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Kevin Parker
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Kevin is an independent investor. He advocates a conservative strategy of waiting for significant market pullbacks and buying long-term dividend stocks during attractive buying opportunities.
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  • Historic Plunge in Money Supply Likely To Lead To More Stimulus 0 comments
    May 28, 2010 10:28 AM | about stocks: GDX, GLD

    The crashing of the United States M3 money supply is intensifying and is now at levels not seen since the Great Depression.  The zero-interest rate policies and massive fiscal stimulus of the past two years are akin to attempting to re-fill a jug of water that has a massive hole in the bottom of it.  So far, the money injections have failed to outpace the destruction of money in the American economy.  

    The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc. The assets of insitutional money market funds fell at a 37pc rate, the sharpest drop ever. [source: Daily Telegraph]

    A sensible person might re-think the strategy since while these policies are not producing the desired effect, yet they are still adding to our deficit.  But who said our central planners were sensible?  Our wise leaders will undoubtedly double down:

    The US authorities have an entirely different explanation for the failure of stimulus measures to gain full traction. They are opting instead for yet further doses of Keynesian spending, despite warnings from the IMF that the gross public debt of the US will reach 97pc of GDP next year and 110pc by 2015.

    Larry Summers, President Barack Obama's top economic adviser, has asked Congress to "grit its teeth" and approve a fresh fiscal boost of $200bn to keep growth on track. "We are nearly 8m jobs short of normal employment. For millions of Americans the economic emergency grinds on," he said.

    While our leaders praise the economic recovery, they simultaneously plan the next phase of spending our grandchildren's money in a futile attempt to avoid a double-dip recession.  Their actions admit failure while their words praise their phony successes.

    The American people have taken a few steps (i.e. Rand Paul's primary win) towards electing politicians who might chart a different course, a course towards American austerity.  While we might view this as a positive step, it's likely that it's too late to successfully navigate such a path.  It's likely that we Americans gave up the opportunity years ago to successfully right the ship in a controllable fashion.  Implementing a harsh austerity package here in America is probably the lesser of two evils, but such a package would likely crash the economy overnight.  The vast majority of politicians will never choose this route.

    Even if a handful of anti-Keynesian politicians make it through into office in 2010, it will still be a small minority.  It's guaranteed that America continues down the path of more stimulus and more quantitative easing.  For now, this path is still the politically advantageous one and therefore, it will be the road we take as a country.  Will it work?  Of course not.  The double dip or the continuation of the depression will set in bringing about brutal deflationary forces.  As our central planners double down again and again, it is this repetitive cycle that will lead to the final collapse of public confidence in our government's ability to "fix" the economy.  This final collapse in confidence is what will push gold higher to historic levels.  History suggests that a loss of confidence in government is a much bigger catalyst for higher gold prices than inflation.

    Disclosure: Long GDX and physical gold/silver
    Stocks: GDX, GLD
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