50% Psychological

April 23, 2009

It has recently been stated by various writers in the press as well as politicians and thinkers such as De Bono, that the recession is up to 50% psychological. It is as if the populace must be put on medication or be made to attend counselling in an effort to save humanity from a mind induced financial calamity.

"Hope and spending" seems to be the mantra that governments and certain opinion makers are spruiking. This sort of thinking and action leaves me both cold and worried as it will inevitably lead to a deterioration that will at the very least be slow but sure.

It is this same mantra that led various central banks to sell large portions of their gold holdings over the last decade or so with startling consequences. More on that further on.

Whilst I believe that hope is an ESSENTIAL element of all aspects of human existence, I nevertheless contend (as I always have) that hope is not a strategy. Above all it is not a cure where there is no plan.

Furthermore, the "50% psychological" component is not so much a "fear component" or "frozen in the headlights" response, as it is a response of human beings who have lived more as consumers rather than as members of society. They are, I believe, taking a breath and re-evaluating what the debt fuelled binge of the last 10 years has really left them with.

I suspect that people are not responding to the stimulus (as hoped) as they are not cattle to be goaded with an electric cattle prod. In their wisdom they know it is time to pull back if they are to go forward. Unfortunately, governments everywhere have come to the conclusion that the previous bubble must be revived to ensure the survival of the debt system which has acted to simply impose modern feudal slavery on the populace whilst making them feel like consumers.

Here in Australia, the government has already given two sizeable stimulus gifts to the public. They sought nothing in return other than a favourable response in the opinion polls which they hope will last till the next election. No doubt there was a hope that it might ignite economic activity. Well, the fact that everyone calls it a stimulus package is an admission that it's not a cure. The bread and circus mentality is alive and well and it is clear that governments everywhere have little understanding of history and even less respect for it. These stimulus packages are trying to prove that there is such a thing as a free lunch. Well I suspect that we are headed for some very expensive dinners and maybe no dinners. The most fortunate nations may well be those that cannot afford stimulus packages.

Unfortunately, the revival of society (if it is to be achieved) can only come about by a change in the way we measure and value things. As I told my adult children recently, drinking fizzy drinks will form part of the GDP of the nation and will have secondary flow on effects on health, teeth etc which will spur further economic activity for dentists etc. These additional activities however only attempt to heal rather than strengthen. On the contrary, drinking water from the tap, will not show up in GDP figures and will not add to the health bills of the nation. The soft drink drinking nation has a healthier GDP whilst the water drinking nation has a healthier outcome as well as a healthier GDP in the longer run if it re-directs it "soft drink" expenditure to something more beneficial such as education. All initial expenditures have echo effects that continue unabated.

I hope that this is the junction where US consumers and the consumers of other nations have arrived. I hope that they will now measure each piece of expenditure against how it will benefit them rather than how it will gratify them. It is only when the pendulum moves closer to benefit rather than gratification that individuals, families and nations can actually progress. This applies equally to the actions of governments.

The Central Banks of Europe are a case in point. The Financial Times reported on May 6, that they have lost $40 billion as a result of disposing a large portion of their gold holdings. At the head of the British sale was none other than the man who now leads the nation and the title of the biggest loser goes to Switzerland the supposed bastion of par excellence banking.

The sales were clearly gratification type actions meant to give governments the ability to pursue and continue their spending addiction. The real question is, if such massive sales of gold did not only fail to dampen gold prices but actually spurred them to new heights in the last 10 years, what will happen over the next decade if they desist from such sales in the face of extraordinary money printing and unparalleled government borrowing by the USA first and foremost?

The question then is not WHAT gold will be worth, but whether the paper currencies as we know them today are still in circulation at that time. So take a good look at your paper savings and ask yourself "what has history done to all paper eventually?" Not a pretty sight, is it?

Minting of gold in the U.S. stopped in 1933, during the Great Depression.