GET
YOUR FACTS STRAIGHT
by Castrese
Tipaldi
January 27, 2005
1982
was not the start of the greatest bull market ever seen in human life.
In 1982 the markets just realized that a monetary system completely fiat would have survived, on a global scale for the first time, after a decade full of doubts about this surviving. So they acted consequently. They adjusted for the new monetary unit, and its corollary: a never-ending debasement!
Therefore, what you see every day looking at your charts is something virtual, a sort of plastic surgery on the reality. If you want to know with a fair approximation what the real story is, take a look at the first two charts below. They are the charts of Dow Jones and S&P 500 since 1959, adjusted for the increase in M2. They have been elaborated by Enrico M. Di Francia, and are based on Fed data not seasonally adjusted, because I’ve never paid my bills in a seasonally adjusted way.
Are you seeing the real story? Actually, Dow and S&P 500 today are worth less than in the 1959!
Just a few comments more, because it’s your job to get something from these charts.
It looks like we have entered another decade full of doubts about the surviving of the current monetary system, or at least, we are witnessing a general reset in the system.
The system could survive, because it’s global and because Governments have never had such a pervasive power on the choices and perceptions of the people. Even if a currency has lost 95% of its purchasing power, it can very well lose another 95% of that power in the future, and then another 95% again. The Zeno paradox here applies!
Forget any comparison with 1929! It would be devoid of any sense! In 1929 the dollar was a certain weight of gold; today it’s just a piece of colored paper with some funny writings on it.
In a fiat-money system, every economic depression will be inflationary, and every debt collapse will involve the destruction of the fiat-currency tied to that debt. There have been precise and recurring historical evidences about this!
Anyway, even if the system will survive, I’m certain it will not be any more completely US dollar-centric. At the very least, it will have to share the privilege with another currency (euro being the only suitable from a quantitative point of view). The Chinese currency could be a viable alternative too, when the Chinese decide to get a real currency (I see this still some years away in any case). Remember, I’m talking about fiat-currency here, not Money (i.e. Gold).
If the system survives, as the stock market indexes are calculated in a nominal way, those of you willing to short those markets are urged to use extreme caution, unless you can get some puts M2-adjusted. The rules of the game are set against you, as much as going long Gold and Silver at the Comex (but without the physical constraint that could destroy Comex at any moment). If the system survives, Dow at 36.000 nominal could be a conservative assumption.
The third chart below is a chart of Gold adjusted for the increase in M2.
From this chart you can draw two alternative conclusions:
-
The Powers-that-be have succeeded in eliminating the monetary component from Gold, through bad press, obscene lies and a scientific price cap.
-
They have not the power to destroy 5000 years of unconscious knowledge of every human being, and as Gold can’t be inflated at their will, and they are running out of physical, it is surging like a tremendous Nemesis against the counterfeiters.
I would opt for the second conclusion. In this case, Gold at present is the second cheapest asset class available in the world (the first being Silver, whose heavy industrial use and consumption fades somewhat its monetary component).
I wish to conclude with a hope.
After the last release of the US trade deficit, I hope that the idiocy stating a weak currency being the best thing for your trade balance will disappear AT LONG LAST!
After two years of the dollar massacre and trade deficit soaring at same time, I hope that all the simple minds stating such a foolishness will cease to annoy with us their blah, blah, blah.
It’s not that the dollar has to go down to correct the trade deficit; it’s the trade deficit putting down the dollar!
The trade balance is made from two voices: import and export. And a weak currency will make the prices of your imports go to the stars. On the other side, the price is not the only component the purchaser considers deciding what to buy; it’s just one of them. If you produce filthiness, I will not buy it, even if it is damn cheap.
But above all, you must have something to export. You must produce goods if you want to export them. It’s quite difficult to export a haircut or other fashionable services. And as US manufacturing is facing extinction, the USA produces very little suitable for export. This because the real and only cause of the US trade deficit is the obscene level of consumption in the total of GDP. It’s a vicious circle!
US producers, whether quantitatively or competitively, can’t satisfy this abnormal consumer demand, which is so diverted towards foreign products and producers. Every dollar going to a foreign producer is a dollar subtracted from an American producer, who in turn will produce even less and will employ fewer US workers, and so on.
And it does not matter if the foreign producer is a branch of an American company. American companies producing in a foreign country enrich almost totally that country, and belong to the trade balance of that country.
To balance the trade, US consumers should consume a lot less and save a lot more. It’s the only way.
Otherwise, it will be the weak dollar stopping their orgy of consumption, but in a bad way: a dollar so worthless and wages so few and so low that they can’t allow anything at all.
©
2005 Castrese Tipaldi
other editorials by Mr.
Tipaldi
Contact
Info
Castrese Tipaldi
Riga, Latvia
Email
The opinions of FSU contributors do not necessarily reflect those of Financial Sense.
