Dear Reader,
Welcome to the weekend edition of Casey's Daily Dispatch, a compilation of our favorite stories from the week for the time-stressed readers.
Of course, if you want to read all of the Daily Dispatches from the week, you may do so in the archives at CaseyResearch.com.
By Vedran Vuk, Casey Research
Ben Bernanke has got to be laughing it up after being reappointed to another term as Federal Reserve chairman. What else could we expect from the ex-lawyers and lifetime Beltway bandits voting on global monetary policy?
As he starts his second term, I’m once again reminded about how supremely unqualified this man is for the job. Prior to becoming Fed chairman, Ben Bernanke basically had zero experience outside academia. His resume only includes three full-time years working for the Federal Reserve and eight months on George W. Bush’s Council of Economic Advisors. The other 23 years of his career were spent teaching college.
A successful publicly traded company could never choose a similar candidate. Imagine a company announcing, “We’re changing CEOs. Our new choice is an excellent professor of management from Princeton. His organizational skills include writing a syllabus, assembling textbooks, and publishing in academic journals with no real-world consequences. Further, our candidate has worked for three years in a government-like position and eight months in the White House.”
As an investor, I would flip out. Yet, this is the exact guy responsible for setting the entire country’s interest rates. To take a further look at Ben Bernanke, I think that we should use Doug Casey’s own 8 P’s of investing in resource stocks applied in our publications, such as the International Speculator and Casey’s Energy Report.
One of Doug’s most important P’s for choosing a company is People. So, how would Bernanke fare should we apply these same standards to him?
Doug points out,
“To state the obvious, Boy Scout virtues like honesty, thrift, courage, and diligence are always good traits for your management teams, as are competence, knowledge, experience and, perhaps most importantly, a track record of success.”
Let’s start with honesty, competence, and a track record of success. As this great YouTube compilation of Bernanke quotes shows, the chairman has a track record of being wrong on just about everything – including the housing bubble, economic fundamentals, and risky bank loans. That pretty much rules out “track record of success.”
This leaves only two options for his character – either he’s an honest idiot or a malicious genius. Regardless, he would fail at least two of the three above-mentioned characteristics.
Let’s continue with diligence and thrift. He has been very diligent about printing piles of money to alleviate his deflationary phobia. Maybe that’s a partial credit there. Thrift… please highlight it and make a bookmark in the dictionary. Then, ship the copy to the Fed.
Well, what about courage? Not only does Ben seem to lack confidence in front of crowds – a strange characteristic for a 23-year college professor – but he’s a complete pushover as well. Whenever the market dips slightly, Bernanke comes out promising endless liquidity and infinitely low interest rates. I’m not sure that we’ve ever had a more cowardly Fed chairman. Bernanke has to be the complete opposite of the tough-as-nails Volcker who raised interest rates to double digits without even flinching.
On knowledge, I will give him some credit. He’s written a bunch of academic articles and has surely read a lot of books on macroeconomics. But his complete lack of first-hand market experience prevents him from really utilizing that knowledge. Plus, if he really knew so much about interest rates, he would have spent more time making money and less time teaching.
Experience is the key. Think MBA programs in business. Why do these programs help so many managers when the topics covered are nearly identical to undergraduate programs? It’s because the second time around in school, students come to the classroom with experience. The synergy between education and experience is the key. Education alone is useless.
Ultimately, out of the eight characteristics that Doug mentions, Ben Bernanke fails about six or seven. This guy could never make it as a CEO. Yet the man continues leading the country into disaster as the chief executive for U.S. interest rates. This would almost be too funny were it not so frightening.
As you are aware, it takes very little to set me off on yet another rant against the American political class – a proxy for governments the world over.
On occasion, I’m tempted to apologize for these rants. Not so much for the message, but for the frequency.
Unfortunately, when surveying the landscape on which our hovels rest, the king’s castle looms large in the foreground.
I am not an envious person by nature and so wouldn’t begrudge the king his fine trappings, provided they were honestly earned.
But therein lies Ye Olde Rub.
