Do you remember the days in the old school yard? Remember how some kids couldn’t take any loss of face? Investors who lost their fortunes in the Madoff Scandal (the guy who made off with over $50 billion from his Ponzi scheme) are now hoping to claim the appreciated amount of money instead of the initially invested amount:
The customers say that, by law, they should be given credit for the full value of the securities shown on the last account statements they received before Mr. Madoff’s arrest in mid-December, even though they were bogus and none of the trades were ever made. According to court filings, those account balances add up to more than $64 billion.
“We are talking about some of the saddest cases imaginable,” he said. “These are people in their 70s and 80s who cannot work and have no possible source of income to replace the money” lost in the fraud.
Let’s not forget that 70 and 80 year olds are adults too, and are as responsible as anyone else for their mistakes or for losses made with what had to be surplus funds to invest with Madoff. We’re not talking about orphans or destitute old bums living out of cardboard boxes in alleyways. They never had any money to invest in the first place.
It’s like a private school sports team that can’t accept defeat. Investors are stamping their feet, complaining that the rules weren’t fair and that they ought to get their money back. Had it been the opposite scenario, had these investors made a wrongful profit, you could be assured that they would not let go of a cent.
Frankly, these investors with Madoff don’t deserve any media attention or extra compensation. Yes, they were victims of fraud and yes, they are rightly sore about it all, but Madoff was not guaranteeing the investment money (he was not posing as a Government backed financial institution, such as a bank). There was no legislation protecting investors from making a loss. They took a risk and they lost. It’s the same for anyone who gambles and loses – why should they have it any different?
The argument that receipts of the inflated sum at investment should be used to gain a tax advantage is problematic, because it encourages Ponzi style schemes (if you win, hooray, if you lose, it’s a tax break). This was not a real investment, and it should not be treated as though it ever was one. When people gave their money to Madoff, who promised to bank it for them, they accepted that they may never see the money again. This is the reason why you should diversify your investments and not trust any one vehicle, or if you absolutely positively don’t want to lose the money, buy gold and put it in a vault or something.
What this illustrates is the mentality of US investors. They are like two-year-olds who can’t come to terms with the negative meaning of the world “risk”. But of course, in this financial crisis, there must be no losers. Everybody has to be bailed.
Our suspicions, just a day or two ago, that gold may not be the metal of choice in a standardised (non-fiat) monetary system, grow stronger today. Russia is likely to take the “palladium standard” as the basis of the Ruble. But first, a short history of alternative toilet paper.
Back in the days of the Soviet Union, in Brezhnev’s era, the edition of Pravda (possibly the most inaccurately named newspaper in history) featuring his speeches was highly prized, not for its content, but for its utility as toilet paper. The Brezhnev editions went so much further than the regular rag. The main disadvantage of newsprint was that it had to be folded and cut, and that it left a nasty black residue on the skin. Things improved somewhat with the dissolution of the Union and the debasement of the Ruble. Rubles were softer, smoother and pre-cut to a convenient size. Users of it still complained of the ink running and the occasional tear during use. Plus, it didn’t come in rolls.
Today, however, things are looking different. Pravda is no longer such a worthless read, and the Ruble is no longer looking like always being such a waste of dead tree. The State Duma’s speaker made this statement:
“We could offer the world the Russian ruble made of palladium. It would be a very strong currency. One may recollect the golden ruble, which Russia had during the tsarist times. It was a freely convertible currency and was circulating very well”
That gold is not the only choice for a standard monetary unit is not a new idea in the least. Silver has also been touted as being a worthy candidate, but both metals are abundant, really, and far too much of these metals exists in the public arena for there to be a fair transition to a new currency basis. Discussion around the Internet still revolves mainly around gold, which is still highly regarded as the currency standard of first choice, although in reality things are not so clear cut:
Goldbugs and Fiatbugs are actually sort of similar; both insisting that it’s an “either-or” situation where gold and paper are mutually exclusive. That’s hogwash. Anything that is able to achieve widespread recognition as a medium of exchange is a viable currency, be it gold, silver, paper, or sand dollars. Empirical evidence shows us that gold has had quite a successful run as a widely recognized form of currency, and suggests that it will continue to enjoy status as currency into the future, despite fiatbugs’ protestations to the contrary.
