Bush Continues Deflationist Policy; Prepare for Long Years of Recession

President Bush signaled his intention to follow along the path toward monetary deflation Monday by signing a 10-year, $190 billion farm subsidy program. The new law boosts U.S. crop subsides by 67 percent and adds an estimated $6.4 billion a year in crop and dairy spending. So what has this got to do with deflation, and more importantly, gold? A lot more than you might think. By signing the law Bush is telling the world that his "supervisors," the central bankers, have decided to continue the U.S. along a deflationary course that has been the mainstay of every presidential administration since Ronald Reagan in the early '80s.

Basically, the massive crop subsidies guarantee that the policy of rewarding farmers for violating the laws of supply and demand will continue. U.S. agricultural policy in recent years has thrown mountains of taxpayer dollars at farmers in the vain attempt at bailing them out of their plight. Plagued by years of low prices (a function of the K-wave), the government has always assumed that by subsidizing farmers it is helping them to survive the years of low prices and low profit margins. In reality, the U.S. has been furthering the decline along the whole time by encouraging farmers to grow more food than is possibly needed, thereby adding excess supply to an already global supply glut of grains.

Nikolai Kondratief, who first quantified the 50-60 year Kondratief Wave cycle that bears his name, used the grains market as a proxy for his research on the effects of long-wave cycles on the economies of the world. What he discovered was that the grains market is the starting point of any economy and without a sound agricultural economy there cannot be broad-based economic soundness. This is because grain is the staff of life in most every culture and without an abundant food supply at reasonable prices, and at which farmers are adequately compensated for growing it, there can be no lasting prosperity. As long as commodity prices are firm (but not too high), wealth tends to trickle up from the farmers all the way up through the strata of the broad-based economy. If farmers are doing well, everyone tends to do well is another way of putting it.

Farming is a low profit margin business, but the K-wave winter of 1980-2002 has been devastatingly painful for all too many of them. This has been made worse by the active intervention of the U.S. government in subsidizing farmers in the face of supply gluts, which only adds fuel to the fire. Consequently, commodities have been in a secular bear market for nearly 20 years, and in the case of the grains and other commodities, show no signs of re-emerging from the downward trend.

Kondratief found that most K-waves tend to bottom after about 50-55 years. However, with the advent of central banking and federal bureaucracy, the governments of the civilized world have been able to manipulate the K-wave to some extent. The K-wave has been known to vary in extremes from 40-60 years. One K-wave expert even says a 70-year K-wave is possible. The last K-wave bottom was in the late 1940s/early 1950s. Technically, it should bottom between 2004-2006. However, since the great depression of the 1930s with the New Deal, the government has consistently intervened with efforts to manipulate the economy.

The last event bureaucrats want to develop is to have the their tax base go south. Their continuing efforts could protract the K-wave bottom until around 2011. What this would mean for the U.S. is a long period of a grinding bear market-a super prolonged recession but yet mild enough to be kept from plunging into outright depression at least until the final bottoming period at the end of the decade.

So what does all of this mean for gold? History has consistently shown the yellow metal to be a terrific hedge against deflation, especially in the extreme "hard down" phase of K-wave deflation which we are now entering. Gold tends to outperform nearly every other financial asset during the late part of "K-wave Winter," and this time should be no exception. While runaway deflation won't be good for most commodities, it will definitely be to gold's advantage. Financial portfolios in coming years should be structured to account for this.