By Raul Ilargi Meijer on 4 March 2011 for The Automatic Earth - (http://theautomaticearth.blogspot.com/2011/03/march-4-2011-damned-if-you-do-doomed-if.html)
Image above: "The Silk Road" by Hing Nian Zhang. From (http://worldhistoryto1500.blogspot.com/2010/10/networks-of-communication-and-exchange.html).
It's somewhat darkly funny, isn’t it: rising food prices are, as we all know, a major factor in the protests in the Arab world, and these protests in turn, according to the FAO, lead to higher food prices (oil being a main driver, for one). Irony, unintended consequences? No shortage of either these days, is there? Damned if you do, doomed if you don't.
You need look no further than Geithner and Bernanke "saving the US economy" (look at those markets!) in the face of persistent mile-high unemployment, with a fast growing percentage of new jobs paying $10 an hour or less with no benefits.
Then again, are those consequences really unintended? As the real economy is being gutted to the bone, the rising markets are nothing but a mirage, a talk-to-the-hand scheme devised by the spin masters who know what all of you like to hear and who feed you exactly that. Until their masters decide the time has come when they can't squeeze enough money out of you anymore to justify keeping the game going.
And then it will all vanish into thin air. And you won't even know what hit you. You’ll be left with a whole load of nothing. No services, no benefits, no jobs, no homes, just a huge bunch of empty bags. Don't let the markets fool you, look at the situation on the ground. That reflects the future much better. We will probably see another set or two of positive numbers for jobs, and the stock markets may not have reached their highest peak.
But it's all the hot air of false optimism: the economy is irreparably broken. For a while, you can delay debt payments by creating more debt, but that is a dead end street, and the piper waits at the other side. Richard Russell, who's about as old as Noah now, writes about Mary Meeker et al.'s USA Inc. report :
Dead Nation WalkingHere I'm wondering where that consumer confidence number comes from that Russell talks about. A newly published poll done by NBC and the Wall Street Journal tells a different story. Neil King Jr. and Scott Greenberg write in the Journal:
[..] Mary writes, "Imagine no Army, Navy, Air Force, Marine Corp or Coast Guard, no federal courts or prisons, no national park service, no food and drug administration, no embassies, no salaries for Congress. That's what it would take to finance the budget by 2025 and still pay interest on America's debts, without either raising revenues or reducing entitlement growth. That's certainly not a recognizable America." Later in the article, Meeker notes that the nation's problem is not a revenue problem, it's a SPENDING problem. She writes, "Simple math says that balancing the budget purely by raising taxes would require doubling rates across the board, which would kill growth." So as I see it, what's coming up is a massive cut-back in federal (plus states and municipalities and cities) spending. This is the stark and painful picture of the years ahead.[..] But what about the markets? What of the Dow and the S&P which have been rising steadily for two successive years? As I see it, investors are taking it "one step at a time." Corporate earnings on a year-over-year basis have surged. And that's what investors have tuned in to. As far as the coming cut-backs, investors' attitudes are "We'll worry about that when the time comes. In the meantime, hasn't the 'good ol' USA come out of every tight problem with ringing bells and confetti. We'll do it again, and the hell with the deficits." Recently and rather ironically, I read that consumer confidence was at its highest level in three years. The history of America has been perpetual optimism, or that well-known expression -- "What, me worry?"
Poll Finds Support Lacking for Entitlement ReductionsWhat'd they do? Talk to a different set of Americans? And what's that about "A country that refuses to feel better"? Do Americans not want to feel better? Or are they just finding it hard on the back of job losses, eroding pensions and benefits, full frontal attacks on collective bargaining, and all the other blanks anyone amongst you can fill in? There's one line in the article on that poll that's really got to be the money shot of the day:
Overall, the new poll found deepening pessimism about the future of the economy and the country's direction. Only 29% thought the economy would get better over the next year, a dip of 11 points since last month and the lowest since August. "This is a country that refuses to feel better," said Mr. McInturff.
See, that's really a great idea: to have people today voice their opinion on the retirement age, 64 years from now, of kids that are 5 year-olds. It says a great deal about the folks who posed the questions, as well as about those who actually responded to such an absurd proposition, and of course about the entire discussion regarding the economy that's pretty much not taking place at all in any serious way, shape or form.[..] more than half [of poll respondents] favored bumping the retirement age to 69 by 2075.
Whenever you see predictions or polls that include dates like 2050 or 2075, please do realize that you're very simply being punked. The overall message of the poll is that a large majority of Americans don't want significant cuts to entitlement programs. Unfortunately, as Richard Russell indicates, those cuts will come anyway, and soon.
American leadership has decided that saving banks trumps saving people, and once you're on that road, it’s very hard to get off it. The die is cast, les jeux sont faits, there's no way back. Again unfortunately, there are very few people out there who understand what must of necessity lie ahead.
The sort of things we hear all over the place is: Buy stocks! or Buy gold! But that's not what we should be listening to, because it's simply not all that simple. Yes, gold is a good investment, but only after you’ve covered your "basic bases", when food and shelter and access to water are taken care of. And when you can afford to sit on it for 5-10 years, or even longer. That will work for some of us, but not for most.
Sitting on gold when you're hungry, cold, or thirsty doesn't make a lot of sense. Our point of view at The Automatic Earth is that in the near future there will be far too many people who hold gold, but will have to sell to cover losses and/or necessities, and into a buyer's market to boot, to keep the price of gold up. Not a popular view, we know.
Where and how do we differ from the 'priests of gold'? It all comes down to the extent to which the world as we know it today is going to change. That extent is in our view greatly underestimated. In the world of finance, there is hardly any recognition of even the mere possibility that owning stocks, bonds, or even gold may not necessarily be the best way to go forward. The main thought remains that if you have enough of something "fungible", you can always trade it and buy whatever it is you need.
