Home » Economy » Doug Noland: “There Is No Concern For Short-Term Funding Issues”

Doug Noland: “There Is No Concern For Short-Term Funding Issues”

by John Rubino on April 24, 2010 · 50 comments

Prudent Bear’s Doug Noland was a must-read in the years leading up to the bursting of the housing bubble. Almost alone out there, he got not just the fact that we were heading off a cliff, but the exact mechanism of our demise: “Wall Street alchemy” was creating unlimited amounts of artificial securities that the marketplace was treating like money, which sent the effective global money supply through the roof and fueled a series of ever-bigger bubbles.

Once the crash came, Noland reined it in a bit and his articles fell off my automatic “Best of the Web” list. But now the bubble is back and so is Noland. His latest post dissects the current “recovery” and explains why we’re headed back into interesting times:

Deficits and Private Sector Credit

The bullish contingent is these days increasingly confident that there is much more to the recovery than a mere stimulus-induced “sugar high.” The marketplace now comfortably disregards bearish developments – and becomes further emboldened by “market resiliency”. The market this week brushed aside issues with Greece, China, Goldman and financial reform.

Complacency abounds, in true Bubble fashion. The U.S. stock market dismisses that there could be meaningful ramifications from the unfolding Greek debt crisis. Chinese authorities’ recent determination to restrict mortgage Credit barely garners a headline. And while the Goldman allegations generate great interest and discussion, few believe they will have much general market impact. Financial reform, well, it’s an afterthought when the market is open. Market participants are enamored with the notion that the securities markets and real economy are now conjoined in the initial phase of a big bull cycle.

Count me a subscriber of the “sugar high” thesis. The combination of double-digit (to GDP) deficits, protracted near-zero rates, and the Fed’s unprecedented Trillion-plus monetization has worked wonders. Government stimulus stabilized the Credit system, asset prices, system incomes and economic output. The bulls today believe that a new expansionary cycle has commenced, and fundamentals and prospects couldn’t be much more encouraging from their point of view. Surging stock prices have the optimists disregarding the possibility of a systemic addiction to massive government spending, ultra-low rates, and overabundant marketplace liquidity. Potential issues in the area of risk intermediation are not on the radar screen.

Yet, the sustainability of this recovery will be determined by private sector Credit – eventually.  The markets assume private Credit growth will snap back after its long recuperation – as it always has in the past.  But, mostly, analysts expend little energy pondering this issue.  Deficits of about 10% of GDP, rapid expansion of government-backed Credit (MBS, “build America bonds,” student loans, bank deposits, etc.), and near-zero rates have created a recovery backdrop where minimal private-sector growth has sufficed.  This won’t always be the case.

Greek Credit default protection began December at 176 bps. Not many months ago there was little fear of a debt Crisis and no worry of default. Yet here we are today with Greece 2-year debt yielding 11% and annual default protection priced at about 600 bps. Markets fear insolvency and debt restructuring.

The U.S. Treasury borrows these days for three months at 15 bps and for two years at 1.02%.  No one dares contemplate how dramatically the world would change if fear injected itself into the equation. While there is certainly more recognition of the structural debt issues confronting our government borrowers (local, state and federal), there is no concern for short-term funding issues. There was an important aspect of the Wall Street/mortgage finance Bubble that receives little attention: The explosion of Credit provided an enormous boost to governmental receipts.  Especially in the case of federal debt ratios, boom-related revenues reduced borrowing requirements and distorted debt-to-GDP ratios.

At about 70% of GDP, outstanding Treasury debt is not on the surface overly alarming.  Obviously, if one throws in GSE liabilities and the massive future spending obligations related to social security, healthcare, pensions, etc., things are much worse. Yet it is conventional wisdom that the U.S. has the luxury of several years to get its fiscal house in order. And there is today great faith that economic recovery will, as it always does, lead a revival of government receipts and ensure rapidly declining deficits. Count me skeptical. The previous Bubble helped disguise underlying structural debt issues at the state, local and federal levels. Going forward it’s payback time.

…The unfolding Greek debt crisis, China Bubble vulnerability, and more intense scrutiny of Wall Street risk intermediation now work in confluence to increase the probability for a negative surprise in our risk markets. Sure, the equities bulls have become intoxicated by some incredible stock and sector performance. But equity market reflation must be approaching the point of unnerving the bond market. And it can’t help sentiment that, as reported today by CNBC’s Steve Liesman, a rising number of FOMC members support a timely sale of assets and a removal of the Fed’s extraordinary liquidity measures. More bearish fundamentals for the private-sector Credit mechanism gladly ignored by a stock market Bubble.

Some thoughts:

  • Exactly. We’ve replaced the housing bubble with a government debt bubble, and there’s no way to transition back to private sector-led growth. The amount of debt needed to fuel an economy this unbalanced is simply too great.
  • Some kind of serious negative event is virtually a lock in the coming year. It might be the spread of Wall Street lawsuits or a PIGS country default. Or the bond market might simply decide it’s eaten enough and get up from the table. No way to know what it will be, but we’ve created the conditions for another nasty “surprise”.
  • Bruce C.

    This may seem obvious to some of you (I admit I can be a slow learner) , but it just recently dawned on me that traders, investors, financial advisers, talking heads, etc. do not do what I tend to do. They don’t try to analyze what’s going on and then speculate about what will happen next and invest accordingly. They are very myopic and think and act short-term, and based on only what is happening at the moment. They don’t act on speculation. I think that difference is ALL the difference between the people who visit these blogging sites and those who don’t. That said, if one doesn’t just invest “blindly” so to speak, one is by default trying to time the market, and supposedly that is a losers game. Nevertheless it seems very difficult (for me at least) to invest so blindly. Practically speaking though, how should one invest assuming we are in the midst of a government debt bubble? Given the fact that bubbles can go much farther and for much longer than one might think possible, and that the US is the biggest debtor nation with the world’s reserve currency and the power of the press – this could go on for decades.

    I have a few friends with small businesses and they each have a few million dollars in savings. They have a few hundred thousands in gold but the rest is in money market accounts and Treasury bills. They don’t know what else do with it, and I suspect there are a lot of other people who feel the same way. So even though they recognize the potential threats out there, they don’t know what else to do. They just hope everything works out. They don’t like losing money due to inflation but since it seems to be the safest option they’ll probably put up with just about anything at this point (volatility, even lower rates, etc.) I suspect that most of the world’s “investors” feel that way and for that reason I can see the status quo holding together for longer than what I (and I think most visitors to this site) believe. But who knows.

    Another point that was not made, in this otherwise excellent article, is the simple observation that if government intervention (fundamentally by increasing liquidity) succeeds in reviving the economy and thus solving all other fiscal ills then why not continue it indefinitely or to a greater degree? What is the theoretical basis for such actions to work and, therefore, why would more or less of it and for a greater or lesser duration not be optimal? I suspect the answer is that there is no complete theoretical basis at all. Everything seems to be done on an ad hoc basis using historical precedents as a guide, and that does not seem to be a very sound basis for confidence and optimism going forward, especially since there are no historical precedents for dealing with world wide debt on this scale.

