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Politics of Hate

By David Galland, The Casey Report

In describing the current situation in these United States, and in many of the world’s other superpowers, we here at Casey Research have often used the word “intractable”… as in, “impossible to resolve.”

While that may not be technically accurate – because there is no problem related to economics that can’t be solved if one is willing to swallow sufficiently strong medicine – it is a correct assessment, given the overwhelming role that politics now play in the economy.

In a recent edition of The Casey Report, I observed that the largest and most persistent bubble of all over the last half-century has been the bubble in government – making the ones witnessed in dot-com stocks and housing mere blips by comparison.

The following chart is particularly illustrative of that contention.

As you can see, the level of government spending (state being the blue area, and federal being the red) as a percentage of GDP has grown to levels last seen during the unprecedented mobilization undertaken to fight WWII – a period marked by the government takeover of entire industries, rationing of all key commodities, wage and price controls, and much more.

Though it is an overused analogy, the chart paints a perfect picture of a frog in a pot of water slowly being brought to a boil.

The economic trap the government has stumbled into opened decades ago, as a result of the nation’s leaders misunderstanding both the basics of economics and the complex relationship between the rulers and the ruled.

To frame the discussion, I would start by pointing out that in order for a government to be successful, above everything else it needs to avoid being hated. That’s not to say that it has to be wildly popular, though that’s never a bad thing, just not actively despised.

Generally speaking, the single most important way that a government avoids becoming the object of public hate is to maintain things in such a way that people are able to get by financially.

Sure, people might not like a politician’s ethics, and they might have strong views about some stupid and destructive government act, but if people can get up every morning secure in the knowledge that there will be food on the table and a roof over their heads – that their businesses will carry on in a more or less predictable manner – their opinion about the government will never rise to the level of hate.

Thus, the overarching goals of government should be to assure that, come what may, the footing of the economy is firm and that the property of the citizenry is protected. Given that the government doesn’t actually create wealth of its own accord, the best way to accomplish these goals is relatively simple and can be summed up as, “Do no harm.”

Which brings us to the trap the U.S. government stepped into, as did virtually all of its peers around the globe.

Decades ago, the government simply decided to expand its role beyond providing the basic services that make some contribution to a smoothly operating society. While it may have done so with the best of intentions, the record makes it clear that its motivations have increasingly been political in nature.

Returning to the chart, you can see that in the early part of the 20th century there was almost no growth in government. You can also see that that period of quietude was sharply disrupted by WWI, then the Great Depression, which was followed by WWII – each of which jacked the government’s role in the economy markedly higher. And once the trend got started, it has largely continued unabated until today. Note the latest spike, at the far-right side of the chart, and you don’t need to wonder where things are headed next.

The government could have avoided stepping into this trap simply by resisting all calls for it to expand the limits of its role in order to “do something” about this societal ill or aspiration – rigorously leaving such matters to the people themselves to address.

While successive generations might have groused about the government being uncaring or unsympathetic to the needs of the needy, by being tight-fisted and modest in its exertions, the government’s finances would have remained solid as a rock. That in turn would keep the weight of the government’s dead hand on the economy light and readily manageable. As a consequence, come what might, the vast majority of people could count on being able to earn a good dollar and keep most of it for their own purposes.

In other words, if back in 1905 or so, the government had just said “no” to foreign adventures and domestic largess, we would today be living in a different world altogether.

Let me get to the point, because it has important implications for us all.

If the government had kept its role limited and its finances in good shape, people might not love it, but they’d respect it – and, more to the point, they wouldn’t hate it.
However, by expanding as it has, the government has drained its treasury. Then, politically unable and unwilling to stop its spending, it kept going – racking up the largest debt in history.

That has brought us to a crossroads.

One path leads to more spending, in which case the currency will collapse, wiping out the remaining wealth of the citizenry… resulting in a hateful population.
The other leads to overt default and a wholesale unwinding of the government’s massive role in the economy, again wiping out the wealth of the citizenry and resulting in a hateful population.

In either scenario, a government anxious to avoid the worst can be expected to raise taxes and take other desperate measures to avoid failure. Hungary, Poland, Bulgaria, and other nations have recently made pension grabs; we can expect to see that in the U.S. as well before this is over. Again, at the same time that these moves may help the government stay afloat awhile longer, it plants the seeds of public hatred and cements its eventual downfall.

