Click to enlarge.
I'm taking the annual growth in our national debt, adjusting it for inflation, and comparing it to the average unemployment rate over the previous 12 months. This data goes back to 1966 so it includes the dreaded 1970s. The blue dot shows where we were as of the end of the third quarter in 2010.
First off, I want to say that I find this chart encouraging. I wasn't sure what to expect when I was creating it. It is much better than I feared.
Although I am very bearish long-term, I realized that there are many people far more bearish than I am. I turned on the radio this evening and was immediately hit with the radio show host talking about hyperinflation in an ad and telling us how we can protect ourselves by buying gold. Good grief.
As seen in the chart, I think gold investors would be very disappointed buying at these levels if we can get the unemployment rate down to even 7%. It may take time, but I do think it is possible.
At 4% unemployment investors felt that 10% unemployment would never happen again. In fact, I debated bulls on the Yahoo's Capital One Financial message board about the perils of assuming that unemployment would stay low back in 2007.
May 2, 2007
Re: This stock is dead money.
So far COF's customers are paying their bills. However, with near record unemployment why would we think otherwise? What will happen if unemployment reverts to the mean?
(I was speaking of near record low unemployment at the time.)
At 10% unemployment investors feel that 4% unemployment will never happen again. Maybe that's true. Who knows? I can say that 7% is the mid point of the two extremes though.
I'm not suggesting that 7% would make it all biscuits and gravy, but it would put us within striking distance of at least some sustainability. Or at the very least, make it possible to push off our eventual day of reckoning to long after I am dead and buried.
Perhaps the gold bubble of the 1970s was not popped by rising interest rates. Maybe that's just an assumption. Perhaps it was falling unemployment that did it. Because let's face it, there would be far fewer bears if our national debt situation was sustainable and it would clearly be more sustainable if more people actually had jobs. I would also point out that I do think gold has been in a bubble (since crossing $1000) and have stated that opinion many times on this blog.
In summary, I am very bearish but I am not apocalypse bearish. I did not create this because I was planning for the end days. I did it because real interest rates were so low and I couldn't think of anything better to do with the money. That's all. I'm not about to move to China for a better life. This is America and we still have a lot going for us if we can just get our act together.
January 11, 2011
John Williams Eyes Gold as Insurance Against Armageddon
But I see this as a time to batten down the hatches, buy your insurance and lock in your wealth and assets in terms of purchasing power.
I find it odd that he speaks of buying gold to lock in purchasing power when it is SO expensive compared to the things you would someday purchase. For example, the miraculous metal known as aluminum is nowhere to be found on his site. That said, I find many of the things he says to be odd. Apparently I am not the only one.
Why do people continue to give credibility to an operation like Shadowstats? Now that's something that I'd like to hear explained. - James Hamilton, September 4, 2008
Me too.
Source Data:
St. Louis Fed: Government Debt: Total Public Debt
St. Louis Fed: CPI-U
St. Louis Fed: Unemployment Rate
Mark, I’m as bearish as you are but…I do believe we’ll reach 7% employment again and I believe there’s a terrific chance we’ll get back as much as 6% or even 5%. That’s not what worries me.
ReplyDeleteI’m worried what 5% employment looks like in the future. Will it come without decent wages, without benefits, without a future for many of the 95% employed?
Unless 9,000,000 people become gold-miners in the next few years. And they all strike.
"This is America and we still have a lot going for us if we can just get our act together.
...at the very least, make it possible to push off our eventual day of reckoning to long after I am dead and buried."
For Pete's sake...
Mark,
ReplyDeleteThis should add to your optimism:
http://online.wsj.com/article/SB10001424052748703396604576088272112103698.html
Personally, I'll put the odds at over 100% that Obama's enhanced deregulatory efforts will lead to more financial tomfoolery and pain for Main Street.
Gramm Leach Bliley v2.0? Commodity Futures Modernization Act v2.0?
All in the name of job growth and "free" (for all) markets!
Exactly how many jobs did we (un)create under the Clinton and Bush deregulations?
a) 15 million?
b) 20 million?
c) 25 million?
