The Economy on Dope: Investors Fear Inflation, Embrace Gold

Gold is trading within a secular bull market for metals and all commodities, whereas stocks and the U.S. dollar have been decimated over the past decade with unfathomable losses; investors quietly seek out stores of value, rather than equity ownership returns of capital.

The happenings represent a stark tribute to these uncertain times of warfare, economic misery, and political shenanigans. Alarmingly, the recent actions of the Federal Reserve Bank and Washington leadership have signaled absolutely no intention of reversing this trend. Gold and commodities outperform stocks, bonds, and currency (for now).

The Incestuous Relationship of the Federal Reserve, Politics, and Fiat Currency

The role of The Federal Reserve Bank, as articulated by its 1913 creation by Congress is to both promulgate economic growth through full employment and enforce price stability. Outside of the 1982-2000 boom time Nirvana, Basic Economics 101 proves that this Fed charter is perfectly contradictory. Full employment ignites inflation, whereas aggressively destroying price level increases cools the economy at best, and fosters recession - at worst.

The Federal Reserve regulates banks and enacts monetary policy via buying / selling U.S. Treasury securities in order to manage interest rates by creating or effectively destroying money with the magic wand printing press. This is fiat currency.

These dollars are legal tender notes of exchange notes simply because Washington says so.

Basic Economics 101 also indicates that increasing the supply of any asset diminishes the value of said asset. Well, the marketplace has been flooded with dollars since the stock market crash of 1987, my friend. The Federal Reserve Bank, established to operate as an independent unit outside of government control, returned to Arthur Burns - Richard Nixon money politics with the "Greenspan put"; that was the beginning of the end for price stability and the U.S. dollar.

Alan Greenspan slashed interest rates to the floor with ever greater urgency through the Black Monday 1987 Wall Street crash, Russian default, Asian financial crisis, technology dot-com collapse, and the September 11 disaster that left the Federal funds rate at an unprecedented 1%. Informed observers must note the fact that the living dead / addict U.S. economy has required increasing amounts of stimuli to achieve even lesser highs over the past twenty years.

The junkie mentality has culminated with today's shock treatment featuring bizarre TARP / TALF acronyms, Economic Stabilization Acts, and the injection of capital onto the balance sheets of Big Banks. The creative technicalities are little more than Washington mumbo jumbo policy wonk speak for literally creating money out of thin air and airlifting it to desperate institutions via helicopter.

Although I remain firmly in support of fiscal Marshall Law, I fear that the mechanics of the system have become increasingly politicized to pander to populism - rather than slaying the deflationary machine. The punch bowl will be impossible to retrieve and will exacerbate ever larger Great Bubble dislocations. Fiscal Marshall Law will degenerate towards Fiscal Debauchery - yet again.

Growth at all costs saves jobs. The jobs of politicians.

The U.S. Economy is a Sham

Of course, the market did not acknowledge the writing on the wall until the year 2000. The 2000-2002 bust marks the inflection point where inflation, oil, gold, and the entire commodities complex re emerged from their long, drawn out slumber to dominate equity and bond market returns. This is a secular bull (bear) market for commodities (stocks/bonds).

Contrary to (nearly) efficient markets that vote with dollars, government officials will never face reality. Facing reality does not win elections.

Ramshackle growth is always embraced at the expense of price stability. Certainly, accepting a nominal raise at work while enjoying skyrocketing home and stock market values is a visceral, good feeling. Never mind that the price levels of real, every day inflation - which does include energy and food (contrary to U.S. Bureau of Labor and Statistics propaganda) - is actually outpacing these paper gains. Never mind that U.S. travelers that may be wealthy stateside degenerate into tattered paupers overseas.

Washington leadership never got the memo. Any elementary graph of the Dow Jones Industrial Average versus inflation indicates that true, economic productivity is absolutely impossible without a stable price level. The Fed has demeaned monetary policy as a quick-fix heroin type of program that ignores the fundamental imbalances of the world economy, prints money, and throws the global marketplace into the fells of further addiction. According to CNBC contributor and 1985-1991 FDIC Chariman Bill Seidman:

The Fed is providing the market with a shot of dope.

This is not a free market. Rather, this is an oligopoly of Banks that are "Too Big to Fail," hack politics, and Sham Economics. Let's propose that Sham Economics is added to the Business Academic Lexicon along with "free markets" and "modern portfolio theory."

Gold and Commodities Store Value

Gold, oil, commodities, and materials stocks are the only sectors of the investment universe that have not been absolutely destroyed by this 2000-2008 debacle. The price of gold has surged from $250 to $1000 per troy ounce over the period. Meanwhile, the Dow Jones Industrial Average peaked at 14,000 and was unceremoniously slammed towards 6500.