In our strongly held view, the government will continue to opt for the path of more spending – until it simply can’t, at which point the first path will lead back to the second. And so, no matter what it does at this point, the government will soon find itself faced with serious and widespread discontent.

Throw a heavily militarized constabulary into the mix, and the potential arises for the situation to get very ugly, very fast.

That the government remains firmly committed to its spending becomes obvious in a recent Reuters article about plans by the new Republican House to reduce Obama’s already diluted $100 million in planned federal budget cuts, to just $50 million.

And this while the government continues deficit spending to the tune of more than $100 billion a month. What a joke. What a bad, bad joke.

In the current edition of The Casey Report, senior editors Doug Casey, Bud Conrad, and Terry Coxon chart the frothy economic waters we are finding ourselves in – and provide practical advice how to navigate them to your benefit.

You have to make your own decision as to how you’ll protect yourself about what’s coming, whether by just diversifying into inflation hedges, or diversifying your life internationally – but whatever you do, don’t be lulled into complacency by any temporary pick-up in economic activity engendered by the government’s monetization. It’s a trap.

[Right now, you can get The Casey Report for only $98 per year – an unprecedented 72% off the regular price. But hurry, this special offer is only available for 72 hours. Details here.]

Gold Tsunami

By Eric Sprott & David Franklin

Ignoring real estate, most people invest their hard earned money in paper things. Stocks, bonds, annuities, insurance – it’s all paper, and it sits nicely in our bank accounts and shows up on our computer screens. Halfway across the world, investors in China and India have never trusted paper investments as a store of value – and they’re converting their hard earned paper money into gold and silver bullion. Not that this is anything new. It isn’t. But the scale and speed with which they are accumulating precious metals IS new, and it’s driving the fundamentals that we believe will lead to higher prices in 2011.

Demand for the metals is literally exploding in Asia, and it’s creating shortages of physical bullion around the world. The statistics are extraordinary. China, the world’s largest gold producer, now requires so much of the precious metal (in addition to what it already mines) that it imported over 209 metric tons (6.7 million oz) of gold during the first ten months of 2010. This represents a fivefold increase from the estimated 45 metric tons it imported in all of 2009.1

According to the World Gold Council, Chinese retail demand for gold increased by 70% from October 2009 to September 2010, representing a total of 153.2 tonnes of gold imports. Yet, over the same period, the demand for gold jewelry rose by only 8%.2 There is a clear trend developing for Chinese investment in gold as a monetary asset, and China is buying so much gold for investment purposes that it now threatens to supercede India as the world’s largest gold consumer. Chinese demand in 2010 is expected to reach approximately 600 tonnes, just behind India’s 800 tonnes.3 To put that in perspective, 2010 world mine production is forecasted to be 2,652 tonnes, which means China and India could collectively lock-up over half of global annual production.

Even more surprising is the increase in Chinese demand for silver. Recent statistics show that silver imports have increased fourfold from 2009 to 2010. In 2005, the Chinese exported just over 100 million oz. of silver.4 In 2010, they imported just over 120 million oz. This represents a swing of 200 million+ oz. in a market that supplied a total of 889 million oz. in 2009 – a truly tectonic shift in demand!5

We are seeing widespread evidence of major shortages of physical gold and silver bullion across the globe. The Perth Mint recently stated that: “Demand for our coins and medallions is strong, but the biggest demand is coming from banks and traders looking for kilo bars.”6 Three weeks ahead of Chinese New Year, Asian dealers were reporting premiums in mainland Chinese gold exchanges of $23 per ounce.7 Even Jim Cramer has acknowledged the current shortage in minted US gold coins, stating on his CNBC television show in December that: “As someone who tried to buy U.S. coins in December, there was a real scarcity. My dealer reportedly just couldn’t get any coins – tried to sell me Australian bullion. Said there was a shortage. Very telling.”8

While Chinese New Year celebrations typically drive gold demand in the month of January, there are stronger forces at work here. The Chinese are fighting the resurgence of inflation. To protect their wealth, the populace is turning to gold and silver as a store of value. Precious metals ownership is a relatively new phenomenon in China, where Chinese citizens have only been able to purchase gold freely within the last ten years. Ownership restrictions were lifted in 2001 when the Chinese central bank abolished its long-term government monopoly over gold. The Shanghai Gold Exchange was then created in October 2002 to replace the People’s Bank of China’s gold purchase and allocation system, thus ushering in a new era of gold investment in China.9 Investor interest in precious metals has increased dramatically since then, and new investment products are making gold more convenient to purchase and easier to own.

