Further to my post of 6 May on the book Sutton, A.C., The war on gold, 1977, ‘76 Press, California, USA, below are some extracts from the book I’ve made for my personal reference:
Page 59: It is this disciplinary function of gold that is irksome to politicians and managed-economy bureaucrats and academicians. Politicians are always eager to buy votes with promises of perpetual prosperity, and bureaucrats are happy to go along to expand their own empire building.
Page 60: Of course, a market clearing price for gold (assuming a 100 percent cover for all present paper debts), might suggest a price of $800 to $1,000 an ounce. This would be a pleasant windfall for those with the foresight to own gold, but it would mean psychological devastation for those who have built their careers on the philosophy of helping everyone to live at the expense of everyone else. The latter need to conduct and anti-gold crusade for their own self-preservation.
Page 111: Defeat turned to disaster between November 1967 and March 1968, as the U.S. lost a staggering $3.2 billion from its gold stocks. By this time other European central banks followed the French example and told the United States that further defense of the dollar would require U.S. gold; none of theirs would be available. The end came on March 14, 1968, the day the Gold Pool lost 400 tons of gold to private buyers. The loss of 20 percent of the U.S. gold stocks within five months finally galvanized the Treasury into action. At the request of the Federal Reserve Bank and the U.S. Treasury, President Lyndon Johnson asked the Bank of England to close the Gold Pool operation.
Page 122: Certainly, a paper system will not last in open competition with gold and silver coins. It is recognition of Gresham’s Law that forces the U.S. Treasury to be vehemently against the issue of any gold coins, even and innocuous gold bicentennial memorial coin. While at the same time the Treasury must keep a damper on the price of gold in the market place.
Page 143: The remaining question is not whether the debt structure will collapse, but when. What do we mean by “collapse”? H.A. Merklein defines collapse as a “combination of unemployment and inflation so rampant that the market ceases to function effectively.” (“Can the U.S. economy collapse?” World Oil, December 1975.) Merklein suggests that, given a 50-percent inflation rate, “public confidence in government issued fiat money tends to break down … and barter begins to replace the money economy.” According to Merklein’s calculations, with a ten-percent unemployment rate, collapse could begin at 30-percent inflation – a figure exceeded by the United Kingdom, Argentina, and Italy in 1975. Even granted the existence of many unknowns, Merklein’s evidence does suggest the early 1980s as Doomsday for the United States.
Page 151: It was, in effect, a declaration of bankruptcy. When President Nixon closed the gold window he did not, as he said, demonetize gold. On the contrary, he demonetized the dollar! Regardless of his words, his actions emphasized the premium value of gold over fiat dollars. The propaganda war on gold by the U.S. since 1971 has been designed to prevent this single fact from penetrating the consciousness of the American public. When the real significance of the demonetization of the dollar is fully grasped by Americans, the result will be monetary panic, probably followed by the collapse of the debt pyramid.
Page 153: Then, on December 31, 1974, the United States removed the official ban on gold ownership by U.S. citizens. At the same time it began a massive internal propaganda campaign, with the help of an unquestioning media, against gold holding.
Page 157: The current battle – one the U.S. Treasury must win or go down in disgrace – is to prevent significant numbers of American investors from acting on the paper-gold equation. At all costs the American citizen has to be persuaded that paper dollars are at least equal to, if not better than, gold.
Page 159: The Treasury, the Federal Reserve System, and the Congress are under the illusion that they can decree what is money. They cannot. They can legislate legal tender, but that is not necessarily the same thing. Money is what people and countries will accept in exchange for goods and services. This may, or may not, be paper dollars. Historically, as we have seen, money has been gold, silver, copper, and even iron. These currencies have led to stable monetary systems. Money has also been leather, mulberry leaves, and rice paper; today it is wood pulp and ink and the present debt system. Historically, the latter have been the unstable systems. Why? Because at some point holders of these latter moneys look for something of intrinsic value as a store of wealth, and the find none.
