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http://www.marketoracle.co.uk/index.php?name=News&fi
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Keynesian Economics- Revenge of the Barbarous Relic
Economics / Deflation Nov 20, 2008 - 04:58 PM
By: Kurt_Kasun
Economics
Best Financial Markets Analysis ArticleMarc Faber's latest report
written on November 1 was titled "Why Market Interventions by
Governments worsen Economic and Financial Conditions!" I might have
called it "Vengeance of the Barbarous Relic". John Maynard Keynes
granted gold with this pejorative, giving license to governments to
intervene, print, and distort to their heart's content. In the long
run we are all dead...right? Wrong! The long run is now and the
chickens are coming home to roost.
Keynesian economics has forced us into this mess and Austrian
economics will get us out...but not willingly. Only after the world's
paper currencies has been totally trashed and nations are forced back
to metals-backed currencies will the transformation and adoption of
sustainable economic policies occur.
Clearly we are caught in deflation for now. The correct trade was and
is to short the popular indices and buy gold. You would have made
money doing this. See my commentary, " The Party Is Over ." When I
wrote the commentary the market still had not violated its bull market
trend line dating back to 1982. We have since blown through that
support line and just about every other support line you can imagine.
There is no more support...only more plunges to come in the market
averages and, since we have become such an asset-dependent economy, we
should only expect extremely hard times. Negative feedback loops
between the financial markets and the real economy are going to wreak
enormous havoc.
Deflation and US dollar strengthening continues for now, but two
points are in order concerning this. First, this is not a positive
development. Paul Kasriel, director of economic research at The
Northern Trust Company hammers home the point:
"In conclusion, falling consumer prices are a symptom of weak consumer
demand, not a reason for hope of a rebound in consumer demand. To be
sure, if consumer demand is contracting, it is better for consumers
that the supply of consumer goods and services is not also
contracting. But the circumstance of falling consumer prices would
only be "good" for consumers if the decline were being brought about
by expanding supply. Journalists can be excused for writing articles
arguing how the current decline in consumer prices is good for
consumers. Journalists are not economists. But it is inexcusable that
economists would be spreading this malarkey!"
Secondly, as foreigners, companies, and investors continue to
accumulate cash and the government continues to owe it, the only party
which is harmed from a further strengthening of the US dollar is the
US Government. There is just way too much incentive for the US
Government to concoct a way to squirm out of its debt obligations. It
is simply the only path. It will not default, but will inflate its way
out, reducing the 'real' price of current obligations.
That is why it is important to be long gold and short the market. For
now gold is holding up better than the market in the current
environment of asset deflation. But when the pendulum swings back to
inflation (I suspect months not years) the price of gold will rocket
much faster than the nominal prices of stocks. I'll place my bet
alongside the 5000-year history of failed paper currencies against
hubris of economists who think they have figured out a better system.
I have seen some estimates that would place the price of gold north of
$50,000/oz. to back all of the money in the world. However, this
number could come down dramatically with a few more months or years of
asset deflation and/or issuances of new currencies to replace
worthless ones.
Notwithstanding the drubbing portfolios have recently experienced, I
believe there is still too much optimism out there..."the Great
American spirit lives on...we have overcome worse than this...we made
it through the Great Depression", etc. The levels of panic and fear
are not as low as they were earlier in the year when the markets began
to crater in earnest. See chart from Barron's below:
I would dub this unhealthy condition as "irrational optimism" (clearly
no longer irrational exuberance). There are still too many financial
media experts comparing this to 1929 or 1974 and calling for a short-
term bottom and "tradable bounce" going into next year. There are too
many people looking to morsels of good news in a sea of bad. Just a
couple of days ago when Hewlett Packard announced their better-than-
expected earnings and lifted guidance, the giddiness of the
"objective" financial commentators reporting the news was palpable and
the knee-jerk reaction of the futures market was to rise sharply
higher. Well, ultimately, the markets ended that day lower as the
reality of the other 499 companies (only a slight exaggeration) are
expecting their fortunes to rapidly decline set in.
This morning news that Saudi Prince Alwaleed is boosting his stake in
Citigroup is giving the bulls' false hope once again. Futures have
rebounded again as investors cling to their irrational optimism.
You should employ investment strategies that exploit this human
fallacy to be optimistic when the evidence clearly points otherwise.
Optimism is a virtue which propels society forward and moves
individuals ahead in 'normal times'. The period we are entering is
going to be unlike anything this country has ever experienced.
On Nov 21, 10:51 am, Don Tiberone <s...@m...com> wrote:
> http://www.marketoracle.co.uk/index.php?name=News&fi
le=article&sid=7413
>
> Keynesian Economics- Revenge of the Barbarous Relic
> Economics / Deflation Nov 20, 2008 - 04:58 PM
>
I don't agree. There is 1.5 trillion dollars of gold in human hands:
it's not enough. If you let the price of gold shoot through the roof
then you are shooting yourself in the foot, because gold is an
industrial item for which there is no known substitute. A system on a
fixed basis as solid as gold has its advantages but the big problem is
that the supply of gold doesn't expand and the human race does. The
price of gold and any gold-backed currency would tend to rise and
result in deflation, a big problem.
I thinik that a completely worthless and imaginary currency such as we
have now is the right idea. You have to watch it carefully though so
it doesn't get out of hand, and this we haven't done. A dollar
collapse is possble.
Once the human race stops its rapid progress and reaches some sort of
equilibrium then the gold standard looks good. But I won't live to
see it.
On Nov 20, 8:00 pm, p...@g...com wrote:
> Once the human race stops its rapid progress and reaches some sort of
> equilibrium then the gold standard looks good. But I won't live to
> see it.
I think you're too pessimistic. You can in lieu of gold have a basket
of commodities that you can trade. The key is a stable (fixed) money
supply, or one that slowly inflates to account for the 50% increase in
human population over the next half century.
RL
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