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The Year Ahead

Posted on January 9, 2006
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Some of my thoughts on the first quarter of 2006 can be found here: http://www.bullnotbull.com/archive/market-01092006.php

But what I’m more interested in is what is your outlook? What do you see for the year ahead? Is this rally for real? How long will it last? Will we see a new high on the Dow in 2006? Or a double top? Or has it already peaked? Political scandals in 2006? Impeachment? What about gold? Oil?

I know that most people will lean toward the bearish side, but is there anything to be optimistic about in 2006?

Looking forward to the responses.

Michael

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Comments

36 Comments so far
  1. Dan January 9, 2006 8:26 pm

    That was an interesting comment about the “Credible Threat” in your article. It made me wonder, wouldn’t the Iranian oil bourse actually be deflationary for the dollar? We all know that the dollar is created from thin air (or a printing press) So with a new oil bourse pricing oil in euros — assuming nations use euros — there would be less demand for dollars, so less would be created. This would, in effect, be a decrease in dollars right?

    So isn’t that deflation - the destruction of credit? Maybe what the Fed is trying to hide in M3 is not inflation, but in fact deflation?

    Anyone have any thoughts on that?

  2. Mark A January 9, 2006 9:18 pm

    Great to have you back Michael, we all missed this priceless resource called “Depression2TV.” I understand you have had some real trials over the past year and that you made it through them all. Maybe in a way what you have gone through is a kind of sample of what our economy is going to go through and has to go through in order to once again be healthy.
    Life ain’t no picnic, there always seems to be plenty of ants around. I think its safe to say I’m in agreement with your outlook for the year ahead. Still a lot of funny stuff going on to push that dow so high. Could it be the Chinese are buying U.S. stocks with the T-bills they hold? Maybe they will buy controling interest of our companies and hold our feet to the fire with our debt all at the same time? Gives a person pause to wonder. I see more hot spots for the military and bio-hazards in the winds like the bird flu. I see a chance for us to educate our children about our fundemental values as we re-discover them through hard economic lessons. I do not necessarily see a stronger America but I do see stronger Americans. Stronger in their convictions and values and stronger in their hope to make the country better than they found it. Stronger in character and faith as they face the economic crisis with courage and resolve.
    Wishing you blessings and peace in 2006.
    Mark A.
    Canada

  3. dan desoto January 9, 2006 9:26 pm

    Have you ever gone back to where you were growing up as a small child? I have. Everything seemed a lot smaller and, while not necessarily shabby, didn’t have the “aura” that I thought I remembered as a child. I have the feeling that looking back ten years from now, the best that can be hoped for is things will be “smaller” with a tarnished “aura”. That’s the best that can be hoped for.
    One other point. The boomers, althought they won’t turn 63 (early retirement for Social Security), may change their consumption patterns beginning this year. When you’re 50 you can convince yourself that your life is only half over. When you hit sixty there’s no way, if you’re sane, than you don’t realize the point of no return has been passed. Trust me. I know. You feel it in your bones.

  4. Ak January 9, 2006 10:33 pm

    Here are some of my thoughts for 2006:

    If (that is a big “if”) Iran starts trading Oil in Euros then there will be less demand for US dollars. This will put downward pressure onto the dollar, this may inflate US stocks and lower debt-to-GDP ratio. On the other hand, Mr. Ben will try to control this US dollar decline by raising short-term interest rates to give a rate-differential favoring the dollar. That in my opinion may not play well for the Housing market. (Although, today Wall Street upgraded the Housing sector. So, I could be wrong.)

    Now, let us say, Iran does not trade Oil in Euros (due to US or Israel Strike, EU-US pressure, etc.) then Mr. Ben has no choice but to keep printing money to inflate a way out of debt. But to balance this insane printing, rates have to just go up enough so that there is no dollar-crash.

    So, in both cases I see rates going up. Why is the market predicting a rate-cut ? Time will tell….

  5. richard January 10, 2006 4:40 am

    to be sure the 2nd year with some spillage into the first half of the 3rd year of the prez cycle is well known, at least since 1945, to be the locus of virtually stock market bottoms and economic recession bottoms.

    for those of you who do not fall for the random wall street walk fairytale and think timing is possible i draw your attention to the most likely period of maximum despair for the coming event.

    the area late february into early march 2007 is the most likely moment to contain a major stock market bottom. expect nasty belching and rumblings before this time moment.

  6. Don Heinrich January 10, 2006 5:31 am

    I also onsidered that the Fed was bluffing. The Fed is the worst thing that ever happened to this country. Also knowing the Fed is made up of keynesian socialist economists I have also considered that crashing the dollar would allow them to pay off the deficits and set the stage for their biggest step which is a one-world government and a global fiat currency. Think waht power the Fed would obtain if it trasferred its personel to a one-world government and used a global fiat currency to enslave the world though debasement and debt. This I thnk is their ultimate goal.

