Ballmer Gets “It”
on January 23rd, 2009 at 7:07 am
Ordinarily I’d simply post a link to a media report in either my Gems or Brickbats page. But this quote from Microsoft CEO Steve Ballmer shows that he really understands what is going on now, in a way that no other person in authority seems to have done as yet. The full report can be found at:
Microsoft resorts to first layoffs, cutting 5,000
Ballmer’s perceptive analysis of what is going on is:
“We’re certainly in the midst of a once-in-a-lifetime set of economic conditions. The perspective I would bring is not one of recession. Rather, the economy is resetting to lower level of business and consumer spending based largely on the reduced leverage in economy,” said Chief Executive Steve Ballmer during a conference call. For consumers, that may mean less discretionary income to spend on a second or third home computer, he said.
Bravo. That is precisely what is happening. It is also why, though government action might slow down the decline, ultimately it can’t prevent a serious decline in economic activity. That can happen only gradually as we slowly replace debt-generated spending capacity with income-generated capacity. What the government can do is remove the logjam standing in the way of that process, which is the crippling mountain of debt accumulated by the Ponzi financing behaviour of the last 4 decades (and in particular the last one). But that will require much more drastic action than simply bailouts: given the scale of debt accumulated, either the debt has to be devalued by inflation, or written down via government decree.
We’re still a long way from any government official or politician realising that. But the fact that someone as influential as Ballmer has put his finger on the problem implies that maybe that day of realisation is approaching.
I have some opinions on the deflation / inflation
What many in the deflation camp don’t seem to get is that the second bubble, in housing, deflated the first in stocks, through general inflation in the money supply, by spreading dollars all over the world. 1929 is like year 2000. The housing bubble is like the UK 1932-1937 housing boom on a global scale. Intervention by China and Japan also pushed down US longer term interest rates, and helped have the US money supply higher than normal, just like they also did during the dotcom. Gold can also work well if there is a lot of money printing and not much price increases. The way to think of gold is that kind of environment that we are in now is that gold prevents you from getting robbed from the price decreases you should have had in the case massive printing is done do avoid deflation, that’s why gold can go up very much even much more than the CPI. In the 1971, the US avoided a deflationary depression by going off the gold standard. From golds view it was a deflationary period. That’s how golds supposed to work if governments try to print their way out of depression, even if there is that much price increases occurring because of low demand. That’s why gold and industrial commodities performed well in the early seventies when there was a boom, but in the late seventies, gold had more of a solo performance.
Another thing is that inflation tends to track the M3 over longer periods of time. You can have periods of productivity gains, like the 80-90 era, when this connection seems to be broken, and gold useless, but these productivity gains ends, and later, all the M3 printed in that era of productivity gains, goes straight into inflation again, like with oil the connection is around 1:1. The natural price level of oil now is around 90 dollars, before any peak oil effects are taken into account. Gold is currently holding up better than oil because it’s not an industrial commodity. As the era of productivity gains are over for a while, any money growth have a more direct connection to the CPI now, than during the era of the 80-90-s. Another difference is that I think US governments bonds have been in a bear market since 1998, and will be so, for a long long time, as they print, the only outcome is a trend of higher longer term interest rates. In era’s of higher longer term interest rates and inflation, people are much more eager to spread money to emerging economies, and people are more obsessed with growth, and getting return on the money. That further fuels inflation. If we was to head into deflation, that would definitely push emerging economies from an era of 1970-s stagflation, to disinflation. That would cause true decoupling. That argument have to validity, but for it to happen, people have to wait for them to have a chance to get their interest rates down as inflation fades, so that their consumers can respond to lower interest rates. Since the interest rates in these countries comes from such high levels, and there is so much room to grow credit, there is no reason why they cannot have a credit boom like we had in the 80-90s.
The performance of gold mining and silver mining stocks from 1929-1936 was an increase of around 600 %. There was a decoupling from gold and silver, with the general market from the spring in 1930, when the general market started to decline after a rally. From 1930 bonds, and stocks were all dumped in favor of gold and silver mining stocks. The graph from gold mining stocks from 1929, and how they behave now, are a mirror in the sense that right now it’s identical to around February 1930. So if we was to mirror 1929, something that is unlikely because we are in a totally different environment, then gold mining stocks would just go on gaining from here.
http://thelongwaveanalyst.ca/downloads/Homestake.doc
http://finance.yahoo.com/echarts?s=ABX#chart1:symbol=abx;range=my;indicator=split+volume;charttype=line;crosshair=cross;ohlcvalues=0;logscale=on;source=undefined
If history was to repeat barrick gold should increase a lot in price. And since gold is not fixed this time, gold should also increase a lot.
