Ben Bernanke made a stir today with a speech indicating (if you read between the lines) more quantitative easing via increased economic stimulus. There are two violently different schools of thought about this; some see it as the road to Armageddon, others see it as the only way to save us from a Japan-style deflationary malaise. I won’t argue about that, except to say that I think Bernanke had no choice. He is so damned if you do, damned if you don’t, and there’s literally no way out. And so we will continue flooding the system with money and propping it up with IOUs, and we will eventually see some serious inflation (that could still be some months off). There really are no good choices under the current situation.
Which brings me to a very interesting post from Zero Hedge, in which the pundit reads Ben’s mind.
You can really see into his head from reading this speech. He is an academic who thinks he is smarter than everyone else which is why he is in the position he is in. He thinks the key to monetary policy is to trick people into doing things that will hurt them in the end. He believes the mal-investments he intends to push people and institutions into equals economic growth. What surprises me so much about the investment community and the American public in general is that so many fail to understand that we live in a top down centralized economic system much more similar to China in more ways than people want to admit. We look at how the government steers the economy in China and sneer. How are we so different right now?
Well, I still see plenty of differences; we don’t have the outrageous waste and unaccountability of China’s state-owned enterprises, for example. But on the other hand, we are witnessing an unprecedented top-down intervention, for better or for worse. And I don’t see that we have any choice. The only thing that would be worse would be turning off the spigot and risking a complete collapse. Either way, we’re in trouble. You can’t keep printing money and devaluing the currency without eventually seeing some serious inflation. And that seems to be the path we’re heading down. Inflation has some advantages (it makes it easier to pay our debts), and the Fed will do everything in its power to hold off a deflationary depression, though some say we’re already in one.
Bottom line: Be careful with your money, and buy gold (and silver, at least for now – it’s on a tear). Either way, hyperinflation or deflationary depression, gold does well during times of economic uncertainty and doubts about the efficacy of fiat currencies. I am no gold bug (they can be quite scary), I’m just a pragmatist. Printing money may be necessary, but it will have to have consequences that will hurt the dollar. Dollar goes down, gold goes up. Period, full stop.
For the record, I hate economics and know very little about it. but that said, I recommended to all of you back in 2006 that you load up on gold, which I did. Gold was about $680 an ounce back then. Today it’s around $1,240. It may have it’s shaky, scary days, with huge ups and downs. But the trend is upward. The current economic dilemma, the box that poor Ben Bernanke is in, makes its rise all but inevitable.
Read the entire article and its delicious comments.
Update: While you’re at it, definitely check out this article.
1
By gregorylent
the west’s waste, like its corruption, is just in a different part of the ecosystem than is china’s or india’s
August 28, 2010 @ 12:09 pm | Comment
2
By David
By telling people to be careful with their money and buy gold, you’re admitting that Bernanke’s strategy will only cause them harm.
The purpose of printing more money is to increase inflation and get people to spend more (because their money is losing value) and borrow more (because the reward for saving and the cost of borrowing are so low). Obviously, for people struggling through a recession, those are the WORST things they could do — and it applies to the country as a whole.
Yes, Americans need to be careful with their money, but that won’t make a difference if Bernanke isn’t careful with the money supply as whole first.
August 28, 2010 @ 2:07 pm | Comment
3
By David
Here’s a flashback to the economic “genius” of Bernanke: http://www.washingtonpost.com/wp-dyn/content/article/2005/10/26/AR2005102602255.html
Compare him (with his access to more economic information and expertise than anyone else in the world), to people like Robert Schiller (http://www.yalealumnimagazine.com/issues/2009_09/shiller032.html) and Peter Schiff (http://www.youtube.com/watch?v=2I0QN-FYkpw) who both had much humbler resources.
August 28, 2010 @ 2:10 pm | Comment
4
By Math
A Suggestion to the Chinese government to send 250 million students to the USA as Part of China’s Economic Stimulus Package
First, I believe America is a very advanced and modern nation. China is not yet an advanced and modern nation. China’s goal is to reach the same level of advancement and modernity as the US. There are many ways for one country to reach the same level as another. You can develop yourself, or you can drag down the development of another. Of course right now, China’s economy/science/technology/military/diplomacy is all developing very fast, while the US is developing very slowly, and even more slowly given this current financial storm. So, I was thinking yesterday in my room with my son, why not take advantage of this current financial storm, and further drag down the US and close the gap between the US and China? I got up from my chair and took out a map of the US and China, and I saw two countries with approximately the same sizes, but one has 1/6 of the population pressure and twice the natural resources of another. Is this fair allocation of world’s resources?
