This from a Dear Reader in Australia:
“You have been talking about your ‘Trade of the Decade’ to buy gold for a long time. Do we have to hear about it for the rest of the decade?”
‘Yes,’ is the answer – unless gold goes down and stocks go up. Then, we’ll forget we ever mentioned it.
But we judge that rather unlikely.
Still, Melbourne-based colleague, Dan Denning, thinks we have a problem here at Markets and Money headquarters.
“Most of what the DR franchise (now itself nearly ten years old) has predicted has come to pass,” he writes. “So now what?”
“… readers are tired of the themes…they want an endgame. But the endgame is going to take a while. So while we still have to cover that from day to day, I think we need to offer them a preview of the NEXT game. That is, if you follow the chain of dominoes in the credit crisis…it leads all the way to the nation state itself.
“This sets off a whole chain of interesting geopolitical consequences that are rich ore for us to mine…”
The easy milestones have been hit – gold at $1,000; oil at $100. Stocks have gone down (though the Dow is still about where it was; in nominal terms stocks have gone nowhere). And the dollar has gone down decisively against the euro.
What is ahead now? We don’t know. But our view of things has not changed. Nor has it played it itself out.
In our view, markets make opinions, not the other way around. In other words, people come to think what they must think in order to play their roles in the great drama. America has become a huge empire. All empires are extraordinary things…fragile and doomed to failure. When the Soviet Union threw in the towel, America was left without any major competition. Since empires cannot last, and since she had no competitors worthy of the name, the Empire of Debt had to find a way to destroy herself.
In that sense, it was no accident that the financial industry invented subprime debt…and then put it in its own coffers. Nor was it any accident that households spent more than they could afford. Nor that Congress went on the biggest spending spree in history. Nor that George W. Bush took the nation into an unbelievably pointless and expensive war, effectively squandering not only the nation’s credit…but also its military advantage.
Meanwhile, Americans’ eagerness to spend money they didn’t have on things they didn’t need caused a huge boom in places they’d never been. Asians built factories, roads and entire cities with money gotten from selling gadgets to Americans. Arabs built ski-slopes in the desert…and constructed towns on manmade islands. And even their former enemies – the Russians – created one of the world’s largest piles of U.S. dollar reserves, and saw their own wages rise 6 times in the last eight years. These foreign competitors have been adding to their skills, their savings, and their capital bases – just while the United States has been running its own down.
This drama is far from over. We are only at the beginning of it. The next scenes should be even more interesting. The dollar will lose its status as the world’s reserve currency (possibly with episodes of hyper-inflation)…China and Russia will greatly increase military spending (with some dangerous moments, as the US still tries to throw its weight around)…U.S. stocks will work their way down to real values – with P/Es below 10…and the average American household will find itself no better off, financially, than the average family in, say, Latvia or Malaysia. Then, Asian manufacturers will outsource production to an area where wages are low and productivity is high – Arkansas, maybe.
Markets and Money