I started a three part series “Exploring the Myths of the Consumer-Driven Economy” a couple of days ago, and I intend to get back to that. But yesterday was a day full of events that just demand comment. Ben Bernanke gave assurances and the recession might end this year, and it sent the stock market up and gold solidly down. Then later that day, Barack Obama addressed the nation and reaffirmed what Newsweek had already declared on its cover. We are all Socialists now.
It was a long hard road to get America here; we have a strong tendency towards individualism and an inherent distrust of the powers of government. At least, we used to once upon a time. Not anymore. Now we have to depend on the powers of the state to correct the excesses of the free market, and we can not rely on the forces of free enterprise to get us out of this crisis. It is only through the intervention of government that we can put this crisis to a end. Or, in the words of our new President:
Helicopter Ben testified before both houses of Congress today and that the recession might end this year. It appears that these comments sent the stock market up over three percent. Citigroup, which has been circling the drain over fears that the bank would require nationalization that would wipe out share holder value gained over 21% because Ben said that the US Government would not need to take such action. Gold fell to around $950 an ounce and, most mystifying of all to me, Barrick Gold (ticker symbol=ABX) and fell over 11%.
Wow. That must have been some speech. It’s hard for me to imagine Barrick falling 11% because Ben said the recession “might” end in 2009. After all, even at $950, gold is still close to its all time high. I guess people were figuring that, if the recession ends, gold will no longer be in demand. Therefore, the price of gold should fall, and Barrick will not make as much money.
Roger recently posted in comments that deflation was bound to continue for “the next 2-3 year period.” His argument referenced a number of different sources and pulls in a lot of complex theories. I feel that it would be best to analyze these points one by one because these are the same points that get tossed around by people on a daily basis. I figure that doing so will take three different posts in a series where I explore economic myths. In so doing I’m going to provide a lot of definitions that are slightly different from the definitions that we here economics spouting. You will find that my explanations provide a great deal of clarity and reduce the situation to mere common sense.
Let’s start with what wealth is. Wealth is a stock of assets. Assets are, for the most part, unconsumed economic goods. We traditionally think of wealth in terms of money and, back in the days of the gold standard, money was itself an unconsumed economic good. However today our modern money has been technically divorced from economic goods and services. It’s not a complete divorce because we can still use Federal Reserve Notes to pay for things. But the rate of exchange between money and good and services fluctuates from day to day. If we ever found that we could not exchange US Dollars for goods then we would cease to desire them at all and someone who had a lot of them would not be considered rich. This proves my point about wealth. If someone has a mass of things that either are unconsumed/functional economic goods (i.e. real estate, a car, a storehouse of fine wines) or things that are immediately convertible into such (money) then we would consider him wealthy provided that he did not also have debts that exceeded his assets.
I’m sure my returning readers have noticed the blog’s new look. I ordered the Lisa Sabin-Wilson’s book WordPress For Dummies and it immediately empowered me to start changing a few things. WordPress is a really useful engine for content management and is very customizable in terms of the look, and WordPress For Dummies really helped to unleash its potential.
We’ve gotten rid of the old frame along the top and are instead allowing WordPress to manage the entire site. We also added a selection of books from Amazon in the sidebar that are all books that I have read and recommend to people in order to better understand the crisis. (Yes, I know, it’s a lot of books. I need to get a life!)
We will start further customizing the look to better taylor the website to the readership. Just today we darkened the “Older Entries” link because Kevin couldn’t see it on his browser. If anyone has any other suggestions please feel free to leave comments.
I have to take a moment to pat myself on the back.
Around the start of the new year, I said that deflation was not going to be the main concern, and instead, it would be inflation that was going to be making a comeback. As it turns out, the January numbers are in and CPI inflation is up, not down . Gold closed at $993 an ounce today and is poised to soon break into new all-time highs. In this way, gold is serving its traditional purpose — as the canary in the coal mine warning all of us that things are not well and that danger, (in this case, inflation) is on the way.
Not everything is going up, however. Yesterday, the Dow Jones closed at a 6-year low. Today it went down even more — so now it’s flirting with its 10-year low. The Dow-Gold ratio, which I’ve talked about before, is rapidly reaching new lows. Dividing the Dow’s close of 7365 by gold’s close of $993 gives us a Dow-Gold ratio of 7.4, which is the lowest it’s been in roughly 20 years.
