Tuesday, September 14, 2010

Gold's New High and Monetization of the Debt

Here is a suggestion about why gold is at a new record high today, up about 2% in one day. It has to do with the following two "front page" article summaries from Eurointelligence (link provided, but free subscription may be required):


So much for phasing out the bond purchasing programme. The latest weekly ECB data suggest that the ECB bought €237m worth sovereign bonds last week, the highest since the middle of August, according to the FT. Still small in absolute size, the paper notes, it is a sign of continuing problems in eurozone bond markets. Irish traders last week reported that the ECB had been in the market to support Irish bonds, whose yield spread to German bunds rose to new record levels. The article suggested that the ECB was also buying Greek and Portuguese bonds.

About that ECB’s exit strategy

Ralph Atkins and David Oakley have an excellent analysis in the FT about the change in the ECB’s exit strategy. While a year ago it was the conventional wisdom inside the ECB that the banking support policy would have to be phased out, and only then could interest rates rise. That is no longer so. As banks have become dependent on generous ECB liquidity support, it is possible that the monetary tightening occurs while the liquidity policies are still in place.

The eurozone, Japan, the U. S.: the three most important currency blocs around, all have central banks busily monetizing government debt and/or central governments engaged in massive deficit spending upon a base of huge accumulated deficits. Gold cannot be printed by a central bank, and I believe that its seemingly inexorable price rise since 9/11/01 relates to the permissive monetary policies that followed in the wake of the twin wars on the post-bubble economy (fighting "deflation") and on "terror".

Unfortunately, there is little evidence that officialdom is changing its pro-money-printing views yet. Witness Dana Milbank's piece today in the WaPo, titled John Maynard Keynes, the GOP's latest whipping boy. I have no time to deconstruct what is in large part a political rather than economic article, but the article tries to make the case that Keynes remains an economic god, or perhaps the God of economists. One brief quote in the article from a Republican economist shows Mr. Milbank's argument:

"If you were going to turn to only one economist to understand the problems facing the economy, there is little doubt that the economist would be John Maynard Keynes. Although Keynes died more than a half-century ago, his diagnosis of recessions and depressions remains the foundation of modern macroeconomics."

In other words, the point is, we are all Keynesians now. Resistance is futile. If you are not a member of the Keynesian Borg, you are just out of it intellectually.

Hmmm . . .

In my view, the idea that Wise Guys in Washington know better than individuals, businesses, non-profits etc. what level of consumption vs. saving is optimal for the inanimate abstraction called "the economy" is wrong in theory and increasingly is proving wrong in practice.

Increasingly, Keynesianism is the ancien regime, out of touch with today's realities. At the close of Milbank's piece, he talks about the "misery" people of today. Perhaps he thinks he's back in France of the 1780's, with most people living in hovels (at best) and Jean Valjeans stealing bread to support their families. Les Mis and all that. Perhaps he more mildly believes this is America of the 1930s, where a brilliant politician could credibly claim to see one-third of a country ill-fed/housed/clothed. Mr. Milbank may not have noticed that today, in contrast, we see one-third of the country obese and one-third in houses too large and fancy for them to afford.

As Shakespeare might have said, Keynesian has succeeded not wisely but too well.

Governments all over the world are dealing with a modern credit collapse of a scale that rivals that of the 1930s; and as in the 1930s, different countries are dealing with the issue differently.

The new highs in gold are evidence that market participants continue to view these efforts skeptically. The gold rally (dollar collapse) of the 1970s did not end until Paul Volcker took decisive action to make dollar-denominated investments attractive. Why should matters be different this time?

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