During the mid to late 1970s, gold ran up, then down, then up, then down, etc., then way up to over $800 … and then the speculators realized that gold bore a disturbing resemblance to tulips, pretty to look at, but, after that little thrill is gone … not much else was goin’ on. Of course, gold is that historically always reliable storehouse of value … except when it isn’t. Like when dire circumstances arise (a major selling point for gold It’s insurance, man! Against the collapse of civilization.) and you want to lug your fortune to some safe haven in the Alps. Oof! The sound you’ll make when trying to lift, say, 1000 ounces of the metal, if the dire is so dire that there’s no gas to be had no matter how many bars you have; it is a metal and, consequently, very heavy. Then, it’s not such a great storehouse of value. It’s a very heavy albatross in an urgent flight to your safe haven.
There was a prescient Twilight Zone episode aired in 1961, “The Rip Van Winkle Caper”; the plot was in the “best laid plans” genus, one of writer/producer Rod Serling’s favorite means of tormenting his characters. 4 would-be gold-bar millionaires steal a train-load; in 1961, the prix fixe for an ounce of gold was $35, making the total weight of $1 mill about 1785 pounds. Back then, the millionaires’ club had a much smaller membership roll than it has now; Serling, playing on our society’s admiration for anyone having reached that millstone, used that figure to make this heist really worthwhile in the eyes of his American viewers. The getaway plan was semi-brilliant, but, as was so often the case with Serling’s men and women o’ larcenous hearts, it was best laid … fried w/wheat toast. After successfully grabbing the loot, this gang, which, if you’d been watching Serling’s work, was doomed, put themselves into suspended animation (another common Serling gimmick) for 100 years, with the expectation that they’d wake up in 2061, have the cops off the scent for decades and drive off in the vehicle stashed in the same secluded hideout cave (in forbidding Death Valley) as their suspended animation pods (there were always all-purpose pods). Comes 2061, three of them wake up as scheduled, but find that their fourth fell victim to a large rock that smashed his pod (What! The pod hatch wasn’t rock-proof!). You already know where the storyline is eventually going to go; Serling’s genius was in the nasty details of how it gets there. Then, you could’ve guessed, the getaway truck is used to kill another gang member, but goes off into a ravine, forcing the remaining two, Farwell and DeCruz, to … let’s see, manually lug their fortune to some safe haven in, well, maybe not the Alps. Of course, both die trying, but the … wait for it … classic Serling twist was that the last man gasping flags down a funny-looking car on the road (Serling’s special FX were, uh, primitive), offering the man in the car a gold bar for a drink, as he keels over in a death slump; the man in the car turns to his companion and delivers the eulogy for this best-laid plan, remarking on how strange that the poor dead slob thought that gold was worth something. After making a steady ascent to over $1200, gold has recently had what’s called a “pullback” which would be, as investment advisers always say, expected after climbing so high. Normally, there’s an inertia to anything that has a market value, with a daily quote, going up in price, frequently referred to in psychological terms as “climbing a wall of worry”, the vast majority of investors, even speculators, being essentially chicken-shit. This ain’t normal; it’s not even, as some economic prognosticators describe it, a “new normal.” In the last great run-up in gold prices, there was a lot of inflationary pressure and not just the easy-money kind of pressure; there was also the giant bubble-blowing machine called the S&L crisis, caused by the artificial inflation of real estate prices via the fraudulent practice of “flipping” which entailed building a condo project, utilizing money obtained from relaxed lending practices. Relaxed? Non-existent. Sound familiar? The developer, more often than not linked to the mob (hence non-existent lending requirements), then sold the project’s units (almost always over-subscribed because they were able to sell them at below market prices because of the favorable terms on the project’s funding and because cohorts of the developer could obtain financing though they were at zero in the way of actual credit-worthiness). That’s when the circus act, flipping, began; in a “hot” market, like, say, Florida, the units would then be sold to buyers eager to cash in and, within a short period of time, would be resold at a handsome profit … and then resold at a handsome profit … and then resold at a handsome profit, etc., ad nauseam. Like musical chairs, when the music stops and there’s only one flip left, last one standing loses. The expansion of “money” flying around in the real estate market was easily in the multi-trillions, which was then parlayed into other ventures, like Iran-contra, e.g., drugs and guns. In the current economic circumstances, there is no such inflationary pressure. With the collapse of the derivatives market, the inflationary forces have been popped with a bullet, check that, a hail of bullets. There’s never been a previous bubble like the multi-multi-quadrillion-dollar (yes, Virginia, that’s as much as 18 digits, depending on the crazy intraminute, nanosec-to-nanosec, computer-to-computer-within-
The Obama stimulus, cut down by the Rs, wasn’t nearly big enough to allow for a more robust releveraging of the economy (see July 1 message re mortgage rates). Nobel-Prize-winning economist Paul Krugman has said the same thing. I defer to him. He also warned that the deflation would persist without a greater governmental stimulus from the stimulator of last resort. My deflation prediction went back to 2007, so Krugman can defer to me. The governmental stimulus, after the collapse of the derivatives market (which was intentional), would and, as far as it went, did act like one of those huge balloons that firefighters use to enable citizens trapped in upper floors of burning buildings to jump onto the balloon, which breaks what would otherwise be a fatal Humpty-style splat on the pavement. We’re seriously risking a reverse rebound on the underinflated balloon - reverse-rebound Humpty splat, the penalty for a lack of resolve in reflating.