Palladium is just another one of the group of metals (including gold, silver, platinum) which could be used in minted coins and as the metallic strip in notes. It is already used in Canadian currency. Its price is very highly, currently at around US$250/oz, it was at over US$1000/oz at the beginning of the 21st century.
Russia’s favouritism for Palladium is, of course, because Russia is one of the world’s major sources of the metal, alongside South Africa. It is, therefore, unlikely that other nations would take Russia’s lead and take on the same precious metal as their currency base. This could be a very good thing:
If Russia takes on Palladium for its currency standard, and other nations choose not to (as they well should), it may save the world from a single world currency and the grip of the IMF.
In recent newspaper articles and, for a long time, on the Daily Reckoning, gold has been touted as the Next Big Thing in commodities, that it is destined to return to glory as the chief component of a world reserve currency. It is, however, just a metal, albeit a pretty one. One has to wonder just why a substance which, truth be told, is in abundance compared to its utility in industry, is so sure to be the natural heir of our current, doomed fiat based monetary system.
The history of Gold is a fascinating subject which reaches back to the dawn of civilisation. A general timeline of the historical milestones relating to gold can be seen here (PDF), but in this article we address Gold’s more recent history in order to answer the question: Is gold a part of our monetary future? Is it a wise investment?
Gold is a metallic yellow substance of molecular weight 197. It is the most malleable of all metals and is more dense than lead (1 cubic centimetre weighing 19.3g at 20 degrees C). Its high electrical conductivity and corrosion resistance has made it a particularly useful metal in the electronics industry for the coating of electrical contacts and for wire bonding of integrated circuits to printed circuit boards, especially in situations where a low failure rate is desired. Other minor uses for gold have included reflective insulation (such as in the lining of McLaren’s Formula One engine compartments) and as a reflective surface of some of the more expensive CD’s. Gold also has some medicinal uses. Prior to the 20th century, gold was solely used for jewellery, decoration and as a form of currency. Even today, the vast majority of newly produced gold is used for jewellery (over 80%). That said, around 25% (30,000 tonnes) of the world’s gold is in the possession of central banks, particularly of the USA, Germany, the IMF, France, Switzerland and Italy. Privately owned bullion accounts for around 20,000 tonnes. It mostly just sits there, doing nothing, as far as anyone can tell.
The rate of gold production around the world has risen steadily during the 20th century, with a peak attained around 2000AD. Its abundance (measured as ounces per capita) has increased, despite its function as collateral to the issuance of money entering obsolescence. South Africa produces the largest quantities (roughly 500,000kg per year), followed closely by USA and Australia. South Africa is also the world’s largest gold resource, but countries such as China, Indonesia and Canada produce modest quantities compared to estimated reserves.
Considering that the basic, industrial need for gold is rather small (around 500,000kg per year), it is the demand for jewellery and market speculation that can be said to have driven production to its current high levels. This is an important consideration. Were the jewellery industry less powerful, or if shiny metallic jewellery were to lose its fashionable status, there would be a glut of gold on the market in excess of demand. After all, gold is nowhere near as important to the world’s daily activities as, for example, oil, fresh water, arable land or food.
Retail sales of jewellery are an extremely important part of the gold riddle when it comes to considering gold’s potential future role as a monetary base. By becoming attached to the stuff, the populace shows its faith in gold as a valuable commodity, even though gold has only modest functional use. Even though central banks have shrugged off gold in the past and embraced fiat currencies, everyone else is still in love with the lustrous metal, particularly those in developing economies such as India.
The Gold Market
The factors determining the price of gold are many, and many of them are steeped in controversy. Like any commodity, price is determined by supply and demand, but each end is heavily manipulated (the purchasing of jewellery is far from a rational activity).