Ever more frequently these days, the drawbridge comes down and a troop of the king’s finest sallies forth to extort from me more than half of my crops, and to read new royal proclamations whose net result is to add to the daily burden of trying to provide sustenance for family and jobs for workers.
Should I protest, say, by grabbing a pitchfork and telling the soldiers to clear off my land, or refuse to fill their wagons with the best of my crops – each leaf of which represents time and investment on my part – they would grab me by the shoulders, drag me to the king’s dungeon, and confiscate my property.
In fact, all that has changed since the days of yore is that the king’s knights tend to no longer rape, as well as pillage.
To be fair, the annals of history contain rare instances of kind and intelligent monarchs, the sort who understand that overburdening the peasants ultimately reduces crop production, leading to unnecessary and unproductive hardship and, in time, even revolt. Though, by temperament, I resist authority of any description, I suppose I could live comfortably under the rule of a fair and benign monarch.
The problem with that notion, of course, is that the corruptive nature of power leads to the near certainty that Baldash the Not So Bad will be followed by Norbit the Nasty.
And all of a sudden, instead of politely requesting I kick in some reasonable percentage of my crops to help maintain a constabulary, courts, and maybe the highways, Norbit’s men are kicking in my doors and we’re back to ox carts full of my produce being confiscated to provide a new set of gold plates and to pay the cost of invading neighboring lands.
While some among you will protest (and may do so by writing to David@CaseyResearch.com), there is, I would contend, little difference between a degraded monarch and a degraded democracy. In the monarchy, a single leader directs his minions in their ruinous acts; in a democracy, the directions come from professional politicians, as well versed in gaining and keeping power as any royalty of a bygone era. (Sir Robert Byrd held high office in this nation for 57 years.)
Far from being benign, the nation’s leadership, masters at appealing to the self-interest of an unprincipled voter class has led us to a perilous situation where the fields are being left unplanted.
And an increasing percentage of the citizenry is now muttering angry curses as the king’s men ride by in their shiny black limo-horses.
For a clear understanding of just how poorly ruled this country has been, look no further than the latest budget projections. In his recent article, “America’s Impending Master Class Dictatorship,” Stewart Dougherty does just that, analyzing the government’s wanton spending and penning some notable, and quotable, words on the topic.
One stark and sobering way to frame the crisis is this: if the United States government were to nationalize (in other words, steal) every penny of private wealth accumulated by America’s citizens since the nation’s founding 235 years ago, the government would remain totally bankrupt.
And this…
Furthermore, with the budgetary equivalent of a straight face, the Office of Management and Budget reports in its long-term, inter-generational budget projection that the United States government will experience massive, non-stop deficits for the next 70 (SEVENTY) years, requiring the issuance of tens of trillions of dollars of additional debt. The OMB does not project even one year of surplus during the entire seventy year budget period.
You can read the entire article here.
Yesterday, our stalwart CEO Olivier Garret sent over an insider doc from the Republicans’ Study Committee that provides talking points for candidates to use in the unending struggle for control of the castle. While I think the color of flag flapping over the battlements is at this point almost irrelevant, the document contains some interesting data points.
For instance…
As mentioned yesterday, the projection on interest costs is far too conservative. While the government’s always flawed projections don’t anticipate it, both Bud Conrad and Doug Casey see strongly rising interest rates as a certainty in the foreseeable future. At that point, the debt death spiral begins in earnest, and the whole charade begins to come apart.
But it won’t take soaring interest rates to bring the economy down. That’s just going to accelerate things. And, of course, the worse things get, the worse the monarchy will act – demanding ever higher taxes and further debasing the currency, as they now certainly must.
How can you protect yourself? It really depends on where you are from.
One obvious solution would be to move to a different kingdom, one that treats you and your money better. Or that pretty much ignores you altogether. For those of our many readers from the U.S., the king’s tax collectors will follow you wherever you go – but even so, there are modest tax advantages you can gain by expatriation. Ask your tax counsel for details.
If, on the other hand, you live in a kingdom that doesn’t tax foreign-derived income (yet), becoming a citizen of the world can offer serious advantages and is well worth considering. The situation in most of the developed kingdoms, where easy money and quick mortgages greatly exacerbated the levels of debt, is only going to get more dire as the rulers cast a wider and stronger net in the quest for more revenue.
