The United States and the United Kingdom are both pursuing similar strategies to deal with this global recession: print more money. France and Germany are taking a rather different track and talking about reducing government spending. Germany went so far as to argue before the last G-20 meeting that if it were to reduce itself to “stimulus” spending, then it would become a burden on the rest of Europe; their reasoning being that they would eventually have to raise taxes to pay off their increased debt load and that that would cause a drag on the rest of the European economy.
It looks like Keynesianism isn’t a huge hit in France or Germany, as they are managing to avoid the peer pressure of their deficit spending neighbors. I’m sure Helicopter Ben is calling them up saying, “Come on! Everybody’s doing it.” But no dice. In fact, the President of the European Union Mirek Topolanek recently came out and called Obama’s plan to get us out of the recession a “road to hell“.
Ouch. That’s going to dent consumer confidence. Does no one else see the irony in our continuing to get warnings from formerly Communist countries, such as Russia and The Czech Republic, that command-style economics doesn’t work? You’d think we’d heed them, but instead we plod stubbornly ahead. “It didn’t work for you, because you didn’t do it right,” we seem to say. “We got Keynesian theory about just how much demand to stimulate by injecting just the right amount of money into the system at just the right time. We’re using the power of the free market, but just commanding it when it goes wrong.”
Sigh. It seems we’re going to have to learn our lesson with command economics the hard way. Which is tragic because this country was made great on the power of free markets. When the rest of the world was under various forms of command style economies (monarchies and Mercantilism), the US prospered to become the greatest manufacturing power in the world. We all seem to know that today, but we’ve convinced ourselves that our success was the result of who we were, rather than what we did. We became the best because we were the best; pure and simple. We pursued freer market than everyone else back then, but our ascent was based on pure American awesomeness and not due to our economic policies.
As they say, pride goeth before the fall. And speaking of falls, we got another sign of the impending crash in the American dollar this week when an auction on 10-year US Treasury notes drew a higher yield (lower price per bond) than expected. It seems investors are beginning to get the idea that maybe US Treasuries aren’t the best place to be when the Fed is printing money like it’s going out of style. In England, our ally in all this foolishness, they had to cancel a bond auction because there weren’t enough buyers. Keep in mind that both of these countries have their central banks currently printing money just for the purpose of buying these bonds, so these bonds already have one waiting buyer. It’s just that the other potential buyers, who don’t own a printing press, are having second thoughts.
That’s not good, folks. It signals that people are beginning to get their fill of the US Dollar and British Pound and simply not buying unless the yield improves. It’s a sign, America, that people are losing faith in your currency. I, and the other goldbugs, saw this coming. What I found funny, was that certain contrarian economists did not. Specifically, Dr. Lacy Hunt runs an investment advisory group and has been telling everyone to get in long term US Treasuries because the dollar was going to keep gaining value because of all of this deflation. As I put in my title, that idea doesn’t seem to be going so well.
If one were to take her advice and pile into the Wasatch Hoisington Treasury Fund (ticker=WHOSX) you’d be down 14.3% this year along. Ouch! If yields continue to creep higher, then look out below. Of course, gold is up this year. Which is why when I posted my criticism of Dr. Lacy Hunt (you can click on her tag to read it yourself) and her strategy my largest criticism was that if you really believe that we were in the midst of a deflationary depression (as she does) then gold is where you’d want to be. Gold bullion is up 5% or so since the start of the year, and it’s best days seem ahead of it.
Economics really isn’t all that hard. Politicians will try to use inflation to make their terms the good times of easy money and pass the bad times off to future politicians. When those bad times start to crop up, more inflation will be called up to try to quash it. Governments and bankers are pretty predictable that way; they only want to value of their money to gradually go down. But when the fur really starts to fly they typically decide to inflate on an even vaster scale, which will run the risk of destroying the entire currency if they’re not careful. That’s the road we’re on right now, and it’s the road we’re going to stay on.
Gold good, dollar bad. See? I told you it was easy.