Watching economists and media analysts react to breaking economic news is a bit like looking at a flock of pigeons flying over the New York skyline. A true wonder of the urban landscape, the flocks can include hundreds of individuals who show an uncanny ability to stay in tight formation as the group quickly zig-zags between buildings. What may be even more remarkable than their ability to randomly fly while maintaining cohesion is the flock’s refusal to stick to any particular direction for very long, and their determination to fly feverishly without actually going anywhere. Sound familiar?
Today’s weak GDP numbers have finally caused the mass of economists to revise downward their formerly optimistic recovery forecasts, with many finally entertaining the possibility of a “double dip” recession. It should be obvious by now that these economists only have the capacity to describe where the economy is moving in the short-term…they have no ability to explain the reasons behind the macro trends or make predictions that go beyond the next data release. But economics is not dart throwing. It can be understood and properly forecast.
The major mental block is that most economists believe that an economy grows as a result of spending. Any policy that encourages spending and discourages savings and investment is considered beneficial. Unfortunately, these policies, which only succeed in growing debt and government, act more as an economic sedative than a stimulant.
On the subject of the “recovery,” I’d like to highlight some of my past predictions, and those of my colleague Michael Pento. With the benefit of hindsight, you can see that although these thoughts were widely dismissed as chronic pessimism at the time of their publication, the current situation supports our conclusions. Although some of our predictions, like for higher bond yield, have yet to materialize.
Michael and I may be birds of a feather, but we don’t blindly follow the flock. We believe economics is a scientific discipline with established laws, and that applying those laws will yield fairly accurate predictions over time. Most other economists say what they need to say to appease their employers (whether on Wall Street or in Washington) and maintain the respect of their peers.
by John Browne, Senior Market Strategist, Euro Pacific Capital
In the first few days of July, the prices of gold and silver appeared to break a five-month upward trend by drawing back about five per cent from the record June peaks. Despite many similar corrections that have occurred frequently during the long bull market in precious metals, pundits nevertheless looked to draw bold and significant conclusions from the drop. But just as investors were getting comfortable with the leading explanation – that a looming double dip recession will prevent inflation and thereby dampen demand for precious metals – the markets for both metals stabilized.
Most investors still credit the accepted orthodoxy that metals will only gain if inflation is widespread or a financial crisis encourages investors to seek safe havens. The failure of both metals to break below their upward trend lines, despite the lack of news on both fronts, should lay to rest these canards. Unfortunately, nothing appears more resilient than the belief in a gold bubble.
In my opinion, the current rise of precious metals is the direct result of the evident profligacy of governments the world over. Spendthrift politicians in Washington, London, and Tokyo, have caused people to lose faith in paper currencies. Investors, as well as an increasing number of lay citizens, understand that debts cannot be accumulated forever and that the most tempting solution will be to simply print more currency. The only alternative is an unpalatable tax hike that will only serve to reduce long-term revenue, as explained by the famed Laffer Curve.
If John Maynard Keynes and F.A. Hayek got into a fight, who’d win?
If it was a real knock-down, drag-out brawl, my money would be on Keynes. At 6’ 6”, he’s got the size, the weight and the reach. Hayek couldn’t lay a glove on him.
But what if they were cutting heads and throwing down rhymes? Then, Keynes could have a real fight on his hands.
You can read the rest of the discussion, and comment, here.
by John Browne, Senior Market Strategist, Euro Pacific Capital
Last week, global attention was focused on Toronto as the G-20 gathered to confront the growing financial and economic worries darkening the global economic horizon. In an irony worthy of Orwell, the representatives of the world’s top 20 economies (19 countries plus the European Union) managed to ignore the out-of-control spending contained in Western governments’ budgets and instead unite behind a banner that they called “financial responsibility.” This is akin to a group of Mafiosi holding a summit on business ethics.
For the sake of indulgence, let us grant that “responsibility” is a relative term. And although the leaders of the EU have committed themselves to massive bailouts of their more profligate members, they are at least showing some remorse after the fact. This stands in sharp contrast to President Obama, who shows no such regret. While the Europeans tried to stick closely to their declared aim of “responsibility,” it was clear that the American delegation was working a somewhat different angle.
From my perspective, President Obama and his team had three main goals:
First, the US Administration sought to win wide support for Fed Chairman Ben Bernanke’s spend, spend, spend policy. On this front, there appears to be not the slightest daylight between the programs recommended by the Fed and the Treasury. This degree of concord runs contrary to the Fed’s supposed independence.
