J. Taylor's GOLD &
June 21, 2004
As we go about living our daily lives, the bigger picture is
easily lost because what is happening here and now is so much
more real in our minds than what happened months and years in
the past. And so with recent economic news being positive, we
"feel" as though things are good and getting better,
even though a view of the past several years reveals a trend
that is, at best, lackluster. No doubt the equity bull market
is still indelibly imprinted in the psyche of American investors.
Since bull market is the only kind of equity market the majority
of Americans have known, they naively expect that to continue
indefinitely into the future. They have little use for the study
of market cycles because they like bull markets, and it is easier
to simply project the known past indefinitely into the future.
I know about projecting the past indefinitely into the future.
I have been there and done that with gold. I
watched and profited from the gold bull market of the 1970s,
and then came the 1980s, and I rather liked future gold price
projections made at what turned out to be the end of the 1970s
gold bull market. And so I think I kind of understand the mentality
of masses of Americans who have built their lives and future
expectations around perpetually rising equity prices.
But the chart below shows that equity markets have not perpetually
risen. In fact as the chart of the S&P 500 illustrates, equity
markets are displaying an unmistakable topping pattern of lower
highs and lower lows. And as Richard Russell points out, there
are indications that the really big money continues to come out
of the market, just as it did prior to the first phase of the
current long-term secular bear market. The S&P 500 is lower
than it was in 1998. The NASDAQ is still far below its peak of
over 5000, and the Dow is still a long way from its peak of over
11700. What is truly remarkable is the fact that these major
indexes have failed to even come close to their all time highs,
despite the most aggressive monetary and fiscal stimulus in the
history of mankind.
What is going on here?
of the Fed to drive equity prices to new highs was predicted
by my good friend Ian
when I first interviewed him in 1999. Ian said then and he says
now that the huge and rapidly-growing debt that was created during
the Kondratieff autumn would not be equaled or surpassed in his
lifetime. (Ian only recently turned 60. And since the Kondratieff
peaks occur only every 60 or 70 years, Ian would have to live
to be 120 or 130 to see the next peak).
Why is Ian so cocksure in this prediction? Because real data
he has collected, some of which dates back to just the Revolutionary
War, suggests that with or without a gold standard, policy makers
always repeat the errors their grandfathers committed. They inevitably
think they are smart enough to overcome the laws of nature as
they apply to money and economics, so they invariably set out
to create prosperity by increasing the money supply. They push
that process as far as they possibly can until the system can
no longer be sustained, because at a crucial point into these
60- to 70-year cycles, debt becomes so excessive that no matter
how hard they try, policy makers are no longer able to keep the
bubble expanding. In other words, when there is no longer sufficient
energy to inflate the bubble, it is not possible to maintain
its current dimensions. Rather, a very rapid and devastating
shrinkage of the economic bubble is mandated by Mother Nature,
because insufficient income is available by a sufficient number
of market participants to avoid a reversal of the inflationary
process into a deflationary process. Defaults beget more defaults
until, eventually, wave after wave of bankruptcies end up in
a massive repudiation of debt that leads to huge levels of unemployment
and a massive decline in income.
This is not a happy event, but as with all corrective measures
in nature, it is a necessary one. Yes, I know
everyone these days thinks our current policy makers, who are
equipped with modern technology and
derivatives and all manner of financially engineered products,
are smart enough to escape laws of nature that have confined
mankind since his creation. What would be unique in the early
stage of the Kondratieff winter (the impending deflation) would
be for policy makers to worry about the excesses. But just as
in 1930, our ruling elite are quite convinced they can escape
natural consequences of the kind of economic immorality that
is at the very heart of "printing press" money.
We are led to believe by our college professors that we have
learned from the 1930s. But actually we have not learned anything
because our policies are exactly the same as they were following
the 1929 stock market crash.
The Fed wasted no time in goosing the money supply back then,
and we have done the same this time around. Within four months
of the crash, the discount rate was cut in half, according to
Murry Rothbard. And President Bush is leading the nation into
deficit spending, just like Hoover did. So we tried monetarism
and Keynesianism in the 1930s, just as we are trying those policies
now. They didn't work then. They won't work now. Yes, we may
have more data and more computer power. But all that will allow
us to do is delay the correction, with the end result being an
even deeper and more devastating Kondratieff winter than if our
manipulators were less competent.
As Ian Gordon pointed out, the demarcation point in each Kondratieff
cycle is the stock market peaks. So much debt money was created
to fuel stock prices to absurd overvalued levels that, ultimately,
the system has lost its ability to be inflated to such a level
as to drive equity prices to new highs. And debt begins to weigh
down the demand side of the economy, too, as an increasing portion
of cash flow must be allocated to paying interest and principle
on debt rather than to buying goods and services.
But surely Ben Bernanke can fire up his super duper helicopter
printing machine and scatter $100-bills by the millions out to
America and thus keep the bubble inflated, no? No, he can't,
because in a fiat money (liability based) system such as ours,
debt is the raw material from which money is manufactured. Every
time Mr. Bernanke drops dollars out of airplanes and those dollars
are deposited in a bank, a liability is created. So, if debt
is THE problem at the terminal stage of the Kondratieff cycle,
how can printing more debt provide the answer to the problem?
And that becomes an especially daunting problem late in the Kondratieff
cycle, when debt is growing so much more rapidly than income.
shown above is the single most important reason why I unfortunately
feel confident in
predicting that we are heading for K-cycle ending deflationary
collapse. The only politically viable solution for either Republican
or Democratic president is to print, print, print. But to do
so means to create debt, debt, and more debt. If income could
be created as easily as the illusion of wealth is created via
increased monetary aggregates, it would be a different story.
But as the chart above illustrates, income is constrained in
a linear fashion over time, while fiat money and the debt from
which it is manufactured can be increased according to the whim
and wishes of politicians, policy makers, and other privileged
thieves on the inside of our system. And so, with mathematical
certainty, as long as the above-noted relationship between debt
and income continues, we will have a deflationary collapse. How
soon? I don't know. But the direction of the trajectory of the
debt line relative to the income line suggests to me that we
are most likely looking at a period of months not years.
June 20, 2004
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