The pandemic and corresponding draconian containment efforts have created an economic and financial situation unseen since the Great Depression. Everyone wants to know whether the economy will rebound quickly or if we will experience a prolonged recession.
How does this play out?
Noted financial expert James Rickards foresaw such economic calamity last year when he wrote Aftermath: Seven Secrets of Wealth Preservation in the Coming Chaos.
Mr. Rickards joins WindRock to discuss:
Why the current financial situation is unlike the 2008 financial crisis
What impact the recently passed CARES Act will or will not have on the economy and various investments
How far equities may still fall despite their recent rally
Which asset classes investors should consider to shield themselves from economic and financial calamity.
We are potentially entering an “Ice-9” situation where the entire world may “freeze” over economically, said Jim Rickards, best-selling author of “The Road to Ruin” and “Aftermath: Seven Secrets of Wealth Preservation in the Coming Chaos.”
“If you shut down the New York stock exchange, and I can’t sell stocks and get cash, I’m going to sell my money market funds or redeem my money market funds.
Then you’ve got to shut down the money market funds industry, and then people say ‘ok, I’ll go to the banks or the ATMs,’” he said.
“And then you’ve got to shut down the banks so the point is, it spreads from exchange to money markets, to brokerage accounts, to banks, and you end up shutting down the entire system.”
During their June Federal Open Market Committee meeting, the Fed left rates the same at a low 0-0.25%. In fact, as Fed’s chairman Jerome Powell said during the press conference, the Fed isn’t looking to raise rates for a while:
‘So we’re not thinking about raising rates. We’re not even thinking about, thinking about raising rates.’
According to the economic projections released by the Fed, interest rates could stay put until 2022.
Powell also vowed to continue supporting the economy through unconventional programs until confidence and employment recover. As Powell said:
‘We will continue to use these powers forcefully, proactively and aggressively until we’re confident that we are solidly on the road to recovery. When the time comes, after the crisis has passed, we will put these emergency tools back in the toolbox.’
And while the last May unemployment came out better than expected, the Fed doesn’t expect a quick recovery. Looking ahead, the Fed believes the US economy will end the year with unemployment at a high 9.3% and a 6.5% drop in GDP.
Whenever the economy’s outlook turns bleak, investors jump into gold.
Aussie gold miners are benefitting from double whammy
Aussie gold miners are gaining from higher prices after the Fed’s meeting but also because at the same time the Australian dollar lost ground against the US dollar.
Gold is priced in US dollars, so when the price of the Aussie dollar moves down against the US dollar, Aussie gold investors will get some extra money from the falling exchange rate.
Gold expert Jim Rickards expecting gold prices to hit US$10,000 in the next years. In a recent exclusive video interview with Rum Rebellion’s Editor Greg Canavan, Jim explains why.
Lockdowns and uncertainty have helped prop up the precious metal, but as economies are reopening, gold prices are coming down.
It must have come as a rude awakening for gold enthusiasts - the price of the precious metal, which was being touted as one of the safest assets to preserve value amid the pandemic, is under pressure.
Last week saw the bullion drop 2.4 percent, the largest weekly plunge in more than two months, according to Reuters.
As of Monday afternoon, the price was around $1,682 per ounce as a consequence of the reopening of economies in many countries. This price is still up more than 11 percent this year and has increased steadily with just a few bumps.
An improvement in US unemployment figures and hopes that an economic recovery will push up the price of other assets such as stocks, have hit the price of gold.
Latest data show that 2.5 million Americans found jobs in May instead of an expectation that job losses will pile up. The unemployment rate dropped to 13.3 percent from April’s 14.7 percent, prompting US President Donald Trump to declare it the “greatest comeback in American history.”
A prophecy that almost came true
Since the spread of the coronavirus pandemic disrupted daily life, shutting businesses and travel, a horde of experts on the fringes of the financial world found a new audience.
Jim Rickards, the author of The New Case for Gold, has appeared on Bloomberg and other news outlets, promoting his views on why investors should trust gold more than the paper currency.
