(This is Part 10 of a series. Go back to Part 9.)
Like the U.S. now, Argentina in the 1990s was spending too much, taxing too little, running huge budget and trade deficits and financing it all by going further and further into debt. And not just the government—all areas of the economy were piling up an orgy of debt.
When the bubble burst, Argentina simultaneously plunged into a depression and inflation. As the Argentine peso sank in value the price of its imports kept rising, and because Argentina had to keep importing vital goods and energy, producer and consumer prices rose relentlessly even as the economy sank.
Meanwhile, the government created more and more fiat money to pay for itself and to "stimulate" the economy, stoking the fires of inflation higher and higher even as the economy sank into depression and a banking crisis.
In my opinion, the U.S. today is in a very similar situation to that of Argentina just before its currency collapsed and its debt bubble burst.
In every financial crisis of the last 20 years—from the 1987 stock crash to the Mexican crisis in 1994 to the LCTM, Russian and East Asian crises of 1997-8 to the stock market plunge starting in 2000—in every instance,
the U.S. Federal Reserve has responded by injecting massive amounts of liquidity into the financial system.
Let's say, just for the sake of discussion, that it is now early 2007 and stocks/bonds/real estate are down 50-60%, which seems likely. (In a later wave, they might end down 80-90% from the peaks in real terms).
But here we are, in early 2007, and let's say there have been a number of bankruptcies and defaults from falling markets and various financial stresses, and now perhaps the banking system is in trouble.
In this circumstance, the Fed is extremely likely to reflate again. Politically, it's become almost impossible to simply "take" a depression in the United States, so there will be enormous pressure on the Fed to reflate, no matter what the cost. And the cost, of course, will be a hyperinflation by the end of the decade.
Thus, in my opinion, in the coming years we'll lurch from depression to inflation and back again and even experience both simultaneously, all the while watching our standard of living fall precipitously. This will not be a "punishment" in any sense, but simply the working out of the notion that extreme financial bubbles, once created, must eventually burst.
In such an environment, the only investment that seems to make real sense long-term is that which has been a store of value for humankind for 5,000 years—gold and silver.
(Parenthetically, there are now exchange-traded funds which solely invest in and store gold bullion—but trade just like stocks—so taking a position in gold has become much easier.)
It's a sign of the times that such a seemingly speculative investment as gold should be—perhaps, since we can't ever say for sure—the haven of greatest financial safety.
And the reason we cannot be sure is that, in my opinion, all markets—including stocks, bonds, housing, precious metals, energy and so on—will be fluctuating violently in the coming times even as they trend one way or another. But that is the nature of markets.
When is all this going to begin? For technical reasons, tops or recovery tops in the asset markets—stocks, bonds, real estate—will probably all occur this summer. And the U.S. dollar will most likely resume its downtrend while gold resumes its uptrend during this same time period.
Remember, these opinions could be wrong. In my view, however, within the next few months the transition to the new era is likely to begin.
—jim sloman, 5.26.05
|