Below is the rough transcript of some remarks I made at the campaign’s successful fun-raiser at the American Sandwich Company in Coopersburg on June 6, the 66th anniversary of D-Day. More details on the fundraiser in tomorrow’s post. The event began with a moment of silence for veterans, especially the 5,490 soldiers who have died so far in Iraq and Afghanistan.
“Today we face a D-Day of a different sort, and while there is still war, the causes are economic. At the last Towne Hall, I presented “The Economy in Pictures” where I demonstrated that unemployment is >>17%, 1 in every 8 Americans is on food stamps, the FDIC that “insures” bank accounts is hopelessly insolvent, and the true national debt is really $120 Trillion – when the $13 trillion in US treasury debt is added to the unfunded liabilities of Social Security and Medicare - a vast sum that is best put into personal terms as $400,000 for every man, woman, and child in the United States. At this point, even if the government were to tax 100% of each citizen’s dollars and properties, there still would not be enough to theoretically pay off this debt.
The plan the country should follow is very similar to an engineer solving a problem, or a doctor treating a bleeding patient. First we must contain the problem, then determine root cause, then take corrective actions. The steps are easy and simple enough, though this doesn’t mean Congress will follow them. Let me recap.
by John Browne, Senior Market Strategist, Euro Pacific Capital
Just a few weeks ago, most financial analysts continued to insist that the road to recovery stretched far into the future. Now, uncertainty has returned with a vengeance and the stock market has booked its first official 10% correction since this tenuous ‘bull’ market began in the spring of 2009.
In recent days, markets have shown signs of life – but nascent rallies have been quickly smothered. I believe there are five fundamental reasons for this persistent uncertainty.
First, the world’s second most held currency, the euro, is threatened with possible extinction. The massive $750 billion bailout package for Greece will not cure Greece’s dependence on entitlements, and will likely only buy time until a debt restructuring.
The world is looking to major nations such as the United States, Germany, and even the United Kingdom to backstop the likely future funding obligations of bankrupt states such as Spain, Portugal, and Italy. However, these so-called ‘major’ nations have little or no money; they themselves have borrowed massively.
New Jersey Governor Christie is fast becoming a political hero to conservatives who want smaller government.
Here is some video from a town hall meeting where he gets into it with some of the questioners telling one of them, “Unlike the United States of America, the state of New Jersey can’t print money.” Bravo Governor!
And here he is a few weeks ago giving reporters some more straight talk.
by John Browne, Senior Market Strategist, Euro Pacific Capital
The European Union’s debt crisis, the threatened collapse of its fledgling ‘euro’ currency, and the uncertainties created by the UK elections may seem very far removed from the American ship of state, but, in reality, this turbulence threatens to capsize our fragile economy.
Greece is in the most immediate danger of default, followed closely thereafter by Portugal, Spain, and perhaps Italy. As the European Union overrides its own treaty agreements to offer bailouts to these ‘PIGS,’ global financial markets have panicked. Essentially what has happened is that the covenants and assumptions underlying one of the bedrock reserve currencies of international finance – and the presumed successor to the US dollar as primary reserve – have been broken. This requires a global re-rating of purchasing power risk. The problem is today’s investors have few havens left.
The state of South Carolina has been an independent republic and nation twice in history, first in March of 1776 and again in December of 1860. History here certainly shows how it is far easier to get into a political union than to get out again. In South Carolina, we have found that once in a voluntary union, the open door slams shut as political and monetary elites who benefit from this arrangement seldom give up their power to tax, inflate the currency, protect special interest monopoly rights and engage in mercantilism without fighting to retain their distant dictatorial controls.
The photos below aren’t of terror bombing of London, Berlin or Dresden but rather Columbia, SC (small photo) and Charleston (large photo). There were no land battles fought in either city but rather Columbia was burned at the end of the war by union forces and the civilian areas of Charleston were targeted by a union naval bombardment which lasted longer than the World War Two German siege of Leningrad (St. Petersburg) Russia.
“They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety.” ~ Benjamin Franklin
Many believe that the Federal Reserve controls interest rates. But what if they do not? Here is a case for readers to decide on.
The Federal Reserve, myself, and many others, have made the claim that the FED controls both the interest rates and supply of dollars and credit. [For those unfamiliar with the FED, you can learn just about everything you need to know from the links at the bottom of my Federal Reserve plank, and this article "Fractional Reserve Banking in Pictures."] Several weeks, I had a conversation with Karl Denninger from Market Ticker on the gold market, and we also discussed his theory that while the FED can jawbone and could theoretically move the federal funds rate wherever it wants, it still follows the marketplace. In other words, its control of interest rates may be all bluster and a false charade.
Liberty Maven
by John Browne, Senior Market Strategist, Euro Pacific Capital
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