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A reply to the question: Is it time to sell gold?

IF WE AT the Daily Reckoning were speculators, we might consider selling gold. But we’re not gamblers: we hold gold because it represents real wealth, not because we think the Gold Price will go up, says Bill Bonner of the Daily Reckoning.

We don’t really know what direction it is going. But that’s why we hold it. We don’t know what direction anything is going. The nice thing about gold is that it doesn’t matter. Gold doesn’t go anywhere. It just sits there.

If you buy a bond, for example, you have to worry about the credit quality of the issuer. If things get bad enough, he won’t be able to pay up. Your bond could be worthless.

Same for stocks. A stock is a share of a company. If the company goes out of business, your stock certificates (assuming you have them) are only good for decorations.

Real estate is more reliable. But there are taxes and upkeep to pay.

Gold is a better way to store wealth. You don’t pay property taxes on it. And the roof never leaks.

Besides, gold is especially valuable when other forms of money lose their appeal. The trend of debt destruction will probably not end soon. And the feds will probably sooner or later follow Paul Krugman’s advice to "raise (the Fed’s) long-term inflation target to help convince the private sector that borrowing is a good idea and hoarding cash is a mistake."

In the meantime, the Gold Price may go down in Dollar terms. Which will make a good time to Buy Gold.

Source:Is It Time To Sell Gold?

Should governments save money, or spend it…?

PAUL KRUGMAN, Martin Wolf and the others push their point that more spending is needed for the recovery, on the evidence of the last couple of weeks, it didn’t work, says Bill Bonner for The Daily Reckoning.

In the world’s leading economy, there have been 8 million job losses. The US government disappeared almost a million jobseekers from the unemployment lists in the last two months to try to make the numbers look better. Still, fewer people have jobs now than when the stimulus began. Those workers with jobs earn less than they did then. And those who lose their jobs wait longer than ever to find a new one. Housing is sinking again, too, with nearly half of all the mortgaged houses already worth less than their mortgages. Illinois has stopped paying its bills. California is laying people off wholesale.

But instead of falling on their swords in shame, the economists behind the stimulus efforts are positioning themselves for an ‘I told you so,’ moment.

In our last instalment, Britain and Euroland had just turned towards austerity. Alone among the Western nations, the United States of America pledged to stay the course, continuing its program of counter-cyclical stimulus. Then, last week, the US Senate rejected a measure to extend unemployment benefits. Suddenly, we’re all austerians now.

Krugman was quick to distance himself: "as I and others have been arguing at length, penny-pinching in the midst of a severely depressed economy is no way to deal with our long-run budget problems. And penny-pinching at the expense of the unemployed is cruel as well as misguided."

‘Spend now; cut later,’ is still his advice. But with so much spending… and so little to show for it… you’d think he’d be shy about proposing more. At least, he might feel the burden of proof more heavily upon his shoulders. Is there any evidence that increased government spending – even in time of private sector retrenching – makes people better off? And even if ‘spend now, cut later’ were good advice, is there any evidence that they can actually do it?

Based on the experience of the ’80s and ’90s, we observed last week that it didn’t seem to matter what governments did or what they said… the markets went about their business. Today, we add a further provocation.

Let us take a look back at the penultimate budget of the Clinton years:
"Eight years ago, our future was at risk," Bill Clinton congratulated himself on Sept. 27, 2000.

"Economic growth was low, unemployment was high, interest rates were high, the federal debt had quadrupled in the previous 12 years. When Vice President Gore and I took office, the budget deficit was $290 billion, and it was projected this year the budget deficit would be $455 billion."
The Clinton team claimed to have turned things around. They claimed credit for a budget surplus of $122 billion. This was the third surplus in a quartet… the only surpluses in US budget history after 1972. That year may be significant. Before then, the world did business in Dollars backed by gold; if a nation spent too much, its gold would be called away to settle its debt. After that, the US could spend as much as it wanted; the gold parked in Ft. Knox stayed put.

And so the deficits grew year after year like the children of Abraham. But in the ’90s, a remarkable thing happened. Practically the entire developed world began running fiscal surpluses. The US. Canada. Sweden. Finland. Europe. The entire OECD. From deficits of about 1% of GDP, budgets improved, with surpluses of about 2% by the end of the ’90s. This seemed to prove that civilized men and women, even in the time of paper money, can get control of their budgets. We already knew they could ‘spend now.’ It was beginning to look like they could ‘cut later’ too.

