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.

Funny that we talked about this just yesterday in regard to a relatively obscure article, and now it is the 2nd leading story on the front page of the NY Times. Get a load of this:

The president of the World Bank said Monday that America’s days as an unchallenged economic superpower might be numbered and that dollar was likely to lose its favored position as the euro and the Chinese renmimbi assume bigger roles.

“The United States would be mistaken to take for granted the dollar’s place as the world’s predominant reserve currency,” the World Bank president, Robert B. Zoellick, said in a speech at the Johns Hopkins School for Advanced International Studies. “Looking forward, there will increasingly be other options to the dollar.”

Mr. Zoellick, who previously served as the United States trade representative and as deputy secretary of state under President George W. Bush, said that the euro provided a “respectable alternative” for financing international transactions and that there was “every reason to believe that the euro’s acceptability could grow.”

Over the next 10 to 20 years, he said, the dollar would face growing competition from China’s currency, the renmimbi. Though Chinese leaders have minimized their currency’s use in international transactions, largely so they could keep greater control over exchange rates, Mr. Zoellick said the renmimbi would “evolve into a force in financial markets.”

Read the article. It is beyond extraordinary that the US-appointed head of the World Bank would be so in-your-face provocative, casting doubt on Obama’s strategy to lead us to financial recovery under the supervision of the Fed (as opposed to the Treasury) and openly questioning whether we can pay our debts without igniting inflation. I personally don’t think so, and it’s clear Zoellick doesn’t, either. All of these points were discussed here yesterday, and it’s clear Zoellick read this site before presenting at Johns Hopkins.

That’s the headline from this new article, one of many I’ve been seeing on the inevitable arrival of the post-dollar world. This one sees the current economic upheaval as a sort of gigantic correction that will restore equilibrium to a global economy knocked out of whack by huge trade and capital imbalances.

A seminal shift in behaviour is being forced on the deficit nations where, despite massive fiscal, monetary and financial system support, there is a continuing scarcity of credit and a growing propensity to save. Neither of these two constraints on demand will reverse any time soon.

This, in turn, is forcing change on surplus countries, whether they like it or not. Export-orientated nations can no longer rely on once profligate neighbours to buy their goods. Against all instinct, they are having to stimulate their own domestic demand.

The most startling results are evident in China, where retail sales grew an astonishing 15.4 per cent in August. Fiscal action has succeeded in boosting consumption in Germany, too, despite mistrust of what one German politician has dubbed “crass Keynesianism”.

…The challenge for a developing nation such as China is a rather different one. In China, the propensity to export and save is driven by an absence of any meaningful social security net, in combination with the legacy of its oppressive one child policy, which has deprived great swathes of the population of children to fall back on for support in old age.

What’s more, most Chinese don’t earn enough to buy the products they are producing, so in what has become the customary path for developing nations, they export the surplus and save the proceeds. Yet even in China the establishment of a newly affluent, free-spending middle class may now have gained an unstoppable momentum. In any case, the country can no longer rely on American consumers to provide jobs and growth. It needs a new growth model, which means ultimately adopting the Henry Ford principle that if you want a sustainable market for your products, you have to pay your workers enough to buy them.

How China actually goes about doing that – adopting Henry Ford’s model – is anybody’s guess, but I’d say if it ever happens it’s generations away. (It reminds me of hopes that Afghanistan’s poppy-growing peasants will adopt democracy in short order, become a second Vermont and work out their most pressing problems in civil town halls over chardonnay and quiche.) That’s the flaw in this article, glossing over just how excruciatingly difficult such a sea-change would be to implement. Its observations about the fate of the dollar and the new balance of power, however, seem to me spot on:

These trends – all of which pre-date the crisis but which, out of necessity, are being greatly accelerated by it – will eventually drive a move away from the dollar as the world’s reserve currency of choice. As China takes control of its economic destiny, spends more and saves less, there will be less willingness both to hold dollar assets and to submit to the domestic priorities of US monetary policy.

This is still a couple of years off, but China is preparing for it now. The dollar will spurt up periodically between now and then, but its general trend has to be downward. It is literally inevitable that the value of the dollar will be slashed over the next couple of years. The government needs to lower the value of the dollar, but is hoping to do so slowly. The problem is, those holding dollars, like China, are hardly stupid and know what’s going on, and will not cheerfully stand whistling on the deck as the Titanic goes down. And if there’s a panic and a global dumping of the dollar, it could mean havoc. For a good description of why this is so, and why the dollar simply must go down, check out this clip from CNBC (scroll down). Highly recommended, especially toward the end.

For the record, i have no background in economics and make no claims that I have even the slightest idea what I’m talking about. I just like to write about money and politics. What I do know, however, is that I first recommended buying gold here in the closing days of 2006. Here’s where it was when I recommended it then compared to now.