Even if you aren’t in a position to move, however, you’ll benefit from clearly understanding one key point about the king. While he may dress well and speak in dulcet and pleasing tones, he doesn’t actually produce anything. What money he has to spend must first be taken off the productive elements of the peasantry.
But there are limits to how much he and his men can squeeze out of the citizenry. We are nearing those limits.
That means that all that is left to the monarchy is for it to issue IOUs. And given the levels of their debts and ongoing spending, lots and lots of IOUs. Those IOUs are called dollars, or pounds, or pesos, or yen, or….
While there will be no straight line up or down for any asset class in the unsettled times we will live through, using periods of weakness to build your exposure to tangible assets – most notably gold, whose primary and best use is as sound money – is the only way to protect yourself from the Great Debasement that’s coming.
(If you are still in the learning stage when it comes to precious metals, seriously consider a subscription to our Casey’s Gold & Resource Report – at just $39 a year, and with our three-month risk-free trial, it’s your single best way to get up to speed on what’s going on with this important asset class. More info here.)
U.S. markets are not yet open as I settle in this Friday morning. They are in Europe, however, where the sell-off in equities continues. The “rush to safety” back into the U.S. dollar is still underway, and so the greenback continues to rally and the commodities fall.
Observing the global flow of money, it seems important to consider the implications of a system built around the notion that debt is considered money. To wit, governments the world over fund their operations largely with money created by issuing debt. Even the payments made on great piles of debt are made using this “debt-money.” So, more debt begets more debt-money begetting more debt. Over time the system is, I hope you can understand, unsupportable.
Which brings us to the case of Greece and other “fringe” countries in the euro-zone. These failing states – and all the nation-states are failing, just at varying rates – need to sell a lot of debt in order to generate the debt-money needed to keep the government’s doors open, but investors, noting just how much debt has piled up, are wary of owning more.
And that gives rise to what is one of the thorniest problems resulting from a systematic reliance on debt-money – the demand for higher interest rates to offset the actual risks of owning the debt-money of an overindebted state.
But it’s even worse than that. To understand why, let’s reduce the situation to more human terms.
Imagine for a moment, being approached by your deadbeat cousin for a $1,000 loan. In exchange, he offers you an IOU that says he will pay you back in specie, with interest, at some point down the road. Now, consider the same situation, but in a world where debt is treated as money. Now, instead of lending him the $1,000 in exchange for an IOU that promises he’ll pay you back your $1,000 plus interest, he promises to pay you back, but only with another IOU.
This is the net result of using debt as money.
Investors are now looking at the mountain of debt looming over Greece and balking, causing that country to raise rates to attract their money – which, in turn, causes losses to existing debt holders and, over time, ratchets up the interest expense on the existing piles of debt. It doesn’t take a genius to see the potential for yet higher and higher interest rates being demanded, and that, dear reader, results in the need to gin up yet more debt-money.
You can see how this all gets quickly circular, and so I will put a period just here.
For the moment, the anxious market believes that the debt-money that trades under the “dollar” brand is of a superior quality to that of the euro (among others), and so the money flows back this way.
But the irony is that whatever brand of the stuff you own, it is still just the same thing: debt-money. Which is to say, an IOU masquerading as money.
Money, in our view, should be a reliable store of wealth. It is hard to use that term when talking about an obligation that someone else needs to pay up on – especially when that someone else has proven themselves to be serially unreliable. That makes the debt-money now sloshing around nothing more, really, than a slip of paper representing an untrustworthy promise.
To understand how untrustworthy the issuers are, you need look no further than the steady decline in purchasing power of all of the world’s many variations of debt-money. Case in point, in 1939 the average house cost $3,800.
Do you think that a shortage in real estate and improvements in construction quality explain the one hundred-fold increase in prices over the past 70 years? Not hardly. It’s that the Fed and other central bankers, in close cahoots with the politicians and their cozy buddies in high finance, have used the ludicrous and dishonest debt-money system to flood the nation with more and more of the stuff, debasing the existing stocks of same.