In June 2000, Clinton administration economists predicted that the surpluses would keep coming, rising to as much as $1 trillion over the next 10 years. But the US economy seems to have gone from Heaven to Hell in less than a decade. The race that turned deficits into surpluses lost its magic touch within 18 months. By 2002 deficits were back. And they were staggering, nearly $3 trillion worth of deficits in 2009 and 2010 alone.

The economists completely misunderstood what was going on. The triumph they celebrated was not in themselves but in their stars. They had just been lucky. Bill Clinton’s administration had kept up spending just as the Reagan team had before them, from $1.4 trillion in ’94 to $1.8 trillion in 2001. But interest rates fell. Credit grew. And the economy boomed.

The Clinton era boom is now the Obama era bust. When the contraction hit, the feds followed the formula. They mustered their fiscal and monetary stimulus. But they got no recovery. Spending more now won’t help. Not because the Obama team is less competent than the Clinton crowd. They are just unluckier. Credit is contracting.

So Krugman will be proven right after all after all. Austerity will not bring prosperity. But then, neither would stimulus. Krugman will say "I told you so"… and spend the rest of his career in darkness and confirmed delusion.

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Source:Spend or Save to Recover?

US Treasury holders have nothing to fear today. Just look how low yields are!

"BOY, the bond vigilantes are really on the warpath," jokes Paul Krugman, noting in his blog at the New York Times that 10-year Treasury yields ended Tuesday below 3.0%.

Never mind that the S&P slumped to 1040 meantime, dropping to a level first crossed (on the way up) in spring 1998 and leaving institutional funds with few places to hide. Never mind that 10-year Treasury yields only fell through 3.0% once before…amid the cataclysm that followed Lehman Bros.’ collapse and thus hardly cause for good cheer. And never mind either that Gold Prices reversed a 0.9% drop on Tuesday, extending their run of higher highs and higher lows to seven consecutive quarters, also starting with the collapse of Lehmans.

"Clearly, we must slash spending immediately to satisfy the market’s demands," mocks the Princeton professor. Which looks a fair satire at first. Because yields only fall when bond buyers bid up prices. And US debt has rarely been more highly priced than today.

But to think that means the market is crying out for more debt – and imagining that it would only be right to meet that cry, as well – is one hell of a leap. Because whatever power Robert Rubin spied in the bond market, it really isn’t that bright.

Despite averaging just 0.40% real interest, for instance, through the 1970s, buyers of 10-year US Treasuries took until Dec. 1980 to see their yield move decisively above the pace of inflation. By then, of course, short-term rates had shot up to 19%, first destroying the capital value of those 10-year bonds as prices fell and yields rose towards that strongly positive post-inflation return, but also destroying the easy returns to be made by borrowing short-term money and lending it long.

Even below 3.0% today, ten-year US Treasuries still offer an easy profit – quite literally money for nothing – in maturity transformation. Those big institutions able to borrow Fed Funds at the current near-zero rate can park those funds in government debt, picking up 2.75% returns from the annualized gap between overnight and 10-year interest. This no-brainer gets brained, of course, when short rates rise above longer-term yields. But what fear of that with Krugman’s one-time colleague, fellow bearded wonk Ben Bernanke, running the Fed?

Still, if there were a genuine problem with Uncle Sam’s outstanding debt today – a debt currently pegged at $13.1 trillion, and equivalent to borrowing $2.82 each and every day since the Big Bang – then the bond market would be first to know and show it. Right? Because as Krugman’s joking implies, the market-price of government debt must be correct in one sense or another. He’s clearly a big fan of the efficient market hypothesis, no?

"There is nothing like deflation to bring on hyperinflation," as our friend, Merryn Somerset Webb, recently reminded readers of the Financial Times and MoneyWeek.

"Governments desperate to prop up prices and economies, despite being broke, print reams of money – money that eventually enters the market in a rush, flipping deflation to inflation. If you can get a copy of Adam Ferguson’s 1975 book When Money Dies (soon to be republished), you will find an excellent account of how this happened in the Weimar Republic. It might not happen again but, at this point, it would surely be foolhardy to discount it entirely."

