The Downside of Debt

by Bill Bonner


Cristina Fernandez de Kirchner, president of Argentina, will never be remembered as a great economist. Nor will she win any awards for ‘accuracy in government reporting.’ Au contraire, under her leadership, the numbers used by government economists in Argentina have parted company with the facts completely. They are not even on speaking terms. Still, Ms. Fernandez deserves credit. At least she is honest about it.

The Argentine president visited the US in the autumn of 2012. She was invited to speak at Harvard and Georgetown universities. Students took advantage of the opportunity to ask her some questions, notably about the funny numbers Argentina uses to report its inflation. Her bureaucrats put the consumer price index — the rate at which prices increase — at less than 10%. Independent analysts and housewives know it is a lie. Prices are rising at about 25% per year.

At a press conference, Cristina turned the tables on her accusers:

“Really, do you think consumer prices are only going up at a 2% rate in the US?”

This Is A Moment In Time That’s Never Been Seen Before

by kingworldnews.com

“Greece is a serial bailout, restructuring, can-kick, and I guess this is going to continue as long as the riots don’t get worse. Maybe eventually Greece will get ejected from the euro. The question (in Europe) is, is Draghi going to get serious about the OMT or not?”

“My suspicion is he is going to. They are going to use the central bank there to make sure the euro doesn’t fracture, in the same way Greenspan and Bernanke have used the printing press to make sure that the United States financial markets don’t collapse.

I suspect Europe will muddle through as long as Draghi is willing to keep buying the government debt and keep the whole process moving.
“The (US) fiscal cliff, near as I can tell, is mostly just a boatload of tax hikes and some proposed spending cuts. But at the end of the day, there is a mood of class warfare in the country which is being fomented by the Democratic Party.
Part of the reason for the disparity of wealth in the country is because the policies of the Federal Reserve have helped eviscerate the middle class, both through losing money in bubbles and inflation, and the misallocation of capital and the ensuing destruction of jobs. So the Fed’s policies have hammered the middle class.

Carlo Ponzi, Alias Uncle Sam

by  Gary North

Carlo "Charles" Ponzi was a con man who was the Bernie Madoff of his era. For two years, 1918 to 1920, he sold an impossible dream: a scheme to earn investors 50% profit in 45 days. He paid off old investors with money generated from new investors. The scheme has been imitated ever since.

Every Ponzi scheme involves five elements:
1. A promise of statistically impossible high returns
2. An investment story that makes no sense economically
3. Greedy investors who want something for nothing
4. A willing suspension of disbelief by investors
5. Investors' angry rejection of exposures by investigators

Strangely, most Ponzi schemes involve a sixth element: the unwillingness of the con man to quit and flee when he still can. Bernie Madoff is the supreme example. But Ponzi himself established the tradition.

The Die Is Cast And Only One Question Remains

by kingworldnews.com

“The Rubicon is a river in Italy that played a major role in the history of Rome and Western Civilization. Prior to Julius Caesar, it was considered an inviolable boundary for a general commanding an army. To cross it with your army was considered an act of treason against the State.

Caesar did just that in 49 B.C. Caesar left Rome to be come the governor of Cisalpine Gaul (northern Italy), Illyricum (southeastern Europe) and Transalpine Gaul (southern France) in 58 B.C.. Actually, he unsuccessfully fled Rome to avoid his mounting debts (he liked to gamble and was a bon vivant). He was only allowed to continue to Gaul after his wealthy friend Crassus paid and guaranteed the debts for him. His conquest of all of Gaul and the details of his military genius are well known, particularly since he wrote it all down in the form of a partial autobiography.

Ambitious men were not welcome to the old Roman order. The Romans had an unpleasant experience with a dictator that led to their founding, and it was in their DNA to despise such men. Caesar was a major threat....

Jim Rogers Economic Collapse Martial Law Alex Jones

How Central Bank Policy Impacts Asset Prices Part 5: How Far Can They Go?

by Tyler Durden  source : www.zerohedge.com
With the unlimited asset purchase announcements by the Fed and ECB recently, the limits of balance sheet expansion will be put to the test. The current levels would have been seen as inconceivable a mere few years ago and now it seems business-as-usual as investors have become heuristically biased away from the remarkable growth. The problem is - central banks are missing inflation targets and credit growth is still declining - need moar easing, forget the consequences.

Via SocGen:

Balance sheet expansion resumes in advanced countries
Following the unlimited asset purchases announcements by the ECB and the Fed, the limits of balance sheet expansion will be put to the test once again.

Let the Markets Clear!

by Ron Paul - Daily Paul

French businessman and economist Jean-Baptiste Say is credited with identifying the fundamental economic principle that aggregate demand for goods in an economy will equal the aggregate supply of goods when markets are permitted to operate. Or in Say’s words, “products are paid for with products.”