One such program recently caught our eye and speaks to the new era of gold investment within China. On April 1, 2010, the World Gold Council and Industrial and Commercial Bank of China (ICBC) issued a press release announcing a strategic partnership.10 Though seemingly innocuous, this press release introduced a completely new investment product for Chinese investors: The ICBC Gold Accumulation Plan (“ICBC GAP”). ICBC GAP allows investors in mainland China to accumulate gold through a daily dollar averaging program. The minimum investment required is either 200 RMB per month or 1 gram of gold per day (equivalent to approximately US$42).11 Customers may renew the contracts at maturity, convert them into cash or exchange them for physical gold. The accounts are perfect for investors who want to accumulate gold over the long-term. While gold accumulation plans exist in Japan, Switzerland and other countries, this is a first for mainland China. Kudos to the World Gold Council for their efforts in setting up and promoting the program.

The most significant fact related to the ICBC GAP program is how fast it has captured the investing public in China. One million accounts have already been opened since the program launched on April 1st, resulting in the purchase of over 10 tonnes of gold thus far. According to press releases, the ICBC GAP plan was taken up by a mere 20% of total depositors at ICBC, and was only launched in select Chinese cities during the test phase. The ICBC bank just happens to be the largest consumer bank on earth with approximately 212 million separate accounts. If we apply some realistic assumptions and arithmetic, it’s easy to imagine how large this program could potentially become.

Suppose, for example, the ICBC GAP plan were expanded to cover all ICBC depositors, and also expanded to the next four largest Chinese banks. Let’s further assume that the gold purchases within the plan enjoyed the same rate of growth as the test phase mentioned above. If we add all these numbers together, it results in gold purchases of an extra 300 tonnes of gold per year, or over 10% of the estimated 2010 global gold production.

The implications of this burgeoning Chinese demand for the gold market are immense. If these predictions prove accurate, the ICBC GAP plan could become the single largest buyer of physical gold on the planet. Considering that the program has only been launched in one Chinese bank thus far, imagine if it were extended to other institutions or other large gold consuming countries such as India, Russia or Turkey?

Speaking from Japan, the head of the World Gold Council recently commented on the early success of the ICBC GAP plan in China: “Here in Japan, it has taken over 10 years for the gold-savings account industry as a whole to reach 700,000 accounts. It is impressive that only one Chinese bank can exceed that level so easily, within one year, without PR or active marketing in-branch.” The World Gold Council does their own arithmetic on how much gold the Chinese can consume: “In 2009, per capita gold consumption in China was 0.33 grams, up from 0.17 grams in 2002.” Based on this data total Chinese gold consumption could range from 1,000 tonnes per year or more.12 This implies that the Chinese could consume almost half of the gold produced globally on an annual basis.

The ICBC Gold Accumulation Plan and other alternate methods of investing in gold have the potential to overwhelm current supply in the gold market. If a similar program were launched for silver accumulation, in the same dollar terms at current prices, it would consume over half of the silver produced each year! In Asia, only physical gold and silver will do… and unlike the supply of treasury bills, bonds or paper currencies, the supply of physical gold and silver is undoubtedly finite.

We believe Asian demand for physical gold and silver is akin to a tsunami. While precious metals prices have corrected on the paper exchanges, the inflation resurgence in Asia is quietly driving new, unforeseen levels of physical demand for the metals. While the world continues to float on a sea of paper, this massive wave of physical demand silently threatens to crash into the physical gold and silver market, potentially wiping out tangible supply.

