On more than one occasion, I have spoken about China's direction to its people to take some of every paycheck and buy gold. Then, I have contrasted that with what our citizens are encouraged to do and that is to borrow more money and spend.
At the same time, Corporate America is being criticized for hoarding cash as it is claimed their coffers are full as the prospect of higher taxes, higher health care costs and lost tax cuts, has many businesses simply afraid to part with any extra cash they accumulate now. Then there are banks. Claimed to have billions to lend, standards for doing so are said to be so stringent that very few can borrow and little cash is making it into the economy.
So what is the right thing to do? Buy Gold? Save cash? Or borrow and spend? Let's just make this real simple. If recovery is dependent on more people borrowing and spending, there is no question that recovery will eventually stall as the capacity of those who must borrow to spend diminishes with every transaction.
In theory, I can only borrow against disposable income or other assets. Unequivocally, this implies a limit to how much money can be borrowed and spent. Hence, a limit to how much economic recovery will ensue. So, the question really is, should I borrow against disposable income or should I save it?
The situation taking shape, is this. One man's spending is turning into another man's savings. If you buy from an American Corporation, they are hoarding cash. If you buy foreign goods, foreigners are hoarding cash and at least in the case of China are using cash to buy gold. Reports suggest Europe is following suit.
Now, if it was just a matter of our corporations hoarding cash and our banks making it difficult to borrow any more, then we could at least rest in the belief that once the consumer reaches his limit of spending, at least the money we spent is domestically held. If the money is here, we at least have the potential that something can happen to encourage corporations to let loose the purse strings and do some hiring and spending of their own. In turn this increases, again, the number of people who qualify to borrow the bank's money.
I think herein lies our biggest economic conundrum. If American consumers borrowed to buy American goods, money could circulate through the economy like air through a tree house. Indeed, this is also how a global economy is supposed to work as free trade circulates cash around the globe. Banks lend, we spend, corporations hire, more people borrow.
Never mind trying to determine whether the economic model works, right now it is not and here's why. First, on a global scale, it seems America is doing most of the borrowing and spending while the rest of the world is doing most of the saving. Our June trade deficit is pretty clear evidence this is what is happening. At $49.9 billion, the June trade deficit was up $7.9 billion from May and the highest level since October 2008.
It could be argued that China's directive to its people is being carried out. We borrow to buy their stuff and they take our money to buy gold.
On a domestic scale, it could also be argued that the money we spend is being kept by corporate America and the banks. Now, let's ask the question. If the entire scenario plays out and our ability to borrow finally runs dry, someone ends up with all the gold and the cash and others end up with all the debt. Which camp do you want to be cutting wood for?
In an interview with The Gold Report, John Embry, Chief Investment Strategist for Sprott Asset Management, who makes a case for gold at $1500 to $2000 an ounce, was asked...
TGR: In reading your recent interviews and columns, one thing that comes through quite plainly is the passion behind your arguments that the public is being duped and not being told that they should own gold. Why are you so passionate about what's happening?
JE: I appreciate you saying that because I am. I think it's really important to tell the public the truth if you really believe that this is what's going on and you want them to protect themselves. I think the public is getting horrible advice from a lot of financial establishments. It's amazing. I can draw parallels to when the subprime thing blew up. It was astounding to me that people thought housing prices in the United States would rise forever. I mean housing prices are related to underlying income. They were so far out of line that it had to crash.
He was then asked why the sentiment for gold was negative.
JE: It totally baffles me in the sense that the fundamentals couldn't be more compelling. But at the same time that isn't what the public is being told by the financial establishment. Just the other day The Economist featured an article on the front page with the question, Has Gold Topped? It was the standard questionable statistics, dubious conclusions, etc. But if you actually read it closely, you could have drawn the exact opposite conclusion and become a roaring gold bull. Essentially, the public doesn't know a lot about it and it's not their fault. Nobody's telling them. To me, that isn't an accident. This is being orchestrated. But I think it's just about to become spectacularly unstuck.
If you think you have been duped, visit LearCapital.com to own some gold or request your FREE Gold Advantage Investor's Guide.