Mish, it's a long debate you have been in with some others.
I happen to agree with Richard Russell, whose comments are
below.
I like to keep what I call THE BIG PICTURE in mind. I see the big
picture as follows -
The US has been living over its head for years with the help of two
phenomena. The two phenomena are -
The US possesses the world's reserve currency - the dollar. Prior to
1971 the dollar was "as good as gold," as far as our foreign
creditors were concerned, because foreigners could call in their
debts in the form of US gold. But in 1971 President Nixon "closed
the gold window," stating that the US would no longer pay off US
debts in gold. From that time on, the US was completely off the gold
standard, and the dollar was reduced to a piece of paper with the
words, "in God we trust" behind it. It's nice to trust in God, but
it would be nice to be able to trust the Fed too.
Surprisingly right up to the present - both foreigners and US
citizens continued to treat the dollar "as though" it was as good as
gold. Of course, that's just a fantasy, the dollar is no longer "as
good as gold."
Debt. The second reason why US consumers have been able to live over
their heads is their build-up of debt. Total debt in the US is now
three times Gross Domestic Product, a ratio that has never been seen
before. Furthermore, the US continues to pile up individual, city,
county, state and federal debt.
The enemy of debt is deflation. This is the reason why the Fed is so
frantic to avoid deflation or even a decline in inflation. What
would happen if deflation did envelope the US? In that case, there
would be a panic by individuals and corporations to carry their debt
and to remain solvent. Today you carry your debt and you pay off
your debt with dollars. This is one of the main reasons to hold
dollars today.
How about gold in a deflation? If deflation was actually to hit the
US, I believe, in view of the sky-high debt levels, that there would
be grave doubts about the solvency of the whole nation and the
viability of the dollar. Thus, although there would be a panic by
Americans to collect "legal tender" dollars, at the same time,
foreigners would have doubts about the wisdom of holding dollars.
Since the dollar is a reserve currency, and most nations hold
dollars as reserves, if there were doubt about the worth of the
dollar, there would also be doubts about the worth of all paper or
fiat currencies. Obviously, this could set off a panic for real
money - gold.
Here is another consideration. If the US goes into deep recession,
the US is such a huge factor in world commerce, I believe the rest
of the world would follow. In other words, I believe that if the US
should run into trouble, that trouble would run off on almost every
nation.
For the first time in history, over 2 billion people have, over a
period of a few years, entered the global work force. Of course, I'm
talking about the people of China and India. These are not third-
world nations, but they do have enormous populations of willing
workers, plus huge unemployment problems. India and China both have
millions of educated citizens, and hundreds of millions of workers
who are only too happy to accept low-wages (by our standards) for
jobs - any jobs.
This has created world over-production and price deflation in
consumer goods. In fighting the forces of deflation and in fighting
the problems of the burst stock market bubble, the Fed has elected
to flood the economy with liquidity while driving short rates down
to 45-year lows. This brand of manipulation will only work for a
while, and while it's working, it is building new excesses into the
economy.
As I see it, because of the Fed's massive reinflation efforts -
almost "everything" is overvalued. There is no guaranteed island of
safety at this time - or I should say there is no island of safety
that brings in any income. The ultimate island of safety is gold,
since gold represents pure intrinsic value. Because gold is pure,
intrinsic money with no debt against it, gold cannot go bankrupt.
Gold is the only real money, and unlike paper money, gold is not
derivative of debt.
Conclusion - If you're one of those fortunate persons who don't need
any income from your investments, the best place to be at this time
is in cash and gold and gold shares. In the end, I'm not sure which
currency will make a difference. In the end, all paper money (cash)
is just a different variety of "legal tender." Historically, every
issue of legal tender-fiat money has, in time, become worthless.
It's just a matter of time. First fiat money loses its purchasing
power. And in the end it disappears.
GOLD AND REAL ESTATE - As for gold, the public isn't in gold, which
is one reason why I like it. A second reason, and of course, the big
one is that I believe gold is in a primary bull market. And like
every bull market in its early or accumulation phase, gold is doing
a great job of keeping people OUT. For instance, the recent
correction scared the hell out of most neophytes. A LOT of people
dumped their gold shares. The gold-haters gloated when gold
temporarily broke below 400 this week.
I've repeated over and over again that the hardest thing to do in
this business is to get in early in a bull market and ride the bull
all the way to its speculative third phase ending. I'll repeat that
I believe that gold is in its early accumulation phase. Only the
true believers are in gold today.
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