Page 172: In early 1975 only about ten percent of South Africa’s gold output was used to mint the Krugerrand, the one-ounce coin that is held mostly by individuals, not central banks, as a hedge against inflation. By the end of 1975, 25 percent of the South African gold production entered the Krugerrand presses. As a result, significantly less gold reached the world bullion market. Test marketing promotion of the Krugerrand in Philadelphia, Houston, and Los Angeles had “staggering” and “incredible” results, according to coin dealers. A major New York advertising agency, Doyle, Dane, and Bernback, was hired by the Krugerrand distributor, Intergold, to promote gold coins directly to the America public, which previously had been exposed soley to the bear-market tactics of the U.S. Government. The response was truly “staggering.” By the end of 1975, Krugerrand sales were running at the rate of 5,000,000 coins annually – an amount equal almost exactly to the total proposed IMG annual sale for 1976.
Page 180: The Treasury plan obviously is to maximize uncertainty in the market to depress price, and it cannot maximize uncertainty by regular sales. It can do so only by random sporadic actions at critical market turns, for example in deflationary periods accompanied by maximum propaganda.
Page 200: The legalization of gold in the United States in 1975 was probably not a withdrawal from coercion but an interim effort to make the propaganda war on gold more credible. History suggests that gold will once again be made illegal in the United States and subject to arbitrary seizure by a police-state apparatus. Looking back over monetary history, we see that gold has always been prominent as a protector of individual sovereignty. Private gold ownership is inconsistent with the aims of dictatorship; a war on gold is a necessary concomitant to centralized political power. Wars and fiat currencies have always gone hand in hand.
Page 203: As we look into the future (in competition with the professional prognosticators), the domestic war on gold looks like this: there will be an increasing realization by the public that the ratio between paper-debt and gold in inexorably shifting in favor of gold. That public confidence is the all-important requirement to keep a paper-debt money system afloat . . . and this confidence is eroding. Surges in confidence-erosion will account for short-run increases in the price of gold, while for intermittent periods the government will regain some public confidence; when this occurs, gold will settle back to its approximate long-run ratio to paper-debt units. At some point, however, there is a distinct probability of panic – if debt holders see the debt pyramid collapsing or even anticipate its collapse. Particularly this will be true if there is general realization that paper assets are actually someone else’s debt and are inherently worthless. However, it is important to note a distinction between “realization” and “action.” Investors may “know” the pyramid is illiquid and in danger of collapse; they may not “act” on this knowledge. The herd instinct suggests that only a few will bail out in time; the majority will act in panic, too late.
Some commercial real estate business is stirring again.
The deals seem to be starting small, but never-the-less they are happening.
“Until a couple of transactions settled, you didn’t have a floor in the market,” says Jeff Pacy, a broker with Preston Partners in Lutherville, MD.
According to Pacy and other commercial real estate insiders outside of Baltimore, they are seeing a “sudden burst of business.” For commercial property under $10M, the pricing now seems to be right. Institutional buyers are also treading softly back into commercial property from the sidelines.
Sensing the recovering markets, those investors see demand growing and bargain basement prices says Jonathan M. Carpenter, vice president with Colliers Pinkard’s Investment Services Group. Some businesses are also looking to save some money by trading their monthly rent for a mortgage payment that they can finance.
And their bankers seem to be willing to lend again. Scott Nicholson, executive vice president and chief banking officer at Columbia Bank says that his bank is more likely to lend to owner-occupied commercial tenants as those loans tend to perform better over the long run.
You may recall additional federal programs that help small business. The U.S. Small Business Administration’s 504 loan program is designed to aid small businesses in getting the money they need to buy properties for their operations. Back in March, President Obama announced that the U.S. Treasury would invest $15 billion with the Small Business Administration (SBA) in order to further boost the secondary markets for such small business loans.
So we’ve, recently we’ve seen:
1. Homeowners with more manageable monthly payments
2. Housing starts bounce up
3. The number of residential foreclosures begin to fall
4. Jumbo mortgage activity increasing
5. Pending home sales jump up
6. Existing home sales rising
And now commercial real estate is showing recovery signs.