    • Wesmouch

      i am one of those people you describe. I have about 30% of my assets in gold the rest cash, and some legacy stocks which I won’t sell. david Ransom at Wainwright Capital has calculated that you only need a 15% gold allocation in a bond or stock portfolio to inoculate yourself from hyperinflation. The bigger issues for me are whether the govt confiscates IRAs, 401k, etc.

  • Scott

    here’s the whole issue: we’re in a war. It’s a war between gov’t stimulus measures [anti-deflationary forces] v the free market [deflationary forces]. Ultimately, the free market ALWAYS wins. All these ‘stimulus measures’ are nothing more than the counteracting of free market forces which are attempting to eradicate all this bad debt paper floating around the world. Deflation is nothing more than ‘the failure of debt.’ The US has ‘sovereign debt issues’ as well; we’ll be faced with the 2 classic choices when this occurs: default on the debt, or devaluation of the currency [makes gov’t debts easier to pay]. If they default, they’ll never be able to borrow again….so the latter choice will be chosen. Therefore, ANY investment denominated in the devalued currency will lose value also. And it doesn’t matter what currency we’re talking about: Euros, Dollars, Pounds, whatever. Anybody at this point who buys T-bills [US sovereign debt] is either ignorant of what’s happening [and needs to educate themselves pronto], or, if they know what’s happening, is a total moron. The answer: get your assets OUT OF the Central Banker’s fiat currency system. More to the point: BUY PHYSICAL SILVER!! All you can afford. Do it now. The gold / silver ratio is ridiculous at 63.3:1 [www.goldseek.com].
    On another point: if you think inflation will bail you out of your debts, you’re making a huge mistake. EVERYONE is in debt up to their eyeballs…do you really think ‘Da Boyz’ will allow something to happen that’ll benefit individual debtors? WRONG!!! What process will make your debts more onerous to pay? Answer: deflation. So how does deflation AND devaluation sound? This is the future of the present fiat currency regime around the world; you must escape. Remember: devaluation means v gold / silver only. Each fiat currency will adjust v the others in their turn….all downward [no one can afford a ‘strong’ currency anymore]. This absolutely insures gold + silver will continue their ‘fiat price appreciation’ in the years forward. Of course, what this really means is gold + silver will hold their value in the future, while all the fiat worldwide will lose value. This has been happening in the US since 1913….and will continue. I hope this helps people a little…..

  • brutlstrudl

    Gold tends to outperform silver during contractions. that’s not to say you shouldn’t have some silver. Physical cash tends to appreciate also. You will need it to protect your metal. A gun or two wouldn’t be a bad idea either.

  • Bill Stewart

    My question is – when push comes to shove – why can’t Ben Bernanke print as much as he wants – and lie, disguise it, and cover it up?
    All the reports I read come from some official source.
    What if there is another set of books?

    This concept of budget deficit is 12% of GDP – who defines these numbers?

    what we do know is that the total outlay is $3.8T and the total intake is – what – $2T. call me a liar for estimating.
    the govt is printing about 40-50% of what they are spending.
    making it up. inventing out of whole cloth. its not there.
    this is absurd.

    But if I were Ben, and I were a patriot, and I saw this as the most important battle the US now faces – or has ever faced – I would lie too. And do so with just as much gravitas and believability and articulateness as he has.
    He is pulling out all the big guns. And inventing some that have never existed. And it is working. And everyone is playing along. Through fear, or complicity, or lack of knowledge, or real belief.

    God Bless America

  • Duane B.

    Scott – When you wrote the following: “so how does deflation AND devaluation sound” – did you mean a period of deflation, followed by a devaluation? Thanks! Duane

  • Duane B.

    Wow – please check out the link below on Financial Trends Matter (The Economy)! Bruce puzzles how long can the govt keep it up? Scott says it’s a war! Bill says govt’s lying! You’re all right! The govt picked up an unexpected ally! (OK, no more exclamation points.) $2T (and counting)!!

    Read the article. Renegonomics shows us how repudiating debt works. Homeowners stop paying mortgages, they get $2T (estimate) of extra cash to spend, and taxpayers prop up the floundering banks!

    So you see – there’s been a shift in the war. Under the new rules, it’s {govt + banks + those who can pull it over on the rest of us} versus {the rest of us}. The odds have been stacked. Let the commercial real estate bubble pop! Go ahead, let it pop!

  • Duane B.

    http://laurencehunt.blogspot.com/2010/04/renegonomics.html (linked from Finance Trends Matters link below)
    Laurence Hunt (in Comments): “As I have been researching this, it turns out that there are something like 7 million of these “non-payers,” as noted. Many are still employed, but they had low down-payments, and their home values collapsed. So they have stopped paying because it is good money after bad (they can’t recover their payments by re-selling the house). In some cases, a year goes by, and the bank doesn’t even contact them. Foreclosure can take up to 2 years. So people can live for 1-3 years or even longer in a house for which they are making no payment, even though they in fact have the means to pay. As they say, “only in America.” This would not happen in Canada…. ”

    Me: (Seven million non-payers) X (avg number of people per household) = alot of people with needs and desires and very substantial extra cash. I guess they are not breaking any laws, though. So maybe I’m not genuinely angry, just red with envy. I guess the housing crisis exposed another major weakness in the system.

    But I wonder why Laurence Hunt says this wouldn’t happen in Canada? Anyone?

  • John A

    Elliott Wave analysis indicates that the rise from March 2009 to the current level is a wave 2 correction, and an impulse wave 3 down is very quickly approaching.

    The impulse waves are currently down and corrections are up. Thus, we’ve had an impulse wave 1 down from Oct 2007 to March 2009. If you look at an SnP chart, you can relatively easily count a 5 wave move down.

    Wave 2 as just mentioned, is just about over based on Elliott Wave count. In my opinion, we have only days left for a completed wave. The next wave movement will be wave 3 and it will be down, just like wave 1. But, wave 3’s are generlly much longer than wave 1’s. As such, wave 3 should take us well below the March 2009 lows.

    On top of that, the market has retraced almost exactly a Fibonacci 0.618 retracement from the low (ie, for the S&P the distance from the Oct 2007 high to the March 2009) has now been retraced almost exactly. The S&P 0.618 retracement is about 1228 and the DJIA is about 11, 250. We are EXTREMELY close.

    I believe the govt credit bubble mentioned in Doug Noland’s piece is just about ready to pop. We’ll have to wait and see!!

  • Bruce C.

    Hi Scott,

    You make some good points but I’d like to make sure I understand a few of them.

    First of all you claim that “ALL” investments denominated in a devalued currency will lose value (euros, pounds, dollars – anything fiat based). But don’t you mean the opposite: That all fiat-based currencies will lose value (its buying power of assets/investments) when it is devalued via inflation? If I buy an investment today for, say ,$1,000 and a few years later the currency has been devalued by, say, 100% (the money supply has been doubled) then that investment would then be worth $2,000 (all else being equal). More to your point, even gold or silver are “investments” that if purchased with fiat currency today should hold their value (buying power) versus the future value of fiat currency (which, strictly speaking, could rise OR fall depending upon whether or not the currency environment is inflationary or deflationary.) And that, to a large extent, is the crux of the problem for investors. If gold and silver are simply just another asset that will hold its buying power, regardless of the fiat currency equivalence, then why bother with them? Why pay the premiums, take delivery, store it, forfeit any interest payments, worry about it falling out of favor and losing value/buying power, incurring more costs to sell it back, etc, etc., if any other assets (except perhaps real estate) would do as well?