Zimbabwe’s more recent collapse into hyperinflation might not strike the rich West either, but it also bears notice. It began gently enough, with a mere collapse of economic production and wages. Between 2001 and 2002, as "reflation" began, the exchange rate of Zimbabwe Dollars to US$1 then held static around 55 (according to the CIA Factbook at least). Domestic Zimbabwean inflation, in contrast, was galloping ahead at 134% per year, on course for doubling shop prices every 24 hours by mid-2007, as the money-printing shown above only accelerated the pace of catastrophe.

Put another way, "Most financial market indicators in the years leading up to July 1914 implied a decline in the risks to investors," as Niall Ferguson wrote in his 2006 tome, The War of the World. No, mounting political concerns, saber-rattling and national armament didn’t specifically forecast the Archduke Francis Ferdinand’s assassination on 28 June 1914 in Sarajevo, and "bond prices did fall sharply once investors realized that a great-power war was a real possibility. "But the striking thing is that this did not happen until the last week of July 1914 – to be precise, in the week after the publication of the Austrian ultimatum to Serbia, which demanded cooperation with an Austrian enquiry."

One month after Austria lost its heir presumptive to an anarchist’s bullet, its bonds finally got round to dumping almost 10% of their value, says Ferguson’s data. The guns of August were already being loaded, in other words, by the time the sovereign bond market took fright. Austrian debt would stand more than 23% lower by Christmas, and the Hapsburg Empire wouldn’t exist five years from there.

Still, US Treasury buyers have nothing to fear today, of course. Like Paul Krugman says, just look how low yields are for proof.

Looking to Buy Gold today…?

Source:About Those Sub-3.0% Bond Yields…

If only China and Germany would ruin themselves…

TOO BAD! writes Bill Bonner in his Daily Reckoning.

You work hard. You save your money. You make a product and sell it at a profit. Everybody’s happy. And then, your customers, the silly spendthrifts, go broke. And what do you know? Everybody points his finger and blames you!

"World leaders are choosing recession," charges the Financial Times. The "world leaders" the FT is talking about are Premier Wen Jiabao of China and Germany’s Finance Minister, Wolfgang Schauble.

The FT says they should loosen up; have some fun. China should raise the value of the yuan, adds Nobel Prize winner Paul Krugman, backed by 130 members of Congress. Germany should raise wages, says France’s finance minister Christine Lagarde. That is, they should be more like grasshoppers than ants.

But neither the Germans nor the Chinese prospered by being grasshoppers. They got rich by being ants. And they’re still at it. China is still exporting…and making a $291 billion current account surplus this year. Germany will clear $187 billion. And now everyone is on their backs. La Tribune, in Paris, even dusts off a prophecy from a defunct 19th century critic, Friedrich Engels: "They will ruin not only other nations’ industries but those of their own country too."

Economists are normally reserved. This is not because they are well mannered. It is because they have nothing to say. But occasionally, timid bewilderment gives way to dangerous bursts of confident opinion. An opinion that has the support of The Financial Times, Paul Krugman, Christine Lagarde, Friedrich Engels and 130 congressmen is almost by definition a threat to the public weal and thereby a suitable subject for today’s back page.

To bring us all up-to-date, the world appeared to prosper in the boom years ‘97 to ‘07 years (the micro-recession of ‘01 excepted). The big exporters – China and Germany, who Martin Wolf calls "Chermany" – ran big trade surpluses. The big spenders – notably Greece and the US, who we will call Gremerica – ran large trade deficits. From these facts, Mr. Wolf infers that if the Cherman ants prosper by making, someone must impoverish himself by taking. In this case, the Gremericans…along with other grasshopper nations such a Great Britain.

The gist of the Krugman, Wolf, and Lagarde et al position is that in the world economy is ruled neither by good nor by evil, but by mathematics. An exporter, such as China or Germany, can only run a trade surplus equal and opposite to the deficits of other nations. What’s more, a grasshopper nation – such as the US – can only run a deficit insofar as the ants are willing to finance it. A deficit is no sin. Nor is hard work and savings anything to be proud of.

