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A preview of the GATA African Gold Summit

Section: Daily Dispatches

By Sean Corrigan
May 3, 2001

The German press carries stories about the sharp
erosion in PC and hand-held phone demand. Taiwan's chip
fabs issue a dark outlook. Another US Telco heads for
Chapter 11 with $2.68 billion in debts. Businesses in
Singapore revise down their outlook and the woes of
their counterparts in Malaysia were partly responsible
for a sharp fall in that country's exports. Networker
Juniper's CFO was reported telling analysts, quot;Most
people are proceeding with design plans, but how it's
playing out is that people want to place smaller orders
for a shorter time frame. At the same time, the
approval process is lengthening, and more people need
to sign off on orders before they go through.quot;

Notwithstanding this, the Nasdaq 100 climbed 44% from
the April lows and Juniper itself soared 135% from its
own trough. DOT, the Internet index -- that repository of
foolish dreams hawked by scoundrels -- rallied the
little matter of 67% in the same period.

Not entirely coincidentally, US Corporate and Agency
debt issued in that same five weeks has amounted to an
impressive $165 billion for a steepling YTD $585
billion, according to Bloomberg data, and 10-year
Industrial B1 spreads have fallen 40 bps, while there
has been a liquidation of around 60k Bond, 50k Note and
45k Five year contracts by speculators on the CBOT.

The ramifications are clear -- excess liquidity is being
put to work buying up the most speculative asset
classes and, with the DXY dollar index unchanged over
the horizon, much of that money is likely to be of
domestic origin. To that extent the Fed has its wish.
It is not so much pushing on a string as reeling a kite
out into a gale. Risk is this Season's new Black.

Financial assets are what we trade and however skeptical
we are of fundamental economic health, we at (a href=
cannot ignore that the results of this renewed inflation
are doing what they always do at first -- artificially
depressing the cost of capital. To fight this in the
short run would be costly: to believe that it signifies
a return to economic well-being would be a much more
grievous error.

P/E ratios have soared, notwithstanding a 30bp back up
in corporate bond yields and despite the worst earnings
quarter in a decade. The Samp;P 500's P/E is now close
to 29, only 6% off its Labour Day level and around 70%
above historic norms and the more speculative we get,
the worse the expansion -- the Russell 2000 has shot from
42 to 78 this past month, for example.

Yet all the while, there is little solid evidence of an
improvement in US conditions, with only government and
credit-enhanced consumption and real estate turnover
showing strength. In the wider world, the malaise is
also spreading. Though it must be emphasized to the
ECB's mindless critics that the EuroZone Purchasing
Managers index is still within two and a half points of
its 15-year highs, and is in the 95th percentile when
spread against NAPM over this period, expectations are
falling here, even if more tangible evidence of
anything more than a deceleration is harder to come by.

Sticking with this wider picture, we must be aware that
credit expansion has not just been limited to the US
and the fostering of malinvestment has been global --
even if the sheer scale and ferocity of the American
Bubble has been its epicentre. US citizens, misled by
the distortions of the pricing and monetary structure
over which the Fed has presided, have been foremost,
though assuredly not alone, in consuming too heavily
and the enterprises they work in have been sapped
because capital has been chronically misallocated,
stretching their capacities to the point of fracture.

If this had taken place in a time of a lesser
international mobility of goods and capital, (before
the fall of the Berlin Wall in 1989, say) the boom
would have ended much earlier as the shortage of real
savings, rather than monetary fictions about them, had
made itself felt. In short, the US would probably have
had a classic inflationary setback three or four years
ago. Instead -- as the Fed itself tangentially admits
by its recognition that low import prices have helped
restrain the overall price indexes -- others' goods
have filled the gap and others' savings have allowed
the imbalanced US economy to endure.

Three historical accidents have helped this occur; the
bust of the Asian Credit Bubble four years ago, the
interplay of that with the ongoing Japanese persistence
in administering the patent medicine of a
HyperKeynesian New Deal, complete with deficit
spending, monetization of the resulting debt and a
studied attempt to destroy its currency in order to
alleviate financial stress, and lastly, the launch of
the Euro, with its subjective and institutional
suspension of a viable alternative to the US Dollar as
a reserve currency.

As in the 1960s, the US has been able to run ever-
expanding balance of payments deficits (quot;without tearsquot;
in the words of that fervent advocate of a pure gold
standard, Jacques Rueff, who analyzed that previous
episode so trenchantly) because its paper has been
willingly accepted abroad and then largely recycled to
it. Moreover, the world's monetary authorities have
greatly compounded this penchant on the part of the
private sector.

