Saturday, March 21

How right they were

Read every word of the following excerpts from Stephen Metcalf's June 5, 2005 report for The New York Times Magazine titled Believing (and Believing and Believing) in Bullion.

This economic crisis was no 'Black Swan' event. Many saw clearly what was coming, years in advance, and knew it had to happen sure as rain.
[...] The Daily Reckoning is a freewheeling Web site for libertarians, gold bugs and doom enthusiasts of every stripe. Its editorial director is Addison Wiggin [...]

The narrative Wiggin spun out for me over lunch is repeated, nearly verbatim, by almost everyone in the gold community.

"This is the blow-off phase for the Great Dollar Era. We're in an unsustainable trend right now," Wiggin told me, ticking off the miscalculations that have brought us to the brink of an economic apocalypse.

To begin with, the U.S. has become the world's biggest debtor, with three outstanding obligations at alarming highs: consumer debt, or our mortgages and credit cards; the federal deficit; and our current account deficit with foreign countries.

Federal Reserve Chairman Alan Greenspan, Wiggin continued, has simply shifted one bubble -- the 90's bubble in stocks and bonds -- into another, in real estate and "overconsumption," or the American propensity to pay for an ever-more-lavish lifestyle on credit.

But the real nightmare involves the U.S. dollar. If Asian central banks weary of buying Treasury bonds -- an asset denominated in the weakening dollar -- then look out below.

"What is that Dylan Thomas quote?" Wiggin wondered over his fusilli. "The dollar will not go gently into that great night."

Wiggin offered up his analysis with a confident and steady aplomb. And for good reason. While no one in the mainstream financial elite seriously advocates a return to the gold standard -- the modern global economy is too fluid and dynamic for such austere discipline -- at this moment, the gold bugs' grim prognosis for the dollar happens to align with a more mainstream view.

A low-level panic about the debt crisis, and its possible effect on the American economy, is gathering strength.

"Our little post-bubble workout is not over, not by any stretch of the imagination," Stephen Roach, the chief economist at Morgan Stanley and himself a noted pessimist, told me recently by phone.

Roach says he firmly believes that an adjustment is necessary and inevitable, and that when it comes, it will be very, very painful. From appearances, Warren Buffett, the savviest investor who ever lived, agrees. His company, Berkshire Hathaway, has placed a $21 billion bet against the U.S. dollar.

Meanwhile, the general tone is darkening. In February, Paul Volcker, the former Federal Reserve chairman, publicly stated in a speech that "there are disturbing trends" undergirding the U.S. economy, including "huge imbalances, disequilibria, risks."

These demand "a strong sense of monetary and fiscal discipline," he said, gently chiding both the U.S. government and its citizens to live within their means.

Volcker, a man known for his prudence and a cautious tone, let his words ring ominously.

"Altogether, the circumstances seem to me as dangerous and intractable as any I can remember," Volcker continued, referring to the very same warning signs as Addison Wiggin, "and I can remember quite a lot." [...]
Story of the week (H/T James Sinclair's Mineset). Emphasis mine:
China Inc. On Huge Foreign Buying Spree
March 19, 2009
By Dan Weil for MoneyNews

China’s companies are fast finding ways to spend, snapping up raw materials across the globe while those assets are cheap.

Chinese companies have been have been gulping down tens of billions of dollars worth of key assets in countries as varied as Iran, Brazil, Russia, Venezuela, Australia and France, the Washington Post reports.

Chinese companies poured $16.3 billion into foreign assets during January and February. If that pace continues, total overseas acquisitions could almost double last year’s total of $52 billion.

The assets are available at bargain-basement prices thanks to the financial crisis. As a result, China has garnered oil, minerals, metals, and other strategic natural resources necessary to sustain its economic expansion.

“That China started investing or acquiring some overseas mineral resources companies with relatively low prices during the global economic crisis is quite a normal practice,” Xu Xiangchun, consulting director for research firm, tells The Post.

“Japan did the same thing in its prime development period too.”

It’s an early sign that China Inc. is gearing up for the next big surge of growth. Chinese demand for iron ore, food, and oil drove up the costs of those commodities at the tail end of the last boom.

As the U.S. and Europe continue to slide commodities should fall, but Chinese buying is buoying commodities instead, creating global stagflation. Western consumers have less money, but prices rise anyway.

The massive size of China’s purchases has swayed energy markets. It also has sparked concern that China will hoard commodities, lifting their prices and making them unavailable to other countries, including the United States.
I don't think China's government would be so stupid as to actually corner markets in precious metals and minerals or even attempt to do so. But I think it's true that their hedge strategy is leading to stagflation. One can hardly blame them, of course. They need to diversify investments and aside from the US dollar, commodities are the only refuge.

How will all this shake out at the G20 summit next month? I think "SDR" might be the operative term. If they do toss around that idea I cannot recommend strongly enough that they add some gold to the current basket of SDR currencies.

I would also very much appreciate it, and I think the entire world would appreciate it, if Paul Volcker attended the meeting. I don't know how that could be arranged; perhaps he could be appointed a temporary assistant to Mr Geithner.

But by any which way I think he should be present to represent U.S. interests. His presence would be an assurance that someone who has widespread respect in the international financial community, and who is a veteran of highly complex monetary crises, will be in attendance at such a crucial meeting.

I think just the announcement that he would attend would have a calming effect, to the extent calm can be found at this juncture.
This entry is crossposted at RBO.

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