Got Gold? The Daily Reckoning
Bill Bonner
London, England
Monday, January 9, 2006 --------------------- - The only way to keep up with the Joneses: keep on borrowing…don't judge a book by its cover…
- An economy on thin ice…gold hits a price not seen since March of 1981…
- Driving on the wrong side of the road…observing the natives in their natural habitat…and more!
--------------------- "Do you really think the end is nigh?" We were on the phone with an Irish radio station this morning. We explained our thoughts: "You can never know when important trends will turn around, but there is reason to worry that both the U.S. Empire and the U.S. economy are peaking out. When the numbers are finally tallied, we think they'll show a decline in real incomes for Americans in 2005 - coincident with a negative savings rate. We haven't seen anything like this since the Great Depression. In the depression, it was obvious why people were drawing down their savings: they needed the money to eat. A quarter of the workforce was out of a job. "But why would the savings rate go negative in 2005, when the U.S. economy is said to be expanding and everyone is supposed to be getting rich? I'll tell you why. [Remember we were on the radio; a certain amount of glib bluster is de rigueur] It's because the whole thing is a fraud. Only the rich are getting richer [we thought this populist demagoguery might have a certain appeal during drive-time]. "At the middle and lower ends of the economic food chain, people are having a hard time making ends meet. The only way they can keep up with the Joneses is by borrowing. In 2005, about $200 billion was "taken out" of house-price equity. But it looks as though these marginal borrowers are going to be squeezed from several directions in 2006. Interest rates are rising. Lenders are being forced to increase minimum payments and stiffen credit policies. Energy costs are twice what they were a year ago. And the hottest housing markets seem to be cooling off." Also on the line was the station's pet economist from a university in Dublin. He offered listeners a rebuttal: "Yes, Americans have borrowed too much. But the United States has a huge, rich, dynamic economy with many assets overseas, etc. Besides, some nations operate with a negative balance of trade for many years. And people have been predicting an imperial over-stretch for a long time. Not a very original idea. We haven't read Mr. Bonner's book, but…" We tried to follow his point or his logic, but we couldn't keep up with it. As near as we could tell, he hadn't read our book, but he was sure he wouldn't like it. "What do you have to say to that, Mr. Bonner?" asked the show's host. What could we say, dear reader? For a long moment, we couldn't think of a single sentence that didn't have a four-letter word in it. But we doubted that that was the sort of honest response the station wanted. So, we gave more figures…more talk of trade deficits and other economic mumbo-jumbo. We were just about to explain the difference between productive debt and debt used for consumption, but our time was up. It was on to something more important - the sports coverage! The banking industry has done a great thing, says another smug economist from the American Banking Association. By encouraging people to borrow against their houses it has helped people "free up illiquid assets." In 2005, they helped people "free up" $200 billion worth of illiquid assets. Surely, they should get a Nobel Peace Prize for that! Imagine all those poor people who have been liberated from their own houses. Last year, they owned a roof over their heads, or "illiquid asset." Now, they own last year's hit CDs and have fond memories of last year's vacations in Las Vegas. Of course, they now have a deeper, more meaningful relationship with a lending institution, too. As recently as the first Reagan administration, America's personal savings rate was nearly 10%. By the first Bush administration it had fallen closer to 5%.In the second Bush administration, the rate has gone negative…to minus 0.20% in November. Over the last five years, debt levels in America grew twice as fast as incomes. Now, "savings have practically disappeared," says Paul Volcker. We have, "an economy on thin ice," says the former Fed chairman. "On thin ice," is a metaphor suitable to the season and the situation. It does not tell us if the nights will grow colder or warmer. It does not tell us when the ice will crack. The end may or may not be nigh, but readers are reminded to be careful. More news from our currency counselor… -------------- Chuck Butler, reporting from the EverBank trading desk: "The forecast was for 200,000, and the actual was 108,000. Really, as I've asked over and over again through the years, does it really matter how many jobs are created when we don't know what types of jobs they are?" For the rest of this story, and for insights into the world currency markets, see today's issue of The Daily Pfennig -------------- Bill Bonner, back in London with more miscellany… *** Wow! Look at the gold price. Instead of falling back in a correction, it has soared to a new high - over $541, a price not seen since March of 1981. Back then, of course, gold was on the way down, after hitting a high of $830 a year earlier. Now, gold is on the way up. Will we get no further opportunity to get in below $500? We don't know. *** Gold is rising against all currencies, but it is rising against the dollar slightly more than against the euro. It looks as though the dollar's rally may be over. This may not be the first time we've said this and it may not be the last, but our hunch is that 2006 will not be a good year for the dollar. The Fed is unlikely to continue raising rates. Consumers are under pressure. And China just announced that it would lighten up on its dollar holdings. Sell the dollar, dear reader. And buy what? Ah…gold, what else? [Ed. Note: Another great thing about the yellow metal: it's the only commodity that restricts fiscal irresponsibility…something we explain in our latest tome, Empire of Debt. The book has been on the NY Times business bestseller list for two months now - and you can get your own copy be clicking below: Empire of Debt: The Rise of an Epic Financial Crisis *** Yesterday, we got into the family car and drove out in the pouring rain to Tweseldown Raceway. It was the first time we had driven in Britain in many years. We had to remind ourselves to stay on the left-hand side of the road. It is easy to do as long as you are on a divided highway or following another car. But when you have no car ahead to guide you, and when you have to react quickly, the results can be unpleasant. Your instincts work against you; you will want to drive directly into the path of an on-coming car. On a roundabout, for example, you are likely to head off in a counter-clockwise direction, while everyone else goes at it in the other way.Fortunately, we still have our French license tags, so the British raise their fists and curse the "damned French" on their roadways. We reply with a Gallic shrug. When we finally got to our destination, about an hour outside London, we felt that we were at last seeing the real English in their native element. London is full of jumped-up parvenus and foreigners. Here in the country was the real thing - the mad English. It was raining so hard the roads were flooded. Any sane group of people would have canceled a steeplechase race, but the English fans stood their ground like Wellington at Waterloo - drenched head to foot, teeth chattering and up to their knees in mud. "What are we doing here?" Henry wanted to know. "I know; this is horrible," his mother replied. " But pretend we are naturalists or ethnologists. We've come to a strange island. Now, we're watching the natives perform a strange ritual. They're going to stand in the cold winter rain and watch horses run around in a circle." "What is the point? Just because they are crazy doesn't mean we have to be crazy," Henry continued, water dripping from his nose. "Yeah, this has got to be the dumbest thing we've ever done," added Edward. "Well, just make the most of it. We'll watch one race and then we'll go." We mucked up to the top of a hill so we could see. But even there we could only make out the beginning stretch and the home stretch. The rest of the racecourse, with its many hedges and water obstacles, was lost in fog, rain, and distance. "They're off," said the announcer. We could see that for ourselves. The horses proceeded cautiously on the muddy track. Then, they were out of sight. We stood in the rain, listening to the commentary. "They are making their way around the south course. Lazy Shuffle is in the lead by two lengths. They are approaching the water obstacles. "Oh no! A nasty fall…now another. The ground is just so wet and waterlogged. Oh my, we have a complete wipeout at the fourth jump. Let's see who's left. Well, it's My Opinion in the lead…actually Lazy Shuffle is still in the lead, but there is no jockey on the horse." When the horses finally came back into view, the field of riders had been greatly reduced. My Opinion won easy. Half the other riders had been unhorsed on the fourth jump. Eventually, all of them came back to the starting line, soaking wet and covered in mud. "Well, the old tea pot is going to get a workout this afternoon," said a nearby English fan as he deserted the field. --- Advertisement --- ---------------------
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