tag:blogger.com,1999:blog-2972588228619015332024-03-14T19:49:10.053+01:00The Lab EconomicsLooking for the Lab Economics? Get all information & latest update on Economics. Find the best Economics information updating blog today.Unknownnoreply@blogger.comBlogger359125tag:blogger.com,1999:blog-297258822861901533.post-60403307005435262632014-02-17T17:31:00.002+01:002014-02-17T17:37:06.419+01:00$10,000 Gold, $50,000 Gold & The Coming Frightening Chaos<div dir="ltr" style="text-align: left;" trbidi="on">
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“On the surface it looks like there is deflation on the way. Japan is failing to inflate and China is tightening because of the problems in their banking system and shadow banking system. The EU banking system has also restricted lending....<br /><br />“This has led to the ECB having reduced its balance sheet substantially. In the US there is now tapering of $20 billion per month. If this continues we will have a deflationary implosion of the world economy. We will have a total collapse of the financial system because the massive debt cannot be repaid in that environment.<br /><br />Central bankers are aware of this but they seem to either be totally paralyzed or perhaps overconfident in their ability to reflate if necessary. Judging by Japan and Europe, it’s much harder to reflate than these central bankers would imagine.<br /><br />Printing money at current levels no longer has any effect, and interest rates are already at virtually zero. Governments also know that a deflationary implosion will also lead to a total loss of power and control. This would just usher in anarchy.<br /><br />So let me again state that money printing is not the solution. Worthless pieces of paper cannot create wealth. Whether central banks print or don’t print wealth, they are doomed because either alternative is catastrophic for the world. They are just a different way of reaching the end game. As Ludwig von Mises said, ‘There is no way of avoiding the final collapse.’<a name='more'></a><br /><br />This collapse will be a final catastrophe for the already fragile global fiat currency system. I agree with what Ludwig von Mises said because either way the collapse will take place. But even though there are signs of deflation in the economy, the markets are telling us something different. <br /><br />Many commodities have bottomed and the CRB is already up 8% since the start of 2014. Many food categories have already bottomed and are already starting a major rise. If you look at soybeans, coffee, cocoa, rice, oats, wheat, sugar, and so on, they have all turned higher and are now set for a spectacular rise. Oil is also set to surge. Gold and silver have also finally broken out of their cyclical bearish correction, and they are now on the way to new all-time highs. The US dollar is also starting to break down, which will only accelerate the inflation.<br /><br />Eric, the markets are setting up for hyperinflation in many countries because of excessive money printing, leading to collapsing currencies. The gold price will simply continue to reflect the falling currencies. Initially we will have an orderly rise of gold and silver, but in the next few years financial markets will not be orderly.<br /><br />As a result of the major structural problems in the world and in the world economy and in the financial system, there will be collapses of currencies and money printing will become disorderly. This will lead to an exponential rise in gold and silver, and we won’t just reach my longstanding target of $10,000+ for gold, but also Jim Sinclair’s $50,000 figure. And if the $1.4 quadrillion derivatives bubble blows up, we could easily see gold at a Weimar price level, which was $100 trillion.<br /><br />But remember that gold is held for the purposes of preserving purchasing power. So the reason why it’s so critical for investors to hold physical gold is to preserve their wealth, and there is no better way of protecting wealth than gold. The wealthy who are not prepared for the coming carnage will see their wealth reduced by 75% or more.<br /><br />But remember also that gold going up is a reflection of a very unstable world, not only financially and economically, but also socially, politically, and geopolitically. Sadly, our children and grandchildren are likely to live in a much more unstable world then we have.<br /><br />Many people have no jobs as it is. Look at Greece, with 61% youth unemployment, and 28% overall. But unemployment will continue to increase all over the world, and so will famine, especially with higher food prices. Meaning, people’s priorities will move from wanting the latest iPhone to getting enough food to survive. But the good part of all of this is the network of family and friends will again become the core of society, just as this is happening in Greece today.<br /><br />Those people who are prepared will not only be able to survive but also thrive and even help to rebuild society into a much better place when all of the chaos finally comes to an end. But time is running short to prepare, and people should be aware of that.”<br /><br />b y <a href="http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2014/2/14_%2410%2C000_Gold%2C_%2450%2C000_Gold_%26_The_Coming_Frightening_Chaos.html">Egon von Greyerz</a><br /><br /><span class="style"><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br /><br />
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-297258822861901533.post-64021887120205612752014-02-07T10:00:00.002+01:002014-02-07T10:00:13.198+01:00Will There Be Another 2008 Style Crash? <div dir="ltr" style="text-align: left;" trbidi="on">
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I think there is going to be a point where QE will become ineffective. There will be a point when countries with a more sane approach, like China, stop buying US bonds and instead start selling them. That would lead to higher interest rates and have a negative impact on stocks. We have already seen the effects of the rise in interest rates on home and auto sales – the two biggest motors of the US economy since the beginning of QE3.<br /><br />On top of that, I believe that the US government is insolvent. In fact, everybody knows the US is broke but people will stand by and let it happen.<br /><br />An analogy for the Federal government is the city of Detroit. Five years ago, they already knew that they were broke. But it is not until they finally had to write a check that they could not write that <a href="http://amzn.to/1f7ZVA8">they declared bankruptcy</a>.<br /><br />Even though the bankruptcy was inevitable, it shocked people. The City of Detroit recently announced that pensioners would get 16 cents on the dollar. Had Detroit faced its budget problems five years earlier, pensioners may have gotten 60 cents on the dollar. Allowing the situation to get worse led to great disappointment and damage.<br /><br />The Federal government looks about as bad as Detroit five years ago. In financial year 2013 it brought in $2.8 trillion in revenues and spent 3.5 trillion, as reported by the Treasury department. Their current liabilities are something like 87 trillion with a <a href="http://amzn.to/1bfcSFq">national debt</a> of 17 trillion. The situation is hopeless.<br /><br />It is propped up by the Fed. When the Fed does an open-market operation, the stocks go up. When they are not doing any such operations, overall, they go down.<br /><br /> - Source, Eric Sprott:<br /><br /> <a href="http://sprottgroup.com/thoughts/">http://sprottgroup.com/thoughts/</a></div>
Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-297258822861901533.post-88279988669362139072014-02-03T21:01:00.002+01:002014-02-03T21:02:29.484+01:00Silver Price Charts and Other Factors Say Now Is Time To Buy<div dir="ltr" style="text-align: left;" trbidi="on">
by <a href="http://dailyreckoning.com/silver-price-charts-other-factors-say-now-is-time-to-buy/" target="_blank"><i><b>The Daily Reckoning</b></i></a><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhOa35Ey79S3VbeIYswhj49iTf-Ey98Nw1bTF9_WDs_b0j4FQ_yufYiMkFJoVSl6Z7MlzFZyyKXxSEc-MFfQ6ms9qvih4qwkhPq6_eNZxUnEQazih6uezPo1v_3WPIlHnvrlCeiEvNvOKvT/s1600/silver.jpg"><img border="0" height="221" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhOa35Ey79S3VbeIYswhj49iTf-Ey98Nw1bTF9_WDs_b0j4FQ_yufYiMkFJoVSl6Z7MlzFZyyKXxSEc-MFfQ6ms9qvih4qwkhPq6_eNZxUnEQazih6uezPo1v_3WPIlHnvrlCeiEvNvOKvT/s1600/silver.jpg" width="400" /> </a><br />
The Hebrew word for Silver is the same word that is used interchangeably for Money in the Torah and Old Holy Bible Testament: Silver metal = Kesef (כסף), which also means Money.<br />
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Moreover, in all Hispanic countries the word for money is the same word for silver: PLATA.<br />
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Since 1000 B.C. to today, the word SILVER is synonymous with MONEY in most countries in the world. Further testament was Stock Market genius of the 1920s, who was right on the money when he said: “SILVER and GOLD have worked down from Alexander’s time…When something holds good for two thousand years, I do not believe it can be so because of prejudice or mistaken theory.” – Bernard Baruch, a 1929 and aftermath winner<br />
<b><br />Silver’s Sterling History</b><br />
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Silver was first mined about 3000 B.C. in Anatolia (modern day Turkey). These early lodes were a valuable resource for the civilizations that flourished in the Near East, Crete, and Greece throughout antiquity. Later, Spain became the capital of silver production. The Spanish mines were the major supplier for the Roman Empire and an essential trading component along the Asian spice routes.<br />
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However, no single event in the history of silver rivals the importance of the discovery of the New World in 1492 by Christopher Columbus. This momentous finding and the years that followed reinvented the role of silver throughout the world.<br />
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The Spanish conquest of the New World led to mining of the silver element that dramatically eclipsed anything that had come before that time. Between 1500 and 1800, Bolivia, Peru and Mexico accounted for over 85 percent of world production and trade. To be sure most of the silver was stolen from the Inca Civilization in Peru. During 1500s the Spaniards had taken (ie robbed) 16,000,000 kilograms of silver from Peru, which they arrogantly used to finance the conquest of all of Europe.During 1500s the Spaniards had taken 16,000,000 kilograms of silver from Peru.<br />
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<b>Major Silver Producers</b><br />
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Silver mining is widespread among countries around the world, from South America to Asia and Africa. The white metal finds value as both a precious metal used to make jewelry and coins; and as an industrial metal used in cellphones and solar panels. What some investors might find interesting is that silver is produced by and large as a by-product of metal, mined alongside other commodities like copper, lead and zinc, rather than coming from primary silver production.<br />
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<a href="http://dailyreckoning.wpengine.netdna-cdn.com/dr-content/uploads/2014/01/vronsky010114-2.jpg"><img src="http://dailyreckoning.wpengine.netdna-cdn.com/dr-content/uploads/2014/01/vronsky010114-2.jpg" /></a><br />
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(Source: The Silver Institute)<br />
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However, in 2013 Peru became the world’s largest producer of silver, mainly due to a decrease in silver production in Mexico.<br />
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<b>Growing Silver Consumption</b><br />
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Demand for SILVER is tremendously increasing through industrial usage, medical applications and especially speculative investments. Moreover, silver Is Used Up 90% And Ends Up In Landfill…unlike gold.<br />
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Most people are unaware of the vitally important role silver plays in your everyday live. World consumption has never been higher and for good reason. Here is just a brief list of some important uses of silver:<br />
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<i>Jewelry<br />Electronic devices<br />Silver Oxide Batteries</i><br />
<i>Water filtration and Medical Uses<br />Solar Panels</i><b><br />SILVER Demand Exceeds Mine Production</b><br />
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The growing Demand/Production Deficits will indubitably fuel SILVER PRICES to ever more record highs in 2014 and beyond as SILVER DEMAND EXCEEDS MINE OUTPUT chart:<br />
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<a href="http://dailyreckoning.wpengine.netdna-cdn.com/dr-content/uploads/2014/01/vronsky010114-3.jpg"><img src="http://dailyreckoning.wpengine.netdna-cdn.com/dr-content/uploads/2014/01/vronsky010114-3.jpg" /></a><br />
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To be sure Economics-101 dictates that when yearly demand far outstrips supply (creating annual deficits), the price of the commodity must inevitably rise…indeed eventually soar.<br />
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<b>All the above Fundamental Factors Project Much Higher Silver Prices</b><br />
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This begs the question of how high might silver prices might fly in the next few years based upon historical Technical Analysis. The following silver price chart covering 1974 to the present provides astounding insights to a price projections for the poor man’s gold. The silver chart below shows a classic long-term Cup&Handle Formation covering a little more than three decades.<br />
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<a href="http://dailyreckoning.wpengine.netdna-cdn.com/dr-content/uploads/2014/01/vronsky010114-4.jpg"><img src="http://dailyreckoning.wpengine.netdna-cdn.com/dr-content/uploads/2014/01/vronsky010114-4.jpg" height="356" width="400" /></a><br />
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The theoretical price objective of this giant Cup&Handle Formation projects a possible silver price objective of $100/oz in the next 1-3 years…time horizon dependent upon volatility.<br />
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FURTHERMORE, it is the considered opinion of this analyst that silver may well far surpass the above $100 Silver Forecast based upon factors that I will elaborate in detail in Parts 2 & 3 of the analysis entitled, Silver Price Charts & Other Factors Say Now Is Time To Buy.<br />
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Vronsky<br />
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By <a href="http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2014/1/31_Richard_Russell_-_The_World_Is_Headed_For_A_Major_Disaster.html" target="_blank">kingworldnews.com</a></div>
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I understand that there was almost a revolt at the Fed. Certain members warned Bernanke to halt the Fed's wild money creation, fearing that it would wind up in hyper-inflation. But the Fed cannot completely halt its QE. The Fed is now buying 90% of the Treasuries that are put out for sale. </div>
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If the Fed halts its buying of Treasuries, who will buy them? Certainly not China or USA investors. Bernanke's thinking or hoping is that continued Fed stimulus will result in the US economy becoming so strong on its own that in due time it won't need any Fed stimulus.<br />
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However, matters are not working out in the way Bernanke wishes. The economy is still dragging its feet, and employment is still lagging. In the meantime, the banks, not the US populace, have prospered. The banks' reserves have been swelling. What dissenting Fed members are worried about is that bank reserves are growing and are beginning to resemble water behind a dam, pressuring to be released. When the dam finally breaks, all assets will go through the roof, and, as usual, leave the ever-suffering middle class behind.<br />
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So that's the story and the problem of the era. As I said years ago, the choice is, “inflate or die.”<br />
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Then there's another excellent reason why Bernanke can't cut back completely on the Fed's machinations. You see, the Fed has manipulated interest rates to ridiculously low levels. The US must manage or carry trillions of dollars in Federal debt. We are currently rolling over this debt at very low Fed-controlled interest rates. But if interest rates are allowed to climb to their normal uncontrolled levels, the cost of carrying the nation's debt (now $250 billion dollars annually) could rise to prohibitive levels -- even into the trillions of dollars.<br />
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So there we are -- to continue the Fed's stimulation and manipulation adventures -- or to back off and let the economy survive on its own?<br />
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So what do we do as investors and survivors? My own choice is to hold physical gold with just enough cash to carry us through each week. The amount of physical gold in the US is shrinking, and it's going to China and India. I believe the only danger to my plan is that possibly, in desperation, the US could confiscate gold from its people.<br />
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True, this was done by FDR back in 1933. But this is a different world, and it's not 1933. I believe there would be so much opposition to a “gold confiscation” today that the government could not get away with it. Besides, today many wealthy and influential people own gold, and they would constitute a powerful force against a government attempt to call in the people's gold.<br />
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At any rate, I've been doing a lot of thinking on this subject, and my conclusion is that holding physical gold in your possession is safe and the best policy for surviving the difficult years that I believe lie ahead.<br />
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Question -- what about buying and holding gold mining stocks, a category that has been denigrated and battered unmercifully? Answer -- I think they represent a good speculation, but I prefer the real deal, and that's physical gold.<br />
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There is something else I want to talk about. It's China, now the world's second biggest economy. China's debt is now 70% of its GDP, a ratio the analysts consider dangerous. If China runs into trouble it will affect all of Asia and the rest of the world.<br />
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So let's take a look at China on a chart. What I see is a huge head-and-shoulders top that has just plunged below support. The chart is telling me that the world's second largest economy is in serious trouble. <br />
<img alt="" src="http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2014/1/31_Richard_Russell_-_The_World_Is_Headed_For_A_Major_Disaster_files/KWN%20Russell%201%3A31%3A2014.jpg" style="border: none; font-family: Helvetica-Bold, Helvetica, Arial, sans-serif; font-size: 1px; font-weight: 700; height: 532px; line-height: 1px; width: 497px;" /><br />
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-297258822861901533.post-73927690765296406242014-01-23T09:13:00.005+01:002014-01-23T09:15:34.207+01:00China's First Default Is Coming: Here's What To Expect<div dir="ltr" style="text-align: left;" trbidi="on">
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<br /><br />As we first reported <a href="http://www.zerohedge.com/news/2014-01-16/chinese-stocks-tumble-contagion-concerns-first-shadow-banking-default">one week ago</a>, the first shadow default in Chinese history, the "Credit Equals Gold #1 Collective Trust Product" issued by China Credit Trust Co. Ltd. (CCT) due to mature Jan 31st with $492 million outstanding, appears ready to go down in the record books.<br /><br /><br />Of course, in a world awash and supported by moral hazard, where tens of trillions in financial asset values are artificial and only exist due to the benevolence of a central banker, it would be all too easy to say that China - fearing an all too likely bank run on comparable shadow products (of where there a many) as a result - would just step in and bail it out. However, at least until today, China has maintained a hard line on the issue, indicating that as part of its deleveraging program it would risk a controlled default detonation, in order to realign China's credit conduits even though such default would symbolically coincide with the first day of the Chinese New Year.<br /><br /><br />In turn, virtually every sellside desk has issued notes and papers advising what this event would mean ("don't panic, here's a towel", and "all shall be well"), and is holding conference calls with clients to put their mind at ease in the increasingly likely scenario that there is indeed a historic "first" default for a country in which such events have previously been prohibited.<br /><br /><br />So with under 10 days to go, for anyone who is still confused about the role of trusts in China's financial system, a default's significance, the underlying causes, the implications for the broad economy, and what the possible outcomes of the CCT product default are, here is Goldman's Q&A on a potential Chinese trust default.<br /><br /><br />From Goldman Sachs: A Matter of Trust<div style="background-color: white; font-family: 'Lucida Grande', Verdana, sans-serif; font-size: 13.142857551574707px; line-height: 17.33035659790039px; margin-bottom: 0.75em; margin-top: 0.25em;">
