Is this a good time for gold?(Read article summary)
The economy is good for owning gold, but it doesn't seem like it because the dollar is going up.
Creativ Studio Heinemann/Westend61/Newscom/File
Not much market movement Tuesday. Dow basically flat. Gold rose $30. Gold investors donât seem to be able to decide. Is the economy good for goldâŚor bad?
Hereâs our opinion: This is a good time to own gold. But it wonât seem like a good time. Not now. Because the Great Correction just gets worse and worse. And as the correction bites the economy, the dollar goes up against almost everything.
âGold is not going down,â says David Rosenberg. But weâre not so sure. Gold investors bought gold to protect themselves against the dollar. But in the short and medium term, they wonât need protection against the dollar. Theyâll need protection against everything else! Theyâre likely to be disappointed with gold and drop it as this period of de-leveraging drags on.
Yesterday, we promised to explain what was really behind what Tyler Cowen calls âThe Great Stagnation.â We havenât forgotten. Weâll come back to it. Just hold on.
First, letâs look at how this world economy is slipping into a worldwide depression.
Just check out the container shipping volumes at California ports. Theyâre down nearly 10% from a year ago. Thatâs a big drop in world trade. What happened? Did Americans finally get enough gadgets and gizmos from Asia? And what does it mean for the Asian exporters? Their economies depend on buying from overseas. Theyâre export economies. Of course, it is true that local demand is increasing. Eventually theyâll adjust to fewer exports and more domestic consumption. But adjustments take timeâŚand are usually linked to major financial crises. What will happen?
Hereâs an answer from Britainâs Telegraph newspaper:
China âfaces subprime credit bubble crisisâ
Monetary tightening in China threatens to pop the $1.7 trillion (ÂŁ1.07 trillion) credit bubble in local government finance and expose the countryâs simmering âsubprimeâ crisis, according to the Communist Partyâs economic guru.
Mr. Cheng said China is entering a âvery tough periodâ as growth runs into the inflation buffers, threatening the sort of incipient stagflation seen in the West in the 1970s and leaving the central bank with an unpleasant choice.
âThe tightening policy is creating a lot of difficulties for local governments trying to repay debt, and is causing defaults,â he told a meeting at the World Economic Forum in Dalian. âOur version of subprime in the US is lending to local authorities and the government is taking this very seriously.â
âEverybody assumes that they will be bailed out by the central government if they default, but I disagree with this. It means that the people will ultimately pay the bill for it all, at a cost to the broader welfare.â
And back in the US the typical American is suffering. He had equity of 61% in his house back in 2001. Now, heâs got a paltry 38%. And heâs lucky to have that. There are 11 million homeowners who have less than zero equity. Theyâre âunder waterâ and still sinking.
One in four young people is joblessâŚwith sentiment among the youth at a record low. The old people may be optimistic, but not the young.
And 15% of the population â a record number â is now below the poverty line. Thatâs 46.2 million people living in poverty in the richest nation on earth.
But donât worry, dear reader, president Obama is on the case. He says he has a solution to the US debt problem. He says heâll cut expenses and raise revenue. Why didnât we think of that!
A quarter of the cuts are supposed to come from the military budget. But theyâre totally fraudulent. The feds donât really know how much their wars will cost. So when they talk about âcutsâ and âsavingsâ they are talking about reductions in projected costs, not real costs. Theyâre made-up numbers, in other words. Even they admit that the savings are âillustrativeâ â rather than real. And thereâs no way these illustrative savings will turn real â not as long as America stays on the imperial path.
Obama also wants the rich to pay more in taxes. Heck, Warren Buffett is on board. And so are most of the voters.
Of course, most of the voters donât pay taxes at all! Not net. About half of the people eligible to vote get more from the feds than they pay in taxes. That leaves the ârichâ shouldering an outsize burden. Already, the top 1% pays 30% of the taxes.
But if youâre rich, donât expect any sympathy from us or anyone else. The rich have rigged the system in their favor. Everyone else has gotten poorer while theyâve gotten richer. Voters will be happy to soak the rich. Heck, theyâd drown them if they could get away with it.
But letâs go back to the big picture. Tyler Cowen thinks the US enjoyed the low-hanging fruit. Fertile farmland, cheap energy, abundant water, easy creditâŚgetting rich was a piece of cake.
He mentions too that investments in health care and education seem to have reached points of diminishing returns. The US spends far more on both than other countriesâŚand gets no extra benefit. Our schools are not better. And Americans donât live as long as people who spend only half as much on health care.
Can we fix this problem, asks Mr. Cowen? Wasting no time answering his own question, he responds that we just need to boost the prestige of scientistsâŚand count on human ingenuity and innovation to come up with a solution. Heck, even Thomas Friedman could have come up with that! In other words, he thinks the system can heal itself.
But the real problem is not a âlow hanging fruitâ problem. Itâs a declining marginal utility problem. And a zombie problem.
As a society ages its institutions become brittle and inefficient. They are no longer dynamic and productive. And, they become nests for dead-head zombies. The two things go hand in hand. On the one hand, declining marginal utility undermines the productivity of future inputs. And the zombies take overâŚmaking it impossible to direct inputs elsewhere. The zombies protect their turf; they make sure they get more resources, not less.
Take education, for example. A little of it goes a long way. When a person learns to read and write, the whole world of ideas and information opens up to him. Whether more inputs of formal education actually pay off or not is open to question. Clearly, beyond some point, they donât. Americans spend twice as much per student as they did 40 years ago. The educational attainment results are about the same. Which suggests that the marginal utility of investment in the education industry declined to zero 4 decades ago.
Most the worldâs great ideasâŚgreat booksâŚand great inventions were produced by people who spent relatively little time in formal school settings. But now, every goofball and half-wit is expected to have a college degree. What do you expect? A college degree isnât really worth very much.
But the zombies want their children to go to college. And the zombies want cushy jobs as âeducatorsâ and educational administrators. (They donât want to teachâŚthatâs too hard!) And children are no dopes either; they know itâs a lot more fun to spend 4 years at Party U., at someone elseâs expense, than 4 years out in the real world. Especially now, when itâs hard to get a job. Thatâs part of the reason student loans have quadrupled since â07.
Obama promised to bring âchangeâ to the nation. But change is the last thing the zombies want. And itâs the last thing that Obama would want to give. The voters wouldnât stand for it.
Instead, we have a Great StagnationâŚan economic deadendâŚwhere further inputs into traditional, zombie-controlled institutions no longer pay. More credit? More military spending? More Medicaid? More Social Security? More education? More consumer spending? More hiring? More capital investment? More energy consumption? More programs? More unemployment compensation? More taxes? More laws? More regulations? More lawyers? More educators? More security guards?
Will they pay off?
Not a chance.
Tune into tomorrow to find out how to really fix the problem.