There was a reason behind investors’ rush for gold a couple of weeks ago. Among the assets in which people and institutions invest such as shares at the stock exchange and US dollar, the precious metal was performing very well.
With the price of oil going dipping, and trillions of dollars being wiped off stock markets, gold was proving its status as a preserver of wealth.
Demand for gold generally goes up in times of uncertainty as people move savings to more secure assets that preserve value for a longer duration.
Analysts at the Bank of America in April even predicted that in 18 months the price could hit $3000 an ounce, a result of an ever-devalued currency given the rate central banks were printing money.
That would be far more than the record price of $1,921 per ounce set in 2011.
Governments around the world have flooded the markets with cash as part of stimulus programmes to counter the effects of the pandemic in which businesses have gone bankrupt and people have lost jobs.
But the gold-backed and exchange-traded funds are sitting on more than 3,120 tons of gold.
A numbers game
All eyes have been on the US job market for a couple of weeks. In April, more than 20 million people filed for unemployment benefits, indicating the stress in the world’s largest economy.
While many experts were expecting unemployment to worsen, the latest data showed an unexpected improvement in the job market.
The trend in the gold spot price indicates that it might have run its upward course as lockdowns ease, markets reopen and money heads back to the stock market and other securities.
But some analysts have cautioned against abandoning the prospect of gold. A recovery will not prove easy after all these weeks of shutdown. The fear is that many of those who have lost jobs may struggle to secure new, immediate employment.
The Indian phenomenon
Gold prices can also be set back by trends in India.
The nation is the world’s second-largest buyer of the precious metal, spending over $28 billion importing gold last year.
Indian households save roughly 30 percent of their income. A large part of it goes into buying gold. For many, that’s not even spending but simply an investment to preserve their wealth.
The belief that the price of gold will continue to rise is at the heart of the sustained Indian interest in the metal. The coronavirus pandemic, however, has dampened its demand to what could be a 30-year low.
Between April 2019 and March 2020, India spent $28 billion on importing gold, a 14 percent drop from the $32.9 billion in the previous year.
The main driver behind demand is Indian weddings where parents give gold jewellery to their daughters, and relatives and friends buy it as gifts.
More than 50 percent of India’s gold demand originates from weddings, according to some estimates. Many weddings were postponed due to the pandemic.
REMEMBER the pro-democracy protests in Hong Kong against Chinese authoritarianism? asks Jim Rickards in The Daily Reckoning.
Well, guess what? They're about to start again. And US-Chinese relations could get even worse than they are right now.
Are you prepared for a bumpy ride?
Last year's protests came in response to a proposed law that would have allowed the extradition of Hong Kong residents to Beijing for trial on charges that arose in Hong Kong.
That would have deprived Hong Kong residents of legal protections in local law and subjected prisoners to torture and summary execution.
The legislation was proposed by Hong Kong's Chief Executive Carrie Lam, who many consider a puppet of Beijing.
The demonstrations grew exponentially, ultimately involving hundreds of thousands of protesters.
The list of demands also grew to include more democracy and freedom and adherence to Hong Kong's rule of law.
Due to social media, these protests were seen around the world.
The proposed bill behind the original protests was scrapped last October, which was a victory for the pro-democracy protesters.
The protests didn't end altogether, but tensions were at least diffused to a great extent and the world moved on.
Well, here comes round two.
China's Communist parliament is rolling out legislation that would ban "treason, secession, sedition (and) subversion" in Hong Kong.
This is different from the previous legislation because this bill actually originates in Beijing, not Hong Kong. It's a direct assault on Hong Kong's democracy. The Chinese parliament will insert the legislation directly into Hong Kong's constitution.
Pro-democracy activists have called for mass protests in response to what they rightly consider a Chinese invasion of their autonomy.
We could be in for a fresh round of protests, with as many or more people. China's reaction will be key.
Will they try to put the protests down by force? That could have major consequences.
Meanwhile news emerged that the US Senate is introducing bipartisan legislation to impose sanctions on officials and business entities that enforce the new law.
And President Trump warned that the US would react "very strongly" to the Chinese legislation.