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<br /><br />Q. What has happened?<br /><br /><br />Local and international media (e.g. Caixin, Financial Times) have reported that a RMB 3bn three-year investment trust issued by China Credit Trust Company (CCT) is at risk of not making its principal repayment due investors on January 31 (which also happens to be the first day of the Chinese New Year). The trust assets were used to make a loan to a coal mine company for mine acquisition and related investments, but the company has still not received licenses related to two of five planned mines, and the owner of the company was reportedly arrested in 2012 for illegal deposit taking. It has been reported that ICBC referred the project to CCT, which structured the trust product as a “collective trust” rather than a “single trust” that typically is used by banks to securitize loans. The trust was sold through ICBC to approximately 700 private banking clients, and reports suggest that ICBC will not guarantee investors in the trust against losses. Our China banks team published detailed information on the trust structure, as well as shareholders and financials of the trust company (see “CCT trust product risk; potential scenarios imply slower trust/TSF growth”, January 20, 2014).<br /><br /><br />Q. What exactly is a Chinese “trust” and how is it structured?<br /><br /><br />A trust is essentially a private placement of debt. Investors in the trust must meet certain wealth requirements (several million RMB in assets would not be unusual, so the investors are either high net worth individuals or corporates) and investments have a minimum size (e.g. RMB 1mn). The appeal is a much higher yield than can be obtained through conventional bank deposits, in many cases 10% or higher, versus regulated multiyear bank term deposit rates in the low single digits. Trusts invest in a variety of sectors, including various industrial and commercial enterprises, local government infrastructure projects (via LGFVs), and real estate.<br /><br /><br />As our banks team noted, 29% of trust assets are invested in higher-risk industrial or commercial sectors.<br /><br /><br />A trust is not to be confused with a “wealth management product” (WMP). WMPs are available to a broader group of individuals, with much smaller minimum investments. They are typically sold through and managed by banks or securities brokers, with or without a guarantee of the payment of interest or principal (WMPs featuring explicit guarantees are booked on banks’ balance sheets; for other non-principal guaranteed products, implicit guarantees may be assumed by some investors). Funds from WMPs may be invested in a range of products including corporate bonds, trust loans, interbank assets, securitized loans, and discounted bills—so WMPs are best thought of as a “money market fund” or pool for other financial products.<br /><br /><br />Q. How do trusts fit within the “shadow banking” sector in China?<br /><br /><br />Trust assets total some RMB 10trn as of late 2013. Though small as a share of the total stock of credit in China (Exhibit 1), trust assets have been growing at an annual rate of over 50% in recent years. The net new credit extension from trusts approached RMB 2trn in 2013 based on estimates from our bank analysts, or more than one-tenth of broad credit flow (total social financing) for the year. (Please refer to the “CCT trust product risk” note cited above for further detail on trust asset growth and composition.)<br /><br /><br />Exhibit 1: Trusts still small as a share of total financing, but growing rapidly<br /><br /><br /><a href="http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2014/01/China%20Trust.jpg"><img src="https://blogger.googleusercontent.com/img/proxy/AVvXsEg1zPcBgeoeXmbPfoomuS0no6JDy6Uoipm3zrB5dHT6GuenK-O4kzJvN6Iin5WMTEPnTZOKQ3Ew24WuQC6Opj6v9bLtrmOP4rhBf3Twng32twOJmSmdrkuPjyBVEeLSN3cOobgY9KwlFbCwyl0h0zKhJGySwEHeiO3ihyDPBTHCCOOSPXXhC8Dept76Yr4AcHRJZUv0DzzurJz9KJpg=" /></a><br /><br />Source: Goldman Sachs Global Investment Research.<br /><br /><br />Some clients have asked about comparisons between the Chinese trusts and the SIVs (structured investment vehicles, sometimes known as “conduits”) that were prominent in the US financial crisis. The SIVs were off-balance sheet vehicles generally funded with short-term commercial paper (“asset-backed commercial paper”) with a period of a few days to a few months. Initially, these SIVs invested in relatively low risk, short-term receivables, although over time exposures shifted towards more complex, longer-term structured products such as subprime mortgage-backed securities or collateralized debt obligations. As doubts about asset quality began to arise in 2007, market funding conditions for the SIVs quickly deteriorated, requiring sponsoring banks to provide liquidity support and ultimately consolidate these assets on the balance sheet, which exacerbated funding pressures as well as asset write-downs. Similarities to Chinese trusts include the linkages with banks, the off-balance sheet nature of the trusts (true for many WMPs also), and the maturity transformation aspect (though it should be noted this is less extreme in the case of trusts, where investors are often committed for a period of a year or more, than for most SIVs; even WMPs typically have commitments of 3-12 months). Important differences include the relatively simpler assets of Chinese trusts – often loans, as in the CCT example – and the fact that the Chinese banking system is funded domestically (many SIVs raised funding across borders).<br /><br /><br />Q. Why is the potential default of a trust important?<br /><br /><br />With a large volume of trust products scheduled to mature this year, who bears the losses in the event of a default could set an important precedent. In our detailed research on the China credit outlook last year (see “The China credit conundrum: risks, paths, and implications”, July 26, 2013), we explicitly identified “removal of implicit guarantees” as one of four potential ‘risk triggers’ for a broader credit crisis. If the realization of significant losses by investors causes others to pull back from funding various forms of “shadow banking” credit, overall credit conditions could theoretically tighten sharply, with consequent damage to growth.<br /><br />From the perspective of policymakers, the default of a trust under the current circumstances might be seen as having less risk of contagion than some other “shadow banking” products. First, the trust is explicitly not guaranteed by either the trust company or the distributor. Second, the investor base of a trust is typically a relatively small group of wealthy/sophisticated investors (the minimum investment in the CCT trust mentioned above was RMB 3mn). This contrasts with broadly offered wealth management products, which have many more individual investors with less investment experience and more modest personal finances. Third, the particular circumstances of this trust (lending to an overcapacity sector, failure to obtain key business licenses, arrest of the borrowing company’s owner) might make it easier for authorities to portray as a special case. Put another way, if the authorities felt obliged to provide official support to this product, it is not clear under what circumstances they would be comfortable letting any trust or wealth management product default.<br /><br /><br />Q. What are the options for policymakers?<br /><br /><br />The fundamental issue for policymakers is how any losses would be distributed among 1) investors, 2) the trust company and/or distributing bank, 3) the government and government-related entities. Potential options include: <br />Allowing the trust to default (investors take losses). As noted above, this would call into question the implicit guarantees perceived by some trust buyers, thereby increasing the risk that new trusts or other non-guaranteed products such as WMPs face more difficulty obtaining funds, leading to tighter overall credit conditions. On the positive side, it would encourage greater focus on the underlying credit quality and better risk pricing going forward. <br />Trust company and/or distributing bank provide support (levered institutions take the principal and/or interest losses), making an implicit guarantee explicit. Although legally there are no guarantees of principal from either the trust company or ICBC, to the extent the trust company manager or the distributing bank were obligated by policymakers (or other reputational or legal considerations) to provide support, it could prompt loss recognition, or at the worst a need for capital raising or shrinkage of the balance sheet if losses are substantial. As such, the quality of the underlying assets and due diligence are key to determine whether and how much losses might be taken by these institutions. Investor demand for trusts might rise after such a demonstration of support, but the higher perceived liability on the part of financial institutions would presumably reduce their appetite for issuing such products in the future. <br />Government-backed entity provides support (government takes losses). In this case, the short-term market reaction would presumably be relief, as refinancing risks would be reduced and both banks and trusts would be off the hook. However, moral hazard for both issuers and investors would be increased, raising the risk of credit problems further down the road. Policymakers might try to minimize this moral hazard by providing support indirectly (via some government-supported entity or third party, rather than publicly and directly) and/or by providing only partial support. An example of the former occurred last year, when an “unnamed party”, possibly the local government which provided some land collateral and guarantees to the trust loans, intervened to purchase the defaulted loans of a steel plate manufacturer, enabling the investors in a CITIC WMP to be repaid fully (see “Latest China bailout reveals risk of local government’s hidden debts”, Reuters, May 7 2013). <br /><br /><br />Some mix of these options is of course possible, if the financial institutions or government provides partial support. Most observers seem to expect at least a partial bailout of the investors, reflecting a compromise between concerns about moral hazard and concerns about contagion. Unless there is a total bailout explicitly funded by the government, credit conditions in the trust sector seem likely to tighten at least modestly. Some central government level policymakers could be open to seeing a default, as it would encourage more careful risk assessment and help to contain credit growth going forward. However, other central government and many local government policymakers might be more inclined to contain the problem. Local officials in particular may feel more pressure to support key local enterprises that are major employers and taxpayers; in the current case, officials could in theory take actions such as granting mining licenses to make the trust assets more valuable.<br /><br /><br />Q. What should investors watch to track the broader market impact?<br /><br /><br />Besides the immediate news on what approach officials take in the case of the CCT trust, investors can watch other financial metrics for signs of stress. As always, interbank rates are useful as an indicator of the marginal cost of bank funding. Spreads to yields on nonbank products may reflect their perceived risk, although they could also be affected by other factors such as tight overall liquidity conditions. While we do not have high frequency data on trust yields, WMP yields have moved higher of late. Finally, data on credit volumes will be important to watch. To the extent conditions tighten, this should become visible in monthly total social financing flows (the trust portion in particular).<br /><br /><br />Q. What is the potential impact on economic growth and markets?<br /><br /><br />The growth impact of a trust default is highly uncertain, as it represents the product of two unknowns. The first unknown is the change in overall credit extension which would result from the default, and the second unknown is the sensitivity of economic growth to new credit. In work last year on the relationship between credit and growth (“The ‘credit impulse’ to Chinese growth”, April 11, 2013), we estimated a RMB 300bn change in the average monthly credit flow would have an impact of 80bp on sequential annualized real GDP growth in the following quarter (with further, gradually fading effects in subsequent quarters if the lower credit flow persisted). This is not far from the average monthly flow of trust loans in 2013 implied by our bank analysts’ estimates. So with our assumption on credit sensitivity, a hypothetical sharp tightening in funding conditions that stifled this flow of new credit (not affecting existing trusts) would imply an 80bp hit to sequential (annualized) growth the following quarter, and roughly a 50bp hit to yoy growth over the following year. Intuitively, the modest estimated impact stems from the small size of the trust sector in the overall financial system. We emphasize the very high degree of uncertainty in these calculations—this is a back-of-the-envelope illustration rather than a forecast. On the side of a smaller effect, officials could take steps to reduce the impact on trust lending or other lending channels could pick up the slack; on the side of a bigger impact, spillovers could occur to non-trust lending or to the real economy via effects on business or consumer confidence.<br /><br /><br />In the credit markets, more willingness to allow losses should lead to greater differentiation between stronger and weaker credits. This is a theme we have emphasized for some time, including in our in-depth work on the China credit outlook last summer.<br /><br /><br />A policy/credit tightening bias may put pressure on China equities in the near-term, particularly credit-dependent, investment-heavy cyclical sectors. Investors are unlikely to reward either option 1 or option 2 above, as the default option may trigger contagion and risks to growth (thus earnings as well) and the “bailout by financial institutions” option is structurally unappealing (thus risks valuation). Option 3 is probably the only outcome that would support a slight market rebound near-term, in our view, as immediate contagion is averted and listed financial conditions are protected from bearing losses—though at the cost of longer-term moral hazard.<br /><br /><br /><div style="margin-bottom: 0.75em; margin-top: 0.25em;">
by <a href="http://www.zerohedge.com/news/2014-01-22/chinas-first-default-coming-heres-what-expect" target="_blank">zerohedge.com</a></div>
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-297258822861901533.post-18448905602753594202013-07-13T10:02:00.000+02:002013-07-13T10:02:13.155+02:00How Should Prices Be Determined? <div dir="ltr" style="text-align: left;" trbidi="on">
by <a href="http://mises.org/daily/author/170/Henry-Hazlitt" rel="author">Henry Hazlitt</a><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg8VyXIjRKrHgzNqh8SK5O32hs2CQzd_f_9eefnQElDkiac1bdvUV6gEXegDuI9zhWP3BcfFuQtkv_PqPOP1rAR5otGA9kwX12AXGqXVih8fcRadxQoo7hmGJh_r2YgSODaIhE_oZ_xMevT/s1600/price.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg8VyXIjRKrHgzNqh8SK5O32hs2CQzd_f_9eefnQElDkiac1bdvUV6gEXegDuI9zhWP3BcfFuQtkv_PqPOP1rAR5otGA9kwX12AXGqXVih8fcRadxQoo7hmGJh_r2YgSODaIhE_oZ_xMevT/s1600/price.jpg" height="300" width="400" /></a></div>
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"How should prices be determined?" To this question we could make a
short and simple answer: prices should be determined by the market.<br />
The answer is correct enough, but some elaboration is necessary to
answer the practical problem concerning the wisdom of government price
control.<br />
Let us begin on the elementary level and say that prices are
determined by the supply and demand. If the relative demand for a
product increases, consumers will be willing to pay more for it. Their
competitive bids will both oblige them individually to pay more for it
and enable producers to get more for it. This will raise the profit
margins of the producers of that product. <br />
<a name='more'></a>This, in turn, will tend to
attract more firms into the manufacture of that product, and induce
existing firms to invest more capital into making it. The increased
production will tend to reduce the price of the product again, and to
reduce the profit margin in making it. The increased investment in new
manufacturing equipment may lower the cost of production. Or —
particularly if we are concerned with some extractive industry such as
petroleum, gold, silver, or copper — the increased demand and output may
raise the cost of production. In any case, the price will have a
definite effect on demand, output, and cost of production just as these
in turn will affect price. All four — demand, supply, cost, and price —
are interrelated. A change in one will bring changes in the others.<br />
Just as the demand, supply, cost, and price of any single commodity
are all interrelated, so are the prices of all commodities related to
each other. These relationships are both direct and indirect. Copper
mines may yield silver as a by-product. This is connexity of production.
If the price of copper goes too high, consumers may substitute aluminum
for many uses. This is a connexity of substitution. Dacron and cotton
are both used in drip-dry shirts; this is a connexity of consumption.<br />
In addition to these relatively direct connections among prices,
there is an inescapable interconnexity of all prices. One general factor
of production, labor, can be diverted, in the short run or in the long
run, directly or indirectly, from one line into any other line. If one
commodity goes up in price, and consumers are unwilling or unable to
substitute another, they will be forced to consume a little less of
something else. All products are in competition for the consumer's
dollar; and a change in any one price will affect an indefinite number
of other prices.<br />
No single price, therefore, can be considered an isolated object in
itself. It is interrelated with all other prices. It is precisely
through these interrelationships that society is able to solve the
immensely difficult and always changing problem of how to allocate
production among thousands of different commodities and services so that
each may be supplied as nearly as possible in relation to the
comparative urgency of the need or desire for it.<br />
Because the desire and need for, and the supply and cost of, every
individual commodity or service are constantly changing, prices and
price relationships are constantly changing. They are changing yearly,
monthly, weekly, daily, hourly. People who think that prices normally
rest at some fixed point, or can be easily held to some "right" level,
could profitably spend an hour watching the ticker tape of the stock
market, or reading the daily report in the newspapers of what happened
yesterday in the foreign exchange market, and in the markets for coffee,
cocoa, sugar, wheat, corn, rice, and eggs; cotton, hides, wool, and
rubber; copper, silver, lead, and zinc. They will find that none of
these prices ever stands still. This is why the constant attempts of
governments to lower, raise, or freeze a particular price, or to freeze
the interrelationship of wages and prices just where it was on a given
date ("holding the line") are bound to be disruptive wherever they are
not futile.<br />
<h2>
Price Supports for Export Items</h2>
Let us begin by considering governmental efforts to keep prices up,
or to raise them. Governments most frequently try to do this for
commodities that constitute a principal item of export from their
countries. Thus Japan once did it for silk and the British Empire for
natural rubber; Brazil has done it and still periodically does it for
coffee; and the United States has done it and still does it for cotton
and wheat. The theory is that raising the price of these export
commodities can only do good and no harm domestically because it will
raise the incomes of domestic producers and do it almost wholly at the
expense of the foreign consumers.<br />
All of these schemes follow a typical course. It is soon discovered
that the price of the commodity cannot be raised unless the supply is
first reduced. This may lead in the beginning to the imposition of
acreage restrictions. But the higher price gives an incentive to
producers to increase their average yield per acre by planting the
supported product only on their most productive acres, and by more
intensive employment of fertilizers, irrigation, and labor. When the
government discovers that this is happening, it turns to imposing
absolute quantitative controls on each producer. This is usually based
on each producer's previous production over a series of years. The
result of this quota system is to keep out all new competition; to lock
all existing producers into their previous relative position, and
therefore to keep production costs high by removing the chief mechanisms
and incentives for reducing such costs. The necessary readjustments are
therefore prevented from taking place.<br />
Meanwhile, however, market forces are still functioning in foreign
countries. Foreigners object to paying the higher price. They cut down
their purchases of the valorized commodity from the valorizing country,
and search for other sources of supply. The higher price gives an
incentive to other countries to start producing the valorized commodity.
Thus, the British rubber scheme led Dutch producers to increase rubber
production in Dutch dependencies. This not only lowered rubber prices
but caused the British to lose permanently their previous monopolistic
position. In addition, the British scheme aroused resentment in the
United States, the chief consumer, and stimulated the eventually
successful development of synthetic rubber. In the same way, without
going into detail, Brazil's coffee schemes and America's cotton schemes
gave both a political and a price incentive to other countries to
initiate or increase production of coffee and cotton, and both Brazil
and the United States lost their previous monopolistic positions.<br />
Meanwhile, at home, all these schemes require the setting up of an
elaborate system of controls and an elaborate bureaucracy to formulate
and enforce them. This has to be elaborate, because each individual
producer must be controlled. An illustration of what happens may be
found in the United States Department of Agriculture. In 1929, before
most of the crop-control schemes came into being, there were 24,000
persons employed in the Department of Agriculture. Today there are
109,000. These enormous bureaucracies, of course, always have a vested
interest in finding reasons why the controls they were hired to enforce
should be continued and expanded. And of course these controls restrict
the individual's liberty and set precedents for still further
restrictions.<br />
None of these consequences seem to discourage government efforts to
boost prices of certain products above what would otherwise be their
competitive market levels. We still have international coffee agreements
and international wheat agreements. A particular irony is that the
United States was among the sponsors in organizing the international
coffee agreement, though its people are the chief consumers of coffee
and therefore the most immediate victims of the agreement. Another irony
is that the United States imposes <i>import</i> quotas on sugar, which
necessarily discriminate in favor of some sugar exporting nations and
therefore against others. These quotas force all American consumers to
pay higher prices for sugar in order that a tiny minority of American
sugar cane producers can get higher prices.<br />
I need not point out that these attempts to "stabilize" or raise prices of primary agricultural products <i>politicalize</i> every price and production decision and create friction among nations.<br />
<h2>
Holding Prices Down</h2>
Now let us turn to governmental efforts to <i>lower</i> prices or at
least to keep them from rising. These efforts occur repeatedly in most
nations, not only in wartime, but in any time of inflation. The typical
process is something like this. The government, for whatever reason,
follows policies that increase the quantity of money and credit. This
inevitably starts pushing up prices. But this is not popular with
consumers. Therefore, the government promises that it will "hold the
line" against further price increases.<br />
Let us say it begins with bread and milk and other necessities. The
first thing that happens, assuming that it can enforce its decrees, is
that the profit margin in producing necessities falls, or is eliminated,
for marginal producers, while the profit margin in producing luxuries
is unchanged or goes higher. This reduces and discourages the production
of the controlled necessities and relatively encourages the increased
production of luxuries. But this is exactly the opposite result from
what the price controllers had in mind. If the government then tries to
prevent this discouragement to the production of the controlled
commodities by keeping down the cost of the raw materials, labor, and
other factors of production that go into them, it must start controlling
prices and wages in ever-widening circles until it is finally trying to
control the price of everything.<br />
But if it tries to do this thoroughly and consistently, it will find
itself trying to control literally millions of prices and trillions of
price cross-relationships. It will be fixing rigid allocations and
quotas for each producer and for each consumer. Of course these controls
will have to extend in detail to both importers and exporters.<br />
If a government continues to create more currency on the one hand
while rigidly holding down prices with the other, it will do immense
harm. And let us note also that even if the government is not inflating
the currency, but tries to hold either absolute or relative prices just
where they were, or has instituted an "incomes policy" or "wage policy"
drafted in accordance with some mechanical formula, it will do
increasingly serious harm. For in a free market, even when the so-called
price "level" is not changing, all prices are constantly changing in
relation to each other. They are responding to changes in costs of
production, of supply, and of demand for each commodity or service.<br />
And these price changes, both absolute and relative, are in the
overwhelming main both necessary and desirable. For they are drawing
capital, labor, and other resources out of the production of goods and
services that are less wanted and into the production of goods and
services that are more wanted. They are adjusting the balance of
production to the unceasing changes in demand. They are producing
thousands of goods and services in the relative amounts in which they
are socially wanted. These relative amounts are changing every day.
Therefore the market adjustments and price and wage incentives that lead
to these adjustments must be changing every day.<br />
<h2>
Price Control Distorts Production</h2>
Price control always reduces, unbalances, distorts, and
discoordinates production. Price control becomes progressively harmful
with the passage of time. Even a fixed price or price relationship that
may be "right" or "reasonable" on the day it is set can become
increasingly unreasonable or unworkable.<br />
What governments never realize is that, so far as any individual
commodity is concerned, the cure for high prices is high prices. High
prices lead to economy in consumption and stimulate and increase
production. Both of these results increase supply and tend to bring
prices down again.<br />
Very well, someone may say; so government price control in many cases
is harmful. But so far you have been talking as if the market were
governed by perfect competition. But what of monopolistic markets? What
of markets in which prices are controlled or fixed by huge corporations?
