Master of the Universe

Author: Jim Sinclair

 
Friday, April 15, 2005, 3:29:00 PM EST




The one Federal Reserve Chairman who truly has acted as Master of the Economic Universe has Spoken.

In 1980 at about the time The Wall Street Journal penned an article about me headlined, "Gold Bull Takes Off His Horns," Mr. Bleiberg, then editor of Barrons, wrote a piece calling me a pinhead because I characterized Chairman Volcker as a "class act."

At a dinner two years later when my former partner was Superintendent of Banks for the State of New York, Chairman Volcker said, "Yes, you and Sinclair. I guess I really got the gold guys." Our answer was quite simple. "Sorry, Mr. Chairman, but you did not get these gold guys. In fact, you did us a good turn because when we saw you coming we exited gold."

Now Mr. Volcker is back repeating to you what I told you Mr. V had said somewhat privately many months ago. However, this time he has added an EXTREMELY important caveat.

I listened hard to Chairman Volcker without emotion and paid strict attention to every word in late 1979. I did not like in the least what I heard. However, I did not argue with it because it had been said and he had the power.

Gold soon fulfilled its price objective in a practical sense and fundamentally at $887.50. Gold had balanced the International Balance Sheet of the USA. That day and through the entire night Vincent and I sold all the gold we and our firm owned. Next morning gold opened down $150.

Will you listen to Chairman Volcker now or to the top callers, the star gazers and the agents of COT? Is financial TV your only access to knowledge?

What Chairman Volcker added when speaking of the need to put in place those POLICIES that have a historical record of turning the triple  deficits towards surplus was a CRITCALLY IMPORTANT caveat.

"I don't know whether change will come with a bang or a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change."

The Chairman has spoken again saying to you EXACTLY the same words that form the foundation of my present position on the US dollar and Gold.

Sadly, I do not expect you, the gold advisors or many others to pay heed to the words of the best mind in finance.

Sadly, I expect you to continue throwing your gold insurance and good gold shares out.

Sadly, I expect the majority of you to be coned into being long the dollar and even short the Swiss and Canadian dollar. 

I know those who know the future and they are not chartists or sooth sayers who might get it right once in a row.

Chairman Volcker is the intellectual powerhouse in finance.

Chairman Volcker has spoken but this time his invitation is to re-enter gold while shorting the dollar by owning other currencies of which my choice is the Swiss and Canadian.

This is the clear implication of his words if you have the ability to listen carefully, unemotionally and act accordingly regardless of whether the establishment considers you a pinhead.

Please, read the piece below, listen, drop your emotions and grasp your intellect.

washingtonpost.com
An Economy On Thin Ice
By Paul A. Volcker
Sunday, April 10, 2005; Page B07

The U.S. expansion appears on track. Europe and Japan may lack exuberance, but their economies are at least on the plus side. China and India - with close to 40 percent of the world's population -- have sustained growth at rates that not so long ago would have seemed, if not impossible, highly improbable.

Yet, under the placid surface, there are disturbing trends: huge imbalances, disequilibria, risks - call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot. What really concerns me is that there seems to be so little willingness or capacity to do much about it.

We sit here absorbed in a debate about how to maintain Social Security - and, more important, Medicare - when the baby boomers retire. But right now, those same boomers are spending like there's no tomorrow. If we can believe the numbers, personal savings in the United States have practically disappeared.

To be sure, businesses have begun to rebuild their financial reserves. But in the space of a few years, the federal deficit has come to offset that source of national savings.

We are buying a lot of housing at rising prices, but home ownership has become a vehicle for borrowing as much as a source of financial security. As a nation we are consuming and investing about 6 percent more than we are producing.

What holds it all together is a massive and growing flow of capital from abroad, running to more than $2 billion every working day, and growing. There is no sense of strain. As a nation we don't consciously borrow or beg. We aren't even offering attractive interest rates, nor do we have to offer our creditors protection against the risk of a declining dollar.