    IF, as some “analysts” (such as Prechter, M. Weiss, etc.) predict we are ultimately entering a DEflationary depression, not unlike the G. D. in the 30’s, brought on precisely because the “free market” ultimately prevails in forcing debt liquidation that overwhelms the CBs efforts to maintain asset values, as you claim will happen, then in their opinion cash in the form of Treasury money market accounts and Treasury bills will reign supreme, ultimately allowing one to buy deflated assets for a song some time in the not-too-distant future. And, importantly, in their scenario the currency equivalence of gold and silver will fall along with all other assets, so owning gold or silver would simply maintain the buying power of the gold/silver at the time it was purchased. It’s future buying power would not be any greater, unlike cash, and could very well diminish because gold/silver may be “over priced” now due to all the fear mongering. The CRUCIAL point for one to realize, however, is that they DO NOT believe the dollar will be destroyed in the process of the CBs’ efforts to counter the deflationary forces at work. Even they admit that if that were to happen (hyper-inflation) only gold/silver would not only survive, but thrive. But actually believing that such a monumental and unprecedented event as the hyperinflation of the world’s reserve currency is not merely possible but likely enough to justify putting all of one’s eggs in one basket is a tough one for most people. It goes against so much (lack of diversification, is gold/silver in a bubble?, would it ultimately make any practical difference given such a catastrophe?, etc.).

    There is one other scenario that I can see happening that sort of sidesteps all the (endless) inflation/deflation arguments, and that is this: At some point people are going to once again recognize gold and silver as the only true money. The will have been whipsawed so much and in so many ways that the “barbarous relics” will finally be recognized for what they really represent. It will be more of social phenomenon than an economic one. Money only works if everyone agrees to use it as a medium of exchange. I suppose most people would accept gold or silver for payment now (though I’m going to test that theory with some real people), but there should come a time when they will no longer accept dollars. What else might be going on economically or politically at that time is anyone’s guess.

    As to your other point, if deflation does set in then I think people will default on ALL their debts en mass, regardless of any more games by the “da boyz”. I’ll speak for myself in saying that if that were to occur I would either literally be unable to pay them or I would stop as an act of rebellion, and I don’t think I’d be alone in doing so. The assaults on economic justice are growing by the day. Duane’s point about home owners deciding to forgo mortgage payments and instead spending that money on more consumption, thus providing more fodder for the stock market is the latest example.

  • Scott

    Bruce C. – I feel you have a number of fallacies in your argument. The most glaring: why bother with gold + silver? Yikes. You, along with most of the rest of the investing world, have forgotten THE MOST important thing of all: gold is money….gold has always been money….gold is money now….gold will always be money [silver too]. Fiat is simply that: little slips of paper with some dead statesman on them created by the Central Bank oligarchy of the world…and BACKED BY NOTHING! So is their debt. When push comes to shove, and TSHTF, do you think people are gonna want some ‘fantasy paper’, or the real thing? This is the reason gold is trading >$1100 now. People want the real thing….and they’ll continue to. A gold price of 4 digits should be an embarrassment to any self-respecting CB’er. This is why deflation is mandatory: all the debt created was created with ‘fantasy money’; it doesn’t really exist. However, this debt destruction does NOT mean the currency will gain in value. They will devalue the currency anyway to make their debts easier to repay. The only reason the ‘beloved’ Federal Reserve Notes circulate here is by gov’t decree: we’re FORCED to accept them in commerce. That’s what “This Note is Legal Tender for all Debts, Public and Private” means. It’s funny, what did that little ditty say before 1950? Try this: “This Note is Legal Tender for all Debts, Public and Private, AND IS REDEEMABLE IN LAWFUL MONEY AT THE UNITED STATES TREASURY, OR AT ANY FEDERAL RESERVE BANK.” [caps mine] So the logical question should arise: ‘if these paper slips aren’t lawful money….what is?’ I think you know the answer. Bottom line: these paper slips started as receipts for gold: $5 in gold, $10, $20, etc. Now they are no longer backed by anything but empty politician’s promises. This is why you should bother with gold + silver.
    Second fallacy: somehow, you got the notion that devaluation is gonna increase your $1000 to $2000. Let’s think about the illogicality of that. Devaluation means ‘worth less’. If your currency has been devalued, $1000 cannot magically double to $2000…it’ll devalue to $500 [it’s worth less]. Maybe thinking in terms of ‘purchasing power’ might help. The devaluation you’re talking about will DOUBLE prices: your $1000 will now only buy $500 worth of goods + services.
    So my premise is that a massive deflation will occur; this ‘debt failure’ will be a quake heard ’round the world. We’re seeing the first rumblings of this now: Iceland, Greece, Latvia, the PIGS…California, Illinois, NYork. EVERYONE is insolvent – countries, states, banks, individuals. Homeowners not paying mortgages fits right in here: debt failure. Mortgage for $300,000 on a home worth $150,000. When the bankers finally re-write their mortgage [and they will] for $150,000, what happens to the other $150,000? Poof! More phantom debt extinguished. And the MBS that was written on it? Poof! Even more unbacked debt extinguished. This is unstoppable, and as long as the ‘paper system’ is in question [as it is now], both gold + silver [real money] will shine. Silver, being much more affordable is ‘primo material.’ Now please don’t start with ‘silver is an industrial metal’ stuff: I know this. I’m old enough to remember silver coinage, it was 1965 they started minting the notorious ‘Johnson slugs’ we still have today. Why did they do this? The silver in the pre-’65 coins was now worth more than the coin’s value [rising silver price]; thus they disappeared from circulation.
    One other point: your pennies and nickels are gonna disappear too. All your older pre-’82 copper pennies are worth >2 cents; the current zinc ones are worth almost a penny. I’m talking melt value. Nickels are worth more than 6 cents now. Once the masses start catching on, you can be guaranteed they’ll start disappearing. This info can be found at: http://www.coinflation.com
    Happy silver days, people! ……. :-)

  • Duane B.

    Scott – In Bruce’s example, $1000 of unspecified investment should – “all else being equal” (his words) – stay worth $1,000 in the original denomination, and he should be able to sell it for $2000 after devaluation. This does not contradict your point that $1000 cash is, after devaluation, only worth $500 in purchasing power. Bruce’s investment has not devalued, just the currency it was denominated in. Bruce’s investment is an “ideal case” where it holds its intrinsic value, like say gold in a perfect world. Some things will tend to retain their intrinsic value, some things will not.