Must not the government intervene here, if only to enforce competition
or to bring about the price that real competition would bring if it
existed?<br />
The fears of most economists concerning the evils of "monopoly" have
been unwarranted and certainly excessive. In the first place, it is very
difficult to frame a satisfactory definition of economic monopoly. If
there is only a single drug store, barber shop, or grocery in a small
isolated town (and this is a typical situation), this store may be said
to be enjoying a monopoly in that town. Again, everybody may be said to
enjoy a monopoly of his own particular qualities or talents. Yehudi
Menuhin has a monopoly of Menuhin's violin playing; Picasso of producing
Picasso paintings; Elizabeth Taylor of her particular beauty and sex
appeal; and so for lesser qualities and talents in every line.<br />
On the other hand, nearly all economic monopolies are limited by the
possibility of substitution. If copper piping is priced too high,
consumers can substitute steel or plastic; if beef is too high,
consumers can substitute lamb; if the original girl of your dreams
rejects you, you can always marry somebody else. Thus, nearly every
person, producer, or seller may enjoy a quasi monopoly within certain
inner limits, but very few sellers are able to exploit that monopoly
beyond certain outer limits. There has been a tremendous literature
within recent years deploring the absence of perfect competition; there
could have been equal emphasis on the absence of perfect monopoly. In
real life competition is never perfect, but neither is monopoly.<br />
Unable to find many examples of perfect monopoly, some economists
have frightened themselves in recent years by conjuring up the specter
of "oligopoly," the competition of the few. But they have come to their
alarming conclusions only by inserting in their own <i>hypotheses</i>
all sorts of imaginary secret agreements or tacit understandings between
large producing units, and deducing what the results could be.<br />
Now the mere <i>number</i> of competitors in a particular industry
may have very little to do with the existence of effective competition.
If General Electric and Westinghouse effectively compete, if General
Motors and Ford and Chrysler effectively compete, if the Chase Manhattan
and the First National City Bank effectively compete, and so on (and no
person who has had direct experience with these great companies can
doubt that they dominantly do), then the result for consumers, not only
in price, but in quality of product or service, is not only as good as
that which would be brought about by atomistic competition but much
better, because consumers have the advantage of large-scale economies,
and of large-scale research and development that small companies could
not afford.<br />
<h2>
A Strange Numbers Game</h2>
The oligopoly theorists have had a baneful influence on the American
antitrust division and on court decisions. The prosecutors and the
courts have recently been playing a strange numbers game. In 1965, for
example, a Federal district court held that a merger that had taken
place between two New York City banks four years previously had been
illegal, and must now be dissolved. The combined bank was not the
largest in the city, but only the third largest; the merger had in fact
enabled the bank to compete more effectively with its two larger
competitors; its combined assets were still only one-eighth of those
represented by all the banks of the city; and the merger itself had
reduced the number of separate banks in New York from 71 to 70. (I
should add that in the four years since the merger the number of <i>branch</i> bank offices in New York City had <i>increased</i>
from 645 to 698.) The court agreed with the bank's lawyers that "the
general public and small business have benefited" from bank mergers in
the city. Nevertheless, the court continued, "practices harmless in
themselves, or even those conferring benefits upon the community, cannot
be tolerated when they tend to create a monopoly; those which restrict
competition are unlawful no matter how beneficent they may be."<br />
It is a strange thing, incidentally, that though politicians and the
courts think it necessary to forbid an existing merger in order to
increase the number of banks in a city from 70 to 71, they have no such
insistence on big numbers in competition when it comes to political
parties. The dominant American theory is that just two political parties
are enough to give the American voter a real choice; that when there
are more than this it merely causes confusion, and the people are not
really served. There is this much truth in this political theory as
applied in the economic realm. If they are really competing, only two
firms in an industry are enough to create effective competition.<br />
<h2>
Monopolistic Pricing</h2>
The real problem is not whether or not there is "monopoly" in a
market, but whether there is monopolistic pricing. A monopoly price can
arise when the responsiveness of demand is such that the monopolist can
obtain a higher net income by selling a smaller quantity of his product
at a higher price than by selling a larger quantity at a lower price. It
is assumed that in this way the monopolist can realize a higher price
than would have prevailed under "pure competition."<br />
The theory that there can be such a thing as a monopoly price, higher
than a competitive price would have been, is certainly valid. The real
question is, How <i>useful</i> is this theory either to the supposed
monopolist in deciding his price policies or to the legislator,
prosecutor, or court in framing antimonopoly policies? The monopolist,
to be able to exploit his position, must know what the "demand curve" <i>is</i>
for his product. He does not know; he can only guess; he must try to
find out by trial and error. And it is not merely the unemotional price
response of the consumers that the monopolist must keep in mind; it is
what the effect of his pricing policies will probably be in gaining the
goodwill or arousing the resentment of the consumer. More importantly,
the monopolist must consider the effect of his pricing policies in
either encouraging or discouraging the entrance of competitors into the
field. He may actually decide that his wisest policy in the long run
would be to fix a price no higher than he thinks pure competition would
set, and perhaps even a little lower.<br />
In any case, in the absence of competition, no one <i>knows</i> what
the "competitive" price would be if it existed. Therefore, no one knows
exactly how much higher an existing "monopoly" price is than a
"competitive" price would be, and no one can be sure whether it is
higher at all!<br />
Yet antitrust policy, in the United States, at least, assumes that
the courts can know how much an alleged monopoly or "conspiracy" price
is above the competitive price that might-have-been. For when there is
an alleged conspiracy to fix prices, purchasers are encouraged to sue to
recover three times the amount they were allegedly forced to "overpay."<br />
Our analysis leads us to the conclusion that governments should
refrain, wherever possible, from trying to fix either maximum or minimum
prices for anything. Where they have nationalized any service — the
post office or the railroads, the telephone or electric power — they
will of course have to establish pricing policies. And where they have
granted monopolistic franchises — for subways, railroads, telephone or
power companies — they will of course have to consider what price
restrictions they will impose.<br />
As to antimonopoly policy, whatever the present condition may be in
other countries, I can testify that in the United States this policy
shows hardly a trace of consistency. It is uncertain, discriminatory,
retroactive, capricious, and shot through with contradictions. No
company today, even a moderate sized company, can know when it will be
held to have violated the antitrust laws, or why. It all depends on the
economic bias of a particular court or judge.<br />
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There is immense hypocrisy about the subject. Politicians make
eloquent speeches against "monopoly." Then they will impose tariffs and
import quotas intended to protect monopoly and keep out competition;
they will grant monopolistic franchises to bus companies or telephone
companies; they will approve monopolistic patents and copyrights; they
will try to control agricultural production to permit monopolistic farm
prices. Above all, they will not only permit but impose labor monopolies
on employers, and legally compel employers to "bargain" with these
monopolies; and they will even allow these monopolies to impose their
conditions by physical intimidation and coercion.<br />
I suspect that the intellectual situation and the political climate
in this respect is not much different in other countries. To work our
way out of this existing legal chaos is, of course, a task for jurists
as well as for economists. I have one modest suggestion: We can get a
great deal of help from the old common law, which forbids fraud,
misrepresentation, and all <i>physical</i> intimidation and coercion.
"The end of the law," as John Locke reminded us in the 17th century, "is
not to abolish or restrain, but to preserve and enlarge freedom." And
so we can say today that in the economic realm, the aim of the law
should not be to constrict but to maximize price freedom and market
freedom.<br />
</div>
Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-297258822861901533.post-41683702160539591252013-07-13T09:57:00.004+02:002013-07-13T09:57:48.672+02:0011 Signs That Italy Is Descending Into A Full-Blown Economic Depression<div dir="ltr" style="text-align: left;" trbidi="on">
<em>by Michael Snyder via <a href="http://theeconomiccollapseblog.com/archives/11-signs-that-italy-is-descending-into-a-full-blown-economic-depression">The Economic Collapse blog</a></em><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhjSNQbPnLtACz_JdygjiaM-PZmsKo14bRFSvzbUQ6m4RfIydSB72ht3xWwMI6RQqnwC_S5l-5D4aHMI5zGBiY4URgQwIdJH7RXqutDlUbq6k58gTOtkGCJ49A67MqGsJ_6Wk0G1qNMyf2Q/s1600/italy.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><br /></a><br />
<strong><br /></strong>
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<strong> </strong><br />
<strong>When you get into too much debt, really bad things start to happen.</strong>
Sadly, that is exactly what is happening to Italy right now. Harsh
austerity measures are causing the Italian economy to slow down even
more than it was previously. And yet even with all of the austerity
measures, the Italian government just continues to rack up even more
debt. This is the exact same path that we watched Greece go down. <br />
Austerity causes government revenues to drop which causes deficit
reduction targets to be missed which causes even more austerity measures
to become necessary. <strong>But if Italy collapses economically, it
is going to be a far bigger deal than what happened in Greece. Italy is
the ninth largest economy on the entire planet.</strong> Actually, Italy used to be number eight, but now Russia has passed it. <br />
If Italy continues to stumble, India and Canada will soon pass it as
well. It really is a tragedy to watch what is happening in Italy,
because it really is a wonderful place. When I was a child, my father
was in the navy, and I got the opportunity to live there for a while.
It is a land of great weather, great food and great soccer. The people
are friendly and the culture is absolutely fascinating. <strong>But now the nation is falling apart. </strong> <br />
The following are 11 signs that Italy is descending into a full-blown economic depression...<br />
<br />
<strong><a href="http://search.twitter.com/search?q=%231">#1</a></strong> The unemployment rate in Italy has risen to <a href="http://www.nasdaq.com/article/italy-unemployment-rises-to-new-record-122-in-may-20130701-00063" target="_blank" title="12.2 percent">12.2 percent</a>. That is the highest that it has been in more than 35 years.<br />
<strong><a href="http://search.twitter.com/search?q=%232">#2</a></strong> The youth unemployment rate in Italy is sitting at <a href="http://www.bostonglobe.com/business/2013/07/04/imf-tells-italy-press-reforms-create-youth-jobs/8mtf8A5F4TA0rKFd45ofaI/story.html" target="_blank" title="38.5 percent">38.5 percent</a>, and in southern Italy it recently hit <a href="http://www.theglobeandmail.com/report-on-business/international-business/european-business/in-italy-a-sense-of-desperation/article13043093/" target="_blank" title="the 50 percent mark">the 50 percent mark</a>.<br />
<strong><a href="http://search.twitter.com/search?q=%233">#3</a></strong> An average of <a href="http://www.ansa.it/web/notizie/rubriche/english/2013/06/19/Crisis-closing-134-retail-outlets-day-Italy_8894597.html?utm_source=twitterfeed&utm_medium=twitter" target="_blank" title="134 retail outlets">134 retail outlets</a> are shutting down in Italy every single day. Overall, approximately 224,000 retail establishments have closed since 2008.<br />
<a name='more'></a><br />
<strong><a href="http://search.twitter.com/search?q=%234">#4</a></strong> Italy's economy has now been contracting for <a href="http://www.guardian.co.uk/business/2013/may/15/eurozone-recession-deepens" target="_blank" title="seven quarters in a row">seven quarters in a row</a>.<br />
<strong><a href="http://search.twitter.com/search?q=%235">#5</a></strong> It is being projected that Italy's GDP will shrink <a href="http://www.bloomberg.com/news/2013-06-10/italian-industrial-output-unexpectedly-falls-for-third-month.html" target="_blank" title="by 1.8 percent">by 1.8 percent</a> this year.<br />
<strong><a href="http://search.twitter.com/search?q=%236">#6</a></strong> Industrial production in Italy has declined for <a href="http://www.telegraph.co.uk/finance/financialcrisis/10069752/Italys-industrial-output-falls-back-to-1970s.html" target="_blank" title="15 months in a row">15 months in a row</a>. It has now fallen to its lowest level in about 25 years.<br />
<strong><a href="http://search.twitter.com/search?q=%237">#7</a></strong> Overall, factory output in Italy has fallen <a href="http://www.theglobeandmail.com/report-on-business/international-business/european-business/in-italy-a-sense-of-desperation/article13043093/" target="_blank" title="by about one-fourth">by about one-fourth</a> since 2008.<br />
<strong><a href="http://search.twitter.com/search?q=%238">#8</a></strong> In May, automobile sales in Italy were <a href="http://www.zerohedge.com/news/2013-06-18/european-car-sales-drop-20-year-low-germany-clobbered" target="_blank" title="down 8 percent">down 8 percent</a> compared to one year earlier.<br />
<strong><a href="http://search.twitter.com/search?q=%239">#9</a></strong> The number of people that are considered to be "seriously deprived" in Italy <a href="http://ca.news.yahoo.com/millions-falling-poverty-recession-racked-italy-report-090130680.html" target="_blank" title="has doubled">has doubled</a> over the past two years.<br />
<strong><a href="http://search.twitter.com/search?q=%2310">#10</a></strong> Italy now has a debt to GDP ratio of <a href="http://www.testosteronepit.com/home/2013/7/6/broke-italy-would-love-to-but-cant-pay-its-bills-this-year.html" target="_blank" title="130 percent">130 percent</a>.<br />
<strong><a href="http://search.twitter.com/search?q=%2311">#11</a></strong> It is being projected that Italy will need a major EU bailout <a href="http://www.reuters.com/article/2013/07/03/us-eu-crisis-return-analysis-idUSBRE9620AL20130703" target="_blank" title="within six months">within six months</a>.<br />
At this point, Italy is flat broke.<br />
<br />
And unlike the U.S. or Japan, Italy cannot run over to a central bank
and have them print up oodles of new money with which to buy up
government bonds. Italy is married to the euro, and so that greatly
limits their options. Unfortunately, the money is rapidly running out.
The following is from a recent article <a href="http://www.testosteronepit.com/home/2013/7/6/broke-italy-would-love-to-but-cant-pay-its-bills-this-year.html" target="_blank" title="by Wolf Richter">by Wolf Richter</a>...<br />
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In most countries, it would be an act of mind-bending chutzpah, or
perhaps a display of political insanity, but in Italy it barely made
ripples: for a government official, a minister no less, to declare that
the country cannot pay its long overdue bills, and not for a month or
two, but for the rest of this year! Due to "technical" problems.<br />
<br />
The Italian government is out of money. Not that the US government is
in any better shape in that respect, or the Japanese government for
that matter, but they have central banks that print the missing moolah
with lavish abandon. Italy doesn't. It has the ECB which is run by an
Italian who promised last year to print with lavish abandon to keep
countries like Italy afloat. But that promise is not the same thing as
having your own central bank.<br />
<br />
On July 4, Italy's budget fiasco <a href="http://www.istat.it/en/files/2013/07/quaterly_accounts_for_GG.pdf?title=Quarterly+accounts+for+General+Government+-+4+Jul+2013+-+Full+text.pdf" target="_blank" title="came to light">came to light</a> once again. Wracked by the pretense of austerity, expenditures <em>rose</em>
1.3% in the first quarter, while revenues remained flat. So the deficit
rose to 7.3% of GDP, up from 6.6% last year, bringing the national debt
to 130% of GDP. Ballooning debt and deficits in a shriveling economy –
Italy has been in recession since the fourth quarter of 2011 – is a
toxic combination in the Eurozone.<br />
</blockquote>
While those numbers may sound really bad, the reality is that the
people that are suffering the most are the average folks on the street.
Many Italians have been completely blindsided by this economic
depression, and <a href="http://www.theglobeandmail.com/report-on-business/international-business/european-business/in-italy-a-sense-of-desperation/article13043093/" target="_blank" title="suicides are skyrocketing">suicides are skyrocketing</a>...<br />
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In Italy, the tragic stories of suicides apparently linked to the
deep recession are becoming all too frequent. Last month, a former
factory worker hanged himself near Turin because he could not find work,
his relatives said. In May, a young man committed suicide outside of
Rome shortly after he lost his job. The next day, Italian President
Giorgio Napolitano begged the government to deliver “the utmost
attention for situations of greatest malaise and need” to help stop the
wave of suicides.<br />
</blockquote>
<strong>That is absolutely tragic.</strong><br />
But you know what?<br />
<strong>The United States is headed down the same path that Italy has gone.</strong><br />
In the coming years unemployment and suicide will both skyrocket here too.<br />
Those that are <a href="http://theeconomiccollapseblog.com/archives/is-it-really-anti-faith-to-prepare-for-the-coming-economic-collapse" title="sticking their heads in the sand right now">sticking their heads in the sand right now</a> will be absolutely blindsided by what is coming. But those that understand what is on the horizon and are <a href="http://theeconomiccollapseblog.com/archives/25-things-that-you-should-do-to-get-prepared-for-the-coming-economic-collapse" title="preparing for it">preparing for it</a> will have the best chance of making it through.<br />
<strong>Italy is kind of like the Leaning Tower of Pisa. Everyone
knows that it is going to fall eventually, and when it does fall it is
going to be a major disaster.</strong><br />
When the financial system of Italy totally implodes, that will be a
sign that things are really starting to accelerate. Expect dominoes to
start tumbling much more rapidly in the aftermath.</div>
Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-297258822861901533.post-32574979027663124602013-07-13T09:51:00.001+02:002013-07-13T09:51:45.921+02:00Financial Independence and Intellectual Influence<div dir="ltr" style="text-align: left;" trbidi="on">
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by <a href="http://www.garynorth.com/public/11054.cfm" target="_blank"><span align="left" class="articlebyline">Gary North</span></a></div>
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<b>If you are interested in the history of
ideas, at some point this question will occur to you: "How is it
possible for someone to gain influence, yet at the same time retain his
independence?" If you traffic in ideas, you have to be able to do both. </b></div>
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A crackpot can go online today and argue for his favorite
theory. He is completely independent. He is also completely ignored. His
independence does him no good, because what he writes has no influence.<br />
I
suppose my two favorite recent examples of people who have maintained
their independence, but whose ideas have had considerable influence, are
Ludwig von Mises and Murray Rothbard. They are more influential today
than they were at the time of their deaths. Mises died in 1973. Rothbard
died in 1995.<br />
Mises had the great advantage in the final phase of
his intellectual career in the fact that Yale University Press
published his books from 1944 to 1957. This gave him an audience. <br />
<a name='more'></a>The
editor of the press was not part of the Yale University faculty. Nobody
holding the ideas propounded by Mises was employed by Yale University in
the 20th century. For that matter, no one holding his views has been
employed by any first-tier American University. Two professors who did
make it into top schools, and who had studied under Mises, informally
were Gottfried Haberler and Fritz Machlup. Neither of them defended
Mises' theories by the time they were offered jobs at their respective
universities, Harvard University and Princeton University.<br />
In
Rothbard's case, he was employed by Brooklyn Polytechnic Institute, an
engineering school that did not offer an economics major. It was so far
off the radar of liberal arts education that no one knew that Rothbard
was on the faculty, except for other faculty members, and most of them
did not know anything about him. Only late in his career did he get a
position at the University of Nevada, Las Vegas. <br />
The same thing
was true of Mises. New York University did not pay his salary. They
granted him only the honorary title of visiting professor, a position he
held for 20 years. He already had an international reputation at the
time when New York University hired him. His salary was paid by private
individuals and the William Volker Fund. It did not cost the university
any money to keep him on the payroll. Universities are usually content
to get free teachers.<br />
Rothbard received no benefits, other than
money, for teaching at Brooklyn Polytechnic. Mises received no benefits,
other than a classroom of graduate students, for teaching at New York
University. The spread of Mises's ideas had only a little to do with his
position at New York University. He was able to grant four men a Ph.D.