Investors are fleeing fiat currency that risks maddening political devaluation in exchange for scarce commodities that must be mined - rather than created by Man. The weak dollar perpetuates the cycle as oil, agriculture, and metals traders demand additional compensation in exchange for increasingly worthless paper currency.

Although commentators attribute 2006 and the housing collapse as the beginnings of today's recession, intelligent observation argues that the global economy has been ensnared amidst a real, secular bear market for the past decade. Stocks have returned nothing in twelve years - which is an unmitigated disaster per inflation adjustments.

This is the "lost decade" and any person that argues otherwise remains heavily invested with commodities, is a tool of the U.S. Government, Zimbabwe, or works for Bernard Madoff.

Admittedly, AIG, Lehman Brothers (LEHMQ.PK), Bear Stearns, the current housing bust, collapse of the Dow Jones Industrial Average, and the circus - like confusion dominating Washington is disturbing proof positive that the U.S. economy has been an outright sham for the past ten years.

The U.S. Ponzi scheme will continue for another ten years without significant intervention.

Disclosure: Author holds a long position in XOM

Comments

[Mbuna:]

Kudos, nice article! I am almost shocked to find someone who generally thinks like I do about this situation. Except I can't imagine this continuing unabated for 10 years- things move much too fast now and I fear the wheels are coming off.

Mar 22 05:24 AM

[huskerbob:]

Bravo! Excellent article. Expect a lot of vitriol from Paulson and Bernanke sycophants who somehow find genius in making our own Japanese lost decade, albeit on a scale almost unimaginable.
You made a good point that people are abandoning the twilight zone economy for things of more substance: energy, gold, medicine, food.
The lot represented by Paulson and Bernanke, alchemists who tried to make something from nothing and destroyed the economy doing it, are on their way out. Expect them to make an even bigger mess of things before they are thrown on the sh#t heap of history.

Mar 22 05:52 AM

[Steve Faseler:]

Amen. Just wait till the banks pyramid on top of the $1 trillion dollars of treasuries the Fed just bought and turn it into $9 trillion dollars worth of loans through the wonders of fractional reserve banking. Were did they get the money? They just created it out of the clear blue sky. We will have inflation for sure, and maybe even hyperinflation. It is time for Americans to rub the sleep out of their eyes and discover what is really going on with the Federal Reserve system. Don't accept arguments that anyone else can cause inflation. The only entity that can cause inflation is the entity that controls the printing presses. I think the politicians and the Wall Street bankers have finally over reached enough that people are starting to wonder what is going on. I know I did, and I found the answers at www.mises.org Once you understand how the system works, a lot of things will snap into sharp focus. Things like why our government is always running up huge debts, and who profits from it. Things like why they think the bailouts are necessary, and who is protected by the bailouts and who profits from them. The government and the banks have been profiting at the expense of the average American worker for long enough. It is time to abolish the Federal Reserve system. I'm angry, and I am not afraid to put my real name on this post. I intend to do all that I can to educate others about how things really work. Along the same lines, if you have money in one of these banks that took TARP funds and really want to get back at them, take your money out of that bank and put it into a bank that did not take TARP funds. If enough people did this fast enough we could run these failing institutions out of business faster than Congress can save them. The solvent and responsible banks would be rewarded and could make new loans based on their new deposits. The credit markets would then be unfrozen, and it wouldn't cost the taxpayers a penny. The taxpayers could easily have the last laugh on Congress and the Wall Street bankers. It's legal and easy. All that needs to happen is to spread the word and take action on an individual basis. Our grandfathers knew how to have a run on an insolvent bank. It is time we re-learned the art.

Mar 22 07:42 AM

[wg:]

Most banks that did not take TARP funds were in such poor condition that the did not qualify for the program.

"Along the same lines, if you have money in one of these banks that took TARP funds and really want to get back at them, take your money out of that bank and put it into a bank that did not take TARP funds. If enough people did this fast enough we could run these failing institutions out of business faster than Congress can save them."

Mar 22 01:24 PM

[Steve Faseler:]

Jews? No, the problem is not Jews. The problem is central banking on the fractional reserve banking system. You are directing your hatred in the wrong direction. If you focus on the wrong problem for the wrong reasons you will fail to recognize and solve the real problem.

