As Shae noted in yesterday’s 60-Second Market Round Up, “The price of gold has hit record highs as a result of the Reserve Bank of India (RBI) decided to buy 200 tonnes of bullion.”
Today the price of gold has gone a touch higher. This morning it’s trading at USD$1,092.60, or AUD$1,200.66.
So while the Indian central bank buys ‘hard assets’ in the shape of the shiny yellow stuff, the US Federal Reserve remains busily giving away almost free money.
This morning the Fed decided to keep interest rates as they are – close to zero.
Personally we don’t have a high opinion of any central banker. It seems to us that they’re all cut from the same cloth. They all have an insatiable desire to meddle with markets, meddle with interest rates, and meddle with currencies.
They’ve convinced themselves that their mastery of tweaking interest rates by 0.25% here or 0.5% there will cause the market to behave just how they want them to.
Of course, we know that’s not possible. No-one is capable of micro-managing the decisions of the millions or billions of people that are affected by the actions of the central bank.
Sure, some people will react as the central bank believes they should, but guess what, the unpredictability of human nature also means some people will act the opposite way.
For instance, raising interest rates is supposed to be a deterrent to borrowing as it makes the cost of money more expensive. The simple rationale would be that raising interest rates will reduce the amount of borrowing.
Simple. Or it is until you think about another scenario. That it draws more people in to borrow because they are fearful of interest rates going even higher. Therefore they are more inclined to take out a fixed interest loan which is typically higher than a variable interest loan.
In this instance raising interest rates has encouraged more borrowers. Plus it has made the cost of money more expensive for existing borrowers. The case is the reverse for lowering interest rates.
Look, you can agree with that or not, but the fact is a central bank cannot just flick switches on interest rates in order to accurately manipulate a market.
Whatever Stevens, Bernanke or King do, it will always result in a knock-on effect elsewhere.
Although according to Garry Shilson-Josling, writing in the Sydney Morning Herald, apparently there is a script, written by the Reserve Bank of Australia (RBA), and the economy is obediently sticking to it.
But let’s not forget that central banks are actually the cause of the problem, not the solution.
For some unknown reason, central bankers are viewed as economic geniuses. In reality they aren’t. They’re just another set of public servants or academics that have risen to the top of the greasy pole.
They make one mistake after another – raising rates, lowering rates, raising rates, lowering rates…
And so it goes on.
Of course, sometimes their mistake is to leave rates as they are.
But while all this tomfoolery is going on in central banking circles, one thing is starting to trouble your editor. Maybe we’re reading too much into it, but we can’t help thinking that the market’s focus on the actions of the US Federal Reserve is misplaced.
I don’t mean that we should ignore what they’re doing, but rather that the problems in the US economy could be the biggest red herring the global economy has seen in the last seventy-odd years.
Let me try and explain what I mean. Stick with me, because I’m just think out loud here…
As I say, maybe we’re thinking too hard about this. We usually like to think that things are much simpler than they appear. And if people are making something unnecessarily complicated then it usually means they’re trying to hide something.
Anyway, keep reading and figure out for yourself whether what we’ve got to say makes any sense or whether it’s just garbled claptrap.
And of course, don’t forget you can make those thoughts known just by leaving comments on the Money Morning website when this article is posted later on this afternoon.
We mentioned some time back that our knowledge of the Great Depression was fairly poor. In fact it was abysmal. And it probably still is.
We knew next to nothing about the Depression apart from what we’d picked up from watching The Waltons twenty years ago – and apart from the poverty bit, it looked quite fun!
But once we’d decided to knuckle down and get ourself ‘some learning’ the next task was to find material that was reasonably objective.
That’s tough. When people write things it’s usually because they’ve got an opinion one way or the other. The book they end up writing will largely confirm their initial opinion.
So finding a neutral standpoint is impossible. Or we think it is anyway.
As we were unable to come up with anything neutral, we did the next best thing. We relied on authors that follow a ‘common sense’ economic approach. We relied on an economic school of thought that not only predicted the current events but are also predicting the next set of events pretty well too.
It’s the Austrian School of economic theory. You may have seen me mention Murray N. Rothbard’s book on the subject of the Great Depression a few weeks back.
Anyway, it’s the kind of economic thinking your editor can relate to. To put it simply, it’s a common sense approach that avoids all the complex methods and calculations that so many of the mainstream economists rely on.
I won’t go into the details here, but if you want to do your own reading a good place to start is the Ludwig von Mises Institute.
So, the result of this reading has allowed us to draw a few conclusions that appear to have been overlooked by the mainstream.
As I mentioned above, it’s just possible that everyone is looking in the wrong place for the next mammoth Great Depression. In fact it’s possible that the terms Great Depression and Terminal Decline are being confused.