Three of them continued to have some intellectual influence, but only
one of them, Israel Kirzner, had anything like academic influence within
the world of professional economists.<br />
Rothbard was never in a
position to work with Ph.D. students, and I can think of only one
student who has had much influence: Doug French. He studied with
Rothbard in Nevada.<br />
Mises gained his academic reputation before
World War I. His ideas were abandoned after World War II. He had very
little influence in American academia. But his books sold well among
economic laymen. He wrote in clear English, which meant that intelligent
people could understand what he said. His system was logical. It was
far more easily understood than Keynesianism. These book sales did Mises
no good whatsoever in any undergraduate institution except Grove City
College, whose chairman was Hans Sennholz. Sennholz received his Ph.D.
under Mises. Sennholz had the backing of Sun Oil's chairman, J. Howard
Pew, who got what he wanted at Grove City College. Pew was a graduate of
the institution, and was its major donor. He told the president of the
college that he wanted Sennholz to head the economics department, and
that was what he got. <br />
Mises and Rothbard, like Sennholz, gained
their reputations through their writing. Sennholz also gained his
reputation by speaking continually to nonacademic groups, such as
dentists. He was a very good speaker. All three gained their leverage
outside of academia. <br />
In this sense, their academic positions
provided income, which meant that academia gave them jobs. Their
callings were different. I define calling as the most important thing
that you can do in which you would be most difficult to replace. Here,
all three of them devoted their callings to writing. Sennholz did make
money speaking to nonacademic groups, but Rothbard and Mises did their
work for free, or close to it. They were given support by the Volker
Fund for a time, but that was about it. They received little support
from foundations.<br />
They gained their influence by their writing. It
was fortunate that there were two publishers that would publish their
materials. Yale University Press published Mises's books, and the Volker
Fund funded their publication by Van Nostrand, a small publishing
house. After 1962, the Institute for Humane Studies helped finance some
of Rothbard's books. Volker ceased to give him support.<br />
Both of
them were able to maintain their academic influence, which was zero,
which is exactly what they needed. They had no influence, so they could
not be threatened by the educational bureaucracy. Their influence could
not be taken away by the academic community. They had none. The
academic community barely knew they existed. At the same time, they
gained considerable influence, and continue today to gain influence, by
the power of their writing. Their books survive. The books are now kept
in print and online by the Mises Institute. The two both have far
greater audiences and they did prior to the development of the World
Wide Web and graphics browsers in 1995.<br />
Both men gained academic
financing, either directly in the case of Rothbard and indirectly in the
case of Mises. The academics who employed them did not care what they
taught in class. In the case of Rothbard, neither did the students. They
just wanted to get through the course. In the case of Mises, those few
NYU students who enrolled in his graduate seminar were interested in his
ideas, but the most influential members of that seminar were not
enrolled at New York University. Rothbard was one of them.<br />
Their
callings were not related to their jobs. Their callings were not funded
by their jobs. Their jobs put food on the table, but they gained their
influence by their writing. They could not have afforded to live on the
royalties generated by their writing. Their jobs did gain them leisure,
including the time to read and write. Academics are paid to read. Very
few of them publish much after they publish their dissertations and a
few articles based on their dissertation, but at least they are given
money to read. In the case of Mises and Rothbard, they both read and
wrote. The world is better off because they did. But they were not paid
to do either. They were not encouraged by the academic world to do
either.<br />
Their callings were self-funded. They earned money, either
directly or indirectly, from their performance in the classroom. They
gained their influence mostly outside the classroom. It was the
separation of academic income from their writing that enabled them to
have great influence. Their jobs gave them independence, precisely
because the academic community had no interest in what they were
teaching. Their readers did not read them because of their respective
academic positions. Their readers read them because of the intellectual
power which their writings conveyed.<br /></div>
Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-297258822861901533.post-57006712662018572712013-07-11T12:56:00.001+02:002013-07-11T12:56:13.500+02:00You Can't Buy Prosperity<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-family: Times New Roman, Times, serif; font-size: small;">by <a href="http://archive.lewrockwell.com/bonner/bonner607.html" target="_blank">Bill Bonner </a></span><br />
<span style="font-family: Times New Roman, Times, serif; font-size: small;"><br /></span>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiUoujCfMcpT_SvKnBj-33PmCA-3xEsgRy7wrbgExcA_FZiqkcTuGn3lDejYUudFbaPcPW-6CkvNAQctojdmpUchMfmdbf3q0M4ulKKMItmq7lUy72TzLNzAKqI3StYWiT2-h1L9cLJ5xrD/s1600/prosperity.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiUoujCfMcpT_SvKnBj-33PmCA-3xEsgRy7wrbgExcA_FZiqkcTuGn3lDejYUudFbaPcPW-6CkvNAQctojdmpUchMfmdbf3q0M4ulKKMItmq7lUy72TzLNzAKqI3StYWiT2-h1L9cLJ5xrD/s1600/prosperity.jpg" height="317" width="400" /></a></div>
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<span style="font-family: Times New Roman, Times, serif; font-size: small;">Gold rose $24
per ounce Thursday. The Dow fell 12 points.</span><br />
<span style="font-family: Times New Roman, Times, serif; font-size: small;">The smart money
is using this dip to buy gold.</span><br />
<span style="font-family: Times New Roman, Times, serif; font-size: small;">Why?</span><br />
<span style="font-family: Times New Roman, Times, serif; font-size: small;">Because the
world's major stock markets... currencies... and economies all depend
on reckless measures by central banks. In the short run, the central
banks can make things appear safe and stable.</span><br />
<span style="font-family: Times New Roman, Times, serif; font-size: small;">How?</span><br />
<span style="font-family: Times New Roman, Times, serif; font-size: small;">By making lending
money at ultra-low rates the norm. It's hard for major players to
go broke; they can just refinance.</span><br />
<span style="font-family: Times New Roman, Times, serif; font-size: small;">But in the
long run, those same policies can lead to instability, bubbles...
and disaster.</span><br />
<span style="font-family: Times New Roman, Times, serif; font-size: small;">Too bad, but
you can't buy prosperity. You can't print prosperity. You can't
borrow prosperity. You can't ZIRP, QE or OMF ("overt monetary
financing," a phrase that is bound to become current soon)
prosperity, either. Prosperity comes from hard work, saving and
discipline.</span><br />
<span style="font-family: Times New Roman, Times, serif; font-size: small;">That is, it
comes from responsible policies, not reckless ones.</span><br />
<a name='more'></a><br />
<span style="font-family: Times New Roman, Times, serif; font-size: small;">Paul Krugman
says that economics is "not a morality play." But he's
wrong. That's exactly what it is.</span><br />
<span style="font-family: Times New Roman, Times, serif; font-size: small;">And Japan is
going to prove it first. Yes, it may be a good thing we congratulated
ourselves when we did. If we'd waited a few days, our <a href="http://www.billbonnersdiary.com/articles/bonner-japanese-government.html">Trade
of the Decade</a> wouldn't look so good.</span><br />
<span style="font-family: Times New Roman, Times, serif; font-size: small;">The important
news yesterday came from Japan. Bloomberg reports:</span><br />
<blockquote>
<span style="font-family: Times New Roman, Times, serif; font-size: small;"> Japan's
Topix index tumbled almost 7%, the most since the aftermath of
the March 2011 tsunami and nuclear disaster, as financial firms
slid amid rising bond yields. Nikkei 225 Stock Average futures
traded in Osaka and Singapore fell in after-hours trade, signaling
further declines.</span><br />
<span style="font-family: Times New Roman, Times, serif; font-size: small;"> Every company
in the Nikkei 225 retreated for the first time since April 2005...</span><br />
<span style="font-family: Times New Roman, Times, serif; font-size: small;">"Rising
interest rates is the story today," said Tomomi Yamashita,
a fund manager who helps oversee the equivalent of $5 billion
at Shinkin Asset Management Co. in Tokyo. "There's also a
lot of profit-taking going on. When volatility is high, investors
want to take off risk."</span><br />
</blockquote>
<span style="font-family: Times New Roman, Times, serif; font-size: small;"><b>Credibly
Irresponsible</b></span><br />
<span style="font-family: Times New Roman, Times, serif; font-size: small;">As you know,
Japan is always ahead of us. Its go-go economy peaked out in 1990.</span><br />
<span style="font-family: Times New Roman, Times, serif; font-size: small;">The US dot-com
boom peaked out 10 years later. Japan's stock market hit a high
in 1990. US stocks reached a high 10 years later (though prices
hit nominal highs later). Japan resorted to bailouts... ZIRP and
QE in the 1990s. The US began these experiments in the following
decade.</span><br />
<span style="font-family: Times New Roman, Times, serif; font-size: small;">And how about
this? Japan's population has been falling for years. America's women
only recently began reproducing at below-replacement levels.</span><br />
<span style="font-family: Times New Roman, Times, serif; font-size: small;">There are differences,
to be sure. In the US, we read left to right, front to back. And
we eat our meat well-done! But in important matters, the Japanese
are always ahead of us. And now they're being even more reckless
than the Fed – increasing QE at a rate that we've never seen
before. From Pragmatic Capitalism:</span><br />
<blockquote>
<span style="font-family: Times New Roman, Times, serif; font-size: small;"> When a central
bank commits to being "credibly irresponsible," it's
not unusual for market participants to take it at its word. And
the commitment to support equity prices gives traders a false
sense of confidence that can then lead to a sort of Ponzi environment
that leads to a huge boom.</span><br />
<span style="font-family: Times New Roman, Times, serif; font-size: small;"> By committing
to being "credibly irresponsible," the central bank
can actually contribute to the boom, which then creates the imbalance
that results in the bust.</span><br />
</blockquote>
<span style="font-family: Times New Roman, Times, serif; font-size: small;">This is almost
a "Volcker moment" for Japan. That is, Japan's central
bank has changed direction. Investors take note.</span><br />
<span style="font-family: Times New Roman, Times, serif; font-size: small;">But the Bank
of Japan's new governor, Haruhiko Kuroda, is no Paul Volcker. He's
more like Gideon Gono of the Reserve Bank of Zimbabwe. Volcker was
incredibly responsible. Gono was credibly irresponsible. And when
the markets realized how irresponsible he was... they went wild.</span><br />
<span style="font-family: Times New Roman, Times, serif; font-size: small;">Mr. Kuroda
announced that he will double Japan's monetary base. Investors have
been buying stocks enthusiastically ever since. Which is why our
Trade of the Decade – "Buy Japanese Stocks. Sell Japanese
Bonds" – looks so good.</span><br />
<span style="font-family: Times New Roman, Times, serif; font-size: small;">Stocks have
gone up. Bonds have gone down. Does this mean that Japan's troubles
are behind it? Not at all. It means only that, when you've got a
reckless central banker, stocks are a better buy than bonds. Stocks
will be lifted on a "rising tide." Bonds will always go
in one direction: down.</span><br />
<span style="font-family: Times New Roman, Times, serif; font-size: small;">Japan's real
crisis is still ahead. That's what yesterday's big selloff signals
– trouble. And there's more trouble is coming for the US and
Europe too. Most likely, they'll want to follow Japan as it heads
for disaster.</span><br />
<span style="font-family: Times New Roman, Times, serif; font-size: small;">The new governor
of the Bank of England, Canadian Mark Carney, has just proposed
that his bank imitate the rapid money-printing policies of the Bank
of Japan. From the Financial Times:</span><br />
<blockquote>
<span style="font-family: Times New Roman, Times, serif; font-size: small;"> QE may have
done its job as far as propping up the financial sector goes,
but... For the economy to really recover, and for it to avoid
another massive shock, there is still an urgent need to redirect
much of the liquidity that's been created – currently chasing
risk assets – to those frozen out of the economy more permanently.</span><br />
</blockquote>
<span style="font-family: Times New Roman, Times, serif; font-size: small;">Print more
money! Drop it from helicopters!</span><br />
<span style="font-family: Times New Roman, Times, serif; font-size: small;"> <i>Banzai!</i></span></div>
Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-297258822861901533.post-76491586983902544782013-07-10T09:26:00.001+02:002013-07-10T09:29:05.758+02:00Marc Faber - Sell Equities and Buy Physical Gold Now while prices are low<div dir="ltr" style="text-align: left;" trbidi="on">
video.cnbc.com<br />
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Faber said it’s a good idea to take money out of the stock market.
“I don’t think there is a lot of upside potential, but I think there is considerable downside,” he said.
However, he said that markets are now seeing emerging markets and their <a href="http://www.cnbc.com/id/100861033">currencies</a> go lower, and “It could be that all the money in the world flows in to U.S. stocks and avoids emerging markets.”
<a href="http://www.cnbc.com/id/100868637">Gold</a> can eventually be a source of profit, according to Faber. He said it’s possible the price of gold can go somewhat lower, even though he thinks it’s now at a reasonable level. “I keep on buying gold and I have faith that gold prices will eventually be higher,” Faber said.
Faber said that, in general, corporate earnings will disappoint.<span style="-webkit-text-stroke-width: 0px; color: black; font-family: tahoma, verdana, sans-serif; font-size: 16px; font-style: normal; font-variant: normal; font-weight: normal; letter-spacing: normal; line-height: normal; orphans: auto; text-align: left; text-indent: 0px; text-transform: none; white-space: normal; widows: auto; word-spacing: 0px;">
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Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-297258822861901533.post-7432835363104544882013-07-10T09:21:00.000+02:002013-07-10T09:21:24.871+02:00The True Cause Of Chaos In Egypt Exposed<div dir="ltr" style="text-align: left;" trbidi="on">
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<a href="http://goldsilver.com/article/the-true-cause-of-chaos-in-egypt-exposed-%284%29/HiddenSecretsOfMoney.com">By Dan Rubock - HiddenSecretsOfMoney.com</a><br />
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<iframe allowfullscreen="" frameborder="0" height="253" src="//www.youtube.com/embed/GfXd2lOueAY" width="450"></iframe><br />
<br />
It's no secret that the situation in Egypt is deteriorating by the day,
but for some bizarre reason the ultimate cause of the recent chaos
remains generally unknown. Ask any friend or colleague what they think
initiated the Egyptian revolution and most will come up with something
like 'The people were unhappy with the government, so they rioted', or
words to that effect.<br />
<div>
</div>
<div>
<strong>But that's only part of the story</strong>… nobody seems to be talking about why the people were unhappy in the first place. </div>
<div>
</div>
<div>
The truth is, it was crippling levels of inflation that sparked the
rioting, looting, and mayhem that Egypt is still experiencing. Upon the
breakout of civil unrest in Tahrir Square back in 2010 CNBC reported:</div>
<div>
</div>
<blockquote>
<div>
<strong><em>"It is food inflation that is ultimately breaking the back
of the Mubarek regime - staples like meat, sugar and vegetables have
been climbing out of the reach of the ordinary Egyptian for a year."</em></strong></div>
</blockquote>
<div>
<a name='more'></a></div>
<div>
Now, if you are like me you don't necessarily take a mainstream news
source like CNBC at their word - but in this case I do. I was in Egypt
just before the first revolution in 2010, and spoke with local business
owners while filming sequences for the series '<a href="http://goo.gl/GGhq8">Hidden Secrets Of Money</a>'.
It was easy to detect a heavy sense of desperation and after looking at
statistics for their currency supply, the effects of devaluation became
all too obvious. As the people suffered a loss of purchasing power,
Egypt became more dangerous. And as Egypt became more dangerous, tourism
all but dried up. And as tourism revenue dried up… you guessed it,
Egypt became more dangerous. <em>And that is a very scary feedback loop.</em></div>
<div>
<em> </em></div>
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<div>
One of my favorite economic commentators is Richard Daughty, at the time of the first revolution he warned: <strong>"No
society breaks up because they don’t have any money – no, they break up
because they can’t afford to buy food…that’s how societies fall apart,
because of this inflation thing." </strong></div>
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</div>
</div>
<div>
<strong>But that's still just part of the story</strong>… to get the
big picture we need to know why Egypt is suffering from rampant
inflation, and the subsequent loss of purchasing power attributed to the
Egyptian Pound. </div>
<div>
</div>
<div>
This is where it gets easier to see through the economic voodoo. The
government of Egypt has been ramping up the supply of currency at an
ever-increasing rate for a long time. Anybody who has watched the first
episode of ‘<a href="http://goo.gl/GGhq8">Hidden Secrets Of Money</a>’
will know what happens next… the prices of everyday goods and services
act like a sponge on an expanding currency supply. Prices go up, to a
point where people can't afford to eat. As Max Keiser points out:</div>
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<blockquote>
<div>
<strong><em>"We see this as a ratio, and we know there are some
danger points. For example, in Egypt recently, once that ratio got to
40% of income going to food, with the price of food rising due to
inflation, that's historically a point where people stage a revolution…
and that's exactly what we saw. The French revolution similarly was all
around the price of food getting to a certain critical point where the
risk/reward was favorable toward revolution."</em></strong></div>
</blockquote>
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<div>
It's that simple. If you are struggling to provide the necessities of
life for your family, and prices keep on rising beyond your reach, you
get angry, to the point where you have little to lose. </div>
<div>
</div>
<div>
<strong>But even still, that's just part of the story</strong>… Why is the government of Egypt printing so much currency if it is so bad for the people? </div>
<div>
</div>
<div>
And sadly, this is also a simple answer: It's because they can. There
is no restraint on the amount of currency creation in modern economies.
We are living in an economic twilight zone of history where central
banks and governments are free to whip up as much currency as they need
for whatever reason they see fit. And because they can, they do, for all
manner of excuses including social programs, bailouts, public works,
and sometimes war. All that currency has to find a home, and eventually
it comes back to haunt a society in the form of inflation.</div>
<div>
</div>
<div>
<strong>And you guessed it, that's still not the whole story</strong>… How are we possibly able to create currency at will?</div>
<div>
</div>
<div>
So here we arrive at the ultimate answer to most of the problems our
world faces, something that is so simple that when it is first learned…
it shocks one to the core. The answer is that we don't use money any
longer - we use currency. The difference between the two is one of the
most insidious secrets of history: money stores value over long periods
of time, whereas currencies do not. As Michael Maloney explains in
Episode 1 of <a href="http://goo.gl/GGhq8">Hidden Secrets Of Money</a>:</div>
<div>
</div>
<blockquote>
<div>
<em><strong>"Your true wealth is your time and freedom. Money is just
a tool for trading your time, it's a container that stores your
economic energy until you are ready to deploy it. But the whole world
has been turned away from real money, and fooled into using currency - a
deceitful impostor that is silently stealing your two most valuable
assets - your time, and your freedom."</strong></em></div>
</blockquote>
<div>
</div>
<div>
Now we have reached our conclusion - the problems being faced not just
in Egypt, but all around the world, is the result of a fundamentally
flawed monetary system. The quality of a society is directly
proportional to the quality of its money, and at this stage of the game…
we don't even use money. Is it any wonder that the world is so
unbalanced? The good news is, there is still time to get educated and
protect yourself from this monetary malfeasance. </div>
<div>
</div>
<div>
We created the series ‘<a href="http://goo.gl/GGhq8">Hidden Secrets Of Money</a>’
with one goal in mind: To enlighten the world that maximum prosperity
can only be achieved through individual freedom, free markets, and sound
money. Remove any of those components from the equation and the world
suffers unnecessarily. Stick to the formula, and history proves that we
all prosper. </div>
<div>
</div>
<div>
To learn more about this most important subject and receive grounding
in real world economics that you won't find in any school, please visit <a href="http://goo.gl/GGhq8">HiddenSecretsOfMoney.com</a>
and watch the first episode of our series. It deals specifically with
the issue of Currency Vs Money, and I hope that you find it to be a
fantastic tool for navigating the turbulent times ahead. Episode 2 is
scheduled for release in August, and expands on the concepts learned in
the first episode, showing that history doesn't precisely repeat - but
it sure does rhyme. </div>
<div>
</div>
<div>
The only way we can help ourselves and each other, is to become
educated about what is really happening in our world today and then take
appropriate action. </div>
<div>
<br /></div>
<div>
Dan Rubock</div>
<em> </em></div>
</div>
Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-297258822861901533.post-43464259028352564442013-07-08T17:49:00.003+02:002013-07-08T17:49:36.767+02:00Is “Austerity” Responsible for the Crisis in Europe? <div dir="ltr" style="text-align: left;" trbidi="on">
by <a href="https://mises.org/daily/6451/Is-Austerity-Responsible-for-the-Crisis-in-Europe" target="_blank">Martin Masse</a><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjNjqi_DgNvqK3R9rXo7juIWW5zv1mp6gJibfXNfmtPZnQhS7cVFFOX3UrSp9EB3ewVhd4LnLLfuidigwM1Da3EKJQg3HQPyl04GxxAyEGglhn1YJxSaXg4MkfmytxJrNUAO3ufrfxDoWUC/s1600/The+Meaning+of+Austerity.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjNjqi_DgNvqK3R9rXo7juIWW5zv1mp6gJibfXNfmtPZnQhS7cVFFOX3UrSp9EB3ewVhd4LnLLfuidigwM1Da3EKJQg3HQPyl04GxxAyEGglhn1YJxSaXg4MkfmytxJrNUAO3ufrfxDoWUC/s1600/The+Meaning+of+Austerity.jpg" height="299" width="400" /></a></div>
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Most European economies have been in recession, or close to it, since
the beginning of 2012. Unemployment rates are reaching record highs.