I saw on the newspaper yesterday that the US gov’t is asking the Chinese gov’t to bailout the US (which means to buy more US bonds). So, as long as the Chinese gov’t will need to spend this amount of money, this post suggests that instead using that money to buy US bonds, use it to sponsor 250 million students to apply and go to the US to study. That is, the government will choose 250 million people and sponsor their application to different US colleges. This will be a government program called “Go To the USA”. in fact, the government will write their applications for them, write their essays, pay their application fees. Now, you say, but what if their scores and backgrounds are not good enough to be accepted? The government will of course forge their education background, their school grades, their test scores, to make them high quality candidates that will surely be accepted by US colleges. However, these 250 million students are not chosen from the best and brightest of the Chinese society. Instead, the gov’t will choose the lowest quality people from the Chinese society, such as jobless teenagers, delinquents, drug users, rapists, young murderes, etc, etc. China has a 1.3 billion, of course it has a large number of such low quality people. I believe one reason China’s GDP is not as high as it should be, is because these low quality people are dragging down the progress. Once these people are sent to the US, of course they’ll not study hard, they’ll not contribute to the US’s technology and research, and instead they may defraud research fund, forge papers, fabricate experiment data, create low qualtiy products for their school and research centers, and overall lower the quality of the US research versus Europe or China. And if these 250 million people can persist for decades, I believe this will have a significant negative impact on the US economy and technological quality, and that is of course the best scenario for China.
For an American university, when they receive an applicant from China, they’ll see great scores, great recommendation letters, great personal statements, etc. And they’ll accept most of those applicants based on objective standards. Of course they do not know that all these data is forged by the Chinese government for the candidates. So after 4 to 5 years, 250 applicants will be accepted into various US schools, such as Harvard, Princeton, MIT, Berkeley, CalTech, University of Georgia, University of Virginia, University of Texas, University of Pennsylvania.
This way, it degrades the quality of the US population and academic research, alleviates resource and population strain on China. THis is simply a way to more efficiently allocate resources in today’s world, should be supported by liberal economists.
I think this project should be part of the stimulus package to recover the Chinese economy and ensure its competitive position in the world.
August 28, 2010 @ 11:22 pm | Comment
5
By Richard
David, what I said was that nothing Ben does can prevent harm. We are truly caught between a rock and a hard place. I freely admit I have no solutions, and the best I can do is try to figure out how to survive the calamity. Selling all my equities and mutual funds in late 2006 and putting the money in gold stocks was about the best I could do, and that certainly payed off (not that I bad that much to invest with, but it sure kept my head above water). Looking at proposed alternative, like continuing tax cuts for the super-rich and imposing harsh austerity measures at a time of rampant unemployment, I see only bad solutions. Ben has little choice; quantitative easing will continue, and I will continue preparing for its aftershocks.
August 29, 2010 @ 1:30 am | Comment
6
By Richard
Math, congratulations on achieving a new first. I never before saw anyone encouraging widespread cheating, forging and lying as a solution to their country’s woes. Brilliant.
August 29, 2010 @ 1:33 am | Comment
7
By PB
In China, industry is hopelessly co-opted by government to the point of being indistinguishable.
In the US, the government is hopelessly co-opted by industry to the point of being indistinguishable.
Corruption in China is brute and ugly, while in the US it is institutionalized in the mechanisms of state and the complete regulatory capture of gov’t by large corporate interests. Why bother corrupting politicians when you know that their first instinct is to do what’s good for you anyways? Ben Bernanke lives in a financial industry bubble with the rest of them- what the US needs to completely rebuild its economy, not dump more money on the smoldering wreckage of the old one.
August 29, 2010 @ 5:51 am | Comment
8
By merp
good post
August 29, 2010 @ 1:51 pm | Comment
9
By HongXing
In China, industry is hopelessly co-opted by government to the point of being indistinguishable.
In the US, the government is hopelessly co-opted by industry to the point of being indistinguishable.
Corruption in China is brute and ugly, while in the US it is institutionalized in the mechanisms of state and the complete regulatory capture of gov’t by large corporate interests.
