A Golden Vending Machine

The Dow fell another 107 points yesterday. Oil held steady at $70. The dollar fell to $1.38. And gold rose $4 to 932.

What if the rally is over? Could be…it began on March 9th. That makes it more than three months old. Most likely, it will continue through the summer. But who knows?

The important thing to remember is this:

There can be no major, sustained bull market without one of two things happening.

Either the mistakes of the Bubble Epoque must be cleared away…allowing for a new era of genuine growth and real prosperity. At best, this would take a few years to achieve. Just imagine how long it will take to restructure GM into a profit-making business again. Just imagine how long it will take consumers to pay down their debts so they can begin to spend again. Just imagine how long it will take to save enough money to build new factories…and convert shopping malls to warehouses and apartment complexes… And just imagine how long it will take with the feds fighting it tooth and nail. At least a decade!

Or people must be willing to go even further into debt…thus increasing the errors of the debt-soaked boom. Anything is possible. But here at Markets and Money we think the economy is already saturated with debt. It can’t absorb more. Besides, the financial industry is no longer capable of pushing debt on the public. That machine is broken. The bubble in finance exploded when Lehman Bros. went down. Once a bubble blows up, it can’t be reflated.

And so far, the feds’ efforts to reflate the bubble in consumer finance have caused a return of speculation in oil, commodities, and emerging markets. There is no sign of consumer price inflation or expanding consumer credit. Instead, consumer credit is contracting.

So don’t expect a real bull market.

Instead, let’s move on…this just in:

The Financial Times reports that a vending machine company is soon to install machines in Germany where you’ll be able to buy gold as easily as buying a chocolate bar. There’s one machine already in the Frankfurt Airport, where for 30 euros you can buy a 1-gram wafer of gold.

Already, in Switzerland, you can buy gold in the post office.

What do these yodelers and sausage eaters know that we don’t? Germany was required to pay reparations after WWI. The amount was about $1.121 trillion in today’s money. In gold. She had no choice. She had to turn over her real money – gold – to the victorious French and English. Thus, she had no real money left in the domestic economy. What could she do? Germany printed up marks…not backed by gold and experienced hyperinflation, up close, in the ’20s. Coming not long after the debacle of WWI and the Treaty of Versailles, it not only destroyed the economy…it also wiped out savers and destroyed Germans’ residual faith in their own sausages. Soon after, there were armed gangs of communists and national socialists fighting for control of the streets. And we all know how that turned out…

So, back to the U.S.A.: The United States has entered the third and final stage in the life and death of a great country.

America’s history can be divided into three broad stages. The first stage was industrialization. This is what took the United States from a marginal nation of settlers, explorers, farmers, entrepreneurs and religious refugees to become the world’s richest and most powerful country. The source of its wealth and power was its factories…and its people. The factories were the best in the world. And the people how labored in them were accustomed to hard work, saving, and self-
discipline. There were no free lunches in America during this period. The fastest growing cities of the time were manufacturing centers – Chicago, Gary, Detroit, Pittsburg, and Birmingham. Thanks to its smokestacks and assembly lines, the US could make things better, cheaper and faster than any other country, with the possible exception of Germany before WWI and Japan after WWII. That is how the US became the world’s largest creditor – by selling US-made goods to foreigners. And it’s how the United States won WWI and WWII too. American factories could turn out more tanks, more planes, more guns and more butter than any other nation. And the United States had an abundant source of fuel too; “Texas Tea” they called it.

After WWII America enjoyed its glory days. It was on top of the world…in practically every sense. The United States was #1.

Nothing fails like success. The New Deal had fundamentally changed Americans’ relationship to the state. Federal meddlers began playing a larger and larger role in the economic life of the country. Soon, American attitudes evolved to fit the circumstances. With the world’s reserve currency…a huge lead over its competitors…and a government that promised to take care of its wants and needs, the US workforce relaxed. Gradually, it shifted from making things to buying them…while industry turned its focus from production to sales…and then, financing. Then, the United States entered the second stage: financialization.

In this second stage, the center of gravity shifted from the wealth-
producing factories to the financial centers – mainly Manhattan. Prices of real estate in New York soared. Wall Street came to be seen not merely as a place to invest the proceeds of honest toil…but a way to create wealth. The most ambitious college graduates turned from engineering and manufacturing first to sales and marketing and later to finance; because that’s where the money was. At the peak, in the Bubble Epoch, 2003-2007, Wall Street was drawing in the world’s leading scholars in mathematics and statistics… These people were creating the biggest debt bombs in history…exotic, complicated financial concoctions…that eventually blew up in their faces.

