug Casey: They’re a special situation; on the one hand they are a play on gold, but on the other hand they’re stocks. There’s an excellent chance that with the trillions of currency units being created, the government inevitably will wind up inflating other bubbles. There’s a very good chance for a bubble in gold and a very big bubble in gold stocks. So I would say that they are an exception to other equities. We could see these juniors go up by an order of magnitude or more, even while most other stocks are going down.
Historically, junior resource stocks are the most volatile class of securities in existence.
TGR: Might other sectors also be in that situation?
Doug Casey: My crystal ball is hazy, but it seems to me that junior resource stocks are the best speculative place in the equities market. There’ll probably be others, but I don’t see them very clearly at this time. I’m waiting to see what materializes. You have to look at all markets of all types, everywhere in the world, to find things that are overpriced, as well as things that are underpriced.
Most of the time the trend in any given market is uncertain. I prefer to act only when, in my subjective opinion, the odds are greatly in my favor, and when the potential return is a multiple of my investment. In other words, most people invest 100% of their capital in hope of a 10% return. I prefer to wait until I can invest 10% of my capital for a 100% return.
As to what’s going to happen over the next few years, I feel confident that we’ve entered upon the Greater Depression in earnest. It will be an extended period of time when most people’s standard of living drops significantly. But as I said, I think there’s an excellent chance of a bubble igniting in resource stocks. That will build on the bubble that’s going to come in gold.
High levels of inflation make "investing," in the Graham-Dodd sense of the word, very hard. And inflation makes speculation almost necessary. Just don’t confuse speculation with gambling – they’re very different. Speculation is the art of capitalizing on politically created distortions in the market.
TGR: What’s your definition of resource stocks? For some, it’s very broad and includes metals, agricultural commodities and such. Are you referring specifically to gold?
Doug Casey: I’m most friendly toward gold; it’s the only financial asset that’s not simultaneously someone else’s liability. I’m friendly toward silver, too, because silver is kind of poor man’s gold. I’m very friendly toward oil because I do believe a good, solid argument can be made for what was first defined by M. King Hubbert as "peak oil". Also, oil is likely to be a major player in the next major Mideast conflict. I like uranium; nuclear is certainly the safest, cheapest, and cleanest form of mass power generation.
There’s an excellent case to be made for agricultural commodities in general, and live cattle in particular. I’m not very friendly toward base metals such as lead, zinc, copper, aluminum, iron and so forth. Usage of industrial metals could drop considerably in the ongoing depression.
TGR: You mentioned earlier that you thought it would be a generation before real estate represents a good investment again. Many economic theories, though, tell us that real estate is a good thing to have in an inflationary environment. How do you reconcile those two schools of thought?
Doug Casey: The problem is that we’ve just finished a decade-long real estate boom. Actually, there’s been a property boom, largely driven by debt, since the end of World War II. There’s been immense overbuilding and it’s got to be absorbed. A lot of the overbuilding will have to be bulldozed, quite frankly, because it’s completely uneconomic. I think the economic contraction we’re going into is so serious that in this country you’ll be able to buy real estate for back taxes, much like in the last depression.
But it’s much more serious than what happened in the 1930s when real estate taxes were de minimis. Now many people have to pay $10,000, $20,000, even $30,000 a year in taxes on their houses before they even start paying the mortgage and the utilities and maintenance. And municipalities are likely to try raising the mill rate, because they’re largely bankrupt, and assessed values are way down.
There’s a great deal more I could say about what’s yet to come in the real estate sector. But let me just say the real estate bubble has a long way to deflate yet.
TGR: Is it both residential and commercial or is it worse in one sector?
Doug Casey: That’s tough. Is emphysema worse than Parkinson’s? I suspect, however, that commercial is going to be worse than residential.
People’s shopping habits are one of the things that the Internet has changed and will continue to change. It makes more sense to buy things online and have them delivered to you, than to take the time and expense of going shopping, and the merchant having to deal with retail space, inventory, a geographically limited clientele and so forth. I wouldn’t be surprised to see prices on a lot of commercial property come down 80% or 90%. You’ll see a lot of properties permanently shuttered. That’s a disaster for owners, who will still have to pay taxes. There will be no money for maintenance.