In response, China's foreign ministry warned Beijing would "fight back" against any US interference.
At a time when US-Chinese relations are already at a low ebb due to China's almost criminal handling of the coronavirus pandemic, it looks like things are about to get even worse.
This situation could become very interesting.
But you shouldn't be surprised. The current trajectory of US-China relations is following a familiar course. It started with the currency war...
When my first book, Currency Wars, was published in 2011, I made the point that currency wars don't exist all the time, but when they emerge they can last for 15 or 20 years.
The reason is that the currency devaluations just go back and forth between major trading partners and no one is any further ahead in the long run.
Readers said, "Okay, we get that, but what comes next?"
The answer is trade wars. Once currency devaluations fail, countries turn to tariffs to slow down imports and help their own exports.
That's where the US and China are now, with the ongoing trade war (which could get worse).
But that's also a dead end from an economic perspective. Again, the question is: What comes next?
Well, with history as a guide, we can see that today's pattern is a repeat of what the world went through in the 1920s and 1930s.
First came currency wars (1921-1936). Then came trade wars (1930-34) and then finally a shooting war (1939-1945).
Are we heading for another shooting war with China? The signs are not good.
Trade war tariffs can be weaponized to pursue geopolitical goals. Trump is using tariffs to punish China for its criminal negligence (or worse) in connection with the spread of the Wuhan virus to the US and the rest of the world.
This also has historical precedent.
Between June and August 1941, President Franklin Roosevelt placed an oil embargo on Japan and froze Japan's accounts in US banks.
In December 1941, the Japanese retaliated with the sneak attack on Pearl Harbor. Will China now escalate its retaliation to the point of armed conflict?
We'll find out soon, possibly in the South China Sea or the Taiwan Strait. The latest reemergence of tensions in Hong Kong only adds kerosene to the fire.
Investors should prepare for US-China geopolitical tension to grow worse. Maybe a lot worse. That's the lesson of history.
American cities are burning, there’s a lethal pandemic and we’re in a new Great Depression.
Other than that, everything’s fine.
People often ask me when things will “get back to normal.” Well, the answer could be never (or at least not for a long time).
Germany was not “normal” from 1914–54, for example. Social disorder is like a virus; it goes away eventually but not necessarily soon.
Meanwhile, we’re now in our third month of a national lockdown, with perhaps another month to go, depending on your locality.
Some states and cities are beginning to reopen, but they’re doing it in “phases,” so maybe your hair stylist reopened last week and your favorite restaurant will reopen next week.
The lockdown has certainly been painful for many. Even under the best of circumstances, anxiety levels went up, patience wore thin and tempers flared at trivial things. Cabin fever is a real disease.
Was it all worth it?
I’ve done a deep dive on this and the answer is almost certainly no.
The lockdown did slow the spread of the virus and did save some lives, that’s true. Yet the gains may only be temporary.
“Flattening the curve” does not mean reducing total infections and deaths. It just means stretching them out over a longer period so the hospital system is not overwhelmed.
There were much better solutions for this, including temporary hospitals and sending doctors and nurses from low-infection areas to those areas most in need, like New York City.
The biggest problem with the lockdown was that everyone counted the benefits but no one calculated the costs.
Many may have died and still could die from suicide, drug overdoses, alcoholism, domestic violence and other untreated medical conditions like cancer and heart attacks because patients were afraid to go to hospitals for fear of getting the virus.
In short, the lockdown may end up costing more lives than were saved.
That’s on top of trillions of dollars of lost wealth and lost economic output. That’s what happens when you put doctors in charge of the economy. Next time, it might be a good idea to let a few economic analysts into the room also.
But don’t worry, the optimists say. We’ll see a “V”-shaped recovery once the lockdowns are fully lifted.
You probably know the theory of a “V”-shaped recovery. The idea is that the economy fell sharply in March and April 2020 but it’s ready to bounce back with a record recovery this summer and fall.
The crash is one side of the “V” and the recovery is the other. The result is you end up recovering all of your losses and are ready for new growth from the old levels.
