You Can't Buy Prosperity

by Bill Bonner

Gold rose $24 per ounce Thursday. The Dow fell 12 points.
The smart money is using this dip to buy gold.
Why?
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.
How?
By making lending money at ultra-low rates the norm. It's hard for major players to go broke; they can just refinance.
But in the long run, those same policies can lead to instability, bubbles... and disaster.
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.
That is, it comes from responsible policies, not reckless ones.

Why My 'Crash Alert' Flag Is Flying High

by Bill Bonner




Whoa! Investors are acting as if it were 2007 all over again.

USA Today has the story:

Emboldened by soaring stock prices and record-low borrowing costs, stock investors are taking out loans against their portfolios at the fastest pace since before the Great Recession hit.

So-called margin debt hit $379.5 billion in March, the highest level since July 2007 when such debt hit an all-time record of $381.4 billion, according to the most recent data available compiled by the New York Stock Exchange.

The trend signals that investors are more comfortable with stocks and are more willing to use borrowed money to buy more securities in hopes of garnering fatter returns in a hot market that has pushed the Dow Jones industrials up more than 15% in 2013.

Why are investors so bullish? Because the economy is coming back? Because the future is rosy? Because stocks are going to earn even more?

Nah... What do you take us for, dear reader? We know the story. Stocks are going up because the Fed is making them go up. Here's David Rosenberg in Canada's Financial Post:

Euro-Land Banks In Trouble

by Tyler Durden

A Record Amount of Bad Loans

A recent study by Ernst & Young has revealed that euro-land banks in the aggregate now hold € 918 billion ($1.23 trn.) in non-performing loans (7.6% of all loans outstanding). E&Y sees about 15.5% of all loans in Spain and 10.2% of all loans in Italy as likely to be in NPL status (this exceeds the most recent official numbers somewhat).
In light of such staggering numbers, the idea to use the ESM for direct bank recapitalization seems somewhat ambitious. This is especially so as the idea to employ the ESM to take over the costs of already bailed out banks is being pushed by a number of euro area members. No doubt Ireland and Spain would be happy to see that (in fact, Spain is already the 'exception' as the ESM is potentially on the hook for € 100 billion for its banks – but this is structured as a loan to Spain's government, not a direct bank bailout).
The problem is that if the ESM wants to retain its AAA rating, it will have to back any financing it obtains from the markets with far higher guarantees if it rescues banks rather than governments. Given that what has been pumped into ailing euro-zone banks to date already amounts to €300 billion,  its official capacity could be quickly exceeded if these existing bailout commitments were taken over by it.

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Taxpayer-funded bank rescues in the euro area so far – the total already amounts to €300 billion, and that is not counting what might be used to bail out Cypriot banks and what may still be required in Italy and Spain (chart via Die Welt).

The Coxeyites, the Bankers, and the Political Class

by Jeffrey Tucker

  
In 1894, a scraggly band of misfits made their way from Ohio to Washington, D.C. They had a plan to present to the political class, one that they said would bring an end to the economic depression that had been sparked by the Panic of 1893 and guarantee a future of endless prosperity for all. Their plan was for the politicians and the government to print unlimited amounts of money.
Surely, that would solve everything! After all, most of these people knew exactly what was wrong with their lives. Their once booming farmland had collapsed in price. Their land was now underwater, just like millions of houses since 2008. They would be stupid to pay what they owed, and they didn’t have the money to do so anyway.

James Rickards: Global Monetary System Headed for Collapse

By Dan Weil

The world currency system is riding down the road to catastrophe, says James Rickards, senior managing director of Tangent Capital Partners.

The world already has entered a currency war that began in 2010 on the heels of the Federal Reserve’s massive easing program, he tells Wall Street Journal Digital Network. Since then, plenty of nations have joined in, including Brazil, Switzerland and Japan, says Rickards, author of “Currency Wars: The Making of the Next Global Crises.”

“All major central banks are easing,” he says. “Eventually so much money will be printed that this will lead to inflation. The endgame is collapse of the international monetary system — sometime sooner than later.”

The Loss of Trust in Political Leaders

by Gary North


When Ron Paul left the House of Representatives, this created a vacuum. Libertarians only had two representatives over the last 60 years: Howard Buffett and Ron Paul. That is not a lot of representatives. These days, the conservative movement seems as bereft of leaders in Congress as the libertarians are. We hear soundbites from Marco Rubio, and Rand Paul is also quoted from time to time, but there is no one who has the conservatives' ear in the way that Jesse Helms did a generation ago.