At the end of 1999, their aggregate foreign exchange
reserves stood, according to the BIS, at $1.75
trillion, of which 80% were in Dollars. What is more
telling is that these reserve balances had expanded
between 30-50% (depending on whether or not we isolate
revaluation effects from those due to flows) and that
only an insignificant 4-5% of this growth took place in
anything other than USD. In the overlapping period of
the Bubble, OECD total M1 grew by half and M3 was up
60%, while GDP expanded only 20% in real terms, prices
went up 10% and -- making up the difference -- the MSCI
World Index managed a massive 120% to its peak.

In many cases, these central banks are not just helping
in the construction of the pyramid, they are
duplicating it. They accumulate the Dollars on their
balance sheets and can thus provide more domestic
reserves, while simultaneously returning the Dollars
for use in supporting the US credit structure by buying
T-Bills or Agencies or by putting them on deposit.
Credit can be created twice using the same old

Federal Reserve mismanagement, exacerbated by its
meddling in international crises, has put US prosperity
in jeopardy and has interlinked the world financial
system ever more closely with it, putting us into a
similar position to those which deteriorated so
disastrously in the Great Depression of the 1930s and
which lead, in contrast, to the Great Inflation of the
1970s. Since no Central Bank will risk triggering the
first concatenation of events, those who accept
anything of this diagnosis must believe they would much
more willingly accept the second (especially since we
can then conveniently blame quot;gougersquot; and
quot;monopolists,quot; such as Big Oil and OPEC).

In all this, beggar-thy-neighbour is alive and well and
those who do not play this Subzero-sum Game, like the
ECB so far, are the ones to be excoriated.

It was ironical to read in the recent BOJ minutes that
while the Bank quot;has come to a conclusion that the
economic conditions warrant monetary easing as drastic
as is unlikely to be taken under ordinary
circumstances,quot; one of its more perceptive members had
noted that:

quot;...prices were falling because nonviable firms, in an
attempt to survive, had raised their capacity
utilization and had slashed prices ignoring production
costs. The member was concerned that this excessive
price competition had engulfed viable firms and was
exhausting both viable and nonviable firms.quot;

Strangely enough, no-one else saw the obvious
connection, that over stimulative monetary policy was,
in fact, prolonging the depression because it enabled
these non-viable firms to undertake this scorched earth
policy and that the resulting quot;exhaustionquot; was the
reason bad debts continued to mount up at the banks
faster than they could write them down.

This policy -- and its usually officially-welcomed
accompaniment of currency depreciation -- are at work
in every Asian country where external restraints will
permit and are tacitly being introduced, or passively
being tolerated, in the Atlantic nations of Sweden,
Australia, New Zealand, Canada, and the United States.
If the United Kingdom cuts next week, we can be assured
that the Federal Reserve District of Threadneedle
Street is fully involved also. Additionally, Latam is
not innocent of the same, and Cavallo seems set on
allowing Argentina maximum latitude to participate,
with his prostitution of the currency board system.

The European Central Bank thus far, in a belated burst
of Bundesbankheit, is the stand-out, and we can be sure
that much of the vituperation being directed at it is
not because anyone really believes that 25bps off
official rates will save the world, but because under
the New World Monetary Order, as Keynes and White
realized at Bretton Woods, in order to inflate
successfully, without leaving one's citizens an escape
from this expropriation, all must inflate at once.

In passing, they also realized that a neutral, free-
market money such as gold must be restricted, outlawed,
or demonized for their schemes to succeed. They would
be proud of the BIS and its members today.

If the ECB resists the browbeating, it may do much to
achieve that elusive quot;credibilityquot; which has so far
evaded it. It will attract capital from around the
world and may see monetary aggregates return to path as
speculative loans, taken out to buy foreign assets, are
repaid and as the currency strengthens (improving the
terms of trade), long-term rates will decline as an

They may not quite understand it themselves and their
recalcitrance may be more due to an annoyance at the
American Hegemon's bullying than a belief in their own
cause, but if the Europeans hold firm, they may
unwittingly start a virtuous cycle and Europe may
indeed function as that quot;island of stabilityquot; so much
derided by Secretary O'Neill.

If the crisis unfolds this way, hard assets will have
their day once more and even gold may shake off the
leaden shackles of price suppression.