You Have To Admire Ben Bernanke
by Bill Bonner
by Bill Bonner
At last, at the head of the U.S. central bank is a man with the courage of his misconceptions. You have to admire Ben Bernanke. This week, he is scheduled to face down the entire global central-banking confrerie with the preposterous claim that U.S. deficits not only don't matter — they're actually good for the global economy.
Only an economics professor or a presidential candidate could fall for such a line; a man must be thoroughly trained in deception to deceive himself so completely. The rest of the world knows at once that it is at best a conceit and at worst, a scam.
How nice, after all, to think that there is a bank that needs to lend more than you need to borrow. It is like finding a pub that desperately needs you to run up a tab and never needs you to pay it back.
But still there are millions of Americans who would like to believe in their hearts what they know with their heads can't possibly be true.
Today's International Herald Tribune tells us that the dollar fell because traders were worried about a bigger-than-expected current account deficit. The deficit is, roughly, a measure of how much more the nation spends than it earns. And the dollar is, roughly, a measure of how much confidence investors have in the nation that issues it. Thus, the higher the deficit, ceteris paribus, the lower the price of the national currency.
But the International Herald Tribune is making a mountain out of a molehill. To our eyes, the dollar barely budged yesterday. Stocks moved not at all, and bonds ended the day not too far from where they began. Yesterday, like the day before it and the day before it and almost all the days before them stretching back several years, the markets remained as dull and lifeless as a bureaucrat's corpse. History — at least financial history — seems to have ticked to a stop.
The only thing that showed a pulse was gold, which leapt $6.20, to $547. As you know, dear reader, we have been waiting for a while now for the price of gold to correct. And, it has come down — to $540. But there, it is as if it has reached the limits of a bungee cord: it bounces right back.
History has been running down, at least in the financial markets, for several years now. There has not been much to say — and what there is, has been dull. The Dow is no higher today that it was near the end of the last decade. Bonds? The dollar? Someone should hold a mirror up to their noses, too, just to see if they're still alive.
By contrast, gold seems not only alive, but to have ants in its pants. The price has gained more than 100% under George W. Bush alone. Oh, what could it be trying to tell us?
Who will listen? Not the Bush administration. The New Conservatives who have George W's ear (and maybe his brain, too) think they have entered a new era — a post-historical age. The triumph of American democratic capitalism and the U.S. Empire are final and irreversible, they think. All they have to do is send in the troops, and soon the people will be voting! Then, of course, it will be clear sailing and right thinking, since everybody knows that democracies evolve peacefully — always getting better and better, forever and ever, amen. The Bush government is the first one to really believe in the passing of history.
But, history never really stops — as we discovered in Iraq. And, gold never goes away. Gold is reactionary. It reacts to history like an oyster to lemon juice. The more history there is, the more it squirms. Wars, depressions, social upheavals, and breakdowns — the stronger history comes on, the more people want gold for protection from it. This demand sends the price of gold higher and higher. Of course, we don't know that for a fact; we've never really studied it. We just take it as a matter of intuition. When the works of man come a cropper, the works of nature become more valuable.
Meanwhile, Ben Bernanke will have to defend his own works at the G10 conference. He will also have to defend the works of his predecessor Alan Greenspan, and those of his boss, George W. Bush, too. Bernanke will argue that the U.S. federal deficit, which contributes mightily to the nation's lack of savings, is a necessary feature of the post-historical age. He must validate that it helps America bring sunshine and light to the rest of the world. He will argue that the U.S. trade deficit is nothing to worry about, but is a virtue, providing work for hundreds of thousands, maybe millions, of cheap foreigners. He will argue that the United States does the world a favor for which it should be grateful, absorbing and redeploying the "surplus" savings of all its penny pinchers. He will argue that the deficits represent a tiny fraction of America's vast wealth. On this point, he might even cite the world's foremost investor, Warren Buffett, who has pointed out that at the current rate, the United States gives up one percent of its net worth every year. But, what's the worry, Ben Bernanke might say, at that rate we won't go bust for another 99 years!
