Tuesday, December 23, 2008

US Consumption Worth More Than All the Gold in the World

After a few days of trying to dig out of two foot plus snows and now battling a middle ear infection that requires antibiotic treatment I have had no time or energy to post. Sorry for the meager material, but the last 2 weeks have been a trying time. I wish all the loyal readers the best possible holiday, and I thank you for another great year of discussion, sarcasm, and fun. My best to Watchtower, Kevin, G, and Lisa for all of their input. I have the entire next two weeks off, so I should be posting pretty heavy after the holiday.

The Front Loading of Demand as Told by Mish
One of may favorite themes was the heavy duty front loading of home buying demand due to psychology, poor lending standards, and ultra low rates. This fact is completely lost on the FED and government as they try to reignite demand that was fake to begin with. Mish had yet another must read post up today where he touches on this key point.
"Hundreds, if not thousands of of auto dealerships will fail. They will fail because they over-expanded in response to fake economic signals coming from the Fed, just as the auto manufacturers did and the housing industry did.
Housing purchases that could have and should have taken place over a period of a couple of decades were crammed into a few short years as lending standards dropped to keep the Ponzi scheme going. Flush with the feeling of fake prosperity from rising home prices, consumers bought cars, trucks, and SUVs with the same reckless abandon as they bought houses.
Dealerships wanting their fair share of the action, rushed into floor plan decisions and made car loans with the same subprime characteristics as did the mortgage brokers. Those dealerships are now flooded with cars that nobody wants, just as housing inventory is stacked a mile high with pent-up selling demand from those praying that prices rise."

Entire article is a homework assignment, so check it out here.

No "Pork Barrel Spending" Except for the Pork Barrel Spending
Had to chuckle when I came across this one today:
Biden nixes idea of pet projects in stimulus bill
Tuesday December 23, 2:58 pm ET
By Jennifer Loven, AP White House Correspondent
Veep-elect Biden rules out pet projects, other pork-barrel spending, in coming stimulus plan
WASHINGTON (AP) -- Vice President-elect Joe Biden said Tuesday that people expecting a bounty of pet projects in a new, massive multibillion-dollar economic stimulus plan should think again.
"It's important for the American taxpayer to know that this is not going to be politics as usual and we will not tolerate business as usual in Washington," Biden said at the start of a meeting at transition headquarters of Obama's top economic staff.
I know it's Christmas, and I know it's the Christmas season," he said, "but President-elect Obama and I are absolutely, absolutely determined that this economic recovery plan will not become a Christmas tree."
Biden said "there will be no earmarks" in the proposal -- referring to the sort of special-interest projects that members of Congress often attach to various pieces of legislation.

Earmarks and pork bills that are attached to legislation usually include such things as bridge repair/contruction, school "improvement", road repair/construction, park and monument construction, you get the idea. So what kinds of thing can we expect from an Obama/Biden "recovery" package rumored to be about $850 Billion dollars? Here you go from the same article:
The plan is expected to significantly increase federal spending on health care, education, infrastructure like roads and bridges, aid to states, and energy. Ideas include weatherizing 1 million homes, shifting to a paperless health system, investing in disease prevention and modernizing schools.
Biden said that "every dollar will be watched" to see it is spent effectively, that only what is needed to turn the economy around will be spent "and no more" and that "make-work" projects will not be allowed.

So basically it is a bunch of pork, but it is pork for progress so it is ok. That last line about every dollar being watched and that there will be no "make work" projects will bite him later I think.

US Consumption Worth More Than All the Gold in the World
Who can forget the James Bond film "Goldfinger" where the arch villain attempts to render all the gold held at Fort Know radioactive in order to make gold skyrocket in price as he has a large gold position? Great film.

I was thinking about that today as I read another "Mogambo Guru" article over at "The Daily Reckoning". While the writer Richard Daughty is always hilarious and informative, he had this little tidbit today that was pretty good:
"I was slurring my words pretty badly, and I forget where I saw it because it mysteriously disappeared in a frenzy of cutting and pasting back at the office, but I'm telling the bartender that some bozo was saying that if the Treasury's gold (or the Fed's gold, depending on who you figure has it) was revalued up from its current and historical book value of $42 an ounce, then the financial picture of the United States doesn't look so bad! Hahahaha!
I can tell by the look on his face that he is not a big fan of economic humor, and must be pretty much "all business" by the way he keeps repeating, "That'll be $6.50 for the drink, pal."
Cleverly, I reply, "I don't know if you are aware of it or not, my dear fellow, but the total amount of gold held by the government/Fed is only about 261 million ounces! That's all! Less than one ounce per person in the USA!"
He looked at me again and repeated, "That'll be $6.50, pal."
Undaunted, I went on, "And at $800 an ounce, that 261 million ounces comes to a value of $209 billion! Hahaha! A lousy $209 billion! Hahahaha!"
At this, I stand up and address the other patrons of the bar, saying, "And already something like $8.5 trillion over the next years in new spending/guarantees have been proposed! Not to mention the original $700 billion in TARP scams and schemes already spent, and more hundreds of billions in bailouts of every kind every day!"
Really warming up to it, I bellow, "Hell, the projected federal budget deficit for next year alone is upwards of a trillion dollars, almost 5 times as much as the total value of all the gold we have as a nation! And this is just the budget deficit! Hahaha! We're freaking doomed!"

So all the Gold held by the US is fair valued at a whopping $209 Billion. That is not even an AIG bailout, let alone a 1 Trillion dollar stimulus plan! Figure in all the other debt the US has and you can see ther is not much backing our currency.

So how does America do it? How is it that we can spend all we want, and then spend even more while we have nothing intrinsic or put back anything of value into the world? The answer is one word: CONSUMPTION.

The US has become the world's mega consumer. Japan, China, and many others rely entirley on US consumption to keep their economies going. If US consumption falls, those countries face severe issues. And thus this is how we have arrived at the obscene reality of the current day: The US spends all the money they have on consumption, then other foreign buyers buy a bunch of our debt to fuel even more consumption. The US makes out because we can do whatever we want, and the foreign countries pretend the money they lend us that we use for consumption is really flowing back into their economies. Sounds wonderful.

I have been perplexed at how long this has gone on and why it has not broken down by now. There seems to be no easy answer. I think things will carry on unless acted upon by an "outside" event. By this I mean a major world war or a conflict that is costly in terms of hard assets.

Consider that the US has no real oil reserves, no gold or silver, little gas refining ability, and no manufacturing base. If a major conflict broke out, how could the US pay if suppliers demanded hard assets? If major asian counteies were more worried about being invaded and less concerned with growing a middle class based on US consumption, might they stop playing the "cash recycle" game with the US?

The US does indeed have massive military holdings as well as nuclear materials. I guess that is something. While I cannot envision a scenario like this happening, it is an object lesson just to consider. US consumption is worth more right now than real money or gold. For as long as the semblance of the status quo can be maintained this will be enough. If things were to change, it would change overnight. Food for thought.

Have a good night.


Lisa said...

Great post, as usual! Merry Christmas, dear man. May you and your family have a lovely holiday.

Anonymous said...

Cox told The Washington Post the biggest mistake of his tenure was agreeing in September to an extraordinary three-week ban on short selling of financial company stocks.

Cox told the newspaper he had been under intense pressure from Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke to take this action and did so reluctantly.

They "were of the view that if we did not act and act at that instant, these financial institutions could fail as a result and there would be nothing left to save," Cox said.


There you have it an admission that three appointed officials conspired to manipulate the market. He had one thing right there is nothing left to save.

Angelina said...

I got a grant from the federal government for $12,000 in financial aid, see how you can get one also at

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