G.H.,
ReplyDeleteI know.
Ideally, we would reach a point of stability where things at least didn't get worse as time went on.
I wish I could say that I thought that was likely.
mab,
ReplyDeleteThis is the lesson of our history: Our economy is not a zero-sum game.
Derivative (finance)
Although someone loses money while someone else gains money with a derivative, under normal circumstances, trading in derivatives should not adversely affect the economic system because it is not zero sum in utility.
What I wouldn't give to return to normal circumstances.
Perhaps with proper deregulation, we can grow the derivatives market to a quadrillion dollars though. It sounds silly but we're almost there. Just $417 trillion to go.
CFTC delays conflict-of-interest rule vote
The purpose of the rule is to keep big banks – which trade many of today's over-the-counter derivatives – from gaining further influence in the $583 trillion derivatives market.
G.H.,
ReplyDeleteOne more thought.
"Unless 9,000,000 people become gold-miners in the next few years. And they all strike."
That quote is really sticking with me. It's a very powerful and effective way to put it.
7% UE, maybe by 2013. Hard to say. If a bunch of folks stay off the rolls and day trade instead of going into gold mining that may work.
ReplyDeleteMark, GYSC,
ReplyDeleteIn a way, the retail investor has become a miner, and the hills that appear inviting are once again the dirty Wall Streets. They're finding their gold again each time they open their 401(K) statements for almost two years now.
I can appreciate the fact that today's environment is providing money managers with a "wider field of opportunity" from which to harvest their profits. It's a little like Lucy and Charlie Brown. Charlie, todays self-directed IRA/401K investor knows that he must take a kick at the ball in order to reach his "goal". And there stands Lucy, the stock broker/trader (with the Fed putting a gun to Charlies head and forcing him into the market for returns), happy to pull the ball away and skim off the proceeds of this perverted system of risk/reward.
I can appreciate the Charlies of the world with their desires to fund their children's educations and their retirement futures also. That must be tough today. I can imagine what they're thinking during this latest rally as it provides them with short-term gratification when they open those quarterly statements: surely, after two enormous hits to our futures Wall Street wouldn't think of taking our money again, would they?
Mark,
ReplyDeletenot sure this one wa son your list, but once again:
"And household debt, in this case mortgage and credit card debt, is the least productive kind of debt. It’s not as if the US was borrowing to invest in its future; the US was borrowing to create an illusion of prosperity while it was actually hollowing out of its economy."
http://tinyurl.com/68gwt7e
"Illusion of Prosperity" is my analysis too, but for some reason few internet/media economics people Get It.
ReplyDeletehttp://research.stlouisfed.org/fred2/series/CMDEBT
says it all.
Due to a bug, you can't stack CMDEBT and the debt held by the public, but if you could, you'd see that .gov pushed $3T of gov't debt over the past 2 years to replace the loss of the +$1T/yr housing bubble machine
The bubble machine first hiccuped in early 2007, started smoking in late 2007 and blew up in 4Q08.
Aside from all the direct bubble employment in housing, finance, construction, and retail, there was also hundreds of billions of dollars of "Helicopter Money" from the HELOCs and cash-out refinances.
The pushed a $15T bubble, and we saw a LOT of that valuation actually monetized 2004-2007.
$100B/yr in helicopter money can putative support TWO MILLION median households.
I think if .gov starts dicking around with cutting the money drops there's going to be an immense reversal here.
All our jobs are done gone now. No bubble machine, no economy, well no economy for 20% of the population.
Perhaps the gold bubble of the 1970s was not popped by rising interest rates. Maybe that's just an assumption. Perhaps it was falling unemployment that did it.
ReplyDeleteAn interesting idea, but I don't think it was falling unemployment. The main problem was negative real interest rates. With inflation above interest rates, holding dollars was a guaranteed loss.
You might want to look up the unemployment rate in Weimar Germany. It was around 2%. That didn't control inflation and it didn't keep gold prices down as the currency was destroyed.