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For the first time in 10 months the Tenth Federal Reserve District is reporting factory production that is now net positive. The Tenth Federal Reserve District encompasses Colorado, Kansas, Nebraska, Oklahoma, Wyoming, northern New Mexico, and western Missouri.
The Kansas City Fed released its manufacturing report on Thursday and claimed that “manufacturing activity showed signs of a rebound in June.” The report also shows that firms in the region have net positive expectations for future factory activity.
The net percentage of firms reporting month-over-month increases in production in June was 9, up from -3 in May and -6 in April. The positive production netted increases in both durable and non-durable-goods production plants.
(Source: Kansas City Fed – click to enlarge chart)
Additionally, over half of companies in the region are now reporting satisfaction with their inventory levels.
Large increases also registered in future factory activity indexes from May to June. The future production index rebounded from 1 in May to 13 in June. Sub-indexes for future shipments, new orders, and order backlog all jumped up.
This positive report from the 10th district follows a string of positive manufacturing reports from across the country. Last week the Philly Fed reported its highest activity reading since September 2008. On Tuesday the central Atlantic regional Fed report showed manufacturing advancing considerably faster in June over May. And a week from Monday there was good news lurking under the June headlines for NY’s empire index.
There is a fascinating article in The Economist about how the world of derivatives has shaped up through the crisis.
I often encounter misconceptions about hedging. The one line that summarises the issue is this: The job of a hedging strategy is to combat extraneous economic exposure. Let me focus on currency exposure as an example, though the basic idea works in all aspects of hedging. A good currency hedge is one which neutralises the effect of currency fluctuations on the NPV of profit.
I have seen four major mistakes in the way people think about hedging:
- Hedging seen as a way of eliminating currency risk in the translation of direct import/export proceeds. This is wrong because it’s an incomplete picture of what happens to the profits of a company when the currency moves. A lot of finance practitioners are confused on this subject, particularly in India where RBI rules have had mistakes on these things for decades. (While RBI staff made mistakes, that was no reason for currency hedging consultants and such like to also make the same mistakes).
- Hedging seen as a profit centre. This is wrong because the job of hedging is to eliminate exposure of the NPV of profit, not to make money. Suppose a company embarks on a currency hedging program. Half the time (ex-post) the hedge will appear to have made money and half the time (ex-post) the hedge will appear to have lost money.
For a company which has very big currency exposure, ex-post, half the time there will be massive cash losses on the currency hedge. If top managers, directors or regulators do not understand this correctly, it’s easy to jump into complaints about `massive losses on derivatives trading’. This emphasises the importance of seeing a hedging strategy and the economic exposure in an encompassing way. A person who closes out one element of an overall hedging strategy because that’s generated a lot of cash outflow in recent days is, well, wrong.
- Hedging away the core sources of profit. A refinery is a bet on the `crack spread’, the gap between the price of crude oil and the price of petroleum products. The shareholder and owners of a refinery are inexorably speculators on the crack spread. If you don’t believe that this spread will do well, don’t build a refinery. For a refinery, this is core business risk, this is the source of profit. It is not an extraneous economic exposure. To try to hedge away this exposure is not correct.
- Insecurities about imperfect hedges. Every now and then, a bright person complains that a proposed hedge has a substantial basis risk. The only perfect hedge is found in a Japanese garden. All realworld hedges are imperfect. The useful question is: Is an imperfect hedge better than no hedging?
The Economist article points out that with the upsurge in volatility, demand for derivatives has gone up, not down. Once most large firms of the world start doing balance-sheet scale hedging, derivatives positions will be much larger than they are today. The world needs bigger, not smaller, derivatives markets. We stumbled on our way to that world, and now have to figure out once again how we are going to get there.
