Saturday, November 03, 2007

More on Gold and deflation

We have a key barometer at our disposal. It's called gold. We also have a fierce problem at our doorsteps. It's called deflation. Yesterday, we saw the stock market's reaction to the Fed's meager quarter-point cut in the Fed Funds. The market's reaction was to take a swan-dive -- I might even call it a semi-crash.

Why did the market take a dive? Here's the background. The housing situation is deteriorating. The specter of mass foreclosures next year is haunting the building and real estate industry and its workers. US consumers are growing increasingly pessimistic. US consumers are pessimistic about the war, they're pessimistic about our President, they're even more pessimistic about Congress, they're pessimistic about their inability to keep up their standard of living because of rising prices, they're pessimistic about their government's debts -- and their own debts. And they're pessimistic about Social Security and Medicare and their own and their children's futures.

Where might all this pessimism lead to? It will lead to a cut-back in consumer spending. Consumer spending amounts to nearly 70% of the Gross Domestic Product of the United States. If consumers cut back substantially, the nation will sink into recession.

The ramifications of a recession are international in scope. US consumer spending comprises 19.3% of the world's GDP. If the US goes into recession, it will impact adversely on the world economy.

Fed Chief Bernanke's got a brutal problem. He'd probably like to go all-out on the path of inflation, knock deflation on its fanny. But to do that means we must kiss the dollar good bye. Already, Bernanke is hearing the hoots and the warnings. The New York Sun newspaper is now calling the US dollar "The Bernanke." The world is sneering at the once all-powerful "Yankee dollar." And that's not a good omen.

What would happen if the US let the dollar fall, and I mean fall hard? We know that the Fed talks to central banks the world over. But the biggies, China, Russia, the Mideast, would they stand for a crashing dollar? After all, they hold billions in US securities. What would they do? What is Bernanke to do?

Maybe Ben should come out with the truth. Maybe he should announce that if the US goes into recession, the whole world is going to feel the pain -- and that will create political and social problems across the face of the globe. Therefore, the US must inflate.

GOLD is a barometer. Currently, gold appears to be holding its own. Is that enough? Remember, Bernanke has to do whatever it takes to inflate, and the key gauge will be the price of gold. To put it another way, if Bernanke can't get gold moving higher, we're in trouble. If gold rallies above 800 and continues to climb, we'll know that Bernanke is succeeding in holding off deflation. But if gold begins to slide, if the gold charts start breaking down, then we'll know that deflation is on the verge of winning the game. And I promise you that if gold loses, we'll all lose.

So the great drama is starting to unfold. The US must hold off the forces of deflation at all costs.

From: DowTheory


Blogger Orbit88 said...

Both things are going to happen. Gold will go over $1700 AND housing prices will drift downward. You can't inflate without causing inflation in the price of things you need - food, gas, etc., and that will cause deflation in the things you want - vacations, appliances, etc. because there will be no more money left over for the consumer to buy anything but the essentials. See Argentina 2001.

10:49 AM  

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