You can't grow the money supply indefinitely...
TWO MAJOR central banks are tightening monetary policy – China and the European Central Bank (ECB). But nobody seems to care, writes Bill Bonner in his Daily Reckoning.
These central banks are warning investors to sell their high-risk investments. Instead, the Gold Price hits new records. The Dollar is at a 15-month low. And oil moves up to $125 a barrel.
This is getting interesting...
Either investors don't believe China and the ECB are serious...or they're counting on the USA to come through again – with more money and more credit.
Speculators may be forgetting that we're in a Great Correction. On the other hand, maybe it doesn't matter. If the feds keep pushing enough money into the system long enough, the correction will take a grotesque, unusual and terrible new form – it will end in a hyperinflationary depression.
Gold at $1470? You ain't seen nuthin' yet!
At least it will give us something to watch...something to write about. Something to laugh at. More important, we'll have yet another opportunity to wag our finger and say: "We told you so..."
And who sees it coming? Just us...and a few other cranks, eccentrics, outcasts and marginalized diehards...
But word is getting out. You can't just add to the world's money supply indefinitely...not without consequences.
Many mainstream analysts are now looking for the Gold Price to hit $1500. But watch out, they say. Just wait until QE2 ends...
They may have a point there. The major, natural tendency of this market is towards contraction. The market wants to correct. No kidding. After a half-century of credit expansion, it's time to pay up...to settle debts...to recognize bad investments and to write off mistakes. That's what's happening in the housing sector. That's why about 12 million Americans don't have jobs.
But that's the way economies work. They "breathe out and breathe in," says old-timer Richard Russell. Unless we're wrong about it, the markets are holding their breath. They're waiting to see what effect all this pure oxygen - coming from the Fed - will have.
Why are the feds so desperate to avoid a correction? Well, that's where the story gets interesting.
It's a tale of one part vanity, one part necessity and one part cupidity.
In their vanity, the feds think they can command the economy to do as they want. They've invested whole careers...and gotten Nobel prizes for their crackpot theories. They're not going to give up now; they think their central planning can succeed, even though central planning by others has been universally disastrous.
But there's more...they are running what is little better than a Ponzi scheme. That's where the cupidity comes in. We were delighted to see that Christopher Caldwell, writing in The Financial Times no less, sees it as we do:
The story of the past half century is that Americans found a way to extract money from future generations and leave them with the bill. What they have been enjoying is not prosperity, but luxury.
We would put it a little differently. What they have been enjoying is not prosperity, but larceny. They've stolen from those who can't vote. Many of them haven't even been born.
A study by the Urban Institute, for example, shows that the Medicare system pays out in "benefits" three times as much as it collects in revenues. This kind of thing adds debt fast. Mary Meeker calculates total unfunded liabilities of the US government at $75 trillion already.
(Estimates are all over the place...depending on what assumptions you make... But Meeker's estimate is likely to be low...)
Congressman Paul Ryan has begun to address the inherent problems in this scheme. It will be interesting to see what happens. He seems to think that voters and politicians will "come to their senses" and do the right thing. We doubt it. And there was no sign of it in the deal just struck to keep the government's lights on.
Paul Krugman put his finger on the problem with democracy. He agrees, for once, with us. Writing in The New York Times, he tells us that Ryan will fail. As soon as the greedy old bast**ds figure out that they are going to lose benefits, the jig will be up:
Mr. Ryan and his colleagues can write down whatever numbers they like, but seniors vote.
Yeah, the zombies vote. Most likely they will vote themselves into an economic catastrophe.
That's the necessity of it. If they want to keep this scheme going...they have to borrow. And if they have to borrow...they have to keep credit easy and cash plentiful.