You’ll hear this a lot, but don’t believe it.
Remember “green shoots” in 2009 and 2010? They turned out to be brown weeds. Yes, the economy eventually recovered and the stock market went on to new highs, but it was the weakest recovery in U.S. history and those stock market highs took almost seven years to appear.
Things are much worse now.
Yes, we will hit a bottom this summer. And yes, a recovery will begin. But it will be long and hard.
Output may not get back to 2019 levels until 2022 or later. Unemployment will come down, but it is still expected to be higher than the worst of the 2008 crisis in 2023. The bankruptcies are just starting.
We’ve seen J. Crew, J.C. Penney, Neiman Marcus, Pier 1 Imports and Hertz all file for bankruptcy in recent weeks. There is a long line of name-brand companies right behind them preparing to go bankrupt also.
Not only will we not have a V-shaped recovery, but it will probably be an “L” (down and then sideways).
The 2009–2020 recovery was an “L” where the new trend for growth was 2.2% instead of the post-1980 trend of 3.2%.
Now the new recovery (when it begins) may have output of only 1.9% or less.
When each recovery is weaker than the one before and debt goes up faster than growth, it’s just a matter of time before you go broke — or eventually break out in inflation.
We probably won’t see inflation for a while because inflation has a strong psychological component and right now a deflationary mindset prevails.
That may change — it probably will — but we’re not there at this point.
Meanwhile, people are looking for “safe havens” right now.
Stock and Treasury market behavior can be explained as much by “safe haven” demand as fundamentals. But what happens when the safe haven doesn’t look so safe?
That’s a question I’m asked frequently. It’s usually followed by a comment along the lines of, “I don’t get it. It’s just a shiny rock. People dig it out of the ground and then put it back in the ground. What’s the point?”
I usually begin my reply by saying, “It’s not a rock, it’s a metal” and then go from there.
I have a lot of sympathy in these conversations. The fact that people don’t know much about gold today is not exactly their fault. The economics establishment of policymakers, academics and central bankers have closed ranks around the idea that gold is a taboo subject.
You can teach it in mining colleges, but don’t dare teach it in economics departments. If you have a kind word for gold in a monetary context, you are immediately labeled a “gold nut,” “gold bug,” “Neanderthal” or something worse. You are excluded from the conversation. Case closed.
It wasn’t always this way. I was a graduate student in international economics in 1973-1974. Many observers believe that the gold standard “ended” on August 15, 1971 when President Nixon suspended the redemption of dollars for gold by foreign trading partners. That’s not exactly what happened.
Nixon’s announcement was a big deal. But, he intended the suspension to be “temporary” and he said so in the announcement. The idea was to call a kind of “time out” on redemptions, hold a new international monetary conference similar to Bretton Woods in 1944, devalue the dollar against gold (and other currencies such as the German Deutschemark and Japanese Yen), and then return to the gold standard at the new exchange rates.
I was able to confirm this plan with two of Nixon’s advisors who were with him at Camp David in 1971 when he made the announcement. I spoke to Kenneth Dam (an executive branch lawyer) and Paul Volcker (at the time, the Deputy Secretary of the Treasury). They both confirmed that the suspension of gold redemptions was meant to be temporary, and the goal was to return to gold at new prices.
Some of what Nixon wanted did happen, and some did not. The international conference took place in Washington, DC in December 1971 and resulted in the Smithsonian Agreement. The dollar was devalued from $35 per ounce to $38 per ounce (it was later devalued again to $42.22 per ounce), and the dollar was devalued against the major currencies of Germany, Japan, the UK, France and Italy.
Yet, the return to a true gold standard never happened. This was a chaotic time in the history of international monetary policy. Germany and Japan moved to floating exchange rates under the misguided influence of Milton Friedman who did not really understand the role of currencies in international trade and direct foreign investment. France dug in her heels and insisted on a return to a true gold standard.
Also, Nixon got caught up in his 1972 reelection campaign to be followed closely by the Watergate scandal, so he lost focus on gold. In the end, the devaluation was on the books but official gold convertibility never returned.
