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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PF – you missed the point, China can change to spenders and i believe the economy will eventually become a consumption economy instead of an export orientated economy but the point is it takes a long time to do it. Years maybe even up to a decade, who really knows? I mean look at how quick the US changed from being spenders to savers – it was almost instantaneous… However, the Chinese have yet to make any real progress towards being a consumption economy, they are increasing investment/capacity not consumption because they are more concerned with jobs, jobs, jobs that fixing structural problems
Also, if you read my first line on my first comment i said I dont believe in the China hype not that i dont believe China can grow, and the rest of my comments point out that China is in just as much trouble as the Americans if no more
Sean – i agree with you that the Chinese and Indians are not stupid and they are hedging against future problems buying gold
i’m not sure if you realised it but by saying that China and India will prosper in the future because they are buying lots of gold you effectively are saying that the US will also prosper. The US has the largest stockpile of gold at around 7000 tonnes, i think the Chinese have 1000 tonnes???
its a win win situation for them
briperth, that is a very accurate statement. The amazing thing is that there is no revolt from the populace. But, then again, sheep will be sheep, while the wolves watch over the flock.
A very intelligent article – I agree except that central bankers are not stupid but are in fact mind controlled/programmed slaves of the elite. The central banks know exactly what they are doing and intentionally manipulate markets to create booms and busts to increase the elites control over the world.
It occurs to me that there is indeed a similarity between the two greatest threats we face today. Economists who believe they can save the economy by tweaking interest rates and environmentalists who believe we can save the planet by tweaking carbon emissions. Unfortunately history has shown that we don’t learn from history. Those of us who have woken up are making a noise but very few people are listening.
cb – below is an extract from Obama and the Dragon from the business spectator website. they say that China is keeping up production because they have no choice but they cant do it forever. So either the US go back to spending like it was 2007 quickly or China is in big trouble
“With a population of 1.3 billion people, China’s greatest fear is social instability; therefore, the government goes to great lengths to keep employment levels up. This requires maintaining production levels even in periods of low global demand, rather than cutting back on excess capacity and creating hordes of unemployed workers who might turn to protests”
oh well….. looks like every-one will have to particpate in mass demonstrations like in the 1960′s,,,,,,people power RISE!!!!!!!!!
..now theres some bang for your BUCK!!@!!!!!
just a few years ago everyone was complaining ” oh look @ those idiots on tv ” when they were protesting s-11 nwo oligarchgy protests in australia 2000 etc & around the world,,
cos they knew its coming to this type of,” duping sheeple “scenario
Thanks, GB. Still struggling to see it, though. If the communist party wants to keep the nation working, they have ample capacity to keep doing it. After all, it costs next to nothing to create “money,” to pay the workers with, and if they in turn do not want to spend the money they earned on consumer goods, such as fridges and cars, then the government can literally give them away to the people in bonuses, so they will not go to waste, but lift the living standards of their citizens.
I just don’t understand what the problem is. With the idiotic transfer of know-how and technology from the West to East, these people now have EVERYTHING they need to keep lifting and improving their own standard of living. They simply do not need western consumers to gobble up the fruits of their production. They can consume it all themselves. The only change they need to make is to rearrange the symbols, the $$$$ signs, and instead of pretending that it is coming into their economy from the West, they can start believing that in fact it is coming from THEM, from within, as it were, because the true underlying value of those $$$ symbols are no longer the knowledge or wealth of the West, but that of their own, their own knowledge and their own hard work and sweat.
This might not be easy to grasp, because it is way too counterintuitive, but I am pretty sure that this is where the substance of the matter lies, even if I am not explaining it very clearly. The problem is now more with the paradigm of thinking and understanding what is happening, rather than with the underlying reality. One sign that clearly confirms this alternative take on reality is this:
1. China has been shipping goods to the US by the container load.
2. In return, it has been largely receiving sweet little more than pretend money, pieces of paper saying ‘IOU.’
3. Yet, this had not stopped China from being able to keep producing and shipping all those shiploads of goods to the US in return for, you guessed it, more IOUs, more promises to pay sometime in the future.
