 Who's Been Sleeping in our Beds?
Dan Amoss
The
Daily Reckoning
Feb 12, 2007
The Daily Reckoning PRESENTS: Wall Street and the financial media
have hijacked the children's story of Goldilocks and the Three
Bears to use as a metaphor to explain the current economic environment.
Dan Amoss points out that if we take this metaphor to its logical
conclusion, we see that it has big, positive implications for
precious metals investors...
A recently popularized concept
dubbed the "Goldilocks economy" sounds nice in theory,
but sorely lacks historical precedent. But Wall Street and the
financial media have hijacked the children's bedtime story of
"Goldilocks and the Three Bears," using it as a metaphor
to explain the current economic environment. If we take this
metaphor to its logical conclusion, we see that it has big, positive
implications for precious metals investors.
Here's how the story goes:
Fed Chairman Ben Bernanke, having broken into the three bears'
house, is faced with a choice of three bowls of porridge: one
"too hot," one "just right," and one "too
cold." His academic background gave him the knowledge to
choose this "just right" bowl - a bowl characterized
by low inflation and 23% economic growth.
Had Bernanke chosen Papa Bear's
"too hot" bowl, maintaining an easy monetary policy
too long, inflation would now be out of control and the economy
would be growing 57%. Had he chosen Mama Bear's "too
cold" bowl, he would have tightened monetary policy too
much, inflation would now be turning negative, and the economy
would be heading into recession.
So what is the moral of Wall
Street's story, now that we are in the midst of a "just
right" economy? We should all invest in index funds and
watch our savings yield real returns above 10% per year all the
way to retirement.
But it's interesting how the
nonmetaphorical version of this bedtime story actually ends.
Wikipedia provides a synopsis:
"Goldilocks is still asleep
in the baby's bed when the bears return home. They wake her up,
and depending on the brutality of the storyteller, either kill
her or scare her away. The moral of the story can differ as well;
a general theme is that the privacy of others should be respected."
Taking this metaphor to a more
plausible conclusion - the Federal Reserve has broken into the
house, sat in the chairs, ate the porridge, and slept in the
beds of every individual saver of U.S. dollars. This institution
constantly injects new floods of cash into the banking system
by "monetizing" government liabilities (mostly Treasury
bills). With each new dollar created, the value of each existing
dollar held by savers declines in value.
Will the Fed ultimately reach
the same fate as Goldilocks, running away from the wrath of savers
in a panic? Probably, but it will take a monetary crisis to wake
savers up from their hibernation and recognize that the Fed is
the primary enabler of inflation, not the "inflation fighter"
that so many have come to believe. The ultimate moral of Wall
Street's version of this bedtime story is to buy and hold a position
in gold to guard your savings from inflation.
This Goldilocks concept rests
on the erroneous assumption that inflation will begin to boil
over once economic growth climbs above some arbitrary threshold.
But this concept exists only in the minds of academics and in
economics textbooks. Real economic growth - the kind that produces
"wealth" in the true sense of the word - actually exerts
downward pressure on the CPI, provided that the Fed-enabled money
supply remains stable.
It's only logical to assume
that a growing supply of manufactured goods and services will
be forced to compete for a relatively fixed quantity of customer
dollars. The business model of Dell comes to mind. This company
provides a great example of capitalism's "creative destruction,"
raising every computer buyers' standard of living by passing
on the incredible productivity gains of electronic component
manufacturers.
Those charged with maintaining
the value of paper money will follow scripted responses to each
bubble's pop or hiss: cheapen money yet again. The future environment
for gold mining equities remains as bright as ever, so stay tuned
for more recommendations in this sector.
In the case of computer manufacturing,
productivity gains are measured by how fast prices fall each
year. Wealthy elites were the first to enjoy the benefits of
personal computers back in the 1970s and 1980s. But as new competition
surmounted the low barriers to entering this business, PC supply
accelerated, while prices and profits fell. Today, the lowest-cost
producers dominate this market.
This example runs counter to
the "Goldilocks" concept. By visualizing the Dell business
model, you can appreciate how complex factors of production and
competition can combine to produce improving products at lower
prices, while yielding profits to reward the most innovative
and efficient companies along the chain of production. Why does
an economy of increasing goods and services productivity require
an ever-increasing money supply? The general price level would
nearly always fall in a free market economy without such an out-of-control
fiat currency backdrop.
But Fed officials do not see
it this way. They believe they can set the temperature of the
economy as if they were preheating an oven. History shows time
and again that the Fed allows the formation of credit bubbles
by lowering the price of credit to artificially cheap levels.
At the first sign of a credit bubble imploding under its own
weight, this highly regarded institution actually compounds its
original mistake, creating another bubble by lowering the price
of credit yet again!
As complex adaptive systems,
economies will react differently to each bubble's aftermath.
Nevertheless, it's pretty apparent that the global economy has
passed the "point of no return" in terms of writing
off its bad debts, rebalancing its imbalances, and beginning
afresh. So at the top of the Fed's playbook is a plan to rescue
the housing and stock markets with a heaping dose of stimulus
at the first sign of real distress.
Regards,
Dan Amoss, CFA
for The
Daily Reckoning
P.S. This is the backdrop I
have in mind when issuing investment recommendations for Strategic
Investment. Ever since the discipline of the gold standard has
been dismissed as unnecessarily restrictive for our sophisticated,
perfectible modern times, the real creators of wealth in the
economy have been tossed about by waves of successive credit
and asset bubbles. Those charged with maintaining the value of
paper money will follow scripted responses to each bubble's pop
or hiss: cheapen money yet again.
To see more of my latest issue
of Strategic Investment, click here:
Public Debt Is Really 10 TIMES
What You Think
http://www.isecureonline.com/Reports/DRI/EDRIGC33
Dan Amoss, CFA
is managing editor for Strategic Investment and a contributing
editor for Whiskey & Gunpowder. Dan joined Agora Financial
from Investment Counselors of Maryland, investment advisor for
one of the top small-cap value mutual funds over the past 15 years.
Dan brings to
Strategic Investment the unique experience of an institutional
background and a drive to seek out the most attractive investments
within favored "big picture" trends. He develops investment
ideas for SI readers with a global network of geopolitical and
macroeconomic analysts. Dan holds the Chartered Financial Analyst
designation, a professional designation widely recognized within
the investment community.
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