Detroit went into a decline as early as the late ’60s. GM continued to make cars, but it looked to financing as a way of make money. GMAC became the major source of GM’s profits. Still mills along the Monongahela River began to rust in the ’70s. Ships began to come to the US laden with goods in the ’80s and ’90s…and to go back empty. The US Fed tried to stimulate the US economy on several occasions, but it had a strange effect. It put more credit in the hands of US consumers – who used the money to buy goods from overseas. In effect, the US Fed was stimulating manufacturing in China!

But in 2007-2008 the bubble in consumer debt blew up. GM went broke in May of ’09. The financialization stage ended. In its place comes a new stage: politicization, the third and fatal phase of a great nation.

Where is the money now? It took the train from Grand Central Station in Manhattan down to Union Station in Washington, DC. Want money? Ask Washington. It’s pledged an amount equal to three times what it spent in WWII to the fight against deflation.

Where is the power now? Just ask Chrysler bondholders; in the end it didn’t matter what their contracts said…when the US government turned against them, their goose was cooked. The Obama Administration, owner of GM, now sets top salaries and determines what kind of cars the company will make. Washington also determines which businesses will be kept alive – AIG – and which will die – Lehman Bros. Now it’s the politicians, not Wall Street, nor investors, who decide the allocation of big capital…

And when ambitious young people buy a ticket to begin their careers, are they going to Milwaukee…to Manhattan…or to the lobbyists’ mecca in Northern Virginia?

Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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8 Comments on "A Golden Vending Machine"

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Nick C

Brilliant article Bill

If politicians could allocate capital communism would have worked!


Excellent article Bill. Politics is the main industry and most profitable profession in USA. A decade ago when I landed in the US, a good (American) friend asked me about the main industry in India and I immediately replied ‘politics’. Harvard,Yale and others would be in business if they replaced the ‘B’ in MBA with a ‘P’ for politics.

Greg Atkinson

It seems this view of the gold price may have escaped DR:

NEW YORK (Reuters) – Oil and gold are overvalued at current prices, which do not reflecting their market fundamentals, economist Nouriel Roubini said at the Reuters Investment Outlook Summit on Tuesday.

I have to disagree that the US is enterring a “third stage” of politicization. I do not believe Obama is in favor of big government for big government’s sake. From what he tells us, the current frenzy of nationalization is a temporary measure to keep copanies alive that are “too big to fail”. The negative effects of government ownership of banks, GM etc, is better then the far worse results of letting these organizations implode. I do not believe it is consistent with Obama’s charcter or beliefs that the nationalizations will be permanent. The free market will survive, America will… Read more »
Ned S
Pat – For all the positives I see going for America, the county has a huge burden in its people’s expectations and aspirations – Those are so difficult to reverse. And no government gets elected by telling its people they should aspire to less over time rather than more. But in America’s case that is necessary. For America and for the world. There’s only so many resources to share out. America is probably getting more than it can reasonably justify based on its true contribution to global prosperity. Unless one has managed to convince themself that chewing through lots of… Read more »
Ned, I actually don’t think the US can maintain its high and unsustainable living standards, I never said I thought it could. What I said is that i don’t believe that the US is entering a permanent state of “politicization”, as Bill Bonner suggests, merely a period of greater and better regulation. Government control over banks and organizations will be reversed over time one way or another, albeit with proper regulation still in place. America will have to adapt obviously, it can’t return to the practices of the bubble era, but I very much doubt that the United States is… Read more »
Ned S
Pat, I found the market’s response to Obama’s recent regulatory legislation informative – I was expecting it to throw a bit of a hissy fit. But as it didn’t, I guess the market is punting the legislation won’t make much difference. The other interesting development is Beijing’s Buy Chinese policy. If they are serious about that, it would indicate they are either very, very worried about their own growth prospects or figure they can internalize consumption way quicker than I’d been imagining. But either way, it doesn’t sound like good news for anyone – Except China maybe? One would have… Read more »

I don`t think 11 million russian dead or the millions of other allied people would think the US won the first or second world war`s, as Churchill said “give us the tools and we will do the job” that where the war was was won the giant US industrial might so the US supplied the tools and make a fortune in the process “lend lease” but like the british empire and all empires before its on the skids now, fifty years time China and India will be one and two.

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