All of this monetary wrangling took a few years to play out. It was not until 1974 that the IMF officially declared that gold was not a monetary asset (although the IMF carried thousands of gold on its books in the 1970s, and still has 2,814 tons of gold, the third largest holding in the world after the U.S. and Germany).
The result was that my Class of 1974 was the last class to be taught gold as a monetary asset. If you took economics after that, gold had been consigned to the history books. No one taught it and no one learned it. Gold was still a “commodity” and something that was taught in mining colleges, but not in economics.
No wonder most people today don’t understand gold.
Maybe gold was banned from the classroom, but it was not banned from the real world. In fact, there was another major development just one year after I graduated. In 1974, President Ford signed a law that reversed President Franklin Roosevelt’s notorious Executive Order 6102. FDR made ownership of gold bullion by American citizens illegal in 1933. Gold was contraband like heroin or machine guns.
President Ford legalized it again. For the first time in over 40 years, it was once again legal for Americans to own gold coins and bars. The official gold standard was dead, but a new “private gold standard” had just begun.
That’s when things got interesting.
Now that gold traded freely, we saw the beginning of bull and bear markets, something that doesn’t happen on a gold standard where the price is fixed.
The two great bull markets were 1971-1980 (gold up 2,200%) and 1999-2011 (gold up 760%). In between these bull markets were the two bear markets (1981-1998 and 2011-2015), but the long-term trend is undeniable. Since 1971, gold is up 5,000% even after the bear market setbacks.
Now the third great bull market is underway. It began on December 16, 2015 when gold bottomed at $1,050 per ounce at the end of the 2011-2015 bear market. Since then, gold is up over 65%. That’s a nice gain, but it’s small change compared to 2,200% and 760% gains in the last two bull markets.
When it comes to capital and commodity markets, nothing moves in a straight line, especially gold.
But this pattern suggests the biggest gains in gold prices are yet to come. And right now, my models are telling me that gold is poised for historic gains as the third great bull market gains steam.
Right now gold’s trading at over $1,700. What could push it firmly over $2,000 per ounce and headed higher? There are three main drivers:
The first is a loss of confidence in the U.S. dollar in response to massive money printing to bail out investors in the pandemic. If central banks have to use gold as a reference point to restore confidence, the price will have to be $10,000 per ounce or higher. Any lower price would force central banks to reduce their money supplies to maintain parity, which would be highly deflationary.
The second driver is a simple continuation of the bull market. Using the prior two bull markets as reference points, a simple average of those gains during those durations would put gold at $14,000 per ounce or higher by 2025.
The third driver is panic buying in response to a new disaster. This could take the form of a “second wave” of infections from the Wuhan Virus, a failure of a gold ETF or the COMEX exchange to honor physical delivery requirements, or a victory by Joe Biden in the presidential election.
The gold market is not priced for any of these outcomes right now. It won’t take all three events to drive gold higher. Any one would do just fine. But, none of the three can be ruled out.
These events (and others) would push gold well past $2,000 per ounce, on its way to $3,000 per ounce and ultimately much higher along the lines described above.
Even if individuals were inclined to spend, there would be reduced spending in any case because there are fewer things to spend money on. Shows and sporting events are called off. Restaurants and movie theaters are closed. Travel is almost nonexistent, and no one wants to hop on a cruise ship or visit a resort until they can be assured that the risk of COVID-19 is greatly reduced.
This will guarantee a continued slow recovery and persistent deflation, which makes the slow recovery worse.
In addition to these constraints on demand, there are serious constraints on supply. Global supply chains have been seriously disrupted due to shutdowns and transportation bottlenecks. Social distancing will slow production even at those facilities that are open and can get needed inputs.
One case of COVID-19 in a factory can cause the entire factory to be shut down for a two-week quarantine period. Companies that depend on the output of that factory to manufacture their own products will also be shut down.
Beyond these direct effects of lost income and lost output, there are significant indirect effects on the willingness of entrepreneurs to invest and of individuals to spend.
