Endless Stimulus and $2000 Gold

SELF-AVOWED "old rock hound" Byron King earned his bachelor's degree in geology at Harvard, and then worked as a geologist in the exploration and production division of a major oil company, says The Gold Report.

After "earning his wings" in the US Navy and the US Naval Reserve, logging more than 1,000 hours of flight time in tactical jet aircraft and recording 128 aircraft carrier landings, Byron practiced law in Pittsburgh before becoming a prolific author and popular investment speaker.

Now a core contributor to Agora Financial's Daily Reckoning, Whiskey and Gunpowder and Penny Sleuth, he also edits the Energy and Scarcity Investor andOutstanding Investments newsletters.

Here he speaks to The Gold Report about the "bottomless pit" of stimulus spending and why he sees $2,000-per-ounce gold on the not-too-distant horizon...

The Gold Report: We've seen quite a rebound in the markets since we spoke in May, and governments across the world have begun releasing some positive economic news. Are we out of the recession as Bernanke has told us?

Byron King: I don't agree with that all. It's like at the funeral home where they put really good makeup on the corpse and people walk in and say, "Oh, he looks so good." Then you think to yourself, "Wait a minute. If he looks so good, why is he dead?" That's where we are now, I think, with our economy. We're still in the recession, it has been well-masked.

Let me digress and say that yes, the stock market rebounded. The "sell in May, go away" thing didn't work this year. So if you stayed in the market, you probably benefited very well from the market recovery. But it was a recovery not rooted in fundamentals. Part of it is that we've had a banking recovery, too. But that was because of massive infusions of new liquidity out of the Federal Reserve and the Treasury Department into the financial sector. That's not the prescription for long-term health.

As with someone really sick in the hospital, the problem isn't putting him on life support; the problem is getting him off the respirator. Now the question is how to stop hemorrhaging public money into the system, and in fact, begin pulling some of it back out.

TGR: Let's assume for now that the government isn't prone to taking the patient off the respirator. Do you expect diminishing returns in terms of less recovery seen for every Dollar the government puts into the system?

Byron King: That's a great point. We're there, at the point of diminishing returns in terms of what it takes to get another Dollar of real GDP. It doesn't matter how much green ink they use down at the Bureau of Engraving and Printing or how many ones and zeros they create in the Federal Reserve. At the end of the day, how much have we improved? How much have we built our economy? Look at numbers like new business formations, numbers that indicate the health of growing businesses – hiring, recalls, overtime certain types of gross output figures, job creation. You're not seeing healthy numbers for those things in the economy.