WHERE ARE WE?
The facts speak for themselves. The unusual behaviour of the dollar and of gold can be explained. Once we develop a paradigm or a set of patterns or a theory based on the facts it is simple enough to test it.
We can back-test it too.
We are doing science here at GOLD-EAGLE. We are questioning. We are fact gathering. We are discussing. And we are challenging each other and others to stick to the facts.
A valid theory has predictive value. This is how we plan to measure our success.
Here at GOLD-EAGLE posters predicted a DOW bear market, a Nasdaq bear market, and the data to support these views was presented. Technical data was made available. TA was presented so others could check and verify. The reliability and validity of the data was subjected to real world tests.
John Murphy in his 1999 book Technical Analysis of the Financial Markets, in the section on Intermarket Analysis, noted a trend change which he suggested was viewed by some analysts as an indicator of coming deflation.
In the view of these analysts, not only were the Asian financial markets in 1997, and other markets later indicating deflation, but the bond market was too.
In this view, in disinflation we see bullish stock markets and bond markets. In deflation we see bearish stock markets and bearish commodity prices and bullish bond markets. This is because people fear that falling producer prices and falling prices are foreshadowing deflation. They switch out of stocks and into bonds and utilities. (p. 427) Some people are expecting commodity prices to fall and bond prices to rise.
There is a 'fly in the ointment.' Kondratiev wave theory suggests that commodity price inflation is due. The strong dollar and declining gold price suggest that deflation is due. How do we reconcile these apparently divergent views?
To help explain this we can turn to remarks made in January 2001 at the Davos conference by former Treasury Secretary Summers (thanks MIDAS for the quote):
'Former U.S Treasury Secretary Lawrence Summers at the Davos economic summit in late January, 2001 as quoted in the Economist:
' "The country's current economic cycle is different from previous post-war cycles. Typically, excess demand causes inflation to take off, which forces the Fed to raise interest rates, which pushes the economy into recession. This expansion, he argued, has been more like pre-war cycles, or like that in Japan in the late 1980's; that is, driven by credit. The absence of rising inflation has allowed the expansion to go on for longer, but at a cost of a greater accumulation of debt. Others have pointed to the similarity to credit and asset price booms in Britain and Sweden in the late 1980's. The unwinding of excesses was accompanied by severe recession." '
Quoting from the other team's notes does give certain credibility to the view we support. Here we can note that former Treasury Secretary, Mr. Summers suggested that the recent expansion was driven by credit, not excess demand. To which pre-war cycle does he refer? Perhaps to the 1920s? Not many would believe he is comparing the 1990s to the 1930s.
The strong dollar in a disinflationary trend is positively correlated to declining commodity prices.
It would appear that we are entering the deflationary phase at the moment. Stock markets in bear phases confirm this. They also suggest that deflation is positively correlated with debt excesses that will not be repaid, and this could lead to a debt repudiation depression. Investors sell the stock market because they expect that companies will not be able to repay debt, that many accounts receivable are uncollectable, that sales going forward will decline, that earnings will decline, that spending will decline, that layoffs will reduce the aggregate spending power of consumers. And that this in turn will lead to a continuation of the downward cycle. We can expect in this view, to see a time when the excess debt is written off. We are not there yet.
Also in this view we can expect to see the consequences of the write-off of the 'excesses' of credit expansion. The reduction in money supply as a result of the loaned money being written off will be large. It is this large reduction of the money supply that will be experienced as deflation. This experience will be due to the inability of banks and other lenders to increase lending, as their asset base would have shrunk and they simply would be out of reserves from which to base new lending.
When this phase occurred last we saw in 1933 a devaluation of the US dollar and concurrently, an upward revaluation of gold.
Another side of the deflation would be its effect on the attitude of the general public. When money has more value in the future than at the present, it makes sense to save it and not to spend it. During a deflation, until prices begin to rise, the deflationary common sense will feed upon itself. There will be little incentive to spend. This change in attitude will affect the velocity of money.
The decline in the rate of movement from one person to another, the velocity of money will also contribute to the overall deflationary trend. Money will simply be less available, less visible, and less common, less in use due to this decline in velocity.
Many writers suggest that 'it took World War II to get the US and the world out of the 1930s depression.' This view is based on a false premise, and it oversimplifies aggregate attitudes. It was not that government spending ended the Depression. Japan in the 1990s has proven that. It is the change in people's attitudes that will one day end the coming depression and introduce renewed spending based on renewed hope and confidence.
We do not need a war to change people's attitudes. We do not need a war to make people forget the coming deflationary period and its lessons. We will need to develop hope and confidence in the public. This change in attitude will come about from the renewal that can occur without war to distract, to unify, to build savings, to renew confidence in people in our ability to overcome obstacles and to build a better future. We do not need to sacrifice our children to some bloody conflict so that those who return will apply the war mentality to their daily lives in peacetime: work hard, do as we are told, and never question why.
We do not need to adopt the war mentality of unquestioning obedience to 'superiors.'
We do need to question what brought us here, and if we want to repeat the process once more. Do we want the 21st century to be as bloody and violent and wasteful as the 20th?
A lack of true good leadership leads to war. Alfred Vagts in his classic, History of Militarism describes how those in the Japanese leadership favouring peace during the 1930s were systematically assassinated in Japan. The war party there overcame its rivals.
We need true good leadership. We need leadership with a vision of the future that encompasses hope, and can lead us to develop renewed confidence. This leadership can repudiate the false values that lead to ruin, depression and war. This leadership can bring, top-down, the values which encourage hope and renewal. These values are present today. They are present in many people, and have been developed into a systematic set of attitudes - attitudes that are necessary to the renewal process. Where people of good will gather, in hope for a better world, in peace, and in the spirit of community service, we find these attitudes. Let us gather together the fruit of these labourers.
Robert Bird
(Copyright 2001)
April 3, 2001
Also by Robert Bird
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