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Thursday, June 17, 2010

Would You Like To Borrow £100,000 at 1% per annum?



Just as the EU starts a campaign of QE to attempt to bail out the Euro, the US Fed and the UK stop their QE programmes, at least for a while. The world's spare financial energy was being used to hold up optimism right up to the time of the British elections. Was that coincidence? If the QE was being used to try to keep europhile Labour in power, and Cameron out, as one of its objectives, it failed.

Now the world's financial 'energy' feed is being directed onto another target, bailing out the PIIGS and trying to save the Euro. While QE was effective in turning around stock markets for a year, sending them on the fastest one year rise in their history, the story so far with saving countries from default is that QE is proving less than effective.



As the chart of Spanish government debt shows, there is little change in the speed at which lenders are demanding higher returns, despite Shock & Awe.

Outside the control of those who hope to use QE to achieve political outcomes, there is the fact that parts of the world economy are beyond the reach of the western central banks. China's boom is slowing rapidly with the Shanghai, Hong Kong and Australian stock markets slowing noticeably.

The deflationary forces are simply too powerful. As people move away from debt, both offering it and taking it, cheap and plentiful money has less effect. Think of yourself. If someone had offered you an extra loan of £100,000 at %1 p.a. three years ago, you would have grabbed it with both hands. But today, you would pass it by, and wait and see. Am I right? Thought so!

I don't mean a replacement loan.

GOLD

Governments depend on your behaviour to make their lending achieve their ends, and no amount of money can ultimately change what people's instincts tell them to do or not do. Deflation like inflation is in the collective mind. Gold is said to be the one thing that will keep rising forever, but the shortage is of cash, and gold needs cash to buy it. Banks who need cash keep bulling up gold, which they own. They would, wouldn't they. But it's cash they are all short of, and debt they are desperate to get rid of. The gold will end up getting sold soon enough.

14 comments:

Alex Porter said...

Hi,
I don't think anyone says gold keeps going up, indeed not that long ago it was at all time lows (accounting for inflation).

The stock markets have been inflated by QE. Giving cheap money to the banks meant they traded stocks even though there was very little earnings in those companies. The only companies which had earnings were financials and those earnings were from trading using free money from the central banks. So, the stock markets have gone up but it's a bubble based on no sound economic fundamentals.

Pumping more and more money into stocks and paying for debts means countries will move out of paper (be it all the fraudulant derivatives still being traded, currency which is being devalued, bonds which will pay out on devalued currency etc) People will move out of those as they lose value and buy gold to protect their wealth. It's really that simple.

The reason people are not taking loans is because they can't secure it against anything. There's so much debt that everything they own has been used to raise cash. The reason banks are not lending is because they have so much fraudulant losses on their balance sheets that they need to try and cover them.

Hence, the real economy constinues to nosedive. There will be no recovery until the financial system is allowed to go insolvent. It would be better to do that in an orderly way. It won't be.

To give more money to the banks the governments will suck savers and taxpayers dry - that's why you have deflation. In the financial sector the money supply is going up. There's a firewall between them.

Anyway, one is a bubble and the other is seeing people's wealth being devalued.

Gold is the obvious place to hide..

tapestry said...

Complicated stuff, Alex.

The facts are otherwise.

Assets are falling in price. Cash is gaining in value. Debt reduction ensures that people are competing for less and less money as they all try to pay off debt. Despite QE, the money supply in America is falling.

It fell 10% during the same year that shares rose 70%, and the Fed released $2 trillion.

The biggest supply of money is people lending and borrowing, to and from each other. Governments and Central banks are a sideshow compared to peoples' chosen behaviour.

Stocks were ready to bounce after a large two year decline. Was QE timed to follow the bounce? Rather than it caused it?

Gold has risen in value faster than money so far, as there has been a lot of hype about inflation. In fact the world has been in a recessionary decline since 2002, masked by growing debt levels, now reversing.

Once people cotton on to the fact that we now face deflation (as starting in the US), gold will get caught up in the rush for cash, which will rise above all other assets.

I don't think people have yet got their heads around deflation at all. They soon will.

Anonymous said...

Interestingly, many commentators who have been banging on about deflation now for around a year (and have been proved correct) are also advocating gold..

I agree that government money is small and that´s why the banks will never get enough of it to make them solvent again. To do that they´ve used new fraudulant financial products (and old ones) such as derivatives and they´re going to bomb again but this time there´ll be no bail-outs because at the same time the governments are now bankrupt.

These two forces combined will drive QE higher and higher.

Main street money is small compared to assets. The reason people are paying off debts is because before they refinanced their mortgages to pay for college education or go on big holidays or build an extension. With house prices going down they have no choice but to save and the governments and banks are killing them with low interest rates.

Saving is capital formation and is needed to invest in factories or manufacturing in general. Without it jobs will continue to fall off a cliff.

To balance the budget there´ll be more QE direct or backdoor meaning dilution of purchasing power.

Again, gold will protect people´s purchasing power..

By the way, liked the Spain charts - I agree the Euro is heading for a cliff. Where to diversify with all the devalued successor currencies?

Anonymous said...

here´s an interesting article about how gold/silver performs during deflation:

http://www.businessinsider.com/jpmorgan-explains-why-gold-is-a-great-bet-during-deflation-2010-6

tapestry said...

Or read this -

Many gold bugs say that because gold was a good investment during the Great Depression, it is a “deflation hedge.” We addressed this topic in At the Crest (p.357) and Conquer the Crash (pp. 208-209). At the time, government fixed gold’s price, so it didn’t go up or down relative to dollars. Gold was a haven during that time, the same as the dollar was, since they were equated by law. But gold served as a haven because its price was fixed while everything else was crashing in price during the period of deflation.

