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[ThatHawaiiGuy]

You are all too optimistic

Gabe Harris

I've been reading the hundreds of articles spewed forth from Bill Bonner, Dr Kurt Richebächer, David Tice, Mogambo and all the folks at gold-eagle to the Austrian economist down in Alabama at the Ludwig von Mises Institute. I'm becoming convinced that all these folks are hopeless optimists.

I've done pretty well in the stock market over the last 3 years gaining a few percent on my meager savings instead of losing a few percent. I also saved enough lunch money over a couple years to buy a few bars of silver and some old coins. Most importantly I have managed to find a new job a couple of times after working for a couple of swan diving corporations. I even managed to earn a couple of credentials for my resume that should help me get future jobs. We all see that the economy isn't good and it is going somewhere even worse. Just add up wildly escalating debts in the US with the decimation of the sectors of our economy that produce real stuff and a reckless thirty year experiment with the world's first reserve fiat currency and things are not going to turn out good. Many of us invest in the precious metals sectors because we don't know what else to do.

The argument can be attractive. If Greenspan and Bernanke do as they say (is that too much to ask?) and print dollar bills until the cows come home, I'd be in high cotton. My mortgage debt is set at a low fixed rate; Argentina-style inflation would reduce that debt to trivial amounts in only a few years. Gold rising and maintaining a level near that seen in the 1980's level of $800/oz would increase the value of some of my more speculative gold mining stocks by ten fold. I'd be able to sell the stocks and pay off my mortgage and my wife's education loans without in 2-3 years instead of 28 years. Even if the market value of my home drops by 90% due to higher interest rates, I'd be better off debt free that with the big mortgage. My indentured servitude would be over, I'd be able to maintain the same lifestyle with 1/3 of the salary (although hopefully I'd be able to talk myself into a higher salary). The really fun part would be seeing many of my peers struggling with the realities of high-debt and a horrible economy, while I get to where a quiet smirk. I'd be well known amongst my friends and family as "the guy who knew what he was doing". If I had enough money left over, maybe I'd finally be able to start my own hedge fund, or buy a significant amount of property in rural county and commence to start my own kingdom…. This is the wet dream of many a gold bug. However, I have suffered from immature delusions often enough in my life.

It goes against everything I have experienced in my short thirty years on this planet to believe that keeping a few thousand dollars in some gold mining stocks is going to save me from the impending economic crisis in the United States, while everyone else struggles.

For one thing, how would a big inflation really get started? Greenspan says he'll do unconventional measures "if needed", but as soon as things start looking halfway decent he turns away from such ideas. Then interest rates rocket up immediately and threaten to drive thousands of people into default on mortgages, stop corporate bond driven cap-ex and cease any other forms of monetary expansion quicker than Greenspan can say "conditions appear to be moderating in a pleasantly in a non downward sloping growth trajectory". This is not the path for my hoped for hyperinflation. One can safely assume that the political pressure to "do-something" will increase exponentially if interest increases were to start putting too much pressure on the millions of American that are mortgaged to the hilt on their homes. This is because 10 million people defaulting on their mortgages would ruin any presidency much quicker than killing a government scientist or getting a BJ from a college intern or eavesdropping on a bunch of democrats. Yes, 10 million people defaulting on their homes and getting thrown into the streets would be a dangerous as hand out pitchforks and machine guns to the crowds outside the Bastille gates. The ruling elites (these guys or the next ones) would have to try and inflate their way out of that type of predicament eventually.

But it appears that the government will do what they can to avoid the big inflation unless they have to. In reality they know that would mean the end of their power just as certainly as the angry defaulters would be the end for the rulers. A few thousand anarcho-libertarian-right-wing gold bugs would suddenly become the richest folks in the country in the case of hyperinflation. This shift of power in the country, coupled with the drastic drop in the dollar on international markets would certainly be enough to topple the current mercantilist, socialist, empire building regime.

So we have established that Greenspan will try to do to something to keep the interest rates from rising too much (and I do believe he is still capable of working them lower if he puts his mind to it). I sense that the majority of folks believe that the trough in interest rates is in, that nothing Greenspan does from here on in will be able to get them down to new lows. People fear that the rumors of European banks running away from GSE debt will start the mad dash for the exits as countries try to preserve all the capital they have locked up in dollar assets. But this doesn't quite make sense because the Chinese and Japs own way more US debt than the Europeans and they seemed more determined to support a high dollar than anybody. There entire economies are built around exporting crap to American consumers. If the dollar falls against their currencies then their ruling elites will get overthrown as well because they would have obscene levels of unemployment and idle factories (aka malinvestments). It appears that these countries will prop up the dollar indefinitely, preventing hyperinflation in the US.

Even if the dollar does depreciate wildly against Asian currencies, my wife points out that "the end" still wouldn't occur. She says the Chinese would just force their folks to work at cheaper wages, "big deal" she says, "it wouldn't be the first time, they'll just keep making stuff for us, but at less and less money, who else are they going to sell too? What else are they gonna do with their time?". I had to admit she had a point, I was so worked up about how we were going to get this great hyperinflation to make me look smart and relatively wealthy, but it just seems too optimistic.

The only real big social economic changes that have come about since I've been on the planet 1973, has been when the baby boomers do something. When I was a toddler, they were in there 20's, it was "free love and experimenting with drugs", and as soon as I get to the end of elementary school it is "safe sex, AIDS and 'just say no'". When I was born they said "screw the gold standard, let us borrow buy houses and enjoy watching our mortgage payments dwindle towards zero as uncle Nixon and Carter pay off our houses for us". When I turned 20 the boomers were celebrating the lowering of inflation and interest rates that helped their bond and stock portfolios blossom. A mere half-decade after doubling social security taxes and volunteering my generation to pay for more medical benefits for their ageing hippy assess. It hasn't been all bad, I had less competition in getting into a good college than kids nowadays (do to my lucky status of falling into the trough of the population waves.), but I digress.

Extrapolating this trend, I can easily see the baby boomer generation hanging on and squeezing as much money as they can out of my generation before dying off or possibly being kicked off the dole by my generation as the debts become to big to bear. However, again that is probably too optimistic, after all the boomers "educated" my generation and they did a good job of avoid subjects like interest, debt, hell basic 6th grade math and reading. They will probably have no problem duping the millions of idiots in generation x into living like slaves for the deadbeat boomer generation. The non-stop preaching of the virtues of self-sacrifice for "the others" and "the community", has worn a neural path as wide as Hillary Clinton's ass through the brains of most Gen-x'rs. There will probably be no rebellion against the parasites that prey on our generation and my child's generation. No, our Empire will just slowly crumble away.

But maybe I'm being too pessimistic.



Gabe Harris
[e-mail]
www.gabeharris.com

23 July 2003

http://www.gold-eagle.com/editorials_03/gharris072303.html