All the Emperors with No Clothes by Navin Doshi

All the Emperors with No Clothes
(By Navin Doshi, March 5, 2010)

Looking carefully at the economic indicators, the current state of the Western (G7) economy appears quite dismal. Led by the Europeans, a competitive devaluation of currencies is wreaking havoc on the economic recovery prospects for the Western nations. The devalued Euro will not help the U.S.A. and Canada, a tired country with little or no gold reserves to back the Canadian loonies. People delude themselves into thinking that Greece, Spain, U.K., Canada, California, New York, and the entire U.S.A. will solve their problems through a tightening of the fiscal belt. Economists believe that governments should start cutting their spending and increase taxes, but such measures could result in astronomical unemployment as seen in Africa. The G7 apparently is a form of a grand Ponzi scheme, with little or no productive backing, like defunct Enron. Emperors of the West, just about a century later, are essentially broke by spending their fortune on an unsustainable life style.

As I have opined in earlier articles, governments need to focus on production, not consumption, to create wealth. Paper money becomes money only when it is convertible to an asset class that is acceptable and respected the world over. Unfortunately, governments are not showing any signs that they will be heading in the right direction.

Reviewing the history of currency, the barter system came first and continued for a millennia, but that initial arrangement was replaced by a more efficient and sophisticated system of world currency in the form of precious metals. Europe became rich because of the Industrial Revolution together with colonization that provided raw materials. The riches and wealth of Europe essentially disappeared by the middle of the 20th century as a result of the two world wars and government socialistic tendencies. Following World War II, America came of age and amassed more than half of the world’s gold and built Fort Knox to store it. In the post-WWII era, if you owned the dollar you also owned gold since the dollar was convertible into gold. America, as a victor of WWII, with the support of the Allies, was able to establish the dollar as the world reserve currency. But human nature rarely fails; power corrupts men sooner or later, if not in the first generation then in the second or third. America, though born out of idealism, is an unexpected example of how corruption and decadence seeps in and spreads.

The U.S. soon used its world dominance to print money to finance a military-industrial complex, multiple wars (Korea, Vietnam, Iraq, etc), to dole out foreign aid, and to exert its political influence all over the world. Some of us would have to confess that we took advantage of the situation since we came to America for higher education, but we took employment in the same military-industrial complex instead of going back to our homeland.

This spending extravaganza eroded the integrity of the U.S. dollar. America maintained the facade for a while by exchanging foreign dollars for gold, with France leading the charge to demand gold for dollars. When half of the gold, about 9000 metric tons, evaporated from Fort Knox in a short span between the late 1960s and the early 1970s, President Nixon disconnected the dollar from gold. That decision marked the end of the true international trading standard. If we compare currencies to the blood of a living organism, the removal of gold as an anchor, or as a “quality controller”, caused the decline in the “nutritional” value of currencies. As a result, for the last 40 years, the U.S. and the rest of the world have embarked on a nonstop printing spree. Trillions have been spent on wars, trillions to save the banks, trillions on health care, and trillions for the good life of the chosen few, and the spending spree continues on and on just like the Energizer Bunny in the battery advertisement.

Please note that after the peak was established in the ’50’s and ’60’s, the U.S. growth rates of GDP, employment, and income have been declining. For example, the average GDP growth rate peaked in the 1940’s at 5.5 %, and it has been declining steadily with the lowest in the first decade of the 21st century at 1.9 %. (Economist magazine, Feb 27th, p. 36).

Ironically this situation has been brought upon us with the blessings of all the great minds of our era including John Maynard Keynes, many Nobel Laureate economists, and rocket scientists who have applied the laws of natural science to economics with very little regard for human psychology. The great minds of the Western world that include psychologist Sigmund Freud, political theorist and sociologist Karl Marx, physicist Rene Descartes and economist John Maynard Keynes have all failed in varying degrees.

I submit that two significantly important causes for the decline are the Western belief that nature must serve humanity’s interests and the “Holier than Thou” mindset. On the other hand, the Eastern belief states that humanity must have reverence for nature since she is the mother, and second, the truth is never absolute. Recall the truth described by the parable, “Elephant and the Blind Men”. Ultimately humanity and nature must exist in a symbiotic way. The growth does not have to be at the expense of the environment. The growth can be extended seamlessly from without to within.

With the institutional manipulation in full bloom, the economy and markets give an impression that we have overcome all the excessive indulgence of the past. Oblivious to reality, stock prices are driven up, down, or sideways by proprietary computer programs with devilish cunning to suck money from idealistic dreamers who believe that markets are free and unbiased. When the stock price drops in a split second, the little guy probably feels like Charlie Brown when Lucy tempts him to kick the football, but falls on his behind every season. Faster than the shark attack or a blink of an eye, high frequency trading machines, employed by the great parasitical vampire squid, a.k.a. Goldman Sachs, alertly look for their prey. The name, “vampire squid”, coined by Matt Taibbi of Rolling Stone magazine, seems most appropriate metaphor for the predatory mentality of the bank. These machines, employed by a few giant banks, can read your order in a microsecond, and squeeze the little guys to their tolerance level for a nickel or a dime, billions of times during every trading day and make millions for their owners. Is it legal? Probably yes, but it is certainly not ethical. Nevertheless, the banks do it to everyone, including to their own clients. The Secretaries of Treasury for the last two decades, Robert Rubin, Henry Paulson, and Timothy Geithner, all came from Goldman Sachs. Wall Street in essence has been able to highjack Washington. Democracy seems to have been replaced by plutocracy. There is a recent news story that Europe, under the leadership of German Chancellor Angela Markel and the French President Nicolas Sarkozy, has declared a war on Wall Street by limiting the sales of some of their derivative products, thanks to Goldman Sachs involvement in helping Greece to hide its debt.

At this stage of economic history, our only solution will be to bring back the discipline that removes the tendency of governments and “Too Big to Fail” corporations to take advantage of others. It is apparent that only the markets, with little but appropriate supervision by policymakers, will determine the next policy system. In some ways, precious metals will be one of the participants if not the only one. In the meantime, we will see uncertainty, volatility and defaults. Keeping substantial cash, investing in precious metals and their mining stocks, and little in growth stocks is a good idea as long as the money supply M3 is stable in an environment of rising mortgage defaults and unemployment. Trading agility is extremely important in this market environment because a black swan could appear at any moment with devastating results. There are a few observers who claim that M3 in reality is manipulated and rising. The real inflation rate given on http://www.shadowstat.com is significantly higher. Highly respecter market analyst, Marc Faber, advises people to keep buying precious metals at equal time intervals for the rest of their lives, since the money printing press is being operated at a much higher speed than the mining of precious metals. Well, Indians have been doing it for thousands of years because they have learnt that rulers almost always cheat their subjects by devaluing their currency.

(Mr. Doshi, a writer, trader, and a philanthropist, posts his articles at http://www.nalandainternational.org)