(The October 28 post follows below)
The denials being trotted out by everyone from Wall Street "gurus" to Bush Administration officials in recent days are wondrous to behold. The best analogy we can come up with is the old joke about the fellow who fell off the viewing platform at the top of the Empire State Building and was heard repeating to himself all the way down - "So far, so good!"
Take US Treasurer John Snow, for example. Mr Snow recently spent a week in China talking to the Chinese leadership about matters of much importance while telling anyone who would listen to him that everything was going beautifully and he and his Chinese hosts were getting on like a house on fire.
Then Mr Snow returned to the US. Having done so, he lost no time informing the AMERICAN people that it was necessary for the Chinese to follow up the 2.1% July "revaluation" of their currency with another and preferably bigger one. He went on to say that this had to be done before Mr Bush's scheduled visit in November 18 - because of the "political pressures" involved. Political pressures on whom? Mr Snow did not say.
Perhaps the political pressures involved might pertain to Mr Snow himself, or more largely to the Bush Administration? It is a sad but unavoidable fact that yields on Treasury paper from three-month to five-years reached 2005 highs this week. The yield on longer-term paper too is inexorably rising, ten-year yields having risen from 4.00% to 4.57% since Katrina hit at the end of August. Fixed (30 year) mortgage rates are the highest in well over a year, with the result that more and more people are choosing adjusable rate loans. These are rising faster than the fixed rates.
Mr Snow had much more to say when responding to emailed questions on the White House website. When asked why the Treasury was letting the Dollar be "devalued", He parroted the "strong Dollar policy" which has been trotted out by every Treasurer since Mr Rubin. When asked about the "housing bubble", he duly denied its existence. Mr Snow had little choice in this matter since the soon to be Head Fed, Mr Bernanke, has already done the same - repeatedly. Also parroting Mr Bernanke, Treasurer Snow placed the blame for the huge US trade deficits overseas, blaming "weak consumer demand" there.
Then there was Wall Street, where the Dow enjoyed two triple digit gains this week. The first came on October 24 in reaction to Mr Bush's announcement that he was nominating Mr Bernanke as the successor to Alan Greenspan at the Fed. The second came on October 28 in reaction to the announcement that third-quarter US "economic growth" had increased by a greater than expected 3.8%.
The report on the 3.8% third quarter GDP growth came one day after a report that US Durable Goods orders were down a greater than expected 2.1% in September. The drop in durable goods orders was blamed on the recent hurricanes. The increase in third-quarter GDP was credited to the hurricanes. The reaction on the Dow was a 115 point fall on October 27 followed by a 172 point rise on October 28. At least "volatility" is back.
The reports on the unexpectedly robust GDP figure brings the whole denial syndrome into sharp focus. The "growth" figure, it was said, "reflected brisk spending by consumers and businesses despite high energy prices." Ah yes, the damage from the hurricanes is immense, but no matter, consumers and businesses are still SPENDING.
Unfortunately, mere "spending" doesn't fix the problem. Here's one example. US oil companies looking for new drill rigs to find more oil can find neither the equipment nor the skilled workers to operate it inside the US, no matter how much money they wave around. To procure the equipment, most of them are going to - you guessed it - CHINA.
The 3.8% spurt in third-quarter GDP (Gross Domestic Product) does not take the loss of physical wealth or the even more important productive capacity into account at all. It focusses on "spending", from whatever source derived. A large part of the "growth" was composed of the increase in government spending in the wake of the hurricanes. More of it was composed of private spending to replace essentials destroyed by the hurricanes. ALL of the government spending and the vast majority of the "private" spending was with BORROWED money. As usual, what has "grown" is not physical wealth, what has grown is the amount of "money" sloshing around in the economy.
What is being denied, because it cannot be affirmed by those in charge of the "system", is that money is not wealth and that no amount of it will procure real economic goods which have not being produced. That is why the US oil company mentioned earlier, with tens of Billions of Dollars to wave about, had to go to China to spend it on the GOODS needed.
As we said here last week: "The production of 'money' has been lauded to the skies . The production of WEALTH has been sneered at and so have its practitioners. For a quarter of a century, the very concept of the "debasement of the currency" has been seen, not as an economically-fatal expedient undertaken by desperate governments, but as the acme of "financial management". In financial markets, the past 25 years has convinced almost everyone involved with them that THIS TIME - finally and at long last - IT REALLY IS DIFFERENT!
Mr Snow, the man in charge of the US Treasury, and Mr Bernanke, the man soon to be in charge of the US Central Bank (the Fed), are the main men in charge of making sure that this delusion lasts for as long as they hold their respective positions. Mr Snow has the "easier" task. If he (or for that matter Mr Bush) lasts that long, his tenure as Treasurer will end with the Bush Administration. Mr Bernanke's is the more onerous task. He is replacing a man who will, by his retirement date, have served as Fed Chairman for eighteen and a half years under four different Presidents. The last Fed chief to last that long, William McChesney Martin, bowed out in 1970. The next decade was, and is, history.
Gold hit its bull market high (spot future closing basis) of $US 477.10 on October 11. It then dived to $US 461 by October 20. Just over a week later, it has regained almost all of that correction.
The political pressures on the Bush Administration are steadily growing, as witness the withdrawal of Mr Bush's nominee to the Supreme Court and the handing down of indictments against Mr Cheney's Chief of Staff. The geopolitical pressures on the Bush Administration are growing, as witness the Iranian President's outburst this week to the effect that Israel should be "wiped off the map." The financial pressures on the Bush Administration are growing too. Treasury funded debt levels topped the $US 8 TRILLION level for the first time on October 20 and have been steadily increasing since. Treasury debt paper yields are inexorably rising right across the "curve". The US Dollar, as measured by the $US index, is repeatedly stalling at or near 2005 highs at levels just above 90. The longer it challenges these levels WITHOUT breaking through to new 2005 highs, the higher the potential for a sudden and drastic fall in the index.
In sum, the political, economic, and financial situation is not changing. It is simply growing worse and worse. As it does, the pressure under the $US Gold price continues to increase. Over the coming weeks and months, public credulity is going to be tested as it has seldom been before. Mr Snow and Mr Bernanke will be the men in the financial headlights. Without the aid of the master dissembler - Alan Greenspan - they simply don't have the tools to do the job.
(Original post - October 28)
I will be posting an updated commentary on Gold tomorrow. In the meantime, and in light of Mr Bush's nomination of Ben Bernanke to succeed Alan Greenspan at the head of the Fed, I strongly urge you to read the two "seminal" speeches which brough Mr Bernanke to prominence:
Deflation - Making Sure It Doesn't Happen Here - November 21, 2002
The Global Savings Glut and the US Current Account Deficit - April 14, 2005
Yes, both these speeches are "heavy" going in spots, but if you want to discern the likely policies and practices of the man who is taking over the Fed (assuming Congressional approval) at the end of January next year, they are REQUIRED reading.