policy of the pre-liberal era was either crude coin debasement,
for the benefit of (the) financial administration (only rarely
intended to cancel out outstanding debts), or still more crude
paper money inflation. However, in addition to, sometimes even
instead of, its fiscal goal, the driving motive behind paper money
inflation very soon became the desire to favor the debtor at the
expense of the creditor.
von Mises; 1928
chap that old fella'. In other words, the rare occasion will occur,
on a changing mandate, where the aim of monetary policy IS intended
to cancel out outstanding debts. This is an important point, for
at this moment in history; US monetary policy is without a fiscal
goal. The semi-annual congressional testimonies, which Greenspan
still chooses to testify at, used to take place under the Humphrey-Hawkins
legislation named after the Humphrey-Hawkins Full Employment and
Balanced Growth Act of 1978 called on in the seventies
for reducing unemployment to four percent. This bill, for almost
30 years now, has been the fiscal goal to which the Fed has been
accountable. But it expired in the middle of 1999 accompanied
by Congressional views that the goal has been achieved.
here we are, the world's largest debtors… searching for a new
mandate to focus the Federal Reserve Board… but what if the mandate
already exists and is searching to be accepted? The United States
has become a net debtor sometime in the past decade. Sooner rather
than later, the new goal of the Fed must be to cancel out outstanding
debts. Ed Bugos.
bad the Dow didn't have a gold producer in the average
as I was thinking about a fitting title for this week's report,
last Wednesday, I began to wonder: Greenspan just finished lowering
the State interest rate, five times, to nearly half of what
it was only five months ago. Something spectacular has got to go
off here. $50 oil, I thought! Sure enough, the charts look good.
Anything is possible now. Something will give, where people least
to wonder what questions the markets might debate this week, when
I received what I think is a timely email from one of our readers:
a long-suffering gold bug, I am thrilled to see gold perking up.
Can you please tell me, either by responding to this email or
by addressing it in your report, if this means we can be long
gold for a number of years? Or is this a trading opportunity only?
second I read it I knew the answer. Of course, you know the answer
too because we've been discussing it since the summer. In fact,
the only reason that no one else knows it is because there is only
one piece left to prove what everyone already sees happening around
him or her. The very validation by the gold market itself, for what
we all prefer to deflation anyhow: perpetually rising prices - the
last bastion of profitability, under the current monetary order.
The enormous monetary inflations we've had over the decade past
have already been blowing holes in the price structure of the economy,
giving price taking industries the decisive edge in attracting investment
interest, a trend likely to continue. It is only utter irony that
anyone sees these price distortions as deflationary.
first, in order to understand how far gold prices might ultimately
go, we need to understand what a free gold price is generally anticipated
Mises called it the crack-up boom. Still others like the term hyperinflation,
or its more benevolent cousin, stagflation (a misnomer by the way).
Your average Russian would call it something completely different,
and he may be the closest. Of course, conventional economists (neo-Keynesian)
like to call it an increase in the general price level due to
an expansion in aggregate demand relative to the economy's capacity
to produce, or thereabouts. But Keynesians, it has been shown
on occasion, can't necessarily recognize a bubble while it is growing
the consequence of the collision between delusion and reality, in
the Nasdaq chart below. Now consider the historical reality that
inflation will result in monetary confiscation as well as economic
dislocation… against the delusion that a growing productive economy
needs ever more liquidity if it is to grow.
Money Stock, U.S.
often seems as though humans can only make essential paradigm shifts
when a crisis confronts them. Until that day, however, they are
usually content with the delusion of the day. It will not make a
difference to the outcome, whether you anticipate it, or not. The
conflict between reality and delusion is inevitable. But it does,
however, make a difference to you.
Delusions: to delude or not… that is the question
I think it is important to acknowledge that Lord Keynes' work tended
to presume that people were capable of deluding themselves to committing
unlimited resources for the production of green cheese, if
they were determined enough to achieve impractical economic (fiscal)
goals. One look, maybe two today, at this economy would confirm
his presumption true.
classify delusion as: an unshakable belief in something untrue.
These irrational beliefs defy normal reasoning, and remain firm
even when overwhelming proof is presented to dispute them. When
an individual has deluded himself to the point that it affects his
or her ability to cope with life, he or she will probably see a
psychologist, who will provide all sorts of treatment. I am no psychologist,
so it is only my observation that the capacity for self-delusion
is not just apparent in every walk of human life, and especially
in market life, but that we have also learnt how effective
a tool it can be for managing so many daily tasks.
is a choice, on some level, often between perpetuating a self-delusion
and dealing with an unpleasant truth. Other times the desire to
have something impossible to acquire is a good motivator. To a whopping
extent, the remarkable technology bubble was a national, and perhaps,
global delusion based on a vision of the very distant future. Of
course, many people haven't accepted that yet, which is why the
bear market ain't over.
it is still too much to imagine that the modern world can, over
and over, continue to fall for such schemes, consider that human
history is absolutely littered with one bizarre example of national
delusion, after another. We've studied accounts of many of them,
and have found very few examples of individuals that were able to
avoid participating in them. (See
Charles MacKay's Extraordinary Popular Delusions and the Madness
Bubble Masters (like Smith's invisible hand: you can't see them
but if they don't exist, they might as well) know that, if nothing
else, humans have throughout history shown that under certain economic
conditions, they will pay dearly for the promise of safety, wealth,
or admiration. We on the other hand often forget that the bubble
heads exist in the first place because we want them to. Maybe it
helps to forget about what we are really paying with - liberty.
Why is it that the job of a man that makes potions at the traveling
show, is as secure as that of a Doctor?
was while Law's plan (John Law was the creator of the Mississippi
bubble) was at its greatest height of popularity, while people
were crowding in thousands to the Rue Quincampoix, and ruining
themselves with frantic eagerness, that the South Sea directors
(in England) laid before Parliament their famous plan for paying
off the national debt
- Charles Mackay
through history, it is always the same: a group of very powerful
people discovers the secret to human fallibility: the individual
predilection for self-delusion. It is in this new world monetary
order, one without an anchor, which the investor must at all costs
work hard to arm himself with an ability to recognize unpleasant
truth, if he is to win The Battle For Investment Survival
(the title of Gerald Loeb's bestseller is coincidental).
Week in the GIC:
- We break
out a new hypothetical asset allocation model
- How will
the Bank of Japan's decision to embrace Paul Krugman's quantitative
easing model affect Dollar/Yen?
- What stage
of the inflation breakout are we at, and how far can it carry?
- Aren't accelerating
inflation rates going to obliterate the Dow's 29 times price earnings
- Does Merrill
Lynch aspire to do more business with the Fed?
- Is the gold
market breakout just a trading opportunity, or the beginning of
a big bull market, in gold?
- China's gold
market ambitions, whatever they really are, hold a wild card that
may throw a wrench into Japan's plan for an Asian currency alliance.
Edmond J. Bugos
The GoldenBar Global Investment Climate is not a registered
advisory service and does not give investment advice. Our comments
are an expression of opinion only and should not be construed in
any manner whatsoever as recommendations to buy or sell a stock,
option, future, bond, commodity or any other financial instrument
at any time. While we believe our statements to be true, they always
depend on the reliability of our own credible sources. Of course,
we recommend that you consult with a qualified investment advisor,
one licensed by appropriate regulatory agencies in your legal jurisdiction,
before making any investment decisions, and barring that, we encourage
you toconfirm the facts on your own before making important investment