At the supply end, it can be rather difficult to determine just who owns the world’s gold mines. In Australia, for example, more than 70% of shareholders in gold mining operations are foreign companies. Most of the mining happens in developing countries, however, where the story of gold mining today is as sad as ever. It is typified by heavy labour, deaths from accidents, pollution and poisoning of water supplies, massive open cut mines which, after they are spent, become expensive environmental liabilities. Just a single ounce of gold requires the production of 30 tonnes of waste rock.
On the question of market price manipulation, one organization (the Gold Anti-Trust Action Committee) has managed to shed a significant amount of light. Their research suggests that an unholy alliance exists between the US Government, western central banks, acting in part through Wall Street investment ‘banks’ such as Goldman Sachs to push the gold price to artificially low levels:
While the people who formed GATA sensed as early as 1998 that something was wrong technically in the gold market, it took us a couple of years to figure out that the culprits were not the visible players in the futures markets — the New York investment banking houses — but rather the Western central banks, and that the investment houses were just their agents, their cover. A British economist, Peter Warburton, may have been the first to put it together comprehensively, with his 2001 essay, “The Debasement of World Currency: It Is Inflation, But Not as We Know It,”…
In essence, it is alleged that these banks, which manipulate interest rates as they see fit, as well as effectively fixing the international currency exchange rates, also rig the gold price in order to milk the market and increase their sphere of influence. A speech by Russian Central Bank deputy chairman Oleg Mozhalskov reveals some interesting insights as to why this might occur:
For the central bank, the gold stock is the international payment reserve for the whole country — for the state authorities, private companies and corporations, as well as individual citizens. Like any reserve, it needs to be conserved, in terms of both actual physical form and its value. To a lesser extent, we need to be concerned about its liquidity, or more precisely, market price developments.
The contemporary gold market has emerged as a byproduct of a series of agreements between governments, initiated by the United States and supported by the other major powers, in whose possession the bulk of all gold ever extracted lies.
The Horse’s Mouth has spoken. The term gold market is probably a misnomer, however.
Central banks currently issue fiat money, but they still keep gold reserves, by and large. This shows that they were never of the opinion that fiat based currencies were going to last forever, but it also seems that they all believe that gold will undergo a return to its former seat of power. They understand that the current approach of using US dollars as a reserve currency is untenable, since the US dollar is based on an empty promise, leading to a situation of undisciplined over-expansion of money supply (which, not surprisingly, we are now seeing). American central banks and the US Government would be well aware of this fact, and so it should come as no surprise to any reader to know that many accuse them of artificially suppressing the gold price to create the impression that gold is less valuable and that fiat money is a better vehicle for doing business.
Central bankers deny that they manipulate the day to day fluctuations in the price of gold, but it has been noticed by some that the 24h gold price follows a predictable pattern, day after day, which can be used to make a tidy sum over many years (in the order of doubling one’s money every other year or so), by buying in the evening and selling in the morning. A random snapshot of today’s gold price movements confirms this theory, which managed to raise at least one eyebrow. Unnatural patterns in markets are what they are.
The problem with gold, for central banks, is that it just sits there, doing nothing. They want it to move around so that it can rise and fall in value. For this reason the central banks have released some of their gold reserves. An added incentive to release gold is to lower its price to support the fiat currencies (the central banks’ main product). The suspicion, however, is that these banks have released too much of it (without admitting the fact) and so have less in reserve than they claim to have. If this guess is correct, then it may well be that some central banks (ie: the Federal Reserve) will not want to allow gold to become a reserve currency any time soon, as it may attract an audit of its true gold holdings. On the other hand, gold is likely to be more precious than it is currently priced. Unless, of course, gold gets dumped by central banks and some other element wins favour.