Most of the time, it has been private capital that has freely flowed into our markets from abroad -- where better to invest in an uncertain world, the refrain has gone, than the United States?

More recently, we've become more dependent on foreign central banks, particularly in China and Japan and elsewhere in East Asia.

It's all quite comfortable for us. We fill our shops and our garages with goods from abroad, and the competition has been a powerful restraint on our internal prices. It's surely helped keep interest rates exceptionally low despite our vanishing savings and rapid growth.

And it's comfortable for our trading partners and for those supplying the capital. Some, such as China, depend heavily on our expanding domestic markets. And for the most part, the central banks of the emerging world have been willing to hold more and more dollars, which are, after all, the closest thing the world has to a truly international currency.

The difficulty is that this seemingly comfortable pattern can't go on indefinitely. I don't know of any country that has managed to consume and invest 6 percent more than it produces for long. The United States is absorbing about 80 percent of the net flow of international capital. And at some point, both central banks and private institutions will have their fill of dollars.

I don't know whether change will come with a bang or a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change.

It's not that it is so difficult intellectually to set out a scenario for a "soft landing" and sustained growth. There is a wide area of agreement among establishment economists about a textbook pretty picture: China and other continental Asian economies should permit and encourage a substantial exchange rate appreciation against the dollar. Japan and Europe should work promptly and aggressively toward domestic stimulus and deal more effectively and speedily with structural obstacles to growth. And the United States, by some combination of measures, should forcibly increase its rate of internal saving, thereby reducing its import demand.

But can we, with any degree of confidence today, look forward to any one of these policies being put in place any time soon, much less a combination of all?

The answer is no. So I think we are skating on increasingly thin ice. On the present trajectory, the deficits and imbalances will increase. At some point, the sense of confidence in capital markets that today so benignly supports the flow of funds to the United States and the growing world economy could fade. Then some event, or combination of events, could come along to disturb markets, with damaging volatility in both exchange markets and interest rates. We had a taste of that in the stagflation of the 1970s -- a volatile and depressed dollar, inflationary pressures, a sudden increase in interest rates and a couple of big recessions.

The clear lesson I draw is that there is a high premium on doing what we can to minimize the risks and to ensure that there is time for orderly adjustment. I'm not suggesting anything unorthodox or arcane. What is required is a willingness to act now -- and next year, and the following year, and to act even when, on the surface, everything seems so placid and favorable.

What I am talking about really boils down to the oldest lesson of economic policy: a strong sense of monetary and fiscal discipline. This is not a time for ideological intransigence and partisan posturing on the budget at the expense of the deficit rising still higher. Surely we would all be better off if other countries did their part. But their failures must not deflect us from what we can do, in our own self-interest.

A wise observer of the economic scene once commented that "what can be left to later, usually is -- and then, alas, it's too late." I don't want to let that stand as the epitaph of what has been an unparalleled period of success for the American economy and of enormous potential for the world at large.

The writer was chairman of the Federal Reserve from 1979 to 1987. This article is adapted from a speech in February at an economic summit sponsored by the Stanford Institute for Economic Policy Research.
 

Artigo muito interessante mas que não acrescenta muito ao que já todos sabemos: problema do défice, sobre-consumo, ausência de poupança etc.

A ver vamos onde isto vai dar

Eu acho que acrescenta e muito.

O simples facto destes comentários virem deste ex-Presidente da Reserva Federal (aquele que salvou, literalmente, a economia americana da grave crise do final dos anos 70, início dos anos 80) tem uma relevância enorme.

Até porque a situação é muito similar à dos anos 70, mas para pior. As medidas então tomadas por Volcker foram muito duras para a economia, mas era a única saída. O problema é que hoje ninguém tem coragem para admitir a situação precária da economia norte-americana, nem vontade política para introduzir medidas de choque que resolvam os seus desequilíbrios estruturais.

Quanto mais tarde agirem, piores serão as consequências.