The Road to Weimar

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Another week, another step closer to global serfdom. In today’s Daily Reckoning, we turn the stage over to the critics of the “print money and steal from the future” craze that’s taken over. All roads lead to somewhere. But where?

Before we begin our journey, a quick note about those of you who aren’t reading this. Bigpond is apparently still blocking the DR from reaching some readers. There’s not much we can do about this. We’re rattling cages and shaking trees. If you want to contact Bigpond directly, instructions on how to do so are here. Agitate!

Here in Australia, all the talk is whether or not Rio Tinto’s London directors are selling its Australian assets at the bottom of the commodity cycle. This would contradict the axiomatic investment advice of “buy low, sell high.”

It was instructive to read Chinalco’s Xiao Yaqing comment in this weekend’s Financial Review about how the deal would be a way for Rio’s board to create further value for shareholders. Here’s a man who must be pretty sure he holds a winning hand. But he can’t overplay it yet.

As we said last week, Rio’s board did not begin last July with the project of ruining shareholder value by taking on massive debt at the top of the resource cycle. But now, the company has to sell assets to a strategic partner in order to pay down that debt.

It’s not a done deal yet, of course. The Treasurer must approve any deal. And Rio shareholder’s are bucking for a fight. However, aside from what happens to current Rio shareholders, the bigger question is whether the whole affair is a marker for the bottom of the commodities bear. So is it?

Leighton’s Wall King says it’s not as bad as it looks. He told the ABC’s Inside Business that, “I think the comments about declining in mining are over-exaggerated…One blowfly doesn’t make a summer and one mine closure in central Queensland or cutbacks doesn’t signal the end of the mining industry.”

He’s right, of course. Mining-with its cycles of capital spending and fluctuating commodity prices based on demand and supply-is about as cyclical as you can get. But assuming there’s not a lot more downside in commodity prices, how fast commodity shares recover depends on access to finance and a pick-up in demand.

But with the clowns who believe they’re running the global economy, a recovery in demand is getting further away, not closer. The G-7 finance ministers met this weekend and the result was not encouraging. They issued a statement that read, “We reaffirm our commitment to act together using the full range of policy tools to support growth and employment and strengthen the financial sector. The stabilization of the global economy and financial markets remains our highest priority.”

Right boys. You get right on that. Nearly twenty months since the first two Bear Stearns funds went belly up and policy makers are still tripping over the neckties trying to figure out which ‘tool’ is the best for the problem. The problem is not with the toolbox. The problem is with the tools.

In the meantime, all this rumbling and stumbling and bumbling weakens confidence in the stock market and strengthens the case for gold. Swarm Trader Gabriel Andre writes in this morning to say, “We had a look this morning at the DOW/GOLD ratio. It is nothing revolutionary. But it’s useful. It shows you the how many ounces of gold it takes to buy a “share” of the Dow.” You can see the chart he was looking at below.

Source: www.chartoftheay.com

“During the last twenty years,” Gabriel continues, “roughly between 1980 and 2000, the ratio rose. It means that the Dow Jones was rising faster than gold prices. Since 2001, the DOW/GOLD ratio began falling within a clear bear market trend.”

“The bear was obviously in the Dow and not gold. Gold prices have performed a lot better than the US equity index. Today the ratio has accelerated its decline, and may break on the downside a support level. That is, the Dow is getting weaker in terms of gold, or gold is getting stronger in terms of stocks. Whichever you prefer.

“Looking at a chart, technically speaking, there is a possibility that the ratio goes even lower more quickly. In layman’s terms, it means that either the Dow Jones will collapse or either Gold price will soar. A ratio of 5 might be a technical objective: therefore a Dow Jones at 8,000 points would imply an ounce of gold at 8,000/5 =$ 1,600 =>$ 1,600 USD!! Or maybe if gold price remains around 900 USD, it would imply a Dow Jones at 900*5= 4500 points!

“The link with the markets here down under? Well if the main US equity index crashes or even remains at the same level, the perspectives for the ASX 200 are also bearish.” But not for everything, the Swarm Trader points out. The gold and precious metals shares may be the place to be for the remainder of the quarter.

Over at the Wall Street Journal‘s European edition (paid subscribers only), Frenchman Jacques Attali reckons we are all on the road to Weimar now. That is, he believes the entire planet may be headed for a depression and massive inflation. We are slouching towards Weimar Germany, where inflation was rampant.

“The major powers think that the crisis is only fleeting, and that we’ll soon return to the old order,” he writes. “No one really wants to undertake the profound changes necessary to resolve it. Although the world’s public debt should be cut, now it is only being increased.”

