Six Situations to Monitor for the Remainder of 2008
by: Michael J. Kosares posted on: September 09, 2008
"The next Fourth Turning is due to begin shortly after the new millennium, midway through the Oh-Oh decade. Around the year 2005, a sudden spark will catalyze a Crisis mood. Remnants of the old social order will disintegrate. Political and economic trust will implode. Real hardship will beset the land, with severe distress that could involve questions of class, race, nation, and empire."
-- William Strauss and Neil Howe, The Fourth Turning, 1997
1. The bullion gold coin shortage
When IndyMac Bank collapsed in early July, USAGOLD-Centennial Precious Metals logged the largest single week volume in its 35 year history. And that was just the beginning. By mid-August gold coin demand had become so strong globally that U.S. Mint and South Africa's Rand Refinery announced they could no longer keep up with their orders and promptly shut down operations. Soon thereafter, the U.S. mint resumed gold coin production, but explained that they would now be forced to ration output. Much of the demand that spawned the mints' problems came from individuals around the globe concerned about the safety of their banks and financial institutions -- a worry not likely to dissipate anytime soon.
2. The election
The economy has replaced the Iraq war and gasoline prices as the centerpiece issue for this election, yet neither candidate comes off as economically astute enough to deal with its complexities. There was some talk about oil at the party conventions, but the trade deficit was skipped over, and neither party talked very convincingly about smaller government, or balanced budgets, or the future value of the dollar. The Fannie Mae (FNM) and Freddie Mac (FRE) debacle wasn't even mentioned, nor was the Misery Index -- the combination of inflation and deflation -- which over the past year has gone into double digits and remains a primary concern for all Americans.
3. The Fed's Magic Money Machine
A well-oiled and functioning market for paper instruments depends in the end on faith and trust. Value in one financial house depends upon performance from another financial house which depends upon performance from still another -- a seemingly infinite web of interlocking counterparties fully dependent upon each other for their existence. A breakdown in one major institution, we are told, could lead to a domino effect and collapse the entire system. As a result, the Federal Reserve and U.S. government have no other choice, the logic continues, than to bail out the institution in trouble and shift that loss to the taxpayer. Fannie Mae and Freddie Mac, the mortgage-backing behemoths, have rewritten the book on bailouts, and who's to say that it ends there. It is important to keep in mind, though, that Fannie and Freddie are only part of the problem. There are other credit land mines buried about this economy that could be tripped at any moment.
4. China's central bank capital shortage
When the New York Times reported that China's central bank was running out of capital, some took the report as preposterous. How could a country have so much money and be broke at the same time? To answer that question all one has to do is to hold in his or her hand a stack of the multi-million mark notes issued by Germany in 1923. Technically, what you have in your hand qualifies you as a multi-millionaire, possibly even a billionaire. There's one problem: That stack of notes wouldn't have bought a cart full of groceries.
For China ultimately it will get down to the value of the money it takes in after it ships something out. As the Times reported, "Victor Shih, a specialist in Chinese central banking at Northwestern University, said that when he visited the People's Bank of China for a series of meetings this summer, he was surprised by how many officials resented the institutional losses. He said the officials blamed the United States and believed the controversial assertions set forth in the book Currency War, a Chinese best seller published a year ago. The book suggests that the United States deliberately lured China into buying its securities knowing that they would later plunge in value."
5. Lies, damn lies and statistics
More and more, I find myself relying on the economic numbers posted by Shadow Government Statistics [SGS] over those by the U.S. federal government. For my money, and I mean that quite literally, I rely on SGS numbers for the real story on the economy. Here are some examples of the differences. Let's start with the inflation and unemployment rates -- two figures near and dear to the hearts of all Americans. SGS, going by the same Consumer Price Index used in 1980, pegs the inflation rate at roughly 9% -- dangerously close to the double digits. The Labor Department has consumer prices up 6.2% over the same period. The official unemployment number is running around 6%. SGS's number is closer to 15% -- a 9% difference! If you combine the two to get the old Misery Index, it is a little over 12% by the government's calculations, and 24% by SGS'!!
 
6. The supply of gold from the central banks
Recently the Bundesbank, Germany's central bank, delivered a lecture on the role of gold as a central bank reserve item. "National gold reserves," instructed Bundesbank, "have a confidence and stability-building function for the single currency in a monetary union. This function has become even more important given the geopolitical situation and the risks present in financial market developments." France and the European Central Bank, both primary sellers of gold over the past several months, might take note. I cannot remember a more direct statement from a central bank on the role of gold in the modern era, and a more direct assault on the "barbarous relic" description made famous by John Maynard Keynes.
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