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Auguries — Keynes Redux

January 12, 2012

By Kevin Michael Grace

Gold was up (at press time) $25.90 (+1.6%) for the week to $1,649.30, and silver was up $0.95 (+3.2%) to $30.22. Reuters attributed gold’s “one-month high” to “comments by the president of the European Central Bank on cheap money [which] stabiliz[ed] the region’s banking system [and] extended the metal’s gain to a third consecutive day.”

That’s one point of view. The same Reuters story quoted Zachary Oxman of futures brokerage TrendMax, “Right now, gold is operating on its own merit as a store of value. The problems in the Eurozone are still there, and I believe the debt issues in Greece and Italy are not going to be alleviated at all.”

January 12, 2012

Oxman’s comment suggests he is a “philosophical goldbug,” one who bets on gold because he is betting against the probability of governments getting their fiscal houses in order. And of course it is not just Greece and Italy that have “debt issues.” Canada and Ontario have them as well, as Andrew Coyne reminds us in the National Post.

“The air is heavy with talk of fiscal bloodbaths,” Coyne writes. “As they prepare their spring budgets, federal and provincial governments are warning of ‘profound reforms,’ ‘fundamental transformations’ and worse.”

Coyne is rightly amused by this sudden, fulsome determination. Harper and McGuinty “must be plenty steamed at whoever it was that ran up spending so recklessly, leaving them without the funds to fulfill their campaign promises. Why, if they ever get their hands on—what’s that? Oh. Never mind.”

Harper and McGuinty have only themselves to blame. Coyne notes the extent of their profligacy: federal program spending up from $175 billion in 2006 to $245 billion in 2010, per capita spending up $5,800 to $7,200 in that time (+24.1%); Ontario spending up 61% from 2004 to 2011.

Coyne argues with regard to cuts: “It isn’t the public [Harper and McGuinty] are afraid of.” Here one must part company with Canada’s foremost pundit. If Dalton McGuinty was not afraid of the public, why did he not mention Ontario’s dire situation during last year’s election? The same question could be put even more forcefully to erstwhile “right-wing” provincial Conservative leader Tim Hudak. And Stephen Harper was decidedly economical with the actualité when it came to his economic promises in both the 2011 and 2009 elections.

Come to think of it, is the air in Ottawa really heavy with talk of fiscal bloodbaths? It is now eight months from Harper’s majority victory, and there have been no cuts to speak of. It is a truth universally acknowledged that the probability of “nasty” decisions becomes ever lesser the closer any government gets to the next election day.

Back in July, Treasury Board President Tony Clement thundered, “The upcoming cross-government spending review our Conservative government will take is in stark contrast to the slash-and-burn campaign of the previous Liberal government.” Clement assured us the Conservatives would “take a more responsible and reasonable approach,” as opposed to those nasty Liberals, whose cuts “hurt health, education and pensions.” Three months later, however, he praised the Liberal fiscal record in a speech to an American audience.

Similarly, Finance Minister Jim Flaherty excoriated the Liberals during last year’s election for their, wait for it, “slash-and-burn” approach. Two months after the election, we learned that Flaherty “asked for a review of the Liberal government’s ambitious spending cuts to programs of the 1990s a full year before there was any hint the Conservatives might do the same thing.”

So are the Conservatives talking out of both sides of their mouth, or do they have no idea what they intend to do? Both, probably. Despite Clement’s promise of a reasonable and responsible approach, he knows all too well that any significant cuts will reduce short-term GDP growth, increase short-term unemployment and gravely threaten the re-election of his government in 2015.

Coyne argues that, for the moment, deficits are a good thing, if only because they constrain spending. But this has not been Canada’s experience since 2008. In any event, we are dealing here with a government which increased the number of federal civil servants by 48,000 from 2006 to 2010. (In contrast, the nasty Liberals decreased the number by 22,000 from 1993 to 2005.) Coyne concludes, “Longer term, fiscal conservatives cannot count on deficits to do their dirty work for them. They will have to make the case for limited government on its own merits.”

Where are these fiscal conservatives of whom Coyne speaks? And who today makes the case for limited government? Modern conservatives are all devotees of the fiscal and monetary beliefs of John Maynard Keynes. In a prescient 2008 essay, Bruce Bartlett (whose Reaganite credentials are impeccable) declared that Lord Keynes (who famously called the gold standard a “barbarous relic“) is a conservative hero.

“What Keynes understood,” Bartlett wrote, “is that governments bear primary responsibility for recessions. In really severe downturns, such as we suffered in the 1930s and are suffering today, government action is essential to turn the economy around; the private sector simply can’t do it on its own. He also understood that democratic societies cannot long tolerate high levels of unemployment. At some point, people will jettison capitalism for some sort of socialism, which would threaten democracy as well.”

Here is our dilemma in a nutshell. If governments are responsible for recessions, and these can be prevented or mitigated only with increased spending, then increased spending we shall have, forever. Keynes was entirely sincere in his fear of socialism, but the implementation of his theory has resulted in something he did not foresee: a mutant form of capitalism that has become increasingly difficult to distinguish from socialism. Just as in Animal Farm, where it became impossible to see the difference between the pigs and the humans. So it is no surprise that the biggest private-sector donor to the Obama 2008 campaign was Goldman Sachs.

And note the date of the Time cover that illustrates this column. The “expansionist economy” of 1965 resulted in something else Keynes did not foresee—stagflation, which is now back with a vengeance, despite the tireless efforts of governments to juke the stats.

In short, limited government is anathema to our democratic system. And this explains why gold is operating on its own merit as a store of value.

As to when this value will begin to accrue to precious-metals equities, Zvi Bar at Seeking Alpha suggests that this is imminent, at least for large-cap gold miners.

And now to cases. David Berman at the Globe and Mail reports that broker Raymond James’ Top 10 picks for 2012 include two gold companies: Alamos Gold Inc TSX:AGI and Eldorado Gold Corp TSX:ELD.

Marc Gerstein at Seeking Alpha names four “precious metals stocks that shine brighter than gold”: Alexco Resource TSX:AXR, AuRico Gold TSX:AUQ, Nevsun Resources TSX:NSU and Revett Minerals TSX:RVM.

And at the Financial Post, Eric Lam identifies Minco Silver TSX:MSV and Teranga Gold TSX:TGZ as “ripe for the picking,” ie, takeovers.

Finally, the BBC serialization of Sherlock Holmes continues its ratings success, just as the Robert Downey Jr and Jude Law movies clean up at the box office. Both feature guns, explosions, fisticuffs and general mayhem. Silly me: I’d always thought Holmes solved crimes with his mind.

One Response to “Auguries — Keynes Redux”

  1. We knew that Jim Flaherty was “more of the same but harder” when, in his first budget he discussed program spending as a percentage of GDP. A sheep in wolf’s clothing.

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