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IllusionomicsSam Mathid In the real world it all begins with savings. Savings is an old-fashioned concept that involves putting money aside for a rainy day instead of immediately spending it; or, more usually now, using it as a deposit on something that allows one to go into unaffordable debt to buy things of questionable value that one didn't really need in the first place. Savings are not just deferred consumption, they are goods that are forgone in order to facilitate a greater flow of goods at some stage in the future. Savings become future production via their transformation into money available for capital expenditure (money borrowed by business and invested for the aim of increasing production). The pooled savings of individuals are where the funds necessary for business expansion come from. By that procedure savings become growth. There is no other real growth possible. The absence of savings, usually caused by excessive consumption, leads therefore to the absence of growth. The seeming prosperity caused by spending instead of saving is an illusion that is short lived and should rightly be called illusionomics. 'Growth' that is caused by consumption instead of savings can only be continued ultimately by the creation and acquisition of debt. The accumulation of debt does not lead to growth, it leads to impoverishment as anybody with the intellectual wherewithal to run a household budget is easily able to understand. When an individual acquires debt for non-productive, personal consumption it is a reckless extravagance. When a business acquires debt it is, assuming that the investment is sound, a means of increasing production which simultaneously increases the ability of the borrower to repay the debt. Economic growth is the outcome. To suggest that there can be economic growth without prior savings to finance it is to hope that one's pigs get fat without actually feeding them. Encouraging consumers to spend in order to strengthen the economy is akin to encouraging society to improve its good health by shooting itself in the foot. Ouch! So how in recent history has the illusion of 'growth' and 'prosperity' been maintained for so long? Well, if savings lead to capital investments which lead to the growth of an economy, then lack of savings leads to a lack of capital investments which leads to the diminishment of an economy. However, if you print more money (inflation) and make it available for capital expenditure, via cheap interest rate loans for business investment in future production, then initially it appears as though a valid proxy for savings can be utilised. Eventually though a point is reached whereby the effect of the inflating of the money supply causes rising prices necessitating rising interest rates leading to people not being able to service the debt that has been acquired to continue their consumption. At that point the economy starts to contract (recession = a state of receding) and WILL LOGICALLY CONTRACT IN DIRECT PROPORTION TO THE AMOUNT OF INFLATION THAT HAS CAUSED THE CONTRACTION. At some point the economy must regain its 'balance', meaning the point of equilibrium between the amount of money in circulation and the production of real goods and services. Inflation under the Federal Reserve has been of epic proportions and still has not stopped.  The resultant and absolutely inevitable contraction will therefore be of a similar magnitude. Note that the above graph only runs until three years ago. It has gone down a long way further since then. The graph starts in the year of the formation of the Federal Reserve which was established and charged (supposedly) with the intention of promoting market stability and protecting the value of the US$ by vigilantly guarding it against inflation. The 'Fed' has been openly and clearly the most dismal and egregious failure. The value of the US$ has plummeted from its original US$1- of value in 1913 to one or two cents of value today. Eventually the price of using quasi-savings instead of the real thing has to be paid. This is the part of the cycle where we find ourselves now. No amount of further debt creation (printing of money) can avoid the consequences. In fact it can only make the situation worse. Fabulous word 'consequence'... 'with sequence'. In other words it is that which inevitably follows in a precise order as a result of the preceding action. Our politicians, supported by lapdog 'economists', have encouraged a lifestyle that was pre-ordained to lead to economic ruin at some point in the future beyond the scope of their political tenures and understanding. The consequences of that short-term, self-serving policy of encouraging consumption instead of savings are now upon us. The further creation of 'liquidity' by the process of printing money is of no use whatsoever. The problem is not a lack of money. The problem is the failure of an economic model which has resulted in insolvency on a grand scale. That insolvency is now accompanied by a shattering of the confidence that has been all that has kept the US economy on its feet for the last twelve years. Our debt based, central bank created, currency system requires a constant expansion of paper money to service the debt levels that are always one step ahead of the supply of money. The at best stagnant state of western economies now demands that we look to the east. But the Asians have a long history of savings and personal solvency. They are unlikely to play this game. Darryl Schoon has an excellent article on this out at the moment (http://www.321gold.com/editorials/schoon/schoon012808.html). Providing further 'stimulus' to the economy by the process of printing and distributing even more money is akin to trying to cheer up a drunk dying from cirrhosis of the liver by offering him a Scotch. What was announced last week was not a tax rebate. That implies that collected taxes are going to be given back instead of spent which is untrue. The money that was taxed or is about to be taxed was spent years ago. This so called 'tax rebate' is new money fresh from the printing presses. It presages not growth, but further debt and even more destruction of real wealth. The term 'tax rebate' was intended to give an air of legitimacy to what is in fact an appallingly profligate and desperate act. How valuable can a currency be when it is literally printed and given away for nothing in return? That is not the act of a responsible government. It is the act of the local hairdresser printing discount coupons for a short term promotion in a bid to boost flagging business... and then handing them out to her existing customer base. It would make more sense if the US government gave its coupons away overseas. That might at least boost tourism. And what to do? Buy gold. Gold is the antithesis of inflation. Gold will retain its value always and everywhere, and through anything and everything. Making money is not really the name of the game here. The first priority is preservation of wealth. The coming restoration of the natural order of economic matters will see the destruction of vast amounts of wealth stored in the form of paper money and assets priced in paper money values. That also is an inevitable consequence of that which has preceded it. The firm hand of government is all over the market-place at the moment and control is being exercised in an extraordinary manner. And it is effective. But all that can be done ultimately is to put off the inevitable, and the longer it is put off the greater will be the eventual disaster. Is a disaster imminent? I really don't know any more than anyone else does. But it will happen and each day brings us closer to that day when truly unprecedented and therefore somewhat unpredictable events are upon us. Financial disaster cannot be contained in isolation. It will spread like a virulent disease to all aspects of society and no part of that society will exist independently of its effects. The potential for 'social unrest' (read what you like into that) is as high as the potential for a complete economic collapse; not a certainty to be sure, but a distinct possibility. The urgency now is to acquire gold to preserve your wealth. Whether or not we are at the dawn of a total collapse is mere speculation. That the price of gold will continue to rise because of the possibility is a certainty. Gold is the only certain foil to the destruction of paper based wealth. The chance of President Bush's strategy of 'tax rebates' and cheaper credit (lowered interest rates) turning around the sick and feeble US economy has as much chance of success as Herbert Hoover's tax rebates and lowered interest rates had 77 years ago in 1930, absolutely none whatsoever. They are solutions based on the wrong premise. The original strength in the US economy was built on savings converted to productive capacity. Illusionomics has led to an obsession with consumption founded on an ignorance of the role of savings. The destruction of growth and real wealth are some of the consequences. Illusionomics is in the process of being blown away as a modus operandi for our politicians and bankers by a hefty dose of economic reality. Jan 29, 2008 © Sam Mathid 2006-2008 321gold Ltd |