G.H.,
ReplyDelete"I can imagine what they're thinking during this latest rally as it provides them with short-term gratification when they open those quarterly statements: surely, after two enormous hits to our futures Wall Street wouldn't think of taking our money again, would they?"
There's a double your profits or no money back guarantee! What could possibly go wrong?
GYSC,
ReplyDelete"hollowing out of its economy"
Jack-oh-oh-lantern?
Troy,
ReplyDelete"Due to a bug, you can't stack CMDEBT and the debt held by the public..."
That bug is annoying. I've hit it myself a few times. They dates are off by a day if memory serves so the data series don't match up exactly. No exact match. No ability to stack.
I wish the tools allowed you to extract monthly data as quarterly data as well. It is a pain when I have to adjust quarterly data for inflation. I have to delete two months worth of CPI data out of every three by hand.
Mr Slippery,
ReplyDeleteIt is often difficult to spot the chicken and the egg when looking back at historical data.
"You might want to look up the unemployment rate in Weimar Germany. It was around 2%."
I would not have guessed that. Zimbabwe's hyperinflation was almost its mirror image. Zimbabwe's unemployment was incredibly high.
Hyperinflation in Weimar Germany vs. The U.S. Now
ReplyDelete"Why did the German government not act to halt the inflation? It was a shaky, fragile government…
More than inflation, the Germans feared unemployment. In 1919 the Communists had tried to take over, and severe unemployment might give the Communists another chance."
It's an interesting analysis.
Great ideas here, no doubt.
ReplyDeleteI cringe when I hear "Germany hyperinflation" talk. It is not the same thing. What we have is reserve currency (dig it!) and what bugs me is that there is no real reason for it, other than it is what has been. Well, imagine you are another nation and some reserve currency dick can do what they like debt wise regardless of what it does to you.....
I'm with GYSC on this, the US is the 'mack daddy' of the world right now, I don't think the US can be compared to Weimar or Argentina/Japan/Zimbabwe for that matter.
ReplyDeleteWe are Rome imho.
and what bugs me is that there is no real reason for it, other than it is what has been.
ReplyDeleteGYSC,
Nobody is forcing foreigners to run surpluses and acquire our dollars. They do it by choice. Military spending causes a large part of the imbalance so I guess it could be argued that we don't charge enough for our security services. In any event, foreigners view treasuries as gold - something to be accumulated.
I have almost my entire financial net worth in U.S. Treasuries. Nobody is forcing me either (although I do question my own sanity at times). My mother was an immigrant and I have a lot of relatives in Europe. I also had a European business partner. My sense is that as bad as the dollar is, it's better than most of the alternatives. The Swiss Franc is generally well managed, but it's too obvious and well liked imo.
The Euro is managed by ideological idiots - even more so than the U.S. at this point. They're asking for a deflationary backdrop. Prosperity through austerity and bailouts of fraud - unbelievable.
Here's how I see it. Our problems are not directly due to the Government sector pe se. Rather, the private financial sector is the problem. The Government's irresponsible support of the private financial sector cements the problem.
It looks bad for the majority here, but good for Treasuries (and the dollar) imo. The dollar should fall hard, but TPTB seem hell bent on squeezing the adjustment out of workers. Sad but true.
Just thoughts.
@Mark,
ReplyDeleteThe Weimar experience was very interesting and surprising. The political situation affected policy as it always does. Understanding the political forces acting on US policy is key, not that I have any special insight on that front.
Dr. Havenstein, the president of the Reichsbank, refused to believe that any amount of money printing was depreciating the currency. Instead, he blamed a falling exchange rate.
I am not predicting a US hyperinflation, but I thought it was very odd to see Bernanke on 60 minutes telling the world that printing 600 billion to buy US treasuries had no effect on inflation or the money supply and that he could stop any inflation in 15 minutes by raising interest rates. Maybe he does have God-like powers over economy! His will be done, amen.
Fed up with the banks holding the world to ransom? Then hopefully you'll want to take part in the Bank Run planned for 26 January, 2011. Protestors are calling it "Revenge Wednesday".