While this may be true in a theoretical way, his accusers could well pull out this passage from our friend John Mauldin...and rub his nose in it:
"The median family has about $3,800 in the bank, does not have a retirement account, has a home worth $160,000 with a mortgage of $95,000. No mutual funds, stocks or bonds populate their investment portfolios. They make (jointly) $43,000 and struggle to pay off their $2,200 in credit card debt. That means 50% of Americans are in worse shape than the above. It is not a pretty picture.
"As I noted last week, '...we find that 67% of the people aged 50—64 saved less than $10,000 last year. Over 40% saved less than $1,000!!!' No wonder that most people expect to work after age 65."
What Mr. Bernanke will argue is that this is a new era. While history would normally punish such spendthrifts, Bernanke will say it doesn't work like that any more. History has stopped short, never to go again. Now, we can get away with errors, conceits, and delusions that would have sunk any other nation many years ago.
But while it could take a century to squeeze every last cent out of the United States of America, millions of American families are already down to the pulp. They could go broke this year...or next. When they stop buying, down goes the entire U.S. consumer economy, and up comes history and that history-loving metal, gold.
• Should you buy gold now? Yes...and no. You should buy it if you want to. Now, how's that for solid advice, dear reader? Surely, it is worth what you paid for it, is it not?
We are still waiting for a correction to the $500 level, but so far, gold has been unwilling to consider it. Does this mean the correction will never come? We don't know.
If we're right about the macro trends — the resurgence of history, for example — $550 gold will seem like a great bargain a few years from now. Of course, $500 gold would be an even bigger bargain.
The problem is, we are waiting in a bull market — one that could run up to $600 at any time. All it would take is a historic shock: terrorism, oil cutoff, war, plague, crash, a dollar collapse, a blow-up in the Chinese economy...or nothing at all. Many are the possibilities. History is bound to reassert herself sooner or later. When she does, options prices will erupt, stocks will crash, housing will collapse, and we will wish we had bought more gold.
• "Repeat after me: 'I am the CEO of my life. My financial independence is my responsibility.'"
The French press loves to highlight America's obsession with money-grubbing. The quote above comes to us from the leftist newspaper, Liberation. It describes a new phenomenon: camps for children intended to teach the squirts how to handle money.
"A Saturday afternoon in a municipal auditorium in Santa Barbara, CA, about 40 children and parents have joined a strange sect. Under balloons, green like dollars, their guru, Elizabeth Donati, a slender blonde, waves a dollar bill in front of the kids, aged between 8 and 16: 'You see this dollar? It doesn't come with instructions written on the back, she explains, putting on a sad face. "It's too bad, but you don't get information on how to use money before you spend it. So, welcome to Money Camp.'"
What do the little bambinos learn at Money Camp? The gist of Madame Donati's teaching seems solid to us. She encourages saving, but the purpose of saving, she says, is not to prepare yourself for a rainy day. It never rains in California; everyone knows that. No, the purpose is for you to position yourself as a capitalist. This must be what sticks in Liberation's crawl: "I make my money work so I don't have to," it quotes Donati, "Investing is cool."
We feel a rare sympathy with Liberation and for Ms. Donati, too. The woman's counsel is far above the financial education that most American children receive, which tends to be instruction in either fraud or outright larceny. Many parents' idea of financial training is showing the boys how to rob a liquor store without getting caught. Others are content with exaggerating their losses on insurance forms. To her credit, Ms. Donati sticks to self-delusion.
Alas, the poor youths are going to be disappointed. Investing is rarely cool. And when it is cool, that is precisely the time to stay away. When people begin to think that they can make their money work in place of themselves, or when investing makes them feel hip and fashionable, it is time to take your money out of investments and put it in anti-investments: cash or gold. When the kids learn that investing is risky — or better yet, a losing proposition — then it is safe to go back into the investment markets.
March 15, 2006
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.
Copyright © 2006 Bill Bonner