The Northern Miner interviews Jim Sinclair

Section:

From The Daily Reckoning
Friday, December 10, 2004

www.DailyReckoning.com

The price of gold got hit, as the technical analysts
thought it would. We thought it might too ... but
only because it had run quite a bit without taking
a breather.

Does it mean the bull market in gold is over? Is it
time to sell -- taking advantage of the 40 percent
gain since George W. Bush took over the White
House?

Here at the Daily Reckoning we wish we knew.
We have tried to foresee the future, but have never
quite got the hang of it. Nobody sends us
tomorrow's newspapers. We know of no websites
that report next week's news. Nor have we
discovered any history books that report the
world's great affairs before they happen.

We know little about the past, less about the
present, and nothing at all about the future.
Our ignorance is nearly complete.

So what can we do?

If only we were as smart as the newspaper
columnists! Not only can they peek around the
corner and see what is coming, they always
seem to have a plan for improving the future
before it actually gets here. Two columnists in
yesterday's International Herald Tribune
explained, with a straight face, what will happen
in the Middle East. Another gives a hint of
tomorrow's news from Southeast Asia. Earlier
in the week, on the same page, Thomas L.
Friedman described how the world would evolve
if the Bush administration took up the cause of
energy independence.

We deeply appreciate Friedman's whole oeuvre;
there is always a temptation to take the editorial
pages seriously. Friedman reminds us that it's
just entertainment.

Yesterday's IHT included two additional hoots,
both on the dollar and both imbecilic in its own
way. First, Jeffrey E. Garten, dean of the Yale
School of Management and former factotum in
several administrations, tells us that even a
collapsing dollar is unlikely to balance out the
trade deficit. Americans will still buy oil, he says.
And they will still buy gidgets and gazmos from
Asia, he adds, because "TVs and toys are
essential to our work and lifetstyle." It seems
never to have occurred to him that they might
buy fewer of them if they had less money to
spend.

No, don't expect Mr. Market to set things straight,
says the former Nixon, Ford, Carter, and Clinton-era
bureaucrat; this is a job for Mr. Public Official.
This is not a time for short selling and hedging, he
maintains, but for "statesmanship."

Mr. Garten believes a good model for U.S.
economic policy wonks is the Plaza Accord of
1985 -- in which Japan agreed to raise the yen in
order to help the United States out of a similar
trade deficit jam. "It worked," he says. Where he
has been for the subsequent 19 years, we do not
know. But somehow he must have missed the
news: The Plaza Accord forced Japan to lower
interest rates, which set off a capital spending
bubble in Japan, which led to a stock market
bubble, which in turn occasioned a devastating
bust in Japan, which then resulted in the 14-year
slump from which Japan has yet to recover. In
America, meanwhile, the Plaza Accords set the
stage for the Reagan-era boom ... which evolved
into the Clinton-era bubble ... which led to the
Bush-era bust, to which the administration and
the Fed probably overreacted. It was as if you
had called a plumber to fix a leaky faucet and
he ended up by blowing up the whole water
main. All of a sudden there was liquidity all
over the place.

Never before have so many people have so much
money that they have not earned. The most
recent figures show houses rising at nearly a 20
percent rate. If you live in a $200,000 house that's
$40,000 of new "wealth" without lifting a finger.
Hallelujah. It is hardly surprising that so many
people "took out" a little of the free money and
spent it. Nor is it surprising that they spent it on
products from Asia -- which is, of course, why the
U.S. has such a trade deficit problem.

But Garten thinks getting another bunch of hacks
together in another expensive hotel can solve the
problem. We suggest The Plaza in New York -- why
not?

Meanwhile, lower on the page, Robert Kuttner lays
the blame squarely on the Bush administration.
"[S]hort-sightedness by a selfish financial elite," he
says, will sink the U.S. economy. Why the financial
elite has become suddenly so shortsighted is
apparently not something that interests him.

Of course, he is right; the Bushmen have done all they
could to make a bad situation worse. That was to be
expected. But that they actually created the problem
is an unfounded calumny. The trends that led to the
brink of the present crisis were already under way
even before the future president gave up drunk driving.
America ceased running trade surpluses nearly two
decades ago. Almost every year since then, saving
rates have declined, debt has increased, and trade
deficits have gotten larger -- no matter which party
was in power.

On the other hand, Mr. Bush's contribution is not
negligible; he added a huge public deficit nearly as
big as the trade deficit. But someone was bound to
do it.

Like Mr. Garten, Mr. Kuttner has a smart answer for
today's dollar crisis. And like Mr. Garten, he
hallucinates that civil servants can manage the
situation. It is merely a policy problem, he implies.
"The U.S. trade deficit has been a problem for more
than a decade, but the responsible fiscal policies of
the Clinton years helped moderate it and led to a
healthier dollar, which in turn allowed for lower
interest rates. In this virtuous circle, we enjoyed a
period of sustained and balanced growth."

We still cannot look into the future but at least we
can read yesterday's news. The period of
"sustained and balanced growth" was the same
period in which Americans were mortgaging their
homes to buy goofy tech stocks ... while Mr.
Greenspan's EZ credit created a mock boom all
over the world. Americans spent so much and
earned so little that it took 80 percent of the
entire planet's savings to keep the thing running.
The Chinese, for example, earn an average of 61
cents an hour. Americans earn 25 times as
much. But it is still not enough to keep them
living in the style to which they have become
accustomed; they have to borrow from the
Chinese just to keep going.

Again, we don't have access to tomorrow's
news. So we don't know what the smart thing to
do would be. But we suspect there will be Hell
to pay. And in the furnace of Hell, gold is likely
to hold up better than paper dollars. Always has.

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