A Fairytale Gone Boom

Get ready. The market is reaching “the business end of proceedings” according to Slipstream Trader Murray Dawes. Short term upside momentum is coming face-to-face with Murray’s long term Sell zone. A lot rests on what happens at the EU summit on 23rd October. One the one hand you’ve got rumours of an increase in the EFSF to $2 trillion Euro. But those rumours need to overcome the possibility that the German constitutional court will not increase the EFSF without a referendum.

Murray’s free S&P analysis is out today. He explains why a reversal into a specific zone over the next week “could be one of the best selling opportunities of the year.” Watch it now here.

One big benefit to the Occupy Wall Street movement is that it’s taken the conversation about money, banking, and social justice mainstream. Granted, most of the people we’ve watched on YouTube would like to get rid of money and profit and private property. But the conversation is a good start.

The conversation will get even better on November 14th and 15th in Sydney. That’s when the Gold Symposium is being held at Luna Park in Sydney. Money Morning editor Kris Sacye will be there on day two to chair the proceedings. And on day one, yours truly will show how fair money can lead to social justice everywhere, without the messy revolution and squatting on private property.

There’s also a cracking line-up of speakers and companies presenting. You can view the full program here. The conference is $199 for both days. We don’t make any money from mentioning it. But it’s our favourite show to go to in Australia each year. The quality of the presentations and the ideas are well worth it. You can sign up directly here

Now, let’s talk about China. You probably wouldn’t call GDP growth of 9.1% slow. But by Chinese standards, that’s the slowest annual pace since 2009. And remember, the official inflation for September was an annualised 6.1%. What you’re looking at then, is a maximum of 3% GDP growth in China – assuming GDP isn’t over-estimated and inflation under calculated.

China consumes 40% of the world’s copper. It wasn’t a surprise, then, that copper traded as low as $3.25/lb in New York after the news of China’s slower growth came out. If the universe can’t expand forever, then China can’t either. That truth is immutable. The question is, is China’s expansion slowing down? Or is its economy due for a contraction?

There’s a lot at stake for Australia in the answer to that question. For example, if you took the view that China’s emergence as an economic superpower since the mid-1970s is a direct result of the decline of the US dollar as a store of value (among other things), then China’s amazing growth would be a kind of derivative of dollar devaluation.

Suggesting that China is merely the largest, most spectacular evidence of a global credit bubble is probably deeply insulting to the Chinese. It also reflects a tendency by Americans (of which your editor cannot help being one) to make everything about America. It’s not always about you, America.

China (like India) has a 5,000-year-old culture and is emerging from nearly a century of forced stagnation. It’s got its own story and its own future independent of the US dollar. But a dollar-free future may be a few years down the track for China.

In the meantime, China will have to reckon with a credit bubble of immense proportions. Its bubble is a product of linking its currency, the Yuan, with the dollar. When America inflates, China must follow. And as the world deflates, how can China not follow?

The International Monetary Fund, for its part, is pushing for a return to the status quo. Specifically, it wants people to spend money they don’t have in order to boost demand for the sake of making GDP grow. When you realise the IMF is really the long arm of central banks and governments, then it’s easier to understand why it wants more spending, even if it means greater government debt.

It’s disgraceful really. The IMF provided a briefing to G-20 finance ministers over the weekend and trotted out the corpse of John Maynard Keynes. The report warned of “severe risks” to the global economy if the entire world decides to get thrifty at the same time. This is Keynes’ famous Paradox of Thrift, which suggests that if everyone saves, demand will collapse and the economy will enter a Depression.

Newsflash IMF: we’re already in a Depression. Nonetheless, the organisation intoned, “The overarching risk is of a global paradox of thrift as households, firms and governments around the world reduce demand…Downside risks have increased and are severe.”

Blah blah blah. This is nonsense. The core problem is that debt-financed growth is no longer real growth. The world’s huge debt loads need to be extinguished. And then savings can become the basis of new credit, dealt out prudently by banks to enterprises that create real value and real returns for investors.

That’s after the revolution, though. First, the revolution…or the Depression…or the crash. Or all three.

More reader mail…

The David Petraeus comment is quite perceptive as he has the political nous to carry it off.

So you see the potential for a fascist military dictatorship rising from the ashes of a debauched republic?

Well it’s happened several times before.

(Contrawise there may be an alternative movement for a reformation of the republic based on a strict adherence to the constitution (think TEA Party) – especially if the states revolt against the FED (both Govt and Reserve Bank)).

Cheers, Graeme

Revolutions are obviously incredibly disruptive. The people Tweeting and Facebooking for them will probably be heartbroken and bewildered when the government shuts down mobile phone networks and sends in the cops on horses to break up the occupation. But as soon as the occupation tips over into violence (by the malcontents at the margin) the public support for them will vanish and the craving for a strong authority will replace it.


