Commodity inflation has always led to depression
By Elaine Meinel SupkisAs the price of raw materials, food, oil and gold rise relentlessly in tandem, it is time yet again to revisit the history of such events. We start, as usual, with today and move backwards in time to see how nothing happening today is new at all but actually part of a very ancient pattern going back to the beginning of civilization.Knowing this, we can look forwards. In this case, it is increasingly obvious that commodity markets will hit their peak the same hour that the rulers of the top empires cease playing with their currencies and restore currency values via either instituting the gold standard again or raising interest rates to the roof. Also, we note a common balance point here: the longer the rulers wait to raise rates or restore the gold standard, the more painful it is.If rates are dropped to 1% below the rate or commodity inflation during commodity inflationary periods, then they have to raise it an extra 3% or more above the rate to fix this. If they delay for years, doing this, it takes a greater rate hike. Up to 20% or they could even wait until the total destruction of the currency reaches infinity while rates are low like in Germany in 1924. In other words, we must look into the befuddled brains of our rulers to guess which choice they will make [in our own case in America, it will be the worst choices]. Banks face "systemic margin call," $325 billion hit: JPM Wall Street banks are facing a "systemic margin call" that may deplete banks of $325 billion of capital due to deteriorating subprime U.S. mortgages, JPMorgan Chase & Co (JPM.N: Quote, Profile, Research), said in a report late on Friday. JPMorgan, which sent a default notice to Thornburg Mortgage Inc. (TMA.N: Quote, Profile, Research) after the lender missed a $28 million margin call, said more default notices and margin calls were likely. The Carlyle Group's mortgage fund also failed to meet $37 million in margin calls this week. "A systemic credit crunch is underway, driven primarily by bank writedowns for subprime mortgages," according to the report co-authored by analyst Christopher Flanagan. "We would characterize this situation as a systemic margin call." The credit crisis that began about a year ago will likely intensify after Friday's weak February U.S. employment report "that most definitely signals recession," JPMorgan said. It is hard to digest this news. So I go peddling backwards through history. Then, as we survey this news from the mountain of the Past, we can more clearly see what is causing this and where this will all go. And the solutions are increasingly obvious. Alas. Everyone is missing their 'margin calls.' This is high talk for 'their reserves stink so they have to put more money in their bank to cover losses.' But there is no money. Nor are banks attracting any money except from one source only: the Federal Reserve. Who is giving them another $200 billion on top of all the other $20, $30 and $50 billions being ladled out every couple of weeks! Throughout this, Bernanke and the bankers claim we have a shortage of loans and they want to drop rates to get more people to ask for loans. But this is pure garbage. The Fed loans are cheap but loans to everyone else are increasingly expensive for obvious reasons: risk is rising! And banks are not attracting savings by constantly dropping interest rates far below the rate of inflation. Before diving into ancient news stories, first let's visit the wonderful Financial Sense University run by Dr. Fekete. Not only did man overthrow what he called “the yoke of gold”; he also sought to obliterate whatever wisdom previous generations have accumulated through painstaking research and careful experimentation with the sharp instrument of credit, the cutting edge of progress but which can also hurt its careless wielder. The monetary system of the Brave New World has feet of clay planted in a pile of rotting paper. It is animated by a false doctrine, the Quantity Theory of Money, a.k.a. monetarism, preaching that gold can safely be overthrown provided that it is substituted by a “quantity rule”. The fundamental error in this is the assumption that gold is there in the first place to limit the quantity of money. Yet the role of gold is to regulate the quantity, not so much of money, but of debt. In falsifying science man has frustrated the only hope to rectify the error. This brings to mind the old adage that “if God wanted to punish someone, He would make him mad first” Anatal Fekete is one of the more thoughtful pro-gold standard writers on the internet these days. Recently, I had called the possible top to the gold speculative markets due to the Indians changing their consumption of gold and moving towards selling it. But then this force was undone by the simple act of Bernanke deciding he was going to drop interest rates until the lending markets that crashed in the West, restart. This Quixotic goal means he will tilt at windmills and get thrown from his horse. He actually believes that a world that is utterly satiated with debt needs one more thin mint, as the Monty Python movie, 'The Meaning of Life' put it. As I see things today, debt is still pouring out of the central banks. I heard on the radio yesterday while driving my son to the train station, the Federal Reserve is handing out super-cheap