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Weekly Musings: April 20th
Posted: April 21
April 20, 2002 For those readers who missed us for the past two weeks, we apologize. Several personal problems hit in early April which have taken a tremendous toll on our time resources. My wife's health condition has caused events to settle into our lives for which we were not prepared. We receive about 10-20 emails per day, with about 200+ on file, and responding to these also takes a great deal of time as we respect the views and comments from subscribers. The original publishing date for this piece was earlier this week, however, for those of you who were aware of my Mother's stroke on Tuesday, we wish to say she is doing much better and expected to regain most of her functions. She has been moved to the Nursing Home and the therapy is helping significantly. Thanks for your support. It would appear that circumstances are about to sell down to allow us to continue publishing articles. This week's Musings issue comes from my attitude, which has been affected by recent events. Contrarian views are ever present around us whether they be on social, political or economic fronts. This week we present the Contrary Contrarian's outlook. Recently Central Bankers from around the world have given lip service to the idea of Central Banks purchasing all types of assets, from equities to gold to commodities to real estate, to continue to fuel our economic binge. Of course, most already suspect the Fed is doing these deeds on a regular basis and the recent revelation was just to judge the reaction when the time comes to reveal the obvious. Those who understand how an economy really works, or how ours was originally intended to work, know that it takes production and consumption, priced at par, to successfully expand a viable economy. We covered these issues in the two Essays published on our Web site. The example we used of the bushel of wheat, times the trade turn, equals the national income available for consumption of our production. Further, the bushel of wheat will make a certain number of loaves of bread, times a retail price, is the cost factor incorporated in operating our economy. If there is enough income to consume all the products from the bushel of wheat, we have full employment and an expanding economic base. If there is not sufficient income to consume these products, we have to borrow money to replace the shortfall and people are placed in unemployment lines while "surpluses" build. This is a simplistic example, but the idea is so novel that learned economists have abandoned all restraint to resist and condemn this simple truth. The result has been the Keynesian economic theory that we can borrow our way to prosperity, resulting in a debt load of presently over 35 trillion dollars. Instead of solving our dilemma, we are teetering on a slippery slope. Some of the accounting work we did back in the mid 1980's often required us to work financial statements and economic records "backwards". For example, if knew what the debt service (income) had to be and what the production costs (expenses) were, you simply adjusted the production to fit the equation. This made good use of the algebra taught in high school, (P - E = I); and in this formula, we simply had to solve for P. The beauty of this technique was the financial records always had the right answer, and if they didn't measure up (pro forma), it was always the fault of production. These types of records always provided the right answer, although the pollsters often asked the wrong question. Apparently this accounting method is now an unpublished Generally Accepted Accounting Principles' (GAAP) discipline. All things work well with checks and balances, that includes economies as well as Governments. Gold and silver are the checks and balances for a fiat monetary system, unless they are held captive by other unpublished GAAP disciplines. Gibson's Paradox is an example of fundamental truth being held hostage to the whims of manipulators. For a complete article on this work, go to: http://www.goldensextant.com/commentary18.html#anchor196905. "Lord Keynes gave the name "Gibson's paradox" to the correlation between interest rates and the general price level observed during the period of the classical gold standard. It was, he said, "one of the most completely established empirical facts in the whole field of quantitative economics." J.M. Keynes, A Treatise on Money (Macmillan, 1930), vol. 2, p.198." "In other words, the bottom line of their analysis is that gold prices in a free market should move inversely to real interest rates. Under the gold standard, higher prices meant that an ounce of gold purchased fewer goods, i.e., the relative price of gold fell. Since under the Gibson paradox long-term interest rates moved with the general price level, the relative price of gold moved inversely to long-term rates. Assuming, as Barsky and Summers assert, that the Gibson paradox operates in a truly free gold market as it did under the gold standard, gold prices will move inversely to real long-term rates, falling when rates rise and rising when they fall. "To test this proposition, particularly for the period after 1984 not covered by Barsky and Summers in their 1988 article, Nick Laird has constructed the following chart at my request. Nick is the proprietor of www.sharelynx.net, which offers an excellent collection of charts relating to gold and financial matters, and I am most grateful for his assistance. The chart plots average monthly gold prices on the inverted right scale, i.e., higher prices at the bottom. Real long-term rates are plotted on the left scale. They are defined as the 30-year U.S. Treasury bond yield minus the annualized increase in the Consumer Price Index (calculated as the sum of the monthly CPI increases for the preceding twelve months)." (Editorial Note: The request for this chart was that of the article's author).  "As the chart shows, Gibson's paradox continued to operate for another decade after the period covered by Barsky and Summers. But sometime around 1995, real long-term interest rates and inverted gold prices began a period of sharp and increasing divergence that has continued to the present time. During this period, as real rates have declined from the 4% level to near 2%, gold prices have fallen from $400/oz. to around $270 rather than rising toward the $500 level as Gibson's paradox and the model of it constructed by Barsky and Summers indicates they should have." "The historical evidence adduced by Barsky and Summers leaves but one explanation for this breakdown in the operation of Gibson's paradox: what they call "government pegging operations" working on the price of gold. What is more, this same evidence also demonstrates that absent this governmental interference in the free market for gold, falling real rates would have led to rising gold prices which, in today's world of unlimited fiat money, would have been taken as a warning of future inflation and likely triggered an early reversal of the decline in real long-term rates." We give a special thanks to our friends at The Golden Sextant.com for the foregoing information. So, what are we getting at, or perhaps more to the point, what does the short-term future hold? While ruling authorities will drain nearly every tool in their arsenal to fight inflation, inflation is the politician's friend. Inflation is a tax on all citizens which does not require a separate bureaucracy to collect. The politicians simply vote for special spending projects (pork barrel) to win voter approval and re-election, and print the funds to pay the costs. By the time the recently printed money cycles through the economy, we discover that because more dollars are chasing the same amount of goods, a dollar is worth less than it was a few months earlier, the process is called inflation. Inflation is very much alive and well nourished in our economy. Our planners have been able to mask inflation of late by forcing domestic industries to compete with the costs of imported goods. This lunacy has forced many companies and industries into bankruptcy with the loss of good paying jobs. Now, with the imposition of tariffs on steel and lumber, full scale trade wars are about to erupt and may result in a reversal of the process of monetary flows to this Country. In normal times, the inflation we are about to experience would be phenomenal, however, these are not normal times. To gain a historical perspective here, we would call your attention to our Article "The Short-Sellers Nightmare, pages 9 - 11. From the period of 1910-1914, to 1919, the average price level increased 220%. However, the National Income increased at about the same rate, so the increase in the price level was not inflationary, just that goods traded at a higher level. The same was true for 1910-1914 to the 1929 period, an increase of 169%. The Government is currently behind the largest housing boom in our history. Government Sponsored Enterprises (GSE's) are backing mortgages which otherwise would never see the light of day. Rather than a down payment, all that is needed to qualify for one of these homes is a satisfactory record of paying rent bills. While all this sounds like a major catastrophe about to be unleashed on an already weak economy, Contrary Contrarian logic sees another possibility. A sudden surge of inflation will provide these new home owners with equity, something to mortgage further, to fund the next economic boom. More inflation, more equity, more borrowing, more spending. Why save?? The main draw back to this scenario is the effect on the values of stocks on Wall Street. Stocks do not like inflation, combined with rising interest rates, and graph comparisons for stocks vs. commodities during periods of rising inflation show these effects. (The decade of the 1970's, for example). The most recent figures we have seen indicate about 60% of households have stock holdings as a form of wealth building or savings. If inflation should begin to affect this large group of voters, the hue and cry would shake the Halls of Congress. But what if a "helping hand" were to miraculously appear to support the market. Or, stated another way, what if the Federal Reserve suddenly supplied a "put" underneath Wall Street. Commodity prices would rise in response to inflationary pressures and stocks would not collapse as would be expected. Anyone watching the gold market since 1995 can attest to the fact that such a scenario is not far fetched, but in reality is very doable as depicted in the above chart. A sudden increase in commodity prices would put money into the economy at the initial stages of production, through distribution, and on to consumption. As during the 1970's, the Federal Reserve would continue to expand the money supply by 10% or more, and fund the process by adding to the deficit. At the present minimum wage level, a tripling of the price of basic agricultural raw materials would be possible, while not approaching the parity level necessary to soundly operate a viable economy ("Short-Sellers" Nightmare, chart on page 21). The increase in commodity prices would not be permanent, however, as the financial industry would use the new-found equity in hard assets on which to base new "loans" to borrowers to resume the servitude policies. We see more behind this scenario than we have the ability to expand upon here, but in a nutshell we will leave you with these thoughts: The Federal Reserve, The Income Tax structure, and the Social Security Program were all designed to centralize Government control and power, (also read as dependency). These were all creatures of the past 90 years of American history. Today, on one hand we have a generation of Boomers ready to retire with a bankrupt Social Security/Medicare system and on the other hand, we have a large class of lower income earners who are awaiting their "piece of the pie". In the larger scheme of things we see a plan for globalization and one world government, but in order to allow for a peaceful transition to this system, there must be agreement and cooperation from the masses. Hence, the Government of "employer of last resort" and "sugar daddy of last resort". There is still much more debt that these "planners" can encourage the American consumer to absorb and personal rights/freedoms to be relinquished. Sincerely, Tom Nichols Northern Lights Research http://www.northernlightsresearch.com nichols@nemontel.net |
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