Disclaimer: The opinions, estimates and projections (“information”) contained within this report are solely those of Sprott Asset Management LP (“SAM LP”) and are subject to change without notice. SAM LP makes every effort to ensure that the information has been derived from sources believed to be reliable and accurate. However, SAM LP assumes no responsibility for any losses or damages, whether direct or indirect, which arise out of the use of this information. SAM LP is not under any obligation to update or keep current the information contained herein. The information should not be regarded by recipients as a substitute for the exercise of their own judgment. Please contact your own personal advisor on your particular circumstances.

Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any investment funds managed by Sprott Asset Management LP. These views are not to be considered as investment advice nor should they be considered a recommendation to buy or sell.

The information contained herein does not constitute an offer or solicitation by anyone in the United States or in any other jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation. Prospective investors who are not resident in Canada should contact their financial advisor to determine whether securities of the Funds may be lawfully sold in their jurisdiction.

I’ll See It When I Believe It

By Tony Richardson, February 8

The Fed’s approach to U.S. monetary policy

In the Q&A session following a February 3, 2011, speech by Federal Reserve Chairman Ben Bernanke entitled Economy and Macroeconomic Policy to The National Press Club, the question was conveyed, “Do you believe that any of the growing political unrest around the world, especially Tunisia and Egypt, is linked to higher food prices which, the questioner says, results from the Fed’s large-scale asset purchases?”

The Chairman’s bottom-line reply: “I think it is entirely unfair to attribute excess-demand pressures in emerging markets to U.S. monetary policy because emerging markets have all the tools they need to address excess demand in those countries.”

Notice how the Chairman stealthily redirected the essence of the question as to the source of growing political unrest from “the Fed’s large-scale asset purchases” to “excess-demand pressures in emerging markets”.

One thing on which the Chairman and the questioner would agree is that soft commodity prices have risen spectacularly over the past year. According to data compiled by Chris Martenson PhD, corn is up 85%; wheat is up 76%; oats up 73%; soybeans up 57%; and sugar up 16% – all of which Tunisia and Egypt import heavily. I will focus on wheat.

Egypt is the world’s largest importer of wheat at about 6.3 million metric tonnes per year; and Tunisia, with the highest per capita consumption of wheat in the North African region at 258 kg per year, imports 1.7 million metric tonnes annually. But even together, 1) they account for only 1.2% of 678 million metric tonnes in yearly global production; and 2) these countries have a combined GDP of $564 billion, which is roughly the same as that of the state of Pennsylvania, and the Fed Chairman expects us to believe it is “excess demand” in these countries that has driven global wheat prices up 76%? I hope not.

Now, to be fair, Mr. Bernanke did say “emerging markets” as a whole, so let’s consider them collectively. Emerging-market nations make up about 40% of global GDP, which is quite significant. However, according to the United States Department of Agriculture (USDA), global 2010/11 wheat supplies are higher, and consumption is projected to be 1.2 million metric tonnes lower. So if supplies are up and consumption down – and in a competitive market, the law of supply-and-demand implies prices fall when supply exceeds demand – why are wheat prices rising? Here’s why: The problem is not excess emerging-market demand, but an excess supply of U.S. dollars, which are bidding up asset/commodity prices. Does the Chairman not see this? Consider the following:

To the question, “Do you attribute the stock market’s rise to QE2?”, the Chairman replied, “The way monetary policy always works is through interest rates and asset prices. That’s how it always works, by changing those prices in financial markets. So, yes, I do think that by taking these securities out of the market and pushing investors into alternative assets, we have led to higher stock prices and lower stock-market volatility.” It is therefore evident that the “alternative assets” of choice include wheat, corn, oats, soybeans, sugar, and the like. For the excess dollars the Fed and Treasury put into circulation have made their way into these soft commodities, and hard commodities such as gold, silver and copper. Why does the Chairman not accept the connection?

To what level have dollars been put into circulation so far via Treasury purchases? Well, my friends, America is now #1 in a new category: The Fed is now the largest holder of Treasury securities at $1.14 trillion, followed by China at $895.6 billion (as of the latest November 2010 data), and then Japan at $877.2 billion. The Fed’s goal in buying Treasuries is to keep interest rates low for as long as possible in order to give the U.S. economy an accommodative environment in which to grow. But rising commodity prices spurred by a ballooning money supply are undermining Fed efforts. Higher commodity prices are feeding their way throughout the economy, forcing wholesalers and retailers to raise prices on higher commodity costs. Just on February 4, 2011, cereal giant Kellogg’s said it would raise prices 3 % in 2011 due to the rising cost of commodities.

