The economy is weak. So you print money. The money pushesDo believe it works like that, dear reader? If you do, you should be an economist. Or a doorstop.
There's no doubt that printing money can create a boom. But it's a phony boom, not a real one. And when it blows up...which it inevitably does...people are worse off than they were before.
It's one thing to introduce small amounts of extra "money" into a growing, prosperous economy. It's a fraud. It's a mistake. But it doesn't blow-up the system. It's petty larceny; nobody cares.
It's another thing to introduce large amounts of new currency into a funky, struggling economy.
But that's what the markets seem to be reacting to - at least, the anticipation of QE - quantitative easing.
Some investors have bought stocks. Some have bought gold. Some have bought Treasury bonds. Those buying stocks and gold are focusing on the inflationary effects of QE. Those buying bonds are focusing on the Fed's asset purchases themselves; after all, they're going to be the biggest, flushest, most inebriated buyer at the auction.
But they can't all be right. Gold buyers expect the dollar to crash. Bond buyers expect it to hold up. It can't do both.
So who's right?
Ah...if we knew that...we'd have to charge you for your Daily Reckoning subscription. Nobody knows the answer. But we'll take a guess.
Stocks headed down yesterday. The Dow lost a modest 19 points. But gold lost $12. Gold is overbought, in our opinion. The dollar is oversold. And the idea of a 'recovery' is oversubscribed.
We expect a correction. A great correction.
The economy is weaker and more vulnerable than people think. It is not going to bounce back. So, stock market P/Es are too high. They should sell off. The Fed's new money will be too timid, at first, to turn it around.
As stocks fall, Treasury prices should go up. Yes, buying bonds - that is, lending to the world's biggest debtor, who is printing money to buy his own IOUs -- seems like a crazy thing to do with your money. But our guess is that crazy will get even crazier before it goes completely mad.
Gold, meanwhile, is probably not going to enter its final rocket stage until this correction is further advanced. Puffing up asset prices alone probably won't do it.
That said, we confess...we're no good at short-term timing. So, you want to buy gold now? Go right ahead.
Our suggestion: buy coins. Not ETFs. Not gold stocks.
Why coins? Because then you won't be tempted to sell them when the price of gold goes down. Analysts are talking about a 10% decline over several months. It could be much worse...say 20% over several years.
Ten years ago, we urged dear readers to buy gold. The yellow metal was low-hanging fruit at $290 an ounce. But now it's $1,335. It's higher up on the tree. You've got to get on a ladder to get it. Ladders always mean risk.
Is gold going higher? Probably. Much higher. But not necessarily tomorrow, next week, or even next year.
Best advice. If you want to buy more gold, buy coins. Bury them. Forget about them.
Just don't forget where you buried them!
It is the Final Struggle of the welfare states...the Zombie War.
"Greece paralyzed as workers strike again," reports the Wall Street Journal.
In France, the zombies are on the attack too:
"Sarkozy's pension tweak fails to appease unions," the WSJ continues...
Le Figaro tells us, meanwhile, that the "unions are going to prove their point by force." They're planning a huge strike beginning next Tuesday...and have pledged to keep at it until the government backs down.
The zombies always want more money from the government...more benefits...more privileges...more make-work... They want something for nothing. They want to continue draining out the blood from the active, wealth-producing economy...
And they have the heavy artillery, because they usually control the legislature, the army and the police forces.
The wealth creators are outnumbered. Pushed back. Voted down and hunted down. Exterminated. But the more of them that are eliminated, the fewer resources the zombies have to support themselves.
Eventually, complex systems always blow up... They become harder and harder to support...and less and less efficient. Near the end, they are value-subtracting systems, like the old Soviet Union or perhaps the Roman Empire in its final days, consuming more than they produce...until, finally, they can't go on.
All empires collapse. Usually, they are taken over by zombies...little by little. Gradually, they become degenerate, wealth destroying societies. Then, they are vulnerable - either to barbarians from the outside...or the zombies on the inside. Or both. Either way, zombie wars always result in the death of the zombie culture itself. Complex zombie-ridden systems are replaced by simpler systems with fewer parasites.
The barbarians don't necessarily brush their teeth. But at least they don't make you fill out a lot of paperwork.
