As I am bit short on time for blogging these days please excuse that I have no new projections and keep to my forecasts that crude oil will not go below $63 per barrel while gold will remain in its upward trend. Looking at bond and share markets I am wondering why US shares stay up with such a resilience although the 10-year Treasury yields roughly 30 basis points more then a month ago. We must be truly living in different times when share markets can afford to ignore such a fundamental shift. Remembering Irving Fishers famous forecast from October 1929 that stocks will remain at a high level I probably can lean back and count my beans and should any doubts arise I surf to Larry Kudlow's blog where I find every day a new verification that stocks are valued so fairly that one should buy even more.
Once Greenspan Starts Quoting Schumpeter...
The only thing that keeps me uncomfortable is Fed chairman Alan Greenspan's latest speech from last Tuesday. I have commented it here, but there are a few worrisome points to add.
First of all I do not share Greenspan's view that Joseph Schumpeter, the liberal economist who coined the term "creative destruction" is best known as a renowned Harvard professor. In Austrian history Schumpeter's name will forever be associated with the fact that he was the first finance minister of the young Austrian republic who oversaw an acceleration of inflation into the triple-digit area. Schumpeter resigned from this post after only a few months and later founded his own bank which went belly up in the early 1920's. After retreating into the academic world later on Schumpeter also started to rethink whether his libertarian approach does actually work in a real-life economy.
While Greenspan still favors abstaining from any protectionist measures, Schumpeter had gone the other way at the beginning of the 1930's.
Although an advocate of a free market economy, Schumpeter turned to protective ideas.
Had he first noted on the US depression 1839-1843 that the economic devastation caused by recessionary periods is essentially a process of "creative destruction" and such periods are essential to the advance of capitalism, his views changed with his personal fate, a situation remarkably similar to the change of attitude towards free trade of US policymakers nowadays.
To quote Schumpeter (from a lecture held in Tokyo in 1931):
"I need only quote the wide spread belief, that every export means a gain and every import means a loss to the nation; or that it is always an advantage to produce at home, instead of importing, a commodity which a nation is able to produce, and that we ought to rejoice in every national industry created by a protective duty; or that tariffs remedy unemployment; or safeguard the national currency; or that they are necessary to keep up a high standard of wages; or that it is their function to equalize cost of production at home and abroad and to enable the home industry to compete with foreign products on what has been called ‘fair’ terms. All this is wrong. The last argument for instance, which is so popular in the United States runs directly against the very meaning of international trade. What other reason can there be for importing a commodity from abroad, and why is international trade advantageous if not for the reason that a nation may, importing, get a commodity with less effort that is to say, at less cost, than if it produced it at home? Hence, equalizing costs at home and abroad would, if carried out to its logical consequences, put a stop to importation and exportation and amount to prohibition of international trade. And if we want this, it is much more logical and much simpler to say so and to prohibit imports entirely, instead of creating in the public mind a vague impression that equalizing costs of production at home and abroad only eliminates some 'unfairness' from international trade but is not really meant to prevent imports. Yet, although protectionist arguments can often be proved to be nothing else but errors, it does not follow that protection itself is always wrong. Indeed, few modern economists will hold the free-trade argument so absolutely as the classics did. They will hold rather that every case has to be dealt with individually and that it is impossible to recommend free trade on general grounds, and for all times and places."Not from Schumpeter, but still valid is the view that the depressions of 1839-1843 and that of 1929-1934 acted as a catalyst for economic and political reform in the US. Still valid is also the view that there is no stronger catalyst for a political changes than a declining economy. Take your own clues (and be long gold.)
And let me add that Greenspan pricked three bubbles last week. First his indiscretion about the US losing its budget deficit control. Second his remarks on the frothy housing market. And lastly his speech from last Tuesday where he discreetly prepared Americans for an era of higher unemployment to come. Reread the last para of his speech and you will note that Greenspan opposes protectionist measures in order to save American jobs but on the other side sees a flexible labor market offering a reward only in the more distant future. Your "agree" or "disagree" will be appreciated in comments.