English classical economist David Ricardo, among others, more fully developed this principle into what has become known as “Say’s Law.” Say’s Law, according to Ricardo, leads us to understand that market equilibrium for goods is constant. This simply means that markets, when left alone by government planners or other fraudulent actors, inexorably tend toward an “equilibrium price” which eventually balances supply and demand for any particular good. Thus markets will clearthemselves of any surpluses or shortages in the form of excess supply and demand.

The Broken Window Fallacy

This short video explains one of the most persistent economic fallacies of our day.

Made by Sam Selikoff and Luke Bessey.
See Luke's page: http://www.youtube.com/lukebessey
See Sam's blog: http://lonelyliberal.tumblr.com/

Against the Hurri-Keynesians

by Mark Thornton

It seems that we may never rid ourselves of the broken-window fallacy.
Hurricane Katrina certainly did not stop economists from proclaiming the silver lining of natural disasters. On September 9, 2005, Labor Secretary Elaine Chao told USA Today that demand could create a labor shortage that could push up wage rates and that "We're going to see a tremendous boom in construction." On December 3rd, 2005, Nigel Gault, chief domestic economist at Global Insight, said, "We are now at the point where Hurricane Katrina's effects are adding to job creation rather than detracting from it."
And it's not only that disasters just have a silver lining: economists have long believed that natural disasters and wars are actually good for the economy! Until recently they have not made any attempt to empirically test their views. However, in 2002 Mark Skidmore and Hideki Toya published a paper where they found a positive correlation between disasters and human capital, productivity, and GDP growth.

How Central Bank Policy Impacts Asset Prices Part 2: Bonds

by Tyler Durden

The Fed sees the need to reduce interest rates as it takes over the US Treasury and MBS markets; but the ECB's actions are more aimed at reducing divergences between peripheral nations and the core. As SocGen notes, it remains unclear how and when the Fed would exit this situation and in Europe, bond market volatility remains notably elevated relative to the US and Japan as policy action absent a political, fiscal, and banking union remains considerably less potent.

Via SocGen:

Fed action pushes rates to record lows

The Fed bought around $2tn of securities since November 2008, pushing rates to historical lows (US treasuries becoming popular safe havens also contributed to lowering rates).



It remains unclear how and when the Fed would exit this situation. Operation Twist expires at year-end and any extension seems to be put on hold until after the presidential elections.

A potential Romney victory could bring an end to low QE rates in 2014 (when Mr Bernanke’s term expires).

As a result of the very low rate environment, the US equity risk premium is currently extremely high (6.3% in October 2012).

Hurdles in transmission of ECB monetary policy

Praxeology and Liberalism

[ Human Action (1949)]

Liberalism, in its 19th-century sense, is a political doctrine. It is not a theory, but an application of the theories developed by praxeology and especially by economics to definite problems of human action within society.
As a political doctrine liberalism is not neutral with regard to values and the ultimate ends sought by action. It assumes that all men or at least the majority of people are intent upon attaining certain goals. It gives them information about the means suitable to the realization of their plans. The champions of liberal doctrines are fully aware of the fact that their teachings are valid only for people who are committed to these valuational principles.
While praxeology, and therefore economics too, uses the terms happiness and removal of uneasiness in a purely formal sense, liberalism attaches to them a concrete meaning. It presupposes that people prefer life to death, health to sickness, nourishment to starvation, abundance to poverty. It teaches man how to act in accordance with these valuations.
It is customary to call these concerns materialistic and to charge liberalism with an alleged crude materialism and a neglect of the "higher" and "nobler" pursuits of mankind. Man does not live by bread alone, say the critics, and they disparage the meanness and despicable baseness of the utilitarian philosophy. However, these passionate diatribes are wrong because they badly distort the teachings of liberalism.

Your Vote Still Doesn’t Matter

By Douglas French

I hit a nerve whenever I write about voting and democracy.

Point out the sheer lunacy of the civic religion and a certain group of readers will blow their stacks, sending back long emails stuffed with long words, calling me things like “intellectually vacuous” and insisting I’m full of “self-aggrandizement.”

Such is the case with an email from Laissez Faire Today reader B.R., who says he doesn’t normally like to start his criticisms with name-calling but believes the idea of not voting is “so astounding” that it “requires an equally strong tactic to stop its momentum in its tracks.”

I hate to break it to B.R., but the nonvoting train left the station a long time ago. For the last 50 years, 40-50% of eligible voters have chosen to stay home on presidential Election Days. President Obama’s campaign in 2008 actually pumped life into the election process.