But that's not necessarily true. It may be the model we have grown up in, but it's by no means universal. Besides, even if you own a ton of gold, and you have water and food covered, but those around you where you live have not, what exactly is it that you have bought yourself? A prison?
Our western economic thinking is Flatland 1- (or maybe 2-) dimensional, in the sense that we think we can always buy what we don't have or can't make. That's not how it works, though. In Sri Lanka, or Guatemala, or some small town in the US in the future, you can't just come into a community and offer them a bunch of gold in return for the scarce or only water they have. There are circumstances in which water trumps gold, hard as that may be to believe living in Flatland.
In a world in which water purification plants are ever more energy extensive and that energy ever more hard to come by, communities even in locations (think cities) in the US will find it increasingly harder to maintain them. The money used to save our zombie banks, and with them the entire mortgage and finance systems, could have been used to save things like water purifying plants, and roads, bridges, sewer systems, and don't let's forget jobs, and, ultimately, people.
But it wasn't. And that will turn out to be a fatal mistake for many. But before we get there, we’ll have to negotiate a major number of steep speedbumps on the way. Like: what will happen to the US dollar in the near future? We at the Automatic Earth are convinced that reports of its imminent demise are greatly exaggerated.
Yes, the dollar will eventually die. But it won't be first in line to perish. And that's where many analysts and experts get it all wrong. As I said before, there are very few who understand what goes on. Mike Shedlock is in many aspects an exception, as he proves once more here, addressing precisely that issue:
US Dollar About to Lose Reserve Currency Status - Fact or Fantasy?And Mish is not the only one who agrees with us on the dollar, as Erik Schatzker and Sree Vidya Bhaktavatsalam write at Bloomberg:
A number of sites are commenting on a Bloomberg video in which El-Erian, PIMCO Co-CEO says "Dollar could lose its reserve currency status".
Bloomberg: "Mohammad what does a weak dollar signal to you, a dollar that can't jump up here on a day like we've seen today?" El-Erian: "It is a warning shot to America that we cannot simply assume flight to quality, flight to safety. That people are starting to worry about the fiscal situation in the U.S. They are starting to worry about the level of debt. They are starting to worry about what they hear about states and municipalities. So, I would take this as a warning shot that we cannot assume that we will maintain the standing of the reserve currency as we have in the past."Fact and Fantasy The first part of what El-Erian said is factual. Here it is again for convenience. "People are starting to worry about the fiscal situation in the U.S. They are starting to worry about the level of debt. They are starting to worry about what they hear about states and municipalities." Those are true statements. Unfortunately, his "warning shot" regarding reserve currency status is fallacious.[..] Global Beggar-Thy-Neighbor Policies It is pretty pale to suggest the end of the US dollar as a reserve currency when countries hold dollars as a function of math, then hold still more dollars to suppress their currencies, hoping to keep their exports up to "stimulate growth". Mathematical Impossibility Another mathematical relationship says the dollar, the pound, the Yen, and the Yuan cannot all be weak at the same time (relative to each other). Yet that is precisely what every country wants. It's mathematically impossible. You can see the effect in rising commodity prices. If commodity prices were a function of the US dollar alone, then they would be rising in US dollar terms alone. Instead there is upward pressure on commodities in all currencies. At some point the desirability to hoard commodities will peak.[..] Will Another Fiat Currency Replace the Dollar? [..] The Canadian and Swiss economies are simply not big enough for them to be global reserve currencies. In regards to the Euro, is Europe in a better fundamental situation than the US? Would it matter even if it was? To answer the second question, please remember trade deficit math. As for the Yuan, it is complete silliness to suggest the currency of a command-economy dictator-led country that will not even float its currency will be some sort of major reserve currency. To the extent that China trades with Russia, South Korea, etc., local reserves in varying currencies can happen (and are happening already), but the global significance of it is wildly overstated. The amounts in question are tiny, as a simple function of math. Will the dollar remain the global reserve currency forever? Of course not. However, it is highly unlikely any of the presumed leading Fiat candidates including the Yuan and the Keynesian wet-dream IMF SDRs (Special Drawing Rights), will take the dollar's place. SDRs are essentially a basket of currencies. The concept of trading in baskets of currencies backed by nothing is even more ridiculous than the existing setup. People do not buy goods and services in baskets of currencies. What can replace the dollar? Gold, or a mechanism like gold that would impose hard restrictions on perpetual deficits is what it takes to restore sanity. However, we may not see a significant move towards gold until there is a massive currency crisis or revolt against fiat currencies in general, not just the US dollar.
BlackRock's Fink Says He's a 'Big Buyer' of Dollars That Gross Says AvoidIn other words, for the near to medium term future the US dollar is the place to be. Don't forget that we have started to see volatility rear its rising head in many places. It may still be in far away lands for now, but that won't last.
BlackRock Inc.'s Laurence D. Fink, chief executive officer of the world’s largest asset manager, said he’s a "big buyer" of the U.S. dollar, which rival Bill Gross has urged investors to avoid. [..] "I’m a big buyer of the U.S. dollar," as the sovereign- debt crisis in Europe will cause volatility in the region, Fink said [..]
Once it becomes clear, as in when the markets start falling for real, that there will be no pensions for the boomers and no jobs for their children, we’ll see people in the streets all over the western world too. And the US dollar will be the first flight to safety haven. Gold will have its day, but that day is a long time away, and when it arrives, the world will be a very different place. And there is no perfect reaction or preparation for it. All we can do is "minimize the suffering of the herd". Our way of life is over. For good. We’ll have to find other ways.