    It is puzzling to think of stocks. If I have $10,000 in stocks, then I expect a buyer to pay me $20,000 for those stocks after devaluation, because his purchasing power has been cut in half. That is an “all else being equal” argument. Stocks will do whatever stocks will do based on all sorts of factors. However, many were attributing the market rally 3/09-12/09 as being due to devaluation of the dollar. Funny thing, though – when the dollar turned around, stocks contracted a bit, but then resumed climbing, probably due to interventionary forces.

    Please tell me if this reconciles the statements Bruce and you made, and where I may be wrong. Thanks!

  • Duane B.

    This is a long link but the only way I could get the correctly formatted chart to you. Please see if you can cut&paste this monstrosity into your browser (or maybe the link will work here):

    The MZM is considered by many to be the best estimate of liquid money out there, leaving out money that’s not available for transactions. I know John Williams would have his own version, but I know he is strongly in the nflationary camp, so I have no way to know if his decisions as to how to process all the data out there are influenced by his inflationary bent. Someone equally industrious and honest from the deflationary camp might come up with different data. Caveat emptor. That aside, this is from the St. Louis Fed. It puzzles me. There is a striking regularity in the cycles. I count 10 dips, or 11 if I start at the first endpoint, over a period of 50 years. This is 5 years per cycle. So roughly every 5 years the money supply increases about 10% or so, sometimes more, and then crashes down to near or even below 0% growth. We are now a little negative. I have never heard of the 5 year cycles, and they astonish me. Presidents are in for 4 or 8 years, or get assassinated or resign – could the average be 5 yrs? Might be interesting to line up the data with historical timepoints or whatever. Well that’s just a first thought that is probably wrong.

  • Scott

    well boys….here we go! Keep in mind ‘Da Boyz’ will do ANYTHING to protect their system….you can bet your sweet bippy Greece will get bailed out…..check this link: http://www.marketskeptics.com

  • Bruce C.


    First of all, thanks for the reference to Hunt’s article and although I appreciate Feckelstein’s observation, I don’t understand how he can get to (or abide by) even close to the $2T that he cites for discretionary spending due to mortgage payment delinquencies. Assuming the average mortgage payment among the delinquents is about $2,000/mo., and there are 7 million who’ve reneged for about 12 months now, that’s about $168 billion. That’s about how much the ridiculous Bush economic stimulus stipend amounted to (remember that? Probably not since that’s how pathetic it was.) On the other hand, Bush’s intelligencia did think that that amount would make a difference, so maybe $168 billion would matter today. In any case, I don’t see how anything close to $2 trillion is possible due to mortgage delinquencies.

    Secondly, yes, you understand correctly what I was saying to Scott. What Scott needs to understand is, as obvious as it may be to him, not every one understands gold and silver in that way – yet. I find it fascinating that as seemingly simple as the concept of gold/silver being true money is, the BELIEF in the integrity of the dollar is amazingly strong (which is often why I assume the devil’s advocate role of challenging predictions of the dollar’s demise). Even gold/silver is constantly being compared to the dollar in terms of its worth, even when in the same breath the dollar is disparaged. People say, “if there’s inflation gold could be worth $5000/oz!!!!”, as if the dollar is the ultimate barometer and gold gained in real value somehow.

    That is why the crucial issue for all is whether or not the dollar will maintain its integrity. The difference between those two probabilities is enormous. If the dollar survives then so does the status quo. The recession/depression of 2009 will be just another asterisk in economic history. Cash and Treasury bonds will be the safe havens, inflated assets will revalue, everything is restored through monetary loosening, etc. Same old same old. Basically in that probability society and finances will reemerge basically unscathed and recognizable. IF, however, CONFIDENCE in the dollar is destroyed by creating so many convoluted distortions in the economy in the CB’s attempts to fight deflation and re-inflate assets, then all bets are off the table. Western society will break down to such a degree that I can barely speculate. There is no historical precedent to even refer to. The dollar is the world’s reserve currency. Unlike Japan, we owe money to the entire planet. The amounts of money in play are unprecedented. Perhaps more so than at any point in history, money is murderously important to so many people. It is because the stakes are so high that I believe the dollar will continue to be parlayed within local communities, amongst individuals, if for no other reason than habit and a lack of any other currency (most people wont have gold or silver coins – get real). “Prices” may be replaced with barter. It’s such an amazing probability that I can barely imagine it, and I don’t particularly like what I imagine either. So (and I don’t mean you personally) be careful what you wish for.

  • Bruce C.

    Hi John A.,

    That would be very cool to see wave analysis work so precisely. At the very least there should be volatility at those levels because every trading algorithm on the planet probably uses Fibonacci numbers as triggers.

    Of all the issues cited in the article, the Greek debt crisis feels the most like the sub-prime mortgage crisis to me. First it was just a small part of the huge mortgage market (just 2%, the same as Greece’s GDP contribution to the Eurozone), then they turned out to be linked with other higher-rated mortgages (Greece woes are linked to the whole Eurozone), then there were more of them and more delinquent they originally estimated (Greece discovered a few math errors too and had to revise upward), then bailouts for those “victims of predatory lending” sounded only fair (“we can’t expect Greece to pay usurious market rates for any more money”).

    Here’s my guess at what’s coming:

    Sub-prime guide post: Everyone else realizes that they’re mortgages are under water too, just like the sub-prime folks’!

    Euro debt mess: All the other Eurozone members realize they too have debts that seem over-burdensome.

    Sub-prime guide post: Lawyers (the voices of Reason and Law) break the moral logjam among the citizenry, explaining that default is rational if it makes financial sense.

    Euro debt mess: European policy makers put there collective heads together and ask, “Why not lump all of the irresponsible countries together and arrange for one comprehensive solution, once and for all?”

    Sub-prime guide post: Ex-Wall Street experts realize that if banks’ mortgages aren’t paid then their stock prices might fall. They recommend government bailouts to cover the shortfalls.

    Euro debt mess: Experts representing every Eurozone country begin arguing.

    Sub-prime guide post: Banks prepare for the daily-double: allow home owners to stay in their houses to support property values while collecting bailout payments from Uncle Sam, then later sell the house and pocket the proceeds.

    Euro debt mess: Leaders of the PIGS announce that defaults are not an option!

    Sub-prime guide post: Rentals of abandoned and foreclosed properties become popular quick cash scams by “real estate agents” and squatters.

    Euro debt mess: The PIGS default because they have no other option.

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  • Bruce C.

    Another “event” that may begin a huge unwinding is a more subtle one than what may make headlines. After skimming a number of articles today I was struck by how many central banks in other countries have already raised their short-term interest rates (Australia, India, and Norway) and Canada is about to do so as well. Japan has also been threatened with a down grade of their gov. bonds, so their rates could climb as well. In the meantime, corporate bond rates have been dropping and pay about 1.5% more than US Treasuries and there seem to be a lot of kool-aid drinkers who think the global economy is strong and getting stronger, so corporate bonds are considered almost as safe as Treasuries. All-in-all that means Treasuries rates may have to increase to sell enough of them, not just because there are so many to sell but their traditional allure as being so safe is becoming challenged. Even if people continue to think (incredibly) that inflation is anemic, corporate bond rates plus gov. bonds from other countries, most of which have stronger fundamentals, are bound to force a flattening the US yield curve. If US interest rates rise much more (like 10-yr Treas. over 4.25%) then watch out.