Meanwhile, a
debate has been raging about the deleterious effects of “austerity”
measures. Various heads of government, finance ministers, and European
Union officials
have declared that austerity has gone too far and is preventing a
recovery.
<br />
Keynesian economists like Paul Krugman are seeing this as unassailable
proof that stimulus policies adopted when the financial crisis started
in 2008-09
should never have been reversed and replaced by austerity measures,
notwithstanding the explosion of public debt that they entailed.
<br />
In the Keynesian view, when idle resources are left unused by the
private sector, governments should put them to work. They should stop
worrying about
budget deficits and start spending again.
<br />
Whereas Keynesians and the rest of the economics profession see
downturns as unexpected and disastrous events to be prevented, Austrian
School economists
explain them as the inevitable result of an earlier unsustainable boom
provoked by excessive credit expansion and interventionist government
policies.
<br />
<a name='more'></a><br />
For Austrians, the recession is actually a cure to get rid of
distortions that have accumulated during the boom. Resources being
wasted in unproductive
uses have to be freed and moved to sectors where there is real and
sustainable demand. Unfortunately, this takes time, and some resources
will have to
remain idle until entrepreneurs have found the best way to use them.
This means temporarily higher unemployment, plants used at half capacity
or closed
until they are retooled, and financial resources parked in short-term
assets instead of invested in long-term projects.
<br />
Governments should not try to prevent this reallocation process.
Keynesian-style stimulus programs and bailouts simply prolong the
unsustainable economic
processes of the boom and delay the recovery. They also create a climate
of uncertainty regarding debt burdens and taxes, deterring private
investment. In
short, unlike Keynesians, who believe government should intervene and
spend more in times of crisis, Austrians advocate a withdrawal of
government and a
reduction in spending and taxation.
<br />
Given this theoretical background, how should we view the situation in
Europe? Is austerity responsible for the crisis, as Keynesians believe?
Or is it
part of a necessary cure, as Austrians think? As we shall see, these
alternatives do not accurately capture what is happening in Europe
because of the
ambiguous meaning of the word “austerity.”
<br />
<h2>
The Meaning of Austerity</h2>
The debate on austerity in Europe has focused exclusively on government
budget deficits and public debt as a percentage of GDP. The Maastricht
Treaty
requires that countries joining the European Union should have budget
deficits no higher than 3 percent of GDP and debt levels no higher than
60 percent. These are also
goalposts for member countries. Most of them (with the exception of
Germany, among the larger countries) fail to meet these criteria. One
facet of the
current debate is whether some countries should obtain additional time
to meet these goals, as France has just succeeded in doing.
<br />
In all these discussions, the only numbers presented as evidence that
austerity measures have been implemented consist of statistics
indicating that
deficits have gone down. Indeed, they have, as the most recent Eurostat
numbers show (Figure 1).<a class="noteref" href="https://mises.org/daily/6451/Is-Austerity-Responsible-for-the-Crisis-in-Europe#note1" name="ref1">[1]</a>
The
average level of deficit as a percentage of GDP in EU countries in 2012
is much lower (4 percent) than it was in 2009 (6.9 percent).
<br />
<strong>
Figure 1
<br />
General government deficit as a percentage of GDP </strong><br />
<strong> </strong>
<br />
<img height="347" src="http://images.mises.org/6451/figure1.png" width="400" />
<br />
<em> </em><br />
<em>Source: Eurostat, Government deficit/surplus, debt and associated data.
</em>
<br />
It should be obvious that there is no direct relationship between
reducing the size of the deficit and reducing the size of government,
the latter being a
key factor to consider if we want to compare Keynesian and Austrian
solutions to the crisis. A budget deficit can be reduced either by
cutting spending or
by increasing revenue. It can also be reduced if spending is cut a lot
but taxes are cut only a little. It can be reduced even as spending
increases if
revenues increase even faster.
<br />
In practice, “austerity” can thus cover all kinds of situations with
differing economic impacts. The term can apply just as well to growth as
to reduction
in the size of government. It seems to be universally taken for granted
in this debate that austerity measures adopted in Europe have meant
drastic
spending cuts, coupled with some tax increases, the net effect being a
downsizing of government. But is this really the case?
<br />
<h2>
Governments Keep Growing </h2>
As Figure 2 shows, there has only been a slight decrease of 1.7
percentage points in government spending as a proportion of GDP in the
Union as a whole
over the past three years. Moreover, the proportion is still 4
percentage points higher in 2012 than before the crisis started, 49.4
percent compared to 45.6 percent
in 2007. Among the major countries included in this figure, only in
Poland have expenditures gone back to where they were in 2007.
<br />
<strong>
Figure 2
<br />
Total general government expenditure as a percentage of GDP </strong><br />
<strong> </strong>
<br />
<img height="347" src="http://images.mises.org/6451/figure2.png" width="400" />
<br />
<em> </em><br />
<em>Source: Eurostat, Government revenue, expenditure and main aggregates.
</em>
<br />
However, there is reason to wonder if these numbers have been distorted
by the periods of negative economic growth that have hit the continent.
Expenditures may have come down in absolute terms, but they would still
be higher as a proportion of GDP if the economy had contracted even
more. So, let’s
look at expenditures in nominal terms.<br />
<br />
<strong>
Figure 3
<br />
Total general government revenue and expenditure in billions of euros — European Union (27 countries) </strong><br />
<strong> </strong>
<br />
<img height="327" src="http://images.mises.org/6451/figure3.png" width="400" />
<br />
<em> </em><br />
<em>Source: Eurostat, Government revenue, expenditure and main aggregates.
</em>
<br />
<strong>
Figure 4
<br />
Total general government expenditure in billions of euros </strong><br />
<strong> </strong>
<br />
<img height="347" src="http://images.mises.org/6451/figure4.png" width="400" />
<br />
<em> </em><br />
<em>Source: Eurostat, Government revenue, expenditure and main aggregates.
</em>
<br />
As we can see, government spending has never stopped rising in the Union
as a whole since the beginning of the financial crisis, except in 2011
when it
remained constant (Figure 3). Spending grew by 6.3 percent in the last
three years, in other words during the period when “austerity” policies
were supposed to
have been applied.
<br />
Thus, whenever finance ministers announced budget cuts, they were
actually referring not to absolute reductions in total spending but
simply to spending
increases that were lower than what was previously planned or to cuts
that were offset by more spending elsewhere.
<br />
There are only a handful of countries where nominal expenditures really
fell between 2009 and 2012, including Greece and Portugal (Figure 4)<a class="noteref" href="https://mises.org/daily/6451/Is-Austerity-Responsible-for-the-Crisis-in-Europe#note2" name="ref2">[2]</a>. It should be noted, however, that both in nominal terms and in proportion to GDP, the governments of
these two countries spent more in 2012 than in 2007.
<br />
With no net decrease in spending, the deficit reductions observed in
most countries must have occurred because tax revenues went up faster
than spending.
And that is precisely what the Eurostat data show, with revenues up 12.9
percent from 2009 to 2012, double the pace of increase in public
spending (Figure 3).
<br />
Governments have not been borrowing as much<strong>—</strong>although
they still borrow heavily, and public debt keeps increasing. Instead,
they tax their
citizens more to fund their growing expenditures (Figures 5). And this
is the case even in countries such as France where “austerity” has been
most
strongly criticized. France leads the pack both among countries where
spending has risen the most and among those where taxes have climbed
most sharply.<br />
<br />
<strong>
Figure 5
<br />
Total general government revenue in billions of euros </strong><br />
<strong> </strong>
<br />
<img height="314" src="http://images.mises.org/6451/figure5.png" width="400" /><br />
<br />
<em>
Source: Eurostat, Government revenue, expenditure and main aggregates.
</em>
<br />
<h2>
Conclusion</h2>
Governments in almost all European Union countries are therefore as
large as they were when the crisis started in 2007 or even larger today.
<br />
If we define austerity as the measures taken to reduce budget deficits,
then in that sense austerity is indeed responsible for the crisis. If,
however, we
define it more properly as policies bringing about a reduction in the
size of government, then these policies cannot be held responsible for
the crisis in
Europe because they were never applied.
<br />
Unfortunately, confusion over the meaning of austerity impedes a better
understanding of the situation and precludes a more relevant debate over
the causes
of the crisis.
<br />
Keynesians will, of course, regret that there haven’t been even larger
spending increases, greater borrowing and expanded deficits in the past
few years to
stimulate the economy. But, from an Austrian perspective, bloated
governments, and higher taxes certainly help explain why European
economies are still in
the doldrums, several years after the financial crisis.
<br />
What Europe needs is smaller governments, not just in terms of public
spending but also as regards deregulation of the job market and other
structural
reforms to encourage entrepreneurship, private investment, and job
creation. There will be sustained growth in Europe only when
governments, and not
citizens or businesses, finally bear the brunt of austerity.
</div>
Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-297258822861901533.post-79407334838245146452013-07-06T20:56:00.000+02:002013-07-06T20:56:32.884+02:0019 Reasons To Be Deeply Concerned About The Global Economy As We Enter The 2nd Half Of 2013By Michael Snyder<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg_nw3ybBeDYI9gaok0GKE-xYx-DBRwYVfQwasSiaxcDLFXakP7UtoIYidjnsgtPepswkfFxU10zbpi9icuHZfi5TjyxHpi9TORvrouYc1CVvKZlLCyiwDM_bJoU5Xp4GpyDcL2Vwtg5f3P/s1600/downturn.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg_nw3ybBeDYI9gaok0GKE-xYx-DBRwYVfQwasSiaxcDLFXakP7UtoIYidjnsgtPepswkfFxU10zbpi9icuHZfi5TjyxHpi9TORvrouYc1CVvKZlLCyiwDM_bJoU5Xp4GpyDcL2Vwtg5f3P/s1600/downturn.jpg" height="267" width="400" /></a></div>
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Is the global economic downturn going to accelerate as we roll into
the second half of this year? There is turmoil in the Middle East, we
are seeing things happen in the bond markets that we have not seen
happen in more than 30 years, and much of Europe has already plunged
into a full-blown economic depression. Sadly, most Americans will never
understand what is happening until financial disaster strikes them
personally. As long as they can go to work during the day and eat
frozen pizza and watch reality television at night, most of them will
consider everything to be just fine. Unfortunately, the truth is that <a href="http://theeconomiccollapseblog.com/archives/40-statistics-about-the-fall-of-the-u-s-economy-that-are-almost-too-crazy-to-believe" title="everything is not fine">everything is not fine</a>.
The world is becoming increasingly unstable, we are living in the
terminal phase of the greatest debt bubble in the history of the planet
and the global financial system is even more vulnerable than it was back
in 2008. Unfortunately, most people seem to only have a 48 hour
attention span at best these days.<br />
<a name='more'></a> They don't have the patience to
watch long-term trends develop. And the coming economic collapse is not
going to happen all at once. Rather, it is like watching a very, very
slow-motion train wreck happen. The coming economic nightmare is going
to unfold over a number of years. Yes, there will be moments of great
panic, but mostly it will be a steady decline into economic oblivion.
And there are a lot of indications that the second half of this year is
not going to be as good as the first half was. The following are 19
reasons to be deeply concerned about the global economy as we head into
the second half of 2013...
<br />
<strong>#1</strong> The velocity of money in the United States has
plunged to an all-time low. It is extremely difficult to have an
"economic recovery" if banks are <a href="http://theeconomiccollapseblog.com/archives/the-federal-reserve-is-paying-banks-not-to-lend-1-8-trillion-dollars-to-the-american-people" title="not lending money">not lending money</a> and people are not spending it...<br />
<br />
<a href="http://theeconomiccollapseblog.com/archives/19-reasons-to-be-deeply-concerned-about-the-global-economy-as-we-enter-the-2nd-half-of-2013/velocity-of-money-3" rel="attachment wp-att-5977"><img alt="Velocity Of Money" class="aligncenter size-large wp-image-5977" height="255" src="http://theeconomiccollapseblog.com/wp-content/uploads/2013/07/Velocity-Of-Money-425x255.png" width="425" /></a><br />
<br />
<strong>#2</strong> The <a href="http://www.usatoday.com/story/news/world/2013/07/03/egypt-morsi-protests-army-deadline/2485355/" target="_blank" title="fall of the Egyptian government">fall of the Egyptian government</a>
threatens to bring even more instability to the Middle East. In
response to the events in Egypt, the price of oil rose to more than 101
dollars a barrel on Wednesday.<br />
<strong>#3</strong> Every time the average price of a gallon of
gasoline in the United States has risen over $3.80 in the past three
years, a stock market decline <a href="http://www.zerohedge.com/news/2013-02-23/380-scariest-number-bulls" target="_blank" title="has always followed">has always followed</a>.<br />
<strong>#4</strong> As the world becomes increasingly unstable, massive citizen protest movements have been rising <a href="http://www.businessinsider.com/is-2013-the-year-of-the-protest-2013-7" target="_blank" title="all over the globe">all over the globe</a>...<br />
<blockquote>
The protests have many different origins. In Brazil
people rose up against bus fares, in Turkey against a building project.
Indonesians have rejected higher fuel prices, Bulgarians the
government’s cronyism.<br />
In the euro zone they march against austerity, and the Arab spring
has become a perma-protest against pretty much everything. Each angry
demonstration is angry in its own way.</blockquote>
<strong>#5</strong> The European sovereign debt crisis is flaring up once again. This time it is <a href="http://www.reuters.com/article/2013/07/03/us-eu-crisis-return-analysis-idUSBRE9620AL20130703" target="_blank" title="Portugal's turn">Portugal's turn</a> to take center stage...<br />
<blockquote>
From Greece to Cyprus, Slovenia to Spain and Italy, and
now most pressingly Portugal, where the finance and foreign ministers
resigned in the space of two days, a host of problems is stirring after
10 months of relative calm imposed by the European Central Bank.<br />
Portuguese Prime Minister Pedro Passos Coelho told the nation in an
address late on Tuesday that he did not accept the foreign minister's
resignation and would try to go on governing.<br />
If his government does end up collapsing, as is now more likely, it
will raise immediate questions about Lisbon's ability to meet the terms
of the 78-billion-euro bailout it agreed with the EU and International
Monetary Fund in 2011.</blockquote>
<strong>#6</strong> It is being projected that Italy will need a major EU bailout <a href="http://www.reuters.com/article/2013/07/03/us-eu-crisis-return-analysis-idUSBRE9620AL20130703" target="_blank" title="within six months">within six months</a>.<br />
<strong>#7</strong> Bond investors are starting to panic. In fact, even prominent firms <a href="http://www.trunews.com/pimco-investors-withdraw-9-6bn-in-one-month/" target="_blank" title="such as Pimco">such as Pimco</a> are seeing investors pull massive amounts of money out right now...<br />
<div>
<blockquote>
In June, investors pulled $9.6bn from Bill Gross’s
flagship fund at Pimco, the largest single month of outflows at the fund
since Morningstar records began in 1993, the investment research firm
said.</blockquote>
</div>
<div>
<blockquote>
The outflows came after investors pulled $1.3bn from the fund in May, which marked the first outflows since December 2011.</blockquote>
</div>
Overall, a whopping <a href="http://www.cnbc.com/id/100855508" target="_blank" title="80 billion dollars">80 billion dollars</a> was pulled out of bond funds during June.<br />
<strong>#8</strong> Central banks are selling off <a href="http://www.cnbc.com/id/100852546" target="_blank" title="record amounts of U.S. debt">staggering amounts of U.S. Treasury bonds</a> right now.<br />
<strong>#9</strong> U.S. mortgage bonds just suffered their <a href="http://www.zerohedge.com/news/2013-06-30/mortgage-bond-prices-collapse-most-1994-bond-market-massacre" target="_blank" title="biggest quarterly decline">largest quarterly decline</a> in nearly 20 years.<br />
<strong>#10</strong> We continue to buy far more from the rest of the world than they buy from us. The U.S. trade deficit for the month of May was <a href="http://www.calculatedriskblog.com/2013/07/trade-deficit-increased-in-may-to-450.html" target="_blank" title="45.0 billion dollars">45.0 billion dollars</a>.<br />
<strong>#11</strong> The severe drought that the western half of the United States is suffering <a href="http://droughtmonitor.unl.edu/" target="_blank" title="never seems to end">never seems to end</a>. What will it do to food prices if ranchers and farmers out west have to go through another summer like they did last year?<br />
<strong>#12</strong> European car sales have fallen to <a href="http://www.zerohedge.com/news/2013-06-18/european-car-sales-drop-20-year-low-germany-clobbered" target="_blank" title="a 20 year low">a 20 year low</a>.<br />
<strong>#13</strong> Unemployment in the eurozone is at an <a href="http://www.usatoday.com/story/money/business/2013/07/01/eurozone-unemployment-at-record-high-in-may/2478777/" target="_blank" title="all-time high">all-time high</a>.<br />
<strong>#14</strong> Could the paper gold Ponzi scheme be on the verge of crumbling? There are reports that there is now a <a href="http://www.bullionbullscanada.com/gold-commentary/26273-fraud-confirmed-100-day-delay-to-take-bullion-delivery-in-london-" target="_blank" title="100 day delay">100 day delay</a> for gold owners to take physical delivery of their gold from some warehouses owned by the London Metal Exchange...<br />
<blockquote>
We’re told that bullion-buyers in London must now wait
more than 100 days to take delivery of the bullion for which they have
already paid.<br />
The comedic drones at Bloomberg, and officials of the London Metal
Exchange itself would have us believe this is due to “warehouse queues.”
