The Lessons of History
Just got this article from gold-eagle.com
The Lessons of History
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According to the September 5-11th edition of "The Economist" magazine, while
there are some similarities between now and the late 1920's (such as falling
commodity prices and an overvalued stock market), the world should be able
to avoid a 1930's depression due to some big differences. Specifically, In
the 1920's, country's were on the gold standard, which restricted their
ability to ease monetary policy as economies went into recession after the
Wall Street crash of 1929. Secondly, governments compounded their tight
money mistake with tight fiscal policies. Rather than allowing taxes to fall
automatically as incomes declined, Americans raised taxes in 1932 to balance
the budget .The claim is now governments have a better understanding of
macroeconomics, and with public spending taking up a much larger share of
GDP, their ability to stabilize demand is greater. The third difference
between today and the 1930's is that there were no organizations such as the
G7 or the IMF to oversee the world economy.
These are the thoughts of many of our economic leaders and certainly the
thoughts of one of the more respected financial publications in the world.
Each one of us must challenge these thoughts, for these are only thoughts,
not facts, and they are thoughts not based on truth, but illusion. The first
claim is that easing monetary policy can reverse a deflationary spiral.
Deflation is caused by excess capacity leading to lower prices, leading to
falling profits, leading to reductions in output and wages. When excess
capacity is financed by debt, the need to generate cash flow will lead to
predatory actions resulting in a much faster collapse in prices. When prices
are falling, investors are unwilling to borrow to buy something that will
cost less next month, even at 0% interest. With excess capacity, and small
or negative returns on marginal investments, there is no incentive to
further add to capacity, even at 0% interest, thus putting a brake on
investment. Japan is a good example of this effect. Interest rates have
fallen to as low as ¼ of 1% and still the economy continues to contract and
has now entered into a deflationary spiral.
Another way for the government to ease monetary conditions is for the
government to print money. This is now happening in Russia and many have
advocated that Japan does this as well. Throughout history, whenever a
country has printed money, it has lead to hyper inflation and the collapse
of the economic system .It will be no different this time .The printing of
money destroys the value of money resulting in the return to a barter system
.A barter system is extremely inefficient which further contracts the
economy. During the depression of the 1930's, money was sound, which will
not be the case in today's economic contraction.
The second claim is that we now have a much better understanding of
macroeconomics and with public spending taking up a much larger share of
GDP, their ability to stabilize demand is greater. My previous articles have
analyzed the "lies" of current macroeconomic theory and I will concentrate
my discussion on how a large government sector affects the response to a
deflationary contraction .The essential question is which government is best
able to act to stabilize demand, a government with a large share of the
economy ,which is running a financial deficit and has a large debt load ? Or
a government with a small share of the economy which has a balanced budget
and minimal debt .The first case describes most of the governments in the
world today, the second case describes many of the governments in the late
1920's.
When an economy enters a deflationary spiral, profits and incomes fall,
which in turn reduces tax revenue .The greater the governments role in the
economy, the greater is the fall in tax revenues, and the greater the
government deficit must rise as a percentage of the economy. In order for
the government to stabilize demand, they must increase expenditures or
reduce taxes. This is much easier done, the lower the deficit level is prior
to the economic contraction. Today's governments, which are entering the
deflationary contraction with large deficits and a large involvement in the
economy, will see their deficits as a percentage of the economy be much
higher than the governments of the late 1920's. This will more severely
restrict their ability to stabilize demand. Again consider the Japanese
economy .On September 14, 1998, the governor of Kanagawa, the prefecture
just south of Tokyo, warned that a steep tax revenue shortfall may force the
prefecture to declare bankruptcy, with a revenue shortfall approaching 64
billion yen."Our finances are in a terrible mess", Gov. Okazaki said;" We
will have to reorganize our services and put brakes on spending."
The other consideration is the large debt levels most governments now have,
as opposed to the minimal debt levels of the governments of the late 1920's.
