By Trace Mayer, on January 12th, 2010
The Federal Government is running massive budget deficits which is creating a massive supply of Treasuries. But there is no demand and so the Federal Reserve is monetizing the debt. But these colored coupons merely amount to certificates of confiscation. Where will Congress find the capital to buy Treasuries? Most likely, your retirement account and screwing up your retirement calculator. 
MASSIVE BUDGET DEFICITS
The Obama administration is on track to need approximately $2T of new debt sales or about 300% of 2008 debt to fund their aggressive spending. But an disproptionately large amount of purchases come from the ‘Household Sector’. Eric Sprott of Sprott Asset Management enlightens us:
We must admit that we were surprised to discover that “Households” had bought so many Treasuries in 2009. They bought 35 times more government debt than they did in 2008. … Amazingly, we discovered that the Household Sector is actually just a catch-all category. It represents the buyers left over who can’t be slotted into the other group headings. …
Our concern now is that this is all starting to resemble one giant Ponzi scheme. We all know that the Fed has been active in the market for T-bills. Under the auspices of Quantitative Easing, they bought almost 50% of new Treasury issues in Q2 and almost 30% in Q3. It serves to remember that the whole point of selling new US Treasury bonds is to attract outside capital to finance deficits or to pay off existing debts that are maturing. We are now in a situation, however, where the Fed is printing dollars to buy Treasuries as a means of faking the Treasury’s ability to attract outside capital. …
As we have seen so illustriously over the past year, all Ponzi schemes eventually fail under their own weight. The US debt scheme is no different.
Ponzi schemes fail when capital seeks safer and more liquid assets by burrowing down the liquidity pyramid. This is similar to the process that happens in a credit contraction. As I wrote earlier, the Federal Reserve will fail with quantitative easing.
CERTIFICATES OF CONFISCATION
Treasury instruments have been, are and most likely always will be certificates of confiscation. The saving retirement calculators are almost guaranteed to fail because of this uncertainty. Here is a visual explanation so you can understand the math.
So likewise Treasury Inflation Protected Securities (TIPS) are just an invitation to be stolen from. This makes your simple retirement calculator even less useful.
RETIREMENT ACCOUNTS
Congress looted the Social Security Ponzi scam many years ago. The social security retirement calculator is completely broken and predictably riddled with fraud.
Where is the next largest pool of capital for these vampire squids? Yes, your 401k (now a 104k), SEP-IRA, Roth IRA, etc. How will these tax eating parasites slurp that value?
The Telegraph reported,
The Argentine state is taking control of the country’s privately-managed pension funds in a drastic move to raise cash. … So, over $29bn of Argentine civic savings are to be used as a funding kitty for the populist antics of President Cristina Kirchner.
On 8 January 2010 Kirchner has attempted to fire the chairman of the central bank because he has refused to use about $6.6B of the funds to pay international debt that falls due in 2010 but a federal judge has ruled Mr. Redrado should be reinstated at the independent central bank. What a mess! The President wants to fire the banker because he will not hand over everyone’s pension money to overseas bankers.
Businessweek has reported,
Seven in 10 U.S. households object to the idea of the government requiring retirees to convert part of their savings into annuities guaranteeing a steady payment for life, according to an institute-funded report today. … The institute’s member companies manage $11.6 trillion of assets in mutual funds, including employer-sponsored 401(k) accounts.
While the state sponsored retirement accounts may appear alluring, particularly when your employer matches your contribution, you may get more than you bargained for. Like this English man if you contribute to your state sponsored retirement accounts then you may find unwittingly find yourself in an uncomfortable situation and have no one to blame but yourself. The tax eating looters and moochers will attempt to force you to become infected with their lecherous colored coupons.
CONCLUSION
The nation does not need Washington DC and individuals do not need Washington DC usurping their retirement accounts and forcing the purchase of Treasuries. Doing so is simply attempting to sustain the unsustainable. But that is most likely what will happen.
Now is the time to begin reducing your exposure to this political risk and safely sheath your capital in safer assets outside of these retirement accounts. For a reliable and free retirement calculator use the Numeraire Spreadsheet and realize that for hundreds of years a one ounce silver coin will buy you approximately one steak dinner. For the ultimate no confidence vote just buy gold, silver or platinum and learn some good hawala techniques like the Argentines.
DISCLOSURES: Long physical gold, silver and platinum with no position the problematic SLV or GLD ETFs.
By Claus Vistesen, on January 11th, 2010
Last week was a good lesson in terms of what might, or what might not, happen when policy makers attempt to steer currency markets. Notwithstanding the obvious question of much how clout policy makers de-facto holds with respect to moving currency markets (not a lot I think), the outgoing finance minister in Japan Hirohisa Fujii has on several occasions made it clear that he, for one, is not worried about a stronger Yen only to revert slightly as markets responded with a; “well then, lets go …” In general however, it does seem as if Fujii’s general position has been that a strong Yen perhaps would not be so bad since it would only serve to boost purchasing power. This is of course true, but it also highlights a rather alarming disconnect between the fundamentals of the Japanese economy stuck in export depedency and deflation and policy makers economic analysis (or spin) of the situation.
Now, Fujii has stepped down due to health reasons and perhaps in an attempt to enter the office with a bang instead of a whimper, his replacement Naoto Kan kicked off his first public appearance by noting that he, for one, would like the Yen to be a little bit weaker and that he believed the MOF and the BOJ should cooperate to make it so. Having not forgot the last time in 2002 that Japan intervened by selling Yen, markets reacted swiftly by giving the Yen a nice jolt downwards (against the USD).