Gold bugs like to claim that gold would have gone up during that period had it not been fixed, but the crashing dollar prices for all other things suggest that in a free market gold, too, would have fallen. It would have fallen, however, from a higher level given the inflation of 1914-1929 following the creation of the Fed. So gold became worth more in dollar terms than it was in 1913, which is why it began flowing out of the country. In 1934, the government finally recognized the new reality by raising gold’s fixed price. Since 1970, markets have been in a large version of 1914-1930, except that gold has been allowed to float, so we can clearly see its inflation-related, pre-depression gains.

In 1970, things changed dramatically. Investors lost interest in stocks and preferred owning gold instead, for a period of ten years. The same change occurred again in 2001, and so far it has lasted seven years. But, as we will see, recession had nothing to do with either of these periods of explosive price gain in the precious metals.

EW International.

I always heavily discount opinions given by financial organisations. They always have an angle.

Anonymous said...

interesting points. Naturally, the article I posted a link to is from JP Morgan - one of the organisations involved in suppressing gold prices and propagandising for fiat currency..

Do you agree that gold ´propaganda´is heavily drowned out by fiat currency propaganda?

Anonymous said...

The problem with this EW article is that it doesn´t look at silver. Silver price was not controlled and did extremely well in the period mentioned. This is undoubtedly the best indicator of what gold would have done during this time.

The other thing that´s missing is the confiscation before the price was increased by the US government. This only screwed the people as institutional gold was not confiscated meaning a transfer of wealth from ordinary people to institutions. Exactly what´s happening now using fiat currency. The need for confiscation demonstrated the force of gold as a means of storing wealth. There is no need for this with fiat currency which can be devalued easily and is being!

The dollar is going up only against currencies going down, not against gold. When Nixon took the US off the gold standard in ´71 gold was 35$ per ounce - it´s now around 1240$ Would you rather have kept the 35$ in your bank account or in gold?

All fiat currencies have been being devalued - it´s boiling the frog...

tapestry said...

Gold rose in the inflationary 1970s to top off at $850 in 1981. Since then it has fallen and is still lower than it was then relative to other prices. That's 30 years of down. Not a great investment. Equities have risen X10-20 or so in the same time period.

Silver is covered by EWI as well but I don't know the copyright status of the article to publish it all. Silver, though, is even worse than gold as an investment over 30 years hitting $40 an ounce in 1981. It's less than half that 30 years later, and a mere fraction in real terms. Inflation was 20% then. It's minus % now in the USA. As EWI says inflation drives up asset prices. Deflation shrinks them, including gold and silver.

As in the 1929 onwards depression, the $ has been strong. Treasuries are starting to rise.

Gold is the con, not the fiat currencies and other financial investments. The propaganda is solely directed onto gold. Why? It's a way of maintaining optimism that wealth can be preserved while shares are falling. But gold fell when shares fell recently as did silver. They are affected by cash, like everything else.

Anonymous said...

Can´t agree on the propaganda from at all. Check out this exerpt from http://jessescrossroadscafe.blogspot.com/2010/06/us-dollar-last-bubble.html

It argues that the $ is the mother of all bubbles. Indeed over the period you mention the dollar has been hugely devalued. The result is that the stocks you mention were a good investment in nominal terms only - not in purchasing power. In the latter they´ve been terrible but that´s the illusion which has taken people from gold and into stocks.

Gold holds pushasing power and stores wealth. It is not necessarily a great investment but when the climate is so tenuous as it is, it is safe.
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Wouldn't it be convenient for the oligarchs if their think tanks could somehow concoct a story, some plausible sounding theory, to persuade a portion of the world's population to hold dollars, expecting them to GAIN in value, even in the face of significant defaults and credit failures and a deteriorating return in GDP growth per marginal dollar debt? Or even better, getting them to remain fully invested in a series of artificially contrived dollar denominated financial assets that could be selectively 'pulled down' while keeping the overall scheme intact and running. Bernays would be proud.

But the trick is to convince the non-sleepwalking portion of the public to ignore the signs of a failing economy and an approaching currency collapse. This is the sort of black is white brainwashing exercise that occupied quite a few of the whiz kids for the latter part of the twentieth century.

It might take a lot of work, and some high level financial engineering, raw determination to play the long game, public relations professionals engaging invoking slogans and prejudices, and a suite of new financial instruments that would have to be protected even when it was suspected they were fraudulent, but it would be a useful tool for the √úbermenschen to have in their toolbox. Nothing works better than to convince a free people to willingly enslave themselves.

Anonymous said...

Since probably the late 50s there has been no growth in the US economy. What has happened is the government has borrowed and that money has went through the book as GDP. It has been easy to make the stock market rise in price when the currency is has been denominated in is being devalued.. To continue the con central banks have been suppressing gold prices in order to keep investors in stocks. Lower interest rates see people being forced to invest in the big casino because savings are being penalised.

There is consequently huge underlying potential for gold going back several decades which we have seen unravelling in the last 8 or so years.

As QE and low interest rates accelerate the devaluation of fiat currency we can think that we are only seeing the start of gold´s ascendency?

tapestry said...

I can't argue with religion.

Anonymous said...

Seems that you do. The better preposition is against ;)

Anyway, try Marc Faber or Jim Rogers. Some of the world´s most famous investors and bulls on gold e.g. http://www.youtube.com/watch?v=hCkY3ap_bIs

tapestry said...

98% are gold bulls right now. There will be a correction coming soon.

The world will go through years of deflation next, which will not help the price of gold.

Beyond that could come an inflationary period, say in ten years time. Then you need some gold. But why buy it for $1000 plus when you can have it for $500 between now and then.

Twig said...

It's always a good idea to have some gold in your investment portfolio, and some of it should be in easily portable demominations.