You probably know the story about the Emperor's NEW clothes. The "head man" surrounded by fawning sycophants who is so filled with hubris that they sell him on the idea that they have a new suit of clothes for him which cannot be seen by anyone who is stupid or not fit for his position. Needless to say, the clothes do not exist. Having "donned" them, the Emperor is naked. But all around him exclaim at the fineness of the fabric and the perfection of the cut. And, of course, the Emperor goes along. Everything goes perfectly, until a child pipes up that the Emperor is naked. As indeed he is.
This con has worked remarkably well in financial circles for a LONG time. The policies and the lawmaking which run counter to economic sanity have poured out of legislataive bodies all over the world for decades. And the vast majority of the subjects have fallen all over themselves to praise the "fineness of the fabric and the perfection of the cut". After all, everyone else is doing it so it must be right. It is true that many "innocents" - REAL economists, REAL economic, financial and political analysts, even the occasional REAL politician - have been pointing to the nakedness of every justification for the path down the "credit expansion road". But they have been ignored. They are clearly stupid, and not fit for their position.
The problem is that this set of "new clothes" for the Emperor is getting very threadbare indeed. More and more people, not necessarily "innocents" either, are beginning to see that there's really nothing there. Just consider a few examples.
The only people in the US who are still saying that the economy is not yet in recession are the politicians and the bureaucrats in the houses of government across the country. The only ones who are still wondering whether a recession is coming are those on Wall Street. Americans don't "measure" a recession as two consecutive quarters of "negative economic growth", they measure it by their cost of living, the ease with which they can find a well-paid job, and the state of their existing finances. On all three counts, the overwhelming majority know that the US is IN recession. The more the contrary claims flow from Washington DC and Wall Street, the more they are confirmed in their judgement.
Then there are the recommended "recipes" for getting economic growth going again. As they have been doing for decades, the "powers that be" claim that all that is necessary is a bit of judicious interest rate "management", a touch of government spending to make sure that the spending continues, or perhaps just a touch of "stimulus" in the form of sums of money doled out to the populace to help in their all important pursuit of "consumer spending".
This too has worked for decades. It is not working anymore. When recently asked what was the best thing the government could do to "fix" the economy, Americans did not hesitate. They suggested getting out of Iraq and Afghanistan and stopping the war(s). They were even more decisive as to their plans of what to do with the "stimulus" on the way to them from Washington DC. What they do NOT plan to do is what the government wants them to do. They DON'T plan to spend the money. Most plan to use it to reduce their debt load. Others plan to save it. A few even plan to give it to charity. But very few plan to spend it.
Oh, and a clear majority of Americans don't think that the "stimulus package" should have ever gotten off the ground. They don't see it as a way to "fix" anything, they see it as a sure route towards making matters much worse. The Emperor's clothes are getting very old indeed when this is the reaction.
The credit-crunch hit six months ago. Government measures to deal with it started to get truly desperate in December last year. They have become steadily more desperate since. And not only have they not worked, they have been SEEN to be not working. Worse still, an ever growing number of Americans are beginning to understand that they are quickly making things worse.
We are in a political year in the US. It would seem that John McCain has all but sewn up the Republican nomination for President. On the Democratic side, Ms Clinton and Mr Obama remain "neck and neck". We are in for what could be a truly fascinating situation in the lead up to the political conventions later on this (northern) summer as those still in power struggle to save the Titanic by looking for more icebergs to run into while those who covet the Presidency try to come up with ways to turn the "old clothes" into new ones again.
The idea that an economy or a people could "spend" their way to affluence was indeed a resplendent set of new clothes in America once - back in the early 1930s. The problem is that this is now a long time ago, and the idea is unravelling much faster than are the paper markets which depend on it. Both the US Fed and the US Treasury depend above all other things on controlling "expectations". This is the modern version of FDR's old chestnut: "The only thing we have to fear is fear itself!" The Fed doesn't worry about the existence of "inflation". It worries about people's ability to see it. The Treasury doesn't worry about the bankruptcy of the US government. It worries about people's willingness to know it. The nakedness of their policies don't matter as long as everyone is oohing and aahing about the quality of the material which isn't there.
Take a look at the abrupt turnaround in the Gold price this week. Take a look at the equally abrupt turnaround in all the other metal (precious and "base" alike) prices too. The Emperors in Washington DC and on Wall Street are wearing very old clothes indeed. And the more they enthuse about the "quality and the cut" the more exposed they're going to get. In the US, it's still early days, but the "powers that be" are slowly but surely losing control of public perceptions. And that they CANNOT afford.
The $US 5 x 5 Gold Point And Figure Chart
(Chart appears here in original analysis.)
We have extended the table below into 2008, even though Gold in all four currencies in the table is now well above its 2006 highs. Gold breaking out to new all time highs in $US terms three weeks ago led to bull market highs in all four currencies. That was repeated when Gold hit another all time high in $US terms on Monday, January 28. This week, Gold in $US terms has corrected and then stormed back up again. With the US Dollar rebound this week, mainly against the Euro, the only new high on Gold for the week is the one in Euro terms set on February 8.
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