It is clear, then, that the gold market is made up of several extremely large players (central banks and other similar institutions) and masses of little investors. The likelihood of making a profit from fair trading, based on conventional principles, is rather small. Also, given that central banks may have much less gold in storage than they claim, there is just as much probability that a future gold based currency will end up being another ‘fiat’ currency. That is, banks will issue certificates of non-existent gold, and the population will have to simply trust the banks, because it’s highly unlikely that the piles of gold bricks will be on perpetual public display.
The only reliable method of owning gold (and being sure that you own it) is to have the bullion in one’s hot little hand, to gaze at and adore, or to keep it in the form of jewellery. Either way it is still a fanciful venture for most people, because it is not foreseeable that gold will be circulating in person, in a cash society, any time soon. Nobody will sell you a carton of milk and a loaf of bread in exchange for several grains of gold dust. Gold is not a practical metal.
Gold, therefore, is not our precious, because we feel that money and effort is better invested in productive projects which address the immediate needs of the people around us, such as food production, essential services and the trade in other tangible goods. As maligned as housing may be, for example, it is still a more useful thing to own than a gold nugget, since people will be willing (even forced) to pay you to live in a house, but they won’t be as willing to pay you to have a quick hold of a gold nugget.
Bloomberg has a commentary by Mark Gilbert, summarising the evidence to support the idea that the U.S. dollar’s days are numbered. His commentary concurs somewhat with one made by Bill Bonner on The Daily Reckoning. He describes the merciless battle between the forces of inflation versus deflation, but with rather more frankness suggests that the U.S. is doomed:
In a larger sense, the US is at war with capitalism…and with nature herself. Markets have natural rhythms. They go from boom to bust…from inflation to deflation…from expansion to contraction naturally. Trying to stop the bust is futile. It is a fight against Fate…a losing proposition. And it is diabolically unnatural.
Mr. Gilbert, despite his pessimistic views, believes that the US will not default on its debt obligations and, furthermore, will not have its credit rating downgraded from AAA status:
It is undeniable that the U.S. government’s ability to finance its borrowing commitments has deteriorated as its deficit has ballooned.
Using the definitions outlined by Standard & Poor’s, a one-step cut into the AA rated category would nudge the U.S.’s creditworthiness into a “very strong” capacity to fulfill its commitments, just weaker than the “extremely strong” capabilities demanded of AAA rated borrowers. That seems an appropriately nuanced sanction — albeit one that the rating companies might turn out to be too cowardly to impose.
In my view, there are mistakes in both analyses, owing to incorrect assumptions. Firstly, Mr. Gilbert may well be playing down his pessimism so as not to be accused of fearmongering, but surely he is aware of the degree to which U.S. mortgages are heading for the wall. The current picture is looking much worse than that which existed even before this whole economic crisis began.
Credit rating companies are not independent, scientific and unbiased organisations by any stretch of the imagination. They are privately owned outfits with great power in swaying public opinion. Indeed, they are crucial part of the fiannce sector, able to make or break whole economies by their assessments. They are, in a sense, no different to mainstream media outlets, privately owned by an oligarchy, providing heavily filtered news with bias at every turn. Yet both are threatened now by the obvious. More and more, media outlets are being forced to report undeniable facts (political and economic) which go against the current “political correctness”.
The world’s population is becoming painfully aware of the economic failings of the U.S., and to suggest that credit rating companies will ignore this fact is like suggesting that Fox News would fail to report an anti-war protest in Washington DC with ten million angry people brandishing torches and fighting riot police with their rubber bullets and teargas. As much as Fox News would probably like to under-report it as being several hundred angry youths having a small scuffle with police, it could not get away with it. The credit rating of the U.S. economy will be revised downwards. It’s as good as given already.
Mr. Bonner, on the other hand, is a believer in markets. They are, in theory, beautiful things. People come and trade, buying and selling whatever can be bought or sold. In so doing, they set the price and value of everything, ensuring the most efficient use of resources of a society. If markets are natural, then one can expect undulations in pricing, rises and falls depending on seasons, social changes and other explainable phenomena. One can even expect massive corrections in pricing as a result of a major changes in government policy (the chief cause of bubbles). On that thought, the U.S. economy has so many bubbles at the moment, that it could be better described as a froth economy. If we blow off the froth, what are we likely to find?