  7. CK January 10, 2006 5:33 am

    Hello Michael Nystrom,

    Your arguments all seem very credible but I’m inclined to think the recent rise is more related to manipulation than anything else - e.g. the PPT could be pumping up the market to coincide with the Administration’s latest Hoopla over how well the economy is doing. As for gold’s increase, the folks at GATA seem to have that one nailed which is more of a function of limited C Bank dumping (they are running out) to surpress prices. (?)

    At some point reality has to set in and that some point could very well be just about now. Like with the New Orleans gamble that a Cat V would never hit and we don’t need to protect the city accordingly - but the hurricane did hit and when it did, the consequences were catastrophic. Seems like we are running our financial house the same way.

    Perhaps you give Bernanke and the Fed too much credit. My guess is we will end up being slaves to those with the US dollars and they will make the calls behind the scenes - the Fed just doesn’t have any more powder to do much. But then again who knows. The fiat system is coming to a close. Think of describing it to someone who hypothetically was setting up a system of international finance and money for a new planet. It is truly amazing that somehow it all still seems to hold together.

    The markets have been so divorced from reality for so long so who knows, but my guess is a big correction is around the corner - but I would never short anymore with all the manipulation going on.

    Enjoyed your article. Good concise list of bearish factors - if anyone is interested in reality, anymore.

    Got silver - the coins?

    Cheers,
    CK
    Orinda, CA

    P.S. Did you have all the phony, misleading economic statistics on your list? CPI, GDP, GAAP in lieu of cash accounting for the deficit and debt, productivity, unemployment????

  8. Dr. Jackpot January 10, 2006 7:13 am

    Who stole my lifetime savings in order to boost the purchasing power of young spenders who will spend it all as opposed to elderly savers who depend on fixed incomes? Will a new man be any different? If you are the biggest borrower in the world AND you also happen to control rates, what are you gonna do? Raise rates of course? Absurd. You’re gonna keep your borrowing cost as low as possible—–watch housing and asset prices climb and then take 25 per cent of them when sold. You can’t lose.

  9. Kelleher January 10, 2006 7:42 am

    What is “real” anymore? If I run a farm and spend 6% more every year than I sell, people would question my ability to continue, and banks certainly wouldn’t lend me money long term. After a few years, I’d be bankrupt.

    But when the U.S. economy consumes 6% more than it produces, year after year, the stock market rallies, people spend their money lavishly, and pols tell us everything is great.

    In their book “Empire of Debt”, authors Bonner and Wiggin observe that markets make opinions. We feel “good” about this economic Twilight Zone because the markets sway our outlook. Why should reality intrude on a wonderful dream?

  10. LB January 10, 2006 8:49 am

    Your “Credible Threat” insight is excellent thinking. Thank you for sharing that.

  11. GP January 10, 2006 8:52 am

    I thought from the beginning that the M3 debacle was a bluff. The markets bought it hook, line, and sinker. The Fed does not have any real control over M3 anyways. It’s funny how ten years ago the markets wanted restrained money creation but now they want hyper money creation. It’s a
    mad mad world.

  12. FeelingWeird January 10, 2006 9:00 am

    YEA!!! I’m glad you’re back. Now I have to go back and read everything, and make some self important comments. I’ll be back(best Arnold impression)..

    Feeling Weird(NW Ohio)

  13. FeelingWeird January 10, 2006 9:26 am

    I think this year, will be a year of continued duplexity. Meaning Gold soaring over 600(more??), while the DOW and NASDAQ somehow keep going up(fueled by foreign invesment, China anyone??). Combined with lowering rates(what choice does Bernake have?) and a slowly(very) declining dollar.

    Think about the next year this way. We are obviously a snake consuming itself. I think that this is a REALLY big snake and we are only part of the way through eating ourselves. We still have almost 3.75 basis points to burn through on the way back down to a 1% overnight borrowing rate(the cocaine that kept this cadaver alive this long).

    But this time it will be a one way road. Because the rest of the world has had enough. China has signaled it’s weariness with our fiscal position. Iran is planning it’s oil borse. And the Caymen Islands are moving quick up the list of foreign bond purchasing. Meaning that the US Treasury is covertly buying it’s own bonds, or that it’s monetizing it’s own debt.

    So I think we will all be amazed at how much longer the snake will be able to munch on itself. And remember the adage that state “a mania will last much longer than an investors ability to ride it out”….

    Robert NW Ohio

  14. bigskymike January 10, 2006 2:22 pm

    I don’t get it. I’m intrigued Michael by your M3 “credible threat” insight - the Fed bluff. Assuming the Fed is indeed concerned about inflation and wants to now slow down M3 growth in addition to (or in lieu of) continued raising of short rates. Then the hiding of M3 is a head fake to keep the markets going, or at least confused. I certainly am. But it does not add up to me.

    If true, does that mean the Fed sees less need ahead to monetize debt? I would be surprised. What does that say for the Fed’s attitude toward the dollar price of gold? Do they want gold to go higher too? Unlikely, unless it is simply that they do not care anymore? Have they recognized the move of gold across all major currencies and figure we’re all in this together now regardless of where gold goes relative to the US FRN? Possible. Is this still bullish for gold?

