The US Congress Charges Commission
Faced with an imminent financial meltdown and a looming depression, one might have expected Congress, inspired with a rush of patriotism, to have stepped vigorously to the plate to pass US Treasury Secretary Hank Paulson's rescue package without delay.
Instead, Congress delayed, causing increased market panic before eventually doing the deed. But in doing so, they had the nerve to demand their own 'commission' of over $100 billion dollars of 'pork barrel' add-ons, or over 15 percent of the total package. These extras will simply be added to the tab charged to the American taxpayer! So much for the end of earmarks.
The latest episode is simply the culmination of a generation of Congressional mismanagement.
Over the past 30 years, Congress has inexorably steered the American economy away from production and savings toward reckless consumption and borrowing. The result of Congressionally-created incentives is an economy where personal consumption now accounts for some 72 percent of gross domestic product.
The Congress has failed miserably in its responsibility to oversee the US Federal Reserve and the Treasury, the two entities that gave birth to the sub-prime catastrophe. Indeed, it was the Clinton-led Congress that encouraged Fannie Mae and Freddie Mac to expand their mortgage lending among low and moderate income earners.
Lending to consumers of modest means and marginal credit was the centerpiece of the government's efforts to enrich the electorate with real estate wealth. This misguided lending is at the root of the current real estate-led financial fiasco.
Congresssional approval of Paulson's Emergency Stabilization Act will at least temporarily improve both the liquidity and solvency of Wall Street, easing the credit markets that are vital to American and world economic growth, although tht hasn't shown up yet.
But what of American householders and consumers? According to Yale Professor Robert Schiller, foreclosures are running at the rate of 10,000 a day. The cumulative distress level of those affected is hard to imagine.
Regardless of Paulson's plan, America is leading the world economy towards deep recession and even depression. Governments around the world are beginning a globally coordinated effort to issue increasing amounts of low cost Monopoly money to avoid a politically expensive downturn. But then, what of the value of money? What of gold?
The current real estate led financial fiasco was founded on a massive level of US dollar liquidity. Leveraged to the hilt, holders of dollars scoured the earth to find any US dollar asset that offered a high yield. In this quest, risk became an increasingly minor concern.
The pain resulting from the massive deleveraging of investments that have proven to be far riskier than nearly anyone imagined, is too great for politicians to bear.
Therefore, instead of allowing a natural economic correction to take place, governments are authorizing their central banks to flood the world with yet more liquidity. Meanwhile they talk inflation down in order to secure wriggle room to lower interest rates. It is like trying to extinguish a fire with gasoline.
We are seeing a collapse of faith in financial institutions. Sooner or later, we will see a massive wave of inflation and a similar collapse of faith in paper currencies. Then gold, the ultimate currency, will have its day in the sun.
But at present, gold is being pushed and pulled in two directions. First, the threat of recession, and even of depression, is exerting major downward pressure. At the same time, the fear of a financial meltdown is pushing it up. As a result, gold is essentially hovering, but is showing a slight upward trend.
It is hoped that the massive actions taken this week by the Fed, Treasury, and central banks the world over will lessen today's panic, although global markets so far are not giving much cause for optimism. At the same time, as recession deepens there will be increasing demands for cash. In common with most commodities, gold may experience temporary erosion of price; at worst down to $600 an ounce.
However, inflation and a progressive erosion of faith in paper money will push gold into a relatively new but historic role as the ultimate money. This has not happened in sophisticated economies since the 1930s. When it finally occurs, look for an explosion in the price.
Conservative investors should maintain a core holding of hard currency treasury bonds and gold. In addition, they should accumulate further gold holdings on major recession-induced price dips and await, with some sense of comfort, the ultimate collapse of paper currencies.
John Browne is senior market strategist - Euro Pacific Capital, Inc. of Darien, Connecticut, USA. Euro Capital publishes the free, on-line investment newsletter http://www.europac.net/newsletter/newsletter.asp