We have heard this value-free line of talk before. Ben Bernanke claimed that the US was not making a mistake by spending too much; instead, it was doing the world a favor by consuming its "surplus savings." Lately, between them, Britain and America consumed as much as 70% of the world’s total savings. While this couldn’t go on forever, it went on long enough to give China a $2 trillion pile of the grasshoppers’ money…and long enough to make Germany the moneybags of Europe. But by 2007, the consumer nations of Gremerica were completely spent. The cost of continuing to live beyond their means was too great. They couldn’t afford to go on. And now, the world appears to suffer. The grasshoppers are laid up. Who will buy? The proposed remedy, in a nutshell… where it belongs, is to stimulate consumer demand in Chermany.

It is hard enough for a sensible man to turn the knobs and adjust the levers of his own family budget. He wouldn’t dare fiddle with a whole economy, let alone the economy of a foreign nation. The meddlers, though, are ready to throw the switch on the whole worldwide shebang. And as usual, those who presume to tell others what to do are those whose presumptions are idiotic. The math says it works. But common sense tells us it is absurd to pressure the world’s most thrifty and productive people into not working so hard.

Trade balances must sum out to zero, but that doesn’t mean that consuming goods is just as good as producing them. Alas, the world economy is not organized in a way that makes it easy for an economist with a calculator. Instead, it’s infinitely complex. Turn any knob you want; you’ll get results you didn’t expect. Turn the ants into grasshoppers? Maybe. But the bugs have ideas too – shaped by experience, culture and calculations of their own.

Wolf’s math tells him that raising German wages will make Greece more competitive. But don’t expect the Greeks to build a Maybach any time soon. Instead of turning Germans into grasshoppers it will more likely turn them into unemployed ants. Likewise, you can raise the yuan. But China’s export economy already looks like a bubble. And making it harder for Chinese manufacturers to sell their wares looks like a pin. Even the threat of sanctions has a sharp edge to it. It was just this sort of high-minded central planning – led by Misters Smoot & Hawley in the ’30s, with their sharp pencils and dull wits – that tipped the world into a deeper, darker depression.

Chermany isn’t responsible for Gremerica’s problems. Chermany can’t solve them. Gremerica made mistakes. It must now correct them.

Ready to Buy  Gold…?

Source:A Threat to the Public Good

Gold, Greece and the Euro currency’s "irreparable exchange rate"…

PRICING YOUR money in gold – in a world where everyone else did the same, and at fixed exchange rates, too – made for a big problem when the welfare state began gobbling up more wealth, year after year, than it could earn in taxation.

"No [social] safety nets were allowed," wrote Peter Bernstein of the Gold Standard in his Power of Gold (Wiley, 2001).

"If the gold stock was flowing outward [thanks to the currency falling on the international exchanges], interest rates had to rise to attract foreign funds and the domestic economy had to be suppressed to curtail imports."

Glued back together after the cataclysm of World War I put an end to cross-border capital flows, this informal yet tightly rule-bound system cracked and finally shattered for good when the 1930s saw world trade collapse in turn. But "even when countries went off gold," as Princeton professor Paul Krugman wrote in late 2009, "the prevailing mentality made them reluctant to cut [interest] rates."

Or rather, it made central banks reluctant to cut the cost of money below zero, as Krugman would advise. Because with the monthly in- and out-flow of Gold Bullion from the foreign exchanges for so long measuring the credit extended by foreign and domestic wealth, government policy naturally leant towards deflation.

Defending the value of cash, rather than inflating it away, gives creditors confidence. And that, paradoxically, is the only way to finance deficit spending long term.

The alternative, at least to the mind of 1931 policy-makers, was Germany’s 2.7 million per cent Weimar inflation of 10 years before. Whereas the solution, 10 years ago, was for higher-spending Euro nations to piggyback on Germany’s unparalleled credit rating with a single, pan-sovereign currency.

"Whether we returned to the Gold Standard [after WWI] too early or not is debatable, but it is no longer a matter of more than academic interest," wrote Edward Peacock, King George V’s own financial advisor, a director of Baring Bank, and a likely-looking successor as Bank of England governor, on 1st August.

"To go off the Gold Standard, for a nation that depends so much upon its credit, would be a major disaster."