    I’m having trouble with the concept of the Fed encouraging the perception of monetary inflation by hiding M3 that would then actually slow down/deflate. The Fed has been inflating for so long and so rapidly lately that the price risks are high. Do they really need to add to the fire with a clever yet arguably unnecessary bluff? The government has gone to great lengths to minimize inflation perceptions up to now. Would not the goosing of financial markets on a bluff of faster money growth while actually removing that money leave those markets vulnerable to an even more severe decline when events turn? Not in the interest of the Fed I think. If they were so clever surely they would see that.. Inflation perceptions are also a difficult beast to turn once out of control. With M3 hidden, when/how would we see that the money supply is not soaring? And does the Fed really need to play such a game if M3 growth were to simply slow. I don’t think so.

    It seems to me that the walk and the quack mean it’s really a duck. The Fed is not bluffing a higher M3. They really do see it soaring and want to keep the panic as subdued as possible. A very interesting insight however Michael. Thanks for the brain workout. Fun.

    Dayton,NV

  15. manystrom January 10, 2006 3:58 pm

    Hi bigskymike,

    Thanks for your comments about the Fed bluff. I guess I wasn’t exactly clear about the nature of the “bluff.” Not that M3 is being bluffed higher - it seems pretty clear that it is rising now, and I don’t question that.

    But I still think that the Fed is more concerned about deflation than inflation. As I mentioned, I was reading the Bernanke Deflation speech - Making Sure IT Doesn’t Happen Here - which he gave in late 2002. It is clear that the Fed was worried about deflation all the way into 2003, until the war started and solved the problem, at least temporarily.

    Just before I read Bernanke’s speech, which is filled with all kinds of schemes for producing inflation, I ran across this very curious article on the web:

    http://today.reuters.com/investing/financeArticle.aspx?type=bondsNews&storyID=URI:urn:newsml:reuters.com:20060104:MTFH46270_2006-01-04_19-04-05_N04310740:1

    Headline: Fed deflation tools can work if understood - study

    “WASHINGTON, Jan 4 (Reuters) - The Federal Reserve has several ways to boost the economy even if official U.S. interest rates were ever to hit zero, but the public needs to understand them to make them effective, a new Fed study says.

    “Two researchers at the Federal Reserve’s Board of Governors used the U.S. central bank’s economic model to evaluate some strategies that economists have suggested to get around the fact that rates cannot be pushed into negative territory.”

    Sounds interesting, right? It lists some policies, then at the end, it finishes off with this:

    “However, the effectiveness of the alternative policies deteriorated sharply when the expectations of businesses and the public were based instead on historical experience.

    “They said their results suggested that a central bank that operates with a low inflation target, which makes the risk of deflation more pressing when the economy weakens, may want to adopt other accompanying policies before crisis strikes to allow time for the policies to become understood. ”

    Listen to the focus on “expectations” and how the Fed “may want to adopt other accompanying policies before crisis stikes.”

    So how can they manage expectations, and what other policies can they adopt? Greenspan has said in the past that he finds the notion that the Fed can prevent recessions “puzzling” because they are caused by “human psychology.”

    Everyone believes that the Fed is hiding M3 because they want to hide massive inflation. But it is such an obvious thing to do. Because it is so obvious, I suspect that there is another reason, that is less so. I thought that maybe there is a paradigm shift going on at the Fed, realizing that it is all about perception and emotion, perhaps they are trying to manipulate that since strict monetary tools don’t seem to be doing the tricke. So my mind put all of the above together in one of those flashes of insight that is either brilliant or ridiculous. In short, the nature of the bluff that I saw in my mind’s eye at that instant is that the Fed is in fact trying to hide an impending deflation by disappearing M3!

    How popular will that Iranian oil bourse be? Who knows? But if a number of countries start buying oil in euros, all those overseas Eurodollar accounts will become redundant. When they are closed, M3 will show a big drop - deflation - which would spook the global economy more than inflation.

    If you noticed, consumer credit fell for the second month in a row - deflation. There are other signs of it here and there, but the potential for the oil bourse to be deflationary is somewhat larger, don’t you think?

    I am happy to entertain opposing opinions, because I’m not completely convinced that my reasoning is sound.

  16. John January 10, 2006 4:15 pm

    Just read Michael’s article on Financial Sense, and I wanted to thank him for the terrific closing paragraph:

    “Keep your sense of humor, stay focused on your family, the good things in life, and do what you can do to help those less fortunate than yourself. Stay in the moment of now, and remember that all this money talk is interesting but it is not everything. The best things in life are free, but priceless.”

    I worry way too much about this stuff, and these words were greatly appreciated. I will be printing them out and tapping it to the wall.

    Thanks!

  17. James January 10, 2006 7:17 pm

    It seems what Nystrom is saying is that deflation is more of a psychological thing than a money thing, and the Fed has realized that, so they’re acting accordingly - i.e. messing with our heads instead of strictly messing with the money supply.

  18. Gordon January 10, 2006 7:19 pm

    “… if an alchemist invented a way to make gold in unlimited quantities, then released this news to the world and said he was going to start making and selling unlimited amounts of gold, the price drop immediately, before the Alchemist made or sold a single ounce.”

    My question is why in a rational world something that has at least some value [the alchemist's gold] should ever depreciate in terms of something that has no intrinsic value i.e. a fiat currency?

    The answer of course rests in the ability to trade the fiat currency to other fools for something of value.

    This is not much of a basis for money when the grand alchemist to be of paper money has already announced his willingness to flood the world with his fiat money at any moment he deems propitious … or the least maintain what he deems to be a healthy level of inflation aka currency debasement.

    Brenanke having been nominated by a Republican — my final question for this post is “Who needs Democrats / Socialists / Communists”?

  19. Jimbo January 10, 2006 7:21 pm

    I agree tht there is a large psychological component to how the markets operate.

    It has been decades — yet I still remember the sense of urgency that consumers felt during the inflation of the 70s. People were literally concerned that if they didn’t buy a product ‘this weekend’ then by ‘next weekend’ the prices would have gone up.

    Similarly, consumers accepted higher rates for borrowing on the assumption that the debt would be paid back 1) with cheaper dollars and 2) based upon an inflation adjusted wage.

    The latter, I think is the key. Wage inflation is *essential* in order to get the inflationary ball really rolling. Given enough stimulus, the economy will require additional labor. The resulting competition for labor will lead to rising wages. Right now just we have inflation in energy, food and some services. Its not rolling, yet.

  20. Peter Scales January 10, 2006 10:59 pm

    From Western Australia it looks like top of the Fed’s agenda is the engineering of a soft landing in housing. The fear is deflation in Asset prices, not the money supply.

    Why? The world depends on the US consumer, who depends on the housing ATM. Ave weekly earnings are down, so wages aren’t growing, and low cost Chinese/Indian workers (including knowledge workers) will ensure that doesn’t change soon. But the need remains for getting more cash into the hands of US consumers.

    How? If you can print any quantity of money, and you have a cosy relationship with the largest Bank lenders on the planet (and have had since LTCM) it isn’t too difficult to ensure large amounts of newly printed money end up in specific financial assets: 10-30yr Treasuries, to keep LT interest rates down (to support housing borrowing) and into Equities (to support perceptions of a healthy, growing economy).

    Lights out on M3? Obfuscation. The information gets out anyways, but at least it’s not “official”, so politicians can make up what they like about the subject. Everybody wins. Too easy.

  21. Rakarules January 10, 2006 11:36 pm

    i am an avid reader of the site. i am in India, where we are seeing all time highs being surpassed everyday.
    please keep enlightening us with your insights.

  22. zzo January 11, 2006 2:49 am

    Besides the new oil bourse you mention; here is another potential pitfall of the pending implosion.
    Pension Crisis Could Hit Balance Sheets
    Look at the link for my blog. zzo

  23. BenedictWilliam January 11, 2006 3:20 am

    Hello Michael,

    I find the idea that the cessation of publishing M3 was a bluff very interesting.

    Another angle on the bluff is this: given current M3 growth then the removal of M3 statistics would be seen to suggest future stronger M3 growth. Which might steepen the yield curve if the bond market decides that the Fed is losing a grip on long term inflation expectations. So it might be seen as a device for the market to induce some tightening via the mortgage mechanism while at the same time producing a yield curve shape that helps the FannieMae et al. These chaps do not enjoy inversion. Same bluff, different conclusion. One elicits economic stimulation, the other contraction.

    One doubt I have about this bluff theory: with this interpration of the M3 move the market moves raises asset prices (other than long bonds) in a way that may not be consistent with the original aim: ie gold AND shares go up. So while the Fed may be happy with the latter and want to engineer it if it fears deflation, it would not want the former as I believe there may come a point when the gold strength is seen as a health warning for other asset prices.

    In this context, the other reason seems to hold up better: ie hiding the impact of the oil bourse. Non-M2 M3 comprises 4 elements: depos>100k, money market funds, repos, and eurodollars. ONLY the last two cease publication (which rather belies the Fed’s claim to be saving money). And these are the two where one would most easily see (a) the impact of a successful bourse on reducing Eurodollar deposits and (b) any attempt by the Fed to address this contraction via the repo mechanism.

  24. Jim January 11, 2006 8:51 am

    So from an investment perspective you may be buying gold based on the elimination of M3 (thinking we are approaching hyperinflation) when in fact it’s a bluff and we have deflation….in which case all bets are off and you lose your ass with your $545 Gold that is now worth $50.

    I don’t buy it. The whole DNA of the FED is to prevent deflation even at the cost of hyperinflation. Why would they do this. Much easier to hyperinflate, monetize the debt and attack Iran for screwing with the dollar.

  25. bigskyMike January 11, 2006 12:56 pm

    Michael,

    Thanks for the clarification. We both agree that the Fed is trying to hide something! I’m uncertain of two things.

