Stockhouse has a great piece this morning, Don’t fear a normal gold correction, except that is exactly wrong. Gold doesn’t “correct”. Gold is real money with intrinsic value that has been of great worth for thousands of years. The dollar is a fiat currency with only symbolic value and it is constantly going down in value against real goods like precious metals, oil and food. So if anything, the United States dollar, like all fiat currencies, to the degree that anyone accepts them in exchange for real goods and services, is technically in bubble territory. Here, we see in the inverse Kitco chart, that this morning, the dollar is correcting against gold. This correction will continue with a high degree of volatility (meaning that it won’t be a straight line down), until the US dollar is worth nothing and people will stop attempting to determine the value of gold and other real things in dollar terms.
I like Randall Hoven, normally. But this article at the American Thinker really pissed me off (Why doesn’t the world imitate the US):
We all know that the U.S. has been defending Europe and the “free world” since World War II. But the U.S. spends just 4.06% of its GDP on defense, according to the CIA World Factbook. France spends 2.6%, and the U.K. spends 2.7%. That 1.5%-of-GDP gap is not significant in explaining the differences in wealth.
Take Canada, which spends only 1.1% of its GDP on defense and is one of the wealthier large countries. It is 83.9% as wealthy as the U.S. If you net out what we both spend on defense, it is still only 86.5% as wealthy as the U.S. Defense spending does not explain the large differences in wealth between the U.S. and most of the world.
So, yes, the free world freeloads off us for defense. But that’s a minor part of its total freeloading portfolio.
Mr. Hoven, have you considered the impact of the United States ability to export its currency into this question of foreigners “free-loading”? Consider this is an extremely offensive manner to describe the post-WWII alliances that the US has with the world, where some countries were literally forced to cede their right to provide their own security and to accept US military bases in their countries–so yes, the US provides security for the world. But the rest of the world agrees to accept worthless US dollars (worthless since Nixon took the US dollar off the gold standard). Who’s freeloading off of whom? We foreigners, because you provide security for us, or you yanks, because you can buy our goods in exchange for essentially worthless currency that your Fed Chair conjures out of the thin air of Federal debt-balance sheet?
Americans are free-loading off the rest of the world too. Just remember that when you drive your foreign-made car and you put Canadian gas in it, and you go to Walmart to buy goods made in China that you can buy these things because you are able to export worthless currency that required you next to nothing to create, while the exporters offer you real things made out of real raw materials. This trade of free goods for security may not last much longer. Enjoy it while you can.
An article by Bruce Johnson at the American Thinker, “Are All Securities Created Equal?, questions whether the bundling of securities and derivatives is really “capitalism”. His contention is that bundled derivative products are too many steps removed from where wealth creation takes place and critics should not blame “capitalism” for what happens.
I responsed with the following comment:
An honest market where derivatives are sold is good for capitalism, because it creates a bridge between those who have capital (savers and investors) and those who need it (businesses). Stocks are derivatives: they are certificates of paper that represents parts of companies. I sell stock options. These are derivatives of stocks whose trade is based on an underlying stock position. Options provide an opportunity for market participants to reduce their risk–by selling positions, I take on the risk of others at a premium.
The problem with the mortgage CDOs is that they were packaged liar-loans that the lenders who made them knew the borrowers could never pay back, and so they bundled them and sold them in order to avoid their own bankruptcy. This is a sign of systemic corruption in the US mortgage industry: banks, brokers, borrowers, and bureaucracies are all corrupt.
The current United States form of capitalism is on its last legs, as the Federal Reserve kicks the can down the road of the greatest derivative fraud of all time: the US dollar. It used to be a derivative of gold, then it became a derivative of the “full faith and credit of the United States”. Since that isn’t worth bucket of warm spit anymore, the dollar itself is a fraud.
I have a saying every time one of my many purchases from China stops working: The Chinese pretend to give us products that work, and we pretend to give them money that’s worth something.
A year ago I mentioned that my in-laws were in India November and unlike previous trips, the U.S. Dollar was no longer accepted by vendors. About a year ago, my next door neighbor was in his home country of Burkina Faso. In previous years, the premium for exchanging US dollars for CFA (the Franc of French Africa) was reasonable. But when he was there last summer they started with 16% premium and negotiated from there.
Jim Rogers is right–the US has already lost its AAA credit status. When vendors and money changers overseas have rejected the reserve currency status of the dollar, small players, then the rest of the world will not be far behind. My utter rejection of dollar began in January 2009, as documented here.
I lamented in May 2010 that the US federal budget deficit was $83 billion, or about $8.90 per person per day. Now the Washington Times (hat tip: the American Thinker) reports that the US government has posted its largest monthly deficit in history, $223 billion in February. Now that means that the US government borrowed nearly $26 per person per day. Clearly, the fundamentals that have caused the US dollar to depreciate against commodities is getting much worse not better: the US government is borrowing three times as much money as what it was only 10 months ago. This is proof that the debt death spiral is a reality in our times.
Now here is what has been happening: (1) the US government borrows money but doesn’t find sufficient lenders whether domestic or foreign, so the Federal Reserve bank lends to them the remaining shortfall. This is called quantitative easing because the money is created out of nothing. But that is not the end of QE: for Bernanke is also buying old debt as it turns over and finds no new borrowers (see “Hyperinflation when?“). QE greatly increases the amount of greenbacks that are in the money base: view (chart below) and be afraid and weep. (2) Next, commodities go up in price because too many dollars are chasing too few goods–food riots start happening in poorer countries. (3) Then, consumer prices go up. (4) Lastly, workers will get cost of living adjustments if indeed their employer can pay them at all. In any case, the last thing to adjust to this whole mess is people’s take home pay. But unfortunately, the adjustments will be too little too late because the next round of QE has already taken place and the spiral of hyperinflation has reached the next stage even before they receive their next pay cheque.
The newly elected Republican Congress? They swept into power with Tea Party momentum. But they can’t or rather they won’t fix anything. Their puny little efforts to reduce the deficit are a joke.
My investment approach remains steady (current portfolio is up 88% above book) :
Short: US dollar
Long: Canadian oil & gas; Canadian gold mining; physical gold and silver (via Sprott Physical Gold Trust, Sprott Physical Silver Trust)
Finally, in my opinion, those who are telling people it is a great time to exchange your loonies for greenbacks and to go long on US stocks are really not doing their readers a favor; they seem ignorant of the fundamentals. Yet even Warren Buffet’s famous and flippant advice about gold is little better. What, pray-tell, Mr. Buffet, do you suggest to the American people regarding how they might protect themselves from this robbery? Remember these words of Alan Greenspan (hat tip: Monty Pelerin):
The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. Deficit spending is simply a scheme for the confiscation of wealth.
… the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold.