In 1980 the sun was rising when it was already nighttime. The sun quickly set when it realized it was smaller than the night. That is, the public jumped into gold after all the reasons for justifiably making that move were no longer true.
In September, 1979, with fed funds at 15% FED was doing exactly what they are doing now: feeding funds into the market to prevent the market from rising too fast and thereby go to excesses. The Volcker Fed thought the excesses would bring on a depression worse than the '30s. This action prevented the market from bringing on denouement of rational expectations for rising prices. It was similar to throwing gasoline on a fire in order to put it out. It is all part of engineering psychology so that human emotion doesn't create a random fluctuation through ruin. I think Volcker got a Nobel for his engineering.
The FED persisted in this action until fed funds got to 18% and then they realized that they had to get out of the market and let the market find its own equilibrium. Meanwhile gold had been tracking interest rates because if FED wished to keep the inflationary game going with their incremental additions to reserves, then the public thought it was prudent to hedge by buying gold. When FED finally threw in the towel and let the market do its thing, no one knew just where equilibrium might lie. Maybe at 100%, no one knew and no one knew what would be the consequence to the economy at such lofty levels.
Necessarily the economy needed to be busted since it had become a machine feeding on expectations of rising prices, so in a financial bust where the Fed's paper is only paper, gold would come to be essentially priceless or inconvertible, or infinitely convertible. These were the extrapolations of the Harry Browne's.
The market finally peaked at 21% at the end of the year and gold was making its short covering parabolic move. Rates then started down indicating that inflation was busted, but that's when gold put on its final public driven thrust. It hung up there for weeks after the fact waiting for the great collapse anticipated by the 'Bugs. It never came because the gold speculation thesis is not valid.
The world of economics is a closed universe. All values are relative. What can you buy with $million/oz? Gold would not be fungible. The 'Bugs had all these end game theories how they would wait for high prices and then sell and so convert back to paper! Others of them were purists and thought there would only be guns, food, and gold, so you would have to exchange your gold for food. In these extreme conditions there would be no economy and so someone would be willing to exchange their loaf of bread for your 1000 ozs of gold. You have to do it or you starve. So gold is essentially worthless under these extrapolated end games. One only has to realize that value, worth, and price, are relative.
Conditions will not again arise in this manner such that gold will have a commensurate performance. Gold went from $40 to $800 in eight years. That's 20 times or $5000/oz now.
Interest rates could be so high that there is no lending, but why should that stop commerce? It wouldn't. Commerce only deteriorates as long as FED plays this ridiculous and absurd game of promoting prosperity by interfering with the market. The market wants to raise rates slowly to slow the will to inflate, but FED interferes because someone might get hurt. In a caring society you can't let anyone suffer. Intellect can beat that possibility they think, but everyone suffers and no one doesn't.
Volcker's depression did hit. It lasted from 1980 until 1995. The product of time and suffering is constant so you either get a quick and nasty situation like the '30s or you have the slow and shallow variety of the '80s. Total punishment is always conserved. The ironic thing is that FED created the depth of the '30s and the length of the '80s simply by practicing the will to do good.
They think they know what they need to know. They don't know squat and they are following right in the footsteps of the past. You could get every last one of them to admit what I've said above is completely true, but when they get into that board room, they have to act responsibly. That means maintain the old evil until that evil has destroyed the economy one more time.
When do we get off this merry-go-round? No time soon because the universities don't think the FED is doing anything wrong. The university professors are completely prejudiced to socialism and hate markets regardless of what they may claim. It is in the universities that mindthink is promoted and so the people that go into the FED take all this useless misleading baggage with them. They are taught that one shouldn't interfere with the market by fixing price for whatever reason, yet that's what they do in money, and every step on the way to the final capitulation is felt to be necessary to promote the general welfare.
The sun never rises. There is only some degree of night. Get the FED out of the market and back on targeting raw money only and gold will random walk in a base indefinitely. Also, there would be recessions in this regime, but no one would know they were occurring, since they would be so mild. Instead what we get is the belief that the sun will rise so we take all these actions that realize what we expect. It only rises in our imaginations and so it isn't real. The best side of a gold move is the down side and that will light you up. |
