Too Nothing, Too Late

The financial panic of 2007 was pretty easy for me to predict, but I can understand why people didn’t see it coming. However, if you get blindsided this time around, it’s your fault. This is literally the easiest crisis to predict, and economic historians will no doubt look back and scratch their heads at the lack of intelligent policy decisions we made to prevent this crisis. This is not a case of too little too late; it’s too nothing, too late. Our leaders are asleep at the wheel.

The biggest fallacy is that the government has everything under control, especially as it pertains to the economy. The truth is that they have no clue, and they only react to crises, they don’t preempt them. But I’m not trying to pick on politicians because 99.9% of the population has a gross misunderstanding of the economy and markets in particular, and dynamic systems in general.

It’s amazing that we can send people to the moon, but we still don’t understand financial markets. The holy grail of financial markets is stability, and artificial stability at that. Government officials don’t understand that by moderating volatility in the short-term, they are creating extreme volatility for the future. They assume linearity when the behavior of markets is indisputable: it’s always been a case of calm followed by full-blown panic. Believe it or not, this is a period of relative calm. Yes I know countries like Italy are blowing up, but this is nothing compared to what’s coming.

I don’t think people appreciate how thin the line is between stability and full-blown crisis. Just take a look at European bond yields to see what I’m talking about. Yields in Italy jump 200 basis points and all of a sudden it’s a catastrophe. Greek bond yields were incredibly low even after the worst of the financial crisis in 2009. But a modest rise in yields put Greece over the edge as well.

Italian 10- Year Bond Yields

Greek 10-Year Bond Yields

It’s a grave mistake to believe that since bond yields in America are low that we are out of the woods. When your debt load becomes so large compared to GDP, incremental changes in yields lead to dynamic changes in debt servicing costs. 10% yields in America are a certainty whether it comes next year or 10 years from now. But when yields hit 10%, interest payments alone will approach $1.5 trillion dollars. This is about 30% of our total government receipts sent out every year for just interest! Are you kidding me? We’re in big trouble. Not buying gold right now and believing all the nonsense that it’s a bubble because of a lack of jewelry demand is probably the definition of insanity. Or perhaps stupidity.

Winners and Losers

Coming out of this crisis there will be winners and there will be losers. By putting bad debts of private corporations onto the public balance sheet, the American people are obviously losers. But the banks are winners, especially since their spreads are so wide right now. The dollar is a loser because the solution to all our economic problems is to print. Gold is a winner because it is a hedge against the government, and no one trusts the government right now.

Printing money is not the solution to all our ills. We should focus on things like the tax on American corporations for income earned abroad, which makes our effective corporate tax rate much higher than the rest of the Western world. We should be focusing on things like immigration. Instead, our leaders argue like children over minor budget issues. Oh boy. Believe me, there is no chance we are going to dig ourselves out of this one. This crisis is going to come out of nowhere, as financial panics are apt to do. Gold at $3,000 is coming, and to be honest $5,000 is a conservative projection as well.

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  • aka_ces

    Moses,

    I’m a regular reader and really enjoy your analysis.

    I’ve also been often struck by a phenomenon that you mention, how “amazing [it is] that we can send people to the moon, but we still don’t understand financial markets.”  I’m getting less amazed by this than I used to be, as I have become more and more persuaded that “we” were able to send a man to the moon only because that served the purpose of power, of winning a struggle between the two global superpowers of the time.  “We” as a society are now unable to understand markets because that too serves the purpose of power, the power of a small elite inside the financial services sector, in its quest to control all rival power, the most important of which is the populace at large, which docilely, sometimes happily, accepts a media diet of distraction and distortion, framed to prevent any genuine understanding of financial markets.

    • http://www.expectedreturnsblog.com Moses

      Perhaps that is the case, it’s hard to say. I do think the extent to which people think our leaders know what they are doing (as part of a grand conspiracy) is overblown. 

      • Wfsparks

        Moses – What is your thought on brokerage and clearing houses in light of the MF Global collapse ?  I am not on margin but do have accounts with 2 separate brokersin which I hold primarily mining and energy stocks. 

        • http://www.expectedreturnsblog.com Moses

          Well it just strengthens the case for physical gold. You never know with these kind of things.

  • Zaferged

    Hi Moses,

    Crises is deeper but gold is going down :)  I think your $300 idea should be forgotten. Gold is going down to $1000 or less.

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