Very insightful statement, very insightful. Not many people (especially not people who uncondtionally admire the Western system) can see this point. I always wanted to express this point, but my English is not too good to express it clearly. Basically, China’s corruption is at least on the surface, for all to see, you see all these nasty people taking bribes, those nasty officials stealing money from projects. In US, it’s no longer on the surface, it has submerged and penetrated the society’s bones. In other words, many things that are considered totally illegal in China, are completely legal in the US – they are just protected under the legal framework of lobbying, campaign finance, etc. Corruption in China is ugly and visible, corruption in the US is built into the US political system. And this applies to many other aspects of “badness” of the two governments. China does very visible and very touchable “bad” things – like taking away peasants land, shutting down media outlets, building weak school buildings. US no longer cares to do these “small stuff” (would the head of the mafia bother to go out and steal a purse from a pedestrian, rob a grocery store, burglerize a house?), it has the ambition and resource to move onto bigger things: like economic exploitation of the 3rd world for decades, starting a war without reason for resource, establishing military base every corner of the world to maintain global hegemony, financial wizardry to maintain the strength of the dollar, etc.
August 29, 2010 @ 11:16 pm | Comment
10
By merp
another good post
August 30, 2010 @ 5:41 am | Comment
11
By Jack
“Ben Bernanke made a stir today with a speech indicating more quantitative easing via increase economic stimulus.”
That’s the wrong takeaway from Bernanke’s speech. If you had only read the initial comments coming across the newswires, Bernanke may have seemed to indicate that the US recovery was soft and the Fed was prepared to buy more, but if you read what he had to say more carefully, if anything the conclusion was that the Fed plans to ease up on quantitative easing and other stimulus programs, and not allow what appears to be a slight slowdown at the moment to draw them into another round of QE.
The movement in the markets reflected this, as stocks plunged and bonds rose in the first few minutes following those erroneous headlines, only to turn on a dime moments later.
August 31, 2010 @ 12:26 am | Comment
12
By Richard
You may be right; as with all Fed speeches, this could one could be read in different ways, as the post-speech hubbub proves. And maybe I was reading stuff into Bernanke’s words. The message to me was, Don’t panic, we’ll recover, while underneath it all are impossible challenges that belie Bernanke’s reassurances and that will continue to make QE the only viable “solution.”
August 31, 2010 @ 12:41 am | Comment
13
By slim
@4 ” The government will of course forge their education background, their school grades, their test scores, to make them high quality candidates that will surely be accepted by US colleges.”
This happens a lot already, although not at the hands of the central government. Ask consular officials to share their typical day.
“Once these people are sent to the US, of course they’ll not study hard, they’ll not contribute to the US’s technology and research, and instead they may defraud research fund, forge papers, fabricate experiment data, create low qualtiy products for their school and research centers, and overall lower the quality of the US research versus Europe or China.”
Based on the fenqing troll population of this blog alone, the outside world is already getting these types from China.
August 31, 2010 @ 8:17 pm | Comment
14
By craig
Richard: How do you find a trustworthy place to buy/sell gold? I’ve looked online and walked into coin shops but don’t really feel confident about them.
September 1, 2010 @ 3:48 am | Comment
15
By Richard
Never go to one of those shady gold sharks that advertise on Fox News. I only trade gold stocks, usually what are known as junior minors – promising mining companies that are not as established as Barrick, Newmont and other war horses. A good way to buy a cross-section of these miner is the junior miners ETF trading under the symbol GDXJ. Always buy on dips, sell on spikes, and be very, very careful. If you try to time the market or trade on margin you will be crucified.
September 1, 2010 @ 3:59 am | Comment
16
By craig
Thanks Richard, I’ll look into those.
September 1, 2010 @ 8:04 am | Comment
17
By Bukko Canukko
Wow — first time I’ve read your blog in three years, Richard, and I find your attitude even closer to mine than it used to be. (Back in 2005-2006 I commented a few times under the moniker “Bukko in Australia” because I was an expat there. My wife never liked it Down Under — I thought it was a bonzer country, mate! — so we immigrated to British Columbia last year, hence “Bukko Canukko.”)
I second your recommendation on gold. We started buying it in 2004 when we were planning to flee the Bush Regime. (Damn shame Obama is following Monkeyboy’s footsteps, which is why we’re not living in the U.S. again.) Gold is an anachronism, and I sometimes feel stupid for owning so much and even burying some of it in the ground. (Not saying in which country, though.) But I’d feel even stupider if I had left my money in the completely crooked stock market.
Anyway, good onya for keeping up the good blogging, eh? Your blog influenced my life in that your Russian commenter “Ivan” turned me on to Joe Bageant, who’s been a frequent source of entertainment and enlightenment over the years. For that, I owe you, mate.
September 13, 2010 @ 1:09 pm | Comment
18
By Richard
Thanks for the very intelligent comment, Bukko – it has been years! I’m not of the school that believes you need to buy and bury physical gold. America’s fundamentals should be strong enough to weather the storm, but there wil be a lot of pain along the way, and the dollar has nowhere to go but down in the long term.
September 13, 2010 @ 2:02 pm | Comment