Taleb On "Skin In The Game" And His Disdain For Public Intellectuals

Nassim Taleb sits down for a quite extensive interview based around his new book Anti-Fragile. Whether the Black Swan best-seller is philosopher or trader is up to you but the discussion is worth the time as Taleb wonders rigorously from the basic tenets of capitalism - "being more about disincentives that incentives" as failure (he believes) is critical to its success (and is clearly not allowed in our current environment) - to his intellectual influences (and total disdain for the likes of Krugman, Stiglitz, and Friedman - who all espouse grandiose and verbose work with no accountability whatsoever). His fears of large centralized states (such as the US is becoming and Europe is become) being prone to fail along with his libertarianism make for good viewing. However, his fundamental premise that TBTF banks should be nationalized and the critical importance of 'skin in the game' for a functioning financial system are all so crucial for the current 'do no harm' regime in which we live. Grab a beer (or glass of wine, it is Taleb) and watch...

Via Redmond Weissenberger of the Ludwig von Mises Institute Of Canada,
A must see interview with Nassim Taleb

Nassim Nicholas Taleb is a former trader and hedge fund manager, a best-selling author, and a ground-breaking theorist on risk and resilience.

Government Promises Are Hallucinatory Drugs.

Reality Check

Here is the first political jingle I ever heard.

"They promise you the sky.
They promise you the earth.
But what's a Republican promise worth?
Don't let them take it away!"

It was sung by a quartet at the 1952 national convention of the Democratic Party. If you substitute the word "political" for "Republican," you get the right idea.
I have repeatedly returned to the theme that all welfare schemes are paid for in the present. You cannot get something for nothing. There is no such thing as a free lunch. The resources that are used to fund every government program are extracted in the present from asset owners, and then these assets are transferred to new owners. The losses are borne in the present by the people who pay taxes to the government. Their taxes are then used to finance government spending. The losses that are sustained by those from whom the money is taken are offset politically by the benefits gained by the recipients of money sent to them by the government. This transfer of wealth is inescapable. It is inescapably a cost borne in the present.

Regime Uncertainty and the Fallacy of Aggregate Demand

In a recent New York Times column, economist Paul Krugman once again took to chastising a claim he has infamously dubbed  the “confidence fairy.”  According to the Nobel laureate, the “confidence fairy” is the erroneous belief that ambiguity over future government regulation and taxation plays a significant role in how investors choose to put capital to work.  To Krugman, the anemic economic recovery in the United States shouldn’t be blamed on this “uncertainty” but rather a “lack of demand for the things workers produce.”  Being the most prominent mouthpiece for Keynesian economic policy in modern times, the Princeton professor represents the school’s circular thinking very well.  Keynes and his followers saw most economic slumps as being the result of insufficient spending.  A slowdown in spending means the animal spirits aren’t so aggressive in their lust for immediate consumables.

Some Additional Reflections on the Economic Crisis and the Theory of the Cycle

by Jesus Huerta de Soto

The four years that have passed since the world financial crisis and subsequent economic recession hit have provided Austrian economists with a golden opportunity to popularize their theory of the economic cycle and their dynamic analysis of social conditions. In my own case, I could never have imagined at the beginning of 1998, when the first edition of my book Money, Bank Credit, and Economic Cycles appeared, that 12 years later, due undoubtedly to a financial crisis and economic recession unparalleled in the world since the Great Depression of 1929, a crisis and recession which no other economic paradigm managed to predict and adequately explain, my book would be translated into 14 languages and published (so far) in nine countries and several editions (two in the United States and four in Spain). Moreover, in recent years I have been invited to and have participated in many meetings, seminars, and lectures devoted to presenting my book and discussing its content and main assertions. On these occasions, some matters have come up repeatedly, and though most are duly covered in my book, perhaps a brief review of them is called for at this time. Among these matters, we will touch on the following:

Social Security, Ponzi Schemes, and Leprechaun Economics

by Gary North

I want to discuss an article. I may be exaggerating, but I regard this article as the most sophisticated exercise in terminal naiveté that I have ever read. It is an intelligent article with respect to the problems that it lays out. It is dealing with the Ponzi scheme economics of the modern world. Certainly, I am in favor of articles that discuss modern government economic policies as Ponzi schemes. I have been doing this for over 45 years, and I see no reason to stop now, especially since we are 45 years closer to the end of the Ponzi schemes.