Unfortunately, markets today are far from natural. The presence of hedge funds, the Plunge Protection Team, the undeniable pervasiveness of insider trading, interventionist governments and the hysterical mass media all ensure that market movements are, more or less, predetermined.
Instead of sailing on an ocean, where navigation and seamanship are a fair mix of art and science, investing in the stock market today is like sailing in the presence of a wave machine and massive propeller fans generating false winds. All is well until someone decides to switch the wave machine off or alter the fans without notice. It would have been better for most not to have sailed at all. Yet how nice it would be to be a friend of the wave machine operator. What advantages could be had!
Death comes like a thief in the night, unpredictably and suddenly (except for when it doesn’t, of course). Whereas the miser wakes early each morning, thinking he will avoid danger, the thief rises the night before and was already at work before everyone else. The death of the U.S. currency will come in the form of a great heist. Already, the middle classes are being robbed blind. In a way, they have been blind drunk on credit, but are now waking with a splitting headache only to discover that the foam has been blown off their beer and, after all that, the glass is empty.
While to many it is an extreme view, even now, it is inevitable that the U.S. will soon default on its credit obligations. It might not be called a default, or a bankruptcy, or anything suggestive of the term ‘failure to pay’, but it will nonetheless happen. Like the bankruptcies of GM and Crystler, the U.S. economy and its people are going to be sold off, divided up and redistributed to its creditors. Some names will change, others will stay the same. Euphemisms are probably still to be invented to describe the coming events, but the coming ‘restructuring’ of the U.S. economy will be nothing less than the settlement of failed debts on an international level, which will effectively result in the handing over of sovereignty to foreign interests. With or without a war, the final and determining step in this process will be the dissolution of the U.S. currency and the adoption of a world reserve currency, and with it the end of the era of Democracy.
The past week saw some important stories break on the mainstream media, including revelations of an explosion in funding of intelligence services in the UK, which reportedly are poorly run, targeting the innocent more often than the guilty. Clearly, the perception of the British Government is that the massive funding boosts are necessary in anticipation of coming major developments around the world.
We found out this week that those calling the latest stock market rise a “sucker’s rally” were right. The pessimists are back in business, with predictions of a fall in the Dow Jones Index to 2,000. It’s a big deal, as the conditions for such a fall in stocks are unlikely to be imaginable for most Americans, even now. Yet two groups in America are conscious of the possibilities: the Government (which has been quietly expanding its prison system and domestic law enforcement) and civilians who are arming up and buying ammunition. But to say that this is merely an American problem would be very narrow minded. Indeed, some of the greatest shifts in economies around the globe are outside the US, such as Japan, having just recorded a record 4 percent contraction in the first three months of 2009.
In a G2 world (the United States and China), he who is the piper calls the tune, and China holds a US$2-trillion mortgage on the United States and is not happy. This country, along with others that lend money to the United States, such as Saudi Arabia, will determine the value of the U. S. dollar and gold. And they have spoken. They are not buying more U. S. treasuries and are buying gold as a new asset class.
It’s estimated (by John Ing) that the gold price will reach US $9000, which is not a reflection of a meteoric rise in the value of gold, but a total debasement in the value of the American economy. The unmentioned and possibly unmentionable thing in all this is that such a debasement in US currency cannot occur without a significant change in the global military balance. Indeed, if this change is not taken into account, assessments tend to conclude that China (and others) will not recover quickly to take the global lead away from the US. The same degree of extreme economic instability is forecast (and is already coming) for the UK (and other first world countries), although it will likely take different forms. The interesting thing is that talk of conspiracies of world government and globaly tyranny, once only conducted in hushed tones by people suspected of having paranoid delusions, is now the stuff of the regular press, making simple arithmetic easier than ever. Perhaps this is because the notion of coming social upheaval is now a foregone conclusion, making it an acceptable thing to discuss in the public arena.