4. Now, simply imagine that, instead of shipping real goods for more hollow and worthless IOUs from the US (there is hardly a soul who still believes that the US can, or will, pay its debts), the Chinese simply give these consumer items back to their own citizens, and VOILA, the production lines are kept busy while the standard of living in China keeps rising higher and higher. The more they produce, the more they can consume, and the actual moneyflow between the producers and the consumers is largely a pen and paper excercise, a rearrangement of the symbols in such a way so as to reward those who are hard working with the fruits of their production.
5. The only thing the Chinese really will need from the West, are resources, ores and energy, and given the oodles of production in their factories, they will have little trouble paying for those.
LOL!!! – i think you are hinting at a return to communism.
i see it this way – using made up numbers, the chinese were making 1000 units of produce, 800 units were sold to the US and the Chinese consumed 200 units.
The US are bankrupt so now they are only buying 300 units but the chinese are still producing 1000 units (jobs, jobs, jobs) which means 500 units are being produced in excess. Currently those 500 units are being bought by the government through stimulus because chinese consumption is not big enough to consume that excess. So how long can the chinese government continue to buy the excess so people still have jobs?
Also, there has not really been any technology transfer to the Chinese thats why there are no Sony, Intel etc… Chinese brands. The Taiwanese have a law that forbids their core technologies of their products being produced in China – core technologies are produced in Taiwan, the ‘container’ it goes in is produced in China. Another example is China’s new step into the aviation industry to compete with Boeing and Airbus except that they have dont have the technology to do it and all the key parts to the aircraft will be provided by US companies etc…
Can China just simply give their products to their citizens. I think (not sure) that China’s so called ‘profits’ from exports (trade surplus) was around $300 billion per year but has since dropped to less than $200 billion per year. That seems like a lot of money until you compare how much the Chinese are spending to maintain their current growth of 8% GDP. The stimulus package was $600 billion dollars which is 3 years worth of export ‘profits’ and they had to couple that with two years worth of bank lending just to get their 8%. Maybe they can drag it out for a few years but eventually they will have to stop it.
The question is: When will the US come back to life and start buying Chinese products so the Chinese government can stop doing the buying? I think its going to take longer than people think and I dont think they will ever come back at the same strength which makes me bullish America and Bearish China.
But hey, that doesn’t mean the Chinese cant pull it off and transfer their economy from export orientated to consumption orientated without lots of problems, e.g. inflation.
lol, GB, they need not return to it. They still HAVE it. It is a command economy of sorts, not unlike we have in the West where key controls are not in the hands of the market, but meddling politicians and their various bedfellows of special interests.
Now, picking up on your illustrative example, what I have been trying to point out is that the 500 extra units of production that the US is no longer taking from the Chinese can now be enjoyed free of charge by the Chinese themselves, because the US was not in fact paying for those extra 500 units at any point before, but instead they simply said, “thank you for the goodies, for the cargo, we owe you, and will pay you sometime down the track.” The point here is that the Chinese have not been paid anything real for those extra units of goods up to this point, since the US has not been settling its debt, and if that is right, then that simply shows that China in fact can do without those payments, since they were never real payments, but simply promises of payment. I hope that I am explaining this right, but the key point is that whatever China might have lost in overseas demand is not likely to hurt them all that much, since they were never really paid, and have been making do, and in fact have been doing just fine even without being paid for all that extra production they have been shipping overseas in return for more and more promises that were not, and will not, because they can not, be honoured.
As for the technology, hmmmm, I could be wrong. The US might have been clever enough to retain key knowledge and technology, but I would not bet on it. Chances are that China has been busy busy busy in the background, trying to make sure that they in fact have enough information to carry on, if they have to, and who is going to hold them responsible for copyright? It is a murky area, but good old commercial espionage is probably as alive and kicking today as it has ever been.
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