TGR: We spoke earlier about inflation and the likelihood of the US government printing its way out of debt. Do you see a point in time where the United States or even other governments will go back to the gold standard?
Doug Casey: It’s both essential, and inevitable. That’s because they have no reason to trust one another. They need a medium of exchange and a store of value that’s not faith-based.
All the other governments of the world know that the US is bankrupt and the Dollar is nothing but a floating abstraction. Why should they hold billions or in some cases trillions of these things on their balance sheets? They’re going to go back to gold because it’s the only financial asset that’s not simultaneously somebody else’s liability.
It’s not because gold is magic in any way. It’s just because it has characteristics that among the 92 naturally occurring elements make it uniquely well suited for use as money. It’s durable. It’s divisible. It’s convenient. It’s consistent. It has use value in and of itself. And it can’t be created out of thin air by some government. It’s a better combination of those things than any of the 92 elements. It’s infinitely better than paper. So yes, I think they’ll go back to gold within this generation.
TGR: You were speaking of buying things online. Most people today don’t even use paper bills. We do everything electronically in terms of banking. Aren’t those properties of gold that you described irrelevant in the electronic era?
Doug Casey: To the contrary. Gold is an asset. You can put it in your bank account and transfer it. You can buy and sell it electronically. The fact that it can be transferred electronically today makes it a better money than ever before. So no, not at all, gold is quite relevant. It’s not in any way an anachronism. I pity fools like Bernanke and Geithner who don’t understand that. If they totally destroy the Dollar, they may end up hung by their heels from a lamp post.
TGR: You said you’re very partial to oil and uranium. Are you attracted to any other energy resources?
Doug Casey: Yes. My friend Rick Rule has justifiably and very intelligently been a big promoter of geothermal energy, because it’s actually superior to even nuclear in some ways. It should have a huge future. There’s very little geothermal being generated right now, and a great deal could be generated in the future. Many other forms of power generation are possible – tides, ocean currents, heat differentials in the ocean, solar microwaved down from collectors in high orbit – there are many, many innovative technologies out there.
Of course as technology keeps advancing, conventional solar will become cheaper and more efficient. Energy shortages, and high energy costs, are totally caused by political issues. In a true free market world they wouldn’t even be worth talking about.
TGR: But will technology-reliant sources such as solar and wind power be able to sustain through this downturn that you’re expecting?
Doug Casey: Well, most of the power we have is now generated via coal. Coal is very problematical as an energy source – it’s dirty, bulky and could be used for better things than burning. Stupidly, most new plants will be running on coal, not nuclear.
That said, you can expect that the average guy will be cutting his standard of living, driving less, turning down his heat in the winter, turning down his air conditioning in the summer and turning off the lights when he leaves the room. So I’m not sure that electricity consumption will be going up for years to come, especially with a lot of stores being shuttered and so forth.
Wind and solar are trivial sources of power. Good for certain applications in certain locations, but not suitable for mass power in an industrial civilization with anything like our present technology.
TGR: So if electricity consumption goes down…wind and solar are barely economically viable now.
Doug Casey: That’s right. It’s just a question of the alternatives. You weigh what you pay for a kilowatt hour on the grid versus what it costs an individual to put up private wind or solar, or for utility to put up commercial wind or solar. I see no reason to invest in these alternatives other than economics.
The way I see it, arguments made about saving the planet and so forth are basically ridiculous, even if naively well intended. All the blather about "carbon footprints" is scientifically nonsensical. It’s not a matter of tree hugging. If you’re paying more for something than necessary, you’re misallocating capital. You’re destroying capital. That’s a real crime against humanity.
To me, it’s strictly a matter of economics. If at some point technology makes a great breakthrough, maybe solar will become the best and cheapest power source; that would be wonderful. That’s not the case right now. As I said before, maybe they’ll be able to put solar collectors into geostationary earth orbit and beam down solar to earth by microwave. There are lots of possibilities for solar to become economic. It’s just that right now, it costs several times what other forms of power do. It doesn’t make sense, except in certain places, in certain applications.
TGR: Given that, would we expect to see any solar in your portfolio?
