The Correction Won

They fought the correction; the correction won.

We refer to Bernanke, Summers, Obama, Geithner, Krugman – the whole lot of them. They added three trillion dollars to US debt in the last two years. In two more years the debt will be at 100% of GDP. Add in the debts they’ve guaranteed – from Fannie Mae, for example, and state and local debt implicitly backed by the feds – and you’re already at 150% of GDP. Worse than Greece, in other words.

And what do we get for it? A recovery? A healthy economy? A gold medal?

We’ll take the gold medal, thank you. It’s the only one that’s real.

The stock market was ready for a little bounce yesterday. So that’s what it did…a little bounce – the Dow up 123.

Gold kept climbing – to a new record high of $1,245.

If you had asked us 10 years ago which we’d rather have – stocks or gold – we would have said gold. Ask us now. Same answer.


There aren’t many times when it makes sense to favor gold over productive investments. But this is one of those times.

Why? Because the world’s monetary system is heading for a crackup. And because the people running it have no idea what they are doing.


Pimco’s Crescenzi Sees ‘Endpoint’ in Devaluations

June 8 (Bloomberg) – Nations have reached a “Keynesian endpoint” as exhausted balance sheets leave policy makers with few options to bolster economic growth, according to Anthony Crescenzi, an investor at Pacific Investment Management Co., the world’s largest bond-fund manager.

“Time, devaluations, and debt restructurings might be the only way out for many nations,” Crescenzi wrote in an e-mailed note titled “Keynesian Endpoint” that referenced the Great Depression era economist John Maynard Keynes. Debt-fueled spending programs aimed at combating the global financial crisis of 2008 are among policy tools now “being seen as a magic elixir that has morphed into poison.”

The Obama administration forecast a $1.6 trillion budget deficit, the most ever, in the current fiscal year that began Oct. 1.

You can fight a correction. You can delay it. You can distort it. You can make it bigger and nastier. But you can’t beat it. Eventually, mistakes have to be corrected…one way or another.

Usually, the mistakes take the shape of bad investments or bad loans. You can pretend that they’re still worth what you have in them. You can bail out the lenders and/or the investors. You can default and inflate. But somehow, someone, sometime is going to take a loss.

That’s when you need gold. Every other asset could have bad debt behind it…in it…or standing so close beside it that a blow-up would be damaging.

The correction that began in ’07 was needed to address all the bad debt built up in the bubble years. The feds tried to stop it. Since they didn’t have any money they had to fight it by borrowing more money – that is, by increasing the level of debt!

We knew that wasn’t going to work.

And now, there’s bad private debt…and bad public sector debt too. And now we’re approaching a Keynesian “endpoint” when lenders are growing wary. They’ve already cut off Greece. They’ve warned the rest of Europe. And when they stop lending…then, all your props fall down…along with the economy…and the markets too…

And more thoughts…

The people running America’s fight against the Great Correction have no idea what they are up against. Here’s Ben Bernanke, as reported by the Associated Press:

Federal Reserve Chairman Ben Bernanke said Monday he is hopeful the economy will gain traction and not fall back into a “double dip” recession.

“My best guess is we will have a continued recovery, but it won’t feel terrific,” Bernanke said.

That’s because economic growth won’t be robust enough to quickly drive down the unemployment rate, now at 9.7 percent, he said in remarks to the Woodrow Wilson International Center for Scholars, a nonpartisan research group.

The economy grew at a 3 percent pace in the first quarter of this year. That’s good growth during normal times. But coming out of such a deep recession, the economy must grow much more strongly to make a dent in the jobless rate.

Fears have grown that the recovery could be derailed if Europe’s debt crisis turns into a broader financial contagion, crimping lending in the United States and around the globe. The situation has spooked investors, sending Wall Street into fits of panic. Bernanke said the Fed is monitoring the European crisis carefully, and he believes European leaders are taking the right steps to deal with the problems.

Asked when the Fed will start raising interest rates, Bernanke quipped “in the future.”

Bernanke pretends that the problem is in Europe. It’s not. It’s in America. Total debt levels in the US are higher than in Europe. What’s more, Europe is already tackling its bad debt problems. America is not.

Meanwhile, Larry Summers says Obama is having great success in “restoring the United States to strong economic fundamentals…while there remains much to do, the US economy is growing.”

Money is flowing to the US now. Because America is thought to be a safe haven. This makes it possible – even easy – for US authorities to go even deeper in debt. As the Chinese philosopher Laozi put it, long before the birth of Christ, “a nation is never so poor as when it appears to be overflowing with riches.”

*** Investment pundits are talking about a bubble in the gold market. And, yes, a bubble will develop in gold. But it’s not there yet. You’ll know there’s a bubble in gold when the people who are now warning you against it begin urging you to buy it.

Until then, we’re still in the second stage of the bull market. Smart investors are accumulating gold. Most investors barely know it exists.

In the first stage, gold is a bargain. It is out-of-whack with the rest of the markets. That’s what happened at the end of the ’90s. It had been going down for nearly 20 years and was severely undervalued in comparison to other assets. In 1980, you could have bought the entire Dow for one ounce of gold. But by 1999, you would have needed 43 ounces to buy the Dow – a huge fall-off in the price of gold.

Today, gold is no longer a bargain. It’s about where it ought to be. Maybe even a little on the high side. Not too long ago, a large cache of golden objects dating from the 8th century was found buried in England. It looked like booty from a raiding party. It had been hidden in the ground…but the raiders never returned to claim it. Why? Maybe they were captured or killed. Or maybe they were driven out of the territory.

It’s hard to track prices back over the centuries. But when Roy Jastram did it in his book, The Golden Constant, he discovered little difference in gold prices over the centuries. In today’s money, gold was always in the $800-$1,200 range.

But when modern paper currencies were cut loose from gold – in 1971 – they lost value fast. In Britain, for example, the pound lost as much purchasing power in the last 40 years as in the previous 7 centuries.

The post-’71 paper-backed money system tricked out everyone. The credit markets went wild. Total debt in the US is 10 times higher than it was then. Almost every major developed nation is nearly bankrupt…yet practically every household in Europe and America now depends on the state to provide essential support. Retirees count on Social Security and socialized medicine. Homeowners depend on government-backed mortgage markets. In America, 40 million people collect food stamps. Millions more collect unemployment or other forms of income support.

It is no wonder the markets are getting edgy. There’s a whiff of disaster in the air…like the smell of an approaching storm. Stocks are prices for sunny skies…and there’s a hard rain coming. The US dollar is priced for stability…and there’s a whole lot of shakin’ coming. People are putting money into US bonds as if you could trust them…and they long ago crossed over to the cheatin’ side of town.

What do you buy when you suspect that the monetary system is a scam and a shambles? Gold. Anything else is a promise. A company promises to pay you a dividend. A renter promises to pay you rent. A homeowner promises to make a mortgage payment. The government promises to pay you interest. And each one of them depends on some other debt-bent promisor.

Gold makes no promises. It is what it is. Not perfect money. But the best kind of money ever discovered.


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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