loans to the tune of $200 billion to the banks this week! Wow. This is more than the hand out the government is going to give us in May! I suspect these things are connected. This is debt. The handouts the government is hoping we all spend is also debt. Make no mistake: this is money being loaned to us. If we don't take on more debt, the government will do this for us! Unasked. Everyone gets to take on a share of this debt unless you collect the check and then commit suicide and use it for the burial. As people celebrate this new layer of debt, the value of gold and other commodities will shoot up since anyone investing this debt will try to put it somewhere that is going up in price faster than the declining value of these new loans. Whew. Figuring all this out and then finding the right words is hard, hard work. I was outside in the pouring rain, this being the wettest early spring in 15 years, thinking about all this. Global bad weather this year is a factor. We are in a very strong La Nina effect weather pattern. This causes huge droughts and terrible floods at the same time. In my part of the world, like China, it means terrible ice storms and frequent storms. I suspect we will see big hurricanes this year, too. Every one of the big storms this winter formed in the Gulf of Mexico and shot up north via cold fronts. This pattern, if it continues during the summer, will mean all the East Coast will be hammered by hurricanes again. This affects the value of commodities. Storms wrecking farms raises prices. Stormy summers coupled with wars and governments inflating spending via debt creation equals terrible sufferings on the part of humanity. History shows this clearly. And if government monetary policies collapse during a bad weather/war situation, we get very violent revolutions. Their talisman, enabling them to perform this job successfully, is the basis. It is a seismographically most sensitive instrument to provide information in a most concentrated form. It makes for an early warning system exposing potential supply shocks threatening society. Moreover, the basis also digests information such as the producers’ estimate of what is a good price for their product, comparing it with the speculators’. The basis picks up all signals, including producers’ forward sales and speculators’ purchases of futures contracts, bringing the two into balance. The question arises how this can be accomplished. After all, the basis is the spread between the nearby (rather than distant) futures price and the cash price. The answer is: through arbitrage. Floor traders hedge their sales and purchases of distant futures as they simultaneously do the opposite transaction in nearby futures. The basis registers and harmonizes all signals coming from all markets trading that particular commodity. One cannot help but admire this fine communication system through which potential supply-shocks, ever present due to risks inherent in nature, are mitigated by the “invisible hand” as directed by the basis. The storage of commodities is closely coupled to civilization's structures and the value of money. Money is meaningless if there is no food, the peasants are revolting and the cities are being burned by barbarians! Great leaders and strong fighters take over by using the sword and the voice to drive people into dangerous actions that takes over in the place of chaos. The battles launched by a collapse in currency vis a vis commodities can roar on for hundreds of years if the central government is totally without moral grounding. Afterwards, an empire can settle down to a thousand years or more of exhaustion. This has happened to India. To China. To Egypt. To the Roman Empire. Fekete gives us a good explanation about basis points here. Basis points are expressed as a number which is connected, not accidentally, to the notion of interest rates. Anyone parking money in a bank is doing just what people buying futures do: he is taking a risk. The bank, to attract this and to be able to use this money, will share the risks with the person saving money. Both then lend it out at an interest rate based on the theoretical possibility of default before being repaid. If there is a default, not only the interest but even possibly, the whole amount saved can vanish. We are seeing this today across the planet as savings have been vanishing in an eye blink. This is due to the bankers lending recklessly at extremely low interest rates. The basis didn't match the hazards at all. The 'teaser' rates were actually shorting the longs here. Long rate payers were being forced to pay over three times as much as the shorts which were the Alt-A, etc. debtors. Since none of the---and I do mean NO---Alt A debtors could pay anything near the higher rates they promised to pay in the long, this meant all the investors backing this were ruined...TOTALLY. Not just 'lost their future interest rate profits' but as in LOST EVERYTHING. Right now, the central banks and the powerful governments running this scam are trying to pretend none of them are bankrupt. But the banks are bankrupt now. The $200 billion bail out this week shows that it is no good. Any savings at all are pouring into the commodities markets. In 1971 I went to Winnipeg to be witness to history. I purchased a seat on the exchange. I was interested in studying the variation of the gold basis on the