  • Scott

    hey guys, here’s a short article by Richard Russell. He’s been studying the markets since 1958; see what he has to say….. “http://www.321gold.com/editorials/russell/russell042610.html”

    I agree wholeheartedly….

  • Duane

    When the housing bubble broke, banks failed, later the stock market crashed, etc. Now the commercial mortgage bubble is due to start deflating in May or June, with something like 50% of them underwater. However, banks have held back on lending to shore up against these losses. Also, they have increased in value, due to stock market rally. The gov’t has a plan in place, I imagine. So I wonder how visible the commercial real estate bubble collapse will be? Credit will contract, wealth will disappear, just like before. This will hurt government revenues, just like before. But the last thing our govt wants is another collapse before the election. The stock market has been presented to us as the number one bellweather on the recovery. So the most obvious govt cure seems to be that the stock market should continue to be propped up through October. It’s evidently not too hard to stage on such thin volume.

    I wonder if strategic commercial defaults will make it all better?

  • John A


    You make a lot of good points. I’m convinced this will capitulate to the World Credit Bubble, of which the US is ‘ground zero’. I agree that it will start ‘small’ and rise up, just as sub prime housing did.

    As for Elliott Wave, I’m new to it and have been learning as much as I can over the past two months.

    People can see a really good Elliott Wave analysis on the Dow Jones Industrial Average as it was nearing the 11,000 level just a week ago. Now that wave 2 has a possibility of being complete (on Tuesday Apr 27), people can listen and observe this analysis and weigh what was said with the gift of hindsite.

    I dont know if I can mention other web sites, but, if I can, it is at ForexInfo.US. I beleive the post is not visible to visitors anymore, but, the direct link is:


    It’s a short 6 minute video and very interesting. It shows in considerable detail of the wave structure on the DJIA. If nothing else, it is interesting for anyone curious about Elliott Waves.

    I truly understand the Elliott Wave debates. Many question its validity and I think that’s a fair point. People can observe and take from it what they may.

    Wishing all and everyone the best.

  • Brad Thrasher

    Today the markets seemed illuminating. At least insofar as I understand it. Stocks are down everywhere. In what is described as a flight to safety, gold, U.S. Treasuries, the USD and the Japanese yen are up.

    The faith in king dollar seems irrational to me. It’s days like this that remind me of a Winston Churchill quip, “You can always trust the Americans to do the right thing; after they’ve tried all the wrong things first.”

  • Duane

    If Sir Winston is right – I consider that a point of optimism! Let’s teach our children well.

  • Bruce C.

    A few random comments:

    Of all the stock market forcasts that I’ve read about over the last few months, not one of them predicts the DOW to go above 12,200 before correcting significantly. Most figure the DOW will pull back to between 10,600 and 10,400, or 9200 according to another, and a few think that the next leg down will go below the March 9 lows. Some even predict triple-digts beore the dust settles. One forcaster (the one who says DOW 9200 begore the end of 2010) predicts all time new highs and beyond in the DOW by 2015 (partly due to inflation.)

    In other words, nobody knows.

    But here are a few random thoughts that I think are more reliable:

    It feels to me like we are in accelerated times. I felt this for a while, and now more so than ever. Everything is happening faster. I think that is what is as bothersome (to me at least) as what actually goes down. It’s literally shocking. Bottom line: If you intend to do something financial do it soon. I think things may change for the worse very quickly, and then fear and panic will ensue to make it worse.

    I read an interesting little throw away line about the inflation/deflation debate. When people talk about deflation what they mean is the RATIO of debts to assets shrinks. But there are to ways to diminish this ratio: decrease debt (to be sure) OR increase asset values. The re-inflation of asset values (real estate, cash reserves, equities, etc.) has been matching the simultaneous debt destruction thus far. So, the deflationists are right that debt is/should/must decrease, but with asset re-inflation efforts by the CBs the debt/asset ratio has not changed, hence neither general deflation nor inflation – yet.

    For those of you who might want to “short” the stock market, consider this line from our economic nemisis:

    “The market can stay irrational longer than you can stay solvent.”
    – John Maynard Keynes

    I would LOVE to short this market successfully, and that’s what has me concerned.

    Jim Sinclair gives some good interviews on King World News, and he talks about his persoanal knowledge of global financial “sociopaths” and their amoral, greedy intents. These would be the CDS traders sucking Greece dry (and now they’re on to Portugal). They are part of the reason the markets are’nt normal now. Everything is happening faster and more predictably to the down side. Be careful. A global financial Lehman style shake-out happening soon is more likely than most want to admit.

  • Brad Thrasher

    Bruce C., regarding consumer debt I’ve been working on theory about debt. Currently, as you know, debt is determined by the contract. Yet the market constantly revalues the debt. Certainly debt buyers revalue debt when they purchase same. That debt is constantly revalued by the market is consistent with every form of debt and financial instrument evidencing debt.

    Thus my question for the court is, should the present value of a debt, the amount owed, be determined by the contract or the market?

  • Duane

    Bruce – Laurence Hunt replied to our comments on his site. Duane

  • Bruce C.


    I would say the contract. That is what the original lender and borrower agreed to, and all the money games played after that use the contract as a basis to assign a probability that that contract will be fulfilled in whole or in part. I don’t see how the borrower could be responsible for anything else. Both sides enter the contract freely and each with limited knowledge. Possible future circumstances and risk assessments are (ideally) subsumed by the terms of the original contract.

  • David Ziffer

    OK here is a question for you gold mavens. I fully understand that in the event of a general currency collapse gold bought at just about any price will hold value better than any fiat currency. However one could buy gold and there might NOT be a collapse any time soon, in which case I refer you to Keynes’ quote: “The markets can remain irrational longer than you can remain solvent.”

    Using a 22:1 reduction in the value of the dollar since 1910 (this is the U.S. government’s own ratio at http://data.bls.gov/cgi-bin/cpicalc.pl) and using the 1910 price of gold of about $19, which was probably fair (since we were on the gold standard), the fair value of an ounce of gold today would be $418.

    If we skip ahead and instead use the Depression-era price of $35 (for no particular reason), the fair-value price today at a 16:1 dollar reduction since 1935 would still be only $560. My basic sense of value suggests to me that at about twice that price, investors jumping in today are likely to be burned. Of course all this presumes the validity of my 22:1 and 16:1 figures. If the bond market collapses and the U.S. can no longer disguise its failed treasury auctions, these dollar multipliers might jump rather radically. But the current value of the dollar would have to be distorted by a factor of at least 2:1 in order for me to imagine that the current gold price is reasonable.

    Now of course it is possible that the current distortion is on the order of 2:1. According to various sources, Bernanke has already counterfeited somewhere around 100% of the currency that was already in circulation two years ago, and has used it to prop up the balance sheets of the major banks, who haven’t lent it out yet. When this lending occurs we would see something like a 2:1 rise in the price of everything including gold, making gold currently still overpriced using the 1910 formula (which would put the fair price at $836) but about fairly priced using the rather arbitrary 1935 formula (which would put the fair price at $1120). So my theory is that the market has already priced in at least a 100% increase in the money supply to account for the as-yet-invisible currency inflation.

