J. Taylor's GOLD &
Technology Stocks
Between
a Rock and a Hard Place
Jay Taylor
June 7, 2004
Debt in the aggregate, is rising exponentially. Income is rising
in a linear fashion at best. There has been a growing inability
of consumers to meet their debt obligations, even during the
period when interest rates were falling. Such difficulty is seen
from a dramatic rise in consumer bankruptcies from a little over
300,000 per year in 1980 to 1.7 million now. Any dramatic rise
in interest rates is likely to trigger the cascading deflationary
spiral envisioned in Ian Gordon's Kondratieff winter.
So, what the ruling elite have to do is hold down real rates
of interest (interest rates less the rate of inflation). But
they have some real problems doing that now because the bond
vigilantes are coming back. Why are they back? Check the gold
price. It is rising. As Lawrence Summers knew, the gold price
had to be capped if real interest rates declined. Otherwise,
the dollar would decline in value and the reality of America's
depraved economic policy would be exposed as foreign creditors
would be expected to begin reducing their holdings of dollars.
And without the benefit of foreign savings, U.S. interest rates
will likely begin to rise dramatically. So why don't the gold
manipulators continue to cap the gold price? There are at least
two reasons I can think of. First of all, if they could cap the
gold price, thereby causing the dollar to remain stronger than
its fundamentals warrant, that would lead the U.S. and then the
global economy into a deflationary collapse. Secondly, I don't
believe the manipulators can cap the gold price any longer. I
say that on the basis of the extensive evidence from www.gata.org that the central banks,
which according to Alan Greenspan, "stand ready to lease
gold in increasing quantities, should the price begin to rise,"
are running out of gold.
Okay, central banks may not be running out of gold. They may
still have as much as 50% of the gold they pretend they have
(remember central banks falsely report the gold they lease is
in their vaults). But somewhere along the way, the Keynesian
and monetarist lies will be exposed for the falsehoods they are,
as non-western countries snap up cheap gold dumped on the market
by the would-be cappers, quicker than a school of piranha tear
the flesh off the bones of a mammal. In fact, with Russia, China,
and India (not to mention smaller countries like Vietnam or a
host of Islamic interests that are reportedly demanding gold
rather than dollars as payment for their oil) already selling
their dollars for gold, I believe the early stages of this process
are already underway.
So the policy makers are, as they say, damned if they do and
damned if they don't. Even if they were able to engage in a phony
strong dollar policy by capping the gold price like the Clinton
Treasury boys (Rubin and Summers), with such a huge amount of
debt on America's books, the resulting strong dollar would snuff
out whatever meager economic life we Americans are now enjoying.
But if gold is not capped, in which case the dollar is bound
to get much, much weaker, especially given the 20% percent growth
rate of M-3 that is taking place now, we are likely to see an
accelerated loss of foreign capital leave our shores, in which
event interest rates are likely to be driven dramatically higher.
And if Bernanke continues to fire up his helicopter dollarprinting
machine, and tries to hold down interest rates to keep the economy
alive, and in the process causes our money supply to grow like
that of a South American banana republic, why would the process
not spin out of control either in a hyperinflation or a devastating
deflation?
"A Fan &
Fred Spectacular"
John
Whitney brought this Wall Street Journal editorial to my attention.
The article by Susan Lee suggested that two of the most likely
catalysts to topple the U.S. financial system into the Kondratieff
winter are Fannie Mae and Freddie Mac, the two extremely leveraged
funds that "pretend to be housing-finance companies."
Ms. Lee pointed out that 34% of these institutions have funded
their long-term book with short-term (1 year) money. As interest
rates rise, clearly the cost of funding rises faster than income
is coming in.
One of the reasons these highly leveraged institutions have been
able to take on so much debt, including short-term debt,
is because investors have seen these institutions as quasi-government
and thus would always be bailed out via the printing presses.
The official position of the government, which has been fostered
by the Bush Administration, is that the U.S. would not bail out
Fannie Mae and Freddie Mac, and Standard & Poor's has begun
rating its debt accordingly. This could start the markets to
face the reality of the awful financial condition these two giants
are in, which in turn may well start to cause creditors to begin
liquidating their holdings in these two organizations.
How big might a defaulting Freddie Mac or Fannie Mae be? The
author finished her editorial with the following. "Their
combined securities-direct and guaranteed debt-are larger than
the Federal government debt, and widely held. Simply put, they
have just the right mix of the big and dangerous to generate
one spectacular financial crisis."
Indeed, John Exter noted this very problem. Banks tend to borrow
short term and lend long term because of the profit from the
spread between long-term and short-term rates. Then when short-term
rates begin to rise (which they tend to do more quickly than
long-term rates), the liquidation process and the downward move
from the least liquid assets (like small business and real estate)
toward T-Bills, cash, and gold gets underway.
With money and debt growing at a rate in excess of 20%, it looks
to me like the Fed is in a panic mode. Something big may be about
to happen, which leads me to think it may very well be a Freddie
Mac and/or Fannie Mae implosion. And with this debt spread out
to such a huge number of Americans who have their money market
fund or other holdings invested in these twin killers, we can
only hope Susan Lee's fears, as expressed in this article, and
the concerns of Federal Reserve St. Louis head, William Poole,
are off base.
 June 7, 2004
Jay Taylor
Email: jtaylor9@ix.netcom.com
www.miningstocks.com
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