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Steve Saville: The Government Bubble



June 16, 2009 – Comments (5) | RELATED TICKERS: CEF

Another good article by Steve Saville. The thoughts here very much go hand in hand with my last big blog post: Market Thoughts and Analysis: The Gold Blog. Gold/Silver/GSMs (and a little Oil for good measure). Basically, QE is, besides simply buying Treasuries, is buying toxic assets off Finanicals balance sheets. It is the biggest private to public transfer of debt in the history of mankind. It is designed to unlock the credit markets even more, to allow Financials to access all of the new Base Money created the last 2 years (see TMS graphs), as a huge inflationary blitz. Here is an excerpt from my last blog post.

"... What all of these posts talk about and discuss is what I believe (again, this is all simply my opinion, nobody has a crystal ball on this one) to be the biggest threat to our “money”, and that is inflation.

I believe that every signal that the Fed has given, both in rhetoric and action, is that it will try to spur the economy / avoid economic collapse by monetizing the debt of the Federal Government and all the Financials that made bad mortgage bets. The newest euphemism for this activity is Quantitative Easing. And this will be an unprecedented transfer of private debt to public debt (largest in the history of mankind). Bond rates are already beginning to signal the inflationary hazard of this policy DESPITE the fact the one of the main goals of QE was to put a floor under bond prices (put a cap on bond rates).


The Government Bubble
by Steve Saville
June 15, 2009

It is clear that a concerted effort is being made to replace the ruptured private-sector debt bubble with a government debt bubble, although the effort is generally not labeled as such. Moreover, the dramatic increase in government debt that we are seeing is really just a symptom of expanding government. In the case of the US, for example, GW Bush presided over a rapid expansion of government power and the trend has accelerated under Obama.

As an aside, although President Obama is sometimes referred to as the new FDR he is probably more like President Herbert Hoover than President FD Roosevelt. We say this because Hoover -- despite the way he is often portrayed -- was a strong believer in the ideology of central planning, whereas Roosevelt didn't believe in anything except the need for him and his party to maintain political power. Both Hoover and Roosevelt were totally clueless about economics, but whereas FDR never expended any mental energy contemplating the long-term economic implications of any policy -- his sole consideration being a policy's vote-winning potential -- Hoover genuinely believed that a government-managed economy would be more efficient than a free-market economy if only the government applied the practices that worked well in the field of project engineering.

Getting back on topic, we can explain why the current trend will lead to poor economic performance and the severe curtailment of individual freedom, and, therefore, why it should be stopped. However, when planning our investments and our lives we must acknowledge the reality that the government's growth spurt will almost certainly not end anytime soon, because there is very little resistance to it. That is, we must act based on the way things are, as opposed to the way they should be, and part of today's reality is an inexorable trend towards a bigger and more intrusive government.

Something to bear in mind when considering the investment implications of the current trend is that governments always play favourites. To be more specific, the governments of today are giant re-distribution machines in that they take money and resources from some individuals, corporations and economic sectors, and give them to other individuals, corporations and economic sectors. The overall economy either grows at a reduced pace or shrinks as a result of this re-distribution, and in the long run almost everyone loses; but over shorter timeframes there will be winners as well as losers. The winners will be chosen by those in power based on perceived vote-gaining potential (the Roosevelt approach) or the misguided belief that the economy can be improved via the government-mandated transfer of resources from A to B (the Hoover approach), although we expect that the biggest winner of all will not be chosen by the government, but will, instead, arise due to the unintended consequences of the wealth re-distribution. We expect gold to be the biggest winner.

Other big winners are likely to be companies involved in alternative energy and companies that benefit from increased spending on infrastructure, but in general the stocks of non-gold companies will have substantial downside risk until after the broad stock market becomes attractively valued.

5 Comments – Post Your Own

#1) On June 17, 2009 at 3:52 AM, checklist34 (98.71) wrote:

he had me until gold.

the current administration is ... well I just agree with Saville that the focus there is getting votes.  Come hell or high water, they are all bout getting reelected and being popular today.  I hope i'm wrong and I hope there is a genuine concern for the long term well being of the US (which, BTW, requires taht some people not do so well (success = capitalism = to no small extent darwinism = survival of the fittest  = everybody can't be happy happy sunshine all the time.  Thats the California trap - "we're so great, we're california, we have hollywood and silicon valley and LA and 1/4 of the fake boobs on planet earth, we are great.  we're soooo great nobody here should not be great, so lets have more welfare than ever").

