»The Daily Reckoning by Bill Borner

Let's talk some numbers
28 JANUARY 2011

Baltimore, Maryland

Let's throw out a few numbers. Numbers lie. The 5 is crooked. The 8 goes nowhere. The 0 is nothing, whatever that is.

-------------------------------------------- Ends today... --------------------------------------------

This is your last chance...

...to subscribe to our Derivative Service that has a 100% success rate, with returns like 110%, 41% , 26%... in just a few months!

But remember, this offer ends at 5pm sharp today! Read on for complete details now...

So, let's throw them out.

15, 34 92, 98888, 21...

Throw them all out.

Or, how about this...?

$14. That's how much gold fell yesterday. Why is gold going down? As expected, the Great Correction continues. Domestic consumer price inflation is still subdued. Speculators are getting worried. They bought gold at high prices. What if there really is a recovery; who will need gold? Now prices threaten to go down.

It wouldn't surprise us to see gold under $1,300. Or under $1,200. Or even under $1,000.

But don't mistake a dip for a change of direction. The bull market in gold won't end until the financial crisis is over. And that's not going to happen soon. Here's another number we can throw out to prove our point:


What the heck is that?

That's the number of dollars that the US government is supposed to need this year to fill the gap between what it collects in taxes and what it spends.

It's the deficit, in other words. And it's a lot of money.

But remember, it's just a number. And you can't trust numbers. Because it was just a few months ago, that we were told the budget deficit would be much, much lower. Remember those numbers? Less than $1 trillion? Then, $1.2 trillion.

Numbers, numbers...1,2,3,4,5,6,7,8,9 - we've seen them all!

But the important thing is not the number itself...it's like a Christmas present; it's the spirit behind it that counts. And behind every number in the federal budget is the Spirit of Christmas...well, it would be the Spirit of Christmas if Santa was a kleptomaniac and he gave all the loot to himself and his friends.

We're not complaining about it. It's just what happens in an advanced, degenerate economy. More people spend their time trying to figure out how to redistribute wealth than trying to create it.

In the event, the Obama team is going to redistribute $1.5 trillion more than it can collect in taxes. Let's throw out some more numbers. That's $5,000 per person...$20,000 for a family of four. And we're talking spending IN EXCESS of tax receipts. This is just the deficit. That's in addition to the $8,000 or so per person that is taken from one taxpayer and given to others.

Okay...so the feds spend $1.5 trillion more than they take in. Or $4 dollars in spending for every $2.50 they get in taxes. Big deal?

Yes...you can imagine how long you could do that. It's like earning $100,000 and spending $160,000. Do that once...maybe you could get away with it. Do that every year...?

And the feds are doing this when the economy is supposed to be growing at 3% to 4%. If it grows more slowly, or not at all, the deficit gets worse.

You'll notice also that $1.5 trillion is about 10% of GDP. You'll notice also - since we're having such a good time with numbers - that if you keep adding 10% of GDP to the debt that pretty soon you have a lot more of it than you want.

That's why we were so disappointed with Mr. Obama's State of the Union address. He gave a false impression. He talked about 'winning the future' and made it sound like it was just a matter of doing things better. Not so. Americans have to do things differently. They'll never win the future this way.

They have to change the numbers. You can't borrow 10% of GDP, year after year, with no end in sight, and still hope to have a healthy economy. You can't expect to win the future that way. Let's face it, that's the way to be a big loser...

*** It took us 2 ½ hours to drive home from work yesterday. We were lucky. Some people were stuck in the snow or the traffic all night.

The East Coast is getting hammered by snow. That's what the news reports tell us. Here in Washington it seems like a normal winter.

But the drive last night was unusually difficult. We waited until 7pm to leave the office. Most people were off the roads. It was snowing hard. The street lights and the remaining Christmas decorations made Baltimore more beautiful than we'd ever seen it. A few people walked around. There were almost no cars moving. We figured we'd be able to take our F-150 and just cruise down I95 without any trouble.