While precious metals bulls undoubtedly appreciate the imagery implied
of a 100-day line-up of armored cars waiting to load their bullion – in
the middle of this “bear market” – the implication is fallacious.<br />
In an era of just-in-time inventories; the notion that there can be a
100-day backlog to load bullion into armored cars with the metal
already sitting in the warehouse is ludicrous. Clearly what the LME is
really reporting here is a greater-than-three-month delay to refine the
gold (or silver) being purchased here – and then ship it to their
warehouse.<br />
In other words, the “bullion” which traders believe they are
purchasing today is in fact merely ore which hasn’t even been dug out of
the ground yet.</blockquote>
<strong>#15</strong> The number of mortgage applications in the United States is falling at the fastest rate <a href="http://www.zerohedge.com/node/475997" target="_blank" title="in more than 3 years">in more than 3 years</a>.<br />
<strong>#16</strong> Real disposable income in the United States is falling at the fastest rate <a href="http://www.zerohedge.com/contributed/2013-06-27/real-disposable-income-falling-2008-rates" target="_blank" title="since 2008">in more than 4 years</a>.<br />
<strong>#17</strong> The percentage of companies issuing negative earnings guidance for this quarter is at a level <a href="http://www.businessinsider.com/negative-positive-earnings-preannouncements-2013-6" target="_blank" title="that we have never seen before">that we have never seen before</a>.<br />
<strong>#18</strong> Is the dark side of derivatives trading about to be exposed? EU officials claim that <a href="http://www.usatoday.com/story/money/business/2013/07/01/eu-banks-collusion-derivatives/2479393/" target="_blank" title="13 major international banks">13 major international banks</a> have been colluding to control the trading of derivatives...<br />
<blockquote>
<span>The European Commission says many of the world's
largest investment banks appear to have colluded to block attempts by
exchanges to trade and offer more transparent prices for financial
products known as credit derivatives.</span><br />
The commission, the executive arm of the European Union, said Monday
it has informed 13 banks — including Citigroup, Goldman Sachs, JPMorgan
and Morgan Stanley — as well as the industry association for derivatives
itself, the International Swaps and Derivatives Association, ISDA, of
the preliminary conclusions of an investigation that began in March.</blockquote>
<strong>#19</strong> There are <a href="http://theeconomiccollapseblog.com/archives/the-441-trillion-dollar-interest-rate-derivative-timb-bomb" title="441 trillion dollars">441 trillion dollars</a>
of interest rate derivatives sitting out there and interest rates have
risen rapidly over the past few weeks. What is going to happen to those
derivatives if interest rates keep going higher?<br />
So what do you think?<br />
Are there any items that are missing that you would add to this list?<br />
Please feel free to share what you think by posting a comment below...Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-297258822861901533.post-38128315113166604412013-07-06T20:50:00.003+02:002013-07-06T20:50:51.016+02:00 The Currency Wars Reignite<span class="submitted">by <a href="http://www.zerohedge.com/users/tyler-durden">Tyler Durden</a> </span><br />
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<em>Via Mark J. Grant, author of Out of the Box,</em><br />
<em>“Always remember, your focus determines your reality.”</em><br /><br /><em> -George Lucas</em><br />
<br />
<em> </em><strong>Our reality has changed in the last twenty-four hours. </strong>The
Bank of England and the European Central Bank have re-affirmed their
old positions since the Fed has changed tacks. The initial reactions
will be a spike in equities and a fall-off in the valuations of the
Pound and the Euro to the Dollar. These, however, are first blush
reactions as the color fades from the bloom.<br /><br />It may well be, as
Europe is in much worse financial condition than the United States, that
there is a policy reason for the European positions but it may well
also be a calculated move to devalue the major European currencies. <strong>Whatever the actual reasons, the European statements have certainly sounded the trumpet that the “Currency Wars” have reignited.</strong><br />
<a name='more'></a><br />The
impact of the Euro/Dollar at 1.25 and then 1.20 will be a positive for
Europe as exports rise and a negative for America as exports fall and
imports rise. The sword could be double edged though as the Fed, in
response, begins to cull back on the more than $1 trillion that it has
lent to the European banks. <strong>Many truths will be shrouded in mystery but the impact will be there regardless.</strong><br /><br />It is a <strong>dangerous
game when the world’s central banks that have been working for the last
five years in unison and now they head down different paths</strong>.
You may expect tears at the seams and various ripping sounds as Europe
moves away from the Fed. Mr. Carney and Mr. Draghi have buddied up while
poor Ben is left to wander alone.<br /><br />The trumpets that had
heralded “The Three Kings” now sound just for two and the drums that
have beat in unison now will sound a disconnected harmony. America has
gone left and Europe has gone right and there will be consequences for
both.<br /><br />I mention one other thing this morning that is surely coming and it will be the hammering of the gong. <strong>The ECB has massive securitizations that are being carried at par (100 cents on the Dollar) at the ECB and at the European banks</strong>.
The losses, with many tied to Real Estate, must be staggering. There
will be a time, a moment, after “extend and pretend” runs out when these
losses must be faced. These securitizations are guaranteed, in the case
of Spain as one example, by the sovereign ($51.6 billion in the case of
Spain). Others, I have heard, are guaranteed by the major European
banks. <strong>The poorer nations in Europe will want the ECB to take the hits, shared losses, but Germany will vehemently object.</strong><br /><br />France,
Italy, Spain, Portugal and Ireland cannot afford the losses. The hits
would bankrupt or severely impair most of the European banks. The clock
is running and midnight will be approaching sometime during the next
twelve months.<br /><br /><strong>I fear what we don’t know and what is hidden. Realization will eventually arrive because it must.</strong>
A very unpleasant reality will surface. When you shout and scream and
make false claims that the money is in the drawer the day will arrive,
because you need the money, that you open the drawer and it is not
there. That day is one of reckoning. <strong>The Europeans will not enjoy it!</strong>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-297258822861901533.post-62712574376568388972013-07-05T12:47:00.001+02:002013-07-05T12:49:09.600+02:00Keynesian Phrenologyby <a href="http://lewrockwell.com/daughty/mogambo93.1.html" target="_blank">Richard Daughty</a><br />
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<br />I am getting more and more upset about the future of the economy, especially the part where I will probably still be alive to suffer through it, instead of being safely dead and gone, laughing disdainfully from whatever circle of Dante’s hell that is reserved for us lousy fathers, worthless husbands, lackluster employees and all-around lazy bastards. <br /><br />“Hahaha!” I will bellow. “Now suffer! Suffer, you morons who actually believed that the idiocy of Keynesian economics would NOT end in disaster! From the heart of hell I strike at thee!”<br /><a name='more'></a>As immensely satisfying as that schadenfreude will certainly be, the dismal fact is that I am still alive, and will live to see the horrendous price inflation, bankruptcy, misery, hunger, ruination and deprivation that always – for the last 2,500 years, anyway – follows episodes of idiotic countries running up unpayable debts, especially those who do so by gigantically increasing their fiat money supplies to pay for massive government deficit-spending.<br /><br />Thus, being alive, I figure that I have to do something to make some cash while I am waiting for my little pathetic stash of gold, silver and oil (the famous Top Three Mogambo Picks For Wealth (TTMPFW)) to finish the cycle of criminal corruption and monstrous market-manipulation that is currently keeping their prices down, whereupon their prices will soar, allowing me to kick my natural lassitude into high gear by hiring legions of comely servants to cater to my every transient whim, as communicated to them by the mere raising of an eyebrow (“Bring me pizza!”) or subtle waggling of my little finger (“And a beer!”).<br /><br />Alas, since I have no relevant education, personal initiative or hidden talents other than arrogant superciliousness and a towering-yet-completely-unwarranted conceit, I knew I was perfect for something in the vein of doofus Keynesian economists like Ben Bernanke of the Federal Reserve, or the laughable Paul Krugman of Princeton University and the New York Times.<br /><br />Namely, I will combine the obvious with complete stupidity via mathematical equations to produce an excuse to meddle in things, making things predictably worse.<br /><br />But what? What could I do?<br /><br />Scratching my head in befuddlement, I was suddenly hit with inspiration! Phrenology! Yes, phrenology, which is the study of the bumps of a person’s head to determine the person’s personality and character.<br /><br />Unlike Keynesian economics, phrenology has already been completely discredited, and only a real dimwit believes in either of them, but (I concluded) only because phrenology lacks the mathematical twist and an excuse for meddling!<br /><br />Now, check this out for Sheer Mogambo Genius (SMG): Firstly, I measure the width and height of the bumps on the head, use calculus to determine their volumes, and combine the numerical results, in novel and mysterious ways, into some huge, bizarre theoretical monstrosity, like Keynesian econometric models.<br /><br />Now here’s the genius part: Like the Federal Reserve’s corrupt championing of laughable Keynesian economics (instead of the Austrian School of economics, like they should because it is the only true economic theory), I similarly use Quantitative Easing by using a hammer to hit the patient’s head to increase the size of various bumps, or flatten out other bumps, changing their whole phrenology!<br /><br />Then, it is all sunbeams and rosebuds from then on!<br /><br />And, best of all, I’ll get The Big Bucks (TBB) for doing it! Fabulous!<br /><br />Excitedly, I decided to test my new Fabulous Mogambo Phrenology Theory (FMPT). Using charts from the Internet, I located the “intelligence bump” on my own head, noting with dismay that its small size perfectly corresponded with my famously dim wit, perpetual confusion and drooling incoherence.<br /><br />Now, giving myself a mighty “whack!” with the hammer on the aforementioned “intelligence bump,” I was delighted to see that my intelligence instantly increased! It was amazing!<br /><br />After falling to my knees, head throbbing, slipping into and out of consciousness, I immediately and intelligently saw that 1) from now on I would experiment on the kids instead of myself, and 2) that permitting futures on financial products is a Gigantically Big Scam (GBS), because while shorting commodity futures, like corn, wheat and oil, cannot go to extreme measures by shorting because the actual supply of corn, wheat and oil are finite and must ultimately be delivered, the supply of financial products is infinite since it is no longer necessary to borrow an asset before selling it, or ever selling it at all!<br /><br />You can just “make up” – literally out of thin air! – as much stock or debt as you want, and sell it!<br /><br />And if you want to short a LOT of stocks or debt via selling futures, then you will automatically manipulate the market down, handing you a profit as your shorts go up in price, which is why gold and silver prices are so ludicrously low!<br /><br />And since there is no limit to this, the financial markets can go to ludicrous heights or depths, especially – in spades! – since the Federal Reserve itself is now creating more and more fiat currency to buy equities, in addition to its already-ravenous buying of debt and financing the shorting of gold! Yikes! What a racket!<br /><br />Thus I learned a third thing: forget phrenology! The big money, these days, is in running a legal scam in the futures markets because there is nothing to prevent it, and the Federal Reserve is not only providing the financing, but doing the same thing! So, pile on!<br /><br />I know what you are thinking. You are thinking “Hey! The Mogambo doesn’t sound as stupid as he usually does! Maybe there IS something to this phrenology thing!”<br /><br />If I wasn’t so stupid, I would probably understand the obvious insults, and maybe come up with some clever riposte.<br /><br />Alas, I can only offer, for the thousandth time, the two pieces of Fabulous Investing Advice (FIA) that I am smart enough to understand.<br /><br />Firstly, inflation in the prices of assets caused by a huge creation of fiat currency and credit will end in a bust.<br /><br />Secondly, buy gold and silver. They are the only things you can count on in this increasingly-corrupt world, as amply evidenced by 2,500 years of history proving, over and over, that increasingly-corrupt markets and exploding fiat money supplies always result in collapse and complete ruination.<br /><br />And with the commodity markets having no supervision or regulation as regards monstrous short positions in gold and silver, allowing these short-lived manipulations to drive down the prices of gold and silver to bargain-basement levels, one must conclude, with an giggle of glee, “Whee! This investing thing is easy!”Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-297258822861901533.post-46011747215853924482013-07-05T12:40:00.003+02:002013-07-05T12:49:29.473+02:00The Most Stunning Development In Silver<br />
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By <a href="http://dont-tread-on.me/?p=30168" target="_blank">Silver Shield</a><br />
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The Silver Bullet Silver Shield makes it's return with Warbird soon.<br />
Today, I learned of one of the most stunning developments in the physical silver demand I have ever seen.<br />
The
physical Silver market is about to explode the paper silver market in a
huge way. Like the price collapse in 2008 set up silver for a 500%+
return for the next few years, this recent price collapse is going to
set up an epic return on silver like the world has never seen.<br />
<br />Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-297258822861901533.post-8808963994529075822013-07-05T12:36:00.003+02:002013-07-05T12:36:30.194+02:00What TARP Boss Neil Barofsky Told Me Yesterday Should Shock Youby <a href="http://lewrockwell.com/bonner/bonner604.html">Bill Bonner</a><br />
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<br /><br />The financial news is getting boring. The Dow goes only one way – up. But gold fell below $1,400 per ounce yesterday. <br /><br />Rather than trying to figure it out, yesterday evening we drove down to Zombietown. A friend in Washington had promised to introduce us to Neil Barofsky, inspector general of the TARP program. <br /><br />You remember TARP? It was the feds' $700 billion program to rescue the US economy from a correction. Neil Barofsky was in charge of it. So we decided to go down and ask him how it turned out... <br />
<a name='more'></a><br /><br />Meanwhile, in yesterday's International Herald Tribune was a small note: "Economists agree that spending cuts and tax increases have slowed the US recovery." <br /><br />Readers will recognize this as the usual claptrap. <br /><br />Government spending does not bring a genuine "recovery." <br /><br />C'mon... how many times do we have to explain? You take $5 worth of resources and give them to an armed 19-year-old in Afghanistan. He shoots a round or two into a mountainside... poof... the $5 is gone. Or you have an ATF official. He's idling his motor as he stakes out a house believed to be used by a cigarette smuggler. In a few minutes, or even seconds, the $5 has vanished. Or give the money to a disabled person; he buys a MoonPie and a Coke. Economists may record the spending as part of GDP... But how are you better off? <br /><br />You're $5 poorer, not $5 richer. <br /><br />But GDP growth is something economists feel they can control. So they go to work on it like a sex maniac strangling a prostitute. Nothing good comes of it. But at least they get results. <br /> <br /> And here comes Paul Krugman with more garroting wire! The New York Times Magazine: <br /> <br />Keynesian economics rests fundamentally on the proposition that macroeconomics isn't a morality play – that depressions are essentially a technical malfunction. As the Great Depression deepened, Keynes famously declared that "we have magneto trouble" – i.e., the economy's troubles were like those of a car with a small but critical problem in its electrical system, and the job of the economist is to figure out how to repair that technical problem. <br /><br />Back to Neil Barofsky... <br /> <br /> Rewarding Mistakes <br /><br />So... where did the $700 billion go? Did that fix the magneto trouble? <br /><br />"I wondered the same thing," he said (from memory). "It was amazing to me that no one knew. We gave it to the banks. But no one knew what they did with it. I proposed to Tim Geithner that we find out. He was outraged. He cursed me out, using the F-word. He said it would bring the whole banking system down, if I asked. <br /><br />"I went ahead and sent out a letter. I didn't really have the authority or the staff to insist. But all of the big banks wrote back. And most of them gave me dodgy responses or gave me the brush-off. <br /><br />"What did they do with the money? They were supposed to increase lending to help bring about a recovery. None of them did that. Instead, they used it to repay each other's loans. In other words, they used it to reduce the amount of credit available... not increase it. And they bought US agency bonds... just as you'd expect. And they paid out their bonuses. <br /><br />"In other words, they looked out for themselves... just as you'd expect. I didn't know this information was going to bring down the banking system... <br /> <br /> <br />"The whole thing was so perverse, I can barely believe it. In a normal financial system, if a bank made a bad bet, it would pay a penalty. Counterparties might lend more money to it, but they'd want higher rates of interest to protect themselves. <br /><br />"But here, in the bubble years, all the big banks made some of the worst bets in history... and what happened? The government stepped in... and lent them money... at lower rates of interest. They were rewarded for their mistakes. The good banks – that didn't have the backing of the government – actually paid higher rates of interest to borrow money than the bad banks.<br /><br /> "Another thing I wanted to know was exactly how much money was really at risk. We gave away $700 billion. But we also guaranteed loans... and gave lines of credit... and stood behind various financial transactions. I asked how much was at stake... how much was at risk. No one seemed to know. So we added it up. We found a total of $23 trillion. That's ‘trillion' with a capital ‘T.' <br /><br />"Again, I'm not saying that we would ever have to pay out that much. Some of this was guarantees on top of guarantees and cross-guarantees... very murky... very difficult to disentangle. But I thought it was worth knowing how much we had at risk. And again, the banks didn't want to tell. And the people in the Treasury department didn't want to know. <br /><br />"The more questions I asked, the more I found myself isolated... and at odds with the Treasury Department, as well as the banks. I was having shouting matches in the Treasury. The banks hated me. And then the undersecretary of the Treasury called me into his office. <br /><br />"He explained that if I eased up on the banks, I could have a very nice career after the TARP appointment expired. If I didn't play ball with them, I would find it hard to find a job. <br /><br />"That's how it works. You go along and you get along. If you don't go along with the scams and the technical mumbo jumbo... you're out." <br /><br />That's how a zombie economy works, dear reader. The zombies throttle the girls. You look the other way. Or else... <br /><br /> Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-297258822861901533.post-550239874589578452013-07-05T12:25:00.000+02:002013-07-05T12:26:33.715+02:00Keiser Report: Dumb Luck, Wash Trading & Gold Suppression<br />
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In this episode of the Keiser Report, Max Keiser and Stacy Herbert
discuss the failure to understand English as saviour of the Japanese
banking system. While price signals, the language of the market, are so
manipulated as to be indecipherable by even those who speak the
language. In the second half, Max talks to legendary investor, Jim
Rogers, about gold, bonds and China.Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-297258822861901533.post-81583524367675142872013-07-05T12:21:00.001+02:002013-07-05T12:21:28.552+02:00Jim Rogers: “This Is Too Insane–And I’m Afraid We’re All Going To Suffer For The Rest Of This Decade”by <a href="http://bullmarketthinking.com/jim-rogers-this-is-too-insane-and-im-afraid-were-all-going-to-suffer-for-the-rest-of-this-decade/" target="_blank">bullmarketthinking.com</a> <br />
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I was able to reconnect with <em><strong>Jim Rogers</strong></em> this morning out of Spain, legendary co-founder of the <em><strong>Quantum Fund</strong></em> with <em><strong>George Soros</strong></em>, author of <em><strong><a href="http://www.amazon.com/dp/B000FC2OO8/ref=as_li_qf_sp_asin_til?tag=dollarcrcom-20&camp=0&creative=0&linkCode=as1&creativeASIN=B000FC2OO8&adid=18AG319E6D7RPCX1NDDF">Hot Commodities</a></strong></em>, and chairman of the private <em><strong>Beeland Holdings</strong></em>.<br />
It was an especially powerful interview, as Jim spoke towards the
relentless downward pressure on gold, the upward explosion in interest
rates, central bank money printing, and how to protect yourself ahead of
the disastrous times he sees coming.<br />
When asked if we’re seeing forced liquidation leading the smash down in gold this morning, Jim said, <em><strong>“We
certainly are. There are a lot of leveraged players who are now being
forced to sell. Usually when you have this kind of forced liquidation,
you’re getting closer to a bottom, maybe not the final bottom, but
certainly close to a bottom. I even bought a little bit [today].”</strong></em><br />
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With regard to the intense bearish news stories being published on gold, Jim suggested investors shouldn’t<em><strong> ”Pay [much] attention to other people. I pay attention to what’s going on…O</strong></em><em><strong>bviously with gold collapsing I know about that—but I don’t listen to other people.”</strong></em><br />
Over the last few years Jim has spoken extensively on shorting
government bonds, and more recently, the 10-year U.S. treasury yield
has <a href="http://bullmarketthinking.com/wp-content/uploads/2013/06/10-year-yield.jpg">rocketed higher</a> (with a corresponding <a href="http://bullmarketthinking.com/wp-content/uploads/2013/06/10-year-price.jpg">collapse in value</a>). When asked if now is a good time to be covering those short bond positions, he explained that, <em><strong>“I’m
grappling with that question as we speak…I’m not short
government bonds, [but rather] I’m short junk bonds on the theory that
they will suffer the most when the bond market finally breaks. The junk
bonds will go first, [along with] emerging market bonds. So I’m trying
to figure out what to do, but I am not covering my shorts [just yet].”</strong></em><br />
Commenting on the Fed’s historical ability to control the bond market, Jim said, <em><strong>“We’re
getting to that point where either one of two things are going to
happen; either central banks are going to stop all this [money
printing], or the market is going to force them to stop it. It looks
like we may be having a juncture of both…where the Fed is getting
worried…and at the same time, the market is jumping in and saying, ‘Yes,
it’s insane what you’re doing, and this has to end.’ So we may have a
healthy convergence of both. And if it’s not ending now, it’s going to
end sometime in the next year, because this cannot go on—<span style="text-decoration: underline;">it’s too insane</span>.”</strong></em><br />
When asked about the explosive riots occurring in Brazil, Jim warned to prepare for much more, in that, <em><strong>“This
is the first time in history where you’ve had all the central banks in
the world printing money at the same time. Europe, Japan, America, and
the UK, all, are frantically trying to debase their currencies…I’m
afraid that in the end, we’re all going to suffer perhaps, worse then we
ever have, with inflation, currency turmoil, and higher interest rates.
