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Since 2000 I have,
like many others, been expecting that the huge imbalances
that have been
created in the financial system to result in a stock market crash ,
a currency collapse
and gold and mining stocks going to very high levels in terms
of a highly depreciated
fiat currency. While this will be the final Act of this tragedy
I have come to
realize that we are going to see a hyperinflationary period first,
because this is the
path that has been determined by the Greenspan legacy.
If the purchasing
power of currency is reasonably stable then business goes
through cycles of
expansion and contractions but overtime this is a continuous
growth trend because
the world population is growing and industrialization and
automation is still
progressing. Business would not need to be cyclical if we could
always balance
perfectly supply and demand in the economy. That is not
possible so there is
an oscillating wave superimposed on the growth trend.
After having gone
through an expansion of the 1990’s the US was due for the
prescribed
contraction. But I said this is what happens in a stable monetary
environment. What
about if the money supply is pumped up and purchasing
power declines? This
allows a “temporary” cheating of the system. Just when
demand should be
falling creating the natural and necessary recession spending
is FORCED to be
increased by monetary debasement. This artificial stimulation
of demand looks like
economic expansion, and if the stimulus is high enough it
can, at a casual
glance, look better than the real thing!
How does this work?
When consumers see that prices are rising they buy more
than they need. If,
for example, they know the price of shoes is going up they will
buy two pairs and
keep one pair in the closet for when the first pair wears out.
When they put gas in
their car they fill up the tank completely instead of just
putting in 5 gallons. Because food is going up in price they buy a second
refrigerator to be
able to buy more food at a time, this also saves money because
the price of
refrigerators is also going up so best to buy now. So because
everything they are
buying is going up in price they need to demand pay rises
from their
employers.
On the other hand,
companies realize that their wholesale prices are going up so
they buy more at a
time and build inventory because it is cheaper than what it will
be next month,
thereby increasing demand. Companies switch from holding cash
balances to holding
very little cash and high inventory. The mind-set of
companies and
consumers subtly changes. They don’t realize that they are
actually “investing”
in real things through these actions and holding less cash.
Buying becomes less
consumption driven and more “hoarding” driven but it has
an identical effect
on increasing demand. The hoarding may eventually result in
consumption such as
buying two pairs of shoes, but it may just be for the sole
purpose of buying
something that will have a higher exchange value at some
later date than it
does today. This is what precious metals investment is all about.
Investors are not
hoarding gold to eventually consume it, they are hoarding it
because it will have
a much higher exchange value in the future.
As this process
accelerates the cure is to provide less “liquidity” not more. But
the people see they
need more currency to meet their expenditure so they ask
for pay rises, they
take out loans, and companies raise their prices and borrow
more money and the
government pumps more and more “money” into the
system as the people
“demand” more money and hyper-inflation takes root.
When this happens in
“The Banana Republic” it does not last too long because
the people
eventually see an escape route is to change their currency into a
foreign currency
that is not being inflated and they refuse to spend more than
what is required for
their immediate needs so their “hoarding” is in a foreign
currency not in “real
things” and as a result the stimulation of the local economy
dries up and the
country goes into a recession requiring the money oversupply to
be reduced to end it
(this is what is happening in Zimbabwe today).
But the dollar is
the Reserve Currency of the world. Everyone around the world is
holding it. The
liquidity that the FED is pumping into the US is forcing everyone to
spend to get out of
dollars. When the Banana Republic debases its currency the
world looks on as
its population buys foreign currency and it watches the nation
implode. When the US debases the dollar every country in the world debases its
currency so as not
to be at a disadvantage!!!!! If all the currencies are losing
purchasing power
then there is only one alternative solution …SPEND IT.
(Central Banks are
referring to this as “diversifying out of dollars”!). This
“spending”
exchanges dollars for something that will have a higher exchange
value in the future
expressed in dollars.
Stock markets are
rising as stocks offer a means of escaping from holding dollars
(to some extent),
which then attracts more buying. Mergers and acquisitions are
on the rise again as
a way of spending company cash. China is buying up
resources in Africa
and Latin America.
