The Big Blue - Part 1 of 3
John Mackenzie
For over a year I have suggested the Federal Reserve would begin a campaign of rapid monetary debasement to begin in July / August of 2004. Prior to this initiative the Gold Market would come under severe attack and quite possibly retrace a very large percentage of the gains achieved off the 2001 bottom, then begin it's next phase of the bull market, phase 2. In addition, of extreme importance, in my view the physical metals are the premiere asset class for those seeking not only safety, but preservation of capital, regardless of the Federal Reserve's monetary initiative's end results.
The reasoning is quite simple. In real, United States Federal Reserve Note (FRNs) terms Gold will outperform all other assets class regardless of the direction of the dollar. Should we begin to experience a collapse in the value of the "U.S. Dollar", all markets "priced" in FRN's will come under severe duress, all paper markets will suffer dramatic declines as exogenous capital will begin to exit en masse. Should Gold ever approach Bob Precther's target of $200, I suspect the worst will have unfolded for Chairman Greenspan's "Matrix of Bubbles".
In observing the markets, both fundamentally and technically, there are a number of very disconcerting signals foreshadowing a decline of sizeable magnitude. In my view, this is not a question of "if", but merely "when".
The fundamental landscape has shifted dramatically as the U.S. Economy's internal structure has radically changed over the past 90 years. We have observed a paradigm shift unparalleled in history's pages. The transition from an industrial nation to a tertiary economy has been the result of our unique status as the World's Reserve Currency. We have been allowed, since Bretton Woods, to provide be the basis of exchange globally. The inherent benefits have been extraordinary for the United States, essentially allowing our nation unparalleled economic power throughout the globe.
Capital flows into our nation's economy were enormous in scope and scale over the prior three decades as returns on capital investment attracted these enormous inflows. Unfortunately mal-investments are made in the best of times as history has shown time and again. In providing the very basis for economic expansion, capital was over-invested creating structural excesses that continue to propagate to this day, these are very real deflationary forces at work decades later.
The very metric used as the premiere form of checks and balances was disbanded in 1971 when Richard Nixon closed the Gold window on foreign exchange. An interesting development took place in short order thereafter: OPEC, with whom we had a very large balance of payments became upset with our monetary malfeasance. Ironically, it was one Alan Greenspan advising President Nixon on the closing of the gold window in FOREX. At the time, the very same suggestion of recycling the surplus balance the Saudi's held into treasuries was met with resistance by OPEC. In my opinion the net result was our first "Oil Shock" and America's first real experience with crisis in balance of payments. A clear and present danger was averted when we began providing Saudi Arabia with it's shopping list of High-tech Military Hardware in exchange for abatement of their immense dis-satisfaction with our Central Banks shift to a pure Fiat regime. A crisis was averted in no uncertain terms, and although it took several years it set the stage for the next shift in paradigm under the Fiat Currency Regime... the emergence of the "Financial Economy," the stage was set none the less.
The early 1980's saw President Reagan's "Morning in America" take hold from the Carter era's "Reality Bites". The very beginnings of deficit spending can be traced directly to the Reagan years. Essentially, we saw the re-emergence of the Military Industrial Complex and it's growing composition within our Economy. Star War's & the Cold War provided the footing to justify the epic expenditures presented to the American public at large.
The Bull Market, the longest running Bull Market in history, began circa 1982.
And with good cause, deficit spending was kicking into high gear and "liquidity" was flowing through the economy in a scale unseen in this nation's history. We had managed to increase our national debt from $1 trillion to $3 trillion in very short order. It took 160 years to absorb the first trillion, a few years to pile on several more. The results of this new liquidity, and I use the word liquidity loosely as it was nothing more than a future promise to pay, saddled upon the backs of American taxpayers, namely Debt in the form of United States Treasury obligations.
Wall Street's slice of the pie found its baker's dozen welcomed with open arms. The Dow began to rise as inflows began in earnest until October of 1987 when Japan hastily beat a retreat on Wall Street sending the broad averages into a tailspin. Only six weeks on the job and heeding Former Federal Reserve Chairman Paul Volker's Advice " Five stocks are the economy, " Alan Greenspan delivered his first transgression: " the Federal Reserve stands ready to provide ample liquidity to the markets. "
In sharp contrast to Chairman Volker's prior hardline:
Announcing that the discount rate was being increased a full percentage point to a record 12%. "We consider that (this) action will effectively reinforce actions taken earlier to deal with the inflationary environment."
Volcker intended to remove inflation, not exacerbate it.
He set about contracting the money supply and began to set a target for the growth of money, knowing that demand for credit would begin to wane. The Federal Funds rate was increased in the hope that banks would eventually cut back on their lending thereby contracting expansion plans.
The punch bowl was taken away just as the party had begun its "all nighter" mode...
Part 2 The Big Blue: The Emergence of the Financial Economy to follow
John Mackenzie
jrmfl@adelphia.net
June 23, 2004
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