In the world of OTC derivatives, firms face credit risk owing to contracts with banks and banks face credit risk owing to contracts with firms. In the good old days, these risks were mostly ignored, and OTC derivatives looked more attractive than exchange-traded derivatives (where posting collateral is unavoidable). Now, both sides are getting wary about what this involves. Banks have started charging higher prices for bearing this risk (either though a bigger price or through collateral requirement), and banks have started refusing to have exposures against certain firms. Both these phenomena should enlarge the footprint of exchange traded derivatives. All this flows logically but it was interesting seeing descriptions in the article about things actually shaping up this way.
On 25 June 2009 I was invited to the Cafe Libertalia to speak at a book club where I was given the latitude to choose the book for discussion. I picked What Has Government Done To Our Money And The Case For A 100% Gold Dollar by Murray Rothbard. This book is an easy to read foundation for the student of the Austrian school of economics. Therefore, I think everyone should get and read a copy.
What Has Government Done To Our Money is 119 pages while The Case For A 100% Gold Dollar is 61 pages. It is printed on archival quality acid-free paper and has a sleek cover. This book makes a great addition to any library.
WHAT HAS GOVERNMENT DONE TO OUR MONEY
This is a well done objective monetary history. It discusses how money developed, the rise of fractional reserve banking and the constant meddling by government in money and currency. A key reason governments meddle in the money and currency markets is because it is a source of funding.
The reader learns some some basics of history, government and economics such as the development of monetary names, benefits of money, a short discussion on legal tender application and an entire part on The Monetary Breakdown of the West.
THE CASE FOR A 100% GOLD DOLLAR
This is a persuasive essay on why a 100% gold Dollar should be adopted. This essay originally appeared in the out of print and hard to find In Search Of A Monetary Constitution by Leland Yeager and published in 1962 by the Harvard University Press. While the arguments Rothbard makes are sound; I do not really agree because of advances in information technology and monetary evolution over the past 47 years.
Four and a half decades ago there was no Fandango, online checkin for airplane flights, etc. So likewise there have been advances made in monetary application and I am of the opinion that private digital commodity currencies, like GoldMoney, provide the most efficient solution to the monetary chaos the world has found itself in.
WHO THIS BOOK IS FOR
What Has Government Done To Our Money And The Case For A 100% Gold Dollar by Murray Rothbard is a quick and easy read divided into two main portions. I think the objective presentation of monetary history is a good read for anybody. The persuasive essay is a good read to for anyone who wants to stimulate their analytical capacities but keep in mind it is obsolete. Therefore, I think everyone should get and read a copy of this book.
You can get a free digital copy from the Mises Institute or purchase a physical copy from Amazon.
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I heard a couple of talkers on business news and talk radio note that government employment had exceeded manufacturing employment in the United States. When I looked into it, I found the origin of this meme at a blogpost of Fabius Maximus entitled America passes a milestone!, with interesting charts and analysis. The charts are from subscription site Contrary Investor. Instapundit, Dr. Melissa Clouthier and Citizen Paine are among the analysts who picked up the story from Fabius, and well done to him.
But I wanted to see the original data, and I found it on one of my favorite sources for primary material, the website of the Bureau of Labor Statistics, for which the relevant interactive dialog box is here.
It is the work of a few minutes to find that, yes indeed, according to BLS, the non-seasonally-adjusted figure for workers employed in the goods producing sector of the US economy was set preliminarily at 21,404,000 for 2008, down from 22,221,000 in 2007, while the comparable employment-in-government figures were 22,457,000 preliminarily for 2008, up from 22,203,000 in 2007.
The services sector is bigger than both put together, with a preliminary 115,648,000 employed for the year 2008.
It was two days after Fabius’s article that Timothy Geithner had his confirmation hearings in the Senate Finance Committee. One of the hostile Senators, Jim Bunning (R-KY), roasted Geithner over the US-China trade and financial relationship. He got started in his opening statement:
Thank you, Mr. Chairman.
The financial crisis we are experiencing today did not happen overnight and it could have been avoided. As Mr. Greenspan now admits, the easy monetary policy that he and Mr. Geithner championed at the Federal Reserve created an asset bubble. Large capital inflows from countries like China, for the purpose of keeping its currency low, contributed to the bubble and they went unchecked. But, the collapse of the bubble would not have been so devastating if Mr. Geithner had been effective in his role as a regulator. . . .
