Things of interest

The result of this short-sighted idiot-ology has been the unrestrained growth of debt under previously fiscally conservative Republican administrations, debts that will in the end destroy not only the US government but America itself.

http://www.drschoon.com/articles/DebtAddictionDepressionDestruction.pdf

Objectives

1. To re-establish gold as the basis of money through an educational process.
2. To ensure that never again will the virtue and efficacy of gold at the base of a money system be forgotten, or become widely misunderstood.
3. To serve as a reminder and a testament to the abject failure of all experiments in fiat monies throughout history.

http://www.goldstandardinstitute.com/

My railing against the economics profession on this blog might give you the impression that I’m a lone wolf, taking on the economics profession single-handedly. I’m pleased to say that’s not the case; though the rebels are outnumbered by the True Believers in neoclassical economics, there are many academic economists who are critical of the economic orthodoxy.

Recently some highly regarded economists have made this emphatically clear with an eloquent and well argued document entitled “The Financial Crisis and the Systemic Failure of Academic Economics“.

http://www.debtdeflation.com/blogs/2009/02/26/and-you-think-im-ornery-the-dahlem-report/

[Nassim] Taleb says that asking an economist to predict the future is like asking the Christmas turkey what's for dinner on Christmas: based on its entire lifetime of experience, the turkey expects to be fed on Christmas, not to be eaten. As far as the turkey is concerned, Christmas is a black swan-type event.

http://cluborlov.blogspot.com/2009/02/of-swans-and-turkeys.html

Volume and Volatility

From Sudden Debt blog:

The FIRE Casino (finance, insurance, real estate) feeds on the Two Vees: Volume and Volatility. Thus, it goes bust only when no one wants to play, when the market is flat and volumes shrink. ... As I said, market makers feed on volume and volatility, not direction. And there's the rub: so far volatility has been immense and volumes quite strong - at least in equity markets. The prediction, therefore, is that this whole crisis thing won't be over until ... you guessed it... volatility drops sharply and volumes tank ...

This also applies to the bullion game. The issue investors have to consider when storing metal is: What is the provider's business model? Where do they make most of their money? If they make most of the money from trading (entry and exit fees) rather than storage, then when interest in precious metals wane (and it will), this may put pressure on their finances. This is the situation where the temptation to sell holders' metal to cover costs with the hope that business will improve and they will replace it later, will mount.

Credit ratings agencies

In this article, Standard & Poor's answers a number of questions posed by gtnews.com. This one caught my eye:

Q: Why haven't the CRAs downgraded the US AAA rating?

A: We have affirmed the ratings on the US despite our judgment that fiscal risk has noticeably increased because we expect that the fiscal deterioration will be temporary and that the country's other credit strengths will withstand current pressures.

The ratings on the US primarily reflect our opinion of the sovereign's high-income, highly diversified, and exceptionally flexible economy. The ratings also reflect our view of its strong track record in terms of growth-enhancing policies, as well as the unique advantages coming from the US dollar's role as the key international currency. In our opinion, these strengths continue to outweigh the US's weakening current-year fiscal performance, growing risks in its financial sector, longer-term challenges associated with its entitlement programs, and the nation's weak external position.

If you read it quickly it sounds OK. Lets list the negatives:

* weakening current-year fiscal performance - they think it is only "temporary"
* growing risks in its financial sector - I'd say "exceptionally" growing
* longer-term challenges with entitlement programs - they spend more than they earn, isn't that bad noncurrent-year fiscal performance?
* weak external position - isn't that another way of saying they spend more than they earn?

Outweighed by:

* high-income economy - what does that mean?
* highly diversified economy - any contraction in spending will also be highly diversified
* exceptionally flexible economy - yes, with high unemployment people will be exceptionally flexible about what jobs they will do
* growth-enhancing policies - euphemistic phrase for easy credit - debt, debt, debt
* key international currency - that is, foreign investors give them money that allow the growth-enhancing policies.

Have S&P considered that the key international currency is not something that mitigates against the negatives, but that the negative can affect the USD status as a key international currency, that people will not want to hold it debts because of the negatives, that this will undercut growth-enhancing policies, in which case you only have the diversified and flexible economy left as positives?

