So how close are we? I think we are very close. The following concept comes from Richard Maybury of the Early Warning Report (EWR). Don't bother looking for it on the Internet because it's not there. It will cost you $300 a year for 10 issues, $15 each for past issues, or $99 for a year's worth of past issues. I'm not trying to spread it for free, just this one concept, in my own words, and giving Richard full credit. He takes Visa and Mastercard at Chaostan.com. [/advertisement]
So how close are we? The Federal Reserve's conventional monetary policy is to constantly inflate the money supply at a controlled rate that will keep us in a "safe zone" between double-digit inflation and recession. As we head toward recession we print more money and inflate. Then inflation gets too high and we pull back increasing interest rates and slowing things down. Think of this in a graphic sense. Two parallel lines, the top one is hyperinflation and the bottom one is depression. In between these two lines we see the fluctuations of the Fed's printing press. Here is the graphic Richard used:
That seems all well and good. But there is a problem with this "standard model"; in a word, malinvestment. Every time the printing presses go to work money flows into the system. That money distorts prices. Businessmen who rely on prices to make good decisions end up making bad decisions based on distorted prices. This causes malinvestment. We can see this right now in the housing sector.
So when the money stops flowing, these malinvestments go bust, companies go broke, and people complain. That is called a recession. So the printing presses go back to work pushing out more new money. But the Fed can't control where this new money goes. People are complex animals and usually this money doesn't go back into the bankrupt industry of a few years ago, it goes into something new.
Thus we have a boom bust cycle that seems to pass from one place to another. Have a look at the DotCom boom, then bust, followed by the housing boom and bust if you are confused.
So what's the problem? Maybe our next bubble will be renewable energy, right? Wrong. The problem is a flaw in the chart above. What if those lines aren't parallel? What if they converge? There IS evidence of this. Here is Richard's second chart:
What this means is that in each cycle of boom and bust, the maneuvering room the Fed has becomes smaller and smaller. Each time it takes more money to reinflate a bubble, yet more money causes ever higher inflation. And if the lines are converging, then they must eventually intersect. I think we may be at that point.
The lines have been converging since WWII. Here are some examples: In 1949 a recession was halted with "only" $10 billion. In 1982 a recession required $100 billion to reverse. The mild 1990 recession took $350 billion. And in 2001 it required $250 billion, but that one was so mild there is a debate about whether it was even a true recession.
The government stopped reporting the M3 in 2006, so it is hard to compare apples to apples, but the MZM is a fair measure of what is going on now. And so far the MZM says we have "printed" $2 trillion for this current crisis. And it isn't even close to being over.
So in 1949 it took $10 billion to keep all the malinvestment afloat. Well you might say that $10 billion in 1949 would be worth a lot more today. True. But if you factor inflation (which of course is the main problem to begin with) into this, we have already printed 22.3 times as much money, in 1949 terms, to get to where we are today. And from where I'm sitting, we are still deep in it.
So where does that leave us? Basically any printing big enough to avoid a depression leaves us with hyperinflation. And anything short of hyperinflating the money supply will not be enough to dig us out of this hole. The Fed is backed into a corner. So what will Ben Benanke do? Will he lower the rate? Will he raise it? Will he keep it the same? Does it even matter? I don't think there is a way out at this point.
So what happens to gold? Obviously it goes up. But there is already a shortage. And the hole that the interventions have dug requires that "official gold" must be released to keep the credibility of the COMEX alive. No one else is selling real gold. The mines can hardly afford to take it out of the ground at these prices. Only the stock of the US Treasury and other Central Banks can keep the paper market alive at this point. But they are getting low. And soon they will not want to part with their gold.
ANOTHER said this in 1997:
In any event, LBMA has traded so much paper/oil/gold that any rise in the currency price of gold will implode them. The CBs must become the full primary suppliers of gold or the system as we know it is done.
One last note: No form of paper wealth will survive the financial crush once the CBs stop selling!
I'll end with some of Richard's own words. I hope he doesn't mind. Maybe someone will sign up for his newsletter because of this post. Here they are:
And by that measure,I think virtually the whole
economy is malinvestment. During its 94 years of
existence, the Fed has injected so many dollars that
hardly anything is where it should be, doing what it
ought to, at the correct prices.
If these estimates are anywhere at all in the ballpark,
they mean we may be close to the end point of
the channel. If the Fed does not do additional massive
injections, we will fall into a depression, but if
they do make these injections, we'll go into a runaway
Any injection big enough to avert a depression
triggers runaway inflation.
Please read that last sentence again, I
think it describes our present situation.