Simplicity: Part 2

Presentation to the Cambridge House California Investment Conference
Indian Wells, CA

Simplicity: Part 1

Presentation to the Cambridge House California Investment Conference
Indian Wells, CA

The Tragedy of the European Union and How to Resolve It

 

 by George Soros New York Review of Books

Preface: In a fast-moving situation, significant changes have occurred since this article went to press. On August 1, as I write below, Bundesbank President Jens Weidmann objected to the assertion by Mario Draghi, the president of the European Central Bank, that the ECB will “do whatever it takes to preserve the euro as a stable currency.” Weidmann emphasized the statutory limitation on the powers of the ECB. Since this article was published, however, it has become clear that Chancellor Merkel has sided with Draghi, leaving Weidmann isolated on the board of the ECB.
This was a game-changing event. It committed Germany to the preservation of the euro. President Draghi has taken full advantage of this opportunity. He promised unlimited purchases of the government bonds of debtor countries up to three years in maturity provided they reached an agreement with the European Financial Stability Facility and put themselves under the supervision of the Troika—the executive committee of the European Union, the European Central Bank, and the International Monetary Fund.
The euro crisis has entered a new phase. The continued survival of the euro is assured but the future shape of the European Union will be determined by the political decisions the member states will have to take during the next year or so. The alternatives are extensively analyzed in the article that follows.

I have been a fervent supporter of the European Union as the embodiment of an open society – a voluntary association of equal states that surrendered part of their sovereignty for the common good. The euro crisis is now turning the European Union into something fundamentally different. The member countries are divided into two classes – creditors and debtors – with the creditors in charge, Germany foremost among them. Under current policies debtor countries pay substantial risk premiums for financing their government debt and this is reflected in their cost of financing in general. This has pushed the debtor countries into depression and put them at a substantial competitive disadvantage that threatens to become permanent.

Extraordinary Popular Delusions And The Madness Of Markets

Whether its new-fangled Japanese stocks, hi-tech internet company valuations, multi-colored flowers, or mansions made affordable by criminally lax lending standards, Grant Williams notes that a bubble is a bubble is a bubble; and citing Stein's Law: "If something cannot go on forever; it will stop." In this excellent summary of all things currently (and historically) bubblicious - whether greed-driven or fear-driven - Williams concludes it is never different this time as he addresses the four phases of the classic bubble-wave: smart-money, awareness, mania, blow-off (or crash) and explains how government bonds are set to burst and gold is only just about to enter its mania phase. This far-reaching and entirely accessible presentation is stunning in its clarity and as he notes, while bubbles are always easy to spot ex-ante, understanding how they come about and why they are popped gives the few an opportunity to profit at the expense of the madness of crowds. From tulips to tech-wrecks, and from inflation to insatiable stimulus, the bubble in 'safe-haven flows' that currently exists has all the characteristics of a popular delusion.

by www.zerohedge.com

Currency Wars Simulation

This short video presents a variety of hypothetical scenarios which would have significant effects on currencies and commodities. See how a geopolitical or black-swan event could give real asset investors a tremendous advantage

Is Financial Crime A Systemic Risk?

By Ron Hera - Hera Research

Famed Austrian economist Ludwig von Mises wrote in his seminal work, Human Action (originally published by the Yale University Press in 1949), that “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.” The collapse of a historic credit bubble occurred in 2008. However, despite years of further credit expansion, “a final and total catastrophe” of the U.S. dollar system has yet to occur.


While an inflationary U.S. monetary policy has serious consequences, Hyperinflation is not an immediate result. There are three general ways in which the U.S. dollar system could break down: (1) rejection of the U.S. dollar as the world reserve currency, or (2) as an eventual consequence of U.S. federal government insolvency and (3) a domestic failure of confidence. Of the three, U.S. federal government insolvency is the most serious because it would result in both the loss of the U.S. dollar’s world reserve currency status and also in a failure of domestic confidence. However, a new threat to the U.S. dollar has emerged which could trigger a hyperinflationary collapse before the U.S. federal government’s finances become unworkable, e.g., when debt service begins to crowd out military and Social Security spending. Specifically, the perceived legitimacy of the U.S. financial system has not merely been tarnished by recent scandals but is in danger of collapsing. The consequences of a domestic breakdown of confidence and trust in the U.S. financial system cannot be overstated.

World Reserve Currency Status

The most commonly cited challenge to the U.S. dollar system relates to its waning status as the world reserve currency. The BRIC countries (Brazil, Russia, India and China), along with South Africa, no longer use the U.S. dollar for trade settlement amongst one another. The Chinese have internationalized the renminbi (RMB), which is now used in trade settlement with the other BRIC countries, as well as with Australia, Japan, the United Arab Emirates (UAE), Iran and various South American and African countries under bilateral agreements. Iran, which is the world’s 4th largest oil exporter, has refused to accept U.S. dollars in exchange for crude oil since 2009.

