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Welcome to USAGOLD's "Gilded Opinion" pages. We invite you to browse our index of outstanding gold-based commentary. Each article or essay is selected on the basis of its long-term relevance for understanding the role gold plays in the individual's portfolio, the overall political economy, or both.
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Is the World Different Since Sept. 11?
by USAGOLD Forum poster, Usul (9/30/01; 07:49:20MT - usagold.com msg#: 62696)
"The World Is a Different Place Today Than It was 9/10/01"....
FALSE
The world may indeed appear to be a different place today, but what has really changed is not the world but the perceptions and behaviours of its people. People haven't changed, as a study of the writings of ancient civilisations will show:
"The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed less Rome become bankrupt." - Cicero (106-43 B.C.), 63 BC
He also said, apparently, "You must look out in Britain that you are not cheated by the Charioteers"- I guess you have to substitute for the word "Charioteers", otherwise little has changed.
Something has nevertheless changed, and it means that future historians may very well date the beginning of the next Depression from the terrorist attack on the United States, even though the stock markets began to roll over in Spring 2000. However, this bear market has begun, not with a terrifying Wall Street crash, but with stealth and hopes for a "V" bottom and a quick recovery. Why has the ongoing bear market failed to register with many people with the seriousness it deserves? It can be summed up in one word, confidence.
Back in the 1920s, people were supremely confident, until their illusions of permanent wealth and prosperity were shattered in October 1929.
Herbert Hoover's 1928 campaign
promised:
"A chicken in every pot and a car in every garage."
The spirit of confidence was
expressed by Irving Fisher (Yale University economist) who said:
"The nation is marching along a permanently high plateau
of prosperity."
People were confident in the economy, confident in Hoover's governance,
and confident in the stock market as an indicator of the strength
of the economy and a source of profits.
But eventually, between Black Thursday (October 24) and Black Tuesday (October 29), the Wall Street Crash knocked out that confidence. Hoover lost the people's confidence in him, and lost the presidency in 1932 to Franklin D. Roosevelt. Loss of confidence contributed hugely to the banks' problems; no longer confident, people rushed to take cash out of the banks and by 1933, around 11,000 of America's circa 25,000 banks had failed.
Alan Greenspan noted in the July 1966 issue of The Objectivist:
"The excess credit which the Fed pumped into the economy spilled over into the stock market -- triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed... The world economies plunged into the Great Depression of the 1930s."
A long economic cycle links today with the 1920s and 1930s- this is best illustrated by perusal of the charts presented by Alan M. Newman, editor of H. D. Brous & Co's "Crosscurrents"- particularly "Dollar Trading Volume" (http://www.cross-currents.net/charts.htm).
Since 1995, there has been a runaway bull market in stocks centred on Wall Street. Easy money -- the plentiful supply of easily obtained credit, and the FED's willingness to lower interest rates at the slightest provocation, has been fuel for the growth of a speculative mania built on easy debt rather than savings, in a similar fashion to the excess credit of the 1920s, and the resulting debt burden and the desire to rebuild savings will keep the bear market going for longer than most people suspect.
In the 1930s, people compensated for their feelings of insecurity and loss of confidence through the escapism of radio and movie musical entertainments. As people turned to the radio, the sale of physical records suffered as people could listen to music without paying for every record. Today, people can download their music of choice without restriction to a playlist or timetable. The growth of the internet has closely followed the recent bull market, as the growth of Microsoft mirrored the growth of RCA in the 1920s.
In 1932, Bing Crosby sang this poignant verse:
"Once I built a tower, up to the sun,
brick and rivet and lime.
Once I built a tower, now it's done --
Brother, can you spare a dime?"
Since the attack on the World Trade Center, thousands have been laid off, particularly from the air transport industry, which in the 1990s had been growing steadily. Just as in the 1930s, as illustrated by Crosby's song, the people who helped build up that industry have now been let down:
"Once I built a railroad, I made it run,
Made it race against time.
Once I built a railroad, now it's done --
Brother, can you spare a dime?"
