LONDON ENGLAND 12 January 2007 – “Greenspan: U.S. Economy Moving Upwards.” Here is our old Fed chief, the Maestro himself, Alan Greenspan, back in the news. The man can’t seem to help himself.
“‘The U.S. economy is, overall, moving upward and showing signs of accelerating again,’ former Federal Reserve Chairman Alan Greenspan told Japanese Finance Minister Koji Omi, a Japanese Finance Ministry official said on Monday,” runs the report by Reuters.
Well, that’s good enough for us. If Alan Greenspan says the U.S. economy is strengthening, it must be so.
And apparently, it is!
The news today is surprisingly good…at least, it is surprising to us.
“Mortgage applications skyrocket last week,” is another Reuters report.
Builders report a drop in cancellations too.
And here, look at this: Oil fell another $1 yesterday – to close at just $54. Boone Pickens famously remarked that we would never see oil below $50 in our lifetimes. Maybe he was right…but, “Never Say Never,” is good advice for almost everyone.
We remarked that we may ‘never see gold below $600 – ever.’ We could come to regret that too…but for the moment, at least, gold is doing better than the industrial commodities, such as copper and lead.
What is going on? How come oil and copper are deflating…while gold remains at $613? A guess: gold is only useful as jewelry…and money. It is most useful as money precisely when paper, and other forms of money, become less useful. When does paper money lose its usefulness? When you can’t trust it. When can’t you trust it? When there is so much of it that it loses its value.
Readers will be quick to think of ‘inflation’, but currency can lose its value in other ways. What we have now is a huge burst of ‘liquidity’ – buying power that is not focused on consumer items. This liquidity is used to buy financial assets, not soap. As a result, consumers do not rush into gold to protect their purchasing power. Instead, investors rush into gold to protect their capital.
The U.S. Treasury Department has stopped reporting M3 – which would tell us how much currency is in circulation. Other sources, though, keep tabs on it. Shadowstats.com tells us that M3 is increasing at an annual rate between 10% and 11% – or about three times as fast as the economy itself. But M3 is not the only source of liquidity. Foreign governments need to try to keep up with the dollar, by issuing more of their own paper. And derivatives, leveraged debt and other gimmicks in the financial industry have the effect of adding billions of extra sops to the system. The Economist estimates that liquidity itself has been on the rise at 18% annually for the past four years.
The question we pose: Why is gold doing better than other commodities? Our guess is that investors are a little nervous. Liquidity comes and liquidity goes, they know. The arrival of it is greeted with cheers and smiles. The going tends to be a sad affair, like leaving a lover at the train station. The investor wants to have something to turn to, just in case she doesn’t come back.