(The following essay was written by Hans H. Kahn and Daniel Tessler, of Au Capital Letter.)

The rise in gold bullion prices against all major currencies [in the third quarter], including a generally strong and rising US dollar, was most encouraging. Gold shares rose nicely but at less than their usual multiple of bullion gain because the larger issues led and because high-grading of production at lower prices and higher energy and other costs restrained demand for shares relative to physical demand for metal.

While oil prices led the financial news, most hard commodities rose to long-term highs, which general commentary ascribed mostly to a spreading fear of inflation. We welcome broader understanding that any proper measure of inflation would show considerably higher rates than subjectively manipulated official figures have shown, just as honest counts would show unemployment substantially higher and investment and job-growth substantially lower. However, we sense that markets are slowly acknowledging more significant matters.

Enormously difficult and chronic conditions have resulted from years of monetary, fiscal, and political management at a "Guiness Book of Records" level of irresponsibility. And financial assets clearly will be first-wave casualties if markets start enforcing the obligations that officialdom has shirked.

The World's Workers

The most significant fact in the economic world today is that countless millions of workers have entered the cash economies of their developing countries in the past twenty years or so and now compete in world markets for the first time. Behind them are hundreds of millions more. They imperil the advanced societies that aren't primarily commodity suppliers -- not because they are cheap, though that helps for a start, but because they are competent, motivated, and increasingly well-trained, well-managed, and well-equipped. Their threat is not that they make quality exports or save and invest at home, though these things also help for a start. Their threat is that their rising incomes will come to represent virtually all the growth in world demand and that they likely will be able to meet virtually all of their own demand internally.

Much like the United States after the Civil War, these developing economies are on track toward self-sustaining, self-financing, autonomous growth and considerable freedom to set their own terms of trade. Thus the fundamental forces at work in the world require the rich kids to change themselves to sustain themselves. It's quite possible, given insight, leadership, and effort, but it's harder than and not so quick or fun as another trip to the mall. Among other things, we'll need more to sell than a new issue of "Lethal Weapon" or Fannie Mae. Particulars vary among the United States, Germany, France, Britain, Japan, and others, but our general condition is the same. Leaders are in denial, though some know better. Populations are naïve and uninformed, though some suspect the truth. And governance, policy, and lifestyles cheer yesterday without serious thought for tomorrow.

No Wage Growth in U.S.

In America real wages haven't grown meaningfully for a generation, even against understated inflation rates. To maintain the standards derived in our fading era of dominance, government, households, and financiers increase debt at near-parabolic rates. Business generates surpluses but no longer invests them enthusiastically in domestic expansion. The nation as a whole saves approximately nothing. This path could and we believe should have been blocked by collapsing liquidity. Instead we spin and spend our way to radical dislocation, courtesy of lower taxes, higher trade and budget deficits, negative real interest rates, and other policies that facilitate the least helpful behavior. That, we think, is today's reality. Like cancer, it is no less
malignant for growing slowly, and no less perilous to ignore. Now symptoms intrude everywhere.

In America, again, the management of Delphi, the largest auto supplier, made general news when saying recently that only a 60 percent wage cut could preserve workers' historical pension rights and values. (Yes, this is old economy, but 60 percent?) If Alan Greenspan wants higher interest rates as he professes so often, why are real rates still decidedly negative after two years of resolute labor? In a similar disparity, Greenspan recently advised John Q. Homeowner to beware the same adjustable-rate mortgages that he plumped as bargains a year ago.

On the political front, the World Wrestling Federation appears to be the model for our self-congratulating, self-perpetuating, trans-partisan Washington elite. See how huffily and puffily the solons grapple, now a Demican victor, now a Republocrat, with never a genuine threat to disrupt the show.

"Spin and Spend"

Imperial feasting abounds. Our current favorite example is the $220 million "bridge to nowhere" of Sen. Ted Stevens, R-Alaska, who chairs the Senate Appropriations Committee. It will keep 50 of his constituents off the ferry for a mere $4.5 million each; if they all commute and pay us $5 a day, we'll have our money back in 3,600 years. Spock, verify those numbers! Bones, bring me an aspirin! What we call spin-and-spend, Greenspan less crudely called a "loss of budget control" in recent private conversation with foreign officials. Perhaps he wanted them to leak his remark and thus get one clear, sober statement on record before the end of his term. We expect, and he may fear, that he will be seen eventually to have been our most profligate and intellectually corrupt central banker ever. A saddening augury for future policy came in today's nomination of his successor, the professorial Ben Bernanke. Non-professors nicknamed him "Helicopter Ben" when he stated publicly (and seriously) that US dollar deflation is impossible given the Federal Reserve's access to modern technologies -- specifically, printing presses and helicopters. Stocks went up a lot on the news. You can't make this stuff up.

Before the 2000 presidential election, Au Capital's Dan Tessler predicted publicly that George W. Bush, if elected, would reap the whirlwind and become the last Republican president for a generation, the modern Herbert Hoover, so to speak. Dan knew nothing then of the coming 9/11; Iraq; acceleration in the rise of commercial China and India; probable imminence of peak oil production; and the substitution of a colossal real estate bubble for a merely gigantic equity bubble. Those are mere details in this context. Rather, our overview was, and is, that America and the other rich kids are fundamentally challenged by worthy competition, are as yet fundamentally unresponsive, and are approaching the tipping point when reality may start writing the headlines without spin and without permission.

This was written in the dark while Hurricane Wilma beyond the window demonstrated the raw mastery of nature over our elegant little works. It makes you think. Modern finance is an oh-so-elegant construct, adorned with all manner of fine derivatives and carry trades and asset-backed securities, but on what monetary bedrock, on what immutable value proposition does it really stand? How will it do in a really big wind?

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Distributed courtesy of Au Capital LP, 304 Villa Drive, Jupiter,
digitaldaniel@adelphia.net.