US Senators Charles Schumer, a Democrat from New York, and Lindsey Graham, a Republican
from South Carolina, traveled to China last week to discuss recently strained US-China trade relations. Allegations by the
United States that China has deliberately suppressed the value of its currency, the yuan, to make its exports cheaper and
imports more expensive continue to present significant diplomatic hurdles for both countries.
The coming economic slide in the U.S. will be based on the forced liquidation of debt.
Housing debt will be extinguished by the pencils of accountants. Financial values that might have existed will no longer exist.
Financial institutions, those now owning the mortgages, will be hemorrhaging red ink. The equity that many consumers thought
existed will have disappeared as do all mirages. Consumer spending will collapse as consumers will be unable to buy on debt.
Cash will be the only way of making purchases.
In his speech on March 20 the new Fed Chairman Ben Bernanke admitted that he is not so
sure whether the Fed should be tightening its stance further or whether the central bank should pause. The reason, according
to Bernanke, is the unusual behavior of long-term interest rates.
I don't know what leading indicators the FOMC puts any faith in, but based on past performance,
it could do worse than putting some faith in the Conference Board's LEI index. Based on the January-February average, the
year-over-year change in the LEI in Q1:2005 is 1.8%. This is down from a cyclical peak growth of 9.0% in Q1:2004. Chances
are that if the FOMC keeps pushing up the fed funds rate, LEI growth will keep falling. Gosh, it sure would be embarrassing
to the new Fed chairman if he nudged the economy into a recession with inflation trending lower and the LEI having given him
a clear "pause" signal at 4-3/4%.
After all the S.E.C. could not withhold permission because Silver buyers didn’t want to
pay more. Industrial users will simply have to adjust to higher prices or alternatives, if a free market is to be continued.
Silver Producers are delighted, with the prospect of earning more, against the annoyance of Silver users having to pay more.
We also wait with curiosity to see just how much scrap or hoarded silver finds its way back to the market as prices rise and
how quickly new production comes on stream?
The U.S. economy is not growing, it is shrinking, says Walter J. Williams. We are already
in recession. Forget stagflation, he adds. What we need to prepare for is "hyperinflationary depression."
We are still quaking from yesterday's revelations, reported at the bottom of our very
own Daily Reckoning. We knew the Feds' numbers were bogus. Now, along comes an honest economist, the aforementioned Mr. Williams,
with a serious reckoning of how bogus they really are:
Why is it that you never hear the phrase U.S. Central Bank Gold Sales? In the news yesterday
were two stories of European central banks and their gold - it seems the German Bundesbank now refuses to part with 600 tons
(about $10 billion) of atomic element number 79 under the terms of the Washington Agreement, while future prime minister Gordon
Brown is being roundly criticized for selling much of the U.K. stash at far too low a price a few years back.
In a free market, society determines and chooses by consensus, the commodity deemed most
worthy to be the common medium of exchange - money. This medium is the most saleable or marketable commodity. It also has
the least declining rate of marginal utility. In other words, the commodity:
Retains its purchasing power better than all commodities available for exchange.
The recent announcement by the Bank of Japan that it will soon end its zero interest rate
policy serves to illustrate the main reason why I am a longer term bear on the U.S. economy and dollar. The two principle
factors that need to exist in order to cause hyperinflation have been set in motion and it is scheduled to arrive in the middle
of the next decade. One is our massive debt and the other is the fiat currency system which will be employed to print the
imbalances away. The reason why I believe hyperinflation is the more likely outcome, as opposed to a depression, is that hyperinflation
is more palatable from the Government's standpoint. It only insidiously destroys the public's wealth, where as a severe economic
downturn would be immediately pernicious for the consumer and not as easily disguised.
Economics and politics are on a dangerous collision course. As the forces
of globalization strengthen, the drumbeat of protectionism is growing louder. Made in France, the European strain of
protectionism reflects a newfound nationalism that strikes at the heart of pan-regional integration. Made in America
and exacerbated by fear of the “China factor,” a different strain of protectionism plays to the angst of middle-class US wage
earners.