Not that we have good traction. Without weight in the back, a pick-up truck is not particularly roadworthy in the snow. But you don't need much traction on a flat road.

The trouble was that the snow had so slowed traffic that there were still drivers on the road who should have gotten home hours ago. They slipped. They slid. They wandered all over the road, trying to follow the tracks of the driver in front of them. There were too many of them.

We tried to stay away from other cars, but it was impossible. Soon, we were in the middle of them. And then, on Washington's beltway, the traffic stopped all together. Drivers turned off their motors. Cleaned their windshields. Talked to their snow-locked neighbors. The atmosphere was almost gay and insouciant.

We turned off the highway and snaked our way through the back streets. The snow was higher. Power lines and trees were down. But we kept moving in the right direction.

It was hard driving. But it was remarkably pretty. Finally, we got home.

*** A friend from Belgium sends this report:

Gold and the Barbarians


Mr. Petkantchin is an associate researcher at the Institut économique Molinari.

Gold has hit fresh highs against the dollar recently, trading at well over $1,400 per troy ounce in the last month, from under $300 per troy ounce 10 years ago. The metal's mounting value is hooked directly to its economic role as a stable alternative to paper currencies, and its rise should tell us something about the health of the global monetary system. Unfortunately monetary authorities around the world still broadly misunderstand and even dismiss gold's role. How else to explain their recent policies?

Lenin committed a similar error when, according to Khrushchev, he said "the day would come when gold would serve to coat the walls and floors of public toilets." And John Maynard Keynes, the monetary guru of so many of today's central bankers and politicians, once dubbed it a "barbarous relic." Yet today, having been unpegged completely from the world monetary system, gold is neither relic nor toilet tile; it is more important than ever, and precisely because the paper value of goods and services is ever-more dependent on the whims of an elite few. So for those businesses and households that need some stable means of storing value, governments' paper-based monetary and financial system is unsuitable. Gold, on the other hand, is a much-needed safeguard against the barbarism of monetary authorities.

Historically, the international monetary system, imposed after World War II by the Bretton Woods agreements, gave the dollar a central role. It was considered "as good as gold" because it was the only currency that maintained a link with the yellow metal. Gold thus acted as economic actors' safety valve against American monetary authorities' abuse of inflationary expansion.

But after these authorities spent the better part of a decade using their printing presses to finance the Vietnam War and a raft of new social programs, President Richard Nixon in 1971 put an end to the dollar's convertibility to gold. So rather than end inflationary monetary growth and face the economic consequences, Washington instead decided to eradicate the one check on its own monetary expansion. As the nearby figure illustrates, the U.S. dollar has lost nearly 82% of its purchasing power since that time.

The 40 years since then have exposed the international system to inflationary U.S. monetary growth, as well as to various manipulations of other paper currencies, such as the Chinese yuan. Today's economic players must therefore take into account major exchange-rate risks between all the world's non-trivial paper currencies. Those paper currencies survive because of governments' interventions to ensure that they are legal tender, and despite their continual loss of purchasing power.

But households and businesses still need a reliable means of storing value. They turned to financial markets to preserve their wealth, but here too, monetary inflation's infection is evident in the boom and bust cycles of stock exchanges, as Keynes's foe Friedrich Hayek explained. And with each bubble, monetary authorities create more inflation that, over time, erodes the very moral capital on which paper currencies depend. At present, this inflationary rush in the U.S. is serving to finance governments' debt, and goes by the name of "quantitative easing."

So it should be no surprise that inflation-which is often confused with one of its consequences, namely a rise in consumer prices-leads to rising gold prices. Today's gold price should serve as a warning to monetary authorities that if they continue down their inflationary path, sooner or later they will mete out death to their paper currencies. Gold will probably never coat the walls of public toilets, but it could one day be used to buy groceries.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has 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. Please read the detailed Terms of Use of the web site.
© Equitymaster Agora Research Private Limited