Another
Great Depression: Buy Gold! By James Turk- Jan 15 2009 11:44AM
I
don’t like to start any new year on a gloomy note. I
am by nature an optimist, but I am also a realist who readily
faces facts. Right now those facts are not very pretty and
suggest to me that the world has entered into another Great
Depression. Here are some shockers about the US economy that
are worth pondering.
The National Bureau of Economic Research reckons that the
present recession began in December 2007. In only one month
since then has the US economy not lost jobs, but worryingly,
the job losses are occurring with increasing momentum suggesting
that the economy is spiraling downward.
Last week the US government announced that the unemployment
rate rose this past December to 7.2% from 6.8% the month before.
The US economy lost 2.6 million jobs in 2008, of which 1.9
million were lost in the past four months. Of these, 524,000
were lost in December alone.
Importantly, there are clear indications that employment
will drop further. Companies have been cutting back on hours
worked, which reached a record low in December of 33.3 hours
per week. This measure is a leading indicator because companies
first cut back on hours worked before they cut jobs. Also,
layoffs are growing. The Wall Street Journal reports: “The
new year has brought no letup on layoffs, as employers have
already announced more than 30,000 cuts.”
The monthly unemployment report is prepared by the Bureau
of Labor Statistics <http://www.bls.gov/news.release/empsit.nr0.htm>.
It reveals that the number of unemployed has climbed over
the past year by 3.6 million to 11.1 million, but the real
numbers are much worse when looking through the government
sugar-coating in these reports. As The Wall Street Journal
explains it: “While the official unemployment rate is
7.2%, a different figure that includes discouraged workers
who have dropped out of the labor force and those working
part-time because they can't find full-time work hit 13.5%
in December. That was nearly a full percentage point higher
than in the previous month and up from 8.7% at the end of
2007.”
While a 13.5% unemployment rate is shocking, the truth is
even worse because the WSJ is still relying upon government
reports. To get the unadorned picture, we need to turn to
private economists, and I reply upon the work of John Williams
of Shadow Government Statistics <http://www.shadowstats.com/>,
who presents in his latest report the true picture of the
dire unemployment situation: “During the Clinton Administration,
‘discouraged workers’ those had given up looking
for a job because there were no jobs to be had were redefined
so as to be counted only if they had been ‘discouraged’
for less than a year. This time qualification defined away
the bulk of the discouraged workers. Adding them back into
the total unemployed, actual unemployment, as estimated by
the SGS-Alternate Unemployment Measure, rose to 17.5% in December
from 16.6% in November.”
Unemployment is the key measure that signals whether or not
a depression has begun, and by the SGS measures we are rapidly
approaching the 25% unemployment rate usually mentioned as
the most important signpost marking the depths of the Great
Depression. That high rate of unemployment cut a wide-swath
of misery through the American population.
Given the current 17.5% rate of unemployment, it would appear
that I am not far off the mark to suggest that we have entered
another Great Depression, and I am not alone in my thinking.
Others who are more attuned to the economic situation see
it the same way as I do.
For example, the following quote is from an OpEd piece by
Nobel Laureate Paul Krugman that was published in The New
York Times on January 5th: “The fact is that recent
economic numbers have been terrifying, not just in the United
States but around the world. Manufacturing, in particular,
is plunging everywhere. Banks aren’t lending; businesses
and consumers aren’t spending. Let’s not mince
words: This looks an awful lot like the beginning of a second
Great Depression.”
I agree, which is unusual because I don’t often agree
with Mr. Krugman. But not only do I think his observation
about another Great Depression is accurate, but I also agree
with another key point of the analysis in his article.
Namely, Mr. Krugman observes: “In 2003, Robert Lucas
of the University of Chicago, in his presidential address
to the American Economic Association, declared that the central
problem of depression-prevention has been solved, for all
practical purposes, and has in fact been solved for many decades.
Milton Friedman, in particular, persuaded many economists
that the Federal Reserve could have stopped the Depression
in its tracks simply by providing banks with more liquidity,
which would have prevented a sharp fall in the money supply...It
turns out, however, that preventing depressions isn’t
that easy after all.”
Not only is it not “easy”, it is impossible,
and the reason is simple. Ludwig von Mises explained this
phenomenon in 1912 in his seminal work, “The Theory
of Money and Credit”.