On a cultural level, the undermining of British social structure appears to be complete, with the sexual equality war now having been lost well and truly in favour of Feminism, where it is reported that advertisers now consider mocking maleness as an advantageous strategy. The significance of advertising trends should not be underestimated, since it is one field where sciences of psychology and sociology are applied effectively, where the current status of a society is accurately assessed. It marks a total disorientation in British society from what could be termed a natural social order.
There is very little left in Western society that reflects the biological realities of being a human being. The lives of men and women are distorted, artificial, medicated. This false way of life guarantees their unhappiness and vulnerability to social pressures. As such, Western society is weaker than it was during the first Great Depression, which is likely to make matters much worse in coming years. Even if people woke up to these facts tomorrow morning, it would take generations for them to relearn what has been lost. It’s unlikely that this will occur, in any case. That particular civilisation has passed its turning point.
There isn’t much anyone can do now to avoid the problems which will arise in the next couple of years. If this were to be compared to the story of Noah and his Ark, then the time now would be that of the first rains of the coming deluge. That said, the people of the world who have been quietly preparing themselves, mentally, spiritually, and materially, are in a position of great advantage. This “advantage” is not the kind that is understood by opportunists or materialists. Indeed, those who only view current events as a way to make some money are going to be rather surprised.
For anyone who had the hairbrained idea that the latest stock market rally was a sign of the return of the good ol’ days, news signaling future woes continues to flood the financial rags.
The housing market in the US and UK is still extending people’s abilities to accept ever more bad news. The Financial Times reports:
The 25 per cent auction discount and the sluggish market give a strong signal that prices have further to fall. But the recent uptick in the auction market also shows the gap is narrowing.
This can mean either of two things; either the housing market is still tanking (in the UK and US), but a turn-around is coming soon, or the housing market is still tanking, and the increase in sales at auction is due to people who have to live somewhere buying at the 25% discount that results at auction, not realizing that prices will fall further still as more mortgate defaults accumulate (since, in the US, as many as 30% of mortgages are still bigger than the asset value). It certainly suggests that the Australian housing market is not at all a safe place to invest currently, although the statistics still look amazingly good there thanks to the naive First Home Buyers.
China, fearing an inflationary spiral, is restricting credit:
Chinese bank lending slowed dramatically in April because of fears that loan growth in the first quarter had been excessive and could pave the way for loans of deteriorating quality, so possibly creating a new round of asset bubbles.
This suggests that nobody there has any real confidence that life is going to get any easier in the near future. Whatever is said of China’s increase in manufacturing, it is occurring in the face of worsening deflation and therefore falling demand. Again we ask, where are the markets going to come from to restart China’s furry toy and other plastic-junk factories? The banks have probably overstepped their mark in spreading around the easy-money:
There have been signs that China’s economy is starting to regain momentum after weak growth in the early months of this year. There was significant growth in fixed-asset investment and industrial output in March. Chinese banks have also lent 4.6 trillion yuan (£460bn) in the first quarter of the year, nearly the total for the whole of last year.
As we described earlier, this is like flogging a dead horse by ramming it with a speeding freight train. Of course the horse will move, but it’s still dead. But according to central bankers such as Jean-Claude Trichet, the recession is over. He is ignoring the magical freight train (the ridiculous amount of new money spirited into existence over the past year) which governments and bankers alike are hoping people will not notice, or at least forget very quickly.
The problems won’t pass until some serious restructuring occurs in advanced economies in order to make them viable. This will take years and, in countries such as Australia, planing for this kind of restructuring (in the form of infrastructure upgrades) is still only talk. Most of this stuff isn’t even on the Parliamentary floor yet.