” Everywhere [ed. including here in Australia], out of fear of a recession, the survival of the system is being financed by all those who still have resources: the banks, when they choose; the governments, when no one else can. Since there is no talk anywhere of increasing taxes, the governments themselves are getting into debt, borrowing from national or foreign investors and, as a last recourse, from the central banks.

“The numbers show it. When the American debt ought to have been reduced, it increased in 2008. The Geithner bailout, just like the Paulson plan, will increase America’s public debt even further. The European debt is also increasing sharply. Many more borrowers will default on their loans: derivatives, credit cards, mortgages. And no one is there anymore to buy them back.”

What is so hard to understand about this? Everywhere politicians dishonestly and immorally believe the way to correct years of too much debt at the household and corporate level is to take on more debt at the government level. Perhaps, while they’re doing this, they can explain to future generations how much we owed it to ourselves to paper over problems of our own creation by borrowing from them. But don’t expect that!

“This growth of public debt, on top of private debt,” Attali writes, “can only lead to catastrophe: the bankruptcy of households, banks, even countries. What has happened to Iceland can happen to larger countries as well, if panic seizes creditors. Anything is now possible, including the collapse of the global banking system, whose losses would have grown beyond reach of rescue.”

“This panic could be set off by the realization of the insolvency of the system. It could also be set off by political or terrorist movements: A number of determined groups, with even limited means, could organize speculative attacks on banks, leading to their collapse.

“Then we could arrive at a global depression. It could even be followed by hyperinflation, provoked by the immensity of the monetary means created since the start of the crisis; the depression would allow the debt to be reduced to nothing, to the benefit of the borrowers. The world would then be experiencing a depression ready for inflation, a global Weimar.”

Attali does hold out one hope. He reckons a new global leader could emerge if one country or economy makes a great leap forward in new sources of energy. More on that as a “production possibility frontier” tomorrow.

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Comments

  1. ‘The problem is with the tools…’
    Yes, and we keep on electing them …..!!!!!

    nic meredith
    February 16, 2009
    Reply
  2. […] Jump to Comments The following is the funniest quotation I have read today, regarding the economy and tools used to induce a recovery in the financial crisis: ‘The […]

    Reply
  3. Well..its always the “clowns” who have the responsibility of picking up the pieces and are now running what remains of the global economy and offering up something to try that are taking the heat. The other “clowns” in the private sector (and Govt Regulatory bodies and the great Greenspan who everyone was bowing down to a few years ago), who caused the problems are begging for Geitner & Co and all the G20 governments to bail them (and us)out. Instead of reading the preaching about buying gold,and I appreciate and enjoy the thrust and purpose of this site, I have been waiting for 3 months on this site to at least hear a constructive plan from someone as to what they would do if they were the treasury secretary had were charged with saving the global economy.Doing nothing in that position is not an option. yeah it has gone over the edge…the egg is broken, Humpty Dumpty is struggling.he’s likely gone…and I hate Tarp and all the rest, but you have to do something. You dont give up in positions of responsibility. Is anyone prepared to put up there own plan and be judged by it or let the other “clowns” do it. I do get the site and its cynacism (dont change that thrust) but it adds variety if alternate plans are discussed.

    Reply
  4. […] DailyReckoning […]

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  5. Gerry, if you’ve been visiting this site for 3 months and still don’t understand the underlying concepts of Austrian Economics, I’m not sure what to tell you. But here’s the concept in a nutshell: The government should always do nothing to the economy. Always. That’s why you’ll find no alternate plans, grand schemes, sympathy bailouts, etc… on this site. I hear Paul Krugman and Thomas Friedman are both great sources of retarded government-intervention suggestions, if that’s what you’re looking for.

    Reply
  6. John, those chasing utopian visions fail to embrace this imperfect thing called human nature. In this way you emulate the socialist that you despise. Stalin fixed the stupid peasants and you would fix the stupid government and the stupid people that think they need them. There would be only guns and blood on the deck of your ship and any nobility in the mission you set would be lost early along the way. National socialism fixed Weimar didn’t it? Will you tolerate us saying but, but, but? We could go back to the Magna Carta times where local barons hogged the capital in gold and the peasants got to be about as entrepeneurial as field mice.

    Perhaps one thought you could set yourself is the Chinese situation where the migratory workers have absolutely no safety net. This means they don’t spend. This in turn means China is bound to export dependence. Now I’m all for savings but it can go too far. Japan & China are no more sustainable given their current courses than the US & Australia.

    And I’m not for the welfare or nanny states we have now by any means but I am more set against cronyism and absolutists setting themselves against the populace.

    Reply
  7. John… Governments by definition are part of the economy whether you like it or not, It is only the level of involvement that differs. So if you were the Treasury Secretary you would do absolutely nothing and refer all enquiries to the Austrian School of economics. Well thats the insight and leadership I was looking for in a crisis. Thank you for your contribution.

    Reply

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