By the process of
mutual debasement, the currency cross-rates do not reveal the
true loss in
purchasing power. The US Dollar strength gets judged by the USDX
Index which measures
the depreciating US dollar against a basket of
depreciating
currencies! The massaging of Inflation Indices can also fool the
people that
inflation is tame despite them seeing higher prices in the shops,
especially if the
focus is on a measure of “core inflation”, which deliberately
excludes the prices
of goods that are increasing the most! The canary in the coal
mine is, of course,
gold. This is why hundreds of tons of gold from central banks
must be dumped on
the market, coupled with a leveraging with futures and
derivatives and
appropriate media disinformation, to try to stop gold from blowing
the whistle.
So conventional
economic wisdom says that we should have a recession, but we
have seen that since
2000 the Fed and the US government have taken the
course of “increased
liquidity” and even the unprecedented step of making M3 a
State secret. There
is NO reason to think they are likely to now throw in the towel
and get an Austrian
Economics education.
Ian Gordon, Vice
President of Canaccord, says he has a friend who knew
Greenspan in the
1960’s and he quotes Greenspan as saying “I would love to be
Federal Reserve
Chairman when the Kondratieff Winter comes because I think I
could override it by
dropping the interest rates and printing enough money that it
would overcome all
the deflationary aspects of the economy.”
As we know Greenspan
did become the FED Chairman and he did drop interest
rates and he did
create ungodly amounts of dollars. And it would appear that the
recession of the
Kondratieff Winter has been “overridden”. But this “override”
can only be
temporary, it doesn’t cancel winter, it just delays it. In a healthy
economic expansion
demand comes from high consumption. In an artificial boom
created by inflation
and hyper-inflation consumption falls but is more than offset
by hoarding such
that composite demand increases. But this demand that is
fueled by a desire
to diversify out of a depreciating currency depends on
someone being
willing to take the other side of the trade and to accept currency
in exchange for
their goods. Initially higher and higher prices are what motivate
buyers but they also
motivate sellers because it seems that they are receiving
“more”
for their goods. The game comes to an end when no one wants to accept
the currency. The
winners are those holding the goods and the losers are those
holding the
currency.
The only way to
mitigate the catastrophe will be to return to some form of sound
money, such as gold,
as France did after the devastation caused by John Law’s
Mississippi Scheme,
and Germany did after the Weimar Republic inflated the
Reich Mark to zero.
Greenspan has
dabbled in alchemy, experimenting to see if he could turn paper
into gold, and defy
the Laws of Economics. One man had the power to use the
whole world as his
economics laboratory. In 1966 Greenspan wrote an article
called “Gold
& Economic Freedom”, in that article he said:
“If everyone
decided, for example, to convert all his bank deposits to silver or
copper or any other
good, and thereafter declined to accept checks as payment
for goods, bank
deposits would lose their purchasing power and governmentcreated
bank credit would be
worthless as a claim on goods. The financial policy
of the welfare state
requires that there be no way for the owners of wealth to
protect themselves.
This is the shabby
secret of the welfare statists’ tirades against gold. Deficit
spending is simply a
scheme for the confiscation of wealth. Gold stands in the
way of this
insidious process. It stands as a protector of property rights. If one
grasps this, one has
no difficulty in understanding the statists’ antagonism toward
the gold standard”
It has been stated
on many occasions that this paper revealed that Greenspan is
really a sound money
advocate, but the leopard changed his spots to become
the Federal Reserve
Chairman. I think a more logical interpretation is that he
knew what was the
real obstacle to him succeeding in his alchemy experiment to
frustrate the
Kondratieff Winter. In this context it is very easy to see why gold has
been manipulated.
But the gold
manipulation is failing, and the tinkering with the Kondratieff cycle is
revealing itself as
inflation that will soon transform into hyperinflation. Such is the
Greenspan Legacy.
Adrian
Douglas
Marketforceanalys.com
Adrian Douglas writes many articles
on his observations and analysis on financial markets, gold and silver
markets, and some selected company stocks. The articles were all initially
published at www.lemetropolecafe.com.
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