    First, we both agree the Fed (to date) has been more concerned about deflation given the incredible monetary inflation accelerating since the dot.com crash/911 economic crunch. Absolutely the Fed has been inflationary in the face of deflationary concern. No argument there. It’s the idea that they want to cover up –only- a future deflationary impact on M3 that is difficult for me to understand.

    I see your logic that this deflationary concern of theirs remains and that the Fed is reaching for additional tools to deal with future deflationary events. I agree. Certainly saying goodbye to M3 will help keep the world in the dark whether we have a deflationary event that drastically slows money growth or whether money growth takes off in Fed response (or anticipation) to the event. It’s beyond me. I guess I favor the perspective of the manipulator. That is, “we (the Fed) win either way by hiding M3.” If an event slows things down seriously, then the Fed is free to step on the gas – seriously. I think the elimination of M3 is perceived by the Fed as useful given any scenario, and does not necessarily imply we will see a slowdown in M3.

    Which way do we fall first when there are tremendous deflationary events in the wings with tremendous inflationary pressure? Either way there is trouble. I keep thinking of the chicken and egg question. Bottom line is, I have trouble seeing a runaway M3 suddenly dropping. I can see it slow and then rise only “gradually” like it did in the early 90’s, or perhaps actually level off but not a sudden reversal that would need to be hidden to avert panic. Easier for my limited imagination to see the Fed trying to hide an exploding M3 in response to their deflationary concerns.

    Second, I agree the Iranian oil bourse is significant. But I don’t see how it would be immediately deflationary though. Would it not be a negative for the US Dollar and inflationary for Dollar economies. That makes more sense to me. Assuming I’m correct about the effect on the Dollar, I don’t understand how a weakening FRN can be deflationary. Eurodollar accounts may close but those Dollars will go somewhere and fewer people will want/need them. It seems logical to me that we will see less – not more – foreign demand for US debt as a result of the gradual demise of the petrodollar. Perhaps that would be the mechanism you’re referring to that eventually brings on a deflation. Higher US rates to draw foreign capital - slowing the US economy and given sufficient push there we go into a deflationary credit crunch. But I’m sure the Fed will follow right up with more money. It’s their job to inflate with glee.

    Finally, if the Fed is more concerned about deflation than inflation, what does that mean for me? It seems to me that if the Fed is concerned about one thing I should bet on the other, as it’s the actions of the Fed in response to their concerns that move the markets over the longer term.

  26. Nuffield Scholar January 11, 2006 8:42 pm

    Expect corn futures to star in the grains complex. Most energy intensive grain. Ethanol market booming. Input costs directly correlated to natural gas price. Corn burning stove makers unable to keep up with orders. Corn futures at near historic lows. All other commodities have run! Its a no brainer despite the large US harvest in 2005! Do yourself a favour. Got grain?

  27. Houston Spaudling January 11, 2006 9:39 pm

    There’s a lot of talk about the impending inflation boom.

    Wouldn’t the markets and the FED react to inflation quickly to counter any serious inflation acceleration?

    It seems to me that we’re more likely to see a recession in the near future than an overheated economy leading to higher inflation.

    Can someone make the case for higher inflation please.

  28. Rich January 11, 2006 9:50 pm

    M3 has risen from about $4.5 Trillion in 1995 to approaching $10.5 Trillion in 2006, that is a fantastic rate of growth of the money supply. If you graph the rate its at a pretty constant 45 degree incline for over 10 years.

    So to imagine “Bernanke the Inflator” bringing this phenomenal inflationary run to an end is very hard indeed.

    The Fed has a history of signaling its intent and also of warning the market of obvious excesses. Look at the way rates have been raised so consistently and with the markets full knowledge and understanding.

    Of course, we all know, the Fed tends to alert everyone with one side of it’s mouth (remember “irrational exuberance”) while adding fuel to the fire (through pumping the money supply) with the other side. However, the fact remains that on the record the Fed typically, in general, signals its intent.

    Pulling the plug on inflating M3 would be absolutely disasterous to the US economy and would be the act of a madman! The only reason I can think of for pulling the plug on the giant Ponzi Credit Scheme would be to deliberately engineer a crash of the US economy, and the US Dollar as the global reserve currency, to then somehow bring the US in to a new Global Economic Order with new global reserve currency. I’ve specualted on this theory over the years, but currently don’t think it has as much credence as some version of what we see playing out in the global press - with the threat of the PetroEuro (which was in existence with Saddam if you remember), the threat of China diversifying away from holding dollars, the threat of the Russians allying themselves with emerging and “non-aligned” countries (with oil reserves) and shutting out the US. etc.

    These various global threats, as well as domestic socio-economic and political reality, will drive the Fed to inflate for a long time to come in order to keep the US consumer consuming and US hegemony in tact (more or less) and the central banks of the world paying their tithes on time in the form of purchasing US Greenbacks.

    Helicopter Bernanke will turn out to be the great inflator that he has threatened to be and we can all look forward to needing wheelbarrows full of credit cards to buy a loaf of bread.