First among these is the “wealth effect.” When stock values drop 20–30% as they have recently, investors feel poorer even if they have substantial net worth after the drop. The psychological effect is to cause people to reduce spending even if they can afford not to.
This means that spending cutbacks come not only from the middle class and unemployed but also from wealthier individuals who feel threatened by lost wealth even if they have continued income.
Finally, real estate values will collapse as tenants refuse to pay rent and landlords default on their mortgages, putting properties into foreclosure.
None of these negative economic consequences of the New Depression are amenable to easy fixes by the Congress or the Fed.
Deficit spending will not “stimulate” the economy as the recipients of the spending will pay bills or save money. The Fed can provide liquidity and keep the lights on in the financial system, but it cannot cure insolvency or prevent bankruptcies.
The process will feed on itself expressed as deflation, which will encourage even more savings and discourage consumption. We’re in a deflationary and debt death spiral that has only just begun.
Based on this analysis, investors should expect the recovery from the New Depression to be slow and weak. The Fed will be out of bullets. Deficit spending will slow growth rather than stimulate it because the unprecedented level of debt will cause Americans to expect higher taxes, inflation or both.
The U.S. economy will not recover 2019 levels of GDP until 2022. Unemployment will not return even to 5% until 2026 or later.
This means stocks are far from a bottom. The S&P 500 Index could easily hit 1,870 (it’s 2,943 as of this writing) and the Dow Jones Index could fall to 15,000 (it’s 24,360 as of this writing).
Those are levels at which investors might want to consider investing in stocks.
Any effort to “buy the dips” in the meantime will just lead to further losses when the full impact of what’s described above begins to sink in.
New Book under development on the Pandemic and Depression *Why Scientists without expert knowledge of the economy may not be the best source for determining economic policy
*Why discernment of the various views of scientists with opposing views on how to deal with Coronavirus is important *Unemployment Claims have exceeded 38m in the US
*There has never been a time when the stock market does not accurately reflect what is happening in the real economy
*S&P 500 is a cap weighted index where a few major companies dominate the index. Major companies which are doing well do not reflect the stock market as a whole or the rest of the economy *Algorithms that decide the majority of trading in markets today were written before the Pandemic
*Deflation, Inflation, Hyperinflation
*The psychology of inflation and what leads to increase of velocity of money - quantity theory of money versus phase transitions in psychology
*In a deflationary environment where the Fed has printed close to $10T but still cant get inflation leaves one tool left in the toolkit.. raising the price of gold
*Raising the price of gold would require open market operations in gold - Fed printing money to buy gold or to sell gold in order to maintain a specific price range measured in USD
*Raising the price of gold as a tool to get inflation in the USD during prolonged and massive deflation is not a theory, it has been used in the past
*Expectations of continuing deflation in the short to mid term, but inflation must be created, the trick for the Fed is making sure it sticks the landing
*Scenarios for gold price and inflation numbers if the Fed overshoots and ends up with higher inflation than it wants *Censorship and deplatforming of people from major media platforms such as YouTube and Twitter
*The polarization of views of people around the world in terms of freedom vs authoritarian approaches to governance, and where it is leading
*Essential versus Nonessential Businesses and Occupations *United States Code: Law enforcement officers, judges, public officials violating Constitutional rights under color of law versus emergency powers granted during threats to national security *Reparations for China such as seizing/cancelling UST’s or delisting Chinese company stocks on US exchanges
*Will reparations move the US and China closer to kinetic warfare
Nothing like what we’re witnessing has ever happened before. Even the savviest analysts cannot yet internalize what happened.
As I explained earlier, comparisons to the 2008 crisis or even the 1929 stock market crash that started the Great Depression fail to capture the magnitude of the economic damage of the virus. You may have to go back to the Black Plague of the mid-14th century for the right comparison.
Unfortunately the economy will not return to normal for years. Some businesses will never return to normal because they’ll be bankrupt before they are even allowed to reopen.
Businesses like restaurants, bars, pizza parlors, dry cleaners, hair salons and many similar businesses make up 44% of total U.S. GDP and 47% of all jobs. This is where many of the job losses, shutdowns and lost revenues occurred.