Basically, banks make too many loans creating a ‘boom’
that is built upon an unsustainable and shaky foundation of
credit. Eventually, the bankers and their borrowers realize
that these extensions of credit and the mountain of borrowing
that resulted from it was imprudent, and they then seek to
improve the dire state of their overleveraged balance sheets.
The ‘bust’ occurs because the loans made during
good times inevitably lead to bad investment decisions that
appear sound only within the illusory prosperity of the boom.
In short, prosperity comes from hard work and savings, not
borrowed money and consumption. Unfortunately, hard work and
savings have been in short supply, and economies around the
world are now feeling the consequences.
For decades the global economy in general and the US economy
in particular have enjoyed the boom. They are now in the throws
of the bust, and this where Mr. Krugman and I part company.
He believes that this current bust can be avoided by more
of the same – government spending.
He says: “Friedman’s claim that monetary policy
could have prevented the Great Depression was an attempt to
refute the analysis of John Maynard Keynes, who argued that
monetary policy is ineffective under depression conditions
and that fiscal policy – large-scale deficit spending
by the government – is needed to fight mass unemployment.
The failure of monetary policy in the current crisis shows
that Keynes had it right the first time. And Keynesian thinking
lies behind Mr. Obama’s plans to rescue the economy.”
This wrong-headed thinking is what put the US economy –
and indeed, the global economy – in this mess in the
first place. Therefore, the cure cannot possibly come from
government spending, all of which is going to come from debt
– some $2 trillion of it that is estimated the government
will borrow this current fiscal year.
If Mr. Obama follows this advice – and he has clearly
indicated that he will – the US government will have
gone ‘to the well’ once too often. It is foolhardy
to think that the federal government’s resources and
borrowing capacity are unlimited. They are not, and more to
the point, they have already been exceeded. It’s just
that too few people today recognize this reality, which is
what always happens in bubbles. People accept certain conventional
wisdoms without question or even any cursory analysis. For
example, consider the following.
Circa 2000 – It doesn’t matter that Internet
stocks are trading at multiples of revenue because ‘these
companies are going to change the way we do business’.
Circa 2005 – It doesn’t matter that people are
borrowing 125% of the home purchase price because ‘the
price of homes always goes up’.
Circa 2009 – US government ‘T-bills and T-bonds
are risk free’, so the federal government can borrow
unlimited amounts of money. This example of bubble-mentality
thinking not only ignores the defaults by countless governments,
it also ignores the history of US sovereign defaults (gold
in 1933 and silver in 1967) as well as the continuing debasement
of the sorry US dollar from inflation.
It is questionable whether Keynesian dogma ever worked, but
regardless, one thing is clear. Increased borrowing and spending
by an overleveraged government in an overleveraged country
that is already the world’s largest debtor will not
make the economy strong or lead to an economic revival. It
will lead to a collapse of the currency, just like it has
done in dozens of countries throughout the world. By pursuing
defunct Keynesian dogma the new administration is ringing
the bell that signals the death knell of the dollar.
In short, the biggest bubble of them all – that the
US dollar is ‘money’ – is about to pop.
The US dollar is on the path to the fiat currency graveyard,
and will soon get there.
Not only does the US have problems, but like the 1930s, they
are global. While it had been hoped that China would be the
shock-absorber of the world, both its exports and imports
are falling from year-ago levels as its manufacturing activity
stalls. Germany is also faltering, as is much of Europe. There
is another similarity to the 1930s.
Most people mark the beginning of the Great Depression with
the stock market crash in October 1929. I think it actually
began over a year later with the collapse of the Bank of the
United States in December 1930, a commercial bank based in
New York City. Its failure turned an economic downturn into
a full-fledged panic that rocked the American banking system
to its core, which in turn sent ripple effects throughout
the world, just like the collapse of Lehman has done.
Is there some good news for 2009? There are two things that
should bring some cheer.
First, the plummeting price of crude oil to $40 a barrel
has put some $200 billion back into the pockets of Americans.
That may help economic activity somewhat or at the very least,
help repair household balance sheets.
Second, gold is likely to have another good year as the world
increasingly wakes up to today’s realities. As they
do, they will also come to understand that gold is money,
which is a good thing to hold any time, but particularly during
economic and monetary turmoil.
James Turk is the Founder & Chairman of GoldMoney.com
He is the co-author of The Coming Collapse of the Dollar,
which has been updated for a newly released paperback version,
now entitled The
Collapse of the Dollar.