That they are either not being applied at all, or that they are being applied to the wrong place.
Are you still with me? I did warn you that I was just thinking aloud. I’ll get to the point shortly.
There are many theories about what caused the Great Depression. The mainstream press and mainstream economists would have you believe the Great Depression was largely caused by two things – the Gold Standard, and the inaction of the Hoover administration.
Both theories are incorrect.
A better way to look at it is to realize that the Great Depression wasn’t actually the problem. The real problem stems back to the creation of the US Federal Reserve and policies during the Roaring Twenties.
The Great Depression which followed was merely the opposite effect of the previous boom. In other words, where there’s a boom there’s always a bust.
However, where things turned from just a Depression into a Great Depression was down to the interference of government and central bankers. Their desire to ‘stimulate’ the economy by borrowing and spending made things worse.
Sound familiar?
It’s no coincidence that the policies followed by governments and central bankers back then are the same – exactly the same – as the policies being followed today.
And back then they appeared to be working too – at least to start with.
But from what we can see, there was another reason for the global Great Depression in the 1930s. And it’s a reason that doesn’t get much airtime.
You see, back in the 1920s and 1930s there was a once great superpower that by that time was in terminal decline. It had spent its way towards bankruptcy following a crippling war and it was quickly losing ground as a major producing nation.
It was consuming more than it was able to give back. It had reached the tipping point and there was no turning back. All it could try to do was minimize the damage to its own economy.
Unfortunately for other nations, that would result in a lasting damage to other economies.
Of course, I’m referring to Great Britain.
Without going into all the details, one of the major direct causes of the Great Depression was the behavior of the not-so-great Britain and its attempts to prop up its own ailing economy.
What should have been a British Great Depression – and probably just a recession elsewhere – became a global Great Depression as attempts were made to stop Britain going down the toilet.
As you’re aware, the scheme didn’t work and Britain eventually ended up down the sewer.
The US Federal Reserve used billions of dollars to try and prop up the Bank of England and the Bank of England’s interests overseas, particularly in Europe.
Bankers manipulated currencies, they manipulated interest rates, and they manipulated the one true store of value – gold.
The worrying thing is that similar actions are being taken today by central bankers and governments around the world.
Only this time it’s not the US Federal Reserve that’s doing the bailing out, it’s the Chinese, Indians, Japanese and others.
They’ve all aided and abetted the American economy during the last twenty years by lending it ever greater amounts of money. Money that the Americans then proceed to spend on Chinese, Indian and Japanese goods.
The proceeds of which the same countries then re-lend back to America.
It’s an almost never-ending debt spiral that will ultimately end. The problem is whether other nations do this quickly and try to isolate the impact just to America, with minimal outside consequences.
Or, as seems more likely, that the withdrawal of support will be drawn out. That it will be the proverbial death by a thousand cuts.
Even the purchase of 200 tonnes of gold by the Indian central bank is unlikely to result in a quick de-coupling of the US economy from the rest of the world.
Our view is that while the purchase is significant, it’s nothing more than a token gesture.
Just as nations during the early 20th Century couldn’t picture a global economy without the presence of a strong Britain, so the central bankers and governments of the early 21st Century can’t picture a global economy without the presence of a strong America.
The problem is their attempts to save the US economy from terminal decline are doing little more than exporting the next Great Depression from the US to the rest of the world.
So the key economy to look at for the next Great Depression is not the US, but China. China’s roaring economy is just as unsustainable today as the US economy was during the Roaring Twenties.
The only question that remains unanswered is when will China eventually exhaust its ability to keep the US economy propped up.
It is, we’re afraid, definitely a matter of when, not if.
Cheers.
Kris.
60-Second Market Round Up
by Shae Smith
The S&P/ASX200 was up 8 points yesterday, closing at 4,540.10. Westpac’s [ASX: WBC] positive earnings report and a strong performance yesterday with gold companies helped pushed the index higher towards the close.
On Wall Street overnight, the Dow Jones Industrial Average finished the day higher at 9,801.83, up 0.31%. The announcement that the Fed will keep rates at 0.25 was expected by traders. You can read more here.
In Europe the FTSE100 finished at 5,107.89, up 70 points. A strong start on Wall Street saw the Footsie climb higher at the end of trade. Find out else happened in the UK here.
The Nikkei bounced back yesterday, finishing the day 9,844.31, up 41 points.
Gold continued to rise overnight.
The price of gold in Australian dollars is trading at $1,200.85, while in US Dollars it is trading at $1,092.90. And the price of silver in Aussie dollars is $19.19 and in US Dollars it is $17.46.
The Aussie dollar versus the US dollar, has stayed strong overnight, trading at USD$0.9102, and improved against the Japanese Yen JPY82.63.