The Reserve Bank of Australia (RBA) has released its May “Statement on Monetary Policy”, where it continues its up-beat report on Australia’s economic prospects in the face of the global financial crisis, pulling together all the positive evidence it can muster to support the idea that a recovery is closer than around the corner:
Reflecting the recent signs of stabilisation in the global economy, sentiment in financial markets has improved in recent weeks. Global equity markets have risen by around 30 per cent from their troughs in mid March, with a number of financial institutions reporting better-than-expected profits. There has also been a further easing of credit spreads, and businesses and financial institutions have found it easier to issue debt. Encouragingly, over the past month, a number of banks – including those in Australia – have been able to issue long-term debt without a government guarantee.
There is a lot of reassuring economic news of late. In addition to the things mentioned by the RBA, including the quite mild assessment of US banks by the Government “stress-test”, showing what is a very small capital short-fall of less than $80 billion dollars. I say small, because, considering that the future value of the US dollar must be much lower than it is now (after the new money issued by the Fed over the last year washes into the world economy), $80 next year might feel a bit more like $20 now.
RBA’s point, though, is that the size of unemployment shifts, price shifts and activity decline is small compared with elsewhere. Housing prices have not yet crashed in Australia in the way they have in the UK or the US. Recent unemployment figures even showed a decline in the jobless rate (although the statistics are disputed). Banks in Australia claim to still be in a healthy state (as a result of the lack of housing crash). One point it makes to support its case is the rate of inflation, at around 4%, which is roughly where the RBA has its interest rate. This has happened due to higher import costs, because the Australian dollar has fallen in value.
The RBA report reads as though, in their opinion, the whole economic crisis is rather overblown (using terms like ‘ongoing risk aversion’) and that there is less substance to it than the numbers might indicate. It cites less ‘bad’ numbers coming from China as signs that the market is improving:
The clearest signs of improvement in economic conditions are from China. While on a year-ended basis, Chinese growth slowed further in the March quarter to 6.1 per cent, RBA estimates suggest that the pace of quarterly growth picked up in the March quarter, and other indicators of activity generally tell a similar story
The question is, though, where is demand for Chinese stuff going to spring up from? It’s doubtful that it will be the old. credit based sources in the US which no longer exist. Also, how much can we trust China’s figures? Do we also believe the official line on other things like human rights, territorial aims, military capability and so on? If China is recording a rise in production, why are similar classes of producers, Philippines, Thailand, Japan and Taiwan recording ongoing massive falls in production?
It is not difficult to imagine that if prices fell low enough (and there has been deflation in prices in major economies), and if consumers held off spending on essential items, they would eventually come out of hiding and buy some of those goods: clothing for the coming Summer, cars, and so forth. Population shifts occur continually and this spurs some demand for housing, even in depression times. They are not, of themselves, signs of the next economic boom, or even recovery.
The IMF is forecasting slight growth in the large economies, by and large, but this is on the back of incredible deficits due to stimulus packages and the printing of new money. Because the IMF measures money in its current value, any growth will be nonexistent when currency devaluation ensues.
The small tick in the massively down-trending graphs is seen by the RBA as a ray of hope, a sign of the inevitable return to prosperity in the First World.
Other issues, such as the bond market bubble and other amazing phenomena are also covered by the RBA. In short, massive amounts of new money are being poured over the world like a bucket of maple syrup over a scoop of ice cream, through the miracle of fractional reserve banking and thanks to fiat money. The catch is that it’s imitation maple syrup, much of it made with artificial sweetener.
This is the big problem with how governments have dealt with the financial crisis. Fiat money has to ultimately find backing in real things, such as goods, good will, and physical force. If these things are not forthcoming, or if there is a major imbalance in them, then no amount of money printing will put it right. Real problems ultimately need real solutions.
