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George Soros said that what we are seeing is not just another recession but the unwinding of the huge credit bubble that began after WW2. Fund manager Jim Rogers said we are going to see something much worse than a normal recession, and that the severity of the onset is surprising him.
Well, surprises to the downside appear to be the norm these days. I think the Central banks, the Fed and ECB, are nothing less than horrified, a bit panicked, and realize their normal major weapons to combat this Depression 2.0 are not working much at all. If this is a credit crisis, offering more credit does not work, people cannot pay what they already have borrowed. We already are seeing cases where banks are freezing their balance sheets (not lending new loans) to try and stem the bleeding. I saw one commentator (Mike Shedlock) say the US banks have lost their entire net capital so far! Financial institutions are literally shell shocked at how fast this happened. (Witness financial mass destruction ala W. Buffett thanks to derivatives.)
In fact, I am seeing comments from financial media that big investors are beginning to realize just what I said above, that the Central Banks have lost control of the situation.
Gold is rallying in this whole mess. In fact, if you look at gold's big rises in the last year, it correlates well with the onset of the credit crisis after Aug, September.
Gold seems to think we are in stagflation. Gold rose dramatically in the stagflation of the 1970s. We see many of the same trends today. The credit bust has caused central banks to flood out money, and growth is stalling. Inflation remains a problem, tying central bank's hands, and since we are in negative real rates (inflation is higher than US interest rates, hence negative) gold reacts by rising dramatically. Gold rises big in negative inflation environments.
As central banks combat Depression 2.0 and try to stave of deflation which wants to emerge, and markets contract and spending contracts, gold will rise during the stagflationary stage, which we are in now.
At some point, deflation might actually come into the picture, and gold steady if the US and ECB don't panic and just flood out $trillions and trillions to try and stop the deflation from emerging.
But, in any case, unless things change the direction they are going, and if the credit bubbles continue to be paralyzed and deleveraging, and central banks keep flooding out money and lowering interest rates, gold will rise well over $1000 in 08 and stay there.
