Fools rush in
I hadn’t seen Carl in ten years. First thing he did was grill me about was my investment position.
“You’re up to your eyebrows in gold, right?” he queried.
“I’ve been in index funds, but I’m ready to switch to gold,” he said, “So, how’re you playing it?”
“I hold dollars,” I replied.
His eyes widened. He opened his mouth to speak, but apparently thought better of it. I figured he was thinking “You damn fool, Rod, don’t you know the Fed is going to print overtime and inflation will kill the dollar?”
If that’s what he thinks, Carl joins a cohort who call themselves bears, but are really inflationistas bullish on gold for the wrong reasons. Inflation? We already had it. Artificially low interest rates over the past decade spawned gargantuan speculative bubbles in gold, oil, real estate, low quality lending (junk bonds), you name it, funded with the most unfettered borrowing binge in US history:
The unpleasant reality now is that the Fed is powerless to stop the implosion of that debt because the amounts are too staggering. What pumping they do will amount to pushing on a string.
Trillions of dollars of crappy mortgages, junk bonds, municipal bonds, collateralized debt obligations and debt related derivatives are held by banks, institutions and individuals and, because the debtors are in trouble, revenues to banks, governments and retirees are collapsing in amounts that are way beyond the ability of the Fed to offset by monetizing Treasury bonds (swapping them for newly printed dollars).
Increasing numbers of institutions and individuals will be desperate for dollars as they scramble to cover shortfalls in revenue and income. Not just in the US. The dollar is the reserve currency of the hugely overindebted global economy. Dollars will be scarce for years.
In Goodbye, Mave, I covered Wired magazine’s story about the transition underway in the US economy in which companies are achieving global competitiveness by ramping up technology to operate with fewer, more highly skilled workers, leaving millions of workers marginalized and facing long term unemployment.
USA Today reported last week that Ford Motors spent $600 million refurbishing an assembly plant in Louisville, KY and sent out a call for about 2,700 jobs. 17,000 people applied. Most of the jobs were given to auto workers who had been laid off there and elsewhere. They will be working for $15.51/hour after having earned $28 before being laid off. Without overtime, the jobs will pay around $30,000 a year, compared to the $55,000 they earned before. Someone please tell me how systemic unemployment and reduced wages will drive up the price of Pop-Tarts.
Gold, oil, commodities, real estate and stocks will all suffer in the ensuing deflationary depression. The dollar will buy lots more of these things a few years from now as they keep falling in price, but you can’t tell Carl that.
Inflation mongers and dollar bears have their heads in the sand.