Japanese Government Demands BOJ Do QE 9 One Month After Failed QE 8

by Tyler Durden

 Almost exactly a month ago, the BOJ surprised most analysts with an unexpected increase in its asset purchase agreement by JPY10 trillion bringing the total to JPY80 trillion. There was one small problem though: the entire impact of the additional easing fizzled in under half a day, or 9 hours to be precise. This was, as Art Cashin summarized the following day, Japan's failed QE 8. It is now a month later, and with nothing changed in the global race to debase status quo, the time has come for the BOJ to attempt QE 9. Or that's the case at least according to the toothless Japanese government, which has formally demanded that Shirakawa do a nine-peat of what has been a flawed policy response for over 30 years now, this time with another JPY 20 trillion, or double the last month's intervention. Because according to Japanese Senkei, it is now Japan's turn to pull a Chuck Schumer and demand even mor-er eternity-er QE out of monetary authority of the endlessly deflating country. In reverting to the Moore's law of failed monetarism, we expect that a QE 9 out of Japan will have the same halflife as QE 8, if indeed the program size is double the last. At which point it will again fizzle.
From Senkei via Bloomberg:

• Govt. is asking Bank of Japan to increase its asset-purchase program by 20t yen, Sankei reports, citing an unnamed government official.
• Program would be increased to 100t yen from current 80t yen: Sankei
• Increased fund likely to be used to purchase long-term JGBs, ETFs and J-Reits: Sankei
• BOJ is expected to lower economic growth, inflation forecasts in an economic report due Oct. 30: Sankei

In other words, "Get to work, Shirakawa-san." One of these days the trillions and trillions in new fiat injected will actually "work"- at that point Japan will look back at its days of deflation as a fond memory when living through the alternative.
But at least nobody pretends anywhere, anymore that the central bank of a country is apolitical: neither the ECB, which is openly using its various monetary programs to finance insolvent countries, nor the Fed, which is buying up all gross Treasury issuance longer than 10 Years, and now the BOJ, which is openly taking requests from politicians who are totally helpless to do anything to the Japanese economy on their own.
The good news is that the Keynesian singularity, where QE XYZ+1 has to take place every nanosecond just to keep the world in one place (courtesy of the magic of a closed fiat loop in which devaluation is always relative to everyone else, and is limited only by the speed of the central printer and toner inventory), is getting ever closer and closer...

U.S. to Get Downgraded Amid Fiscal ‘Theater,’ Pimco Says

 By Tracy Withers
source : bloomberg.com

 The sovereign credit rating of the U.S. will be cut as “fiscal theater” plays out in the world’s biggest economy, according to Pacific Investment Management Co., which runs the world’s largest bond fund. 

“The U.S. will get downgraded, it’s a question of when,” Scott Mather, Pimco’s head of global portfolio management, said today in Wellington. “It depends on what the end of the year looks like, but it could be fairly soon after that.”
The Congressional Budget Office has warned the U.S. economy will fall into recession if $600 billion of government spending cuts and tax increases take place at the start of 2013. Financial markets are complacent about whether the White House and Congress will reach agreement on deferring the so-called fiscal drag on the economy until later next year, Mather said.
In a “base case” of President Barack Obama being re- elected and Congress becoming more Republican, there is a high likelihood an agreement “doesn’t happen in a nice way, and we have disruption in the marketplace,” he said.
Policy makers probably will agree on cutbacks that would lower economic growth by about 1.5 percentage points next year, Mather said. They may roil markets by discussing scenarios that would lead to a 4.5 percentage-point fiscal drag, he said.

‘Budgetary Meth’

Bill Gross, manager of Pimco’s $278 billion Total Return Fund, this month said that the U.S. will no longer be the first destination of global capital in search of safe returns unless fiscal spending and debt growth slows, saying the nation “frequently pleasures itself with budgetary crystal meth.” He reduced his holdings of Treasuries for a third consecutive month to the lowest level since last October.
S&P last week cut Spain’s debt rating to BBB-, the lowest investment grade, and placed it on negative outlook.
“Almost all sovereigns with poor debt dynamics are going to get downgraded, we’re just talking about the pace,” Mather said. Credit rating companies “have been slow in downgrading some sovereigns, but we think the pace probably picks up in the year ahead.”
Bond investors needn’t worry that a rating cut will hurt returns. About half the time, government bond yields move in the opposite direction suggested by new ratings, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back to 1974.