Saturday, July 3, 2010

Fuzzy and Faulty Stimulus Math Used to Support Bubble-nomics

Courtesy of a Zero Hedge post, the accompanying Goldman Sachs-generated graphs demonstrate first the abysmal employment data; if labor force participation had not plummeted, the unemployment rate would be around 12%. Exhibit 4 purports to show that fiscal policy is turning from stimulus to restraint. (Click on it to enlarge.)

Actually, what that graph shows is "stimulus" (if it stimulates) is simply going from higher speed to lower speed. It would take negative spending (e.g. surpluses) to be "restraint". It's the difference between speed and velocity, otherwise known as the first derivative of a curve and the second derivative.

Here's an example. Let's say a person has a weight problem. He gains one pound a month for 6 months. Not good. At that rate, in only 5 years he will have gained 60 pounds. Now let's say he gains one pound every two months for the next 6 months. Still not good. Or, perhaps a chemo regimen slows a cancer's doubling time from 3 months to 6 months. Better, but the patient's still terminal.

This is what Exhibit 4 is showing. Less deficit spending for uncertain benefits remains, in this case, a rapid build-up of Federal deficits. This imbalance could be acceptable if at the end of the spasm of deficits, the equivalent of a victory in World War II allowed the debt to be paid back with something left over. That's not what's happening now. What's happening now is that money is being printed and borrowed for ordinary expenses-- paying roads, providing medical care to the poor and elderly, fighting a war without a credible exit strategy, etc.

My chemical engineer father who likes President Obama believes that since bodies in motion tend to stay in motion, it very well may take a crisis to cause an important course change in Federal and Fed policy. He does not believe that the president will bite the bullet in the normal course of events. I would agree. Think Britain in the 1970s and the need for the IMF to be called in for the public to begin to see the benefits of true reform/austerity.

The more debt the Feds issue, the more business Goldman gets. So it's in Goldie's interest to plump for more deficit spending. And just so it has enough advance notice, Goldman can do just fine if the bond vigilantes turn on the gov't just as they did on Greece starting last year. The more you see propaganda such as that massive deficit spending simply becoming less massive is "restraint" or that the British have embraced "austerity" by gradually cutting their massive governmental deficits to become smaller deficits, the more you need to see through the smoke and mirrors to the basics of supply and demand. As governments such as the U. S. issue more and more debt at higher and higher prices (lower and lower yields), the worse deal it is.

It is short-term Federal debt that is in bubble valuation territory, not any precious metal, the stock market, or even long-term Federal debt. A la Japan, this unprecedented valuation can last a long time, just as one can keep a balloon inflated a long time. But zero interest rates and an upsloping yield curve makes no economic sense.

Since the interest rate structure is insane, at least gold is, simply, what it is. And my speculation is that at least in the short and intermediate term, gold will not become less important in the financial structure than it now is. Thus, direct ownership of this non-confusing, non-distorted globally accepted store of wealth makes sense, especially when the short- to intermediate-term opportunity cost of funds used to own or purchase gold is approximately zero in nominal terms and probably negative in real terms.

If government actually went Volckerish and raised interest rates to above the price inflation rate, otherwise treated capital with respect, and started running governmental surpluses, the case for gold at today's price would vanish. What is the chance that Chairman Bernanke and President Obama will support those policies?

No, they want you to believe that very large but smaller deficits constitute "restraint".

Yes, and an addict whose supply is cut in half has kicked the habit.

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