    Cheers Rich

  29. Pravin January 12, 2006 8:15 am

    I’ve a silly question for all you gold bugs -those who support a gold backed currency system -instead of paper.

    Since the fact that unlimited paper money can be conjured from thin air by central bankers is given as a major reason for its absurdity, what about the same question with relation to gold?

    Gold supply is limited and it takes time to find more gold(find a mine,extract gold etc) -so does this mean that the total wealth in the world is basically limited? and that growth is a zero sum game?- would this mean that the countries having gold mines should be essentially richer?..what about human ingenuity? Is no value to be given for man’s intellect .
    Does a gold hoarder -who possibly got the gold only because he was lucky to be born in a nation with lots of gold - have a divine right to be rich?

    Why not choose uranium or something even more scarce- that should make wealth even mor limited?.

    I do not completely understand ‘why gold’ except that it has been ‘historically accepted’.Appreciate if somebody could throw some light on the path

    Regards
    Pravin

  30. bigskyMike January 12, 2006 12:21 pm

    Hello Pravin,

    No question is silly if it can draw light to the darkness. IMHO there has been much darkness this past century from an American economic point of view. We are all encouraged every day to believe in illusions and unwise schemes. Beginning with the establishment of the Federal Reserve, an insane tax system, “progressing” nicely with FDR’s seat-of-the-pants experiment with our government and economy, his moves against domestic gold during the depression (a depression caused and extended by government stimulus, inept policies, and subsequent manhandling of the free market), and Nixon’s endorsement of global fiat Federal Reserve Notes. How does a person judge the success of these events? For me, just look at a chart of the purchasing power of a US FRN since, the growth of government, and the tremendous financial imbalances that grow each day, leading us to who knows what.

    Have we really created more “wealth” by simply printing more bills? Absolutely not given the liabilities that hang over our heads! One can argue the opposite in fact – perhaps another day. Real wealth is indeed limited as much with a paper fiat currency as with any other more disciplined money like gold. Real wealth is not built with dishonest currency nor is human ingenuity devalued by an honest money. Real wealth is built with human ingenuity, structure, and sound money that retains its value against that structure, while remaining in the pockets of the people - not the government. In fact, wealth is better protected from government confiscation with an honest currency. By limiting the printing of money we do not limit wealth, we protect it. We would not limit “real” growth - we would encourage it.

    I cannot resist a digression regarding your mention of human intellect. Is economic growth or a higher standard of living a birthright because we have an intellect? Our intellect is just as capable of destruction as it is creation. I don’t think human intellect has improved all that much for thousands of years and some would argue that it may have declined in recent decades. Most of what we mistake today for human intellect is but better communications, inventions and clever gadgets built upon the back of prior discovery and the combined work of lots of different people. Some were geniuses, yes, and buried or forgotten long before our “brilliant” generation was born. Ours is a highly specialized society that allows each of us to be brilliant in one small little tiny area. It’s a civilization that through its structure encourages us to develop the intellectual skills we’ve possessed for thousands of years. But we are still burdened with engineers who can’t articulate, creative artists who can’t think logically, beaurocrats who lack creativity, initiative and wisdom, scientists who can’t manage their finances, finance professionals who don’t understand science or economics, professional athletes who… well, let’s stop here (let’s see, anymore groups I can offend ; ). By the way I am included in more than one of those groups and challenged by my own limitations. Anyway, my point is, we’ve set up this fantastic civilization where we can specialize, develop our intellect (or waste it?), be more efficient, see economic growth, and not tax our little brains too much in the process. This structure, not intellect has more to do with generating real growth. Honest money supports that. Fiat money robs it over the long run as history shows.

    I think you are also confusing the use of gold to back a nations money supply and to keep it honest and relatively safe from the corrupt hands of government - with other things. With a gold-backed currency, the discovery of a gold mine would have no significantly greater benefit than the discovery of another important resource. They all require capital to extract, process, distribute. In the end hopefully a profit is made (profits reflect the successful combination of risk and added value = growth).

    “Gold hoarders” have to use something to acquire their gold. Whatever currency they use to buy gold, must they reside in a country that has abundant gold reserves to purchase gold? And the purchase of real gold is not a guaranteed road to riches, but it is one way to protect your accumulated wealth/purchasing power from government confiscation through monetary inflation via fiat money.

    By the way, we should all give “hoarding” more respect. Hoarding is more of a symptom of a problem than the cause. It’s a natural reaction that if left alone would actually be better by allowing people a mechanism to survive, and to bounce back afterward, resulting in a quicker economic recovery. Where do you think some of the new risk capital comes from after an economic devastation? If hoarding were respected rather than vilified and suppressed, the actual cause of the economic trouble might be better focused upon and resolved sooner, lessening any short-term disruptions caused by hoarding and most likely seeing a rapid increase in supply as soon as the fear abated and the hoarders either stopped hoarding or moved to liquidate their hoard. The hoarding of toilet paper may motivate panic and bring bloodshed to the streets but I think everyone should accumulate as much gold and silver as they can – meaning convert their worthless fiat currencies into real money. It’s more of a vote for real money and an insurance policy rather than a drawdown of a critical good or product. It might accelerate the move toward a more sane monetary system.