Yet at the same time, I am always dismayed to see an article written about the inevitable Ponzi scheme collapse of the modern economic world that begins with some version of this assurance: if we act now, we can solve this. It is not too late. The article begins as follows:

Fractional Reserve Banking: The Source of All Evil?

by Paul Tustain - Bullion Vault

I'm getting very suspicious of anything which regulators think is "safe" collateral... Fractional Reserve Banking is not responsible for the bad practice of 'creating money', writes Paul Tustain, founder and CEO of BullionVault. It is a speed limit on money creation, put in place by a Central Bank to stop banks doing too much of what comes naturally to them. The Central Bank used to leave lending decisions to bankers, and step in to liquidate them when they screwed up. But in a world of Deposit Protection Insurance and bank bailouts, the Central Bank picks up the tab for excessive money creation. To limit the risk, they impose the 'Fractional Reserve' to try to calm the commercial banks down. But it is only necessary because we have a timid central bank which lacks the gumption to swing its axe in the direction of bad banks.

Our Whole Economy Is a Ponzi Scheme !

The Boston Consulting Group (BCG), one of the world’s most prestigious consulting firms, is making waves by stating something that only a few marginal analysts, generally from the Austrian school, are saying : all developed economies have become giant Ponzi schemes (read the essay). The fraud consists in paying interests to the investors with funds provided by newcomers, which can only lead to bankruptcy, as shown by the Madoff affair, last example to date.


In the same way, developed countries have borrowed tomorrow’s riches to finance today’s consumption. According to the Bank for International Settlements (BIS), the total debt of governments, households and companies in the OCDE countries has grown from 160% of GDP in 1980 to 321% in 2010. And most of this debt has been used for financing consumption (bureaucrats’ salaries, household spending) rather than for infrastructure or investment. Most countries being in deficit, a part of their debt goes to... servicing older debt, which is the definition of a Ponzi scheme. On top of that, those countries are guaranteeing « entitlements » (retirement, health care) that are far from being funded.

It’s a mad mad mad mad world

By Detlev Schlichter 

Shinzo Abe, Japan’s new prime minister, has some exciting new ideas about how to make Japan’s economy grow. How about the government borrows a lot of money and spends it on building bridges and roads all over the country?

If that doesn’t sound so new, it is because it isn’t. It is what Japan has been doing for 20 years, and it is the main reason why Japan is now the most heavily indebted nation on the planet – and still not growing a lot. Its debt-to-GDP ratio stands at an eye-watering, world-record 230 percent, which already guarantees that the country’s pensioners-to-be (and Japan has a lot of those) will never be repaid with anything of true value for the government bonds they kept patiently accumulating in their pension funds, and that they optimistically keep calling ‘assets’.

But never mind. The Keynesians agree that this policy was a roaring success, and that this is why the country needs more of it, as, strangely, Japan has still not regained self-sufficient growth after 2 decades of such a policy. Hmmm. Well, in any case, surely the next set of roads and bridges are going to make all the difference. I suggest that this should be called the ‘Krugman-doctrine’, after the outstanding Keynesian thinker, Paul Krugman: even if a few trillion of new government debt and a few trillion of newly-printed paper-money have not revitalized your economy, the next trillion in government deficit-spending and the next trillion in new central-bank money will finally get the economy going. “Just keep the foot on the gas pedal until the economy grows, damn it!”

Promises Will be Broken

By Bill Bonner

 
When wealth was easy to identify and easy to control — that is, when it was mostly land — a few insiders could do a fairly good job of keeping it for themselves. The feudal hierarchy gave everybody a place in the system, with the insiders at the top of the heap.
But come the industrial revolution and suddenly wealth was accumulating outside the feudal structure. Populations were growing too…and growing restless. The old regime tried to tax this new money, but the new ‘bourgeoisie’ resisted.
“No taxation without representation,” was a popular slogan of the time. The outsiders wanted in. And there were advantages to opening the doors.
Rather than a small clique of insiders, the governments of the modern world count on the energy of the entire population. This was the real breakthrough of the French Revolution and its successors. They harnessed the energy of millions of citizens, who were ready to be taxed and to die, if necessary, for the mother country. This was Napoleon’s secret weapon — big battalions, formed of citizen soldiers. These enthusiastic warriors gave him an edge in battle. But they also ushered him to his very own Waterloo.
Napoleon Bonaparte himself was an outsider. He was not French, but Corsican. He didn’t even speak French when he arrived in Toulon as a boy.