ReplyDeleteAs well as whatever you do on the day, you can help build the momentum by using Twitter to send the following tweet. (And if you receive this tweet from someone else, please "retweet" it!)
Suggested tweet:
************************* **
Hit back at the banks: BANK RUN on Revenge Wednesday, 26 Jan 2011. Info at: tinyurl.com/bankrun2011 PLEASE FORWARD THIS
************************* **
Further info - which also, please circulate if you can...
BANK RUN ON REVENGE WEDNESDAY, 26 JAN
========================= ============
On Wednesday 26 January 2011, thousands of people in the UK will try to cause a bank run by withdrawing money from their bank accounts, in person, at high street bank branches.
The hope is that the movement will snowball.
Everyone is welcome. Just print out the form below, fill in your details, and take it to your bank, preferably around lunchtime, e.g. about 1pm. Even better, print out multiple copies and hand them round. Use email, Twitter, Facebook too.
When the first bank branch says it won't pay out people's money, let everyone know, using every means possible. Take photos. Use mobile phones, send tweets, get the journalists in on the picture. This movement is decentralised. It is what you and we make it.
Note that this idea was tried last December, after being suggested by Eric Cantona. Unfortunately it didn't go very far, mainly because the organisers asked people to "sign up" online. We're not asking you to sign up to anything. In particular, you do NOT have to give any personal details to anyone. The form below is just for giving to your BANK.
If you can only afford to withdraw 10 pounds, please do it. If you can afford to withdraw thousands of pounds, do that too. EVERY LITTLE HELPS. Banks cannot withstand everyone withdrawing even a tenth of what they've got in the bank. LET'S SEND THESE PARASITES A MESSAGE THEY'LL NEVER FORGET. It's an open secret that they're holding the country to ransom. Let's kick 'em where it hurts.
This is the financial system's MAJOR WEAK SPOT. That's why the Dutch government is considering making it illegal to call for a bank run. Because they're SCARED. In 2009 there was a bank run against a Dutch bank. This was considered to be a particularly unpleasant bank, which had been encouraging millions od Dutch people to get into debt who couldn't afford it. People did a run against it, and it went bankrupt. How sad.
In Britain, you'd be hard pushed to name a bank which DIDN'T try to get people into massive debt they can't really afford.
Here's the bottom line: THE BANKS HAVE GOT IT COMING TO THEM.
So please take part. Spread the news. Distribute this leaflet. Print your own. Just do a little bit to help, and we'll be strong and we'll blast the damn banks like they've never been blasted before.
Please print the following, complete the details, and hand it to your bank around 1pm on 26 Jan 2011.
************************* *********
NAME: _________________________ _
ADDRESS:_________________ ____________
_________________________ _______
ACCOUNT NUMBER: ___________________
SORT CODE:____________________ __
NAME OF BANK:____________________ _
To: the Branch Manager
Dear Sir,
I wish to withdraw ____________ pounds from my account in cash, immediately.
Yours sincerely,
__________________ (signed)
************************* *********
Don't you know there will be "Tanks in the street" if the big banks cannot hand out bonuses? This is crazy talk.
ReplyDeleteHarriet,
ReplyDeleteMost banks have limits on what you can withdraw per day (this is no secret). i think it offers them SOME protection from bank runs.
Perhaps an online bank transfer run targeting one bank at a time is a more fruitful idea to serve your goals.
cheers,
mab,
ReplyDeleteNobody is forcing foreigners to run surpluses and acquire our dollars. They do it by choice.
I agree. I would add that nobody is forcing us to buy goods Made in China. We do it by choice.
If we all opted to pay a premium for goods made in America then more goods would be made in America.
It's just another example of the prisoner's dilemma. What is good for us individually might not be so good for us collectively.
We're all ultimately responsible for the imbalances.
Mr Slippery,
ReplyDeleteMaybe he does have God-like powers over economy!
I just wish Ben "No Housing Bubble to Go Bust" Bernanke was omniscient. Is that really too much to ask of our God? ;)
Harriet,
ReplyDeleteI will respect your right to post your opinions, but I'm pretty much with GYSC on this one. The unintended consequences are not being thought out.
remy,
ReplyDeletePerhaps an online bank transfer run targeting one bank at a time is a more fruitful idea to serve your goals.
