In a sign of the times, Bloomberg reports that the University of Texas just took delivery of some $1 billion in gold bars.
The decision to turn the fund’s investment into gold bars was influenced by Kyle Bass, a Dallas hedge fund manager and member of the endowment’s board, Zimmerman said at its annual meeting on April 14. Bass made $500 million on the U.S. subprime-mortgage collapse.
“Central banks are printing more money than they ever have, so what’s the value of money in terms of purchases of goods and services,” Bass said yesterday in a telephone interview. “I look at gold as just another currency that they can’t print any more of.”
Gold is over $1500 an ounce today.
Meanwhile, two bond ratings services have trashed the world’s top two economic players. Last week Fitch Ratings gave a negative outlook on China, amid news that the Chinese could be on the edge of a major banking crisis brought on by a disastrous program of boondoggle economics. Today, Standard & Poor’s just issued the same notice on the American economy – a verdict on the failure of our politicians to reel in deficits and debt.
And that news comes on the heels of announcements by the Saudis and Kuwaitis that – with oil prices still over $107 a barrel, the world is “oversupplied” with oil.
There is no good news on the economic front. There is only frightening news.
At National Review, Kevin Williamson says it’s not even news.
A little over a year ago, the markets already were telling us that the government’s story about how it is finally going to fix its finances is pure fiction. Yields on U.S. Treasury bonds went higher than those on a number of blue-chip corporate bonds, leading your obedient servant to remark:
Who has better credit than Uncle Sam? If you ask the bond market, that elite list includes Berkshire Hathaway, Procter & Gamble, Lowe’s, Johnson & Johnson, and a host of other blue-chip corporate borrowers. The U.S. government has the ability to levy taxes on the largest national economy in the world, a vast and fearsome revenue-collection apparatus, and more than two centuries of constitutional government under its belt. P&G has Tampax.
As in the case of Enron, the smart money gets gone long before credit downgrades start hitting the headlines. As noted in this column, PIMCO, the world’s largest bond fund, got clear of U.S. Treasuries some time ago, following the lead of a number of hedge funds. The oil-exporting countries are dumping U.S. debt, too. Perhaps they know something we don’t?
Actually, they know something we do: Nothing about this is a secret. In the phrase adopted by Rep. Paul Ryan, what is coming is the most predictable economic crisis in our history: a nominal national debt of more than $14 trillion, a real national debt ten times that, and Barack Obama standing between the reformers and the needed reforms with a veto pen and excellent chances of being reelected in 2012. This isn’t sophisticated macroeconomic analysis; this is that anvil falling out of the sky onto the head of Wyle E. Coyote, and you don’t have to be a super-genius to figure out that it’s going to hurt like hell when it hits him. Even S&P gets that.
And that’s probably the reason this announcement hasn’t really sent big-time shock waves through the markets: It’s just confirming what everybody already knows: Washington’s finances are Enron writ large.
So what does this mean?
Why, inflation of course. As Dick Morris notes in his column today…
The latest data indicates that prices soared in March at an annual rate of 6.5 percent, by far the highest increase in decades. Half of the increase was in energy prices and one half point in higher food costs. While the Federal Reserve Board focuses on the “core” inflation rate, that excludes these volatile items, American consumers dip into the same pocketbook to pay for food and fuel that they use to pay other prices.
And there is little likelihood of any leveling off of the prices of either food or fuel. The former is driven by the use of food for energy, diverting corn and other food crops from nutritional use. The later is animated by the instability in the Middle East and North Africa, an international crisis that is likely to worsen in the coming year. Indeed, should the disease that has brought down regimes in Egypt, Tunisia, and Yemen and is fighting to topple them in Bahrain, Syria, and Libya spreads further into Saudi Arabia, we could face huge increases in energy costs.
And don’t forget the likely upward pressure on interest rates. The Fed is likely to end its QE-2 (quantitative easing 2) program in June. No longer will it buy mortgage backed and Treasury securities from banks into order to pump more money into the system. Once the printing press stops, the Treasury will have to start borrowing real money from real lenders and pay real interest. It will no longer be able to borrow back the money the Fed prints at nominal interest rates. With Washington needing to borrow $40 billion a week to finance its deficit, the upward pressure on interest rates will be severe.
Then, there are health insurance costs. With the onset of the requirements of Obamacare, the increase in premiums has averaged twenty percent, further raising costs of business.
Faced with these increases in fixed costs, businesses will have to raise prices. But nobody will be able to pay them because the economy is terrible. That will trigger a loss of customers and ever higher prices to make up the gap. This stagflation cycle is now upon us and will wipe out any gains that the so-called recovery may offer.
Annual inflation of 6.5% is just the beginning, just like $5 gas is just the beginning. The inflationary forces Obama has unleashed by his record deficits and his virtual tripling of the money supply will batter the economy with a violence that will make his re-election impossible.
The storm is just starting.
The problem, fundamentally, is that the government is borrowing so much money that it’s running out of people willing to lend. There are too reasons for that – first, as PIMCO and now S&P have figured out, the U.S. government isn’t all that terrific a credit risk. And second, there’s really only so much money to be lent out there. Already, the federal debt has crowded out private lending to such a large extent that you can’t get a loan to start a business or buy a house. For well over a year now, banks can borrow from the Fed at virtually a zero interest rate and loan back to Treasury at better than three percent – meaning they have no incentive to carry the risk of individual lending.
So until the government borrowing stops, the economy can’t grow. Unemployment won’t drop, and the number of people on the dole won’t decrease. It’s a vicious cycle that our politicians are invested in – to such a staggering extent that even an effort at cutting a modest $100 billion gets demagogued and whittled down to some gassy $38 billion in future savings. And Paul Ryan, for his effort at balancing the budget over the course of a quarter-century, which while laudable for its attempt to redefine two major entitlement programs without killing them is still woefully inadequate to break this cycle, is treated as Alaric I on the march to Rome.
Amid all this, no one can blame the University of Texas to buy gold even at an all-time high. It might seem like a bad investment today, but given what’s brewing over the horizon $1500 an ounce might be cheap.
Particularly considering that if you’re not buying gold, it means you have faith in the fiscal continence and economic competence of politicians in Washington.