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There is news out this week about US GDP growing at 4%, and the US adding over 220,000 jobs this last month. Corporate profits are up. New unemployment claims are down as well, and at a surface level, things appear semi robust. The US is growing at about 4%, while the EU region can barely maintain 2% and is often more like 1%. US unemployment is 5% (the public statistics). In Europe, unemployment is 10% roughly. France is mired in stagnation, and one reason for this is the reluctance of the EU region to reform economically. Socialism is very alive in Europe. One of the major reasons that France voted against the EU constitution in July was the fear of continued job flight and competition with the cheaper work forces of nations in east Europe, as well as fear of continued Muslim immigration should the EU region become more open for travel within. Japan is mired in a seeming permanent battle with deflation. That is causing them to have interest rates at virtually zero. The US has interest rates from 2 to 3 % higher than Japan or Europe. This creates lots of demand for USD interest instruments, even though the yield on US long term bonds is barely above inflation….. SO the US is considered to be one of the only vibrant economies excepting Asia with good prospects. Therefore, with these latest statistics about the US economy for unemployment and GDP, things appear more or less sanguine. Sometimes it is difficult for gold bugs to make the case to others that, with economic statistics like the above, that the US is really economically in a shambles. The problem is that the weaknesses of the US economy are more or less hidden out in the open. Many people know the US has terrible trade and Federal deficits. This has been known for years. Being out in the open, these problems are regarded as not a big deal. We haven’t ever had to pay the piper yet on these issues, except perhaps for the also well known issue of lost manufacturing and technical jobs overseas. The real problem the US has is that these problems being in the open make people complacent. I have heard many times that trade deficits don’t really matter, not only by neophytes but by well known business and government officials. It will only be when a real depression happens (not a recession) that these issues will become acknowledged to be the disasters they are. So, the major issue here is that, until we get hit hard in the pants, the masses will just blithely go on partying. Remember, in the previous editions of the newsletter, I wrote about the book the 4th Turning. In that book, the thesis is that in every saeculum (80 years) there is a terminal generation that is weak, flaccid and morally corrupt. That generation has to undergo a major war or a great depression to clear their minds of their corrupt and flaccid mentality. Then a new generation that survives rebuilds the work ethic and things begin anew. The generation following the ‘roaring’ 1920s experienced both a great world depression and a world war. We are now in the 4th turning (the 4th generation after these events). We are due again for either a major war, a great depression or both. Time has run out. That book, the 4th turning explains why we are in the stagnant economic and social situation we find now in the West. The issues of debts and excesses are merely the symptoms. The real causes of our problems are due to the 4th turning we are in now. One of the problems the gold community has is that it looks 5 or more years ahead. We will write about things that are inevitably coming, and sometimes we appear to be off-base because the trends we write about are years ahead. Many times a gold writer will say we are at the precipice, not realizing that he is maybe two years ahead of what is going to happen, then since he said this or that will happen soon, it appears he is wrong. The problem is not that he is wrong, but that he is well ahead of the present, and just needs to be more accurate on his timelines. I am aware of this issue, i.e. that the trends I see are at least 6 months out. Studying gold will do that to an analyst. One of the advantages of my approach to gold and economic reporting is that I focus predominately on fundamentals. As you know, I do not make investment recommendations. I do not make stock recommendations. What I do is read hundreds of news articles and data weekly, sift it, and bring together a big picture. Then it is your turn to take action warranted, buy stocks that would fit the situation, or gold or whatever. Most analysts focus on the short term, and it shows. Sometimes they have a good pick for you, sometimes not. They spend so much time looking for the few good stocks that the fundamental analysis essential for good timing is left out. They just don’t have the time to do what I do in a consistent way. Anyway, back to the fundamental problems of the US. The problems of our economy are latent. They are building. Federal debt is a latent time bomb that will cause the US either to permit hyperinflation to get out of debt, or will constrict the Federal budget for decades which is heavily deflationary. The same goes for public debts of all kinds. Eventually some hope inflation will make those debts go away effectively. But if inflation does not appear, the latent effects of this debt shows itself when the economy cools off and then Mr. Public cannot pay to lease his possessions (that is what debt really is) and when the lease payment cannot be made he loses his possessions. Now, as long as a person has income, he can use debt to live very highly. But as soon as things turn wrong for him, instead of having paid off assets, he has to let them go back to the lessor (bank). The US started this debt paradigm in the early 1900’s. Of course people could borrow money since antiquity. But to make debt creation a society wide phenomena creates latent forces that emerge in a recession or a depression, and just extends the pain of these by a factor of 5 to 10 times. Hey, you borrow from the future, and unless you die first, you have to eventually pay it back. All these homeowners in the US are really lessees. As soon as they cannot pay the monthly payment (just like rent) they are booted out. The house is usually sold in a declining market in those times, and pretty much any equity the original homeowner had is lost. The whole housing bubble is only as good as the latest sales figures. What houses were worth last year has nothing to do with what they can be worth this year. But