But it’s going to keep heading down even further than that. Soon, we should be seeing a Dow-Gold ratio of three or even two …
In a prior blog, I questioned the wisdom of two financial advisors, Dr. Lacy Hunt and Van Hoisington who were recommending that investors put their money in long term obligations of the US Government. I consider this advice to be financial suicide. Enter Roger, a new blog reader, who has left a slew of comments yesterday saying that I did not really understand that the true genius of these two and the power of US Treasury Bonds as we continue on in our deflationary environment. Before we get to the meat of Roger’s feedback, let’s take a look at how US Treasury bonds have done over the past few years.
A few months ago I commented on Dr. Paul Krugman’s receipt of a Nobel Memorial Prize for Economics. Well he just recently released an update of a ten year old book he has called, The Return of Depression Economics and the Crisis of 2008. Personally, I don’t see how Dr. Krugman is qualified to talk about the return of the current financial crisis given that he didn’t see it coming. However, if real insight or predictive power were required for macroeconomists to write books, the field wouldn’t exist.
I haven’t read the book, so I’m not going to judge the proverbial book by its cover, but judging by the reviews off of Amazon Dr. Krugman doesn’t spend much time in this book addressing our current financial crisis. It would seem that the theme of the book is that more regulation is needed to correct various situations that he feels are excessive and most of the situations he presents (such as Long Term Capital Management) are ten years old. Towards the end of the book, Krugman presents his analysis of the current financial crisis. I am not the least bit surprised to read that he feels that our current crisis was the result of insufficient demand. Continue reading Paul Krugman’s Return of Depression Economics
Yahoo! News ran a story today that 65 historians rated Lincoln’s administration as their favorite. I’ve always been at odds with the Presidents that historians seem to prefer. There’s top five Presidents of all time are:
Franklin D Roosevelt
Harry S Truman
Wow. Thomas Jefferson didn’t even make the top 5. For some reason, historians prefer Harry S Truman, the President that ended the second World War by the unnecessary use of nuclear weapons and threw the US into the Cold War. I’m not sure how that beats out authoring the Bill of Rights, but who do I know.
For that matter, FDR? The man failed miserably in his attempt to end The Great Depression and introduced many laws and policies that were clearly inspired by Communism and smacked of totalitarian authority. As I asked in my book, where in the Constitution does it say that the government has the power to confiscate the gold of all US citizens? Continue reading Historians Mark Out to President Lincoln
As those of you who have read my book know, I’m a firm believer in the power of looking at the daily closes of the Dow Jones Industrial Average and comparing it to the price of an ounce of gold. For those of you who don’t know, the Dow Jones started as a simple average of the share price of all of the companies that comprise it; for example, if there were three companies on the comprised the Dow average that had share prices of $5, $10, and $15, then the average would simply be $10.
Over the years, the number of Dow companies that comprise the Dow has risen from the original twelve to now include thirty different industrial companies. Since it’s simply an average of the number of companies, expanding the number didn’t have much impact. it’d be similar to looking at the average test score for classes of different sizes: more or fewer students don’t matter as we’re looking at an average. The reason the Dow Jones Industrial Average (DJIA) is such a large number in comparison to the stocks that comprise it is that those stocks have had numerous splits throughout the years while the Dow has not. Rather the Dow simply corrects for splits so as to maintain a continuous average throughout time. Just as the price of a single share of Microsoft stock would be $8928 at the close of 2007 if it had never split, the DJIA is a average of companies with such share prices. Continue reading The Dow-Gold Ratio Renders Its Verdict
When I was a teenager “Alternative Rock” was just coming on the scene. In the early days, Alternative Rock was just that- the alternative to the music that was consumed by the masses. But then people decided that Alternative Rock was cooler than Pop Rock and suddenly there was a movement en masse out of pop and into alternative. The result was that the term “alternative” became increasingly ironic because it was, in fact, simply the new pop marching under a different label. Rebellion, as they say, is best done through conformity.
The reason I bring this up is because I’m starting to feel that way regarding investing and the mainstream media. A couple of years ago economic contrarians where the lepers of the financial media. Everyone seemed to know that the stock market was the place to be, as Dr. Jeremy Siegel wrote, for the Long Run. After all, the Federal Reserve was firmly in control of the economy, and they would never let a prolonged market downturn occur.
People aren’t saying that anymore. Last week the New York Times ran a story saying that the ten year period ending last month was the worst for stock market returns in the history of the S&P. As the story said, if you factored in Consumer Price Inflation, the S&P returned a negative 40.4% over that ten year period. Now media pundits are lining up to say that the economic troubles we are in are going to get worse still. A friend of mine just forwarded me an article saying that, if the stock market were to return to historical bear market averages for price-to-earnings, that the S&P would soon see levels of around 500 or so- a decline of another 40%. Continue reading Ack! Contrarian Overload