Doug Kass has been a gold bull and a decent forecaster. I hope he is wrong. I to worry about the crowded trade aspect in PM since I know many people including myself who are in first foray into PM is in the past 6 months. I feel there is no way in the long term 3-5 years gold can stay below 2000 by it could spend a year consoldating around this level. Let's say we have silver 14-15 and gold 900 what price level do you think Hecla can hold?
I don't understand your point, I'm sorry. You are saying that the fiscal deficit somehow leads to a strong dollar, which in turn leads to the balance of trade problem? I don't follow that. Could you lay out that line of reasoning for me?
Carl, your posts raise some very good issues and nail some solid points. However, your earlier comment about "...It isn't the fiscal deficit that will destroy the dollar, it is the balance of trade" is off-point. You have cause-and-effect backwards! The fiscal deficit is what allows the balance of trade imbalance!! We Americans, as a nation-state, are spending way more than what we actually take in at the time, which means we are creating more debt just to meet our needs. This debt then has a direct correlation, as a monetary unit of measurement to business transactions. Let's not forget that the majority of business transactions done everyday around the globe is energy related, and that no one can buy a barrel of oil anywhere without it being priced in dollars! As Moc articulated earlier, it truly is a catch 22 situation. It would be hard to be an exporter nation if the greenback is strong.
Exactly, Matt. That is my point. When we were a creditor, the debt, even though large, was manageable. Today because of the balance of trade issue, it is not. And yes, even though it is not, the politicians still keep on spending, but that is their normal function, and I make no distinctions between parties.
I also agree that the answer isn't pure inflation or pure deflation. Investors will need to remain flexible, and adapt.
As far as wiki, yes, I am careful with it. I've seen that GDP-debt graph probably 100 times before, and I know what it looks like. Wiki just happened to be one of the first links google brought up, so i used it, after verifying that it was the right graph.
Well, let me back up a step and start over. You partially understand what I am saying and ironically your post essentially agrees with me, yet your tone acts like you are disagreeing. Clearly you seem my point that there is a major difference between a healthy economy, where we have real jobs, and where we owe money to ourselves, as was the case in 1946, and today's situation where we have a bogus economy, and owe the debt to people overseas. This a critical difference. This is the reason we were able to support a much bigger debt load back then. Today the prolonged balance of trade deficit is making the fiscal deficit impossible to support even though it is smaller. It isn't the fiscal deficit that will destroy the dollar, it is the balance of trade. Repeating, when we had no balance of trade issue, we had a healthy economy, and that meant that even a truly massive debt was not a problem.
As for the debt to GPD ratio, perhaps it would help if I personalized it. Suppose you make $50,000 a year, and owe $10,000. That might be manageable. Now suppose you make $100,000 a year, and owe $20,000. That may be about the same. Same for the guy who makes $500,000 a year, but owes $100,000. Yet, the guy that makes $50,000 a year would have a hard time paying off $100,000. The debt to income ratio would just be too high. The same works for a country. When the debt grows relative to income, it becomes a bigger problem.
Back then Keynsian concepts were new. The original idea was to deficit spend during bad times, and then run a surplus during boom times. They did deficit spend during the depression, which continued into the war years. They were supposed to run a surplus in the 50s and 60s during boom time, but you know governments - they had it, so they spent it. Then, when the recessions of the 70s came, the deficits got big again. They should have paid that back during the 80s and 90s, but no, there were no surpluses. Now, as we enter another downturn, we should have a low debt, but instead because of loose fiscal policy, we enter it loaded with debt. No doubt in 5-6 years, after a major downturn, the debt situation will be a lot worse because it always grows in a downturn. The problem is that, unlike the 40's we have a major balance of trade deficit that seems unlikely to end. That, as I pointed out, means that the money to support our fiscal deficit is being exported, and that means we have to borrow from overseas.
Again, lets personalize the situation. Suppose you run a small business, say, a shoe store. You loan the business $30,000 to start it up. Now, say the first couple years you struggle, and barely hang on, and can't make debt payments. Will that debt load crush you? No, because you owe it to yourself. Suppose instead that $30,000 came from a bank. Now suppose you can't make the debt payments those first couple years, what happens? The bank shuts you down. Clearly when you owe the money to someone else, you are a lot worse off.
