SheerazRaza had a long post:
I can’t say I’ve read it all – part of it had some basic misconceptions and other parts I couldn’t quite follow the arguments (perhaps it is just me). So I will – instead of boring with a blow by blow rebuttal – address the main conclusions.
Our long-term view can be summed up in the following points:
- The developed world is overly indebted.
- So far, there is little indication that heavily indebted countries will be able to grow their way out of debt.
- Recent measures to cut government spending will create further headwinds to near-term economic growth.
- Failure to provide added monetary stimulus will likely risk a fall into a debt deflation spiral (this risk is heightened by the Euro zone situation).
- Central banks will continue to “print money”, as needed, to prevent debt deflation.
But first I’ll try and put the record straight on the subject of gold.
There is in economic and finance no such thing as absolute value – every commodity or service is evaluated against each other. Money (coin) is just a common denominator in that respect – and you can use tinned fish, muzzle shells and Nubian slaves as such a denominator. It is a question of practicability – and gold is not particularly practical – silver is historically far better.
Gold played the main role in a comparatively brief span of time form the beginning of the 19th century to about the beginning of the 1920’ies – simply because the amount of gold available grew with approximately the same speed as the world economy.
The theological adoration of gold is probably due to the fact, that through antiquity to the discovery of America gold seeped to the Far East, as there was no Asian demand for European commodities – Chinese and Indians were quite self-sufficient when it came to banging helmeted heads with swords.
But the fact remains that gold prices will probably continue to rise for some time still: Gold has become illiquid in the sense that f.i. China cannot use gold to buy anything for – not without gold price plummeting – so they won’t use gold as a means of payment. It is disconcerting to realize that your nest egg is worthless.
As to the conclusion:
1. The developed world is overly indebted.
Well yes and no! Part of that debt is money needed for transactions and are thus not debt to be paid at all. That is the advantage of having the reserve currency.
The other part is not to be paid either! Not in the sense the creditors expect!
As Alan Greenspan once told the Chinese: “We can promise You, that we will pay; but what we pay will be worth is a matter of conjecture!”
If the Chinese start spending their hoard of US bonds they will discover that the dollar will drop very quickly with respect to the commodities China is interested in buying.
2. So far, there is little indication that heavily indebted countries will be able to grow their way out of debt.
That very much depends on growth in WHAT? If you imagine large amounts of American cars in the streets of Beijing – you are right. But Russia and Brazil both do reasonably well in exporting raw materials to China and India – for the time being – at some point there will be a limit to the construction of empty cities and useless infrastructure. That limit is indeed absurdly high as pictures from North Korea reveal.
No the breaking point is going to be food. Chinese farmers may become more productive (easily); but the total amount of calories produced will not be much higher, as every flowerpot in China makes some kind of food.
Today food is so cheap in the West that you have to destroy it in bio-fuels. This price will rise – as it has indeed done. Just watch it continue – raw materials such as iron ore and copper are stagnating as Chinese industrial production is quietly sinking into the ground with a moaning.
The great tragedy of Chinese economic policy is that they have build infrastructure in China, where they should have build it in Russia to provide access to the vast grain fields – so the price of food could remain reasonable. But rational thinking is not the Chinese leadership’s forte.
Of course the West can grow economically out of their debt! Partly through higher export volume of food, partly through higher prices.
Ross Perot once said: “The future is in production of computer chips – not potato chips.” He might very well be dead wrong!
3. Recent measures to cut government spending will create further headwinds to near-term economic growth.
Defense cuts is the opposite of the traditional US economic stimulus. In fact investment only grew in the US when she started the rearmament preparing for WWII. That won’t happen this time as there is no real threat on a comparative scale.
And yes less public spending will slow economic growth.
But there is more to it than that: The US market is dying on the Chinese (and so is the European) – if for no other reason than the need for China to start overvaluing their currency as they shift from net exporter to become net importer.
This will give Chinese products a higher price on the US market so some jobs will return to the US. Not the same number as what has disappeared; but some. Goods will be produced more economically: Nobody will today build a car like they did in 1980 (thank God!) – and they will not be build in Detroit. Not unless the unions get a reality check.
Just look at what happened in the London docs! Featherbedding and inefficient cargo handling led to ships mooring anywhere but London. So they build banks on the banks – progress is unstoppable! (Bank productivity is a contradiction in terms as far as I’m concerned)
4. Failure to provide added monetary stimulus will likely risk a fall into a debt deflation spiral (this risk is heightened by the Euro zone situation).
Let me interpret that statement as foreseeing deflation without assigning epithets: I couldn’t agree more.
If we look at major economic groups:
- a) Food. Sure we are facing higher food prices; but nothing that will make a dent in a western consumer’s budget. With less than a million farmers in the USA there is an overproduction of food – and overconsumption: The problem of obesity is most pronounced in low income groups.
- b) Raw materials: Well there isn’t really any need for them. If we take steel I believe the major source of it in the USA is scrap. Furthermore is does not strike me as there is a lack of housing in the US – on the contrary after the bubble: The massive stock of foreclosed houses will keep pressing the price down.
- c) Oil: A continued rise in oil prices will depend heavily upon