California is great, or was, and will be again, but its not great because of its wild runaway liberalism and welfare program.  Its great because of darwinism.  It has long attracted an inordinate percentage of the most ambitious people in the country.  Recently that do-anything-for-success mentality seems to have drifted towards a do-nothing-but-try-to-have-success-anyway, i-live-in-la-and-can't-afford-this-car-but-WTF-i'll-buy-it-anyway thing. 

California is a leading indicator of our fate if we continue to be socialistic and welfarish.  No matter how much greatness exists here (and Cali is without any doubt not short of greatness) we will fail if we try to go Europe style socialist.  Europe has some key advantages over us that helpt hem deal with it a tiny bit better than I think we could. 

I hope like hell for the future of this country.  We need manufacturing.

But that means we need to lose the unions or at least restrict their power and their ability to kill the companies they work for, and, ironically, themselves in the process.  As much as anything, unions stand between the US and long term greatness. 

That means we need to step back to our roots, to become again the land of OPPORTUNITY, not the land of free health care and easy living.  big, big, big differences.

the basic liberal attitude is that we're so rich, corporations are so rich, they should pay for everyting (please note that nobody in hollywood volunteers their own money for these causes they champion)... but look at the earnings figures, look at reality, look at the national debt.

we are not rich enough to give everybody an easy life, corporations cannot foot the bill ofr all of society. 

but freebies get votes.  and that seems to be the basic premise of the liberal party today.  vote for me and i'll give you free stuff. 

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#2) On June 17, 2009 at 5:54 AM, portefeuille (98.84) wrote:

It is clear that a concerted effort is being made to replace the ruptured private-sector debt bubble with a government debt bubble, although the effort is generally not labeled as such.

see the bottom chart here.


(no link to provide since you did it. another one unemployed ...)

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#3) On June 17, 2009 at 8:15 AM, kaskoosek (30.13) wrote:



Do you work for the Obama adminstration?


If not, I know Krugman does.

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#4) On June 17, 2009 at 8:25 AM, portefeuille (98.84) wrote:



Do you work for the Obama adminstration?

thanks for the laugh!

no, not affiliated to any political institution. just like to add some links ...

If not, I know Krugman does. 

He also worked for Reagan, as did Summers ...

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#5) On June 17, 2009 at 8:45 AM, binv271828 (< 20) wrote:

checklist34, I disagree with your position on gold (obviously), but I agree with some of your other thoughts

I hope like hell for the future of this country.  We need manufacturing

I agree with this 100%. I am exceptionally optimistic for the future, because I don't believe transitioning from a consumption based economy to a production based economy is a choice, it is a necessity. I think smarter heads will eventually see this in the coming years. In the meantime, I am very bearish on stocks and the economy in general, and bullish on commodities and gold.

portefeuille, I disagree with nearly all of Krugmans's positions. He is a smart guy and sometimes makes very salient points, but I fully disagree with him on this issue. Here is a classic government econmist type thinking in a similar vein to your link above:

.Here is an excerpt:

"...First things first. It’s important to realize that there’s no hint of inflationary pressures in the economy right now. Consumer prices are lower now than they were a year ago, and wage increases have stalled in the face of high unemployment. Deflation, not inflation, is the clear and present danger.

So if prices aren’t rising, why the inflation worries? Some claim that the Federal Reserve is printing lots of money, which must be inflationary, while others claim that budget deficits will eventually force the U.S. government to inflate away its debt.."

Are you kidding me?!?. This is the same BS the government economists do all the time. They talk about monetary inflation and price inflation as if it were the same thing. IT IS NOT!!. So by definition, if we raise the Monetary base and the CPI doesn't rise, then we are in a liquidity trap and we can raise the base all we want! Right? NO!!

This is either an excpetionally poor grasp on the facts or it is an intentional obfuscation of the truth. The most salient rebuttals to this logic are here Steve Saville: Money Confusion and Inflation/Deflation and here Steve Saville: Market Value, Money and Credit

... Also, I don't think you are part of the Obama admininstration :) LOL! But I do think that we do not see eye-to-eye on these issues, and that's okay :) I always enjoy the discussion!

kaskoosek, LOL! Your rebuttal style is always direct and amusing. But I do appreciate the comment man!. And I agree, Krugman is far from an impartial advocate on this matter.

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