floor first hand. At that time gold ownership and trading was still a crime in the United States pursuant to a Presidential Proclamation dating from 1933. F. D. Roosevelt nationalized (read: confiscated) monetary gold. In Canada gold ownership and trading has always been legal. Canada was chosen as testing grounds by the U.S. Treasury to see how the market would react, in preparation for the legalization of gold ownership in the U.S. four years later. I value the good doctor's advice in this case because he actually does the things he talks about. Just as I did real estate much of my life, he traded in the gold markets. When Canada let the US government fool around with the Canadian gold market, the US government thought they could use gold as a counterbalance to the dollar. Instead of a direct connection to Fort Knox, it would be at one remove: as future trading based on the gold with no actual gold exchanging hands. In other words, instead of being a repository for gold, Fort Knox would be a BANK. But this was problematic. The amount of gold involved wasn't growing so the price of gold began to shoot upwards the more the government tried to increase commerce via increasing lending. The more the lending rose, the faster the value of gold went up..I would suggest the loans were being displaced into gold. People went into hock to hold gold as they are doing today because it was rising faster than the rate of inflation. The more the Fed tried to increase lending, the worse this got. Soon, all savings as well as loans were flowing into oil and gold. They and wheat, corn and other commodities began to shoot upwards due to a shortage of all these things in relation to the amount of money being lent. Instead of flowing into industry and real estate, money began to flow only to commodities back then just like today. The only thing that halted this was Volker finally pulling the plug on the lending business. This meand there was no more money flowing around, seeking somewhere to go and grow larger, faster. The commodity markets as well as what was left of real estate and other markets all fell. We had a mini-depression. I had cash at that time due to making the right choices. I could walk into any store and buy whatever and have the staff beg me to spend my cash. It was a good time to be flush. But not to be stuck with no way of getting a loan, of course. Depressions are horrible in the long run. This brush with a depression was ended by Reagan's 'Morning in America' which was all about spending money. This is when our trade deficit, the dying dollar and government overspending all joined forces to become the tsunami of red ink we see today. America was still the world's #1 manufacturing and economic power back in 1982. But now we are no longer this at all. We literally hollowed out our nation in response to the Volker mini-depression. The faux-wealth of these past 25 years is obvious: most families coped with inflation and the destruction of our finances by having both parents work even when having very little children and by going very deeply into debt. Gold and oil have been rising like crazy lately. This is due to the 'rescue' operations by the central bankers and the vanishing wealth within the markets for CDOs and other instruments of debt. This is entirely created by humans making very irresponsible, political choices. The Fed pretends to be in charge of 'prices' and 'wages'. Talk about communist! HAHAHA. And the GOP loves this! Nixon, not Carter, did the wage/price controls. Carter supported Volker raising interest rates! Playing the gold markets is very dangerous because it is not a market, it is a place where people flee disasters caused by governments. And governments can torment this market by very sudden changes including CONFISCATION. Or making it impossible to hold physical gold via either breaking down the door, raiding the bank vaults or passing laws forbidding the sale of raw gold or gold coin outside of government banks that set a draconian value vis a vis the currency. This happens ALL THE TIME. Indeed, I might suggest, it is inevitable if gold markets corner all excess cash put out by the central banks trying to give out sub-inflation rate loans! Gold bug organizations try to minimize this obvious risk. But investors must keep an eye on these risks for they are key to the basis point value of any investment. Just as the risk of future harvests get blasted by Mother Nature via floods, hail, drought and insect infestations or diseases, so it is with gold: the biggest holders of gold are still the governments of various nations...wonder how they got this way? HAHAHA. Yup. Power grows out of the barrel of the gun. These holders can use sales of gold to make it look as if money is worth more than everyone is guessing by releasing waves of gold such was we saw last spring and will see very soon. If 300 tons of gold hits the markets, it soaks up a lot of loot. BUT NOT IF THE SAME BANKS ARE ALSO OFFERING INFINITE LOANS WELL BELOW THE RATE OF INFLATION! This is why I suspect, even if 2,000 tons of gold hits the markets this next year, it will only cause more people to take on more loans to buy this 'cheaper' gold and within a year, the inflation of the value of gold will redouble. This is why the only cure is to restrict the flow of money. In other words, to deliberately make for a depression.