Who Owns the Gold?

venality businessman or banker  in black costume throw open one's shirt packed heap gold money

One of our favourite series of films are the Pink Panther movies starring Peter Sellers.

In particular, we’re fond of Herbert Lom’s character of chief inspector Charles Dreyfus.

In the films, Dreyfus becomes more and more disturbed, and insane, because of Sellers’ Inspector Clouseau. At the end of the Return of the Pink Panther, Dreyfus is committed to an insane asylum.

And at the end of The Pink Panther Strikes Again, Dreyfus is destroyed by his own laser weapon, after Clouseau foils his attempt at world domination.

But Dreyfus doesn’t become insane overnight. It’s a slow process. It begins with a barely noticeable twitch of the eye, and ends in complete mania.

This is (as you may have guessed) a roundabout way of saying that, on reading the mainstream financial news these days, we know how he feels.

The trouble is…we’re not entirely sure whether we’re the Clouseau character or the Dreyfus character. Is it the world’s mainstream economists who are going mad while we watch, or are we going mad as the Inspector Clouseaus of central banking infuriate us with their idiocy?

Take, if you will, the opening paragraphs from an article in this weekend’s Financial Times:

Eight years after the 2008 financial crisis the global economy is still stuck with slow growth, inflation levels that are too low and rising debt burdens. Massive monetary stimulus has failed to generate adequate demand. Money-financed fiscal deficits — more popularly labelled “helicopter money” — seems one of the few policy options left.

The debate on its merits can get lost in technical complexities. But the important question is political: can we design rules and responsibilities that ensure monetary finance is only used in appropriate circumstances and quantities?

If you could follow the path of your editor’s eyes as we read that passage, you would see them dilate sharply over the words ‘can we design rules…

Ah! The central planners continue to do and try the thing they are least able to do…that is, to centrally plan things.

The old guard of the Soviet Union…former Soviet presidents (or the ghosts of expired presidents) Gorbachev, Andropov, Brezhnev and Khrushchev must surely be slapping themselves on the thigh wondering how they didn’t think to rule their economies through the central bank rather than through the Politburo.

The result, economically, wouldn’t have been any better. But perhaps if the communists could have seen out the troublesome 1990s, they would feel right at home in today’s world.

The article from the FT is written by Adair Turner. The biography accompanying the article says that Mr Turner is the former chairman of the former UK regulator, the Financial Services Authority.

We wouldn’t dare suggest that the content and thinking within the article have any reflection on the fact that writer and regulator are now both ‘former’ rather than current.

To do so would be mean-spirited.

Our point is that governments, central banks, bureaucrats and (perhaps worst of all) academics insist on believing they can steer and prod the economy in a precise direction.

When they raise or cut interest rates, they believe they can instantly convince millions of people to obey their unwritten command to save or spend.

When they want people to spend, they cut interest rates. But when the lumpenproletariat disobey and don’t spend, the central planners become enraged.

What do they do? The only dastardly thing they can do: they cut rates further…and again…and again.

And when that doesn’t work?

[Look closely at your screen; you’ll see our right eye beginning to twitch.]

That’s when they try to ‘design rules’. Or, as Mr Turner concludes his article:

The key question on monetary finance is therefore political: can we design a regime that will guard against future excess, and that households, companies and financial markets believe will do so. The answer may turn out to be no: and if so we may be stuck for many more years facing low growth, inflation below target, and rising debt levels. But we should at least debate whether the problem can be solved.

Alas, there is only one way to solve the problem. But that would involve the abolition of central banks and a return to a free market for money.

A free market that would likely result in the resumption of gold as the main focus of the financial system.

The only pleasing part of the article is that Mr Turner appears to be concerned about rising debt levels. Mr Turner, we too share that concern.

Yet, the system that Mr Turner and others are trying to save and grow is a purely debt-based money system.

Where a gold-based system is typically referred to as a ‘Gold Standard’, we should be honest about the foundations of the current ‘standard’. It is a ‘Debt Standard’.

Mr Turner acknowledges this. He notes, rightly:

Most money is not created by central banks but by the banking system, with the total money supply a big multiple of the monetary base.

That’s entirely true. Most people think that banks lend money to borrowers after receiving deposits from savers.

In reality, the reverse is true. Banks create debt, which they then deposit into accounts. This creates savings (or spending), as the person or firm that borrowed the money uses it to buy goods or invest.

The person or firm that receives the proceeds likewise spends or invests. The point is that debt is the core of the current money system.

And as long as the system survives in its current form, the more that the problems of the system will grow.

So, which are we — Dreyfus or Clouseau?

At the moment, we’re afraid it appears we are Dreyfus, twitching like a lunatic, as the central bank Clouseaus haplessly wreak destruction around us.

Remember, in the movie, it was Clouseau who drove Dreyfus to insanity…and it was Clouseau who survived as Dreyfus perished.

Maybe things will turn out better for us Dreyfus’ in real life. After all, it is we who own the gold. And when the system collapses (as it surely must), we still believe there will be no better asset to own than gold.

Cracks appear

If the concept of money is too tough a subject to comprehend, what about the concept of mergers and acquisitions (M&A)? Bloomberg reports:

Cracks in the foundation of the bull market in U.S. stocks are quickly spreading.

The Wall Street deal-making machine that powered 2015 to one of the biggest years ever for mergers and acquisitions has slowed, and that means the pop to stock prices that investors could count on from corporate transactions has been reduced. While there are still seven months left in 2016, the volume of takeovers shows few signs of picking up.

It certainly doesn’t, as the chart below shows:

Source: Bloomberg
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At the current rate, global M&A is heading for around US$4.6 trillion. That’s a big number. But it’s short of last year’s US$5 trillion.

Not only that, but another of our favourite ‘bear’ charts shows that the cracks in the market are spreading wider and farther than most investors would care to admit.

The chart below shows yet again that US company earnings continue to decline:

Source: Bloomberg
[click to open in new window]

The white line to the left of the green line is historical and actual company earnings. The stepped line to the right of the green line is forecast earnings.

In order for the actual to reach the forecast, US company earnings have to increase over 12%. Look at the chart for yourself. See if you can spot a period, apart from the 2009 ‘recovery’, when company earnings grew so fast.

The cracks are there, but no one wants to admit it.


Kris Sayce
Editor, Port Phillip Insider

Ed Note: This article was originally published in Port Phillip Insider.

Kris Sayce
Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Daily Reckoning e-newsletter in 2005. He is currently the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service — Money Morning.

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