The point is – it is not the Gold you want – it is what it can buy at a time when it performs best.
In an inflationary nightmare Gold and Silver will mutiply alot more than an asset like a house.
It may buy you many income producing houses if you trade it in at the right time.
Gold should be the basis of all portfolios.
My 2cents worth.
Hi Bullturnedbear,
My Super cash account should be covered by the government guarantee as the investment fund indicates for the cash component “all underlying investments are currently covered by the Government guarantee arrangements applicable to wholesale bank securities and large deposits.”
I advise others to check that their “Super – cash accounts” are covered. If the government does not back up its guarantees on cash deposits then I would imagine that the social unrest would bring down the government.
Hi prudentsaver!
The context for gold mining stocks was different in the 1930s. In Which industry’s profitability grew as the Great Depression progressed?, Wilhelm Röpk was quoted
The gold standard allows gold mining stocks to prosper during the Great Depression. Today, no country is in the gold standard.
Hi Stats,
Thanks for the reminder about the guarantee. I don’t trust it and will not rely on it. How can the government cough up over $2T in cash. They can’t. If the guarantee is required they will force marriages between banks and keep the electronic entries alive or they will issue IOUs.
If a run on the banks starts, the government could restrict the amount a depositor could remove (for a time). Were they to do that you will be able to buy anything you want. As long as you have money outside of the electronic system.
If the guarantee is not needed and I am outside the electronic system, I won’t lose that much (forgo a small amount of interest that will be taxed). If the guarantee is needed and I am outside the electronic system, my money will increase in value by 10 times overnight. I like that potential upside with limited downside.
It’s not the fixed gold standard price that helped gold mining companies, because the price was not fixed, it fell to 17 dollars in 1932. It was the knowledge that the fractional reserve was failing, the system would collapse, and that money was being printed, just like it was showing signs of last year, and that a gold mining company was safer than a bank in the sense that they had some real reserves. It had nothing do with fixed price for the gold mining companies, or dividend payment from the gold mining companies.
Most don’t acknowledge it but 1932-1949 inflation was higher year on year, than in the seventies in the worst period, with wage and price controls. It’s the same thing that’s likely to happen now, once the economy pick up.
In my Local currency the Norwegian currency there have been a huge strengthening compared to the dollar lately, it’s just getting stronger and stronger.
It’s related to a peak in risk aversion (as seen in the 10 year treasury chart), and a likely bottoming in oil prices. Money are likely flowing into the norwegian currency because foreigners are loading up on norwegian stocks, because they think oil have bottomed out.
http://finance.yahoo.com/echarts?s=USO#chart1:symbol=uso;range=5y;compare=^tnx;indicator=split+volume;charttype=line;crosshair=cross;ohlcvalues=0;logscale=on;source=undefined
a news release from the AMI with a very interesting video of Congressman Dennis Kucinich
Dear Friends of the American MONETARY Institute,
Monetary reform is advancing rapidly, because it must, in order to resolve our national crisis.
There are two links below that are MUST viewing, and please forward them to your email lists.
On this link http://cspanjunkie.org/?p=1724 Congressman Dennis Kucinich describes the economic and monetary crisis for one hour on the floor of the House of Representatives. You can see what a devoted and great leader he is. View it all. At about 40 minutes in, he discusses Stephen Zarlenga and our monetary reform proposal – a must see!
Here, http://votersthink.org/?p=1073 Dennis in just over one minute describes the reform program in summary.
Please enjoy the second link immediately, and set aside an hour to view the first link.
The internet is allowing a marvelous communication process to take place in our land, in this time of crisis. Please use it fully, forwarding this to your friends and let me know their reactions.
The full text of the American Monetary Act can be viewed at
http://www.monetary.org/amacolorpamphlet.pdf
Warm regards and thanks for your attention,
Stephen Zarlenga
Director,
American Monetary Institute
Regards
Paul