First, it is much easier for a government with little or no debt to borrow,
than it is for a government with a large amount of debt. More important,
when an economy in which the government has a large debt and is running a
deficit enters a deflationary contraction, the holders of this debt seeing
an increase in the government deficit now have concerns regarding the
governments ability to repay the debt .The resulting sell-off of this
government debt, pushes up interest rates, both to the government and
business sectors. This, the increase in interest rates, only adds to the
fall in profits, employment, and increase in the government deficit, all of
which only adds to the deflationary contraction. Brazil is a good example of
this effect. With a government deficit of 7% of GDP, and the economy in a
deflationary contraction due to the Asian crisis and the fall in commodity
prices, interest rates recently reached almost 50%. Interest rates of 50%
would add another 9% to the government GDP deficit bringing it to 16%, while
punishing an already hard pressed corporate sector, with both effects only
adding to the deflationary contraction. Some may point to Japan as a country
with a large government debt and deficit where interest rates have gone down
and not up. This is the result of confidence. Most investors fail to
understand the powerful forces acting on world economy's and fail to see the
danger that exists. If Japan, with the second largest economy and the
greatest exporter of capital were to fail, they ask what would be left of
the world economy? The huge government deficit of the Japanese government is
about to get much larger. Tax revenues are imploding while calls to
stimulate the economy and bail out the banks are heard daily. There is no
mathematical way for the Japanese government to repay its debt (besides
printing money). Once investors reacquaint themselves with elementary
mathematics, Japanese interest rates will skyrocket and the Japanese economy
will implode into the abyss.
The third claim is that organizations such as the G7 or the IMF are now able
to oversee the world economy. Look at the IMF, its policies of double digit
interest rates and government fiscal contraction have devastated the
economies of South Korea, Thailand, Indonesia, and Russia. Countries that
have followed its advice such as Malaysia and Brazil are experiencing a
similar fate. While I make the point that not even 0% interest rates can get
countries out of this deflationary contraction, these double-digit interest
rates advocated by the IMF ensure a quick death. In Korea, domestic demand
is imploding, exports shrinking and the whole country is headed for
bankruptcy. Domestic consumption has plunged 28% during the first half of
this year from levels one year ago. In 1931, during the midst of the Great
Depression, the U.S. posted only a 13.4 percent decline in consumption. In
August 1998, exports fell 10.8% while imports fell 37.5% from year earlier
levels. In Indonesia, it is estimated that two thirds of the population will
be below the poverty line in 1999. One must certainly question what secret
agenda that the IMF aspires to.
Lies and deceit, mirrors and illusion, have we lost our ability to see the
truth?
To date, the 10 Billion US dollars the worlds' banks have written off of
their Russian debt has resulted in minor financial tremors. With US $40
billion under payments moratorium, write-offs will soon increase. However,
there is another $180 Billion of corporate and government debt which has not
come due for repayment, but for which there is no source of repayment. While
bankers now pretend that this is a quality asset, it will also one day be
written off. With Russia having to import grain due to the worst harvest in
41 years, finding money to feed its people may be impossible. Any thoughts
of debt repayment only a distant dream. Russia's GDP contracted 8.2%
year-on-year in August, a trend that is clearly accelerating. This
contraction of GDP will only add to the massive funding deficit. Much of
hundreds of billions in debt to Southeast Asia are in a similar situation.
Rescheduled or not due, there is no source of repayment leading to eventual
default.
Japan continues to struggle with their banking crisis. With losses form
loans and derivatives likely to exceed trillions of U.S. dollars, there is
no solution as the Nippon government continues in self-denial as the economy
implodes.
The crisis is now spreading to South America and will soon destroy the
economies of every country in the region. The certificates representing
Brazil's US $290 Billion is domestic debt may make expensive wallpaper,
because soon this will represent their maximum value as a collectors item.
Around the world, the pattern is similar. Banks create vast sums of money.
This money flows into countries creating credit bubbles. Then this money is
pulled out of these countries collapsing their bubble economy. Doesn't
anyone see this pattern?
The last great bubble is in America - and watch out because it is now
beginning to crack. The savings rate is below 1%, there is a massive trade
deficit, foreigners own a huge amount of their debt, the stock market defies
any rational sense of valuation, and there is literally trillions of U.S.
dollars floating in the world -- which serve as the world's reserve
currency.
When the stock market falls, Americans will cut back on consumption and
increase savings, bringing about a severe contraction in demand, both
internally and externally. The flow of money into the U.S. creating the
credit bubble will reverse, and as foreigners sell U.S. stocks and bonds,
interest rates will rise and the dollar will fall. A crisis will then be
created where the holders of the trillions in U.S. dollars circulating
around the world, will no longer see the value of holding them, and they
will be returned to America as a debt, with payment demanded.
"You know, by the time you become the leader of a county, someone else makes
all the decisions. You may find that you can get away with virtual
presidents, virtual prime ministers, virtual everything" - said Bill Clinton
during his recent trip to Ireland.