On a broader scale, the USDA reported the following price increases in food costs from December 2009 to December 2010: Beef up 6.1%; pork up 11.2%; chicken 1.3%; eggs 6.1%; cheese 4.3%; butter 21.9%; bread 1.2%; fresh fruit 3.1%; and fresh veggies 1.2%. And the agency’s 2011 forecast is for dairy prices to rise 4.5 ~ 5.5%; pork to rise 3 ~ 4%; beef 2.5 ~ 3.5%; produce 2.5 ~ 3.5%; and beverages 1 ~ 2%.

What’s more, a one-year food-basket survey by The Tennessean newspaper from November 2009 found a 12.5% spike in prices for a typical grocery basket filled with staples. Do such news and data not reach the Chairman’s desk?

Interestingly, the latest Consumer Price Index (CPI) reading indicates prices have risen only 1.5% over the last 12 months, before seasonal adjustment. CPI tracks prices in the following sectors (I distinguished food and energy, and included a weighted breakdown): Food (14.8%); Energy (8.6%); Housing (37.9%); Transportation (12.2%); Medical Care (6.5%); Recreation (6.4%); Education & Communications (6.4%); Apparel (3.7%); and Personals (3.5%). I don’t know the details on the 100,000 or so individual items the CPI considers in calculating its results, but a reading of up just 1.5% doesn’t seem to reflect what is happening on the ground.

Moreover, the Fed prefers to use Core CPI, which excludes food and energy prices because it considers them volatile. However, can you imagine a typical family “excluding” the cost of food, gasoline, heating and electricity when considering its level of spending? One would think such “in-your-face” expenses – which account for a whopping 23% of total outlays – would be “core” to the Fed and to an index that wishes to be taken seriously for gauging how much Americans are paying for goods & services.

I am reminded of the Hans Christian Andersen story, The Emperor’s New Clothes. Everyone saw that the emperor was exposed, and even after the king accepted the fact that he had on no clothes through the honest statement of the young boy, he continued to parade proudly before the crowd. In the same way, if Chairman Bernanke wants to pretend inflation, induced by excessive printing, is not a problem, that is his prerogative. I just hope he accepts reality before it’s the American people who become the financially dismayed laughing stock of the international community, as the world looks on and says, “Those ‘rich’ Americans can’t even afford their own goods. They can’t see that they are broke!”

In conclusion, rising commodity prices, through Fed large-scale asset purchases, are indeed contributing to political unrest; eating into U.S. discretionary spending; and limiting U.S. economic growth. Why doesn’t the Chairman get it? You may be familiar with the saying, “I’ll believe it when I see it.” In the Fed’s case, it seems they will see it once they come to believe it.

This article is written by Tony Richardson of Richardson Heritage Group and with his kind permission, O B Research has been privileged to publish his work on our website. To find out more about RHG, please visit:

China Silver Imports Hit Record 3,500 Tons in 2010

Silver is getting hot in China as imports of the white precious metal is soaring thanks to increasing demand for the commodity for industrial use and jewellery purposes.

For the first time, China’s net imports of silver hit a record high as it quadrupled in 2010 to 3,500 tonnes (112 Million ozs). Precious metals analysts view this as a shift in the Chinese demand for silver as traditionally China used to be a silver exporter.

Lee Kui, a precious metals dealer in Beijing, said that a few years back, China used to export silver in big quantities. “For instance, in 2005, China made net exports of 3,000 tonnes of silver. In five years, the exporter of silver has become the importer of silver. This shows that Chinese demand for silver is soaring,” he said.

China was a net exporter of silver for many years and the Chinese export used to be a major component of global silver supply. This changed in 2007 when China became a net importer of silver. The demand figures being released by the General Administration of Customs in China has been showing the massive turnaround in China from large silver exporter to large silver importer.

China has gross exports of 1,575 tons of silver in 2009, down 58 percent from a year earlier. China’s gross imports of silver increased 15 percent to 5,159 tons in 2010.