Doug Casey: If somebody makes a cosmic breakthrough, I’m happy to buy the stock. I’m certainly not inclined against solar on any philosophical grounds.
TGR: The Chinese recently announced that they will start selling gold coins through their banking system. What do you make of that? Is it really big news?
Doug Casey: I think it is. The Chinese know that one of the reasons Mao took over is because the government of Chiang Kai-shek destroyed the national currency. The Chinese can see the problems with the US Dollar. That it could blow up in their hands. They also see the problems they’re creating for themselves by creating trillions of new renminbi. So I think that they’re encouraging the average guy in the street to do some saving with gold so that if things go sideways with these paper currencies, the average guy isn’t left too destitute and too angry. At least he’ll have some Gold Coins. I think they’re being quite intelligent about encouraging their people to Buy Gold.
TGR: What do you make of the fact that a country with a communist orientation encourages its citizens to Buy Gold, while the world’s supposedly premier democracy does not?
Doug Casey: First of all, let’s recognize that communism was a very short-term aberration in the 5,000-year grand screen of Chinese history. Mao only ruled the country for about 30 years. Since the late ’70s, China’s been returning to its old ways. Everybody knows that the Communist Party in China is nothing but a scam for its members to cream something off the top of everything. It’s ludicrous to say China is a communist country. It’s easier to do business in China than it is in the US – lower taxes, less regulation, less legal hassles.
In point of fact, the Chinese are reverting to the mean. For many centuries, up until the Industrial Revolution, China was much wealthier than the West. Now it’s rising again.
As far as the United States is concerned, unfortunately it’s going the other way. The issue has nothing to do with democracy. Democracy is just mob rule dressed up in a sports coat. It’s much overrated. The US government is becoming more powerful, and the US is radically departing from the economic philosophy of free markets that made it great. It’s simultaneously becoming more politically repressive. The Chinese are just reverting to their traditional economic philosophy, which is not communism, it’s capitalist trade and production.
TGR: Presumably, participants will get a lot more of what we’ve been talking about at the Casey Summit that you have scheduled for October 1-3 in Carlsbad, California.
Doug Casey: For sure. We’re going to be talking about specific ways to take advantage of the problems that we have today. It’s important to remember that as the Greater Depression deepens, most of the real wealth in the world still will be here. It’s just going to change ownership. The key for this conference is we’re going to examine why things are the way they are. But perhaps even more important is how to capitalize on them, how to take advantage of them.
TGR: Of course you’ll be at the conference too. And your lineup includes Bob Bishop, Eric Sprott, Richard Russell, Bob Prechter, and obviously Rick Rule.
Doug Casey: And Neil Howe, who with William Strauss wrote The Fourth Turning and Generations: the History of America’s Future, 1584 to 2069. It’s among the most brilliant, and original, analyses of long-term trends of history I’ve ever seen.
TGR: And I understand you’ll be introducing the Casey NexTen. How does that complement your Casey Explorers’ League?
Doug Casey: When Ross Beaty, Bob Quartermain, Simon Ridgway and the other members of our Explorers’ League come out with a new deal, it automatically carries a huge premium because they’re proven commodities; highly technically competent, honest guys with good work habits, who have found and made economic more than three mines.
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Aug 22
Europe seems bound for austerity.
Success will not distract Germany from its austerity program…
IT’S NOW BEEN 65 years since Europe’s last major war, writes Bill Bonner in his Daily Reckoning from Ouzilly, France.
Still, when Germany gets up off its knees, the continent trembles. And last week, the Berlin government announced the best results since the wall fell in ’89. From the first quarter to the second one the republic’s GDP rose 2.2%.
At that rate – about 9% a year if it continues – Germany is running neck and neck with China. Compared to France and the US, Germany is flying nearly 4 times as fast. Greece meanwhile is backing up. Its economy shrank 1.5% last quarter.
Histocially, the Teuton tribes were an aggressive lot. The Usipetes, Tenchteri, Batavi, Cherusci, Chatti, Vandals, Goths, Franks, Alans, Suebians – all jostled each other for centuries. They must have gotten a taste for competition. And when Rome wheezed her last gasps they fell on her like French tax collectors on a widow’s estate. The Vandals pushed all the way across Gaul and Iberia, crossed to North Africa, and from their new base in Carthage, continued to tickle the old Empire until it rolled over on them.
