Date: Sat, 22 Apr 2006 06:47:04 -0700 (PDT) From: Loren Goldner <lrgoldner at yahoo.com> Subject: 1970's redux and where do we go from here?
Dear Doug,
Poring over the tea leaves, I jotted down the following analysis the current conjuncture for a few friends, then decided I'd like to get broader feedback.
Would you mind posting this on your list serve?
Thanks
Loren
The following is thinking out loud about the current world conjuncture, in hopes of eliciting some feedback.
I argue that we are still in the early phase of an inflationary blow-out centered in the indebted "U.S. consumer" as the "locomotive" of the world economy.
Every indicator I can see in the world economy today points to a reflation-driven boom that can ultimately be traced back to credit expansion in the U.S. generalized to the world by unbelievable levels of U.S. balance-of-payments deficits. When this house of cards collapses, the Asian exports giants (Japan, Korea, China) will go into the tank with the U.S., as will the Third World raw materials producers (e.g. Latin America) currently enjoying a boom from exports to Asia, above all China.
I'm constantly struck by the uncanny parallels with the early 1970's:
-U.S. bogged down in a losing, unpopular war (Vietnam then, Iraq now)
-a scandal-ridden, foundering Republican administration
-all commodity prices headed skyward, led by gold and oil
-a lingering "boom" (now Goldilocks) mentality in the U.S. mainstream (the Dow hitting highs not seen since January 2000)
-unbelievable run-up of consumer (and all kinds of) debt in the U.S.
-faltering dollar and growing uneasiness of the U.S.'s international creditors, who have made the above run-up of debt possible
The financial press, such as the Financial Times and the Economist, continue to turn out their anti-gold crap, such as in Saturday's FT where the usually lucid Phillip Coggan talks about the gold price being out of line with "fundamentals", by which he means "supply and demand", as if he'd never heard of masses of liquidity looking for a safe haven.
It is true that Chinese exports are exerting a deflationary drag globally, which is different from the 1970's. But wages are rapidly rising in Shenzhen and in Guandong province to attract workers, and Bangladesh has now edged out China as the low-wage champion of the Third World.
Further, the relentless boom in China is pulling up all commodity prices by its seemingly bottomless demand for raw materials, now spreading the boom to Latin America, and to African oil producers.
Last but now least, let's not forget geopolitical dislocation, led by the brewing Iran crisis, one of several that takes the above out of purely economic considerations.
The only counter-scenario I can imagine is that the downward turn of the U.S.housing market, seemingly underway, plunges the U.S. (and, by a fall-off of U.S. demand, the world) into a deflationary crash faster than we anticipate. IMHO, Bernanke et al. will not allow this to happen without first pulling out all stops on reflation with his famous "helicopter money". True, the Fed is hardly omnipotent and there would be a huge run out of the dollar, forcing a rapid rise in U.S. interest rates, which would in turn further act to kill off the housing bubble. It is precisely the prospect of a run on the dollar that I see as the most likely scenario for a surge of gold to levels even higher than in 1980.
I would be interested in receiving feedback on the above analysis, particularly from anyone who sees major flaws in the argument, and who considers for example that a "healthy" boom (e.g. in Asia) is underway, or who thinks that a deflationary scenario will in fact preclude an inflationary blowout.
The broader theoretical underpinnings of this brief analysis are developed in articles going back to the 1970's on the Break Their Haughty Power web site
http://home.earthlink.net/~lrgoldner
Send comments/criticism to
Many thanks
Loren