As we now know, because we can see it in the brazen numbers pushed forward by the president and Congress, the debt-money game is heading for a wall. It was one thing when the size of the debt rose at a measured pace that left it largely unnoticed as it grew and grew. But in 2009, the façade fell away, and now the severity of the problem is there for all to see.
While there have been some whiffs of a recovery in the economy, it is important to recognize that what recovery there is, is based on yet more debt-money. A lot more.
In other words, the roots of the recovery, as tentative as they may be, are exactly the same as the roots of the crisis.
There are good reasons that gold and silver have been used as money through the eons. As Doug Casey often points out, it is because it they are durable, divisible, convenient, consistent, and valuable.
While I can’t say, sitting here in the early hours, what the stock market is going to do today or how the unemployment numbers are going to ring in, what I can say with some certainty is that the era of debt-money is going to pass in the foreseeable future.
It won’t be a simple or easy transition back to something tangible. When the average man learns that his debt-money is not worth much more than the paper it is printed on, we could even see riots in the streets.
For the time being, though, the money flow is headed back into the U.S., where, unlike the irresponsible Greeks who ran a budget deficit equal to 12.7% last year, our government’s 2011 budget shows deficit spending at “just” 10.6% of GDP. For the record, as recently as 2006, that deficit was only 1.2% of GDP. Even so, for the moment, our debt-money is considered to be better than the euro and, it appears by looking at their prices, gold and silver.
It’s all a matter of perspective. And from where I sit, I have a strong preference that my money be no one else’s obligation.
Before long, I suspect a lot of people will come to the same conclusion, and the rush to convert debt-money into something more reliable will send gold and silver soaring.
As I wrap up that little diatribe, I notice that the U.S. stock market, which has been open for awhile now, is off – again. And so are gold and silver. Silver is looking particularly promising, but there’s no need to chase it – up or down. Interestingly, at least for the moment, the larger gold stocks seem to be holding up pretty well. That could be an important sign in the wind… but I think I’ll wait until Monday before doing anything else just now.
And now for something entirely different, I’d like to share a link to a music video featuring one of my favorite actors, Christopher Walken, who, as you will see, is also a dancer. It’s a lot of fun and the music “Weapon of Choice” by Fat Boy Slim is pretty good, too. Here’s the link.
Moving along, because it’s all over the news, here’s Bud’s analysis of the latest jobs report.
By Bud Conrad
Today’s report showed only 20,000 jobs were lost, which confirmed the expectations from ADP, as I reported yesterday, of 22,000 losses. There were other good signs; most notably, the unemployment rate dropped to 9.7% from 10% because household employment was up 541,000 and the pool of available labor dropped 771,000. Month-over-month change in average weekly earnings was up 0.6%, which is very good. Even manufacturing jobs were up 11,000. Construction being down 75,000 and government jobs increasing 33,000 should be no surprise.
The Bureau of Labor Statistics (BLS) does two surveys, one of the establishments and one of households. The establishment survey is larger and considered more reliable, and that provides the loss of 20,000 jobs. The household survey provides the number of people unemployed and results in the 9.7%.
So today one survey shows a decline in jobs and the other shows an improvement in the unemployment rate. If you are a little skeptical, you should be, as these numbers are also subject to big revisions, and one month shouldn’t be taken too seriously.
Which gets to the special problems of seasonal adjustment and annual revisions: This month the BLS revised its estimate of how many jobs there were by looking at unemployment insurance data for March 2009. The total nonfarm employment level for March 2009 was revised downward by a whopping 930,000, and the previously published level for December 2009 was revised downward 1,363,000, both on a seasonally adjusted basis.
The best I can say is that they haven’t learned how to count. This re-benchmarking is spread across all the months of the year, so the month-to-month changes are not large, but the conclusion that the number of jobs is actually a million less is a pretty ugly revision and should confirm that this is an unreliable source. One more tidbit: while all the measures of unemployment rates improved in the seasonally adjusted numbers this month, they were all worse in the non-seasonally adjusted data.
This is the picture that tells the story in its simplest form, just how many jobs there are:
And that, dear reader, is that for this week. See you on Monday!
David Galland
Managing Director
Casey Research