Here's another comparison for you. We've heard how the indians sold Manhatten Island for $14 of beads and trinkets and blankets? That was a balance of trade deficit, by the way. Today the US is doing the same thing. They are selling the US for a pile of worthless beads and trinkets, er, cell phones, and HDTVs, that will someday fill our landfills.
After WWII, the general populace had a large savings which enabled us to grow internally. Perhaps you can quote an unemployment figure from 1946? Don't you think that has something to do with tax revenues at the time and our ability to pay debt...internally or externally? We were a net creditor back then. People owed US money. We have a completely different situation today with the general populace in debt that it cannot afford and unemployment reducing tax revenues (not to mention that a significant amount of our manufacturing capacity has moved away). And our politicians are still spending money that we don't have in the hopes of gaining re-election via a voting population that doesn't think past their current needs.
PM's could go either way. I don't have the answer and I'm humble enough to know it. It is pretty clear that we cannot pay our debts and that will leave us in the poorhouse. It is also pretty clear that if we do pay our debts, it will have to be done via devalued currency...which again puts us in the poorhouse. Inflation? Deflation? We're at such an extreme today in comparison to the past that I don't see any outcome other than going broke. So choose your poison as to how you wish to deal with it.
I think it is a mistake for anyone to think that we will have strictly inflation or deflation. The Japanese have had property values decreasing for 20 years. It will be the same here. But on the other hand, I would expect the price of food, oil, and energy to skyrocket. You can't create the kind of money that we have (with nothing to back it) without consequences. If we go into deflation, we go into default, and that's the stuff wars are made out of; I don't even want to think about it. So you should consider that in your arguments.
As for wiki, I was only making the point that you need to be careful with what you take off of there. Nothing more.
Karl I enjoy your post's. You articulate some of the economic "mechanic's" very well. At least in a historic sense. You also don't seem to have any obvious agenda where HL is concerned-I don't either at the moment, it help's in the "being objective" dept.!
I liked your reference to FDR-very true! In the meantime I think most on this board have more in common then they realize. We ALL have a sense that this current economic train wreck just might rewrite economic cause/effect history. Also lead to longer term social & economic changes/expectation's!
That last sentence in your post say's it all! "back then we didn't have a history of a huge long term trade deficit. We still made stuff here, and the money stayed here, so it was possible to finance the deficit"--And when the music stop's??
My own opinion-as bright as uncle ben might be-and a few other's in govmnt.-can they really avoid the pain of a deleveraging economy-- Of decades of fiscal folly?Personally I seriously doubt it in the longer term. They-and corp. america are buying time right now, nothing more. Manipulation, money creation, easy credit[for bank's], BS, short term debt financing-and bunko book keeping---all the same M.O. that led us here in the first place-where's the change for the better ben? IMO, they need to dismantle the FRB-and build on the FDIC with some real hard & fast reg's, out of congress' reach! Also Reinstate Glass S. law separating comm. banking from trading activities.
Maybe my negativity comes from getting older-and a little bit wiser from watching this scenario repeat so many times before. I'm a poster boy for that bumper sticker-I love this country-but fear my govmnt.!! I suspect I have a LOT of company in those feeling's.
So where are we right now?
In a true global transition-and with a painful deleveraging cycle being played out at the same time. Just how much wealth will evaporate for the avg. joe before this is over?
With the advent of the net, more folk's then ever will see what's going on-something we didn't have in past cycles.
The confidence level of the average joe is pretty low-with VERY good reason. Large institution's run the market's---like our creditor's over seas, the small investor has been burned pretty good the last 10 yrs. How long can the charade last without someone to shovel the junk to? Instit. cash level's are pretty low right now.
Higher tax's-bet on it! If it moves tax it. That's the only way the "agenda" can be sustained.
I'm glad you brought up those previous dump's in PM market's karl--While history MIGHT not repeat, it sure is a strong possibilty. I was burned a couple times in the '70's-during a high inflation invironment that brought that lesson home! I don't think any of us can take ANYTHING for granted right now! Deflationary forces have a way of sinking ALL boat's--except maybe cash. As tempted as I am to buy this dog on good fundamental's right in here-the market's lately sure look toppy-valuation's/expectation's are high. And Low holiday vol. can be decieving before a trend change. Can we really bet on PM escaping a general market route? Long's stay on your toes-and try to enjoy the holiday's--and don't emulate that punk in the movie WS-[he probably worked at GS anyway HaHa]greed is not good, ambition is good!