Mar 22 03:57 PM

[Northstar10000:]

Jews are you nuts. Don't answer I'll answer for you, go to your nearest mental hospital. I am not Jewish but I can see things as they are. First the only problem we ever had and continue to have in spades is the foolishness of the left. It is not the Fed either, congress and the president could get rid of it if they wanted to. The left will take the wheels off the bus, try to blame the jews and of course most americans won't wake up until it is too late. The left includes all the Republicans who allowed, voted for and fostered left wing nut programs, regulations and pure out right taking of rights and money thru the tax system. I'm just so glad that we have a pure left wing nut job government at the federal level when the wheels come off. They will get and deserve everything coming their way. Their policies will turn a recession into the Kondratieff Winter. Good luck fools you will be lucky if the winter doesn't morf into an Ice Age. One question for my jewish friends which no one has been able to answer. How can you continue to vote for dembocrates? I am not suggesting you vote republican but it seems you could find a way to express your displeasure with the dembocrates other than supporting them at the voting booth.

Mar 22 04:27 PM

[Glen L.:]

To the author: a generally good article, except for "(f)ull employment ignites inflation, whereas aggressively destroying price level increases cools the economy at best, and fosters recession - at worst." You will never fully grasp the problem until you understand that inflation is ever and always caused only by the government debasing the money supply, whether by debasing the metal in coins in ancient times, printing fiat money in recent times, or creating money by keystrokes in modern times.

To Steve Faseler: I'm 100% with you, man, as I too have educated myself in Austrian school economics, the school that Bernanke, Krugman, Paulsen, etc. all hate, because it correctly points the finger of blame at the government that they all worship. And I'm here on SA every day trying to educate investors as best I can. I can tell you that, for the most part, the response has been positive. That in itself is reason for hope, even though all the economic and political news is completely dispiriting.

Mar 22 04:35 PM

[austrian63:]

Your anti-semtism proves that you have no real clue. Your rubbish is a stain on this website. I have no problem with a person's right to spout their incorrect and racist garbage but I will not allow it to go unchallenged and to duvert attention from the real problems which eminate with the state.

The problem is not Jews it is government and the statist mentality that is now so readily accepted. If you had any knowlege and understanding of history you would know that business cycles, which have plagued the industrialized world for the past two centuries, are caused by the state's inetervention in monetary policy, via central banks, and the creation of money out of thin air through inflationary credit expansion. J.P. Morgan's men were prime movers of the Federal Reserve Act of 1913 and they were WASP's not Jews.

It's a shame that in an environment that needs real discussion of ideas all you can think of is Jew bashing. You should be happy with our current situation in that the public private partnerships of the government owning the banks and AIG is very similar to Germany in the 1930's. Fascism is more subtle than Communism in that the government makes it appear that the means of production are still private property but the government really controls all production decisions.

Please take a break from your religious and racial bigotry and spend some time reading and studying history, especially the past 300 years of Western economic and political history and you will be surprised what you will learn.


On Mar 22 03:17 PM MADE IN W.GERMANY wrote:

> I think jews are to blame for creating current economic depression,
> jews have too many important positions in the US government, from
> CIA to FED all are jews.
> Most investment banks ceo's are also jews, how can you explain it?
>
> In Germany there are also many jews who are allowed a top jobs, no
> problem, but they don't represent such a high proportion as in US.
>
> American people must wake up and look into the roots of the problem.

Mar 22 05:55 PM

[austrian63:]

I applaud you recognition of the "sham" economy mananged by the Federal Reserve Bank and its control of the fractional reserve banking system. Our system is truly "crony capitalism" in which the government's policies are intended to benefit the few at the expense of the many. This is the nature of interventionism no matter who (Left or Right) is intervening.

You stated the U.S. Ponzi scheme will continue for another 10 years without significant intervention. You need to realize the current system of zombie companies staying alive and asset prices remaining propped up only continues because of intervention. However, this intervention cannot and will not prevent the eventual collapse of the malinvestments that were funded because of the artificially low interest rates maintained by the Fed.

The biggest story now is the fact that last week we were all diverted, by the government, with the "populist" backlash against the AIG bonuses. This is in reality a non-story and most Americans should be smart enough to realize that $165 million does not have the same impact on the economy as $1 trillion. It's very interesting that Ed Liddy was being roasted on Capitol Hill on Wednesday when the Fed quitely decided to "monetize" up to $1.15 trillion of the U.S. debt. This was the real story but it was not covered as we too busy acting outraged over the AIG bonuses.

The U.S. has been partially off the gold standard since the 1930's and fully off since 1970. In the 4 to 5 thousand years of commerce with currency, only about 40 of these years has been conducted with fiat currencies. There is a reason for this and we will very likely see a currency crisis in the near future. And you can bet that Obama, Geithner, Benanke, Summers, Romer, Dodd, Frank, et.al. have foreign bank accounts, probably Swiss accounts denominated in Swiss francs and gold accounts. They will be just fine when the dollar collapses under the weight of their own stupid and selfish inflationay policies.

Mar 22 06:47 PM