The great penance

When the economic crisis becomes acute, when the rate of profit sinks towards zero, the bourgeoisie can see only one way to restore its profits: it empties the pockets of the people down to the last centime. It resorts to what M. Caillaux, once finance minister of France, expressively calls "the great penance": brutal slashing of wages and social expenditures, raising of tariff duties at the expense of the consumer, etc. The state, furthermore, rescues business enterprises on the brink of bankruptcy, forcing the masses to foot the bill. Such enterprises are kept alive with subsidies, tax exemptions, orders for public works and armaments. In short, the state thrusts itself into the breach left by the vanishing private customers. ...

In richer, more fortunate countries, the bourgeoisie seems to have succeeded, not in escaping the crisis permanently, but at least in extricating itself for the time being from its difficulties. They have been able to start up again, after a fashion, the mechanism of profit, resorting to expedients which at least have not required the substitution of dictatorship for democracy. But they used basically the same methods in both cases: the state refloated private capitalism, revived it with great public works and huge "defense contracts."

Guerin, Daniel. Fascism and big business. 2nd ed. 1973.

Originally published in 1939 by a French journalist and scholar. I found this in a used bookshop many years ago and had never got around to reading it (there are a number of books in a similar state of limbo in my library). It title on its spine caught my eye tonight and I thought the chapter titled "Big business finances fascism" might yield something relevant to our current situation. Didn't take long to find the paragraphs above. History repeating? Question is: if the "bourgeoisie" can't start capitalism back up, are we headed for fascism? Some may say that the fact that the President/Prime Minister changes every now and then just distracts us from the fact that we are already there!

Free markets work

Continuing the theme of my recent posts. This from Troy Schwensen at The Global Speculator:

Australia’s Prime Minister, Kevin Rudd, has recently delivered an address to the nation providing details on his second stimulus package. Within this briefing, there was a number of sniping remarks about the so called “failure of free markets”. This apparent failure has forced the government to step in and clean up the mess. ... It seems free markets cannot be trusted to spend money wisely, so it is up to the government to spend our money for us. I want to make a couple of points.

Firstly, free markets work fine. The global problems we have experienced in the credit markets were caused by easy monetary policy. Many argue the cause was a lack of financial sector regulation. The more pertinent question to ask is why does the financial sector need so much regulation in the first place? Why is it that free markets work well in other industries but fail so dismally when it comes to the financial sector? The answer is quite simple. The financial markets are anything but free! We have a government entity called a central bank that essentially sets the price of money. It decides the level of interest rates under the flawed belief that the market is incapable of performing this function on its own. ...

The second point I want to make is governments are incapable of investing money smarter than individuals and companies. By deficit spending, they are drawing funds away from the capital markets and effectively competing with businesses for money. Over the longer term, this will put upward pressure on interest rates exacerbating our economic problems. What Australians should be doing right now is saving and paying down debt. At some point this will inevitably have to happen anyway. By lowering interest rates to historically low levels, the message central banks are sending is don’t save, borrow and spend. Governments are releasing stimulus packages encouraging us to spend and “save the economy”. You cannot save an economy via consumption. All you are doing is prolonging the agony. Individuals and organizations need to clean up their balance sheets and save.

Falling prices are a good thing

Could not agree more with Mike Shedlock in his latest post:

The idea of a deflationary trap is in and of itself complete nonsense. Deflation is actually a natural state of affairs. As productivity increases, standard of living rises and prices fall. Absent government intervention, productivity would actually increase the amount of goods produced, causing prices to drop. Falling prices are a good thing not a bad one.

Fed and government policies rob taxpayers by promoting policies of inflation. Look at what accompanies rising prices: rising property taxes, rising sales taxes, and rising income taxes. Is that a good thing? The answer is no, especially when wages fail to keep up, which is exactly what happened.

Who benefits from inflation? The answer is government, banks, and already wealthy because they are first in line to receive money. Everyone else is screwed. Inflation is theft from the middle and lower classes for the benefit of government and the wealthy.

Over time, the government and the Fed so distort the economic picture, that a mentality sets depicted in the often heard phrase for a few years' back "Better get that house now, before it's too late".

The problem is not falling prices, the problem was the excess of debt that led to massive speculation and ever escalating prices.

Flawed Economics

Two interesting articles on the failure of convention economics.

Wanted: A new economic theory discusses real estate cycles as a the cause of recessions and concludes "that until radical economists learn to focus on practical outcomes instead of trying to change human nature, and traditional economists fully accept and develop theories around the work of regulatory economists, and we learn that we can't all quit our day jobs to become property developers, it will all be forgotten as before, until next time."