My ex-wife was a flight attendant and they know all about selective targeting.
CHAOS
CHAOS, or Create Havoc Around Our System™ is AFA-CWA's trademarked strategy of targeted work actions using random, unannounced strikes. Actual targets are a closely guarded secret.
If I was unethical grocery store manager and I was competing head to head with a grocery store right next to me, then think how effective this strategy would be.
You make targeted buying runs on random perishable food items.
One day the store is out of milk. The next day there is no butter. The following day there are no carrots.
Just think about the CHAOS that would create.
For the record, I am not a grocery store manager and I would not consider using those tactics. It is just a thought experiment and one I have thought about in the past.
"If we all opted to pay a premium for goods made in America then more goods would be made in America."
ReplyDeleteAnd more Americans would put their greedy little hands out for each and every good sold.
I learned a little about "middlemen" a few months back. I was looking for a Flag Case for my father's burial flag after his Memorial Service.
I started at Michaels and I found one. But I wasn't about to place my father's flag in a Chinese product. It cost $30.
Knowing that if I wanted to properly honor my father, I had to "pay up" for an American made product. No problem. Online for $87.95, from Texas.
The case arrived poorly packaged and with damage. I submitted my complaint and a new case arrived in only two days, perfectly packaged, and flawless. From North Carolina.
It was at that point that I realized that the folks in Texas were merely "helpers" in the process. Adding zero value and, in fact, introducing a step that was fraught with possibilities for problems.
I could have simply bought the case from the manufacturer in NC, paid less, and received the product in acceptable shape the first try.
But that would not have been the American way. Not when there are so many people out there that want to help...for a price.
I'll pay up for American goods when I can be assured that I'm not lining the pockets of overpriced "helpers".
G.H.,
ReplyDeleteI'll pay up for American goods when I can be assured that I'm not lining the pockets of overpriced "helpers".
I bought a Hoover vacuum cleaner and it lasted less than 6 months. It died in a flash of light and a belch of black smoke. It was made in Mexico if memory serves. I was able to return it to Costco for a full refund.
I decided that I'd rather just own a high quality vacuum instead. I turned to Germany.
It's a Sebo. It will probably last longer than I do. It even has a cogged belt so there's no slippage or extra wear caused by slippage.
I accidentally vacuumed up a sock once. The vacuum didn't care. The sock was sitting there in the bag. No damage to it either.
http://www.creditwritedowns.com/2011/01/gold-bullion-bottleneck-or-supply-deficit.html
ReplyDeletewell I know I'm banned, but in the interests of some sort of balance and in the forlorn hope that despite everything, a teeny tad of this balance might stretch to your portfolio, the above is IMO exceedingly interesting - if the "facts" are true.
Stevie b.,
ReplyDeleteYou do hold the distinction of being the only non-spammer who I have asked to stop posting here in the 3+ years I've had this blog.
Telling me "you need to take off the blinkers and insert the hearing aid" and calling me "desperate", "senseless", "myopic", and "besotted" was more than I was willing to tolerate in the name of balance apparently.
All because I had the audacity to compare the historical price of one chemical compound (salt) to one element of the periodic table (gold).
As for balance, I link to an ample supply of blogs that would disagree with my opinions on gold. Economic Disconnect is one such blog and Mish would be another. Perhaps I am offering balance. It's not like the TV and radio ads are listing off reasons why gold might be overpriced.
As for gold supplies dwindling, I would point out that land supplies haven't grown in over 4 billion years. That did not stop us from having a real estate bubble though. Some might argue that "speculative" real estate became too expensive relative to "non-speculative" salt. I would have in 2007 had I thought of it. Of course, some real estate bugs might not have taken it well.
I have absolutely no desire to own gold at these prices (or even $675 when adjusted for inflation since I sold in 2006). I might be wrong to think that way but it is my opinion. The higher any asset goes relative to other assets the less value I see in it. That's true of dotcom stocks, real estate, commodities, and even my preferred investment: TIPS.
