Each weekend edition of the Financial Times publishes a lengthy interview of some noteworthy individual. On 26 May, Paul Krugman, winner of the phony Nobel prize in economics, was interviewed by Martin Wolf, a long time advocate of Keynesian policies of failure. The topic of Japan was raised. Both view Japan as having got it right.
"We have already gone straight into the issues. The conversation turns to the Japanese crisis of the 1990s. In retrospect, I suggest, the Japanese seem to have managed the aftermath of their crisis quite well. He agrees. 'What we thought was that Japan was a cautionary tale. It has turned into Japan as almost a role model.'"
In the following week we got a glimpse of what Keynesians view as a "role model", and one of their goals for the future. Below is a headline that appeared that next week.
"Tokyo Hits 28-Year Low Amid Global Rout(cnbc.com, 4 June)"
Following appeared in a news story that same day, again about a week after Krugman and Wolf declared that Japan got it right.
"In 1983, the Topix was in the sixth year of a 12-year advance that ended when an asset bubble burst, ushering in an era of deflation and economic stagnation. The gauge has lost 76 percent since peaking on Dec. 18, 1989.(bloomberg.com, 4 June)" [Emphasis added.]
Given the above facts, what will make the Keynesians happy? Answer: A bear stock market in the U.S. lasting until at least 2036, and carrying the Dow Jones Industrial Average to 3400. With such intent little wonder investors have chosen Gold in this era of repetitive Keynesian failures.
The above chart is one at which we have looked before. The blue line, using the left axis, is Federal Reserve credit, essentially the assets of that central bank. Red line, using the right axis, is the year-to-year percentage change in the size of the Fed's balance sheet. That massive rise in the blue line is QE-2. That massive injection of liquidity into the U.S. financial system was widely praised by Keynesians. It was to "save" the U.S. economy.Instead, both the number of unemployed in the U.S. and the price of $Gold rose to all time highs.
So, what do the Keynesians advocate as the solution to the early stage Greek disease in the U.S.?
Krugman, undaunted by the failures of his past recommendations, replies,
"So what, I wonder, would he[Krugman] do if he were put in charge? He says he would add maybe another $2tn to the Fed's balance sheet, by purchasing a wider range of assets, including more private sector liabilities."
Investors have, fortunately, learned from past Keynesian mistakes. We know what to do if the Federal Reserve does implement QE-3. Investors should buy Gold, lots of it. Gold, that relic which continues belittled by dinosaurs from an investment age long since past, is indeed the only defense against further Keynesian policy failures.
Such is a reason that Gold should be a core part of an investor's portfolio. While a longer term view to investing should always be our overall guide to action, we still must maneuver in the short run. That means we must deal with the implications and ramifications of the latest Keynesian failure, Greece.
Undaunted by the obvious problems of Greece, the Keynesians advocate more of what the Greeks had been doing all along, with one modification. Their recommendation is that Greece should go on spending money, but this time borrowed from taxpayers in Germany, et al, and simply never pay it back. The Keynesians want to "tax" all the working people in the Eurozone to finance the leisure of the Greeks. One can hardly blame the Greeks for liking that idea. Why work when the Germans, et al will pay the bills?
In the next two weeks up to the election there, Greek citizens are going to receive a strong lesson on what life outside the Euro will be like. Medicines are increasingly unavailable as pharmacies are requiring full payment for prescriptions as the government has not been paying them for some time. Co-pays no longer exist. One Greek beer brewer may have to cease considerable productions. Seems the cans and bottles are not made in Greece, and no credit exists to import them. Recognizing the financial failure imminent for the Greeks, export financing for sales to Greece is unavailable. If a good is imported, it will cease to be available in Greece. One has to wonder if they will have ink and paper with which to print the ballots.
As the Greek problem has unfolded, investors have withdrawn massive amounts of money from European banks. The Chicken Little Society became convinced that the Euro would disintegrate. Money poured into the U.S. dollar, and it has strengthened materially. $Gold's price naturally suffered in this process. As Summer passes we will find the Euro still exists, and the EU will remain intact. As that happens, those funds will begin to flow back into the Euro out of the dollar. $Gold should respond quite favorably to all of that. Gold in Euros and other currencies should generally weaken.
In the meantime, $Gold and $Silver are in fantasy rallies. Physical demand for Gold and Silver has plummeted, meaning that the rally is again in paper Gold and paper Silver. The massive error in forecasts for U.S. employment showed that expectations for the U.S. economy clearly had become too optimistic. Perhaps that led some to believe that QE-3 was really imminent this time. This fantasy rally should be viewed with skepticism. The over sold condition has rapidly become an over bought situation. $Gold investors should expect price weakness to again develop, but should hold their Gold due to the longer term situation.
Silver investors face a far more worrisome situation. Silver price approaching $30 is totally unjustified, given the ominous supply/demand situation developing. Silver production is going to be far higher in the future than the forecasts. Demand, having already collapsed, will be well below forecasts. Silver investors should consider switching into Gold. Those that might have a need for funds in the remainder of the year should consider raising that money through Silver sales.
Though we have already said much, we did not discuss the red line in this week's chart. It has some ominous implications, but it will have wait till another time.
GOLD THOUGHTS come from Ned W. Schmidt,CFA,CEBS as part of a now victorious mission to save investors from what became the financial abyss of paper assets, and the now the great Silver Bear Market. He is publisher of The Value View Gold Report, monthly, and Trading Thoughts. To receive these reports, go to: www.valueviewgoldreport.com