ebear, when i said "don't fight the fed" i didn't mean "don't buy gold." it may be a misconception, but the saying "don't fight the fed" refers to not making investments that run counter to the fed's current policy. when the fed is raising interest rates and draining reserves from the system, one should not buy gold. but when the fed is easing, and lowering interest rates to zero, that is the best time to buy gold. the fed is the 800-pound gorilla that controls not only short-term interest rates, but also the printing press. if you stand in its way, you get run over. but right now, the fed's actions are extremely pro-gold.

The idea that you don't fight the Fed is a tacit acceptance that Keynes' theory on moderating the business cycle was correct. Not proven in my books, but besides the point as this isn't a normal business cycle. What we're dealing with here is a credit cycle contraction- something most of us have never experienced because they don't come along very often. The last one 1929 - 1940 was interrupted by a world war. We also had a gold standard at the time, at least until 1933, and for international settlement, until 1971.

My point is, we have never before experienced a credit contraction of this magnitude, so the past may not be much of a guide to the future here. The expression "pushing on a string" comes to mind. It may be that no amount of easy money will kick start the economy - essentially they are trying to fight the problem with the same methods that caused the problem. Not very wise if you ask me, and almost certain to fail from an Austrian point of view.

as far as creating sustainable demand and the unwillingness of borrowers to take on additional debt; that would be a problem if we had to depend on the private sector alone. when you see that consumers are tapped out, and businesses won't borrow, you would expect spending to decline. but in addition to monetary policy, the government also controls fiscal policy. i am confident that we will see a huge increase in government spending to make up for the decline in consumer spending and business investment. as far as whether this will be sustainable, president obama has already said he will do whatver it takes to get the economy moving again, and not to worry about this year's deficit, or the following year's deficit.

Shades of FDR! Unfortunately a war came along and scotched any chance of accurately gauging the success (or failure) of the New Deal. That war transfered a lot of international gold to the US Treasury, which, along with the minimal damage suffered by the USA, set the stage for the US to emerge as the only winner, at least in an economic sense. Familiar history, but it bears repeating when people use the New Deal as a model for addressing the current situation, which is in no way comparable

Also important to note is that the New Deal occurred against a backdrop of rapid industrial growth, and in the main was intended to compliment that trend, the Tennessee Valley Project being one example. Outside of rapid development of nuclear power, and a concerted effort to develop new sources of conventional oil, neither of which feature prominently in Obama's plans, I don't really see a way out of this situation. Building roads to nowhere, like they did in Stalinist Russia for example, will only hasten economic decline as resources are misallocated (and misappropriated) by a heavy handed, poorly informed government.

so as far as demand being sustainable is concerned, the spending will continue as long as congress is willing to appropriate the money. can anyone remember the last time congress didn't want to spend money? so you and i and everyone else can pay down debt, but the government will make up for the difference by spending money to rebuild bridges, roads, airport, water pipes, and all manner of infrastructure.

No doubt this will mitigate some aspects of the problem, and we can look for that to be reflected in stock prices over the short term, but the overall effect will be more of the same waste and profligacy we've come to enjoy since the 70's. No amount of government spending ever created prosperity. If it could, the USSR would be the most prosperous nation on Earth, followed closely by the People's Republic of China.

the fact that the government doesn't have the money won't stop anything. it will simply create the money, and that is bound to be inflationary, and good for gold, silver, and other commodities. for that matter, one way to play the infrastructure boom is to own commodities. a study from a few years ago said the world would spend $41 trillion on infrastructure over the next 25 years, and most of that was not china and india; a healthy portion is expected to come from developed countries.

I agree, much money will be thrown at the problem, and some of it will no doubt stick. In terms of future purchasing power, a dollar invested in this area will be better off than a dollar left in Treasuries or the money market, but will it buy more than it does today? That remains to be seen, but it looks like we're going to find out.

we don't need genuine prosperity (which is a good thing because i doubt we will have any) for the economy to grow. the economy will grow by taking on huge amounts of public debt, as next year's us deficit may exceed $1 trillion. i think the market action of the past two months is a sign that investors are recognizing this, not just from physical demand for gold and silver, but also the huge rally in mining shares. the stocks are still well below their highs, but many have already doubled and tripled from their lows.

Well, I wouldn't call that growth in the classic sense of the word, but I get your point. As long as the generative effect of this spending in terms of capital creation can run ahead of the capital destruction caused by low interest rates and high debt levels, I suppose you'll see something you could call growth. Hell of a way to get there though.

peak oil is yet another inflationary factor, as higher oil prices inevitably lead to higher everything else prices. just like the 70's, we will have higher prices with a weak economy, only this time around the government will be using every tool it has (fiscal, monetary) to stimulate it. if things get out of control (labor unions demand 25% annual increases, gas rationing) the long term choices will be a deflationary collapse in which everyone defaults on their debts, both public and private, or a hyperinflationary blowoff like argentina. but i think those events are still years away.

Well, gold has been signaling something like this for several years now. Of course both outcomes are simultaneously possible - everyone defaults AND prices run off the board. This outcome to me seems almost guaranteed once the current deleveraging in the oil market runs its course. In effect, we'll just start to see a bottom in the liquidation process when supply driven higher energy prices kick in.

We live in interesting times.

ebear