In an analysis by Simon Derrick, head of currency research at Bank of New York Mellon, the decline in the price of gold has been, in part, due to “the threat of rising deflationary pressures” rather than as part of expectations that the euro was getting healthier. According to Derrick, the price of oil was beginning to act in a manner similar to gold and, since gold and oil tend to rise and fall for similar reasons, this also pointed to poorly performing economies. Translation: Deflation, although Derrick seems reticent to admit the bleedin’ obvious, that we’re in a global deflationary spiral.
James Bullard, president of the Federal Reserve Bank of St. Louis and also a voting member of the Fed's main policy-setting committee, recently proposed that the Fed should be prepared to buy Treasury debt to put some liquidity into the economy if the US begins to spiral back down due to deflationary pressures. Bullard, an inflation hawk (obsessively fears inflation), expressed concern that the US could face an extended deflationary sequence of events, suggesting Japan as the model. In the 1990s, Japan’s central bank zigged when it should have zagged with respect to economic policies which exacerbated a poorly performing situation, resulting in a recession from which Japan is still suffering.
What Bullard, as an inflation hawk, fails to get is that, as Derrick partially recognizes, we’ve already got both feet stuck in a Japanese-style deflation; by both feet, I mean we’re already in by a couple of years. Right under his nose (i.e., he’s been sitting in the room every time these votes were taken) is the now 18-months-long fed funds rate of ZERO percent which has led to what is widely acknowledged as a weak recovery. If there’s no inflation after the last 18 months of ZERO percent what blunt instrument applied to his thick skull can knock some sense into it?
At Deutsche Bank, economists fear inflation because that’s what Germans do, fear inflation, like a child curls into a fetal position to fend off the under-the-bed boogeymen. Their now-nearly-a-century-ago bout with hyper-inflation is fondly remembered with hysterical responses to fairly benign upticks in the rate of inflation in the fatherland. The climactic hyperinflationary pop! of 1923 having been made the sacrificial goat for the emergence of Adolf, et al., and the subsequent political purge of anything with the Fuehrer’s stamp of approval (see, e.g., the X-out of Wagnerian music), grown-up Germans worship the sanctity of the deutschemark more than the Holy Mother of God. So, when Deutsche Bank econo-prognosticators warn, as they are this week, that now is not the time to start tightening the money supply, maybe later when things look more upbeat, take that as a sure sign that we are in deep deflationary shit.
Joachim Fels, chief global fixed income economist at Morgan Stanley, NYC, is as schizophrenic as the rest of ‘em. With Chicken Little, the sky’s always falling; with these German (Joachim’s originally from Germany) economists, the sky’s always falling … up. No surprise, then, that Joachim cries boogeymen are on the loose … with enough loose money to scare the bejesus out of his solid German genetic predisposition to see inflation ghosts everywhere. He says this in the same breath as “real global interest rates remain negative”, that is, the rate of inflation is negative and that a ZERO fed funds rate is actually too much, that the interest rates charged by the Fed should be negative. Of course, Bernanke can’t do that. All the computers on Earth processing some kind of fed funds interest rate calculation would have a simultaneous crash like the one that was supposed to happen in the infamous Global 2000 non-event. And, of course, he couldn’t do that and cause all the financial markets to crash as well. But, of course, 10-year Treasuries are being bid up to more than their face value at about $105 for $100 face value, i.e., negative interest rates compared to the rate at issuance.
Hey, you ideological conservative business types, always looking to bash Obama and always bleating about “the free market, the free market, let the free market take care of the Great Recession!”, guess what? The free market is saying, Derrick/Bullard/the-anonymous-