. . . and in questioning he was if anything tougher, blaming Chinese manufacturers and workers, in effect, for the financial crisis in which we now find ourselves. This, I believe, is a dangerous new aspect of international financial and trade relations, as I stated in my posting of January 26.
It strikes me that there is a direct line between the manufacturing implosion and the current account deficit with China and certain other trading partners, if anyone just cared to draw it. And there’s not a thing Mr. Geithner could have done about it in his role as a regulator.
The capital inflows that so trouble Senator Bunning are just the flip side of America’s trade deficit with that country. It’s a matter of double-entry accounting identities, rather than any cunning device to “keep its currency low.”
It can be shown — I have done the work, and will put it here at some point — that a portion of the trade deficit with China is really with American companies who have investments there.
Nevertheless, it is clear that the US economy has gone post-industrial.
Our trading partners will not buy our manufactures if we do not manufacture.
They will buy very little of the output of our large and growing government sector.
They will buy some of our services, but of course in these times of financial crisis and straitened circumstances, they too have less need of the financial and creative services in which American business specializes.
Our trading partners will buy hardly any of the spa, tanning, psychotherapy, handyman, coaching, self-actualization, pet grooming, personal-shopping, kitchen-designing, dog-walking, SAT-essay tutoring, Search Engine Optimization consulting, skateboard training, party-planning, eBay-auctioning, credit-counseling, baby-sitting and similar personal services in which a huge number of Americans now occupy themselves and try to scratch a living.
An entrepreneurial Chinese person might as well try his hand at manufacturing. An entrepreneurial American might as well shoot himself in the head as try his hand at manufacturing. The thought of going into the business of manufacturing a product for sale, with all the nightmares of taxation and regulation that go with that in the United States in the year 2009, is not for the faint-hearted among the business-minded.
And that is why perfectly serviceable industrial parks near my home in New Jersey are rented out to ballet schools, medical offices, day care centers, basketball clinics, gymnastics facilities, skate parks, senior centers, art studios, martial arts gyms, fitness centers, churches, mosques, schools, and even government offices, but hardly at all to industry.
If this cannot be changed — and if anything the anti-manufacturing tide is still at the flood stage — then how can the US current account deficit be anything but a huge long-term structural problem for us?
On Thursday the Fed announced that it will end or significantly curb the use of three emergency programs that it had been using to provide cash to brokers and money-market funds.
The developments are additional signs that the Fed sees improving financial markets and that it will begin honoring its promise to back out of its unprecedented interventions as market conditions warrant.
Michael Feroli, from JPMorgan Chase was quoted as saying, “The crisis is abating and the worst is behind them.” Feroli is an ex-Fed official.
A Fed statement released Thursday also states, “Conditions in financial markets have improved in recent months.” The officials state they will continue to “monitor closely” the need for their interventions and appropriate timing for backing out of other intervention measures.
The Fed noted that it will also reduce its program to provide needed cash to commercial lenders. You’ll remember that we noted those commercial markets thawing out considerably and reported that in late Feb.
Some economists have worried that since the Fed policies were so accommodating during the recession, it will be difficult avoid inflation as the Fed attempts to unwind its program during the recovery. Thus far inflationary pressure has not materialized.
Ciaran O’Hagan of Societe Generale stated that the Fed’s actions on Thursday would begin to slowly reduce the market’s “fears that the Fed’s generosity is excessive.”
Meanwhile as the stock markets continue to reflect on their huge run in recent months, it is to be expected that skeptics remain… and accordingly the trend continues to show stocks moving sideways.
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In the Times of India I hear is all about “infotainment”, with more information less entertainment in economic times. So as far ET columnists go hardly can one hold them the standards of an academic debate, loose ends are quite natural. But what about sheer inconsistency, or gross error?