My friend Dror has put up an interesting post on Thomas Friedman’s controversial column that I wrote about yesterday. Dror fears that many of us, dazzled by gushing reports of China’s success a la Friedman, will get a distorted picture of a country that’s not really doing quite as spectacularly as Friedman would have us believe.

As Ian Buruma points out in a recent article, ‘China’s economic success is convincing too many leaders that citizens… want to be treated like children’. This ideological shift is already showing itself in the calls for increased government planning in the US, as well as the shift of geopolitical power towards China. Taiwan, for example, recently announced that it will not apply for a UN seat this year, for the first time in 17 years. We can expect to see more and more political and ideological deferral to Chinese interests as we progress deeper into the crisis.

All this has happened before. In 1929, American pundits were mourning the failure of capitalism and listing the achievements of central planning in other countries. Back then, commentators were impressed by the Soviet Union’s high employment rate, and its incredible environmental and infrastructure initiatives. These included the Dnieprostroy hydroelectric plant (the largest of its kind in Europe), the 950 mile Siberian-Turkestan railway, and the Volga-Don water canal. Other achievements of that period included Nazi Germany’s 100% employment rate, Hitler’s autobahn (highway) projects, and Fascist Italy’s train system and efficient cooperation between government and business.

(Go to Dror’s post for the many links he incudes to back up is argument.)

Dror and I have had an ongoing argument for months about how strong China’s economy actually is, and how it stands up to America’s. I tend to think China is in better shape than he does. If you are watching its behind the scenes maneuverings, like shoring up its natural resources by cutting deals with Iran, Iraq and African countries, or its nearly silent investment in gold, you can’t help but see that they do have a blueprint for wielding the kind of global influence that for decades we imagined only the US could. China and the US are both pulling out of their recessions, but the US is going to get pulverized by the next wave of home foreclosures and the ticking time bomb of CDOs, all of which must (not might) pull down the dollar and weaken our financial system. China, while faced with its own staggering problems, is relatively unaffected by America’s mess, especially as it quietly moves away from the dollar.

China’s economy is so fragile, making predictions about it is dicey at best. I do think it’s safe to say that its global influence will continue to expand as America’s contracts, and it will be increasingly better poised than we are to cut deals, win friends and influence people. And yes, I know the huge problems China faces. But it’s faced many of these problems for the past 30 years (and some for far longer) and has continued to move ahead, or at least to plod along. And China has what we don’t – money in the bank. And nothing else talks like money. Maybe they will screw it all up and go crashing down. But for now, I see them as having the upper hand. Which, considering how America’s fallen, doesn’t really say very much, but still….

I took heat in other threads for maintaining that gold was more currency than commodity; you can always sell it and use it, in effect, as a currency. Thus, as true commodities like oil and copper deflate, gold goes up during times of economic uncertainty. No, you can’t buy a candy bar with it, but gold is always, always the safe haven during a crisis, and if this isn’t a crisis…. I think this theory holds water.

Meanwhile the dollar is doing great, for now. That’s not due to any great faith in the US economy, rather to the awfulness of other currencies (have you checked the Euro lately?). When the auto industry goes belly-up in April, the dollar will crash, hard.

Investors have taken to terming the flight from risky assets into gold a new currency trade. The ongoing concern about the enormous task of getting the world’s banks on track — bedeviling investors across the globe — has produced a safe-haven trade into the likes of Treasurys and the dollar. However, the dollar’s success is, in some ways, a mirage, improving only because other major world currencies have been dreadful.

The dollar has strengthened in the last couple of months, along with gold, which is an odd occurrence, and speaks to the dearth of worthy investments around the world. But the shift to gold has picked up as “everyone is trying to devalue their own currency against everyone else,” says Sean Peche, manager at BlueAlpha Investment Advisory Limited in London.

Gold is nearing its highs from last summer.

That explains the dollar’s strength of late, one founded on risk aversion. Since the beginning of the year, the dollar has gained 9.5% against the euro and 2.3% against the pound, while gold, in dollar terms, is up 9.4%. The yellow metal closed up $25.50 to $967 an ounce Tuesday, highest since July 17, 2008. “Gold is telling you the dollar’s rally is not going to continue,” says Lance Lewis, fund manager at Lewis Capital Partners.

Please fasten your seatbelts. Gold is going to $2,000. I know, I have no idea what I’m talking about, as my earlier posts indicate. It was 880 when I last posted about it two weeks ago; now it’s near 1,000.

Dali is like heaven. It wasn’t on our agenda, we sort of stumbled here, and don’t want to leave. Onto Chongqing tonight.