Economists are the forgotten guilty men claims that bankers and regulators ("practical men") were "blinded with science” by academic economists' theories but didn't realise that these theories were flawed: "the risk management consultants who told them their banks would face no solvency problems and the economists who advised them that financial markets were always right were basing their analyses on two theories that were catastrophically wrong. These two theories - called “rational expectations” and “the efficient market hypothesis” - essentially assume that the economy is a predictable, comprehensible machine with a defined set of instructions."

For me Steve Keen makes a lot more sense.

Blame yourself before blaming others

I liked this reply by Tom Szabo to some comments on his Today in Silver blog:

Market making should be temporarily and is not the same as manipulation in the sense of trend change.

“Should” is your own totally arbitrary qualifier. Market making is an activity that provides liquidity to the market, period. Since the trend in gold has been up for the past 6 years but it was sideways to down before then, can we conclude that manipulation is actually responsible for the “trend change” being up? In other words, maybe the central banks have been trying to manipulate the price of gold higher. Certainly the ECB gold agreement first put in place in 1999 seems to coincide rather well with the current bull market in gold.

Prof. Fekete wrote some time ago an article about Barrick’s forward selling of future mining output pointing out that this hedge is forcing gold prices down and might bankrupt Barrick in the long run.

I would have agreed (and did in fact agree) up to about a year ago but it is now clear the Professor was obviously wrong about the long run. I’m willing to make such a conclusion at this point even if we go instantaneously on the gold standard because Barrick has amassed a very large near-production gold resource that swamps the remaining hedge position even though it might represents more than 1 year of production. While it is very likely that Barrick’s forward selling was a business decision facilitated by the desire of central banks to “lease” gold, there was never any secret about this relationship. I’ll grant even that Barrick may have hedged in part to purposefully put other gold miners out of business. That, however, still does not constitute a trust or make its actions illegal. Note that gold miners who hedged were actually more likely to go out of business because their hedges, unlike Barrick’s, were FIXED MATURITY. Meanwhile, Barrick was able to roll its hedges forward indefinitely as well as to contractually allocate them to specific projects.

In late October 2008 gold traded at a low around 700$ but no metal was available (possibly except 400 oz bars.) Low prices and shortage do not go together in normal supply/demand situations.

The vast majority of the gold market by QUANTITY consists of 400 oz. bars. Your parenthetical admission of “possibly except 400 oz. bars” is quite relevant in that there was in fact no shortage in gold. In fact, the price tells us that there was more than adequate supply of gold. And I’m not talking about paper. Your point is only that there was a shortage in some gold coins. BIG difference.

A shortage in minting capacity is not the explanation either since the US mint was able to produce 2 million oz in 2000 and only some 700,000 in 2008.

So what? Annual mine and recycling supply is in the 80 million ounce range. Total world stockpiles are in the 5 billion ounce range. That makes U.S. mint production, whether it is 2 million or 700,000 ounces, completely irrelevant as far as the gold market.

Lundeen’s argument of CB’s leasing gold can be supported by a statement from Greenspan from 1998 that the central bank(s) are ready lo lease gold in increasing quantities if the price of gold increases.

He and you have taken Greenspan’s comment TOTALLY out of context, as all good conspiracy theorists and others who like to contort basic logic and common sense for personal gain have done. Greenspan was addressing the role of derivatives regulation and specifically the idea that derivatives can be used to extort market players by squeezing the physical markets. In respect of this, what Greenspan said was that worries about a short squeeze in gold, a finite market, are misplaced because central banks would be willing to lease gold to the market so as to make a short squeeze impossible. While central banks actually being able to do that (especially today) is debatable, the fact is that Greenspan was arguing for central bank action in gold being used to support a FREE MARKET (free of manipulators trying to create a short squeeze). This is exactly the opposite of how this quote has been used, that central banks stand ready to co-opt the free market by leasing gold in an uneconomic manner.

Starting around 2000 the balance sheet of the German Bundesbank shows instead of gold “gold and gold receivables” without assigning an amount to either position. This is at least a highly unusual accounting practice that in normal business life would be unacceptable.

“Normal business life” is full of millions of examples where things are described in specific ways meant to limit disclosure. For example, Central Fund of Canada, a private company in “normal business life”, currently trading at several % premium to spot prices which presumably means that investors find it a very attractive way to hold gold and silver, discloses as physical gold and silver holdings even the bullion that is a receivable from refineries. Is this unacceptable? Clearly not to CEF holders, many of whom I’m sure would nonetheless have a problem with the Bundesbank practice. In any case, the Bundesbank actually made an improvement in its disclosure (which is also arguably better than the current disclosure of the CEF) by moving from a title of “gold” to “gold and gold receivables”. Yes, a further improvement would be to actually break out the two numbers but the improvement itself cannot be used as “proof” that a conspiracy exists.