I'm trying to figure out why you posted. Clearly my opinions are not those you wish to read. I hope it isn't because you need to save the world from a gold heretic (a former believer). That's exactly what I am though. Good luck converting me back (at these prices anyway).
Well we're agreed on one thing - i'm trying to figure out why I posted too!
ReplyDeleteYou are indeed very sensitive to what I would call mild criticism - I would have no objection at all to you calling me what you claim I called you - in fact (surprise) I've been called a lot worse!
Anyway, I thought the "facts" of the post to which I referred were pretty cool. I don't know how to check them out, but if I did, and found them to be true, I'd want a lot more gold than wot I got! I'd like to think I'd get opportunities to add to my position from say $1275 to $1175 to $1075 - and would still hope gold goes to zero. But clearly, trying to get you to see what I regard as rational common-sense is a lost cause.
Stevie b.,
ReplyDelete"But clearly, trying to get you to see what I regard as rational common-sense is a lost cause."
Here we go again.
You do seem very frustrated that I have a different opinion about the value of gold.
"$1275 to $1175 to $1075"
You see opportunity. I see three numbers chosen pretty much at random. Why? Because you don't have any idea what one ounce of gold should really be worth. You just know you want more. It's the same thinking that drives every bubble.
If you were using what I would regard as "rational common-sense" thinking then you would have bought all you were ever planning to buy when gold was dirt cheap. There would be no need to add to your position at greatly "inflated" prices.
Well it's easy to be wise after the event. I'm not so smart as to think I know it all, or even a tiny bit of it all. Of course I never really had and still have no idea what gold is worth and dare I say - nor do you. It's all about "events, dear boy" to quote a UK ex-p.m.
ReplyDeleteBut I do know what gold is/has been worth to me as a hedge against my paper assets, & maybe they've been in a bubble, not gold. Gold is worth what makes me react with equanimity if it falls to zero, because I know my paper assets will then be enough to see me through. If I read the tea-leaves (and having been around the markets for 50 years I still don't actually know what they really may mean, but it doesn't stop me doing it cos I know my interpretations have been more right than wrong - so far)...if i read the tea-leaves and worry that my paper assets could be becoming more vulnerable, I fret cos I would not view with equanimity the value of those paper assets going to zero - so I'd want to add to gold, presently 25% of those liquid assets. I think 30% would be about my max, only cos it would still leave me enough (with my other hard assets & my recently taken pension) to make it to the end of my days even if gold became worthless (or let's say $600 or whatever). The fact is I semi-retired when I was 41, fully retired at 51 and -so far- I've survived ok on my judgement/anticipation of events.
And the figures I gave to buy, that you consider plucked out of the air, are what I consider round-number technical support levels - gobbledygook perhaps, but something to hang my hat on. I used to lecture new brokers on very basic technical anaysis, so I know a wee bit - yes, i know, knowing a wee bit is dangerous, but what mere mortal can "know" more these days?
Stevie b.,
ReplyDelete"Of course I never really had and still have no idea what gold is worth and dare I say - nor do you."
One rule I definitely have when it comes to investing is to NOT invest if I have no idea what an investment is worth. Therefore, if you are right then I definitely would not want to invest in gold at any price apparently.
When I bought gold (and silver) in 2004 I felt that it was a good relative value to the other things I need and use every day (the type of analysis you find useless, as opposed to "gobbledygook" which you can hang your hat on apparently). That's how I valued it. I put a full third of my nest egg into gold and silver in 2004 and walked away with very good profits in 2006. Using that very same logic I no longer wish to own gold at these prices. I have no interest in chasing the leveraged herd. It's 10 years into the bull market. It stands to reason that there is serious leverage being applied, just as there was in the real estate bubble and the dotcom bubble before it.
Soros calls gold the ultimate bubble. He's willing to ride it. I am not.
...I call gold the Ultimate Bubble because it may go higher, but it's certainly not safe and it won't last forever. - George Soros