Nothing moves in a straight line forever though. The inevitable rebound came yesterday as the Federal Reserve murmured reassurances into the market's ear.
The Fed told said they'd continue to make borrowing cheaper than the stingy free market would. Really cheap. Like "just a rounding error away from zero" kind of cheap.
For some reason this gave investors confidence, like a hit of the hooch or a line of blow. They got back on the dance floor with vigorous abandon. Stocks regained a good chunk of the previous day's losses.
The euphoria just couldn't last, however, at least not in stocks. Stocks are down again today while gold hit an intraday high. Gold had already surged yesterday to a new high, then closed lower...but as of this writing the once and future money is still in the all-time nominal high zone. It even shot past $1800 as it hit $1801 for a moment.
And now a correction of our own. We misspoke in Monday's concluding remarks. We said that gold hadn't quite sextupled since its 2001 low. We meant to say that gold had not quite risen sevenfold since then.
It looks like gold means to make even that correction need correcting. As of today gold is indeed a bit more than seven times as expensive as it was at its lowest point ten years ago.
As much fun as these gyrations are to watch, we have to keep our eyes on the prize. The Dow and gold are going to approach each other in price eventually, perhaps even cross the line somewhere and pass each other.
Even as we type these words, however, the markets are paring today's losses. They may go down again by the close. Or back up. But our attention now is on the price of gold and what it is trying to tell us...
That rising price tells us that more and more people are catching on to the scam. Which scam is that you ask? Well consider...
In order to hold down interest rates as promised, the Fed has to...create new money...
In order to ease quantitatively as they are likely to do later, the Fed has to...create new money...
The mainstream media likes to tell us that investors worry that such Fed action "may cause inflation down the road". We scratch our head at that one. We don't imagine what else they think could happen when trillions of dollars of new money are created from nothing and shoveled into the economy by means of buying government debt (and lord knows what else; if you have some inside knowledge of what's on the Fed's books these days, please share).
Of course, monetary inflation eventually yields price inflation. But inflation gets its destructive power because it doesn't happen everywhere at once. Rather it is a process in which the money is gotten and used by certain people first. These people get to use the new money before all that extra cash bids up prices as it sloshes and sluices through the economy.
Getting money from the Fed first is great work if you can get it. Just ask the Fed's preferred bond sellers, like Goldman Sachs! As the Fed seems to have a fetish for buying government debt with the money it conjures, the government usually makes out pretty well from this, too.
The further away you are from the mouth of the money river, however, the more you'll be hurt by the flow of the new money when it finally reaches you. It's sort of like the difference from being at the origin of a tsunami (where things can look amazingly calm) and being on the shore where the wave eventually lands.
If you're earning a wage, you have some hope as you can beg your paymasters for raises to keep up with rising prices. Be warned, however: those wage increases tend to lag general price increases and increasingly so over time....
Still, you're better off than those relying on savings and whose incomes are fixed. If you're counting on your savings or a fixed income...tough luck! The new money leeches away the purchasing power of the saver's money and bails out debtors. The whole point of creating new money is this backdoor theft.
We have to point out here that the U.S. government is pretty deeply in hock. Debtors tend to favor policies that help debtors. This particular debtor is making you an offer you can't refuse... backed by a legal monopoly on what is to be used for money.
You and everyone else within their geopolitical jurisdiction are legally bound to transact in what the government issues as money. The makes the inflationary theft much more efficient.
So if you mean to be a saver, it may make sense to do so with something besides the paper issued by really big debtors. Gold comes to mind.
You could rely on some other government's paper...except that they all seem to be in more or less the same shape as the U.S.
The temptation to spend beyond the income made (or stolen, depending on your philosophical bent) in taxes and then inflate away the pain later is just too great. Governments are notorious for this. (We are looking right at you, Uncle Sam.)
Of course, some people think that deficits are the answer...
Conza, co-founder of president of Liberty Australia, made the following pics:
The caption in that last picture underscores the point about inflation. If everyone at least kind of cottons on to the fact that inflation destroys savings, why do they put up with it? Why don't they consider it theft?
We venture to say it's because of outright propaganda. The dominant economic theory is one that says the government ought to encourage spending no matter what to keep the economy flowing.
Savings, they say, may be good for the individual, but they are bad for the economy. A paradox, you say? Yes, it's a supposed "paradox of thrift".
Not only are savings bad; debt is good! Especially debt the way the central government authority handles it. Nobody does it better. Debt is what plants the seeds for growth, not savings.
And as the Krugmaniac points out, when the debt gets too ridiculously high to pay back, just remember that you have a printing press!
We're not so foolish as to take on Princeton professors who write in America's "Paper of Record". We'd be laughed out of the room!
...So we leave it to friend of the Whiskey Bar and editor of Mises.org Jeffery Tucker. Jeffery writes:
I don't often read Paul Krugman, but because the NYT was hyping his new column as the most emailed I had to see what was going on. He begins by trashing the S&P for its downgrading of U.S. debt, comparing the rating agency with "a young man who kills his parents, then pleads for mercy because he's an orphan." Krugman seems to regard the down-rating as the sin that cries out to heaven for vengeance. And why? Because S&P had given Lehman Bros. an A rating before it went bankrupt and therefore the company has no credibility.
Huh? Doesn't his point suggest the opposite of what he intends? By his own account, S&P has a bias to overrate bonds. S&P down rated U.S. debt from AAA to AA+. Seems like S&P could continue to downlist U.S. debt a long way before even approaching Lehman territory. Plus, if A is supposed to be a vote of confidence in Lehman, how can AA+ constitute a pessimism so horrible that it is a crime against humanity?
He then goes on to suggest that there really aren't any problems with America's fiscal health that tax increases can't solve. And this is justified because we have "very low taxes by international standards."
I'm sorry, but this is just chilling. A debt rating agency dares to let out some slight be of truth, and Krugman trashes it, foaming at the mouth and nearly advocating jail terms for hate speech. Then he goes on to advocate the wholesale looting of the country to pay the government's debt that is anywhere between $14 trillion and $215 trillion including unfunded liabilities.
Now I see why people like William Anderson and Robert Murphy are often driven to fits by this guy who is probably the most influential economist in the world.