Recently by Bill Bonner: As Japan Goeth… SoGoeththeUS
Whoa! This is getting interesting.
Two major central banks are tightening China and the ECB.
But nobody seems to care. These central banks are warning investors to sell their high-risk investments. Instead, gold hits new records! The dollar is at a 15-month low. And oil moves up to $125 a barrel.
Either investors dont believe China and the ECB are serious or theyre counting on the USA to come through again with more money and more credit.
Speculators may be forgetting that were in a Great Correction. On the other hand, maybe it doesnt matter. If the feds keep pushing enough money into the system long enough, the correction will take a grotesque, unusual and terrible new form it will end in a hyperinflationary depression!
Gold at $1,470? You aint seen nuthin yet!
Only we, here at The Daily Reckoning, will appreciate it. It will give us something to watch something to write about. Something to laugh at. More important, well have yet another opportunity to wag our finger and say: We told you so
And who sees it coming? Just us and a few other cranks, eccentrics, outcasts and marginalized diehards
But word is getting out. You cant just add to the worlds money supply indefinitely not without consequences.
Many mainstream analysts are now looking for gold at $1,500. But watch out, they say. Just wait until QE2 ends!
They may have a point there. The major, natural tendency of this market is towards contraction. The market wants to correct. No kidding. After a half-century of credit expansion, its time to pay up to settle debts to recognize bad investments and to write off mistakes. Thats whats happening in the housing sector. Thats why about 12 million Americans dont have jobs.
But thats the way economies work. They breathe out and breathe in, says old-timer Richard Russell. Unless were wrong about it, the markets are holding their breath. Theyre waiting to see what effect all this pure oxygen coming from the Fed will have.
Why are the feds so desperate to avoid a correction? Well, thats where the story gets interesting.
Its a tale of one part vanity, one part necessity and one part cupidity.
In their vanity, the feds think they can command the economy to do as they want. Theyve invested whole careers and gotten Nobel prizes for their crackpot theories. Theyre not going to give up now; they think their central planning can succeed, even though central planning by others has been universally disastrous.
But theres more they are running what is little better than a ponzi scheme. Thats where the cupidity comes in. We were delighted to see that Christopher Caldwell, writing in The Financial Times no less, sees it as we do:
The story of the past half century is that Americans found a way to extract money from future generations and leave them with the bill. What they have been enjoying is not prosperity, but luxury.
We would put it a little differently. What they have been enjoying is not prosperity, but larceny. Theyve stolen from those who cant vote. Many of them havent even been born.
A study by the Urban Institute, for example, shows that the Medicare system pays out in benefits three times as much as it collects in revenues. This kind of thing adds debt fast. Mary Meeker calculates total unfunded liabilities of the US government at $75 trillion already.
(Estimates are all over the place depending on what assumptions you make But Meekers estimate is likely to be low )
Congressman Ryan has begun to address the inherent problems in this scheme. It will be interesting to see what happens. He seems to think that voters and politicians will come to their senses and do the right thing. We doubt it. And there was no sign of it in the deal just struck to keep the governments lights on.
Paul Krugman put his finger on the problem with democracy. He agrees, for once, with us. Writing in The New York Times, he tells us that Ryan will fail. As soon as the greedy old bast**ds figure out that they are going to lose benefits, the jig will be up:
Mr. Ryan and his colleagues can write down whatever numbers they like, but seniors vote.
Yeah, the zombies vote. Most likely they will vote themselves into an economic catastrophe.
Thats the necessity of it. If they want to keep this scheme going they have to borrow. And if they have to borrow they have to keep credit easy and cash plentiful.
Reprinted with permission from The Daily Reckoning.
Bill Bonner is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and The New Empire of Debt: The Rise Of An Epic Financial Crisis and the co-author with Lila Rajiva of Mobs, Messiahs and Markets (Wiley, 2007). Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning.