A couple of years ago, we saw the world evolving in five key ways. We called them the 5 Big E’s. This morning, we wonder how they held up.
At the top of the list was Energy. We saw it getting more expensive. Partly because the world was using more of it. And partly because the currency in which it was calibrated, the dollar, was increasing faster than oil production. In the last two years, oil has shot up to $100. All right so far.
Next up was the Exodus of money and power from West to East. Has anything happened in the last two years to slow it down? Nope. Asians have more market share than ever… .and more of Westerners’ money. A global recession might slow down the process, but we see nothing that will stop it.
The Economic cycle also seemed to be bearing down on the West when we wrote two years ago. We were a little ahead of ourselves, or so it appeared at the time. Stocks kept rising, at least in dollar terms. But now even the economic cycle seems to have turned down. George Soros says we have reached the end of a 60-year credit expansion. Well… maybe a 25-year credit expansion. Either way, the tide has turned. Liquidity is ebbing out. And the assets that ride on that tide are going down.
Ah… the Experimental money. Since 1971, the world has toyed with a money system that never, ever worked before. Never before had paper money, not backed by gold, lasted for very long. But for the last 25 years, it looked as though maybe, just maybe, this time was different. Then again, maybe not. More on that below.
And finally, the declining Anglo-Saxon Empire. Yes, dear reader… if you have to borrow from your competitors to pay for it, your empire won’t last very long. The United States Empire began in the late 19th century, when America began throwing its weight around in the Philippines and Latin America. It probably hit its peak in the Clinton years… after its last major rival, the Soviet Union, threw in the towel… and the U.S. stock market rose 11 fold in 17 years.
Then, along came George W. Bush, just at the right time with just the right program. Empires don’t last forever. So every great empire needs to find a way to ruin itself. Bush was the man for the job — with huge new spending projects… including a war in Iraq that pinned down the U.S. military, while Congress and the public squandered its assets.
Yes, stocks will eventually bounce back. They always do. But unless there is some remarkable renaissance – probably marked by bankruptcy, revolution and civil war, like the period in Rome preceding the rise of Augustus — the glory days of the empire are over. It has peaked out.
*** This from old friend, Lord Rees-Mogg:
“All paper money has historically proved defective in terms of one of the classic functions of money. Nineteenth century economists such as William Stanley Jerons – a great economist by any test – taught that money ought to act as a “store of value”. There is no fiduciary issue which has survived the period since the end of the Second World War in 1945 without very substantial depreciation. Even comparatively respectable currencies, like the pound or the dollar, have lost a significant proportion of their purchasing power since 1945, and are expected to continue to lose purchasing power for the foreseeable future.
“… A non-convertible paper money [not convertible into gold] can be expected to depreciate over time, more or less rapidly. In the twentieth century, the great majority of non-convertible paper currencies depreciated by more than 90 per cent in purchasing power, and money depreciated to zero.
“Gold, on the other hand, has a high degree of stability in the purchasing price over very long periods, as demonstrated in statistical studies by Professor Jastrom and others. … The gold standard, and indeed the principle of stable money, had two great enemies. They were, and are, war and democracy. The gold standard had to be suspended by the European powers in 1914, when the First World War broke out. It has never been fully restored. The Bretton Woods system, which was based on international convertibility into the dollar, and dollar convertibility into gold, lasted for about twenty five years before President Nixon suspended gold convertibility in 1971. After the Bretton Woods system collapsed, the final link of currencies to gold was broken.
“The great democracies of the West will find it difficult to make the sacrifices necessary to deal with the growing shortage of fundamental sources of energy, including oil, gas and uranium. The excessive levels of debt are likely at some point to lead to inflation – which wipes out the real value of debt. In these conditions, the underlying economic pressures are for a still higher gold price. In the last decade, the gold price has been doubling every five or six years. My own guess would be that gold will hit $2,000 an ounce in the early 2020s, but some analysts think that will happen much earlier.”
Markets and Money