The sudden shock of the WTC disaster and the forthcoming uncertainties of the War on Terrorism (just as the Iraqi invasion of Kuwait of August 2, 1990 and the ensuing spike in oil prices gave a sudden shock to the confidence of American consumers), will dampen spending and push the economies of the Western world further in the direction of recession. But we have been promised anything but a quick end to the uncertainties of the War on Terrorism.
Consumers have now become fearful of flying and are reluctant to go shopping for anything that might be considered discretionary, as jobs cuts spread from aviation through to dependent industries. The University of Michigan's consumer sentiment index fell to 81.8 in September, the worst drop in confidence for 11 years.
With an atrocity on their home ground unseen in the 20th or 21st centuries, people in America, and many other countries whose people worked in the WTC and will be involved in the War on Terrorism, have suffered a shock to their confidence in their safety from threats of further terrorism, chemical and biological attacks included.
Many people have been touched by a tragedy far beyond those who lost their lives on September 11th. There are close relatives, friends, business associates, customers... of those people, and also of those who have lost jobs in the following loss of confidence in air travel.
Yet despite the widespread perception that "the world has changed" since September 11th, the truth is that the retrenchment of the stock markets had already been in progress, and confidence had already begun to be lost. On September 3rd, the director of the UK's Confederation of British Industry, Digby Jones, said:
"Clearly the economic slowdown facing the UK is now spreading beyond the internationally exposed sectors typified in UK manufacturing."
And on August 28th, it was reported that: "U.S. consumer confidence fell unexpectedly to its lowest level in four months in August as a weakening job market weighed on consumers and threatened to undermine retail spending".
East Asia's loss of confidence led the West's, in the wake of the Asian financial crisis- as was illustrated by these headlines:
Business confidence drops due to Asian Crisis - December 1997
Hong Kong's lost confidence - January 1998
Crisis of confidence despite rally - January 1998
Japan economy stalls as confidence wanes- - MOF head - January 1998
Asia leads to crisis of confidence - January 1998
We can clearly see the effects of lost confidence in Japan's Nikkei, still falling from its high in late 1989.
Here are a few more things for people to be uncertain about now:
Will deficit spending and skyrocketing
money supply after September 11th set fire to inflation?
Will conflict in the Middle East cut off oil supplies, sending
energy prices soaring?
Will the financial infrastructure survive the loss of the companies
in the WTC?
Will deliveries and just-in-time business models disrupted by
grounded transportation cause shortages and price inflation?
A strong economy depends for its continued health not just on the availability of finances, but also the confidence of people that their money is safe in the bank, and the confidence of trading counterparties that payments due will be honoured. Without confidence, people are inclined to withdraw their money from anything that may be perceived as risky. Early to go are the high-risk investments (junk bonds). Financiers are less inclined to lend to business ventures; funding for new business development dries up. Businesses let people go. The economy slows, and the willingness of the high street consumer to spend is sapped by their awareness of industries suffering and other people losing jobs.
Consumer confidence may well have peaked in January 2000 - "Consumer Confidence Is Highest Ever" said the press. Consumers had no fears about the valuations of the stock market and demonstrated their confidence in profligate levels of spending while savings hit an all time low.
In a speech by Paul A. Volcker, on January 27th, 2000, he said:
"A world of convertible paper currencies, a world that has long since abandoned the discipline of gold, and a world in which money can move so freely, necessarily requires high confidence in its basic monetary institutions"
By Spring 2000, however, most of the stock market indices in the West had seen tops that have not since been bested. The technology-laden Nasdaq index began to fall heavily in April 2000, as confidence began to be lost in the earnings potential of high technology companies. Until the WTC tragedy, it was generally hoped that the loss of confidence was confined to the speculative high technology area.
The masters of banking systems try to maintain confidence by maintaining liquidity, but confidence itself is more fundamental. If people have lost confidence, no amount of urging them to borrow and spend will work. If they perceive a high risk of redundancy, a threat to their sources of income, they will want to keep as much of their personal wealth in reserve as possible, no matter how low interest rates are lowered.
