The money system may surprise us

Aug 31, 2011

Poitou, France

The Dow rose 20 points yesterday...after a fabulous increase the day before.

Gold went up $38.

We've already given you our forecast. We think gold AND stocks are going down. But what do we know?

The role of markets is to make fools out of market analysts. So, the shrewd forecaster has to be careful. He shouldn't be too precise in his predictions. He can say what direction prices are going. Or he can say when. But not both.

If we tell you that 'stocks are going up,' we're sure to be proven right - if we wait long enough!

Likewise, if we say 'you'll see gold hit a high this autumn' we leave ourselves plenty of slack to shape events to fit our forecast. It's bound to hit some kind of high during that period.

But here at the Daily Reckoning, we have no reason to hedge. No reason to wiggle and slide. You don't pay for this subscription: you get what you pay for!

For 11 years we've told dear readers to 'buy gold; it's going up.' This was good advice. Gold did go up...more than any other asset.

Now, what are we saying? We're still urging readers to buy gold. Gold is the only true money. It's been used as money for thousands of years. And it will probably be used for thousands more. At least, we have a strong hunch it will be used when today's claptrap money system blows up.

Still, the system may surprise an old refrigerator, it may last a lot longer than we think it should.

Did we explain why?'s the explanation again:

We're in a Great Correction. Recently, this correction has given every indication of hanging around for a long time - a la Japan.

We're also in a period when the feds are throwing caution to the winds in order to over-turn the correction. But, here's what has happened: the feds have not been able to do it. They've tossed a lot of caution to the winds already. But the winds don't care; the correction continues. Just read the headlines. Consumer sentiment is sinking. House prices are still going down. The number of people on food stamps is going up.

This is fundamentally a deflationary economy. It's not an inflationary economy. It's not an economy that will take up the Fed's EZ money and transform it into consumer demand. It's not an economy that will borrow money from the banks and increase employment and the money supply. The feds have been unable to ignite the kind of 'animal spirits' you need in order to get inflation rates up. They've tried everything. It hasn't worked.

No, it's an economy where demand is falling. We saw that yesterday. Gasoline use in the US has dropped to an 8-year low. Households are saving money. Incomes are going down. The real economy is shrinking.

At the household level, thrift is on the rise. Among the investoriat, fear is the dominant emotion. This stock market could collapse any day; all it needs is the right headline.

The Fed has been forced to tell the world that it will keep its key lending rate at zero for two years. This is an admission that nothing has worked in the fight against the Great Correction. It is a clear signal that the US will follow Japan down that long, lonesome highway...towards a multi-decade slump. The US has already had one 'lost decade.' Most likely, it will now lose another one. For now, the feds have been beat.

The victory of fear over greed means that investors are no longer concerned with the return ON their money; they're worried about the return OF their money. And they think that the safest place for their money is in US Treasury debt. Lend money to the people who print it; what could go wrong?

Well...that's what we'll find out when this current stage of Great Correction/de-leveraging comes to an end.

When? How? We don't know.

But NB...we don't really know what is coming. So, we try to figure out what we think you should BELIEVE is coming. And right now, there's a lot of risk in stocks...and in bonds. And in the short term, there's risk in gold too.

You're probably best off believing that stocks will go will go down...and that the economy will remain in a period of fear/demand destruction for months, and probably years, before a major corner is turned.

In the meantime, stick with gold (as insurance) and cash (as ammunition).
At least that way, if the price of gold goes'll feel rich. If it goes down, you'll feel smart. And then you can use your cash to buy more gold.

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*** Yesterday, time seemed to stand still. We were sitting at the lunch table on the back porch. No leaf stirred. The sun shone feebly through thin clouds. No sound was heard.

It was as if time has been suspended so mother could talk. Her voice is never strong. Now, the world hushed and cocked its ear:

"I didn't find out about it until many years later. She actually hung herself."

Our mother turns 90 in 2 weeks. She has spent the summer with us. We were a little surprised that she wanted to come. She is still able to get around, but she is frail and thin.

On an outing to a neighbor's birthday party she sat down in a chair and fell over on her right hand side. Then, unable to move her right arm, she fell onto her left arm the next day. Grace a Dieu, she recovered from these traumas and is getting ready to go back to the US.

"You know, my mother made up a story. She said that Eleanor...I think that was her name ...had ridden in the barn and somehow gotten tangled up in ropes that were dangling from the crossbeams. But she hung herself.

"She was only about 17 years old. One of the teachers at the high school had had his way with her. I think she was pregnant. Back then, those sorts of things were so shameful that people didn't talk about them. And they didn't put up with them either. Robert and Uncle George got their out their shotguns. They went after him. This was in the '20s. But he knew what was coming. He left...nobody ever saw him again.

"But that family was plagued. Almost cursed. We lived with them for a while after the war. Robert was a tough man. Smart. But tough. His son, Tommy, couldn't stand to be around him. As soon as he could leave home he went out west. We never saw him again. Then, we got word, about 10 years later, that he was killed in a motorcycle accident.

"Robert was a good businessman. He had been buying up farms at tax sales. By the 1950s it seemed like he owned half the county. But Tommy was his only son. And his daughter married a man from Denmark that she had met at the tobacco auction. He was a buyer for a Danish cigarette company. So she left too.

"Robert had all that land...but he was alone when he died."

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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1 Responses to "The money system may surprise us"


Aug 31, 2011

Hey Bill,

Thanks for your very interesting posts.
I do not have an economical background but in these exciting times of currency wars and looming recession and GREAT CORRECTION I am obviously becoming very interested to learn more.
Could you please elaborate on the forces that will bring the gold price down again substantially (1200 USD per ounce ) as you predict. I do not understand why gold would fall back that much if the dollar is really moving steadily towards losing it's reserve currency status.

Thanks a lot,


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