The press attributed this week’s rise in gold to benign causes. The end of the world seems to have been postponed – indefinitely. Bloomberg reported that a clear majority of those polled thought the world economy was recovering. With no more fear of the deflation devil investors feel they are in the arms of angels. Surely Ben Bernanke watches over them even when they sleep. Even the President of the United States thinks he saved the nation.
As for Tim Geithner, he takes no chances; he sings his own praises. Speaking to a gathering of the G20, he congratulated them all:
“…facing the greatest challenge to the world economy in generations, the G-20 gathered here in London and committed to an unprecedented program of policies to restore growth and reform the international financial system. Those actions have pulled the global economy back from the edge of the abyss. The financial system is showing signs of repair. Growth is now underway.”
Stocks are still up. Commodities too. Oil is over $70. And most encouraging of all: the 10-year US Treasury note yields only 3.47%. So what evil sends investors running to the protection of gold? None at all, say the papers; investors buy gold in anticipation of better times. They see a recovery, bringing with it tightened supplies and rising demand. Every economist, investor and hair stylist knows what this means – inflation.
But if growth is underway, investors should be glad there is not more of it. The key indicators of real economic progress are negative. Unemployment is not rising; it is falling. Nearly 7 million Americans have lost their jobs since the recession began. In California, only 3 of 5 working age residents have a job. And those who are still working are putting in the shortest workweeks ever recorded. How could the economy be growing with fewer people earning money? The New York Times attempted to explain the enigma by calling it a “jobless recovery.” But a recovery without jobs is like a loveless marriage or a fat-free burger – it is disappointing.
Another key indicator is personal spending. Not surprisingly, that is down too. Personal spending has fallen in four of the last six quarters – something that has never happened before, since they began keeping records in 1947. The level of consumer spending is down 33% from a year ago – with discretionary spending in the United States now down to a level it hasn’t seen in 50 years. Consumers aren’t spending partly because they have no money…and partly because they apply what money they have left to relieving the headache from their previous binge. A report this week showed they had reduced their hangover of personal debt in July by more than $21 billion – four times as much as economists forecast. These are, of course, the same economists who pimp for the angels at Bernanke & Co. If they’re right, we have a spending- less, jobless recovery pushing up the price of gold.
We offer an alternate interpretation. We begin with a doubt about the one now on the table. In the popular version, the more the recovery seems real, the more investors fear real inflation. This drives them to buy gold. Of course, it should drive them to sell US Treasury bonds too – which hasn’t happened. Nor has inflation gone up. And if this view were correct, we should begin to see remedial measures from the US central bank. The Fed should soon begin to withdraw its monetary stimulus, returning the economy to a kind of normalcy it hasn’t seen in years. The risk, not insignificant, is that Fed economists will err. They may loosen monetary policy too slowly or too quickly. Asked about the risk, Janet Yellen, President of the Fed’s San Francisco branch, promised to avoid the error of 1937 – she will not “tighten policy too soon, aborting the recovery.”
Gold bulls are counting on her. And they may be right. But here on the back page, we add a nuance. We’re not surprised by an occasional Fed error. What surprises us is the rare accidental success. There are 500 basis points between zero and 5%. It would take a miracle for central bankers to find exactly the rate the market needs precisely when it needs it most. The ’37 error, for example, might have been a success. At least it sped up the process of liquidation so the decks were clear when the post-war boom finally came.
Maybe we’ll get lucky and the Fed will make the same error again. Not likely. This time they’ll make a different error – adding too much cash and too much credit for too long a time. Today’s ‘recovery’ is based on hot money from the feds. It’s a fake. It won’t cause real growth. When this becomes clear, commodities will sink – along with stocks…and gold. Central banks, ignoring the futility of their hot money program so far, will add even more hot money. Eventually, the hot money will cause inflation to rise and gold to ‘melt up.’ Gold bulls will be proven more right than they imagine. But they may be proven wrong first.
Until next time,
for Markets and Money