Gold and Guillotines

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Not much happened in yesterday’s markets. Of course, not much has happened for a long time. This leaves most people thinking that not much will ever happen. The Dow will be over 10,000 forever. The dollar seems stable at 1.18 versus the euro. And why would you ever have to pay more than 6% for a mortgage loan?

But two things happened yesterday that might be significant. First, oil seemed to end its correction with a move back towards $60 a barrel. Second, the price of gold went up again to over $512 per ounce (Feb. contracts).

These things are significant because in the happy picture of America’s finances and the world economy, they shouldn’t be there. It would be like a man with a turban on his head saying Mass at Notre Dame, or a sour smell from a bowl of yogurt. Something is rotten, they tell us.

The accepted view of America’s economic situation is that it is enjoying strong growth that — thanks to its dynamic economy and enlightened central bank — is not merely sustainable, but eternal. People expect GDP growth of 2% to 5% annually…with inflation between 2% and 3%, and property prices rising somewhat faster.

Gold points an old, gnarled finger at this pleasant scene and mutters, “It ain’t necessarily so.”

Oil, too, seems unwilling to go along with the Fed’s gag. When the price seemed to peak out a month or so ago, economists breathed a sign of relief. “At last,” they said, “the crisis is over. Oil will go back down to where it is supposed to be: under $50 a barrel.” But yesterday, it looked more like the correction was over. Instead of continuing to go down, oil turned around and headed back up. “It ain’t necessarily so,” says oil.

Of course, if you look carefully you will see a lot of other things saying the same thing.

The Bush Administration is puzzled as to why it doesn’t get more credit for such a healthy economy, writes Paul Krugman in the New York Times. You already know why it doesn’t, dear reader: the economy’s health is largely a statistical illusion.

“The president made an appearance in the Rose Garden,” explains Krugman, “to hail the latest jobs report, yet a gain of 215,000 jobs would have been considered nothing special — in fact, a bit subpar — during the Clinton years. And because the average workweek shrank a bit, the total number of hours worked actually fell last month.”

“Back in August the Census bureau released family income data for 2004,” he continues, “It should have been a good year…the economy grew at 4.2 percent, its best performance since 1999. Yet most families actually lost economic ground. Real median household income — the income of households in the middle of the income distribution, adjusted for inflation — fell for the fifth year in a row. And on key source of economic insecurity got worse, as the number of Americans without health insurance continued to rise.”

“Never mind the GDP numbers,” Krugman concludes. “Most people are falling behind.”

The numbers are not in for 2005, but we are sure they will show the same thing: for the sixth year in a row, real median household incomes are going down.

And yet, the economy is supposed to be healthy, dynamic and growing.

It ain’t necessarily so, is it?

• All assets — except stocks — seem to be rising, especially at the top end. Christies reports that art prices have hit new records, after rising as much as 40% over the last year. Diamonds are also soaring in price — particularly big ones…mansions, too.

We have no data on this, but our guess is that while inventories of “McMansions” are backing up, the real mansions are selling quite well. The difference is that the McMansions are bought with debt. Real mansions are bought without mortgages. Bonuses on Wall Street, and in London’s “City,” are huge. Everyone who works in finance or the shelter trades is making money. A friend here in London tells us that he was staggered when he went to put a new kitchen in his country house:

“Well, one thing led to another. We have to fix up an apartment over the garage so we’d have somewhere to stay while they were redoing the kitchen. And then, when we got into it we decided to update the plumbing…and why not do this and that. But in the end, the new kitchen is costing me about $400,000!”

Now the plumber has more money, and the people who put in granite countertops, and the builders. All over town, the money oozes out. GDP rises. Everyone is richer, right?

Well, our friend has a nice kitchen, but he has $400,000 less in savings. The money has been converted into a consumer item: a better kitchen. And then consumed by plumbers, masons, electricians and so forth.

Is this how people get rich? Nope.

• And now for something really interesting. We have always wondered what happens when you get your head cut off. Do you black out immediately? Or, do you have some brief time to reflect on life without a body? Do you have time to curse the executioner? Thankfully, the Daily Mail provides answers:

“Generally…it appears to take around 30 seconds to lose consciousness after decapitation. We know this from the French Revolution and the liberal use of the guillotine. The condemned were asked to blink if they were still alert after their heads have been removed from their body. Records show that it took between 20 and 30 seconds for the heads to stop blinking.”

Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and Empire of Debt: The Rise Of An Epic Financial Crisis.

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