As I say, this has never happened before, it’s never been a good policy
in the long run, so I’m afraid we’re all going to suffer for the rest
of this decade from this crazy, crazy money printing.”</strong></em><br />
As a final comment to investors looking to protect themselves from these impending disasters, Jim said, <em><strong>“The </strong></em><em><strong>way to protect yourself is to own real assets…because that’s the only thing which </strong></em><em><strong>will protect you as currencies debase.” </strong></em><br />
<em><strong>“If you have money in the financial system and the financial system collapses,” </strong></em>he added,<strong></strong><em><strong> “</strong></em><em><strong>even
though you may have done nothing wrong—you may suffer because somebody
else did something wrong. So you need to be very careful about where
your assets are in the financial system, or <span style="text-decoration: underline;">have strict control over them yourself</span>, so that you’re not going to lose them.</strong></em>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-297258822861901533.post-75405698597089129112013-07-04T18:02:00.000+02:002013-07-04T18:02:32.138+02:00Eric Sprott: "Have We Lost Control Yet?"by <a href="http://sprottglobal.com/markets-at-a-glance/maag-article/?id=7997" target="_blank">Eric Sprott</a><br />
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<span style="line-height: 1.5em;">Recent comments by the Federal Reserve Chairman Ben Bernanke have shocked the world financial markets. It all started on May 22nd, 2013, at a Testimony to the US Congress Joint Economic Committee, where he first hinted at tapering the Fed’s quantitative easing (QE) program. Then, on Wednesday, June 19th, during the press conference following the FOMC meeting, the Chairman outlined the Fed’s exit strategy from QE.</span></div>
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Since the first allusion to tapering, volatility has been on the rise across the board (stocks, currencies and bonds) (Figure 1A). Moreover, the yield starved, hot money that had flown to emerging markets has been rushing for the exits, triggering significant declines in emerging market (EM) equity and bond markets (Figure 1B). Finally, the prospect of the end of monetary accommodation has triggered rapid and significant decreases (increases) in the price (yield) of longer dated Treasury bonds (also Figure 1B).</div>
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<span style="font-size: x-small;">FIGURE 1A: VOLATILITY INCREASING <br />FIGURE 1B: ASSET PRICES DECLINING</span><div style="color: #444444; font-family: sans-serif; font-size: 14px; line-height: 20px;">
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It has been clear to us for some time that the Fed was uncomfortable with the relative certainty (i.e. Bernanke Put) that has prevailed in the markets since the introduction of QE-infinity last fall. Officials definitely wanted the market to start thinking about a future without non-conventional monetary policy. However, we seriously doubt that the resulting chaos is what they had anticipated. This was evident in the Chairman’s response to a journalist’s question about the rapid rise in rates, saying the FOMC was “a little puzzled by that”.<span style="font-size: 11px; line-height: 0; position: relative; top: -0.5em; vertical-align: baseline;">1</span> The genie is really out of the bottle now.</div>
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Indeed, we believe that the recent “market appeasement rhetoric” by James Bullard and Narayana Kocherlakota (Presidents of the St. Louis and Minneapolis Federal Reserve, respectively)<span style="font-size: 11px; line-height: 0; position: relative; top: -0.5em; vertical-align: baseline;">2,3</span> are further proof that the Federal Reserve has realized it went too far and that it is now in damage control mode. (Update: William Dudley, President of the New York Fed mentioned in a June 27th speech that “<em><strong>asset purchases would continue at a higher pace for longer</strong></em>” if the economy was to grow slower than the FOMC’s estimate)<span style="font-size: 11px; line-height: 0; position: relative; top: -0.5em; vertical-align: baseline;">4</span>.</div>
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However, as the Bank for International Settlements (BIS) so elegantly put it in its most recent annual report, “[…] central banks continue to <em><strong>borrow time</strong></em> for others to act. But the cost-benefit balance is inexorably becoming less and less favourable.” To this they add: “expectation that monetary policy can solve these problems [deleveraging, financial stability] is a recipe for<em><strong>failure</strong></em>”.<span style="font-size: 11px; line-height: 0; position: relative; top: -0.5em; vertical-align: baseline;">5</span> Clearly, the Federal Reserve knows this and wants to exit their QE program. But can they really?</div>
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A large portion of the current economic growth depends on housing. However, mortgage rates are closely tied to long-term treasury rates. While housing affordability is still relatively good because of low house prices, significantly higher mortgage rates might slow the housing market. Furthermore, banks are still very cautious about lending and most borrowers have difficulty accessing credit. While gentle increases in yields are good for banks (who lend long and borrow short), meteoric increases in yields (as in Figure 1B) are damaging because they are hard to hedge and create large losses on the banks securities portfolios (mostly composed of government bonds and mortgage-backed securities) as well as mark-to-market losses on their derivatives portfolios. So, the large and rapid increases in rates the talk of tapering has engendered will damage the economic growth the Fed has been working so hard to engineer, potentially requiring even more stimulus down the line.</div>
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The US government itself would also suffer from increases in yields. In its Annual Report, the BIS shows that even a small increase in interest rates would have a large impact on the projected government debt-to-GDP ratio. As shown in Figure 2, under the CBO’s base case scenario (bottom line), the US debt-to- GDP ratio would hover around 110%, whereas a 1% increase in rates would take it to 118% in 10 years (middle line). According to the Chairman’s comments, the fiscal drag that has been partly to blame for the lackluster performance of the economy should subside going forward. But, larger debt servicing costs (because of higher rates) will put more pressure on government finances, forcing it to spend an ever increasing portion of its budget on interest payments. This will have the effect of increasing the fiscal drag, going against the hopes of the Fed.</div>
<div style="color: #444444; font-family: sans-serif; font-size: 14px; line-height: 20px;">
<span class="small-bold blue" style="color: #272a54; font-size: 0.85em; font-weight: bold;">FIGURE 2: U.S. GENERAL GOVERNMENT DEBT PROJECTIONS UNDER ALTERNATIVE SCENARIOS - AS A PERCENTAGE OF GDP</span></div>
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<span style="color: #272a54;"><span style="font-size: 12px;"><b><br /></b></span></span><span style="color: #444444;"><span style="font-size: 14px;"><img alt="maag-charts-2-june-13.gif" height="160" src="http://sprott.com/media/255781/maag-charts-2-june-13.gif" style="border: 0px; vertical-align: middle;" width="400" /></span></span><span class="small" style="color: #444444; font-size: 0.9em;"><br />Sources: IMF; OECD; US Congressional Budget Office; BIS calculations.</span></div>
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<span class="small" style="color: #444444; font-size: 0.9em;"><br /></span></div>
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To add to all this uncertainty, the situation in the Euro Zone’s periphery is far from stabilized. Following the surprise Cyprus bail-in, international bank regulators have made a push for a democratization of this alternative to outright government bail-outs of banks. This idea is quickly gaining traction amongst central planners. We recently discussed the shortcomings of the BIS’s “Template For Recapitalising Too-Big-To- Fail Banks”.<span style="font-size: 11px; line-height: 0; position: relative; top: -0.5em; vertical-align: baseline;">6</span> The BIS, again in its annual report, reiterated that “we need resolution regimes to make it possible for large, complex institutions to fail in an orderly way.” As uninsured depositors and bank bond holders realize that they do not benefit from government guarantee anymore, bank funding costs will rise and funding might dry up for peripheral European banks.</div>
<div style="color: #444444; font-family: sans-serif; font-size: 14px; line-height: 20px;">
Conclusion: at the last FOMC meeting, by prematurely announcing the timeline and the specifics of an exit from QE, Bernanke might have lost control of rates and volatility. The current US economic growth is still feeble and hinges on housing, which would be slowed down by raising rates. Banks, while better capitalized than pre-crisis, are still not lending to most borrowers and would be dearly affected by too fast increases in rates. Moreover, European woes still threaten the stability of the international financial system and the recent rush to the exit might further exacerbate funding pressures for weak European banks. Finally, the US government (amongst others) debt load, while already unsustainable, would keep on climbing if rates were to increase only by 100bps.</div>
<div style="color: #444444; font-family: sans-serif; font-size: 14px; line-height: 20px;">
The chaotic reaction by market participants and the corresponding increase in yields now risks destabilizing this very fragile equilibrium. It is yet unclear whether or not the damage control from the other Fed Presidents will put a lid on yields and market volatility, or if the damage to the Fed’s (poorly executed) exit strategy is permanent.</div>
Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-297258822861901533.post-55021629865834702862013-06-30T10:17:00.001+02:002013-06-30T10:17:22.246+02:00Collateral Transformation: The Latest, Greatest Financial Weapon Of Mass Destruction by <a href="http://www.zerohedge.com/node/475842" target="_blank">zerohedge.com</a><br />
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Back in 2002 Warren Buffet famously proclaimed that <strong>derivatives were ‘financial weapons of mass destruction’ (FWMDs). Time has proven this view to be correct.</strong> As <a href="http://www.atomcapital.co.uk/the-amphora-report/">The Amphora Report's John Butler</a>
notes, it is difficult to imagine that the US housing and general
global credit bubble of 2004-07 could have formed without the widespread
use of collateralized debt obligations (CDOs) and various other
products of early 21st century financial engineering. But to paraphrase
those who oppose gun control, <strong>"FWMDs don’t cause crises, people do."</strong>
But then who, exactly, does? And why? And can so-called 'liquidity
regulation' prevent the next crisis? To answer these questions, John
takes a closer look at proposed liquidity regulation as a response to
the growing use of <strong>'collateral transformation' </strong>(<span style="text-decoration: underline;"><a href="http://www.zerohedge.com/news/2013-05-01/desperately-seeking-112-trillion-collateral-or-how-modern-money-really-works">a topic often discussed here</a></span>)<strong>: the latest, greatest FWMD in the arsenal.</strong><br />
<br />
<em>Submitted by John Butler of <a href="http://www.atomcapital.co.uk/the-amphora-report/">The Amphora Report</a>,</em><br />
<br />
Back in 2006, as the debate was raging whether or not the US had a
mortgage credit and housing bubble, I had an ongoing, related exchange
with the Chief US Economist of a large US investment bank. It had to do
with what is now commonly referred to as the ‘shadow banking system’.<br />
<strong>While the debate was somewhat arcane in its specifics, it
boiled down to whether the additional financial market liquidity created
through the use of securities repo and other forms of collateralized
lending were destabilizing the financial system.</strong><br />
<a name='more'></a><br />
<br />
The Chief US Economist had argued that, because US monetary
aggregates were not growing at a historically elevated rate, the Fed was
not adding liquidity fuel to the house price inflation fire and that
monetary policy was, therefore, appropriate. (Indeed, he denied that the
rapid house price inflation at the time was cause for serious concern
in the first place.) I countered by arguing that these other forms of
liquidity (eg. securities repo) should be included and that, if they
were, then in fact the growth of broad liquidity was dangerously high
and almost certainly was contributing to the credit+housing bubble.<br />
We never resolved the debate. My parting shot was something along the
lines of, “If the financial markets treat something as a money
substitute—that is, if the incremental credit spread for the collateral
providing the marginal liquidity approaches zero— then we should treat
it as a form of de facto money.”<br />
He dismissed this argument although I’m not sure he really understood
it; at least not until there was a run on money-market funds in the
wake of the Lehman Brothers bankruptcy in November 2008.<br />
<br />
<strong>It was
at that point that economic officials at the Fed and elsewhere finally
came to realize how the shadow banking system had grown so large that it
was impossible to contain the incipient run on money-market funds and,
by extension, the financial system</strong> generally without providing explicit government guarantees, which the authorities subsequently did.<br />
<br />
This particular Chief US Economist had previously worked at the Fed.
This was and remains true, in fact, of a majority of senior US bank
economists. Indeed, in addition to a PhD from one of the premiere US
economics departments, a tour of duty at the Fed, as it were, has
traditionally been the most important qualification for this role.<br />
<br />
Trained as most of them were, in the same economics departments and
at the same institution, the Fed, it should perhaps be no surprise that
neither the Fed, nor senior economists at the bulge-bracket banks, nor
the US economic academic and policy mainstream generally predicted the
global financial crisis. As the discussion above illuminates, this is
because <strong>they failed to recognize the importance of the shadow
banking system. But how could they? As neo-Keynesian economists, they
didn’t—and still don’t—have a coherent theory of money and credit.</strong>[1]<br />
<h4>
FROM BLISSFUL IGNORANCE TO PARANOIA</h4>
Time marches on and with lessons learned harshly comes a fresh
resolve to somehow get ahead of whatever might cause the next financial
crisis. For all the complacent talk about how the “recovery is on track”
and “there has been much economic deleveraging” and “the banks are
again well-capitalized,” the truth behind the scenes is that central
bankers and other economic officials the world over remain, in a word,
terrified. Of what, you ask? Of the shadow banking system that, I
believe, they still fail to properly understand.<br />
Two examples are provided by a recent speech given by Fed Governor
Jeremy Stein and a report produced by the Bank of International
Settlements (BIS), the ‘central bank of central banks’ that plays an
important role in determining and harmonising bank regulatory practices
internationally.<br />The BIS report, “Asset encumberance, financial
reform and the demand for collateral assets,” was prepared by a “Working
Group established by the Committee on the Global Financial System,”
which happens to be chaired by none other than NYFed President William
Dudley, former Chief US Economist for Goldman Sachs. (No, he is not the
Chief US Economist referred to earlier in this report, although as
explained above these guys are all substitutes for one another in any
case.) [2]<br />
In the preface, Mr Dudley presents the report’s key findings, in particular <strong>“evidence
of increased reliance by banks on collateralized funding markets,” and
that we should expect “[t]emporary supply-demand imbalances,” which is
central banker code for liquidity crises requiring action by central
banks.</strong><br />
<br />
He also makes specific reference to ‘collateral transformation’: when
banks swap collateral with each other. This practice, he notes, “will
mitigate collateral scarcity.” But it will also “likely come at the cost
of increased interconnectedness, procyclicality and financial system
opacity as well as higher operational, funding and rollover risks.”<br />
<br />
Why should this be so?<br />
<strong>Well, if interbank lending is
increasingly collateralized by banks’ highest quality assets, then
unsecured creditors, including depositors, are being de facto
subordinated in the capital structure and are highly likely to ‘run’ at
the first signs of trouble.</strong> And if banks are holding similar
types of collateral that suddenly fall in value, then they can all
become subject to a run at the same time, for the same reason.<br />
<br />
Collateral transformation is thus a potentially powerful FWMD. But
don’t worry, the BIS and other regulators are on the case and doing the
worrying. As a belated response to the financial crisis that they all
failed to foresee, the latest, greatest trend in financial system
oversight is ‘liquidity regulation’. Fed Governor Jeremy Stein explains
the need for it thus:<br />
<blockquote>
<div class="quote_start">
</div>
<div class="quote_end">
</div>
[A]s the financial crisis made painfully clear, the business of
liquidity provision inevitably exposes financial intermediaries to
various forms of run risk. That is, in response to adverse events, their
fragile funding structures, together with the binding liquidity
commitments they have made, can result in rapid outflows that, absent
central bank intervention, lead banks to fire-sell illiquid assets or,
in a more severe case, to fail altogether. And fire sales and bank
failures–and the accompanying contractions in credit availability–can
have spillover effects to other financial institutions and to the
economy as a whole. Thus, while banks will naturally hold buffer stocks
of liquid assets to handle unanticipated outflows, they may not hold
enough because, although they bear all the costs of this buffer
stocking, they do not capture all of the social benefits, in terms of
enhanced financial stability and lower costs to taxpayers in the event
of failure. It is this externality that creates a role for policy. [3]<br />
</blockquote>
Ah yes, wouldn’t you know it, that ubiquitous, iniquitous enigma:
market failure. Regulators have never found a market that doesn’t fail
in some way, hence the crucial need for regulators to prevent the next
failure or, at a minimum, to sort out the subsequent mess. In the
present instance, so the thinking behind liquidity regulation goes,
prior to 2008 the regulators were overly focused on capital adequacy
rather than liquidity and, therefore, missed the vastly expanded role
played by securitised collateral in the international shadow banking
system. In other words, the regulators now realise, as I was arguing
back in the mid-2000s, that the vast growth in shadow banking liquidity
placed the stability of the financial system at risk in the event that
there was a drop in securitised collateral values.<br />
In 2007, house prices began to decline, taking collateral values with
them and sucking much of the additional, collateral-based liquidity
right back out of the financial system, unleashing a de facto wave of
monetary+credit deflation, resulting in the subsequent financial crisis.
