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It's fascinating to
study and observe the distribution of wealth. History has shown great nations
and companies that rose to the top from nothing and subsequently fell to
nothing.
During the last
phase of a boom, few save while most spend on credit. All the money spent
flows to a few strong hands. Eventually banks (then private) stop lending,
the public is bankrupt, and price deflation follows as people liquidate (so
called K-winter). The few strong hands with money have no effect on prices
since
a. They are very few
in number, thus their consumption doesn't affect prices.
b. They believe
their money is worth something, therefore they are in no hurry to spend until
deflation is over and inflation picks up again.
This is what
happened in the 1930's deflation/depression. Why were those strong hands
(JPMorgans, Rockefellers etc) so few in number? First, there simply aren't
many smart ones with the sole desire to make money; secondly, the contrarian
group by definition is small in number. When everyone is bathed in good
times, few can detect the winter is coming.
Those insiders
reaped the benefits of deflation and came out even further ahead with their
increased purchasing power. Such a theory is supported somewhat in reality as
the world's wealth is concentrated in a few dozen hands. Over time, though,
few rich manage to keep the wealth. When you have massive wealth (as a
country, individual, or company), you attract the unscrupulous, and one
careless mistake sinks your entire boat. There is the old Chinese
saying-Wealth doesn't pass on 3 generations. Therefore, a fair amount of the
concentrated wealth gets redistributed back to the ordinary people.
This is my view on
how the world managed to get along reasonably well. 1930's is also what the
K-winter / deflationists predict will happen again, as USA seemingly approaches the end of its boom.
This time, however,
I believe we won't have K-winter. Refer to points a. and b. above and we see
that
1. This time the
strong hands aren't few in number. The strong hands with $trillions are in
Asia-Just India and China constitute 40% of world population. You see, the
Chinese and Indians didn't live under the same roof as the dollar-printing
Americans. The general public this time aren't monogamous in spending
attitudes and debt level. Asian debt levels aren't even close to their
American counterpart.
Asia's share
of population consumption will have big impact on prices. We never had such
polarized, contrasting general public (one part broke, while the other part
rich). Since the strong hands are larger in population size (2 billion vs 600
million in Europe and USA), I'd say inflationary forces are stronger than
deflationary. Again, for price deflation to happen, most public must be
broke, this just isn't the case today.
2. This time, the
strong hands know their dollars are worth nothing. Because they didn't bathe
in the golden times and debt bubble, they get to see things clearly. The US government never had such a strong hold in influencing money, banks, and with such corrupt
morals-the US gov't doesn't care for the dollar's survival. Such arrogant and
ignorant attitudes are demonstrated repeatedly with explicit action (deficits
and market manipulation in unprecedented proportions) and statements
(printing electronic dollars, helicopter money)
The take away is:
K-winter proponents didn't take into account of:
1. The makeup of
strong hands. The strong hands this time are large in population, whereas
before the strong hands were the elite few.
2. A US government
that has lost its time and place. Banks are no longer private, markets are no
longer functioning, and few in power care to salvage what's left of the
dollar, because they have other ways out (I mean with airplanes and internet
access, there are plenty of nice places to live around the world than a
bunker hole in Wyoming should things go wrong, right?)
John Lee, CFA
Goldmau.com
John Lee is a portfolio manager
at Mau Capital Management. He is a CFA charter holder and has degrees in
Economics and Engineering from Rice University. He previously studied under
Mr. James Turk, a renowned authority on the gold market, and is specialized
in investing in junior gold and resource companies. Mr. Lee's articles are
frequently cited at major resource websites and a esteemed speaker at several
major resource conferences.
Please visit www.GoldMau for
instant market alerts and stock updates.
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