    Any comments on all this?

  • Duane

    David – I don’t believe we have devalued the dollar by 1/2, because private debt overwhelms public debt, and actual currency is even less. Many experts believe there has been a net contraction in money supply due to wealth destruction and credit contraction. So even when that money is lent out, it will help, but the figures show we will still be contracted. However, as private debt contracts, and as public debt and currency expands, the initial conditions I described will move closer to what you are describing.

    However, it does seem plausible that in the scenario you describe, gold is over-valued. However, that money the Fed has made easily available to the banks is probably not so idle. It is fueling speculation in equities, etc…, and who knows – maybe gold(?). So there maybe a speculative component, too.

    I’ve always wondered – if I buy gold, don’t the sellers end up with cash? Well…LOL… it’s the only world we live in so what else would they do? Nevertheless, if the gold sellers are “sold” on gold, then when they take my cash, are they speculating with it in the gold market? I suppose there’s no disclosure that tells me what their doing with the cash they receive in payment for gold. Maybe their fabulously rich in both gold and cash, and won’t be left “holding the bag” because they have two bags. This last paragraph may make no sense to someone sophisticated in gold markets. Please be brutal so I can learn!

  • Brad Thrasher

    Excellent points David Ziffer. I particularly appreciate your observation about the banks hoarding the Fed & Treasury new paper and that we’ll experience higher inflation when that money is loaned out. And this is where we part.

    The rate of inflation increases exponentially as it moves through the economy. Thus I don’t hold with previous ratios. I fear we are moving toward a Weimer Republic scenario.

    According to Dylan Ratigan, corporate welfare bailout, which includes the banks, auto makers, TARP, Fannie & Freddie bailout and the Fed direct purchases of toxic assets now totals $24 trillion.

    While previous ratios may hold, the newly created that will eventually make its way through the economy is closer to 24:1 than 2:1.

    Frankly, I greatly fear that Noam Chomsky is right and we will fall under some form of dictatorship, if we haven’t already and just don’t know it. Or as Alexis de Toqueville noted back about 1842, “The great American experiment in democracy will work so long until the people discover they can raid the treasury.”

    Recent evidence would indicate that the bankers have studied de Toqueville.

    Besides there’s the quick common sense answer. If currency had any value do you really think they’d be giving it away?

  • Brad Thrasher

    Duane, the smartest thing I’ve ever done was in 2003 when I converted our pension into 1 ounce Maple Leaf Gold coins. At that time gold was about $350.00 per ounce and 1 USD was $1.37 CDN. I’m still holding and have increased that position since.

    I truly appreciated what those great fiscal conservatives, Clinton and Chretien, accomplished through balanced budgets. My faith in Bush, Obama and Harper has been rewarded since.

    Even after taxes and penalties I’m way ahead. I wish I was as smart or sophisticated enough to ‘splain like John Rubino or Bruce C. but I remain convinced that gold has more upside. I do plan to sell some off at $1,500 per ounce. Good thing for me Canadians remain “hewers of wood and drawers of water” such that it is a commodity based currency.

  • Bruce C.

    All you guys – David, Duane, and Brad – make some good points and raise some good questions.

    Here are some more pieces of the puzzle to consider:

    A popular proxy for the value of gold since the 30’s is that 1 oz can buy a good quality (man’s) suit. Maybe one can check on that equivalence at different points in the recent (presumably US) past. That seems to me about right today.

    The cost to produce one oz of gold today is about $900.

    The fact that dealers who sell gold would rather have dollars than gold is an interesting point, especially since their sales pitches are, essentially, a wager that the dollar will devalue against it. Oddly enough though, I’ve met many a salesman in many different fields who either really don’t believe their own shtick or don’t act on it for some reason (e.g., real estate agents are famous for finding good deals for investors but never investing in RE themselves.) Also, they’re interest is short-term. They want the commission. In fact they probably need the commission to live on. They, not unlike many people in all businesses, may not have much disposable income or savings to invest, so they couldn’t buy gold even if they wanted to. They probably think people who buy gold are rich.
    However, I know of one PM broker who has been buying all the precious metals he could afford for years, and I have no reason to think he’s atypical.

    I think the fact that central banks have become net buyers of gold recently is another reason to believe it’s fairly valued today, if not actually undervalued.

    Indians (from India) have been big buyers of gold for centuries, so they have a good historical sense of its value and price action, and they have been buying more in the last few years than ever before. In fact, it was India’s central bank that bought 200 tonnes from the IMF recently at about $1,100.

    The ratios that David cited are consistent with other statements I’ve read, the dollar having lost 95% since 1913 is one stat often quoted by Ron Paul. If the dollar is now worth only 5% compared to 1913 then that
    is equivalent to saying it is worth 1/20th, so the 1913 dollar was worth 20 times today’s dollar. So that’s consistent with his 22:1 overall ratio. However, I think some important details are being overlooked that complicate the issue. One needs to focus on the dollar/gold ratio after 1971 when Nixon nixed (no pun intended) the gold standard completely. Or, in other words, that is when the price control of gold was lifted. Gold was literally priced at $35/oz in 1970 which was the same as it was in 1933 (?, or thereabout), so clearly it wasn’t reflecting the falling value of the dollar during that time. Unfortunately, I don’t have the figures readily available to complete my point quantitatively, but using David’s approach one should compare the value of the dollar in 1972 compared to today and in relation to the spot price of gold after 1972 with today. Maybe one of you can look that up somewhere. I’d like to know the outcome.

    Finally, at least for now, gold is worth whatever a decent sample size of people are willing to pay for it. So, though this may be a tautology, gold is worth whatever it is selling for now. Whether or not the gold price rises or falls from here on out remains to be seen, but there are far more reasons to believe it will rise than fall. Remember, there are two issues going on: the buying power of gold holding steady (its traditional or theoretical role), and the value (buying power) increasing. Most gold owners would like to experience the later, but given all the monetary problems in the world the former is a surer bet than anything else one can invest in. Notice what happened to the gold price when Greece bonds were downgraded a few days ago. Money went into gold and Treasuries. If/when Treasuries are no longer considered such a safe haven then gold will be the last resort. Time and time again gold has been the chosen final safe haven and storer of value. When civilization breaks down a little (e.g., young people won’t be able to text) I think we’ll see that again. The US is on a course to devalue the dollar to pay it’s debts. That will cause the inflation/hyper-inflation that will trigger it all.

  • Bruce C.

    Hey, it’s me again.

    After submitting my last comment I realized I was off by on few numbers (like gold was $43/oz in the early 70’s not $35). Anyway, here are two articles that have some good factoids to ponder (the first is a little sensational, but still valid.)



  • Brad Thrasher

    Just a quick aside. Did anybody see the report that John Lennon’s original, in his own hand lyric sheet for the song “A Day in the Life”is expected to bring between $500k-$700k at auction?