In the current economic situation globally, the problem is not that of recession, which consists of a market correction to undo various imbalances that develop in an otherwise healthy and believable financial system. The fundamental problem in the crisis is that the amount of money people say they have, and the tangible things they can use to back up that money, are seriously out of balance. For example, America no longer produces enough goods to exchange for the goods it imports. It has lost its moral authority internationally as a result of many serious scandals. Its military superpower is lessening and may well be eclipsed in a year or two. China’s goods need to find new customers, and China is very aware that its US dollar reserves are soon to be savagely debased, unless, of course, something dramatic happens outside the sphere of economics.
Domestic circumstances are far from natural, currently, as a result of the Australian Government’s stimulus packages. This, for example, has resulted in the mitigation of the housing correction, where the low-end of the market is now recording a growth in prices, funded by the ever more generous First Home Buyer’s Grant (FHBG). The RBA calls the housing market a “softening” rather than a correction, because it probably does not hold the opinion that housing prices in Australia are excessive:
Looking ahead, low mortgage interest rates and the increase in grants for first-home buyers have made home purchase more affordable, and this is expected to help support residential building construction in the second half of 2009.
The problem is that the FHB housing boom, occurring in the face of a global economic depression, is entirely credit based. The FHBG is based on Government debt and the rest is private debt. In other words, the lack of housing crash in Australia is happening on borrowed time and borrowed money.
In the commercial sector, things are less artificial. Empty offices accumulate and their prices fall.
But there is something to the RBA’s positivity. Australians still eat, and demand for farm produce continues to rise. Also, because prices of imported goods have risen, Australia is importing less. This has managed to buffer the fall in exports, so that a trade surplus might result. In the background, however, is the looming shadow of government deficit which is set to skyrocket. Claims of a fall in unemployment need to be taken with a grain of salt as well, since this has not been backed up by an increase in job advertisements.
Saving rates are rising in Australia, which is a great sign (a sudden outbreak of commonsense?), but ultimately, this is not the business model for banks and governments, whose aim is to issue debts and charge interest, encourage the movement of money and the tax collection that results. To that end, bank bonds are being issued again without government guarantees, suggesting that, for banks in Australia at least, business as usual is resuming. That is, for the time being, and to a small degree. It appears to represent a spike in loan approvals as a result of the FHBG, which itself is a mini-bubble which will likely pop into the next financial year.
The stock market is the main indicator used to suggest impending recovery, driven by the resources sector. Resources are tangibles, and in a depressive economic climate, it was predicted that companies in that sector would fare better than the rest of the Australian economy, because demand exists for resources within China itself which is cashed up. Otherwise, even during the boom, Australia’s performance was lackluster in other areas apart from finance and real estate. Bank profits are still high also, as a result of not passing on interest rate cuts. These positive trends do not reflect any improvement in the way Australia’s economy is run. Rather, they are a result of the banks screwing consumers, and a dip in the Australian dollar value. Calling the bottom of the market at this stage, although popular, is not particularly convincing.
In summary, it appears that the RBA has somewhat tempered its optimism over its previous reports. The idea of a V shaped economic recession is being recognized for the fantasy that it is, but the analysis still fails to take into account the big questions of how the US expects to climb out of the debt hole it is still digging for itself at a frantic pace, or how other nations will respond to the US Federal Reserve’s “fiscal easing” policies, reminiscent of the Weimar Republic.
Our expectation would be that the world economy will not see as sharp declines in the next year or so as has occurred in the last six months, but that any recovery is a very long way off. This is not because the economic stimulus packages around the world will fail, which they are destined to in the long run, but because “recovery” is not the likely outcome for many of the nations that are expecting one. Rather, there is sure to be a major shift in the global balance of power, economically, politically and militarily. People don’t like to think of war in a rich country as a possibility, and mentioning it always raises eyebrows, especially on a clam day with the warm sun shining overhead. Nonetheless, since American money has been exposed as a farce, the card players at the table have quietly put their cards down and are reaching for the holster. A conflict may develop rapidly, and not necessarily at a time of America’s choosing. It is this scenario that makes one a skeptic when reading the RBA’s rose colored view of the world.
(Graphs are sourced from RBA’s report. Download the full text of the RBA assessment here.)