Fed-led brave new national economy: All propeller, no charts

The American dollar, bastard brother to the Zimbabwe dollar, suffers a like congenital deformation.

The Zimbabwe dollar, late bastard brother to the American Federal Reserve dollar, suffers a like congenital deformation. Here, a 100 trillion dollar bill

The greatest poison in your local economy and mine is the fluctuating medium of exchange known as the paper dollar and the excesses it engenders, starting with the greatest one of all, the American federal government. If it were not for the government in Washington, D.C., and its tens of thousands of financial hangers-on and dependents and all the free money they consume, we could have a prosperous local economy. Chattanooga, my hometown, would have a right future, given the genius of its people and their goodwill. Instead, we are constantly under temptation. We are tempted not to care for our neighbor, not to invest in real assets, not to work hard and not to save our dollars for future troubles. Instead, we are driven to consumption, heavy borrowing, passivity before national government’s great oracles, subservience to its policing and fear of the future that creeps into the heart of every dependent. — DJT

By Franklin Sanders

When the U.S. Federal Reserve adopted Quantitative Easing in 2008 it threw our managed economy into a new era: All propeller, no charts. They haven’t merely reached uncharted waters, they’ve also pegged the motor wide open. We can’t be sure what might happen, because central banks have never intervened on this colossal scale before. That enormous quantitative change will likely induce qualitative behavior changes in the economy. Worse yet, those changes may not only be unpredictable, they may be unsuspected.

Think of Quantitative Easing and central bank management of the economy as snow in the Alps. As winter deepens, the snow accumulates deeper and deeper. One six inch snowfall is hardly noticeable. Five more snowfalls don’t make much difference, but at some point the snow pile clinging to the mountainside becomes unstable, so unstable that the least catalyst, a little more snow or a warm day or a loud noise, unleashes a crashing avalanche.

Neither fish nor fowl

The U.S. economy can no longer be called capitalist and certainly not entrepreneurial. There’s a horrible French loan word that nearly describes it, dirigism. It simply names an economy where the state “directs” the economy but does not run every detail as in full socialism. In post-World War II France dirigism described directing state-investment into state enterprises (think “government sponsored enterprise” or GSE with all the sterling efficiency & bright foresight of Fannie Mae, Freddie Mac, Amtrak, or the US Postal Service). Dirigism is not merely passive regulatory interference in the economy, but also active state economic planning and direction by jawboning & policy, subsidies, grants, intimidation, and taxes that punish or reward certain industries.

Logic doesn’t require me to observe that this never works. History has beaten me to that. Nor do I need to mention that this cannot be described as a free economy.

With increasing reach since the Federal Reserve was established in 1913, the U.S. has lived under dirigism, or the term I prefer as more merciful on my tongue, a “managed economy.”

Through high order management – looseness or tightness of money by manipulated interest rates – the Fed manages the economy above, and though policy, regulation, influence, subsidies (for example, to solar power like the amazingly successful Solyndra), grants, and tax policy, Federal and state governments manage the economy below.

This cannot be called “capitalism.” If capitalism means anything, it must include not only private ownership of property, but also freedom to use that property. All the devices I just mentioned limit or stymie that free management of private property.

The U.S. economy is not “entrepreneurial” because regulation and other government policies block those freedoms essential to entrepreneurs: freedom to enter markets and freedom to compete. For that untamable entrepreneurial function, the managed economy substitutes a tame government-corporation partnership where government funds or undertakes research, under the excuse that the market can’t be trusted to innovate on its own. Or corporations undertake research with government funding.

Entrepreneurial research and innovations are squelched or bought and shelved. Lastly, the managed economy manages best with really big partners, namely, giant corporations, big banks, big defense contractors, etc.

Amazing waste

Surprise! This system misdirects and wastes capital. In most U.S. states more than half the income (GDP) already comes from local, state, and federal government spending. The other half of GDP comes from is all that’s left of a producing economy, and its production is distorted and misdirected by the Fed and government.

Keeping interest rates artificially low misdirects capital into bubbles and other unprofitable investments that eventually go bankrupt (“malinvestment”): Feed the seed corn to the rats.

