Tuesday, August 4, 2020

Lots of Financial News - Not Much Good

It doesn't seem to be widely discussed but the credit rating agency Fitch lowered its outlook for the US credit rating last Friday.  That's in the no man's land between saying "everything is fine" and we "don't think it will stay that way." 
WASHINGTON -- Fitch has lowered the outlook for its U.S. government credit rating to “negative” from “stable” due to soaring budget deficits, but the agency is keeping its overall rating at the highest AAA level.

Fitch said Friday that the downgraded outlook reflects the surge in government debt and “the absence of a credible fiscal consolidation plan” to get the deficits under control.
Most all media was breathlessly reporting about the 33% decline in US GDP also reported last week.
The U.S. economy shrank at a record-breaking 32.9% rate in the second quarter of this year as Americans sheltered at home during the coronavirus pandemic and slashed personal spending, the Commerce Department said Thursday.

That figure shatters the previous record for a quarterly decrease in the nation's gross domestic product, a 10% decline in 1958.
As in most things the mainstream media wants to report on that's a little deceptive.  Yes, it declined 32.9%, but that's an annualized rate.  It's the way those reports are written.  Since the measurement was for one quarter, the decrease was actually smaller.
Gross Domestic Product, the combined tally of all goods and services produced, fell a colossal 9.5% between April and June as many Americans were forced out of work and asked to stay home as the coronavirus pandemic raged. That number, at an annualized rate — or what the decline would look like if it occurred for a full year — equals 32.9%.

The plunge, however, was not quite as bad as predicted. Economists surveyed by Dow Jones had expected a 34.7% annualized decline in the second quarter.
I'm going to bet that you haven't heard the perspective in that last sentence.

These two - especially the first - go along with the increase in the prices of gold, silver and precious metals.  The credit rating downgrade is an indication of lack of faith in the economy's ability to recover.  Those metals are "safe haven" assets that people get into when confidence in the monetary system is going down.   Gold is up 30% this year while silver is up 43%.

The ordinary perspective on those facts is people are bidding up the price of gold and silver: they value the metal more than the paper.  The other perspective is worth considering, too: Silver and Gold are staying constant in value and the dollar is becoming worth less as more and more dollars are created.  That's a natural, even inevitable consequence of making up currency on demand backed by nothing except the promise it's worth something.  The people who are holding the resources that others want are aware that an almost unlimited amount of currency is being created and they want more of that paper for their metal.

In either case, the fact that people value the metal more than the paper they're holding is a good explanation.  The buyers are willing to give more slips of paper, but that's good because the sellers don't value those slips of paper as much as they did, either.  At some point, sellers of all sorts of things could decide they don't want those slips of paper anymore at all.

Inflation is always a monetary policy problem.

Snapshot from Kitco


  1. That's not really a ray of sunshine, but I didn't expect one. If Biden and whoever is really going to be president wins, it will get much worse.

  2. When I was a kid and had made a couple o' bucks that I wanted to throw into Wall Street, my Dad made me read about tulips - the ones the Dutch were buying back a few hundred years ago - like they were going out of style.
    If the media and assorted politicians don't create yet another panic, we should pull out of it just fine.

  3. Dollars are supported only by the expectation of tax collection occurring in the future. This means dollars are extortion futures. Meanwhile, every unit at every level of American government is bankrupt, unwilling or unable to pay debts as agreed. I wonder what's in Fort Knox. Paper IOU's ("nonnegotiable bonds") from the general revenue budget, like the social security "lockbox" contains?

    Decide now what you're going to carry off for yourself when government logistics finally collapse, and the organized criminals of government can no longer defend their territory. Think big. Maybe you could use a city block of well-built buildings? A square mile of Yosemite?

  4. Great post, unfortunately.

    Silver was $27.10 pre-market this morning. Many more buyers than sellers at the moment.