Are we there yet?
Jay Taylor
May 12, 2002
As noted above and as Ian Gordon has pointed out time and time again, debt is deflationary. And this is a very basic economic fact of life we as a nation and as an economics profession have seemingly chosen to ignore. Ian's work demonstrates that the threshold of lethality takes place in the "Kondratieff Winter" of the 60 to 70 year Kondratieff cycle. The Kondratieff winter before the present winter, began as they all do, with the stock market peak in 1929 and it lasted for 20 years, until 1949. The Kondratieff winter that we have just entered, according to Ian's work began with the equity market peak in January 2000.
Famed central banker John Exter, himself a member of the CFR, a Harvard Professor, ex-central banker and Citicorp big wig, was one of the few truly establishment people to warn that the expansion of liability money would end in a deflationary collapse. And we have in this letter, interviewed Ron Gilchrist a stockbroker and former student of John Exter. Mr. Exter was clearly early in predicting an imminent deflationary collapse back in the 1970's. I believe one of the insights Ian Gordon adds with respect to the workings of the Kondratieff cycle that was missing from Mr. Exter's work was that the Kondratieff summers (the last occurred from 1966 to 1980) are characterized by runaway inflation, not deflation. This is true because the debt load has simply not yet built up to the levels that start to cause the economic
system to break down. Then comes the Kondratieff Autumn, a period in which the strains of debt begin to weigh on prices, thus causing a DISINFLATION. In other words, the rate of inflation declines but overall, prices do not outright decline. And while the demarcation line between disinflation and deflation may not occur exactly on the day the cycle moves from the fall to the winter, there is no denying that the direction of prices is downward as the Kondratieff winter winds blow decidedly cooler as time progresses.
And so, this past week, in an effort to keep people from worrying about deflation, Mr. Greenspan talked about a reduction in the rate of inflation. The Fed is clearly worried about the continuation of declining prices and the prospects for declining prices to continue to put downward pressure on economic activity. That of course has been a problem in Japan over the past 10+ years but it is likely to be an even bigger problem for the U.S. because of our enormous debt burden, not only among ourselves but also to
the world. Debt is not such a problem in an inflationary world because you pay with cheaper dollars in the future. But it becomes an insurmountable problem when you are a huge debtor because you will be forced to pay for more expensive, hard to come by dollars in the future.
So, unfortunately, the predictions made by Ian Gordon in the June 11, 1999 interview are now coming to pass. Judging by the prominence of "the declining inflation issue," the Fed seems to be approaching a panic mode, and in my view for good reason. Since World War II, two or more successive Fed rate cuts have always managed to stimulate higher stock prices within one year. But now, twelve rate cuts have been ineffective over the past two + years in doing so. The reason for that failure we think is very clear.
The dynamics of excessive debt are starting to reach the threshold of lethality. In fact, as I discussed with Tom Arnold on a radio program yesterday (go to www.TFNN.com and click on Tom O'Brien to listen) we are
now at the point in the Kondratieff cycle where the cure is worse than the disease. Remember, debt is the problem. So whenever Mr. Greenspan lowers the interest rates by printing more money, he is essentially printing more money by creating more debt. In other words, at this point in the Kondratieff cycle, the cure is worse than the disease.
The M-3 Money supply as well as the Global Money Supply has been growing very rapidly. Of course, that means that debt is also growing very rapidly. A former London banker named Teddy Butler Henderson reported to both Bill Murphy of GATA and Ian Gordon that Greenspan once told him over lunch in the late 1960's that he hoped to be the Fed Chairman one day. And that if he were Fed Chairman and if he were given the prospects of a deflationary collapse as we had in the 1930's, he would print money as fast as possible in the hope that he could outrun deflation. He also reportedly said that if that fails, the outcome would make the 1930's economic depression look like a Sunday school picnic. Given the growing stealth discussions by the Fed (Greenspan talks of declining inflation rather than deflation) it now seems that the moment of truth in this grand economic experiment for the Green man may be rapidly approaching.
You can print money but not wealth. Judging by the drubbing the U.S. dollar has taken again this past week, the rest of the world seems to understand that, even if we refuse to understand this very basic and logical concept. Notwithstanding the chart above, which measures the U.S. Monetary Base plus foreign holdings of U.S. dollars, this past week, the dollar index fell to 94.97. The next short term support level on the longer-term chart appears to be around 90 and from there, down to about 80. The last time the dollar saw 80 on the index was in the late spring of 1995, about the time that the Clinton Administration announced their strong dollar policy. We are confident that policy was instituted by applying the academic theories of Lawrence Summers as outlined in his paper on Gibson's Paradox. (See Golden Sextant to learn more about the Summers paper). What followed was an artificially strong dollar that defied gravity. Even as the U.S. was expanding the supply of dollars at double digit rates, the dollar kept getting stronger and stronger. Why? Because a rigged gold price allowed Larry Kudlow to go on CNBC every Friday and say, "the Fed has to print more money because the gold price is declining." And people believed that with the gold price declining and stock prices rising, we indeed were experiencing a new paradigm in which old laws of economics no longer applied. But the strong dollar was basically a lie fostered by a President who preached and lived THE "virtue" of lying and spinning half-truths.
But now we are faced with the reality that there is no easy way out of this mess. The only cure is to bite the bullet by suffering through massive debt defaults, bankruptcies, unemployment, deflation and a depression. The politicians and central bankers will all that tooth and nail Just as they have been fighting off lesser problems in the past. But the accumulation of debt from past policies aimed at avoiding economic reality now appears to be reaching a breaking point. Like the Japanese policy makers, ours too
will print more and more money and engage in more and more fiscal stimulation, but to no avail because the laws of nature and markets have been pushed to their limits. In the end, nature and market forces win. And with respect to the exponential growth in debt in relation to the linear growth of GDP, simple mathematical reality ensures that trillions and trillions of dollars of debt used to manufacture fiat money out of thin air will never be repaid which in turn means that our currency, like all other fiat currencies before it, will eventually become worthless. The Kondratieff winter will have its way in destroying debt which is why we must protect ourselves the systemic risk of fiat money by stepping out of our dollar liability system into an asset based monetary system, where the value of your money is not dependent on others to repay their debts. In other words, you need to own gold and perhaps silver, both of which have
served as a store of wealth when currencies disintegrate in value.
What about commodities? Well commodities also retain intrinsic value. But aside from gold and silver, most commodities are perishable or cumbersome to use as a store of value and medium of exchange. And in an outright deflation of the severe nature we anticipate in the depths of the Kondratieff winter, we believe commodities, even in terms of a rapidly declining dollar are not likely to hold up as well as gold.
###
Jay Taylor
May 12, 2003
321gold.com |
