In any event, gold finished 2012 up for the twelfth year in a row, gaining 7% measured in US dollars. As for 2013, Ambrose Evans-Pritchard writes January 1, “The US, Japan, Britain, as well as the Swiss, Scandies and a string of states around the world, are actively driving down their currencies or imposing caps…. The side-effects of this currency warfare—or ‘beggar-thy-neighbour’ policy, as it was known in the 1930s—is an escalating leakage of monetary stimulus into the global system.”
Prognosis: “The more that investors come to think another cycle of global growth is safely under way, the riskier it will be to hold corporate bonds, $8 trillion in the US alone. With yields priced for deflation, that bubble is dangerous to own on 10-year maturities. The money will rotate into equities and bullion, with China’s central bank driving gold through $2,000 at last.” Evans-Pritchard sees this as “a rally within a structural trade depression.”
Martin Hutchinson, at the Prudent Bear December 31, comes to the same conclusion. “As money pours out of the Bank of Japan…Japanese markets will soar, even as the yen weakens. With the EU, Britain and the United States also printing money like madmen, we likely to see a massive stock market and commodity price boom, with corporate profits also boosted by cheap money but accompanied by disappointing, unbalanced economic growth. The Dow Jones index, currently around 13,000, could hit 20,000 or even 25,000, but investors may do even better in precious metals, with gold rising beyond $3,000.” He concludes, “This period of euphoria will make it through 2013 but not through 2014. At some point, debt markets will choke…. The result will be a collapse of credit and a very nasty global recession.”
Who’s a Dismal Desmond then—didn’t Washington avert the fiscal cliff? Yes, as this column predicted, there was no Götterdämmerung, only a damp squib. There are no cuts to speak of; the ratio of increased tax revenues to decreased spending is 41:1. And, as ZeroHedge reports, “According to the just-released scoring by the CBO, the total impact on the US budget deficit of said permanent tax cuts will be a $4-trillion increase in the deficit over the next decade. In reality, due to the CBO’s perpetual optimistic bias, this number will likely be orders of magnitude lower than what it actually ends up being.”
In the Financial Times January 2, Nouriel Roubini points out that the deal “translates into a 1.2% of GDP drag on the economy during the year. If the economy was happily growing above trend—at say 3.5%—that would not be such a big deal, as growth would still be above 2%. In the past few quarters, growth already averaged about 2%. So the US could quite easily come perilously close to stall speed this year—or worse, if the Eurozone crisis worsens.”
Roubini expects “another dispute between Republicans, who want to shrink the size of the federal government, and Democrats, who want to maintain it but are unsure how to pay for it.” Not a chance. There will be no cuts—not this year, not ever. When have the Republicans ever reduced the size of government? When has any “right-wing” party anywhere in the world?
Our friend Peter Grandich directs us to this video, which explains that even the elimination of all discretionary spending would not balance the US budget. That leaves entitlements, which are sacrosanct and which will continue to mushroom, given that the “recovery” is not likely to appear any time soon.
Mortimer Zuckerman, in US News December 28 warns, “There’s a sound in the mountain range that’s even scarier than the cliff. It’s the sound made by an avalanche, the trillions of dollars of debt that’s heading our way, gathering speed and mass.” True enough, but there’s a sound even scarier than that—the sound made when a shock liquefies a world economy built on Keynesian economics.