But none of this was caused by ‘market failure’, as Governor Stein
contends. Rather, there is another, simpler explanation for why banks
were insufficiently provisioned against the risk of declining collateral
values, yet it is not one that the regulators much like to hear,
namely, that their own policies were at fault.<br />
In one of my first Amphora Reports back in 2010 I discussed in detail
the modern history of financial crises, beginning with the 1980s and
concluding with 2008. A pattern rapidly becomes apparent:<br />
<blockquote>
<div class="quote_start">
</div>
<div class="quote_end">
</div>
[Newton’s] third law of universal motion was that for each and every
action there is an equal and opposite reaction. While applicable to the
natural world, it does not hold with respect to the actions of financial
markets and the subsequent reactions of central banks and other
regulators. Indeed, the reactions of regulators are consistently
disproportionate to the actions of financial markets. In sinister
dialectical fashion, the powers assumed and mistakes made by
policymakers tend to grow with each crisis, ?thereby ensuring that
future crises become progressively more severe...<br />
<br />
[W]as the Fed’s policy reaction to the 1987 crash proportionate or
even appropriate? Was it “an equal but opposite reaction” which merely
temporarily stabilised financial markets or did it, in fact, implicitly
expand the Fed’s regulatory role to managing equity prices? Indeed, one
could argue that this was merely the first of a series of progressively
larger “Greenspan Puts” which the Fed would provide to the financial
markets during the 18 years that the so-called “Maestro” was in charge
of monetary policy and, let’s not forget, bank regulation...<br />
<br />
By the late 1980s, a huge portion of the S&L industry was
insolvent. The recession of 1990-91, made a bad situation worse. FSLIC
funds were rapidly depleted. But a federal guarantee is supposed to be
just that, a guarantee, so Congress put together a bailout package for
the industry. A new federal agency, the Resolution Trust Corporation
(RTC), issued bonds fully backed by the US Treasury and used the
proceeds to make insolvent S&L depositors whole...<br />
<br />
In retrospect, the entire S&L debacle, from its origins in
regulatory changes and government guarantees, through the risky lending
boom, bust, credit crunch and fiscal and monetary bailout can be seen as
a precursor to the far larger global credit bubble and bust of
2003-2008: Just replace the S&Ls with Fannie/Freddie and the
international shadow banking system. But there is no need to change the
massive moral hazard perpetrated by incompetent government regulators,
including of course the Fed, and the reckless financial firms who played
essentially the same role in both episodes.[4]<br />
</blockquote>
<strong>Notwithstanding this prominent pattern of market-distorting
interest-rate manipulation, guarantees, subsidies and occasional
bailouts, fostering the growth of reckless lending and other forms of
moral hazard, the regulators continue their self-serving search for the
‘silver bullet’ to defend against the next ‘market failure’ which, if
diagnosed correctly as I do so above is, in fact, regulatory failure.</strong><br />
Were there no moral hazard of guarantees, explicit or implicit, in
the system all these years, the shadow banking system could never have
grown into the regulatory nightmare it has now become and liquidity
regulation would be a non-issue. Poorly capitalised banks would have
failed from time to time but, absent the massive systemic linkages that
such guarantees have enabled—encouraged even—these failures would have
been contained within a more dispersed and better capitalised system.<br />
As it stands, however, the regulators’ modus operandi remains
unchanged. They continue to deal with the unintended consequences of
‘misregulation’ with more misregulation, thereby ensuring that yet more
unintended consequences lurk in the future.<br />
<h4>
MIGHT COLLATERAL TRANSFORMATION BE THE CRUX OF THE NEXT CRISIS?</h4>
In his speech, Governor Stein also briefly mentions collateral
transformation, when poor quality collateral is asset-swapped for high
quality collateral. Naturally this is not done 1:1 but rather the low
quality collateral must be valued commersurately higher. In certain
respects these transactions are similar to traditional asset swaps that
trade fixed for floating coupons and allow financial and non-financial
businesses alike to manage interest rate and credit risk with greater
flexibility. But in the case of collateral transformation, what is being
swapped is the principal and the credit rating it represents, and one
purpose of these swaps is to meet financial regulatory requirements for
capital and, in future, liquidity.<br />
<br />
<strong>An obvious consequence of such collateral transformation is
that it increases rather than decreases the linkages in the financial
system and thus in effect replaces firm-specific, idiosyncratic risk
with systemic risk</strong>, exactly the opposite of what the regulators
claim they are trying to do by increasing bank regulatory capital
ratios. Liquidity regulation is an attempt to address this accelerating
trend and the growing systemic risks it implies.<br />
Those financial institutions engaging in the practice probably don’t
see things this way. From the perspective of any one institution
swapping collateral in order to meet changing regulatory requirements,
they see it as necessary and prudent risk management. But within a
closed system, if most actors are behaving in the same way, then the net
risk is not, in fact, reduced. <strong>The perception that it is,
however, can be dangerous and can also contribute to banks unwittingly
underprovisioning liquidity and undercapitalizing against risk.</strong><br />
<br />
Viewed system-wide, therefore, collateral transformation really just
represents a form of financial alchemy rather than financial
engineering. It adds no value in aggregate. It might even detract from
such value by rendering opaque risks that would otherwise be more
immediately apparent. So I do understand the regulators’ concerns with
the practice. I don’t, however, subscribe to their proposed self-serving
remedies for what they perceive as just another form of market failure.<br />
<h4>
PLAGARISED COPIES OF AN OLD PLAYBOOK</h4>
Already plagued by the ‘Too Big to Fail’ (TBTF) problem back in 2008,
the regulators have now succeeded in creating a new, even more
dangerous situation I characterise as MAFID, or <strong>‘Mutual Assured FInancial Destruction.’</strong>
Because all banks are swapping and therefore holding essentially the
same collateral, there is now zero diversification or dispersion of
financial system risk. It is as if there is one massive global bank with
thousands of branches around the world, with one capital base, one
liquidity ratio and one risk-management department. If any one branch of
this bank fails, the resulting margin call will cascade via collateral
transformation through the other branches and into the holding company
at the centre, taking down the entire global financial system.<br />
Am I exaggerating here? Well, if Governor Stein and his central
banking colleagues in the US, at the BIS and around the world are to be
believed, we shouldn’t really worry because, while capital regulation
didn’t prevent 2008, liquidity regulation will prevent the scenario
described above. All that needs to happen is for the regulators to set
the liquidity requirements at the right level and, voila, financial
crises will be a thing of the past: never mind that setting interest
rates and setting capital requirements didn’t work out so well. Setting
liquidity requirements is the silver bullet that will do the trick.<br />
Sarcasm aside, it should be clear that all that is happening here is
that the regulators are expanding their role yet again, thereby further
shrinking the role that the markets can play in allocating savings,
capital and liquidity from where they are relatively inefficiently
utilized to where they are relatively more so. This concept of free
market allocation of capital is a key characteristic of a theoretical
economic system known as ‘capitalism’. But capitalism cannot function
properly where capital flows are severely distorted by regulators. <strong>Resources will be chronically misallocated, resulting in a low or possibly even negative potential rate of economic growth.</strong><br />
The regulators don’t see it that way of course. Everywhere they look
they see market failure. And because Governor Stein and his fellow
regulators take this market failure as a given, rather than seeking to
understand properly how past regulatory actions have severely distorted
perceptions of risk and encouraged moral hazard, they are naturally
drawn to regulatory ‘solutions’ that are really just plagiarised copies
of an old playbook.<strong> What is that definition of insanity again, about doing the same thing over and over but expecting different results?</strong><br />
<br />
<em>[1] Neo-Keynesians will deny this, claiming that their models
take money and credit into account. But they do so only to a very
limited extent, with financial crises relegated to mere aberrations in
the data. The Austrian economic school of Menger, Mises, Hayek, etc, by
contrast, has a comprehensive and consistent theory of money and credit
that can explain and even predict financial crises.</em><br /><em>[2] The entire paper can be found at the link <a href="http://www.bis.org/publ/cgfs49.pdf">here</a> (PDF).</em><br /><em>[3] This entire speech can be found at the link <a href="http://www.federalreserve.gov/newsevents/speech/stein20130419a.htm">here</a>.</em><br /><em>[4] FINANCIAL CRISES AND NEWTON’S THIRD LAW, Amphora Report Vol. 1 (April 2010). The link is <a href="http://www.financialsense.com/contributors/john-butler-john-boylan/financial-crises-and-newtons-third-law">here</a>.</em>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-297258822861901533.post-22286482252690856132013-06-30T10:10:00.000+02:002013-06-30T10:10:52.009+02:00What’s So Scary About Deflation? by <a href="http://mises.org/daily/6459/Whats-So-Scary-About-Deflation" target="_blank">Frank Hollenbeck</a><br />
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<b>When it comes to deflation, mainstream economics becomes not the science
of common sense, but the science of nonsense.</b> Most economists today are
quick to
say, “a little inflation is a good thing,” and they fear deflation. Of
course, in their personal lives, these same economists hunt the
newspapers for the
latest sales.<br />
<br />
<b>
</b><b>
The person who epitomizes this fear of deflation best is Ben Bernanke,
chairman of the Federal Reserve. His interpretation of the Great
Depression has
greatly biased his view against deflation.</b> <br />
<a name='more'></a>It is true that the Great
Depression and deflation went hand in hand in some countries; but, we
must be careful
to distinguish between association and causation, and to correctly
assess the direction of causation. A recent study by Atkeson and Kehoe
spanning a period
of 180 years for 17 countres found no relationship between deflation and
depressions. The study actually found a greater number of episodes of
depression
with inflation than with deflation. Over this period, 65 out of 73
deflation episodes had no depression, and 21 out of 29 depressions had
no deflation.<br />
<br />
<b>The main argument against deflation is that when prices are falling,
consumers will postpone their purchases to take advantage of even lower
prices in the
future.</b> Of course, this is supposed to reduce current demand, which will
cause prices to fall even further, and so on, and so on, until we have a
deflation-depression spiral of the economy. The direction of causation
is clear: deflation causes depressions. You can find this argument in
almost all
introductory economics textbooks.<br />
<br />
<b> The St. Louis Fed recently wrote: </b><br />
<b> </b><i>“While the idea of lower prices may sound attractive, deflation is a
real concern for several reasons. Deflation discourages spending and
investment
because consumers, expecting prices to fall further, delay purchases,
preferring instead to save and wait for even lower prices. Decreased
spending, in
turn, lowers company sales and profits, which eventually increases
unemployment.” </i><br />
<br />
<b>
</b><b>
There are several problems with this argument.</b><br />
<br />
<i><b>The first is that,
regardless of how low prices of consumer goods are expected to fall,
people will always consume some quantity in the present </b>and in order to
do so, they therefore need to spend in the present on investment to
ensure the flow of consumer goods into the future. We
can see that many high technology products have had brisk demand despite
living in a deflationary environment. Apple has been able to sell its
latest
version of the iPhone, although most people expect the same phone to be
much cheaper in six months. </i><br />
<br />
<i>The second mistake with this argument is that it assumes that we base
our expectations only on the past. Falling prices makes us anticipate
prices to
continue to fall. Of course, our expectations are based on a multitude
of factors, of which past prices is just one. I am sure that the
economists at the
Fed are surprised that we did not react to lower interest rates as we
did after the dot com bubble of 2001. Human actions simply cannot be
modeled as you would the reactions of lab rats in a biology
experiment. </i><br />
<br />
<i>A third mistake is that if we are consuming less, we must be saving
more. Investment must therefore be higher. Therefore increased saving
that can lead to
deflation does not reduce aggregate demand but simply alters the
composition of demand. The demand for consumption goods will decline, to
be replaced with
demand for capital goods. If anything, this will lead to growth and more
consumption goods in the future, since the economy has more capital to
work with. </i><br />
<br />
<b>Growth lowers prices: that is a good thing.</b> The period of the greatest
growth in the U.S. during the nineteenth century, from 1820 to 1850 and
from
1865 to 1900, was associated with significant deflation. In those two
cases, prices were cut in half.<br />
<br />
<b>Let me explain this point with a very uncomplicated example.</b> Suppose you
have 10 pencils and $10. What is the price of a pencil? It can’t be $2
since we
would have pencils that remain unsold, so the price would tend to fall.
It can’t be 50 cents since people would have money and nothing to buy.
Prices
would be bid up. This would lead to equilibrium where pencils would be
sold for $1 each. Now suppose we double the amount of pencils, so we
have 20 pencils
and $10. The price will fall from $1 to 50 cents. Other things being
equal, including the stock of money, the price will be cut in half,
falling prices here is very positive since our dollars now give us more
goods and services. It reflects
society’s ability to push out the bounds of scarcity. We can never
conquer scarcity, or all prices would be zero, but falling prices shows
that we are winning this crucial battle. More goods and services for all
is a good thing and deflation reflects this additional abundance.<br />
<br />
<b>Now let’s talk about the deflation which causes such fears in so many
economists. </b>Suppose the production cost of a pencil is 80 cents. The
rate of return is
25 percent. Now suppose people hoard $5 and stuff money in their
mattress instead of saving it. The price of a pencil will again be cut
in half, falling from $1 to 50 cents. If input prices
also fall to 40 cents per pencil then there is no problem since the rate
of return is still 25 percent. What economists fear is that input
prices are sticky, and
don’t adjust to output prices, so that firms produce at 80 cents and
sell at 50 cents. This leads to bankruptcies, unemployment, and falling
output, so now we may only be producing 8 pencils, which causes more
hoarding, more bankruptcies, and so on, and so on. You get the picture.
To avoid this,
most economists advocate that the government print $5, keeping the price
of pencils steady at $1, and avoiding a deflationary-depression spiral
in the
economy.<br />
<br />
Of course, there are also some major problems with this little story. <b>
There is always a certain amount of stickiness in both input and output
prices.</b> You
don’t want to have to constantly renegotiate your salary, nor do you
want to constantly check on the hourly ticket price of the latest movie.
So what is
important is the lag existing between changes in output prices and input
prices. If the lag is not long, then the policy solution described
above may not
be necessary and counterproductive. Also, entrepreneurs survive by
forecasting output prices and then bidding for the inputs to be able to
make a profit.
This would suggest that the lag is probably relatively short.<br />
<br />
<b>Also, the printing of money is distortive.</b> When the government adds $5
to the economy, it is not neutral. It initially benefits those that
receive the
money first, the government and banks, and penalizes the late receivers
of the money, the wage earners and the poor. The printing of money and
its
associated price effect is the reverse of Robin Hood, taking from the
poor to give to the rich. These early receivers, the rich, will spend
the money in a
certain way, altering relative prices in the economy.<br />
<br />
<b>Now what happens when the economy improves and people reverse their
hoarding?</b> We now have 10 pencils and $15. Other things being equal,
prices will rise from $1 to $1.50, unless the
government retires the $5 it put into the system. If they do, this will
create another round of altered relative prices. The medicine is likely
to be
worse than the disease.<br />
<br />
In a multiproduct world, <b>inflation (including asset prices) from
excessive credit growth causes changes in relative prices that induces
unsustainable
investments, like housing from 2001-2007. </b>Deflation, in the bust phase,
is a partial realignment of these relative prices closer to what society
really
wants to be produced. The printing of money simply interferes with this
essential clearing process. The real solution is to end fractional
reserve banking and central banking.<br />
<br />
<b>Inflation is much worse than deflation because it robs wage earners and
the poor. </b>Central banks are the primary cause of inflation and are the
main
reason for the growth of income inequalities, as the rich get richer and
the middle class sinks toward poverty. This income trend has been
self-evident and
growing since the demise of the Bretton Woods system in 1971 and its
replacement with fiat currencies. Central bank power depends on the
ability to generate inflation.<br />
<br />
<b>This is why central banks have been so generous supporting economic
research in so many academic institutions that serve to theoretically
justify the
central bank’s current inflationary policies.</b> The common fallacy of “a
little
inflation being good” has been expounded by the media and economists for
a reason. Inflation is theft as you sleep, since it robs the value of
the dollars
in your wallet. Two-percent inflation over 35 years reduces the value of
money in your pocket by 50 percent. If anything, evil has a new face;
it is called a central bank.<br />
<br />
<b>Many times deflation follows a period of central bank inflation.</b>
Deflation is part of the deleveraging process that is necessary
following such an excessive
policy by the central bank. As Austrian economists have always said,
“fear the boom, not the bust.” Delaying the deflation by extending the
bubble or creating new bubbles by printing more
money only delays the adjustment making it much more painful.<br />
<br />
The real solution is to end fractional reserve banking and central
banking. <b>A world without fractional reserve banking and central banks
would be a world
of gentle deflation, which should be hailed as indicative of one of
mankind’s greatest achievements: the raising of living standards for
all.
</b>Unknownnoreply@blogger.com0tag:blogger.com,1999:blog-297258822861901533.post-44195157834147596062013-06-30T10:00:00.002+02:002013-06-30T10:00:39.249+02:00Henry Smyth: Is this the Rothschild Moment for Gold?`<div style="text-align: left;">
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"Interest is the difference in the
valuation of present goods and future goods; it is the discount in the
valuation of future goods as against that of present goods." </div>
<div style="text-align: left;">
<span style="font-size: 1em; line-height: 1.3em;">Ludwig von Mises</span></div>
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“Planning for Freedom”</div>
<br />
<em>We’ve all been watching the selloff in the global gold market.
Armies of chicken littles are in a frenzy due to suggestions that the
Fed may be ending its quantitative easing, so I thought this is a good
time to check in with my friend Henry Smyth of <a href="http://www.granvillecooper.com/asset_man.htm">Granville Cooper Asset Management Ltd. (GCAM)</a>.
Henry is a former Coutts & Co. banker and a very astute observer of
the global financial markets. We spoke last week in New York. -- Chris</em><br />
<br />
<span style="font-size: 1em; line-height: 1.3em;">RCW: Henry, the
gold market has been taking a beating in the past few months. What do
you see as the drivers of the gold market today? </span><br />
<a name='more'></a><br />
<br />
<span style="font-size: 1em; line-height: 1.3em;">HS: Since $1525
support broke gold has been in the throes of stop loss selling. Gold is
now over 2% below its 200 day moving average. Physical supply is
extremely tight. The precious metals analysts where I trade in Zurich
have very good contacts among the refiners. They tell me the order
backlog is over four weeks now versus four days in a normal market.
Same for Shanghai and Mumbai where you see sharply increasing demand as
US Dollar gold prices fall and gold premiums rise. Here in the United
States the US Mint cannot keep up with demand for gold and silver
eagles. </span><br />
<br />
<span style="font-size: 1em; line-height: 1.3em;">RCW: So is this
correction a normal reaction to the Fed? Or has the fact of QE
magnified the volatility of gold (and everything else)?</span><br />
<br />
<span style="font-size: 1em; line-height: 1.3em;">HS: The shorts in
the market are running out of short fuel. The decline in gold has been
going on since late 2011 and is very long in the tooth. Sentiment
against gold is virtually 100% right now among Western gold analysts.
This is a Rothschild moment.</span><br />
<br />
<span style="font-size: 1em; line-height: 1.3em;">RCW: This is a reference to the famous dictum by Baron Rothschild: “Buy when there's blood on the street?”</span><br />
<br />
<span style="font-size: 1em; line-height: 1.3em;">HS: It is. There
seems to be an expectation that the end of QE will be bullish for the
Dollar and therefore bearish for gold. My view is the end of QE will be
bearish for all those asset classes which require QE for life support
and/or do not do well in a rising interest rate environment. That would
include the bulk of US equity and fixed income markets. </span><br />
<br />
<span style="font-size: 1em; line-height: 1.3em;">RCW: So then I take it you currently are a buyer of gold?</span><br />
<br />
<span style="font-size: 1em; line-height: 1.3em;">HS: Gold is in a
primary uptrend and has been since 2001. The long gold strategy of the
Granville Cooper Gold Fund II Ltd. began in 2003. We went through a
correction in 2004-5 and another in 2008-09. The current correction is
longer in duration but similar in percentage change to the previous
corrections. Our investment mandate is long term outperformance against
the US Dollar gold price. We use corrections to build positions for the
resumption of the primary trend. We have buy stops out there now.</span><br />
<br />
<span style="font-size: 1em; line-height: 1.3em;">RCW: So given the degree of government manipulation of the financial markets, how do you get a clear view of the gold market? </span><br />
<br />
<span style="font-size: 1em; line-height: 1.3em;">HS: Gold began its
uptrend prior to the onset of the first QE. Fed policy can accelerate
or retard, but not alter, the primary uptrend in gold. Gold is a global
asset class but is viewed in a very provincial way in the United States.
We are seeing a tectonic shift in global asset allocation as gold
moves from West to East. This is far more significant than the West
appreciates. In my view, this shift is it is akin to the movement of
gold from Europe to the US following the 1933 devaluation of the dollar
via gold by the Roosevelt administration and the promulgation of the
Nuremburg Laws in Germany in 1935.</span><br />
<br />
<span style="font-size: 1em; line-height: 1.3em;">RCW: That is a
pretty bold statement. The real driver of wealth migration from Europe
to the US was two world wars. How do you see China leveraging their
accumulation of gold to build long-term advantage for the Chinese
economy? </span><br />
<br />
<span style="font-size: 1em; line-height: 1.3em;">HS: It appears that
China has since the turn of the century had a state policy of
encouraging gold ownership by its citizens. Given this policy and the
evolution of their bilateral trading and clearing agreements and
systems, it is reasonable to assume the Chinese have global ambitions
for their currency, and that their gold holdings will be a significant
support to the international acceptance of that currency. A reserve
currency is the ultimate projection of state power. I think the Chinese
get that.</span><br />
<br />
<span style="font-size: 1em; line-height: 1.3em;">RCW: Thanks Henry. Hopefully somebody in Washington will take heed of your analysis. </span>Unknownnoreply@blogger.com0