With the Lewinsky affair, Bill Clinton is being set up. Why now is the
question? The unresolved deaths of Vincent Foster. Rob Brown and over 100
other bodies, drug – smuggling through Mena airport, Whitewater, Travelgate,
drug use, FBI files, illegal campaign contributions, technology transfers to
China, Gennifer Flowers, Paula Jones, Kathleen Willey, and the list could
continue. Even Bill Clinton may be wondering, "why now?" -- and all for what
is likely one of his lesser transgressions. Only time will reveal the "Why
now" -- though it is likely that Bill Clinton is being set up to take the
fall, indeed become the scapegoat for some major event.
On September 18,1998, the Senate failed to override President Clinton's veto
of a measure banning a type of late-term abortion. The procedure involves
the partial, feet- first delivery of a child and the draining of its' skull
contents.
America used to stand for Life and Liberty. America used to care about the
morality of its leaders. America used to care about truth and justice.
Americans used to have strong personal beliefs and defended these beliefs to
the death. Many Americans no longer have beliefs, only opinions fed to them
by their corrupt political, economic and religious leaders. Many Americans
no longer care about truth, and have become manipulated. Many Americans no
longer care about the morality of their leaders. As long as they feel good
and have an imaginary stock bubble, this is now what is important.
Many Americans have stopped defending the life of the most innocent and
precious of its citizens, their children. They have become blind to the
truth. They now fail to see the illusions in economics, in politics, in
religion. When the "One World People" take over their country, when
Americans are headed into concentration camps, will they then see the truth?
Many Americans have stopped defending Life -- and for this they will soon
loose their Liberty.
Behind the scenes, the One World People continue to plan and manipulate.
Recent rumors have Australian mining giant BHP being split up and sold.
Shell Oil would take over the oil and gas properties. Rio Tinto would take
over the mining properties, there- by consolidating its control on the
majority of the mineral wealth in the world. Such a move would give
Rothchilds, through their influence on both DeBeers and Rio Tinto virtual
control on the world diamond market.
In October 1998 BHP/ Diamet's Ekati mine will commence production. The Ekati
mine hosts world class Kimberlite pipes with diamond grades and quality that
rank amongst the highest of any mine in the world. The economics are superb
with the mine likely to supply 4-5% of the world diamond market. However,
the real gem is the Rio Tinto / Aber, Diavik project located only a few
short kilometers away. As world-class as the Ekati diamond pipes are, they
pale in comparison with two of the pipes on the Diavik project. The value of
the top layer of Pipe 418A is US $408/ ton while the top layer of pipe A1545
is $328/ ton, several multiples higher from the Ekati mine.
By purchasing the Ekati mine, not only would Rio Tinto be consolidating
control of the diamond market, but they would be in a position to begin
mining the high grade Diavik pipes as soon permitting allowed, using the
equipment and infrastructure just completed. Moreover, the cost of doubling
the production capacity of the Ekati mine from 9000 ton/ day, to 18,000 ton/
day is estimated at US $ 80 million, just a fraction of the cost of a new
mine. With cash costs of $40 / ton, mined at 9000 tons/ day, the daily cash
flow of pipe 418A is US $3,312,000 / day and for pipe A1545 it is US
$2,592,000 / day. These construction costs would be recovered in just days.
Cash flow per share for the 40% joint venture partner, Aber Resources would
be Cdn $1.36 / month for the top layer of Pipe 418A and Cdn $1.06 / month
for the top layer of Pipe A1545. With a recent price around Cdn $9.00, Aber
appears under – valued to an extreme, especially compared to the average
stock on the NASDAQ which recently traded at a P/E ratio of 85:1. Moreover,
with the price of diamonds about to explode as all investors sell their
worthless paper financial instruments for the tangible illusions of gold and
diamonds, cash flow from these pipes will be multiples of those projected.
With the earnings of the stocks on the NASDAQ about to implode, as the
values of gold and diamonds rise to unbelievable heights, master
illusionists could only create the present imbalance in valuations.
Gold and diamonds are cold and lifeless. Our life, our existence, our
physical well being does not depend on their existence. Gold and diamonds
are not life, they are not love, they are not liberty, nor are they truth
and justice. Do we aspire to the higher gifts? Or do we follow the desires
of the One World People?
John Kutyn
23 September 1998
gold-eagle.com
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