Everybody has his elbows out. But competition takes many forms. Better to build Audis and Mercedes than Tigers and Messerschmitts. Better to race for market share than for the Champs Élysée. Whatever form it takes, competition isn’t likely to stop. Happily, most of the time, it is a boon to everyone – even to the losers. That’s why Germany’s current success is only a threat to the economists and commentarists who’ve been giving her advice. The rest of us hold our breath and hope for more.
It was only a month ago that Martin Wolf led a “great debate” on how governments should react to the financial crisis. Of all the ideas to come out of financial crisis of ’07, Wolf proposed one of the most remarkable. He illustrated it with the fable of the ant and the grasshopper. He saw two types of economies. There were those that produced and those that consumed. The trouble, according to Wolf, was that the two didn’t compete at all. Instead, they lived in a kind of symbiotic parasitism. The grasshoppers lived off the labors of the ants. Not only did the grasshoppers make the things that the ants used, the ants took the grasshoppers’ money and lent it back to them, so they could buy more. The grasshoppers were ruining themselves. But the ants were making a mistake too. They were building up capital, but what could they do with it? There was no point in expanding output capacity; arguably, they already produced too much. And what could they buy? The grasshoppers had nothing to sell.
That was not the worst of it. When the grasshoppers had spent too much, said Wolf, both bugs were trapped. If the grasshoppers in Spain and Greece were forced to spend less, the ants in Düsseldorf were condemned to sell less. Their economies were doomed to go down together, like galley slaves chained to a sinking ship.
In any case, it looked like the sort of thing the fixers could fix. Germany is all make. Greece is all take. The system was out of whack. Trade flows must balance out to zero, so Wolf et al concluded that the problem could be corrected on either side. Germany could stop working so hard and exporting so much stuff it didn’t want. Or, Greece could stop spending so much money it didn’t have. Since any slowdown in spending threatens the “recovery,” it would be better for Germans to do more spending themselves. They should raise wages and encourage their own people to buy more Audis…more ouzo…and more pointy shoes with curled up toes. This was no time for austerity.
They misunderstood the problem. Imagine two men marooned on an island. They barely survive. One works hard, hunting, gathering, and planting. The other dances on the beach like Zorba, depending on the kindness of his companion for his daily rations. The problem is not the lack of balance. The problem is the slacker. You could redress the balance between them by getting the productive one to slack off too. But then, they’d both starve.
The Euro was seen as part of the problem, too. It was either too low for Germany or too high for Greece, said analysts. In the good old days, Greece could have pulled a fast one, devaluing its currency to make its citizens poorer, and their labor and exports cheaper. But now, there is no cheap and easy solution.
Which set us to a-wondering about how the world possibly got to where it is. For the hundred years from the end of the Napoleonic Wars to the beginning of WWII, Europe was rarely happier, more prosperous…or more at peace. Yet during that time, money was even more inflexible than the Euro. Governments did not commit premeditated murder of their own currencies. Instead, the value of paper money was protected by gold. People competed by working harder, saving more, and figuring out how to produce more with less – just as the Germans are doing now.
This week, the Merkel team followed up. “The lady’s not for turning,” Ms. Merkel might have said, taking a line from Margaret Thatcher’s Brighton conference speech of 30 years ago. With the pressure off its budget, the commentators thought the Germans might be tempted to ease up on their austerity program. Instead, the German government will continue to pursue cuts to military and social spending, she said.
Success will not distract Germany from its austerity program. Whether failure will send it off the rails is a question to be answered later.
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Aug 16
Base metals are soaring. Investor sentiment seems to the the driving force as improved manufacturing data is reported in several areas worldwide.
Metals prices were higher Monday as gains for equities markets improved investor sentiment, and on news on manufacturing activity in several regions of the globe.
A Eurozone purchasing managers’ index was up, led by Germany and Italy, and while US data showed that manufacturing activity slowed last much, it remained in expansion and did not decline [...]
