Catastrophe Insurance

“Retail Sales in US Unexpectedly Stagnate,” says a Bloomberg headline.

Unexpectedly? Guess they don’t read Markets and Money. Stagnating sales are what you get in a Great Correction. We’ve been saying so for the last 4 years.

In an expansion, well…everything expands. Why make it complicated?

In a contraction…everything contracts. What do you expect? That’s what it’s all about. That’s how it works.

And when you have a consumer economy, what contracts most? Consumer spending, of course. Simple, huh?

And when consumer spending contracts, business sales go down. Eventually profits go down. And eventually investors realize that holding stocks is not going to be profitable. Then, stocks go down too.

And here’s another Bloomberg headline:

Wholesale Prices in US Are Little Changed as Energy, Vehicle Costs Drop

Surprise, surprise! The feds pump in trillions in cash and credit. Still, they can’t get prices to go up significantly

Contractions are deflationary.

That’s why we don’t expect the price of gold to rise.

And now that Germany and France have gotten together with China and all have agreed that they aren’t going to throw poor little Greece off the Euro-Bus…gold has nothing to do but go down. No crises on the horizon. No inflation either.

So who needs gold?

Well… We all will. But maybe not just yet…

“Gold fulfills the functions for which money is used better than any other type of money,” wrote Lord Rees-Mogg in his introduction to “The Case for Gold” — a three volume tome rehearsing the history of the yellow metal.

But if gold is the best money, how come we don’t use it rather than dollars?

Lord Rees-Mogg explains: “The problem for gold is not that it doesn’t work, but that it works too well…it imposes limits on human behaviour, and those limits can be resented and rejected. Indeed, it can become impossible for a government to maintain the discipline of gold…”

Ah yes…

Limits. There are always limits. You can ignore limits. You can reject limits. You can pretend they don’t exist. But you can’t ignore the consequences of ignoring the limits.

Right now, the economy is in a major contraction. As long as this phase continues, you only need gold as insurance against a catastrophe. But what would cause a catastrophe? The feds, of course.

In a contraction, the market itself imposes limits. It forces asset prices down. It undermines businesses. And it drives debtors and creditors into bankruptcy.

The feds don’t like limits. And they don’t like contractions. Especially not when an election is coming up. Maybe they’ll keep their nerve. Maybe they won’t. They could do something reckless and desperate…in an effort to overcome natural limits. That’s when the merde will really hit the fan… That’s when you’ll need your gold.

And more thoughts…

Here’s an interesting item.

In July, consumer credit rose. This was much applauded and much discussed. Analysts said that the $12 billion increase proved that the credit expansion of the last 60 years was not over. They thought it meant that recovery was just around the corner. Consumers were borrowing again they said…so they must be spending too.

But it turned out it wasn’t exactly consumers who were doing the borrowing. It was students. And they weren’t borrowing to spend. They were borrowing to pay the high costs of education.

Real consumer credit went down, as expected. Credit card debt, for example, fell some $4 billion.

And guess what else. Many of them will never pay the money back.

Government-backed student loans have risen from less than $100 billion in ’08 to about $400 billion today. We don’t know why. But we smell a zombie.

The default rate is rising. And we suspect that many ‘students’ are actually people marking time in universities because they can’t find a good job in the outside world.

Speaking of which… Senate GOP leader Mitch McConnell describes Obama’s jobs plan as a “re-election plan, not a jobs plan.”

But it’s so easy to criticize! Give the prez credit. At least he’s trying.

At least, he’s trying to get re-elected, that is.

*** Yesterday’s subject was intriguing — at least to us. We’ll stick with it.

What if everything you thought you knew about investing wasn’t so? Or, to put it another way…what if everything you learned about investing was learned in an unusual period in investment history? A period that won’t be repeated in our lifetimes?

You’re used to stocks going up, right? But they don’t always go up. They only go up — in general — when the economy grows.

But economies always grow, right?

Well, maybe not. How much did the economy grow in 2011 BC? Nobody knows, right? But we’ll take a guess. It didn’t grow at all.

And guess how the real economy in the US is growing this year? Probably about as much as it did 4,000 years ago.

No, we’re not kidding. The numbers are all over the place. But they’re all near zero. Even the feds say the economy is “barely” growing…or that the ‘recovery is very fragile.’

Guess how many jobs the economy added in 2011BC? We don’t know that either, but we’ll take another guess: zero.

Okay… You see where we’re going with this. This economy sucks, right?

But here’s the thing. You think the suckiness of this economy is a temporary thing. You think the economy USUALLY does okay. You think that there is something inherent in technology…that it is always finding new and better ways to do things…and that as a result we all get richer all the time, right?

Well, what if you’re wrong?

What’s the measure of wealth? Here’s one way to look at it. It’s how much output you can get from a unit of time. You take your bare hands…you try to dig a ditch. Your output is very limited. So, in a remarkable breakthrough, someone invents a spade! The first ones are made of wood. But they get better and better. Now, with a steel spade in his hands a man can dig much more hole in the same amount of time. He is richer. He can produce more. He can improve his standard of living just by using the tools he has available to him.

But then what? Then…maybe 5,000 years after the invention of the first hoe, a man invents a machine to do the digging…a backhoe. Now he’s really smoking. With a backhoe he can dig 10…20…times faster than a man with a regular hoe.

The first mechanical diggers are clumsy. Steam-powered. But gradually they get better. Now, they’re so smooth and responsive a good backhoe operator can use them to light a man’s cigarette for him. No kidding, it’s included in backhoe rodeo contests.

Mechanical diggers have been around for 100 years. They’ve gotten bigger and better. Presumably, each new generation of machines pays off. But not like they used to. The first backhoes produced huge new gains in productivity. The last produced only marginal gains.

Meanwhile, the energy needed to run the machines becomes more expensive. At 15 cents a gallon, the investment in fuel and machinery was almost sure to be worth it. Now, at $4 a gallon, a man has to think twice. If he has a small hole to dig, he might be better off digging it with a spade!

The energy revolution may have peaked. Growth may be a thing of the past.


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.

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> Presumably, each new generation of machines pays off. But not like they >used to.

There are some pretty big advances (10-20%) that are starting to be made in draglines, which are many times more efficent than hydraulic diggers (which is why they are used for the biggest jobs).

I know that “the shovel “is only an illustration and doesn’t affect the point you are making, but it is an interesting footnote!


Dig deeper, shove farther. Perhaps we have dug most of what is needed and the new mantra is “do more with less”. You don’t need to drive as much if you can work from home. You don’t need to fly as much if you can run an international business from home. The energy revolution may have peaked. The energy saving revolution has begun – and it is bringing its own growth.

But what can you do from home that I would want ? Lets be silly and pretend everyone was working from home……what is the advantage of this for growth….in fact where is the growth…..I can only see the opposite. The world needs real things to be wealthy not words or thoughts (not the type of thing that comes out of working from home) But yes yes words and thoughts are required I understand that, but can only be a set size of an economy before you hit the cast iron law of declining marginal utility….you try for more or people… Read more »
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