Swami ET article today is titled “Beware: Recession maybe Hayekian”. My faint smile on reading the title soon disappeared when I read this
“The current recession looks more Hayekian than Keynesian. A Keynesian recession represents a sudden fall in demand, and can be remedied within six months by pumping enough purchasing power into the economy. A Hayekian recession, however, is caused by misallocation of resources over a long period, driven by unrealistic interest rates, ending in a bust that requires years of structural adjustment. Such a recession can last a decade (as in Japan in the 1990s)”.
Swami goes on to argue that many a crises have been Keynesian and successfully solved by government spending. My contention here is not that Keynesians are wrong, that point I have already made. But that one cannot argue that some recessions are Keynesian others Hayekian!
The Hayekian method involves a complete reject of the aggregate demand and supply framework. Hayek rejects and warns us against the very idea of “capital” as a homogenous commodity at the very beginning of “Pure Theory of Capital”, turning our attention to the structure of capital in a system of production.
Moreover Swami makes no mention of why there might be a fall in aggregate demand in the first place to cause a Keynesian recession. And since we are talking about a Keynesian syndrome, the cause must be independent of central bank policies. For people like Krugman, Stiglitz the cause may lie in “animal spirits”, which is consistent with their political philosophy. But what about Swamy who won the Bastiat Prize.
Also note that though he says this recession is Hayekian, there is no mention of “central banking”, “centrally determined price of capital”, etcetera.
Infotainment is all good, but an article with absolutely no academic grounding is a real pity. And I am not entirely sure whether such writing does Austrian economics and libertarian politics any good. Your call.
Also read my earlier critique of a Swami ET piece here.
And another incorrect portrayal of Hayek by Meghnad Desai (he offered a Marx-Hayek solution to US crisis) here.
Tuesday we reviewed a dozen areas where home prices are rising. Wednesday yielded the release of home sales data with three more significant pieces of great news.
1. Sales of previously owned homes rose for the second month in a row in May. The improvement was 2.4% better than the sales rate in April.
2. Inventories of existing homes continue to decline rapidly. Inventory levels are now below the 10 month mark for all existing homes for sale. That level is down over 15% from a year earlier. There is now only a 9 month supply of existing single family homes on the market.
3. What may be the best news in Tuesday’s home sale data is the fact that the number of distressed sales has drop precipitously. Earlier in the year close to 50% of sales were distressed. May’s data shows that level down to 33%
It is no wonder then that home prices in many cities are beginning to recover.
Early in the financial crisis, Raghuram Rajan put compensation issues into the centre of thinking about what has gone wrong. In recent weeks, in India, this dimension has come to life. P. Vaidyanathan Iyer had a story in Indian Express saying that RBI had blocked the compensation packages of the CEOs of three private banks: ING Vysya Bank, Axis Bank and Development Credit Bank. Something similar might be taking place with HDFC Bank also.
See Anita Bhoir in Mint on CEO compensation of private banks in India. In the case of Axis Bank, the compensation of the outgoing CEO (P. J. Nayak) in 2007-08 was Rs. 1.5 crore. This is a firm with a market value of Rs.25,000 crore today, which reported a net profit of Rs.1041 crore in that year. I would also reckon that of all Indian banks, Axis Bank is a cut apart in terms of the corporate governance culture, and the say that the outside board members have in the affairs of the firm.
I have an article in Financial Express today, where I say that concerns about ownership, governance and compensation are important components of the regulatory process in finance. But what is needed is a sophisticated analysis of the incentives that these three elements (in combination) induce. This requires a subtle understanding of economics and incentives. An approach of merely blocking high wages is one of giving in to the populist politics of envy. Conversely, improving compensation structures of PSUs requires not just shifting to a higher level of wages under an old-style wage formula, but a full rethink of the incentive implications of a wage formula.
See Alex Edmans and Xavier Gabaix on voxEU on designing the right mechanism for executive compensation, and we get a flavour of the kind of subtlety that RBI needs to bring into this.
Also see: statement by Timothy Geithner on compensation on 10 June, a debate between Gary Becker and Richard Posner, and a blog post by Jayanth Varma.
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