I have subscribed to all your products and in varying degrees found them useful. Most interesting is the Markets and Money News Letter. It is thought provoking and should continue to be so for we are a complacent lot who yearn for yesterday’s apparent warm fuzzy security. Actually this feeling was not the true reality at the time, it is just a mind adjusting process to block out discomfort.

If we move out of ourselves and our emotional filters, we see an increasingly overcrowded resource limited world emerging. That will continue and there are universal natural selection processes at work to restore balance and equilibrium. These may not be comfortable for humankind but nor is the reality that we are not the centre of the Universe. Many ‘advisors or commentators’ still believe that the financial/social experience of the last twenty years can be straight lined into forecasting the next twenty. The pain being experience and yet to be experience is and will be as great as the social/financial change that occurred when early Britain was left to its own devices after Rome withdrew. Pax Romana ceased. So will Pax Americana.

Your provocative thinking is valuable. I don’t agree with everything you put up but you get my mind working Thanks

Chris G

Finally, a financial fable of sorts…

One thing has become apparent to me reading Dan Denning and Bill Bonner’s excellent commentaries about “Kicking the can down the road” in terms of the European bailouts:

The can doesn’t just roll down the road like an ordinary can: It gets bigger each time it’s kicked. It finally grows into a barrel so big, filled with cement that it can’t be kicked down the road anymore. It has to be launched with explosives.

At first one stick of economic-bailout dynamite blasts the now barrel-sized debt a huge distance and everyone congratulates themselves on a job well done.

But soon the barrel dented though it may be, as if by magic, has grown huge and transmuted the cement inside it to lead. It requires much more dynamite to move it now.

More blasts ensue.

Each time the cylinder’s arc of flight grows shorter, the self-congratulation more strained. Eventually tons of TNT barely make it roll down road, even a short distance.

Finally, we see a gigantic storage-tank, filled with spent radio-active fuel-rods (toxic debt). It lies at the bottom of a sharp rise in the road.

Yes, there’s a big steep hill in front of it now.

The experts confer. The solution: Nuclear explosives (massive bailouts) are the only thing that will lift this behemoth tank to the top of the hill.

They explain: As the huge tank is lifted to the top of the hill, it will roll down the other side, magically turning to gold for everyone!

All will be well!

The decisive date comes, every country has contributed. The explosive yield and trajectory have been precisely calculated.

Crowds have gathered at a safe distance at the bottom of the hill. The leaders in their bunker give the order.


The huge cylinder lifts off! Higher and higher it goes, the leaders and their followers cheer!

The enormous tank lands with a thunderous rumble that echoes throughout the valley and back.

All eyes look to the top of the hill.

The cylinder at the crest of the hill is still. Then slowly, almost imperceptibly it starts to roll…backwards!

With gathering speed the colossal cylinder comes back down the hill. The shocked crowds try to escape but there are too many people for all to get out of the way.

Finally the rolling, roaring cylinder slams into the leader’s bunker. Exploding, it flies apart spewing its radio-active contents far and wide.

For years the valley becomes uninhabitable.

The fairytale ending:

And so the world returned to the gold-standard.

From then on, whenever someone suggested kicking a debt-can down the road, they were reminded of the story just told.

No one ever did it again.

Of course we know that people have constantly forgotten what the Romans did to their coins. The history of fiat currency has repeated itself again and again.

But for those of us who can remember, thanks to the reminders in the Markets and Money we don’t have to be crushed by the events that must and will come.

I think the story would make an interesting illustrated fable.


Daniel Hicks

Dan Denning
for Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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5 Comments on "A Fairytale Gone Boom"

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Good article Dan, really enjoyed this one. Thanks ;)

Zombie Sympathizer
The moment we enter into credit we admit our lack of available money. And thus the cause of credit is lack of money. If we resolve this lack by investing in income production we would shortly find ourselves investors and not creditors and our credit paid back. If on the other hand we use it to fund our lavish lifestyles we find our lack has increased and so we indebt ourselves more. The first type of credit is good the second insane. The ancients had a way to force better thinking about credit: Jubilee years – every 7 years all… Read more »

Good article Dan. Just what I was thinking when the Chinese gdp figures were announced “what about inflation”, we seem to be the only ones to think of it.
It seems the IMF has not heard of Mr Macawber, and his dictum on annual income and annual expenditure.


Further to my comments above: I have recently left Germany and one thing i discovered is that the Eurocrats will do ANYTHING to keep the EU together, the arrogance of those people is astounding. They care nothing for the general population but are beholden to the banking elite, which is strange really, as the gnomes of Zurich are of course in Switzerland, and not part of the EU. So if anyone is banking on the collapse of the EU or of any one country ie Greece, beware the politician’s ego.


@Dan Hicks, Nice fable musings on the universal law of deminishing margin returns.

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