MIT economics professor Paul Krugman said in May 1998:
"... if people have low expectations about their future incomes, then even with a zero interest rate they may want to save more than the economy can absorb... And in that case, no matter what the central bank does with the current money supply, it cannot reflate the economy sufficiently to restore full employment..."
Efforts need to be made to encourage investment in businesses that have a sound plan, proper control over spending and debt, not businesses that promise the earth on sketchy concepts, only to suck in large amounts of financing and waste it on frivolous purchases and ineffective business models. And this will not be achieved simply by making it easy for businesses to obtain funding. There needs to be a weeding out of the unsound businesses, bad debts, and establishment of financial stability and sound control of credit. And nothing encourages financial stability and sound control of credit better than an economy firmly linked to gold.
When on May 1st 1821 the Gold Standard, with a fixed price for gold, was formally established in Great Britain, there followed a long period of price stability with monetary policy, in effect, on auto-pilot.
As George Soros pointed out in December 1997, without a currency fixed in some way -- to a relatively stable currency, or gold, the currency of a heavily indebted nation can depreciate in a self-reinforcing process, because this aggravates the problems of repaying the external debt and further undermines confidence. And not even Soros could say how far that process would move away from equilibrium. When a currency depreciates, the value of an investment denominated in that currency falls, and the currency buys less goods from abroad. Of course, wealth held in gold instead of depreciating currency would be preserved.
Increasing gold prices are considered an important indicator of inflationary pressures, and an indication of loss of confidence in paper money and stocks. By corollary, a loss of confidence in paper will lead to a growth in interest in the ultimate store of value, which is gold.
As Adrienne Roberts of the Financial Times pointed out on September 29th, "Gold has risen 7 per cent since the attack on the US while oil and base metals have fallen. Gold has also outperformed equities, illustrating its negative correlation with most other asset classes"
President Nixon took the dollar off the gold standard in 1971. The US national debt subsequently began to grow exponentially (a graph may be perused in the U.S. National Debt Clock FAQ), until today it exceeds $5 Trillion, a colossal debt.
How does gold give us confidence? Let me quote the French central bank governor Jean-Claude Trichet, who said in an interview with Central Banking magazine in February 1998:
"Gold is a very important element in the credibility of the currency in the eyes of our people. It is one of the elements on which confidence in the currency is based, particularly in the eyes of public opinion. It is often viewed as the ultimate reference asset."
Here's another quote, from Peter L. Bernstein in September 2000:
"And because gold is chemically inert, it doesn't ever tarnish, it gives people a sense of being in touch with eternity. I think this is the magic of it. It stands for security and assurance"
And another, from Alan Greenspan in May 1999:
"Gold still represents the ultimate form of payment in the world. Fiat money in extremis is accepted by nobody. Gold is always accepted."
Gold, therefore, is clearly excellent compensation for loss of confidence in the paper economy.
One of the greatest gold fields of modern times, the Rand, began with the discovery of the aptly named "Confidence Reef" on the land of a Dutch farmer, about twelve miles west of Johannesburg.
Gold is no-one's debt; the only financial asset that is not a liability on someone else's balance sheet. Its value derives ultimately from the labour required to mine it from the earth -- relative to the labour required to obtain more common substances. Gold buried in the time of the Roman Empire can be dug up today, after the rise and fall of several civilisations and their paper currencies, and it not only holds its bullion value, but also acquires numismatic or historical artefact premium.
Hold gold, and its value will never collapse like a speculative dot-com stock.
Hold gold, and its value will endure; even the most highly regarded companies, (Marconi for example) can fall from a high profit, cash rich status to a loss-making debt-owing skeleton by the imprudent decisions of its controllers.
by Usul
(9/30/01; 07:49:20MT - usagold.com msg#: 62696)
September 30, 2001
Copyright © 2001 by "Usul". All Rights Reserved.
Reprinted here by USAGOLD with permission.
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