A longer term perspective is as ever important as are the net figures. In 2005, China was a net exporter of nearly 3,000 tonnes (3 million kilogrammes) of silver. Last year, in 2010, China imported more than 3,500 tonnes of silver. Incredibly, Chinese net imports of silver surged four fold in just one year from 2009 to 2010.

Demand for silver in China has risen sharply in recent months and years. Growing middle classes and savers in China, India and other Asian countries have been turning to “poor man’s gold” and using silver as a store of value. Gold has risen above its historical nominal high in local currency terms internationally and silver is seen by many as a cheaper alternative.

Buyers in China, Asia and internationally can buy some 50 ounces of silver for every one ounce of gold. The gold silver ratio today is 49.3 (gold at $1,342 per ounce divide by silver at $27.20 per ounce) meaning that 49.3 ounces of silver can be bought with every one ounce of gold.

Gold is increasingly unaffordable to the “man in the street” in China and wider Asia and this is leading to increased purchases of silver as a store of value, rather than gold. With the price of gold set to remain high in the coming years, this will continue.

Chinese and most Asians have experienced the decimation of their life savings through currency debasement and hyperinflation and unlike westerners understand the importance of owning gold and silver.

Besides huge demand for silver as a savings vehicle and a store of value in China, there is also very significant industrial demand in China and internationally.

There remain a huge range of industrial applications for silver. While demand from the photography sector has declined, demand from the medical, solar energy, water purification and many other sectors continue to rise significantly.

Today industrial uses account for 44% of worldwide silver consumption and in conjunction with investment and store of value demand, industrial demand continues to grow.

According to a new research report from China Research Intelligence (CRI), an important feature of China’s silver market is that the domestic price is higher than international market price.

“Domestic price of silver in China is not completely synchronized with the international price and it lags behind with too large fluctuation, resulting in increasing risk of downstream silver consuming enterprises,” said the report.

The CRI report said that China urgently needs to improve the formation mechanism of domestic silver price and seek appropriate trade modes to maintain values and avoid risks. It will be the general trend to introduce silver futures.


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Bank of England Attempting Inflation ‘Confidence Trick’

By Emma Rowley, February 5

Keeping inflation under control is a “confidence trick” that the Bank of England may fail to pull off, Kate Barker, one of its former rate-setters, has warned.

Ms Barker, who served nine years on the Bank’s Monetary Policy Committee (MPC), said rising prices may have already damaged the Bank’s credibility and threaten a “more profound” loss of faith among the public.

A loss of credibility is dangerous as people begin to assume inflation will remain over target and so put up wages and prices accordingly, resulting in a self-perpetuating spiral of rising prices.

“If you believe inflation is going to come back to 2%, you are going to behave as if that’s going to happen when you’re setting wages and setting prices,” said Ms Barker.

“Once you start to think this monetary policy isn’t all that it’s cracked up to be, and things need to be changed in some way, then things inevitably become more difficult.”

She added: “It’s like a confidence trick.”

Businesses and markets think the MPC has “perhaps been behaving in a different way coming out of the [financial] crisis and has tolerated inflation more than you might have expected”, she said, adding that companies probably have less faith that inflation will return to the official 2% target “than in the good old days”.

Ms Barker’s remarks will increase the pressure on the Bank policy makers over their failure to keep the official rate of inflation, as measured by the consumer price index (CPI), near the target.

The annual pace of price rises was 3.7% in December and Mervyn King, the Bank’s governor, has said that inflation is likely to be between 4% and 5% over the next few months.

He argues that prices are being pushed up by “temporary” factors like the recent rise in VAT, climbing oil prices and the weak pound making imports more expensive, but expects them to fall back given the slack in the UK economy.

Others fear that the driving factors are more persistent. The issue has split the MPC, which last month saw its most “hawkish” member, Andrew Sentance, joined by Martin Weale in voting to raise the benchmark interest rate from its 0.5% low to curb inflation.

Ms Barker, whose comments at an Anglia Ruskin University event were reported by Bloomberg, said the dilemma the Bank faces has worsened since she stepped down from the MPC in May.

The chance of a surprise rate rise when the committee meets next week has increased after key surveys showed the economy rebounded in January after the snow melted. That suggested the alarming 0.5% contraction in GDP in the last quarter was a temporary weather-related setback and that the economy may be better able to cope with a rise.


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