Thursday, September 29, 2011

Doug Casey attacks a common fallacy

The Gold Report, Sept. 27:
TGR: If panic erupts on the U.S. dollar, would products manufactured in the U.S. become super-cheap or super-expensive?

DC: They would become super-cheap. Everybody says that devaluing the dollar will stimulate U.S. industry because the products will become cheaper and foreigners will buy them. This is a huge canard everybody repeats and nobody thinks about. Yes, it is true for a while, but if devaluation were the key to prosperity, Zimbabwe should be the most prosperous country in the world as it has already collapsed its currency.

A strong currency is essential for a strong economy. Sure, a strong currency can hurt exporters for a while. But, a strong currency encourages manufacturers to invest in technology, and become more efficient. It rewards savings and results in the growth of capital that's critical for prosperity. A strong currency allows businessmen to buy foreign companies and technologies at bargain prices. It results in a high standard of living for the country, and yields social stability as a bonus. The idea that decreasing the value of currency to stimulate exports is a short-lived, stupid and counterproductive solution to the problem. People seem to forget that while the German currency was rising about sixfold from its level of 1971, and the Japanese yen about fourfold, those countries became the world's greatest export economies. It didn't happen despite a strong currency, but in large measure because of it.
I wonder if anyone's done a study like Friedman's and Schwartz' A Monetary History of the United States for Germany and Japan. I know about the hyperinflation and that Hitler ended it and I was watching Germany pretty closely from the mid-'70s on.


The probligo said...

There is a whole lot in there that Casey puts forward and which I can not dispute.

His comparison with Zimbabwe though is invalid unless he takes just a little time to run through some missing consequences. What he misses is this –

Yes, selling cheap product (if you can) will generate income. He has left out the very important fact that to survive a producer’s income must exceed the cost of making. So, an essential part of the equation is that incomes – both producer’s and worker’s – must fall commensurately. This is the reason why Zimbabwe failed, and was the cause of the hyper-inflation in that country. Mugabe in his wisdom decided that he and his mates at least would maintain their standard of living with no regard to the cost involved.

You will note that this does tie back to the general gist of Casey’s statements. It is a matter of the emphasis. If the US were to go down (and it is still quite on the cards I must say) then the impact will not be limited to government and international sufferers.

You could likely expect to be paying perhaps three times the present price for gas; food might double in price; interest rates might reach 10%; and the average income might be 25% of what it is at present.

After reading through Casey –

TGR: So, how long will this Greater Depression last?

DC: It doesn't have to last long at all. It could be quite brief if the U.S. government, which is basically the root cause, retrenches vastly in size and defaults on the national debt, which is essentially an enormous mortgage, an albatross around the neck of the next several generations of Americans. The debt will be defaulted on one way or another, almost certainly through inflation. I simply advocate an honest, overt default; that would serve to punish those who, by lending to the government, have financed its depredations.

Guess who that is? Mostly Chinese mum and dad investors. Can you imagine China marching in for a closing down sale? I certainly can. You go bankrupt – what Casey is proposing – and the creditors move in. That is what is so scary about Greece. They really have nothing to be taken!

His promotion of the Gold Standard is no more than sadly misguided political wishful thinking. What does he propose? That is unclear. It is possible that China, India and others have been buying large on the market.

The probligo said...

Should the US print more money in order to join the dance? Who will suffer the most if that were done? China? India? Or the people of the US? What value of gold does the US have at present in its reserves? A huge lot less than the value of currency in circulation – “M1”. Add to M1 the value of all of the “securities” used by banks to prop their money-generating activities and the amount of gold is just totally insignificant.

Remember while you say “We must buy more gold then!” that as each ounce disappears into the depths of Fort Knox, the next ounce is going to cost more. This is exactly the problem foreseen by Breton Woods; the realisation that led to the abandonment of the gold standard; and the creation of World Bank and IMF both at the instigation of the USA.
Bonds pose a triple threat to capital because:
1. Interest rates are artificially low, and as interest rates rise—which they must—bonds will fall.
2. Bonds are denominated in currencies, and most currencies, let's say dollars, are going to lose a lot of value.
3. The credit risk of most bonds, certainly those issued by governments, is high.
On the long side, mining stocks are very cheap relative to the price of gold right now. I'd say there's an excellent chance of a bubble being ignited in gold mining stocks, especially the small ones; in fact, I'd put my finger on that as likely being the easiest way to make a killing.

Sorry Al, that is about one of the worst pieces of advice I have heard. The mining industry must now be one of the most corrupt you could find. The right to mine is generally controlled by governments. You can bet your last pair of boots that if it is not now, it very well will be and soon. The patronage and corruption in the mining industry today is thick enough to allow the ordinary mortal to walk on water unaided.

This just has to take the cake though as the worst of Casey’s specious approach.
DC: It's very hard to be an investor in today's world because an investor is someone who allocates capital in a way to create new wealth. That is not easy in today's highly taxed and regulated economy. It's late in the day, but not too late, to buy gold, silver and other commodities. Productive assets are good to own.

“..allocates capital in a way to create new wealth…” No problem with that definition. But look at the follow-up – “Its late… to buy gold, silver and other commodities…”. That is where I turn off. Anyone who thinks that commodities are “the way to create new wealth” knows nothing of economics. Butter is a commodity and it is yellow like gold. Trees are a commodity and better still they are green!