Where should gold be? In terms of buying power, we calculated that an ounce of gold should sell for between $800 and $1,200 an ounce.
There are dark clouds hovering over the world’s financial system. Gold is the logical shelter. You can’t buy gold for $800 an ounce partly because so many people see the storm coming. Once the storm hits, you may be glad you bought gold at any price.
But the shocking news this morning is that Janet Yellen admitted to a confidante, who spilled the beans, that she is a disciple of the late Yuri Pavlovovich.
Who Is Yuri Pavlovovich?
Not many people remember Pavlovovich. He was the founder of the Pavlovovich School of Economics, which was obscure even at its peak in the 1970s and then was largely forgotten by the 1980s.
First a bit about Pavlovovich’s extraordinary life. He was a young man when the Bolshevik Revolution shook Russia. But he was shrewd enough to figure out which way the wind was blowing. He joined Lenin and headed the first Soviet Economics Committee.
At the time, he was married to a Ukrainian, Sonja Denisovak, who was also an economist and who later became influential in her own right. The problem for Denisovak, it was later discovered, was that she was a passionate defender of local languages – notably, the now defunct Obviak Lesser Georgian.
In the 1930s, Denisovak openly criticized Stalin for his attempts to destroy local loyalties, regional cultures and vernacular languages. She was accused of crimes against the people… was sent to Siberia and never seen or heard from again. (Even from his distinguished post at the Economics Committee, Pavlovovich could not save her.)
But let us turn to Pavlovovich’s radical ideas on economics…
The central concept of Pavlovovich’s pensées was that people do as they are told to do. Few people are original thinkers. Few are willing to defy authority.
The job of the ruler, he figured, was merely to direct human action in a way that was salutary. People, he reasoned, could be enticed, lured and ordered to do many different things. The challenge for the elite in charge of the economic system was to find the course of action most beneficial to citizens… and to themselves.
“Policy should direct people where they ought to go,” was one of his famous dicta.
“Give them a bottle of vodka or seven years in a gulag. That will help make up their minds,” was another.
Unfortunately for Pavlovovich, Stalin seems to have made up his mind during World War II that he no longer needed his ideas.
In the winter of 1941, Stalin transferred Pavlovovich to Byelorussia to do a “survey of the attitudes toward the Soviet economy of the invading of German troops.” Interviewing the Nazi soldiers proved hazardous. Pavlovovich was shot as an agent provocateur.
Making the Right Decisions
Still, his oeuvre grew more influential, if not more coherent. We thought we heard whispers of it in a recent speech by Yellen (who is of Russian extraction):
“As modern economists, we have to approach old problems with new energy and determination. Despite all you have heard, the economy is not responding to our stimulus, as we had hoped. Although we are making progress in some areas, in others the progress has been slow… or even negative.
“I am speaking of two key areas. First, consumer price increases have been extremely low. We know that this is dangerous. When prices do not go up at a regular pace, consumers may determine to save their money rather than spend it. This has severe repercussions throughout the economy. Spending falls. The retail sector slows. Incomes drop. And finally employment goes down too. This is clearly not a good thing.
“And we can understand it most clearly as the result of people not doing what they should be doing. This deflationary tendency reinforces itself. As spending and incomes fall, businesses cut back output further, in anticipation of lower sales.
“This further reduces spending, which further reduces pressure on consumer prices. In some cases, prices of goods and services may go down.
“Although you may think this gives you more for your money, we have determined that falling prices are extremely deleterious to a properly functioning economy. So, we must try to avoid consumer price deflation at all costs.
“You probably think this is nothing but gobbledygook BS… economists’ mumbo jumbo… or the old blah, blah, blah. But it’s not. We are principally interested in human action… and in guiding our fellow citizens to make the right decisions.
$30 Trillion in New Debt
“Now, working together with my colleagues at other central banks all over the planet, we have helped governments and consumers add $30 trillion dollars of additional debt over that period. I am proud to have been a part of this new deluge of debt.
“You may regard an extra $30 trillion of debt as a burden or a nuisance. But we economists have studied the matter in depth. More credit – not based on savings, but created by governments and banks out of thin air – increases the supply of money. More money and credit in circulation increases the general price level, which is what we were after in the first place.
“So you see, more debt and higher levels of consumer price inflation are good things. You should be happy to have them. And you should thank your central bankers for making them possible.
“Another thing we have done for you lately is give you stable markets. I know some people will dispute this point. They will mention the crash of 1987, the dot-com bust of 2000 and the lollapalooza of a crash in 2008. But they should remember that since we have been on the job there have been plenty of years when the markets didn’t crash. And the way I see it, the more credit there is in the system, the less likely there is to be a crash.
“Let’s face it. People make mistakes. Not central bankers, of course. But normal people like you. You might make a mistake in your investments, in your business, or even in your personal life. We can’t do anything about your personal shortcomings, but in business and investing, we can help by telling you straight out what you should be doing.
“If you want this economy to be worth a tinker’s damn, get out and spend money. If you don’t have any money, borrow. We’ll help by pushing down interest rates to ridiculously low levels… and sending stocks sky high.
“And if that doesn’t work, we’ll put a more robust plan into action. All retailers will be required to raise prices at least 2% per year. At least.
“And that’s just for starters. To lower unemployment, all employers will be required, by law, to hire one new person every month.
“And we’re going to have growth if it’s over your dead bodies.”
What Happens When the Next Debt Bubble Pops?
From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners
Astute readers will have realized that there was no Yuri Pavlovovich… nor any Pavlovovich School of Economics.
Today’s Diary was an April Fools’ Day hoax… except for one important element…
According to the Bank for International Settlements (BIS), total global debt indeed rose from $70 trillion to over $100 trillion between 2007 and mid-2013.
As the BIS reports, most of that debt has been added by governments and central banks.
And the US has played a major role in that debt buildup. According to Bloomberg, marketable US government debt outstanding has risen by $4.5 trillion to a record $12 trillion over the same period.
Another big factor is global corporate debt. Issuance of corporate bonds now totals more than $21 trillion (much of which has funded share buyback programs).
With interest rates near zero, all this new debt is easy to service. It’s about the closest thing to free money there is.
But when interest rates inevitably rise, so will debt service costs. And rolling over existing debt will no longer be a cheap option either.
At this point, the second… and much more severe… phase of the financial crisis will begin. One that will threaten the very foundations of the fiat money system.
Editor’s Note: Our publisher, Will Bonner, has created a free report on what he calls the coming “Economic Armageddon.” It includes information on how you can protect your savings… and even profit. For full details go here.