Posted by
Andrews on Thursday, February 19, 2009 1:31:55 PM
I was reading
Ross Mackenzie's column when I saw this:
On precisely the day Barack Obama signed into law the most
gargantuan economic measure in the nation's peacetime history (White
House Chief of Staff Rahm Emmanuel termed it "the most major, sweeping,
comprehensive legislation as it relates to economic activity ever") --
at almost precisely the moment of his pen-strokes -- the stock market's
hope balloon went "bang!"
The
Dow fell to its bear-market low. In a cascade of awful economic news,
the market had struggled to hold on. But the signs weren't good. It
fell on the day of the inauguration of a man who had campaigned as the
embodiment of an idea called hope. It fell on the day his
tax-challenged treasury secretary rolled out his salvational plan.
Then, at the signing, it fell again. Said The Wall Street Journal
Wednesday, with gold pushing toward its all-time high (up 9 percent
this year, with the Dow down 14 percent): "The rising gold price says
investors are starting to freak out over governments' response to the
credit crunch."
I am glad to see someone else mentioning this. Not only have I been personally shifting more money into gold producers (foreign gold mining firms not gold futures, just in case Obama goes the FDR route and does something funky with gold itself), but I have written before about both the market drops, and the 40% increase in gold future prices since November.So it is good to see someone else mentioning this.
The one complaint I have is that mainstream conservative pundits (excepting John Stossell and Thomas Sowell) are not attributing the flight into gold properly. Yes, some is because of the failing markets, but even more is because of the financing of the trillions in anticipated stimulus. Obama, and his congressional allies, will not raise taxes, nor will they cut spending, and since the market is already in a massive liquidity crunch, they won't have recourse to borrowing from the private sector.
Which means, every dime of stimulus will be paid by inflating the money supply. And that is why investors are fleeing into gold. (I know it is why I am shifting my investments.) The flight into gold happens during times of flux, true, but not at the present pace. And it is no coincidence the price of gold began to rise as soon as Obama's plans for stimulus were revealed (to the degree they ever were). It is simple fear of inflation, and not just inflation, but Carter-sized inflation, that has investors hiding in commodities.
So, while it is nice to have pundits agreeing with me, it would be even better if a few more started to mention
the I-word. After all an additional trillion or two of spending equates to a 7-14% increase in the money inside the Federal Reserve system (currently about $14 trillion). You cannot increase the money supply in that way with repercussions.
POSTSCRIPT
And this ignores the
continued efforts to both
depress overall interest rates and
"encourage" subprime refinancing to
prevent foreclosures, in essence adding yet more bad loans to the system while inspiring a new housing bubble (sped along by
tax credits for home buyers). And a housing bubble combined with low interest means nothing but another inflationary increase in the credit supply. So on top of the inflation from federal spending, we are looking at a
parallel bank-driven inflation. If you were trying to destroy the economy, you would be hard pressed to find a better method.
POSTSCRIPT II
As usual, to ward off any lawyers with designs on my (snicker) massive personal fortune, this is not meant to be investment advice, I am simply recounting my fumbling efforts to deal with the outcome of
two decades of nonsensical
money "management" by the government. (Yes, Bush is
to blame too. Not as much as Clinton or Obama, but still to blame.) So before you think about taking this as investment advice, consult a professional. Of course, the professionals who ran my mutual funds lost between 5 and 40% of value (and the 5% is only one bond fund, some of these geniuses managed to lose 15% in the
BOND MARKET), so not sure how much help they will be. So, listen to whoever you want, just don't sue me if you take my lead and end up losing your shirt, because I will have lost mine too.
POSTSCRIPT III
All of my previous writing on this can be found in the postscript to "
Not Entirely to Blame". A proposal to resolve the problem can also be found at "
How To Resolve Our Current Problems". Ideally, I would like to see the government out of monetary matters, and a private gold standard established, but that is unlikely. However, even among the possible solutions there are many better than this massive giveaway calling itself a "stimulus".
POSTSCRIPT IV
Just to be clear, Mr. Mackenzie does mention inflation briefly near the end of his article, but doesn't tie it in any way to massive overspending or deficits. He may understand, but as long as he does not make this connection clear, readers may be left without the important understanding that spending this much will inevitably cause inflation, that inflation is not a problem separate from Obama's proposed massive spending. (Or, for that matter, almost all past administrations' massive spending, excluding that of Reagan who borrowed on the open market, rather than having the Fed buy up bonds to increase the money supply.)
I also have one additional objection, the criticism of "debt culture". It is a mistake to criticize this separate from inflation. In an inflationary culture, taking loans is sensible as they will be paid in inflationary dollars. On the other hand, savings is a bad thing in inflationary times, as interest does not usually cover inflation, making monetary investments with fixed returns a losing proposition., and generally discouraging any sort of investment except those in concrete assets. So accusing people of "too much borrowing" in an inflation is absurd. Borrowing is the most sound fiscal policy, if you can find anyone to lend.