The U.S. government response to the economic collapse has been unprecedented in size and scope. The U.S. has a baseline budget deficit of about $1 trillion for fiscal year 2020. Congress added $2.2 trillion to that in its first economic bailout bill. A second bailout bill added an additional $500 billion. Another bill may add another $2 trillion to the deficit.
Combining the baseline deficit, enacted legislation and anticipated legislation brings the fiscal 2020 deficit to $5.7 trillion. That’s equal to more than 25% of GDP and will push the U.S. debt-to-GDP ratio to as high as 130% once the lost output ($6 trillion annualized) is taken into account. The previous record debt for the U.S. was about 120% of GDP at the end of World War II.
This puts the U.S. in the same category as Greece, Lebanon and Japan when it comes to the most heavily indebted countries in the world.
The Federal Reserve is also printing money at an unprecedented rate. The Fed’s balance sheet is already above $6.7 trillion, up from about $4.5 trillion at the end of QE3 in 2015. The first rescue bill for $2.2 trillion included $454 billion of new capital for a special purpose vehicle (SPV) managed by the U.S. Treasury Department and the Fed.
Since the Fed is a bank, it can leverage the SPV’s $454 billion in equity provided by the Treasury into $4.54 trillion on its balance sheet. The Fed could use that capacity to buy corporate debt, junk bonds, mortgages, Treasury notes and municipal bonds and to make direct corporate loans.
Once the Fed is done, its balance sheet will reach $10 trillion.
That much is known. What is not known is how quickly the economy will recover. The best evidence indicates that the economy will not recover quickly, and an age of low output, high unemployment and deflation is upon us.
Here’s why the economic recovery will not exhibit the “pent-up demand” and other happy-talk traits you hear about on TV…
The first reason the economic downturn will persist is the lost income for individuals. Unemployment compensation and PPP loans will only scratch the surface of total lost income from layoffs, pay cuts, reduced hours, business failures and individuals who are not only unemployed but drop out of the workforce entirely.
In addition to lost wages through layoffs and pay cuts, many other workers are losing pay in the form of tips, bonuses and commissions. Even a fully employed waitress or salesperson cannot collect tips or sales commissions if there are no customers. This illustrates how the economy is tightly linked so that problems in one sector quickly spread to other sectors.
In addition to lost individual income, there is a massive loss of business income. Earnings per share of publicly traded companies are not only declining in the second quarter (and likely the third quarter) but many are negative.
Lost business income will be another source of lower stock valuations and a source of dividend cuts. Reduced dividends are also a source of lost income for individual stockholders who rely on dividends to pay for their retirements or medical expenses.
Programs such as PPP and other direct government-to-business loans will not come close to compensating for the losses described above. The loans (which can turn into grants) will help for a month or two but are not a permanent solution to lost customers.
For still other firms, the loans won’t help at all because the firms are short of working capital and will simply close their doors for good and file for bankruptcy. This means the jobs in those enterprises will be permanently lost.
From these straightforward events (lost individual income, lost business income, dividend cuts and bankruptcies) come a host of ripple effects.
Once the government aid is distributed, many recipients will not spend it (as hoped) but will save it. Such savings are called “precautionary.” Even if you are not laid off, you may worry that your job is still in jeopardy. Any income you receive will either go to pay bills or into savings “just in case.”
In either case, the money will not be used for new spending. At a time when the economy needs consumption, we will not get it. The economy will fall into a “liquidity trap” where saving leads to deflation, which increases the value of cash, which leads to more saving. This pattern was last seen in the Great Depression (1929–40) and will soon be prevalent again.
Jim Rickards argues that the price of gold is manipulated. Today, we examine his view on gold price manipulation, how it occurs and whether the suppressing of gold prices can be sustained.
After all, if you’re buying gold you want to understand all of the factors that can influence its price.
We then explore arguments made by Real Vision Co-Founder Grant Williams exploring the gold leasing mechanism which he likens to a pyramid scheme.
Taking on board the views of these experts we determine whether gold price manipulation can be sustained.