    Finally, why gold? Uniformity, monetary utility, durability, adequate but LIMITED supply, relatively minimal industrial need, and equally important, it’s non-toxic. Though perhaps a radioactive money supply would discourage hoarding and stimulate money velocity ; ) What do you think Mr. B?

    Good luck in your inquiry and journey.

    Dayton, NV

  31. Wayne Skolas January 12, 2006 9:34 pm

    I have been reading the essays, comments, and opinions from the many smart people, with something smart to say, for many moons. You are all very good at communicating your thoughts about fiat money, the fed, gold, global economics, etc. The article about the fed bluff was very good and stimulates the analytical mind. You all remind me of the scene from the movie Titanic when the dinner party retires from the dinner table to smoke cigars to talk politics and money, (no outsiders allowed to join them, or females). I’m pretty sure they shared their ideas among themselves to network with each other for the purpose of improving their own independent financial positions, not much different from what is going on today. A good point to consider is that most of them went down with the titanic! or commited suicide after they lost their shirts from the depression! Maybe it is time to network together and figure out how to get rid of the fed, ppt, one world government elite, new world order power mongers, me first polititions, and all the other self interest manipulators! If you gave only 10% of your thought to this goal, I bet your net long term return would be 100 fold, in ways that only God could imagine how you would best benefit! Just think about it!

  32. Administrator January 13, 2006 6:37 am

    To: BigskyMike, Wayne & Everyone,

    Last night I was at the Harvard Coop, a bookstore in Harvard Square that gets some amazing authors coming through to speak. Last night, John Perkins, author of Confessions of an Economic Hit Man came through. It was an amazing talk. He told the story of what he used to do, which was: On behalf of the US “corpratocracy” and the US government, he would go into small third world countries and essentially bribe the government to see things the American way. As he put it, people like him would (and still do) go to the government leaders with the following choice: “In this pocket, I have hundreds of millions of dollars that will make you and your family wealthy beyond your wildest dreams, if you want to play our game. In this pocket, I have a gun with a bullet that has your name on it, if you choose not to see it our way. It is your choice”

    The “way” he talked about was essentially engineering a huge loan via the IMF or World Bank to the nation to build infrastructure projects - ports, dams, industrial development parks, etc. The loan would never see the nation - it would go directly to a US conglomerate (think Haliburton) which would build the project and reap HUGE profits. The infrastructure would be built, foreign multinationals would use it for their profit, but there would never be enough tax revenue to repay the laon. Loans are so big that the country sinks further into debt, and plunders its resources at firesale prices in an attempt to repay it. This is at the root of the scheme. This is the goal. The country now “owes” the US, and US companies have cheap acess to the resources while the nation remains impoverished.

    I am going to write more about this over the weekend and have a bigger post next week because I think it is important for people to understand the mechanisms behind America’s incredible weath and the impoverishment of the rest of the world.

    But the relevance here, two the two posts directly aove this one, is that Perkins had a decent-sized list of things that we can do to start to change the situation. Some may think that it is too huge to even try to begin to tackle, but he reminded us of the founding fathers of this country, who at the time, had the courage to stand up to the MOST POWERFUL EMPIRE IN THE WORLD - England, with the most powerful armed forces in the world. To stand up for what they believed in, and the courage to be traitors to the law but true to their beliefs. I think Americans today are all grateful for their courage and their saccrifices. Just think about history - empires come and go, big corporations come and go. Just like all of us - here today, gone tomorrow.

    Perkins also reminded us of Rosa Parks who was just a regular person at the time she decided to express her courage. At the time of her death, I think we all recognize that she was pivotal in changing the world with a very simple act of disobedience. Perkins said that when he was growing up here in Boston, he had no idea that black people had to ride in the back of the bus in some places in the country! It was not until Rosa Parks let it be known to the world. Once known, good people with conscience simply had to act to right the wrong. That is how the world is changed, slowly, little by little. And even though she is gone from this plane, Rosa Parks lives on. Her courage continues to inspire many people. I only hope that I can be so courageous one day.

    Just like many didn’t know about the conditions blacks were forced to suffer prior to the civil rights movement, many Americans today don’t know the story Perkins is telling. Like many, I have always suspected such a thing, but never had the evidence to prove it. In 1998, I travelled around the world and saw real poverty for the first time in my life, in Egypt. In another of those flashes of insight, I knew deep in my heart that it was not just that the US was rich and the third world was poor, but that the prosperity of the US was somehow the CAUSE of the poverty that I saw. At the time, I did not know the mechanism, and I have been piecing it together over the past 7 years. Last night I think I got a very big piece of the puzzle.

