Are we talking ourselves into another recession?
Posted on 14 August 2011 with 8 comments from readers
It is quite absurd to think commentators can talk an economy into a recession. It ascribes far too much power to the media. We can only exaggerate a force from nature to a limited degree and for the most part are just interpreting what is actually happening in an economy, not causing it to any meaningful extent.
However, such thoughts do get to the nub of the problem: what is a recession and what causes it? Essentially a recession is a reaction to a period of economic growth characterized by the accumulation of debt, eventually there is a tipping point when the economy can no longer handle the debt and you get a recession.
Boom-to-bust
In a recession debt will be reduced as people pay off loans and save money, businesses go bankrupt and banks write-off bad debts. Then just as everybody has lost all hope the cycle turns and the process of debt accumulation and higher growth starts again.
The problem this time is that the debt problem has become pretty much global. Only a few countries like the UAE are net creditor nations. That is not unprecedented. The debt left over from the world’s first global war, World War One, led directly to the Great Depression.
At first the post-1918 world tried a combination of money printing and austerity programs to deal with the debt. That just inflated financial markets and that ended in the 1929 Wall Street Crash.
Wall Street was just escaping from its nemesis in 1931 when a second crisis hit from Europe, and smashed the recovery to bits. The Great Depression followed with US unemployment topping 25 per cent.
Nobody talked themselves into this crisis. Indeed, Wall Street tried its hardest to stay positive and distort the picture so that even more investors lost big time in the ultimate crash. The Fed also injected liquidity into the economy, albeit not as much as in 2008-2011. If talk was all that was needed there would have been no Great Depression.
Not different this time
Fast forward to our current crisis and it is not so different this time. An initial global financial crisis in late 2008 has been combated by rallying markets with another massive debt accumilation, this time by the public sector.
Now the Fed’s policy tool kit is largely empty as it faces a second major crisis that is outside of its control. An even more highly indebted US economy slams into a far less controllable crisis coming from Europe.
At the moment it is only the sophistry of commentators that maintains the belief that this can somehow be overcome. The optimistic talkers just about have the upper hand, although they showed signs of losing it last week.
Actually placing money for future investment in such a market looks very foolish, and that is why a record $50 billion was pulled out of bond and equity markets last week by professional investors who make reasonable value judgements about when to buy and when to sell.
Judge an investor not by what they say but what they do with their own money!
8 Comments posted by readers:
If the post-1918 world tried a combination of money printing, on the one hand, and austerity measures, on the other, in order to deal with the debt, and both of these failed because of the 1929 crash, what should the post-1918 world have done instead?
Should we believe that if they had just used austerity measures with no money printing, the post-1918 world would have regained its economic strength in time without a 1929 crash? Or would poverty and human misery have lasted for longer and more severely than what did happen after 1918?
Perhaps the ratio of money printing to austerity measures was unwise. Perhaps there should have been more austerity and less money printed.
Of course, it would have been better not to have gone to war in 1914-18 so that there would not have been a post-1918 economic problem to grapple with. However, there were, arguably, positive results from the First World War such as the destruction of the old Empires of Europe, which would have had no place in our modern world of today.
So, the First World War caused the Great Depression but the Second World War cured it, perhaps! Truly, economics is a dismal science because it is so hard to understand what happened and what to do at any one time!
Surely…all wars are wealth destroying. Capital is allocated to products & services that destroy infrastructure and material goods. History may read that “The War on Terror” stretched the American Empire to breaking point and this period is just the start of a 20 year “Great Correction”.
Will every stock go down and every market in the world decline? Surely there must be some safe havens as a diversification from cash and PM’s?
There’s no need to diversify out of the safe haven of gold into whatever else you think you have found as a safe haven. Gold follows the increase in devaluation of the dollar automatically over time.
Furthermore, gold has no counterparty risk. With quadrillions of bad derivatives out there, can you be sure that the promise to pay back your bond or your share will be kept by those who made such promises?
With gold, however, you own it outright so that keeping its value (including cashing some of it if necessary) does not require the promises of anyone else to repay you, because its yours.
So what’s the point of looking for a safe haven, other than gold, to put your money into? There’s no point at all!
Cash is not a safe haven! Cash loses its value due to the rising cost of what can be bought with that cash, even though the cash retains its numerical value. You need something which will rise in value as the cost of things are rising. Gold is the answer!
But for me, I prefer silver because it is an investment as well and can exceed gold’s capacity to rise in value as inflation increases. Besides, I’d rather pay £24 for an ounce of bullion than £1,068 for an ounce of bullion.
