Gold Today: Complacency can be dangerous
Trillions of dollars of new stimulus and money created out of thin air has pushed commodity and equity prices to very high levels. In fact our IDW is now just a whisker away from its all-time high of 147.99 recorded on May 16, 2009. What this means for most average folks who are not making a fortune in these speculative markets is a higher cost of living for stuff that Wall Street conveniently ignores, such as food and energy. For most folks on Wall Street, these basic items of life amount to chump change, so they can easily ignore it. But for most middle-class folks, putting food on the table and driving the car to work is a major part of their budgets. So the continued rise in those basic commodities represents a major reduction in purchasing power. It is this rape of the middle class in America that continues to make me very pessimistic about any kind of meaningful recovery. As to the extension of the Bush tax cuts, all that has been accomplished is a major increase in taxes. But don’t worry. The ruling elite is taxing Americans through commodity inflation. That is the tax that all the politicians and bankers conveniently forget or just ignore by talking about core inflation.
Although the IDW has been rising, I do not think this is an endless one-way street toward inflation. To the contrary, as the recent work of Bob Hoye, Dr. Robert McHugh, Robert Prechter, and others points out, the markets are looking increasingly vulnerable and very possibly getting ready for another Lehman Brothers kind of a decline.
While commodity and stock prices are inflating, complacency has become common once again, while in fact commodity prices are weakening the recovery in the U.S. But what about China? The inflation bulls argue that China will continue to drive prices higher. Well, that may be true, but one reason I don’t take that as a given is that China is still very much a command economy and not a free market economy. Thus, I believe it is very vulnerable to a major deflationary implosion that could most certainly bring the world economy down with it.
This past week, a discussion I follow among an Austrian economic chat group made the point of Chinese economic vulnerability very clear. Satellite photos of the newly built ghost town of Ordos as well as China’s biggest ghost city—namely, Zhengzhou—illustrate how command economies are so, so inefficient. Politicians decide to spend other people’s money to enrich themselves and their political cronies. But unless the market is dictating construction, it is highly unlikely that these will be economically viable projects. And if these huge projects are not economic, the loans that were used to fund these senseless construction projects into existence cannot be repaid.
You’d think Americans would know better. But in fact our statist colleges are very much Marxist oriented, as Lt. General Boykin told my radio listeners last week. I would urge you to listen to General Boykin’s remarks. Except for lumping me in the same school of thought with Sean Hannity and Glenn Beck, I very much appreciated my conversation with the general. Listen to Audio
In the Austrian chat group, the notion that cities could be built by command rather than being stimulated by market forces, prompted one member to comment as follows:
“During the 1930s, the wish of the world’s politicians to “plan” other men’s lives was strong and, by unhappy coincidence, so was their power to do so. The urge to “educate and uplift” their fellow (if lesser) man into a state more agreeable to their theories beat brightly in every progressive heart from Moscow and Berlin to London and Washington D.C.
“The Communist Manifesto had vastly more influence on the intellectual mind than it does today, and its exhortation for “combination(s) of agriculture with manufacturing industries; gradual abolition of the distinction between town and country, by a more equitable distribution of the population over the country” was taken seriously as a workable idea and, more important, as a morally correct idea. Writings such as the Manifesto undoubtedly contributed to the birth of the Back to the Land movement, an intellectual fad that swept through the brains of many 1930s Western politicians.
“As a result, the city of Magadan in Russia’s Siberia was built from nothing, by and for Stalin’s slave army. It still exists today. In Germany, the town of Ramersdorf was built from scratch on the magnanimous whim of Adolph Hitler; it too still exists today. And America’s very own example of the fad was the West Virginia town of Arthurdale, constructed during 1933 on the magnanimous whim of Eleanor Roosevelt.”
As General Boykin pointed out, we do have elections that move back toward traditional economic and social values, but they never swing back to the right as far as they were. In other words, the center keeps shifting leftward, away from individual liberty towards a Marxist or at least a statist direction. China may be able to get away with non market driven policies for a while because they did liberalize their economy in part towards a market economy. And of equal importance the Chinese people work hard and are big savers. America is a spending nation and we have lost a work ethic that was much more prevalent than when your editor was a young man in the 1960s. So the margin for a planned economy given our cultural mindset, is minuscule. At the moment, market conditions appear to be improving. But don’t bet the farm on a continued recovery. If anything, I’m worried that 2011 could be another year like 2008 given massive money printing by the Fed and huge and growing sovereign debt problems in Europe. If the Euro self destructs the potential credit deflation for the U.S. could be enormous.
In any event, Bob Hoye believes the expansion in prices for stocks and commodities is ready for a major correction in 2011. And he thinks those declines result a further political backlash against Obama and Bernanke and other statists who have total disrespect for free markets. In summary, 2011 may be shaping up as a very dangerous year, while the mainstream becomes complacent and convinced that government and the Fed has the answers. Unfortunately policies continue to cause more dislocations and inefficiencies in the global economy, and will lead to an even more sever day of reckoning.
Because of my concerns, I am continuing to suggest raising cash and taking short positions against the equity markets. This year it could be the disintegration of Europe that triggers the next waterfall event in stocks and commodities. We want to be ready to defend the gains we have been fortunate to make in 2010.
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