people still have fixed levels of debt on those houses, and should the values drop, the debts remain or else the persons are evicted. So, the US with its debt paradigm is putting off reckoning with the imbalances, even while manufacturing jobs are lost. We are literally living on borrowed time. But, try to tell your spouse that. Or your neighbor. Or your sister. Forget it. You, who know that eventually the piper has to be paid, cannot compete with all the fancy cars and homes and whatever offered by this debt based economic paradigm. Now, even if the US has some decent economic statistics, the problem is that the accumulated debts and public debts are just too much to ever be amortized. Public, Federal and corporate debts are massive. (GM owes 360 billion not to mention their under-funded pensions, and Ford another 160 billion…etc) Yes, right now the US has some decent economic statistics. But at what cost? Home mortgages outstanding doubling in about 5 years? Federal deficits adding trillions more in the last 5 years? In the last 5 years, the most significant trend in the US is continued lost competitiveness and millions of manufacturing jobs. Probably a million technical jobs as well. When I worked for Oracle in 2002, that company was moving entire engineering divisions to India. Most of the heavy technical software design (done in C code) is done in India now. So you have educated societies in Asia that are taking over technical leadership, something the US was renowned for for 100 years. We are living on borrowed time. Now, Carl Mauldin has written for years about what he called a muddle through US economy. What he says is that eventually the US will get over these imbalances and in ten years we will muddle through. I cannot agree with this hypothesis. For one thing, the golden goose of US technical superiority is being lost rapidly. That means one of the central underpinnings of US economic competitiveness is being lost. Imagine what the US would be like if we were not leading all the major technical innovations since1900! We would be a stagnant poor country. Imagine, rather, China and Asia proper taking the technical lead for the next 50 years, and having not only a manufacturing industry that can operate for 1/5th or 1/10th the cost in the US, but then becoming technical development leaders for the next decades. They will be unstoppable economic giants. We will become impoverished, with masses of disgruntled former middle classes that are unemployed and remember a better time. This is what the future holds for the US and that future is rapidly approaching. Now, if I were to look at all the accumulated debts in the US that cannot ever be repaid plus lost manufacturing and technical leadership, I cannot see a muddle through economy. The latent debts will overcome any economic growth we can muster, and eventually overwhelm it. As I said, we have some economic growth now, but at what cost? We have trillions of public, corporate and private debt that cannot ever be amortized. Right now, we are in the first stages of this latest debt frenzy, sort of like buying a new car. Later, in a few years, the newness wears off and the car is now just a tool, and has to be paid off for the remaining 5 or 6 years. People like their shiny new houses, with equity that is transient but they don’t know it. The whole US economy is subsisting on debt in general, and as I said, it cannot ever be paid off. But when you first buy that shiny new toy, it’s fun. I really think the US economy overall can be put as simply as that. Soon the US will have to deal with paying off all the debts and excesses. Where does that leave you? Well, for one thing, you are positioning yourself to be out of debt. You are following gold closely and getting an economic education. You are being informed of the economic future at least 5 years ahead of the general public. You are gaining a lot of time to prepare for a depression. You can sell assets for their highest prices right now, pay off any debts associated with them, and be ready. The other 99.9 % will just have to lose everything they own, or sell their assets in declining markets. As I said, the US homeowners are lessors, renters. As soon as they cannot make the monthly payment they are out of a house. Any equity is transient, and if the house is foreclosed, they will most likely lose that too. But that does not matter because so many are using the house as an ATM, but there is one problem now with that…. Eventually all these people have really done is just create massive debts they cannot ever repay. We are one recession away from a massive depression. Remember, in 1929, things were so similar to now it is amazing. They had a huge stock bubble. A real estate bubble too. Then the stocks collapse, real estate collapses and we get a 10 year depression. This is coming next, but as in 1929, just before the collapse everything looked rosy. Economic statistics were great. GDP was way up. 5 years later the US had 30% contraction of GDP! But in 1929, it sure did not appear that was coming. This is why I am writing now that these economic statistics now are meaningless. We have a modest economy right now that really just has been a debt creator. We do have some economic statistics like 4% growth now, but in 1929 it was the same with economic statistics! Don’t be fooled! I saw a post in an economic forum that said “Laird still believes there is a depression coming.” Well, I suppose that, because we have these latest semi robust economic statistics, that we are out of the woods? We will just grow our way out of our economic troubles? NO. We WILL have a depression because we will never be able to amortize all this debt. Period. If this latest economic growth was accompanied by solid wage growth, and good permanent employment growth in a high leverage area like manufacturing then I would be singing a different tune. But, we will not grow our way out of this one! I had one reader email me that he bought the 4th Turning and it changed his view on the future drastically. I advise all of you to go get that book.
The Prudent Squirrel newsletter is Chris Laird’s weekly macroeconomic gold newsletter. A month or so ago, I predicted the short term gold bear market is over based on the weak USD and the continuing concern in the Mid East. That has proven to be true – holding up gold in spite of weakness in the base metals…. Stop by and have a look. CONTACT
INFORMATION The opinions of FSU contributors do not necessarily reflect those of Financial Sense. |