We look at the real estate markets in coastal cities and conclude, "these are bubble markets."
Yet they have not risen as far and as fast as silver and gold have risen since 2001.
Nevertheless, most recent first-time buyers of gold and silver give no thought to what
should be obvious: the moves of both metals over the last four years are anomalies. Other than believing they are geniuses,
why should precious metals investors not be getting nervous?
So the Dubai ports deal is done, a United Arab Emirates-owned company has backed down,
and CNN anchor (and deal opponent) Lou Dobbs is going to have to find something else to talk about. But the after-effects
are likely to be felt in boardrooms across America as well as on Capitol Hill and in Arab capitals from Riyadh to Bahrain
and Cairo.
America's trade deficit has been setting records with such frequency that it seems almost
tiresome to hear it again: Another month, another $68.5 billion.
But the gap between what America imports and what it exports is growing so rapidly
and relentlessly that it is provoking new concern about how long the world's largest economy can play borrower and consumer
to the world.
This week we look at the possible direction of interest rates both at the long end and
the short end. Bottom line: history suggests there is some serious volatility in the future on the long end of the interest
rate curve later in the year. The yield curve and the 6/50 Rule when looked at together reveal some very interesting insights.
(This letter may print longer than usual, but that is because there are a lot of charts. In words it is actually shorter than
most letters.)
Since 1992 more than four trillion dollars of foreign capital have been invested in the
US. This capital influx was due to a series of currency crises, beginning with the Brazilian Real in 1992. Capital, seeking
a safe haven, poured into the United States. Initially, this influx of capital caused US interest rates to fall, US corporate
profits to rise and consumer spending to increase. The resultant bull market in stocks and bonds was fertile ground for investor
speculation and gave rise to the high-tech, or Internet bubble. When the high-tech bubble burst, the Federal Reserve reacted
by artificially driving interest rates even lower, causing a real estate bubble in the US and averting the collapse of the
broader US stock market.
Since 1992 more than four trillion dollars of foreign capital have been invested in the
US. This capital influx was due to a series of currency crises, beginning with the Brazilian Real in 1992. Capital, seeking
a safe haven, poured into the United States. Initially, this influx of capital caused US interest rates to fall, US corporate
profits to rise and consumer spending to increase. The resultant bull market in stocks and bonds was fertile ground for investor
speculation and gave rise to the high-tech, or Internet bubble. When the high-tech bubble burst, the Federal Reserve reacted
by artificially driving interest rates even lower, causing a real estate bubble in the US and averting the collapse of the
broader US stock market.
Billed as the great equalizer between the rich and the poor, globalization has been anything
but. An increasingly integrated global economy is facing the strains of widening income disparities -- within countries
and across countries. This has given rise to a new and rapidly expanding underclass that is redefining the political
landscape. The growing risks of protectionism are an outgrowth of this ominous trend.
Yield-curve inversions occur when short-term interest rates exceed long-term rates. Bernanke
has argued that when this occurred in the past, short-term real interest rates were high. To put it another way, he says the
Fed is merely in neutral territory and has not yet applied the brakes to the economy. Long-term interest rates are low because
of a global "savings glut", because much of the rest of the world would rather put their money into liquid US assets than
invest it in other economies with underdeveloped financial markets.
"'If we would have spent one-hundredth of the money that we have spent to send tanks around the world
to protect our oil supplies.. we would already be using cellulosic ethanol,' said Michael Bryan, chief executive of BBI Intl.,
a Colorado biofuels consulting company." Obviously, Michael Bryan has an axe to grind, but does anyone doubt what he said?
If you ask me to name the proudest distinction
of Americans, I would choose- because it contains all the others . . . the fact that they were the people who created
the phrase "to make money." No other language or nation had ever used these words before; men had always thought of
wealth as a static quantity . . . to be seized, begged, inherited, shared, looted or obtained as a favor. Americans were
the first to understand that wealth has to be created.
