3 Minute Gold News
A Quick Read for Busy People
Lower Gas Prices
European Central Bank and Germany
Easy Money Credit Creation
Swiss Gold Referendum
starting at 4:30 min.
October 27, 2014
LOWER GAS PRICES
Lower gas prices puts more money in consumers’ pockets, but it doesn’t mean they’re going to spend it. They could reduce debt or save it.
Making a connection of “more money in their pocket means more spending” treats consumers like an automaton that doesn’t know what to do with the money — just assuming they’ll go out and buy their ninth TV set.
That’s not what happens in the real world.
In the real world people are paying off debt and saving.
Gas prices going down is deflationary.
“Deflationary” blows up the debt-to-GDP ratio and puts the U.S. on the path to Greece.
Deflation increases the real value of debt and the U.S. has a debt problem — so that is not bullish.
Deflation is the FED’s worst nightmare.
Lower gas prices means that the economy is running out of steam.
An economy is nothing more than two things:
1. How many people are working?
2. How productive are they?
You can slice it and dice it all you want but it’s nothing more than those two things.
– labour force participation is going down, so there’s fewer people working
– productivity is going down
– real wages are stagnant
– 50 million people are on food stamps
– 7 million have part time jobs and wish they had full time jobs
That’s the real story.
Lower gas prices is just day-to-day happy talk.
EUROPEAN CENTRAL BANK AND GERMANY
We’re in a global depression.
There’s a slow down in Japan, China, Europe and the U.S. — the whole world is in a global depression.
There’s enough fights to go around, but in a fight between the ECB (European Central Bank) and Germany, Germany wins.
The ECB is only doing $2.5 billion worth of asset buying, while the FED has been doing almost $1 trillion a year. So the ECB is going through the motions but they’re not doing anything like QE. They’re not buying soveirgn debt. They’re buying some asset-backed securities, but there aren’t even enough of those to have much of an impact.
The ECB’s Mario Draghi is the best Central Banker in the world. He understands that Central Banks are essentially impotent.
When you’re impotent you have to talk a good game — so Draghi says little and does less.
The U.S. FED is the opposite. They don’t understand how impotent they are so they’re out there yakking all day long, giving speeches and all that.
EASY MONEY CREDIT CREATION
How can easy money help at all?
Printing money doesn’t create jobs. Central Banks don’t create jobs. We need structural changes.
Economy, as was said, is just how many people are working and how productive they are. With labour force participation going down and productivity going down, there’s no way the economy can expand except by credit creation.
But all you do when you create credit, easy money, is you don’t create real wealth you just create asset bubbles.
And the bigger the asset bubble gets it explodes, creates more harm than good, and puts you back worse than where you started.
That’s what we’re headed for now.
The struggles in Europe are part of the currency wars that started in 2010, and was talked about in the book Currency Wars.
We’re not always in a currency war, but when we are they can go on for five, or ten, or fifteen years. So it’s not surprising that a currency war that started in 2010 is still going on in 2014.
Currency wars are an alternative to interest rates.
Interest rates and exchange rates are just reciprical to each other to a great extent.
So when you’re at a zero balance, which Central Banks are, then one way to ease is to cheapen your currency. The opposite is also true, when your currency gets stronger that’s a tightening move.
So the combination of the FED tapering and a stronger U.S. dollar, which is what we’ve seen over the last year and a half, is very deflationary from the U.S. perspective.
So those policies probably have to be reversed.
China is the biggest credit bubble in the world.
The U.S. has created a bubble in housing and stocks with easy money, but there’s no bigger bubble in the world than China. They have a greater capacity to keep it going because their investors have fewer alternatives.
Chinese middle class investors/savers, are not allowed to invest in foreign stocks. They don’t like to invest in their own stock market because it’s had it’s own problems and is very weak.
They have invested in real estate, but they’ve created a bubble and they are now backing away from that.
They don’t want to leave their money in the bank because they only get something like 25 basis points (0.25%) .
The only two alternatives are:
They are buying gold in enormous quantities. Purchases coming out of the Shanghai Exchange are astounding. They’re in the thousands of tonnes per month.
2. Wealth Management Products
These are just CDOs, but they’re not guaranteed bank deposits, and the banks that sponsor them take the money and invest it in worthless real estate.
The investor thinks they’re getting a 5-6% yield but doesn’t realize that the bank doesn’t stand behind it and the money is being put into worthless real estate that can’t pay off the debt.
That’s a Ponzi scheme waiting to collapse.
So, in China you have a real estate bubble ready to collapse and a Wealth Management Product Ponzi that’s ready to collapse.
China has enormous reserves which they can use to bail out their banking system, but they tend to be very slow decision makers.
In a financial crisis, slow decision making is fatal. It allows the panic to spread before you can get on top of it.
Probably what Chinese banks will do if the depositors are banking on the doors asking for their money back, is to look at their dead real estate in China that they can’t sell and then at maybe some U.S. stocks and bonds they own, and they’ll sell the U.S. stocks and bonds because they’re liquid.
That’s how the contagion will go from China to the U.S. and spread around the world.
Jim isn’t sure which is going to collapse the system first — something in China or something in the U.S. — either one is a possibility.
There’s also a few wild cards in the deck.
SWISS GOLD REFERENDUM
The Swiss referendum coming up in November is one of the wild cards that could collapse the system.
Another Week on Wall Street
words and music Elaine Diane Taylor
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from the album Coins and Crowns available on iTunes