    I’m a Beatles fan, I still listen to the music now and then. I worked with Roy Young on a project for about 3 years. Ringo was Roy’s drummer in Roy’s band, the Beat Bros. before the joining the Beatles. Roy shared the stage with the “lads” at The Star Club in Hamburg, Germany. Brian Epstein extended an offer to Roy to join the group but Roy had just signed a two year contract with The Star Club and thought it unethical to walk. Obviously, how could he have possibly known. Yeah, whoops.

    Anyway, $700k for an original lyric sheet? Wow!!!

    @Bruce C. I’ll do some research on gold and the dollar since 1972 and hopefully get something up over the weekend. BTW, you don’t seem like too bad a guy for a conservative 😉

  • Duane

    Will the Real Adam Smith Stand Up
    By Hossein Askari and Noureddine Krichene
    Asia Times Online

    After reading this, I think I understand our leaders and the G-20 leaders better. While still under the sway from this article, I clearly see that all of our leaders will continue with the same solutions, with only talk to make us think they are thinking about acting responsibly, eventually, too. I think Bruce is right. There will be no change in policies until there is a change in economic thinking – decades or calamities away. Supply side economics was well derided, but demand side economics is a bust, too. In fact, trying to stimulate demand has created the credit bubbles and is arguably far worse than supply-side ecnomics. So we get to see them both at play in our lifetimes. Well, all leaders are Keynesians, now, and that won’t change until after the leaders are dearly departed. So back to my earlier point, and after reading the article above, yes – our leaders will simply keep applying the same formulas. By this thinking, Greece must be bailed out – that is the only way the current of leadership herd know how to think. Please take a look at the article (it is 2 pages).

  • David Ziffer

    Thanks for your inputs guys, but I’m no closer to feeling like I have a definitive answer on the price of gold than before.

    If any of you wants a spreadsheet containing both the raw data and a grapha of the price of gold (annually) from 1850 through 2010, send me a request at DaveZiffer@ProjectPro.com.

  • Duane

    Well, David, you just let us know if there is anything else we can do for you!
    Actually your question raised a possible answer in my mind, which takes the form of another question. If we can answer the following question about any “asset” (catchall word), we may be on to something.
    1) Is the price of a given asset influenced by the current (still growing) debt bubble.
    2) Also, was the asset’s price influenced by the most recent collapsed debt bubble, and if so, did it see a price correction?
    (The longer ago a bubble popped, the less it probably matters, now.)

    This is bubble theory – bubble inflation, bubble deflation and bubble memory. Of course, one can trade with the bubble. But if the price is bubblified, then one might wait for a correction, or be willing to hold it long until the current and recent bubbles are no longer overvaluing it. I guess bubbles would be defined by “easy money” credit expansions.

    This will probably get you no closer to an answer to your question.

  • Bruce C.

    Hey Bubbles (I mean DUANE),

    I’ve noticed that you’ve made a distinction between the sizes of public debt and private debt several times recently. Why the distinction?

    Also, I thought you think that debt/money-supply is decreasing, so why the question about the effect of debt bubbles on asset prices?

  • Bruce C.


    There is an inherent irony in your question concerning the fair price of gold.

    First of all, by “fair price” I assume you mean the price at which there is an equal probability that it will rise in value as fall at some point in the future. Just about every one who has even considered buying gold as a safe haven or profitable investment has wonderd the same thing, and those who do own it do so continually. Since we’re dealing with future events the question is fundamentally unanswerable with certainty, only probabilitistically. Therefore, you will never be able to determine the “fair price” with certainty.

    Secondly, you must decide two things:

    1. whether or not the monetary system in the US and/or globally will improve in the near future, or worsen; and

    2. whether or not you believe that people will (once again) treat gold as the ultimate safe haven and storer of value.

    If you think the monetary system in the US is fine, or at least under control and will improve, then don’t buy gold. If that happens then I do think many current gold owners will sell it because they’ll perceive no threat to their buying power using currency, and gold earns no interest and actually costs to store/insure it.

    However, if you think the US is committed to budget costs that can’t be paid with tax revenues, that must be subsidized with further bond sales (debt), so that interest rate increases and/or devaluation of the dollar is inevitable, then your money will have no refuge, unless….

    People, once again, treat gold as the ultimate safe haven and store of value. In that case many people will buy gold in desperation and the price will rise because of limited supply. However, if people – this time around – do nothing then inflation will consume the country and wealth will be lost. As of now, most people feel a little nervous about the economy, etc. but know or understand little or nothing of the events taking place. Until or unless they do gold will only be bought by educated investors and the price will roughly follow geo-political and monetary events.

    Will fears of near-future economic problems turn out to be a bad dream? Will everyone who bought gold in the last few years feel stupid? I doubt that, but I don’t for sure. Another possbility is a short-term price drop due to efforts to discredit gold and shake out investors who are on the fence about it (no one named David I’m sure). I can only speculate about that. I wouldn’t count on it though. Too many investors are on the qui vive.

  • Scott

    in case you haven’t figured out by now: I’m a huge ‘gold bug’. This means much more than just ‘buy gold now.’ It means I’m one of the biggest ‘anti-Gov’t’ proponents on the planet. I hate ’em. You know what gold really is, and what it’s price represents? It’s the free market’s “monitor of political mismanagement of the world’s economy.” It is the “price of real money in fiat currency.” In order to fully understand what’s happening now, and what is likely to happen in the future, you must learn + understand HUMAN NATURE. One facet of human nature that will never change is: “no one who has attained a position of real power will willingly give it up.” The fiat currency system of the world is simply a tool used by the Bilderbergers of the world to CONTROL THE WORLD’S MONEY SUPPLY, THEREBY CONTROLLING THE WORLD’S ECONOMY. Some call them the ‘Illuminati’ or the ‘Elitists.’ Who are the Bilderbergers? These are the people with ‘real power’ in today’s world: they decide what wars will be fought where, who will be elected President or Prime Minister [or Premier, etc] in various countries [including ours]; all the “important items” are actually decided by them. This ‘climate change green’ crap is another front run by them to attain MORE CONTROL. In short, they are the ‘slavemasters’ of the world, and we are the slaves [in the current fiat system.] If any of you doubt this, go on amazon and look for ‘Bilderbergers’, buy a book and educate yourselves. Your jaw will drop. They set up our current worldwide fiat regime as a tool to control the world. All this being said, what is likely to happen in the future; this will determine the gold price. In short, SAME SH*T, NEW DAY. Nothing will change, because it’s not in their best interest for it to. Human nature strikes again. This is the real nature of the ‘war’ I alluded to in my 1st post. They’ve temporarily stopped the debt deflation from happening because it’s not in their best interest. The political mismanagement of the last 50 years WILL continue, because it brings them [the Bilderbergers] closer to their goal: unified world gov’t. This is their ‘master plan’ for the human race: we will be controlled by a unified world gov’t….of course, the Bilderbergers would be ‘the gov’t’; in control. They would be the Politburo, and we get to be the ‘serfs in the field.’ I’ve learned and grasped this; I have NO DOUBT where the gold price is headed in the future…..because I understand human nature. And the free market agrees with me, too, as is graphically depicted in this chart: “http://jsmineset.com/wp-content/uploads/2010/04/Monthly-Gold-4-2010.pdf”. I am a market technician; technical analysts have all studied human nature / behavior as it relates to price activity on charts. This is about the MOST BULLISH chart I’ve ever seen; the gold price IS going higher, and I’ve bet my assets accordingly. I hold both metals, and will continue to….and sleep soundly at night knowing I’ve made the correct decision. If you guys educate yourselves, you will see what I’m saying is the truth. Otherwise, you’re on your own…….. :-)

  • Bruce C.