    The point of this is that over the last few days, I have seen a theme begin to emerge, and that is that we do have power. When things look hopeless, we have even more, because then we feel we have less to lose. Perkins compared the big corporations to schoolyard bullies: They push the timid around, but often, all it takes is for one kid to stand up to the bully, kick him in the shins, and the bully backs down and later, even becomes a friend. We need more people, both inside the corps and outside, to speak up, to stand up for what is right. Do not forget that corporations depend on us for their profits. They rely on marginal profits - profit growth of 5-7% per year is considered good. In order to have leverage over them, you don’t have to reduce their profit completely - just 1 or 2% and they will take notice.

    Matt Simmons gives a number of excellent proposals for reducing our dependency on oil in this interview: http://japanfocus.org/article.asp?id=493

    From above: “Maybe it is time to network together and figure out how to get rid of the fed, ppt, one world government elite, new world order power mongers, me first polititions, and all the other self interest manipulators! If you gave only 10% of your thought to this goal, I bet your net long term return would be 100 fold, in ways that only God could imagine how you would best benefit! Just think about it!”

    Consider this as a meeting point for the network that Wayne speaks of.

    And: “Have we really created more “wealth” by simply printing more bills? Absolutely not given the liabilities that hang over our heads!”

    The liabilities hang not only over our heads, but the heads of our children, and grand children…The time is here that we will be called upon, individually, in our own ways to display courage and to act.

    Thank you all. Michael

  33. FeelingWeird January 13, 2006 7:39 am

    Michael;

    I would like to say again how happy I am, that you are posting again. I really missed Depression2.tv.

    The above posting is worthy of a spot in any major publication. As usual your thinking is tight and your ability to express yourself is incredible.

    I also listened to “confessions of an economic hitman”, and I also had the same Epiphony. I knew that something wasn’t right with the world. I always hung my hat, on the fact that America got where it was, through hard work and a superior form of government.

    This WAS true, through the first 2 centuries of our existance. But as I’m coming to find, that World War II really was the end of this country. Since that time we have continued to stray further and further away from our core beliefs.

    I HAVE to believe, that if the average American could just grasp a little of the truth that is exposed in Mr Perkin’s life, that there would be a mass revolt against the powers that rule this country. I say “HAVE”, because if I don’t at least have that small amount of hope about the state of humanity in my country, I think I’d go crazy

    Thank you for your work!

    Robert NW Ohio

  34. ChemicalGal January 13, 2006 10:29 am

    I think Hugo Chavez may be another Rosa Parks.

    I just hope he survives and stays the course of what appears to be an honest polititian.

    Chemical Gal

  35. Kelleher January 13, 2006 1:19 pm

    Hugo Chavez already had a visit from “economic hit men”. But they were hailing from China, not the U.S. Are you people really so naive to think that the American government is the only one playing hardball?

    As for Halliburton et al, what are they supposed to do - say “No, we won’t help you spend that money, let some Japanese or Korean company do it instead”? Get real, the world doesn’t operate under Boy Scout rules or the utopian musings of Karl Marx.

  36. Chad Olivent January 14, 2006 4:08 am

    Michael, it is great to have you back. I have been a big fan of your website for many years. Here are my thoughts on 2006. One interesting ‘aside’ I would like to share is that about 4 years ago at a wedding I mentioned Hubbert’s Peak to a well informed relative in attendance. They blithely ignored my statements about ‘the oil must flow’ etc, and dismissed the concept out of hand. Now, over the Christmas holidays, the same person is telling me about Hubbert’s Peak with some vague picture emerging about resource depletion and all of that. I found it interesting, and did not mention that I had told them about it years ago. At any rate, I believe that we are at the peak of world oil production, which translates into the peak of economic activity. I expect only a marginal slip in the economy. To use FedSpeak, I think that we will see economic slippage at a ‘measured pace’ this year.
    A contact in a Florida title company tells me that whereas they were running 500 titles per month the last six months, it has dropped down to 150 per month now. Whether that is due to the holidays, or is evidence of a real slow down remains to be seen. It is something that I am watching closely. The county is one of the ‘up and comers’ in the Florida market, not south Florida as you might expect.
    I am a stock market bear, and have been since 2000. This bias colors my analysis. As a long wave adherent, I do not see anywhere for stocks to go but down in the longer term. Remember, even eeking out a 1-2% gain is still a loss at the end of the day after taking into account an inflation rate that will most likely average 6% in 2006.
    I expect the dollar to fall against the other major currencies at some point this year. It may be second or third quarter before the trend is evident. Even with China giving hints that they want to diversify their $800 billion dollar reserve holdings, they will want to unwind it with as little pain and disruption to their own porfolio and econmic exports as possible.
    The significant event in question in my mind is Iran. How in the world did they elect such a perfect ‘madman’ ? Could the neocons have asked for a better leader to forward their agenda? I think not. There is definite momentum building to take action about Iran’s nuclear capabilities. Meanwhile, let’s nuke their plans to set up an Iranian oil bourse and sell oil in euros instead of dollars. This is the key driver of events in my opinion.
    So, to sum up, measured slippage is in store for us for 2006. The Iranian card being the deal killer…. Oh, and let’s not forget about the H5N1!

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