Hence the deflationary measures – such as slashing the dole by ten if not twenty per cent – argued over in cabinet. Great Britain couldn’t support both its gold reserves and its growing state-spending commitments, a fact made livid by the apparent "bankers’ ramp" that bet against the Pound on one side, trying to force a cut in state wages…and the near-mutiny of a thousand Royal Navy sailors from the Atlantic fleet at Invergordon, Scotland on the other, after those wage cuts were imposed.

The news sent to the Admiralty on August 19th sparked a fresh run on the Pound, finally forcing the crisis in London. Something must give, and in a world of gold-fixed exchange rates, that something was Sterling – its gold backing, and thus its international exchange-rate value.

Great Britain, long "the conductor of the international orchestra" in John Maynard Keynes’ phrase, abdicated its role with the ultimate default five weeks later.

"Two lessons were taught by Invergordon and the withdrawal from the gold commitment," reckoned William Rees-Mogg, former editor of The Times and advisor to Margaret Thatcher, as the ugliest financial crisis since the Thirties hit the global exchanges in late 2009.

"Governments should not try to balance the budget by cutting the pay of essential public servants; and they should not defend at all costs an overvalued fixed exchange rate."

Athens today, of course, is a long way from balancing its budget, and it rarely tried to defend the pre-Euro Drachma, let alone at all costs. But did it enter the fixed currency union at too high an exchange rate…over-valuing its money and thus itself…thereby dooming Greece to a date with deflation, if not default, sooner or later?

Pricing yourself out of the market, and thus out of Gold Bullion, was what France (at first) avoided but Britain fell for when the pre-WWI Gold Standard was revived – only to gasp its last a decade later – in the mid-1920s. Thanks to what became known as the 1925 "Norman Conquest of $4.86" in honor of the Bank of England’s eccentric, neurotic and frankly unhinged governor, Montagu Norman, Sterling was priced at its 1914 valuation in terms of both gold and the Dollar. Whereas Paris, instead of nailing itself to some pre-war ideal of honor or virtue, watched the Franc lose two-thirds of its Dollar value, before cutting income tax and raising consumption levies in 1926, inviting a flood of French wealth back into its coffers.

"From a position of approximate equality with the gold reserve of the Bank of England in 1926, the Bank of France’s gold holdings were double [that] by 1929," writes Peter Bernstein in his Power of Gold. "Two years later, the French gold hoard would be approaching five times the size of Britain’s."

Hence Britain’s failure to devalue Sterling against bullion, rather than quit gold entirely, in Sept. 1931. It couldn’t risk a final flight from the Pound, sucking out what little remained of its hoard – a phantom that would haunt the US when it ran the world’s Gold Exchange system post-WWII (and only exorcised by Richard Nixon also "closing the Gold Window" four decades later). Not with France, the US, Russia and even post-Weimar Germany all hoarding ever-more gold in what proved a scramble for the ultimate money as Japan annexed Korea, Spain fell to Franco, and the Wehrmacht then marched into Prague.

Devaluation today – a policy so often used to rescue the short-term political and economic fortunes of what City analysts cannot now call the PIIGS – also remains shut to the Greeks, but for another reason entirely: Revaluation within the Euro is impossible.

Joining the European single currency, and consigning sovereign notes and coins to history, meant swapping those notes and coins for a certain, agreed quantity of Euros. Once set and enacted, that exchange rate could never again be revised. Because the exchange…once you were holding Euros…could never again be replayed.

"There is no wiggle room here," as two English academics – both smirking and gasping at the Eurozone strait jacket – wrote in a 2004 tome.

"Greece has to live with this conversion rate no matter what happens to its level of productivity or inflation relative to its Euroland partners, or its level of internal unemployment.

"If it becomes politically unacceptable to live with this rate, Greece has only one realistic option, and that is abandoning the Euro."

Hence the name – "irrevocable exchange rate"…although "irreparable" would seem a better name with hindsight, and after the domestic inflation which continued regardless.

Set 12 months in advance of each member state’s last sovereign trade, this fixed, irrevocable and now historic rate offers no second-chance to price the Euro again. To inflate (i.e. devalue) its way out of this fiscal crisis, Greece only has the nuclear monetary option of quitting the Euro. And just as in 1931 London, the forecasts for what will come after – a "major disaster" indeed – are dire.