Crude oil rose overnight at USD$80.23.
For the biggest movers on the market yesterday click here…
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what you suggest is impossible. If the US never actually paid for the goods it received from China then how does the Chinese factory pay its workers or pay Australia for its raw materials.
the IOU’s from America to China is to do with lending the savings of the Chinese to the US consumer/government – i think? Never really been into finance
me neither, GB, so there is probably something here for both of us to catch up on. As you say, I probably exaggerate somewhat partly out of ignorance and partly out of a natural predisposition, but the essence of it is that a lot of the goods the US has been getting from all around the world has not been paid for. Whatever the mechanism, the recycling of savings, or surplus trade dollars earned, or whatever, the net result is that China and the rest of the world has been shipping real good to the US, a large part of which has not been and will probably never be paid for. What part that is, the percentages, I do not know, as I am talking in broad brush terms here like everybody else. The devil, as always, will be in the detail, as will a conclusive answer and resolution to our respective, vague but different impressions.
We can and probably will continue to stick to our respective impressions until we have firm figures to count out the beans for a more definitive answer to the question of China, and its likelihood or otherwise to collapse. The answer may well lie somewhere inbetween our differring impressions and expectations, but even here I must point to a proviso, that we are dealing here with a fair dinkum, and clean economic problem, rather than a contrived and manipulated situation by interests with a much bigger agenda than the likes of us in the dark can even conceive. And, I must put on record, again, that in such a clean game, for the time being, I can have but little faith.
CB, You said:
”They have the technology now, and the know-how. They also have ready and willing workers to make it happen, and equally eager consumers to enjoy and consume the fruits of their own labour. The only thing they might still need for the mix are resources, raw materials. And that is where these green and sunburnt lands are supposed to fit into the picture.
I, for one, find these prospects rather plausible when focusing on the real things: the aspirations, the manpower, the capacity, the knowledge and the technology in the hands of the East, there is nothing, NOTHING, standing in their way, as long as they can secure peace with the West and a steady flow of resources to realise their aspirations for Western style development and standards of living. ”
What about energy? to increase the production of ‘stuff’, an increase in the delivery of energy must be in parallel. Can this be done? More cars for China/India = more oil, and it seems perhaps we are at a peak in production with a tail off already in many producing countries. Can they carry on increasing and supplying power stations at the same rate as the last few years? etc etc.
Oil is currently at around $80 pb at the very same time the US and many other countries is in a major slump, what price will it be if there is some sort of an economic recovery (in real terms, not just banker talk), how will this affect not just Chinese demand for ‘stuff’ but western countries also.
I’m convinced that energy is the key to what ever happens regardless of Chinese economics and politics.
is that why Iemma took orf?
http://www.elliottwave.com/cnbc-11-05-2009.aspx
THE COUNTRY IN DEBT = YOU IN DEBT
http://www.youtube.com/watch?v=tUs760ILyVw&feature=related
http://www.elliottwave.com/freeupdates/archives/2009/11/06/If-The-US-Economy-Is-Out-Of-The-Woods-Then-I-m-The-Queen-Of-England-.aspx
Steve99 – I agree with you. Energy, including uranium, oil, coal and gas, are all part of the raw materials I had in mind. And guess what? China has been reported on every continent to be on a shopping spree, buying up resources and signing agreements with energy and other resource exporting countries. The race is on, and China, not unlike Japan during the World War is vulnerable on this front. Unless they can keep Russia on side, they would be stuffed if it came to a confrontation with the West. Plus, Ujghurstan and Tibet would be their achilles heal. The Taliban and other mad muslim extremist groups would love nothing more than being financed and armed by the West to go to the aid of their muslim brothers in Ujghurstan and kick some communist butt.
China knows all this, of course, and they will not provoke confrontation with the West, and that is why I also mentioned peace with the West as a precondition for their development.
But if you pressed me really hard, then I would say, at some risk of inconsistency here and there, that the Chinese people’s goose is also cooked, just like the rest of us. They will have peace only if they will allow the IBC (International Banking Cartel) and its institutions (the IMF, the BIS and the SDR) into their system. If they do, then these parasites will comfortably live off them and their labour from within. If they kick out the Goldman Sachs and Co from their financial system and the multinationals, etc., then they will not have peace.
In short, the Chinese are caught between the devil and the deep blue sea, and will not be tolerated to prosper, unless within the confines of certain parameters set by the IBC. The fact that China has been one 0f the more vocal nations calling for a new reverve currency, and specifically the SDR shows that they are pretty much captured by the IBC. Ahmadinejad and Chavez, by contrast, are real thorns in the IBC’s side and will probably be object lessons sooner or later for the rest of those who might have similar ideas. I know I ramble, but we will see.
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