Roger Lowenstein @ Bloomberg News suggests the economy is recovering, but ...

Republicans claim that higher taxes translate to lower growth. Recent evidence is to the contrary. In the 1990s, the top tax rate was 39.6 percent. The U.S. enjoyed a booming economy, warmed by the balmy breezes of a balanced budget. In the 2000s, George W. Bush cut the top rate to 35 percent. Deficits ballooned, and the economy was mostly lousy.

Going back further, the connection is murky at best. In the 1960s, marginal tax rates were extremely high — 70 percent and in some years even more. The economy roared. In the 1970s, taxes remained high and the economy slumped. In the 1980s, President Ronald Reagan slashed taxes: By 1988, the marginal rate was only 28 percent and the tax code was greatly simplified. Clearly, those giant tax cuts, plus the elimination of many loopholes, stimulated a boom.

This isn’t 1964, there is no dominion of American productivity. The boom that began in the 1980’s was the beginning of the debt bubble and the sale of US output overseas. What remains is American debt and resource waste. What is being done to address this? Nothing. Energy never gets a mention. People bitch about outsourcing but nobody wants to upset the China debt-recycling apple cart. China mercantilism bankrupts the US as well as China. What a fiasco!

Meanwhile, TPC @ Pragmatic Capitalist examines commodities. wherein Dylan Grice @ SocGen calls commodity ‘investors’ speculators.

OUCH!

Commodity prices have underperformed other speculative vehicles since the modern era began:

Grice added that the purchase of commodities is actually the sale of human ingenuity. You are essentially betting that humans won’t one day replace their oil based energy needs with some alternative energy. Or you are betting that humans won’t find a way to more efficiently produce wheat:

I would add that Grice’s comments regarding innovation are applicable here as well. Ultimately, a bet on gold is a bet that we will revert back to some form of commodity based currency system which proves the modern fiat monetary system is flawed. But as I have previously explained, I believe this is faulty thinking in the long-run. In fact, the move from the gold standard was a form of financial innovation due to the fact that the gold standard imposed inherent restrictions on the modern complex and dynamic global economy.

What we are seeing in single currency Europe is in many ways equivalent to the flaws generated in a world which was once a single currency world (see here for more). Obviously, that system is highly flawed. And it was these inherent flaws that ultimately led to the demise of the gold standard. A move back to the gold standard would quite literally be like moving back into the stone age.

In the near-term, however, (remembering that all commodities are speculative bets) we can’t ignore the voracious demand for gold as a currency, the problems in Europe, the false belief that the Fed is “printing money” and the misguided belief that fiat currencies are not the wave of the future. As I have repeatedly stated in recent years, it’s likely that gold prices continue to surge higher as investors seek a safehaven from a world of economic uncertainty, political strife and what is viewed as a failing fiat currency in Europe. Ultimately, I still believe gold’s endgame in the current cycle is an irrational bubble, but that is a purely speculative short-term bet and not a long-term investment.

In conclusion, mathematician John Allen Paulos famously said:

“people generally worry only about what happens one or two steps ahead and anticipate being able to get out before a collapse… In countless situations people prepare exclusively for near-term outcomes and don’t look very far ahead. They myopically discount the future at an absurdly steep rate.”

Investors are caught in a wave of euphoria in the commodity markets today. And that’s not to say that it is wrong to own commodities or that their prices won’t be substantially higher in the coming years. But just remember that the product your Wall Street broker so nicely wrapped up for you is NOT an investment. It is a product that is guaranteed to line the pockets of bankers while you make nothing more than a speculative bet that a greater fool will one day buy from you at a higher price.

Maybe, maybe not. Commodity prices in general are self- limiting except in a few areas, one of which is gold.

In the past, high prices stimulated more production as miners, drillers and farmers increased yield, a process aided by greater returns on the commodities already sold. The high prices were limited by the appearance of the yield in the markets.

The response of oil production to high prices suggest this dynamic has been exhausted. Price increases do not bring new yields to markets. If the price of a commodity increases beyond what demand is physically able to support as an input, the demand disappears instead.  Finance can drive prices higher but the physical economy must find a margin — a profit on the commodity’s use. If the price of the input is too high, the economic return on its use is insufficient to support the high price.

The increase in costs in many retail goods and services is a reflection on the steady increase in energy costs since 1998, interrupted only by the plunge in oil prices in the Spring of 2009. Plastics, chemicals, processes, transport and infrastructure are all represent energy- dependencies embedded in these goods and services.  The retail market for products that endlessly cost more shrinks. Up until 2006 or so, the increase in product prices was hidden by the ‘wealth effect’. Not so now.

At some point in our pauperizing USA, the high costs of products such as higher education, medical care and gasoline will plummet. The credit apparatus that supports the prices of these goods will fail. People who work in the credit apparatus will lose their jobs, taking their demand away. This is what debt deflation is, the effect of debt- driven high prices on demand.

Also, if you haven’t already please subscribe to Jim Hansen’s excellent ‘Master Resource Report. This is a weekly newsletter that analyses energy markets and connects a lot of the production/consumption dots. Hansen along with Gregor McDonald are among the sharpest of the energy commentators.

To subscribe, send an email to: jim.hansen-at symbol-kmsfinancial.com and put the word ‘Subscribe’ on the subject line.

Check this out:

http://www.poodwaddle.com/worldclock.swf

Now that the holidays are here little will happen on markets as traders are with their families. You can do the same!

Bankers and politicians have gone back to their coffins …