Civil protests had long since rattled Great Britain; the General Strike and its flirtation with revolution came within 12 months of the 1925 return to gold. British civil servants then fretted over ten, twenty, even fifty per cent overnight hikes in the cost of living. But the loss of credibility – and even with Sterling dropping from $4.86 to $3.25 between mid-Sept. and end-Dec. 1931 – never quite destroyed Britain’s credit. Because the entire British Empire also went off gold together, taking nearly one-quarter of the world’s land mass and population with them. London thus remained the centre of world finance, including the global Gold Bullion trade, regardless.

Quitting Euroland, on the other hand, would leave Greece – or Spain, Ireland or Portugal, or all of them together – horribly alone. Gold Standard historian and former IMF advisor Barry Eichengreen posited an Italian exit back in late-2007. Only the names have been changed:

"The very motivation for leaving would be to change the parity [between Greece's new domestic currency and the now-neighboring Euro]…Market participants would be aware of this fact. Households and firms would shift their deposits to other Euro-area banks. A system-wide bank run would follow. Investors anticipating that their claims on the [Greek] government would be redenominated into [the Euro's devalued replacement] would shift into claims on other Euro-area governments, leading to a bond-market crisis…

"It would be unlikely that the ECB would provide extensive lender-of-last-resort support. And if the government was already in a weak fiscal position, it would not be able to borrow to bail out the banks and buy back its debt."

In short, "This would be the mother of all financial crises," guesses Eichengreen. But no matter, he says; it can’t happen. "The decision to join…is effectively irreversible. Exit is effectively impossible."

How come? "The insurmountable obstacle to exit is neither economic nor political, but procedural," says the professor. Short of a coup, revolution or state failure, you have to agree.

First, all contracts – both domestic and cross-border – would either be void (which again means revolution, state failure, coup or all three), or they’d be subject to a sweeping redenomination law. That would require long, detailed, co-operative discussion, both internally and with governments, business and private individuals across the European Union and beyond. So no dice there, then.

Then there’s the logistical nightmare of re-pricing all goods and services, replacing all those vending machines, and reprogramming all Greece’s bank and till systems – a fun project when Euro accession approached, but hardly a laugh as hyperinflation looms. So again, we’re back to revolution…if not a coup or failed state…and you don’t need to be Helmut Kohl or Jacques Chirac to wince at the irony of Europe’s greatest unifying dream (to date) ending with chaos and bloodshed west of the Balkans.

Greece’s problem, therefore, really is "a Eurozone problem" as finance minister George Papaconstantinou has repeated throughout this crisis. Since it cannot devalue or exit, something else has to give. And that something, we guess, is the Euro – or rather, its historical backing of post-war German-style strength, built on the living memory of Weimar inflation and so coveted by those very Eurozone states now making it untenable.

"The Europeans would be silly to let this blow up," says Credit Suisse’s head of interest-rate strategy, speaking to Bloomberg. "The ECB will have to be relatively dovish and relent a bit on their plan to withdraw [banking] liquidity."

Relenting "a bit" is precisely what the Euro was supposed to avoid, however, and precisely what got it into this mess. Sticking to the Growth & Stability Pact’s budget deficit rules may (or may not) have kept the Euro’s 16 members aligned economically (a balance of payments limit would have helped, too) but it’s too late now to pretend 3% and 60% hold more than totemic value. The ECB’s half-trillion in ultra-cheap liquidity, meantime, went against all the European Central Bank claimed to stand for when it opened in 1998, setting the aim – long since denied and disdained – of keeping money-supply growth at 4.5% per year for fear of the price-inflation or deflationary collapse that might otherwise follow.

"Public commitment", "inflation vigilance", "price stability"…these are just words. The Eurozone union is fact. And while promises, like stability pacts – or the commitment to honor a gold-exchange at a certain weight of metal – can be over-looked, the world’s most heavily issued money cannot.

Not by those 317 million people for whom it’s now their domestic currency. Right now, it would seem their only-possible currency, too – whether strong, weak, or devalued to all-time record lows against gold, as it has been already in 2010.

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Source:1931 for the Euro, Part II