There might be stockpiles of silver around, but if the owner is insensitive to the price and does not want to sell the metal, why sell it short on paper?

You are kidding right? The owner is insensitive to price but like most people in this world, he/she/it/they are sensitive to profits.

There is the risk that the buyer of the contract wants delivery.

At least on a historical basis, this is a tiny, tiny risk. Other than the Hunt Brothers’ threat of wanting delivery in 1980, there has never been anything for shorts in COMEX silver to worry about. Even Warren B. was able to acquire over 100 million ounces of silver mostly over the COMEX and I doubt any of that came from these “secret stockpiles”. If a lot of deliveries were constantly taking place, that would be different, but at it stands only a small percentage of contracts are ever delivered each month. This is NOT the “fault” of the shorts, but the “fault” of the longs; there is simply not that much physical demand for COMEX silver. Besides, no specific contracts can be forced into delivery and the short position, in the worst case, can be offloaded for cash, even if it is at a really high price. At least that has been the case in 100% of the months (with the possible exception of January 1980) so far since the 1960’s when COMEX silver started to trade, and that is quite a good track record.

Moreover, the owner of the stockpile and the short seller are not necessary the same body.

Clearly, Sherlock! The owner of the stockpile uses a bullion bank as an intermediary, which makes it look like the bullion bank is “naked” short (since it does not itself hold a large stockpile of silver) to those who have no concept of how the bullion markets work.

That leaves the bullion dealer (or fabricator) as legitimate short seller. By selling the equivalent of his inventory short he takes a market-neutral position. But this assumes the dealer has no concept of market trends. Why sell short as long as an uptrend lasts? This is throwing money away. Only in a downtrend short selling makes sense.

You must clearly be a communist or socialist because you don’t appear to grasp even the most rudimentary aspect of capitalism. A dealer makes money by intermediating the spread between the buy and sell. In the case of gold and silver, the dealer is typically long paper and short the COMEX. That is the main intermediary play. In commodities like oil or grains, the intermediate trade is different. But in all cases the dealer makes money on the spread between the two markets (physical and futures). Of course the other side of the paper is held by the owner of the physical stockpile. In effect, the dealer makes a deal to hedge the physical position using the COMEX. That is why the dealer is called a “dealer”.

A dealer who can call trend changes correctly should be way more profitable then shorting gains in an uptrend away.

This is not a dealer, it is a trader. Many bullion banks have both dealer desks and trading desks. The two are separate although there are “leaks” between the two, primarily of information that gives the trader an upper hand in the market. Even without this leak, however, it is obvious why “sell short as long as an uptrend lasts” — BECAUSE it won’t last forever. Typically the short selling will increase during price spikes of a magnitude that have not been historically sustainable. A subset of longs ALWAYS hopes “this time might be different” while the shorts simply play the averages. These longs then make up crazy stories about why they are wrong EVERY SINGLE TIME. I prefer the credo “blame yourself before blaming others” but that’s just me.

The roving cavaliers of credit

The latest Steve Keen post is essential reading. Some quotes:

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The standard money multiplier model’s assumption that banks wait passively for deposits before starting to lend is false. Rather than bankers sitting back passively, waiting for depositors to give them excess reserves that they can then on-lend in the real world, banks extend credit, creating deposits in the process, and look for reserves later.

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The point made by endogenous money theorists is that we don’t live in a fiat-money system, but in a credit-money system which has had a relatively small and subservient fiat money system tacked onto it.

We are therefore not in a “fractional reserve banking system”, but in a credit-money one, where the dynamics of money and debt are vastly different to those assumed by Bernanke and neoclassical economics in general.

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The money multiplier model implies that, whatever banks might want to do, they are constrained from so doing by a money creation process that they do not control.

However, in the real world, they do control the creation of credit. Given their proclivity to lend as much as is possible, the only real constraint on bank lending is the public’s willingness to go into debt ... that willingness directly relates to the perceived possibilities for profitable investment—and since these are limited, so also is the uptake of debt.

But in the real world—and in my models of Minsky’s Financial Instability Hypothesis—there is an additional reason why the public will take on debt: the perception of possibilities for private gain from leveraged speculation on asset prices.