A Tojo Moment
"This week, Tokyo's central bankers rediscovered a modicum of their old mojo," the Financial Times told the world on Wednesday. Typically, the FT reports the dialogue correctly but misunderstands the plot action. But we can correct the sentence with a single capital letter. For what they really discovered was a modicum of their old Tojo.
Japan's Co-Prosperity Sphere expanded greatly in the '30s, as the Imperial army marched through Asia. But as its supply lines stretched, Japan became more and more vulnerable to interdiction by the US navy. Rather than restrain its ambitions, Tojo Hideki bombed Pearl Harbor.
One of the eternal puzzles of history is why smart people do such silly and stupid things. We have no answer, but we're happy to see the Central Bank of Japan, the US Federal Reserve and the European Central Bank swing into action. It should be entertaining. Bankers tend to be boring, prudent and cautious. They hold their pants up with belts and suspenders too. "On one hand this...on the other hand that..." they say, hedging their bets. And every one of them has two arms! What a delight to see these timid pedants take decisive, bold and foolhardy action.
Japan's economy has been taking on water for the last 20 years. They must be getting tired of it. In the heavy seas following the crash in 1980, they flung out life preservers to its businesses, heaved aboard thousands of soaked enterprises and submerged banks, flushed the seawater out of their lungs, and crowded them onto the lower decks. Then, Japan used all its monetary and fiscal tools to keep the boat above water - including quantitative easing, QE. While the economy never fully recovered, neither did it sink.
In the West, the storm blew up only 3 years ago. Lehman went down. Trillions of dollars worth of assets were washed overboard. But tempest-toss'd and weary, the great ship of modern, degenerate, state-managed capitalism is still bobbing up and down...kept afloat - as in Japan -- by pumps and chumps.
And now, their barks riding lower in the water than ever, the admirals grow desperate. The Japanese have vowed to use their QE more aggressively. The amount pledged so far -- $60 billion - is trivial. But they say they're going to target a wider range of financial assets...drive the key lending rate even closer to zero...and keep at it until deflation is defeated. The ECB is committed to spend $63 billion on QE too. It was forced to spend $1.4 billion of it last week to buoy up poor little Ireland, which is in danger of slipping beneath the Atlantic waves at any minute. And Ben Bernanke has told America that it should expect a more muscular approach to QE after the Fed meets on November 2nd.
"Central banks open spigot," proclaimed the Wall Street Journal.
What else could they do? They think they face a choice: it's the devil or the deep, blue sea.
The politicians didn't hesitate for a minute. They passed their stimulus bills in a panic. And now they claim success. Steven Rattner, former advisor to the US Treasury secretary, argued in the FT that TARP "did more to keep America's financial system - and therefore its economy - functioning than any passed since the 1930s." Were it not for TARP, he says, AIG, Citigroup and Bank of America would have certainly sunk. Maybe GM and Chrysler too. And the recession would have "spiraled downward."
Maybe he's right about that. Even so, it seems like a small price to pay. Besides, how do Rattner, Geithner, Bernanke et al know who should survive and who shouldn't? The trouble with degenerate, state-managed capitalism is that it lets politicians and policy makers decide these things. Why should a bank survive if it can't weather a foreseeable storm? Why should an automaker stay in business if it can't make cars at a profit? Why can't willing buyers and sellers decide these things for themselves? That's just how it's suppoed to work. It blows up gusts from time to time and sinks the unworthy and the unprepared. That's what the deep, blue sea was made for.
But the interveners are neither poets nor philosophers. They're men of action. In Japan, there is little room for more fiscal stimulus. Japan's government already owes twice the nation's GDP. In Europe, the big spenders cannot overcome opposition from the tightwad Germans. The Americans are blocked by politics too. Voters rarely have any idea what is going on. But the TARP plan - which just expired on Sunday - was seen for what it was, a payoff to the bankers at everyone else's expense.
"You can take your stimulus and shove it," is the message being sent to the US Congress.
Not only that, the paralysis in Congress could prevent an extension of Bush's tax cuts. This will be the equivalent of raising taxes during a recession, a repeat of the mistake of 1937, when Roosevelt's pact with the devil led to higher taxes, more regulation and trade barriers.
Everyone claims to favor the democratic process, but few people want to abide the decisions of the yahoo masses. Fewer still will put up with an honest economy. So, it's up to the central bankers. Bonzai!
Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.