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Best of Doug Noland
By James R. Cook
Nobody knows the future. But a chorus of voices gives plenty of warnings of danger ahead. Today’s loose money policies draw powerful criticism. My friend, the economist Doug Noland writes, "The U.S. financial system has grown severely dependent on unsound money, and the maladjusted system is only sustained by gravitating further and further away from any semblance of reasonable monetary management….. What we have today is so far removed from sound money, with the lunatics directing the governors of the asylum to pump in only stronger laughing gas."
He concludes, "No one will step up and admit we have set course for financial disaster. Sure, ultra-easy money stimulated unprecedented household borrowings, with a spike in home and auto sales. We will now pay the price for artificially inflating housing and auto demand. It was absolutely irresponsible monetary policy to actively stimulate consumer over-borrowing and spending in this manner – a desperate attempt to sustain unsustainable boom-time demand. It’s been little more than a dangerous monetary gamble with great risk and NO possibility for success….."
The economist Frank Shostak tells us, "One cannot create real wealth by printing money. If printing money could create wealth, there would not be poverty in the world today. Every third world country could print money and become rich. There would never be a recession. We would have perennial wealth creation with no effort. You can pump all the money you want but it does not create anything; it only destroys. It creates a misallocation of resources, consumes capital, and makes everything much worse."
Dr. Kurt Richebacher warns, "Renewed drastic weakness of the U.S. economy is the great shock waiting to happen for the world. A slumping dollar will turn it into a nightmare."
The prudent bear, David Tice articulates, "The economy is imploding, the consumer is retrenching, the real estate bubble has been recognized, and corporate profits are evaporating….. Fasten your seat belt!"
Steve Puetz (pits), the newsletter writer, stopped in to see me the other day and we went to lunch at the Mall of America. He’s convinced gold and silver are the only thing to own. "Keep 90% of your assets in gold and silver coins." On stocks he advises, "The Wall Street sales force tries to persuade investors that stocks are cheap because they are down substantially from their all-time highs. Yet, traditional valuation indicators show the opposite – that stocks are as over-priced as ever."
Jim Puplava of "Financial Sense sums it up. "Some economists are arguing that the Fed could induce spending by consumers and business by targeting a higher rate of inflation, which would make holding on to cash less beneficial. This is the kind of madness that is now taken as sound economic policy, and most in the investment community would go along with it. In fact, many are calling for even more money. You got to have gold. Madness and lunacy and political risks are everywhere."
By James Cook
Without savings mankind would still be living in caves. Without savings there would have been no Babylon or Rome. Without savings there would be no automobiles or Motown, no stock exchange or Manhattan, no movie makers or Hollywood. High savings rates are the hallmark of prosperous countries, dominant cultures and successful people. Bill Bonner recently explained why. "Real prosperity results not from consumption, but from its opposite – forbearance. It is the capital that is not consumed – the savings – that determines how quickly a society gets rich."
In America, where government intervention runs supreme, savings are under attack. Transfer payments and social programs erode the will to save. Inflation discourages savings. High taxes on large incomes reduce the ability to save. Low interest rates make savings unrewarding. Taxing earnings once and then again when they bear interest reduces savings. Rising asset values, brought on by easy money and credit, channel money away from savings into tangibles and speculation.
The government and the Wall Street casinos steadily beat the drum for consumption. Spend your paycheck on goods. Borrow against your future income for more goods. Exhaust your savings on additional goods. Finally, take the last drop of equity out of your home and spend it too. The monetary authorities make money and credit readily available to those consumers who will spend with abandon. Forget about postponing gratification or the need to accumulate capital. The consumer is encouraged to spend and thus neglect savings. At a time when personal consumption is at the highest level ever, they coax us to eat the seed corn.
In a balanced economy, the money that people save is a real resource that can be loaned out to borrowers for constructive purposes. New savings provide an equal amount of new credit. But, in this country, credit exceeds savings by 700%. Dr. Kurt Richebacher explains, "Basically, saving is unspent income. Credit creates spending power out of nothing. These two observations point to America’s true growth engine: a grossly outsized credit machine, pouring persistently unlimited amounts of credit into the economy and its financial markets, as against almost nonexistent domestic saving….. What’s more, this credit machine is overwhelmingly geared to finance consumption and financial speculation. Very little of its lending goes into capital formation."
Every economic thinker of note up until the Second World War would warn against the encouragement of consumption over savings. The outcome of this policy is capital destruction. Today’s economic leaders have totally failed to understand the role of savings and capital accumulation in improving the economy. If people do not consume their entire incomes, this surplus can be invested to increase the amount of tools, equipment, plants and facilities that produce goods. Restricting consumption has always been the formula for growth and prosperity. It should be the government’s role to encourage this process rather than to impede it.
We ignore the economic wisdom of the ages at our own peril. As Ludwig von Mises wrote, " It rests with men whether they will make the proper use of the rich treasure with which this knowledge provides them or whether they will leave it unused. But if they fail to take the best advantage of it and disregard its teachings and warnings, they will not only annul economics; they will stamp out society and the human race."
Inflating, capital consumption, government intervention, low savings and overwhelming indebtedness are not the path to prosperity. They are the road to economic destruction and financial perdition. If you do not protect yourself against these eventualities, you risk being ruined by the fatal conceit of our age.