All your eggs in one basket?
I too like silver and gold and cannot envisage any way that they do not rise. But the unexpected often happens.
Putting it all on red is the way to win big and also lose big…
Why have eggs in different baskets when all the eggs in all the baskets, other than silver and gold, are BAD eggs?
If share prices weren’t on the edge of a gigantic downturn and if bonds weren’t so unreliable in that you get paid back with lower value fiat currency, even though you get it all back (though that might be delayed for some years), then OK have lots of different baskets.
Besides, you can have two different baskets for bullion: one for gold and one for silver. Gold follows the devaluation of the dollar faithfully, and will only do “a big lose” if the dollar increases in value. But who believes the dollar will increase in value? No one! And if, by a miracle it does, then we’ll all have time to sell our gold if we want to.
The eggs in the gold basket are good eggs, so why purchase bad eggs to fill your other baskets?
Silver is an investment in a way that gold isn’t. But why invest in shares and bonds when you can invest in silver. Silver has a far better track record over the last decade from 2000 than either shares or bonds, and it has the tendency to follow gold which, in turn, follows the devaluing dollar.
So, the eggs in the silver basket are good eggs, especially when you can sell these eggs at a click of a mouse button if you invest through an internet dealer. In other words, you can get out of silver if you see it falling seriously in price.
But then, you can’t envisage any way that they cannot rise and nor can I.
I think that your “not putting all your eggs into one basket” is the investing psychology of the past, a psychology of investment failure for today.
Mr Sprott of Sprott Investment says that he would advise having 80% of your portfolio in bullion and Mr Embry, chief analyst of Sprott Investment, says he would look at 100% investment in bullion. And James Turk of GoldMoney agrees with them.
It’s time to think differently, my friend, and make sure that all your eggs are good eggs and ignore the number of baskets they’re in!
Ed Note: Did you own gold and silver in late 2008? If you had done you would look at this differently. When I read comments like this it makes me nervous as such confidence usually comes before a fall…
Ed., it makes me nervous replying to your question! It’s one thing to get into discussion with others on your website, and quite another with the Editor himself.
I first purchased gold on 30 June 2008 when the spot price was £14.8741 per gram (now at £35.0458 per gram).
My first purchase of silver was on 29 August 2008 and the spot was £7.4823 per ounce (now at £24.29 per ounce).
I am sorry about the different units but they can still be compared with today’s prices.
Since June 2008, the gold spot went up roughly £1 per month with a drop in August. Sep: £15-16; Oct: 14-15; Nov: 16-17; Dec: 18-19; Jan: 18-19; Jan: 19-20; Feb: £20-21 for 2008/9 according to my records.
Silver was more erratic in 2008 so that Aug: £8; Sept: 7; Oct: 5.5; Nov: 6; Dec: 7; Jan: 8; Feb: 9; Mar: £9 per ounce in 2008/9.
With these figures being my experience of gold and silver in late 2008, I don’t see how I would be looking at things differently from the way I did recently in the post you wrote a note for.
I accept for myself an underlying nervousness, although sometimes I think it is actually excitement at times. Given this basic nervousness, it is essential, it seems to me, to have a rapid escape route.
My quick exit from bullion is that I can sell it over the internet and receive the money obtained within 3-6 days without having to cart my bullion to some trader in town.
But I do think that the figures that I recorded in late 2008 justify my confidence going forward and don’t seem to show any evidence of a fall between 2008 and 2011. Of course, it depends on what is meant by a “fall”, but I have lost nothing since 2008 and gained considerably over the intervening time.
Ed Note: In mid-2008 silver fell 50% in price and gold by a third – and it took a year to recover those highs! Just have a look back at any historical graph and you will see it – with that kind of volatility it pays to be a bit more cautious at close to historic highs.
What’s encouraging, Ed., is that it only took a year for silver and gold to regain the highs, from which they fell. In that year, shares would have yielded/increased by about 5% and bonds about 9%, perhaps.
But silver increased by 50% in that year and gold by 30%. So, it seems to me that in addition to being cautious, as you say, it also pays to be patient, especially when we are in such bad times for shares and bonds.
The person, who say had 80% of his investing wealth in bullion, as Eric Sprott recommends, would have regained his investment value within the year and then have gone on to higher returns between 2009 and 2011. After all, even I went from £14 per gram of gold to £35 today and £7 per ounce of silver to £24 today.