The Entitlement Cliff

The Welfare States of the Developed World are “long growth.” Without it, their finances are doomed.
First, a little background…
Generally, investors will pay more for a dollar’s worth of earnings from a stock than from a bond. Stocks are riskier than bonds, in the sense that share prices tend to go up and down more, depending on company results. But investors believe this ‘risk premium’ is worth it, because there is more ‘upside’ in stocks; they will grow with the economy. Over the long run, therefore, the rate of return on stock market investing should more or less reflect the stream of dividends received, plus the rate of growth in the economy. If the economy doesn’t grow, however, the risk premium becomes a costly artifact of an earlier age.
Pension and insurance funds, too, count on growth. They collect money. They invest it and make projections based on what they consider a likely rate of return. The difference between what they collect in premiums…and what they need to invest to cover their costs and payouts…is profit. As of 2012, the typical pension fund — such as those operated by state and local governments — was banking on a rate of investment return as much as four times higher than the GDP growth rate. If growth does not pick up, these funds will go broke.

Fiscal Cliff Explained - How Do We Land?

The year 2012 in perspective

by sibileau.com 

“…If you tax a nation to death, destroy its capital markets, nourish its unemployment, condemn it to an expensive currency and give its corporations liquidity at stupidly low costs you can only expect one outcome: Defaults….”

Click here to read this article in pdf format: December 9 2012

Today, I want to summarize what we covered over the year. During 2012, I sought to address both theory and market developments. Under an Austrian approach, I discussed many macroeconomic topics: the effect of zero interest rates, the myth of decoupling (between the US and the Euro zone), collateralized monetary systems (as imposed by the European Central Bank), the technical (but not realistic) possibility of a smooth exit from the Euro zone, the destruction of the capital markets by financial repression, the link between the futures, repo and gold markets and consumer prices (I don’t like the word “consumer prices”, but it is better than speaking of a “price level”), insider trading, circular reasoning in mainstream economics, high-frequency trading, what can precipitate the end game to this crisis, the technicalities of a transition to a gold standard, the conditions for a successful implementation of the gold standard, and the flawed logic behind the Chicago plan, as proposed by Benes & Kumhof.

Let’s now briefly follow up on each of the market themes I covered in 2012:

1.-There has been no decoupling: The Euro zone is coupled to the US dollar zone

At the end of 2011, when the collapse of the banking system in the Euro zone (courtesy of M. Trichet) was dragging the rest of the world, the Swiss National Bank established a peg on the Franc to the Euro and the Federal Reserve extended and cheapened its currency swaps with the European Central Bank. These two measures –indirectly- coupled the fate of the assets in the balance sheets of the Euro zone banks to the balance sheets of the central banks of Switzerland and the US.

What causes hyperinflations and why we have not seen one yet: A forensic examination of dead currencies

by mises.ca

As anticipated in my previous letter, today I want to discuss the topic of high or hyperinflation: What triggers it? Is there a common feature in hyperinflations that would allow us to see one when it’s coming? If so, can we make an educated guess as to when to expect it? The analysis will be inductive (breaking with the Austrian method) and in the process, I will seek to help Peter Schiff find an easy answer to give the media whenever he’s questioned about hyperinflation. If my thesis is correct, three additional conclusions should hold: a) High inflation and high nominal interest rates are not incompatible but go together: There cannot be hyperinflation without high nominal interest rates, b) The folks at the Gold Anti-Trust Action Committee will eventually be out of a job, and c) Jim Rogers will have been proved wrong on his recommendation to buy farmland.
(Before we deal with these questions, a quick note related to my last letter: A friend pointed me to this article in Zerohedge.com, where the problem on liquidity being diverted back to shareholders in the form of share buybacks and dividends was exposed, before I would bring it up, on my letter of March 4th. )

A forensic analysis on dead currencies

When I think of hyperinflation, I think of dead currencies. They are the best evidence. There is a common pattern to be found in every one of them and no, I am not talking of six-to-eight-figure denomination bills or shortages of goods. These are just symptoms. Behind the death of every currency in modern times, there has been a quasi-fiscal deficit causing it. Thus, briefly, when someone asks: What causes hyperinflations? The answer is: Quasi-fiscal deficits! Why have we not seen hyperinflation yet? Because we have not had quasi-fiscal deficits!

What is a quasi-fiscal deficit?

A quasi-fiscal deficit is the deficit of a central bank. From Germany to Argentina to Zimbabwe, the hyper or high inflationary processes have always been fueled by such deficits. Monetized fiscal deficits produce inflation. Quasi-fiscal deficits (by definition, they are monetized) produce hyperinflation. Remember that capital losses due to the mark down of assets do not affect central banks: They simply don’t need to mark to market. They mark to model.

"fraud. why the great recession" (official documentary)

Free markets are not to be blamed for the Great Recession. On the contrary, its origins rest upon the deep government and central bank intervention in the economy. Through fraudulent mechanisms, this causes recurrent boom and bust cycles: bad policies create phases of irrational exuberance, which are then followed by economic recessions, a result that every citizen ends up suffering from.