If the folks who live off their accumulated capital cannot earn enough interest to live off it, they have to consume the capital itself: Eat the seed corn.

A silent question shouts, “At what point has so much capital been misspent and consumed that the economy seizes up?” Who can tell? Perhaps the managed economy never seizes up in a single spasm — perhaps it just slow burns, relentlessly limping toward a miserably lower living standard for the people, and greater wealth for the elite.

Now into this toxic witches’ brew throw colossal quantitative easing. Sure, sure, the Fed was “forced” to do it to prevent the financial system collapsing in 2008, but now it’s mounted that tiger, how can it dismount without being mauled along with the whole economy?

Throw out the chart

The main feature of uncharted waters is, well, no chart exists. We have no way of knowing where the managed economy might go, or how well our instruments and indicators are pointing the way. This meditation is a roundabout confession that I haven’t a clue how the world-wide economic and monetary meddling since 2008 will turn out. But I can pretty accurately predict how the Federal Reserve will react to the next crisis: Create more money. The system’s nature mandates they must inflate or die, so they will inflate.

That Fed imperative to print more money leads me to conclude by simple supply and demand that gold and silver should rise: More dollars chasing the same number of ounces. They must rise, eventually, yet that hasn’t happened yet. Will it happen this year?

Under the shadow of artificial interest rates, an artificially managed economy, newer & bigger wars pending, and artificial (manipulated) markets, it’s not clear how much good technical analysis does. Still, it’s the best indication of the future we have at hand, so let’s see what it says. But first, the presuppositions that I’m working under:

• Silver & gold bull market. Silver & gold entered a 15-20 year primary uptrend (bull market) in 2001 and although correcting since 2011, remain in that bull market.

• Ready for reversal. After nearly four year long corrections, metals should be ripe to reverse upward and resume trading with the primary uptrend.

• Stock bear market. Stocks entered a 15-20 year primary downtrend (bear market) in 2000, and despite the Quantitative Easing induced rally since March 2009, will remain in that downtrend for another five year or longer.

• Bear market for stocks versus metals. Measured by gold (or silver) since 1999, stocks have lost way more purchasing power against gold than they have lost in mere nominal terms.

Proof in the numbers

These statements seem to clash with what the media tells us every day about the recovering U.S. economy and the bright future for stocks. Yet they are not my opinion, but facts. Behold!

• Stocks in nominal terms. From a 14 January 2000 high at 11,722.90 to a new all-time high on 20 February 2015 at 18,140.44, the Dow nominally gained 54.7% (rose 1.5472 times its beginning price). That’s a compounded growth rate of 2.95% per year.

• Stocks against gold. From a 22 August 1999 high at 44.56 ounces, the Dow in Gold on 20 February 2015 had tumbled to 15.08 troy ounces, a 66.2% loss or compounded annual loss of 6.55% per year.

• Gold in nominal terms. From a 25 August 1999 low at US$254.20, gold mounted to US$1,203.30 on 20 February 2015. That’s a 10.2% compounded annual growth rate.

• Stocks in inflation adjusted terms. In constant 2000-dollars, the Dow since 14 January 2000 has risen from 11,722.90 to 13,195.22, a gain of 12.6% or compounded yearly increase of 0.79% (79/100ths of one percent).

• Gold in inflation adjusted terms. In constant 1999-dollars, gold since August 1999 has risen from US$254.20 to US$875.20. That’s an increase of 234.3% (3.343 times) or an inflation-adjusted compounded annual growth of 8.03%. ***

Used by permission from February’s editions. Franklin Sanders is publisher of The Moneychanger, a privately circulated monthly newsletter that focus on gold and silver and the application of Christianity to economics, culture and family life. To get it for a year, $22 in constitution-honoring 90 percent silver coin or F$149 in paper money. We subscribe to this newsletter and consider it a must read. Franklin is an active trader in gold and silver (he’ll swap your green Federal Reserve rectangles and give you real money in return). He trades with savers and investors outside Tennessee. Subscribe to his daily price report and market commentary on the website.

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