Thursday, September 16, 2010

Greenspan and Gold

So the former FED chairman has been touting the merits of gold in the media recently. Now that he is retired, he can finally tell the truth. He is of the view that fiat currencies have no place to go but gold.

He has advised central banks to keep a close look on gold, and also influenced John Paulson, one of the star hedge fund managers, to start a gold fund which focuses on gold mining stocks and gold-related investments. 

Why is Greenspan in support of Gold now, but not back then when he was Fed chairman? Afterall, his policies were similar to Bernanke's policies. Low interest-rates, flood the economy with paper, easy money. He was the one who blew up the real estate bubble in 2007 when he tried to re-flate the economy from the dot com bubble burst back in the early 2000s.

It shouldn't be surprising that Greenspan recently made these gold-related comments. In fact, it gives credence to gold vs fiat currencies. Greenspan was once a supporter of the Gold Standard, but he had sold his soul to the Fed when he became chairman of the organisation in 1987. Noted investor, author and commentator Jim Rogers has claimed that Greenspan lobbied to get this chairmanship in his book Adventure Capitalist (It's a great read by the way).

It's too late, Mr. Greenspan. He has destroyed millions of lives and possibly an entire generation with his printing presses.
For me, being a central banker is one of the worst crimes in humanity.

Monday, September 13, 2010

US Recovery.... Not!

So the US govt tells us that they are on the road to recovery. I would beg to differ. Unemployment is still way to high (22% if you use the past method of measurement). Deficit is increasing. Debt is exploding. Government is getting bigger and sucking the private sector dry of resources.

The reported 2009 budget deficit was $1.4 trillion. But according to John Williams from, if one were to use the same accounting methods that businesses are required to use, this deficit jumps to $4.3 trillion. That's about 30% of the US GDP. Look at how much trouble Greece got into with their deficit at about 10% of GDP.

Democracy has an inherent flaw in that it gives rise to populist governments. And populist governments more often than not drive up the national deficits and debts. Here are the largest annual contribution to the outstanding public debt for each of the preceding US presidents: Nixon $30.9 billion, Ford $87.2 billion, Carter $81.2 billion, Reagan $302 billion, Bush(Sr) $432 billion, Clinton $347 billion, G.W. Bush $1,017 billion, and now Obama $1,885 billion.

Professor Laurence J. Kotlikoff, Professor of Economics at Boston University, says the US, and even IMF data, reveal that the US is already bankrupt. That is due to its unfunded Medicare, Medicaid, Social Security, defense and other liabilities totalling $202 trillion, or over 14 times the annual US GDP of $14 trillion.


Americans are having a hard time getting a job. The chart here shows the median duration of unemployment. It has risen straight up to more than 2 years. Imagine going 2 years without income! You'll be utterly broke. Not to mention that the Americans have ultra low savings. An interesting tidbit to share: More than half of the Americans have less than $10,000 saved up for retirement.A study conducted by Boston College's Center for Retirement Research says Americans aged 32 to 64 are $6.6 trillion short of what they need to retire. And the assumptions used in this study were conservative.

Obama is still trying to create more jobs with the $50 billion infrastructure stimulus. But what's the use? Why spend unnecessary resources building and repairing roads just so that some people can have jobs? Afterall, all these jobs are non-productive and will not strengthen the economic fundamentals. If the previous $1 trillion "stimulus" package doesn't work, why would a $50 billion package work?

Analysts agree unanimously that the USD will weaken against other currencies, yet at the same time they proclaim that the US economy (70% based on consumer consumption) will strengthen. I think this is contradictory. If you want consumers to spend more, you need more purchasing power, a stronger dollar. A weak dollar can't buy you many things.

Obama's administration also advocated a weak dollar because it helps in exports (making US goods cheaper and therefore more competitive). Have we seen a reduction in the trade deficit in the past decade, while the USD has been getting weaker? Not so! This idea is flawed. The strength of a currency is indicative of the economic well-being of a nation. Strong economies have strong currencies. The US used to have a strong currency, they were the largest creditor nation, they pay the workers the highest wages, and yet they have one of the cheapest and best-quality products. I remember back in my younger days, I still see Made-in-US products (although it's very few), but now there are none at all. Back then, I read of the American tourists spending money like no one's business while on vacations in Europe and Asia, because their currency was so strong. Things were cheap for them. Now the reverse is true.

The real problem with the current trade deficit lies in the policies that the US govt has been pursuing for years and decades. Growing govt crowds out the private sector, reducing the capital available. The cost of capital is high. Higher taxes take away the incentive to produce in the US. Excessive regulations increase the cost of operation.

So what are they gonna do? Well, Bernanke's recent speech shows that they are most likely going to print more money. The rest of the world usually follows suit. And this means much higher prices for real assets.

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