    That’s good stuff. Thank you. May I quote you?

    I agree with about 90% of it, the last 10% being the unforeseeable wild card events that would keep things interesting. The diabolical world domination play is a good one, but I feel sorry for the huge burden those zealous “Bilderbergers” will be taking on, despite the power. (I wonder if there is such a thing as a power hangover? Nihilism maybe? Will the real Atlas shrug?)

    More importantly, how did you paste a happy face at the end of your comment?

  • Brad Thrasher

    Well Scot, if you’re right I find comfort in the idea that at least somebody has a plan. Kinda scary to think all this happens willy nilly, no?

    And BTW, there is no such thing as a “free market.” There never has been nor ever will be. That isn’t a conspiracy my friend, that’s reality.

  • Duane

    Bruce – regarding private debt vs. public debt, please see
    Steve Keen’s DebtWatch No 31 February 2009: “The Roving Cavaliers of Credit” http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/

    Steve starts off with a prominent endorsement of his work:
    “Talk about centralisation! The credit system, which has its focus in the so-called national banks and the big money-lenders and usurers surrounding them, constitutes enormous centralisation, and gives this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner— and this gang knows nothing about production and has nothing to do with it.” – Karl Marx (1894)

    Regarding the question about debt bubbles and asset prices, I was wondering about the possibly peculiar nature of reflation caused by Fed monetary policy. In the present case the stock market is plausibly being inflated by easy money from the Fed. Gold may or may not be – hence the question. Reflation – an attempt to counter deflation – by the govt is targeted at certain areas and hence we may see price inflation in those areas, at least temporarily (bubble) until monetary and fiscal stimulus wind down.

    But I do believe the overall money supply is shrinking. There are more recent charts than those in Steve Keen’s article showing that private credit is contracting, and that the overall money supply is shrinking.

  • Brad Thrasher

    Duane in March 2009, Ben Bernanke appeared before the Senate and house finance committees and stated the plan was to reflate the economy and deflate in an orderly fashion. At the time he used the metaphor of inflating a balloon and letting the air out gradually.

    Bernanke’s point is that only by reflating and deflating could we achieve a true market bottom from which we can grow. What you are recognizing is policy at work.

  • Scott

    need I say more? The “Oracle of Omaha” says it all…..


  • David Ziffer

    Bruce C: Thanks for your response to my question about gold. Actually I’m not really looking for the “fair price” definition that you surmise, so let me give you an analogy. One of the things I look for in buying stocks on some foreign exchange is the average weighted P/E ratio of the exchange or of a major index on that exchange. If you look back at the S&P 500 over 100 years, for example, you’ll see that the weighted P/E ratio always gravitates back toward 15. Historically, whenever the S&P P/E ratio approached 20, you could basically say for certain that a crash was coming. Conversely whenever the P/E ratio was near 10, you could be certain that a boom was coming. This told you when to buy or dump American stocks. The only single exception to this rule in the entire history going back into the 1800s was the stock mania of the late 1990s, when the P/E ratio topped 46 … sheer insanity by historical standards. This peak was particularly peculiar because when the market collapsed, it collapsed down to about 20. So in other words, the S&P for the first time in its history actually crashed DOWN TO the level (20) FROM which it historically collapsed. So this left investors with a dilemma in 2002/3 … since there was no historical precedent, we didn’t know what to do. Of course we knew the market would eventually collapse from 20, but when?

    Of course we know the answer now. The housing bubble dragged it down from its impossible-to-sustain level of 20 and it is now down somewhere around 15, which is its historical norm toward which it always gravitates.

    Of course it was possible in 2003 to have a simplistic answer to the question of what to do with one’s stocks. By historical standards, it was “sell”. But as I mentioned before, in 2002/3 there really was no historical standard. Since the P/E ratio had actually fallen TO 20 from above 20, the question became, how long before it falls again? Hence my Keynes quote (which I stole from someone else on this blog) … the market could remain irrational longer than I could stay solvent.

    What I’m seeking in the price of gold is something similar. I am using the 1910 price in much the same way as a P/E ratio of 15 … namely, a “fair” price, which is to say, a measure of the amount of dollars we have in circulation. I want to know if the current price is “fair” by measuring today’s gold price agains the 1910 price. The problem is that I don’t know how much hidden money may have been pumped into the economy that is just now waiting to break through the floodgates. The feds claim that the ratio of today’s money to 1910 money is 22:1, but are they lying?

    I get really annoyed with all the “gold is king” and “buy gold at any price” advice that I get. What a joke. If you would look at my gold price chart (which I unfortunately cannot post here) you’d see for example that we had a spike in the price of gold similar to the current one way back in 1980. Had I bought gold then on such advice, I would have seen it decline to half its purchase price over the course of about 20 years before beginning its current recovery. So it doesn’t even matter in this case whether the price was fair .. it eventually dropped to a distinctly “unfair” price and stayed there for a couple of decades. I can’t afford to invest in gold and possibly lose half my investment for the next 20 years while waiting for a currency collapse. And yes I realize we probably don’t have 20 years.

    My gold price chart shows gold right now in a totally unprecedented exponential price rise. It looks like we’re just about at the top of a 1980-like peak and subsequent crash. It doesn’t matter whether the crash is justified. If it comes, I’ll lose probably half of what I put in, and I could wait the rest of my lifetime for it to recover.

    So despite the probable validity of all the dark predictions here, I feel uninclined to buy gold at what looks to be the height of a totally unsupportable price trend that could only be sustained in the event of a total currency collapse. Once again, if you want to look at this graph, send me an email at daveziffer@projectpro.com.

  • David Ziffer

    Scott C: I wouldn’t put a whole lot of stock in anything Warren Buffet says. Just a few months ago he was touring the country with his buddy Bill Gates spouting a bunch of totally unsupportable positivistic blather. If you spend enough time listenting to him (and I’d recommend you don’t) you could find support for just about any economic position.

  • Duane

    Dave – I found the P/E ratios of gold miners = mainly Canadian companies, only non-penny stocks that have revenues for the past year and a large market cap. Most are listed on US exchanges.

    Sample size = 24
    Average P/E ratio = 74
    Deleting 2 obvious outliers, average P/E ratio = 43.
    The median P/E ratio = 34.
    Deleting 2 outliers, median P/E ratio = 31

    So, if the seemingly most representative P/E ratio is 43, does that give an indirect indication of gold valuations, in your opinion?

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