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PRISONERS IN OUR OWN HOMES OR HOSTAGE TO GROWTH?

Last week we were treated to a round of economic numbers implying “anything but” growth:

• Last week’s anemic economic numbers began with Aug. 23 report of July Existing Home Sales - where already slowing estimates were for a 6.60M [annualized] rate. The actual number when reported was for a much weaker than expected - dismal -6.33M annualized rate. In economic jargon, folks, this is what is referred to as a “spectacular miss.”

• Compounding the reporting of fragile housing data was the weaker than expected Aug. 24 report of July Durable Goods Orders. Broadly defined, durable goods are products that aren't consumed or quickly disposed of, and can be used for several years. Here, a much larger than expected decline occurred [-2.4%] than was originally forecasted [-1.0%]. In economic speak, folks, this means that consumers have basically “zippered-up-their-wallets” in the month of July. This is worrisome to economists because the economic recovery that has reportedly been in place since 2001 has been largely “consumer led.”

• Additionally, and confirming the July Durable Goods Report, on Aug. 24 we also learned that July New Home Sales had also weakened more than originally anticipated [1100K] to the 1072K mark. In case you were wondering, folks, this dismal report would tend to confirm that the Fed’s long line of interest rate increases has finally had the intended effect of slowing the once ‘red hot’ housing sector of the economy.

Amazingly, or perhaps not, while giving all of us the “head fake” of tightening rates, the FED has been merrily INJECTING liquidity [high powered money as measured by M3] into the financial system with reckless abandon. Me wonders if it was a coincidence or not that during this tightening cycle, that the FED decided to stop reporting the growth of M3 money supply data when they reported,

“In the past two decades, however, the relationship between growth in the money supply and the performance of the U.S. economy has become much weaker, and emphasis on the money supply as a guide to monetary policy has waned.”

We’re all conditioned to think that economic growth is desirable. This is exemplified by and large when companies – or more specifically their performance - is judged [most often on a quarterly basis] by their sales being greater than the previous reporting period. This translates to higher share values and what we have come to accept as wealth creation.

I’m not going to beleaguer the point, but isn’t it interesting that what-gets-reported-as economic growth we generally associate with rising asset prices? I mean, we’re conditioned to think that bigger is better and more always implies a higher standard of living, right?

In fact, economic growth has become synonymous with rising prices, hasn’t it? And we all know that economic growth is good, isn’t it?

Precepts of Prosperity

For those of you who are ‘caught up’ or bought into the notion that the status quo either is or has been great for all of us, please consider the following sage words from Mr. Nelson Hultberg’s wonderful treatise, Contrarians and The Keynesian Myth,

“As recorded in The Statistical History of the United States, real wages for the workingman tripled in the years 1850-1913, and the GDP increased over 500% averaging 4.3% annual growth from 1870-1913. This was all done without any inflationary infusions of fiat money from the Fed because there was no Fed. This highly productive era, based upon the "barbarous relic" of gold, was accompanied by an actual deflation of prices. From 1800 to 1913, there was an overall 30% reduction in the Consumer Price Index from 43 to 30. 6 That's right, we had 4.3% annual growth amidst gently deflating prices all without government fiat money, all without FOMC pooh-bahs, all without today's Gargantua on the Potomac.”

It is not until we view economic growth, productivity and prosperity in this light that one might ‘make the connection’ and realize why economic growth has come to embody what we nowadays accept as such.

One needs to consider that the very nature of all fiat money systems implies that ALL MONEY is, in fact, loaned into existence. This fact [that all fiat loans are repaid principal PLUS interest] dictates that the money supply must FOREVER expand to simply service the existing debt. An ever expanding money supply juxtaposed against the constraints of the earth’s FINITE resources is fundamentally foolish and unsustainable with a completely predictable outcome.

In this light, money growth as we know it is more akin to CANCER – a type of growth that touches so many of our lives – which generally harms [or kills] the host,

Cancer is a class of diseases characterized by uncontrolled cell division [growth] and the ability of these cells to invade other tissues, either by direct growth into adjacent tissue (invasion) or by migration of cells to distant sites (metastasis). This unregulated growth is caused by a series of acquired or inherited mutations to DNA within cells, damaging genetic information that define the cell functions and removing normal control of cell division. ...

In case any of you are wondering, here’s a graphical depiction of what Central Bankers – cheered on by BIG GOVERNMENT – have done to our money supply:

Fed Res. Chart compliments of Jesse: http://www.geocities.com/arthurcutten/jesse.html

By observing the chart above, is it not obvious to everyone how closely correlated money supply growth is with virtually everything? Since 1996:

• Has the stock market not doubled or tripled?

• Have housing prices not done the same?

• What about the price of crude oil?

• How about commodities prices?

• How about the value or purchasing power of the dollar?

• Deficits?

Do the words of the Fed, namely,

“….the relationship between growth in the money supply and the performance of the U.S. economy has become much weaker,….”

seem credible to ANYONE?

In the end, perhaps the real question is whether or not we will opt for something resembling the discipline of the gold standard, how long we’ll all be prisoners in our own homes or maybe even how many of us will be lucky enough to be cancer survivors.

Today’s Market

Overseas equity markets got the week off to a shaky start with Japan’s Nikkei Index losing 176 points to close at 15,762. North American Markets fared better with the DOW ahead by 67.96 to 11,352.01, the NASDAQ up 20.40 to 2,159.39 and the S & P up 6.70 to 1,301.80. NYMEX crude oil futures fell 1.90 – closing at 70.44 per barrel.

In foreign exchange, the U.S. Dollar Index dropped .14 to 85.16.

The interest rate complex was largely unchanged with the benchmark 2-year government bond ending the day at 4.88%, the 5-year bond at 4.77% and the 10-year bond at 4.79%.

Precious metals were pounded with COMEX gold futures dropping 6.90 to close at 616.40 per ounce while COMEX silver futures gave up .35 to end the day at 12.08 per ounce. The XAU was hit for a 2.88 point loss, closing at 143.47 and the HUI fell 8.81 to close at 336.08.

On tap for tomorrow, at 10:00 a.m. we anticipate Aug. Consumer Confidence data to be released – expected 105.0 vs. prior 106.5. Then at 2:00 p.m. the FOMC is due to release the minutes of their Aug. 8th FOMC meeting on interest rates.

Wishing you all the very best for the last week of summer and a most pleasant upcoming long Labor Day weekend!

Rob Kirby

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