Yet, that position lasted only one day;
(quote Bloomberg)
Japan’s Finance Minister Naoto Kan said markets should set currencies, while underscoring the ability to intervene in extreme circumstances and taking account of the yen’s impact on the economy. “Currencies of course should be determined by markets, but I must be aware that I have the right and the responsibility to take action in emergency situations,” Kan told reporters in Tokyo on his second day in office. “I must take into consideration businesses’ expectations.”
It appears then that Mr. Kan has received comment from above as the statement noted above was followed by comments by prime minister Yukio Hatoyama and finance minister delegates that members of governmetn should not really comment much, if at all, on currency markets.
So, will this be the last we hear from Kan on the Yen. Not very likely in my opinion. Japan needs a weaker Yen and slowly Japanese policy makers will wake up to this. In this sense we are likely to see policy makers and delegates tip-toeing in and out on this refrain as the data comes in. Whether this means that we will see actual intervention is another question. I have called for intervention once to many times before. However, I can say with the strongest possible conviction that prime minister Hatoyama’s growth target for Japan in the 2010-2020 stint of 2% annually is dubious at the offset and completely bogus if Japan is not able to maintain a stable and growing external surplus towards the rest of the world. In a post-crisis context where many economies look set to follow the same road of export reliance this would definitely need a weakening Yen.
In his annual 10 non-predictions Macro Man revealed the non-intervention by part of the MOF/BOJ as number 8. I have no reason to disagree with him, so for now; plus ca change indeed!
By Ajay Shah, on January 11th, 2010
I wrote a column in Financial Express on Friday: How leftist is India?. This draws on the data shown in this previous blog post. I just noticed a piece in The Economist which dwells on related themes which is well worth reading.
Many people wrote me email about this piece. An important criticism of this evidence is that individuals parse questions differently across countries. In India, it’s easy to construct questions such as: The government must setup more PSUs so as to give jobs to the people where it will seem that there is overwhelming support for a more socialist position. The main advantage of the Pew data is that they are doing it, across time, and across countries. More fine-grained measurement of political attitudes would surely be nice to have. But we don’t yet have such household survey databases in India. The CMIE Consumer Pyramids is good data – but on politics they ask really only one question, that of the most favoured political party.
By Bron Suchecki, on January 11th, 2010
Two interesting quotes caught my eye in a recent Andy Smith note:
“We cannot stop terrorism or defeat the ideologies of violent extremism when hundreds of millions of young people see a future with no jobs, no hope, and no way ever to catch up to the developed world” Hillary Clinton, Remarks to the Center for Global Development at the Peterson Institute for International Economics
For a moment there I thought she was talking about the US – “when millions of young Americans see a future with no jobs, no hope, and no way ever to catch up to the Baby Boomers”. Generational class warfare anyone?
“could seriously disrupt bond markets if it triggered concerns about creditworthiness or inflation because of concerns with government incentives to inflate debt away” Bank for International Settlements in invitation to top central bankers and financiers for a meeting in Basel
This doesn’t need any further comment for readers of this blog, suffice to say I find it interesting that the BIS acknowledges that inflating debt away is an option.
PS – unfortunately Andy Smith’s stuff is not publically released, because I rank him as the top precious metals analyst.
By Thomas Knapp, on January 11th, 2010
Quoth Thomas Frank in The Wall Street Journal last week:
This was once a familiar line of criticism: Big business’s sin was that it wasn’t entrepreneurial enough. If given the opportunity, business would use government to form cartels and suppress competition. Free markets must thus be protected from the grasp of the corporate monster. The way to bring big business down is by deregulating even more.
If this sounds twisted and counter-intuitive, that’s because it is. This is an argument that might have sounded good in 1979 but for it to make sense today one has to disregard the wreckage all around us courtesy of three decades of regulatory rollback.
Figures from the Law Librarians’ Society of Washington, DC:
Total number of pages in the Federal Register as of 1979: 77,498
Total number of pages in the Federal Register as of 2004: 78,851
Yes, that number has gone down (to as low as 47,418 pages) and up (to as high as 87,012 pages) in the intervening years, but while there are multi-year trends within the narrative, there’s no clear overall trend — and the bottom line is that there were 1.7% more pages of federal regulations in 2004 (the last number LLS offers figures for) than in 1979. How do you get “three decades of regulatory rollback” from that?
Quantity versus quality of regulation is an obvious factor, but frankly (pun intended) I never see any argument or evidence attached to claims of overall “regulatory rollback.”
For me, those claims always bring to mind California’s great turn-of-the-century electricity “deregulation,” which eliminated all sorts of controls … but which was accompanied by one eensy-teensy little bit of new regulation. That one little item — requiring utilities to buy their out-of-state power at the highest possible price in last-minute spot auctions instead of grabbing it cheap a month in advance — drove prices through the roof and resulted in rolling blackouts/brownouts. Which, of course, were promptly blamed not on the idiotic regulation, but on the deregulation.
Anyway, that’s my quibble with Thomas Frank. The rest of the piece is actually quite instructive and well worth reading. He smells a rat in the Republican Party’s faux-populist marketing strategy. So do I.
By Ajay Shah, on January 8th, 2010
As the months are going by, we’re slowly building a better picture of what went wrong and why. If you want to only spend two hours on figuring out the financial crisis, then listen to this interview with Charles Calomiris, and read this interview with Raghuram Rajan.
By Thersites, on January 8th, 2010
As mentioned in my previous post, most businessmen will do anything they can to preserve their position. This extends to people in all realms. Whether manufacturers, farmers, financiers, academics or politicians, those who wish to preserve their power will promote as many measures as necessary to do so. In the case of those in the latter two fields, they impose the same anti-competitive barriers as those in the former ones. For the statists of the academy and the capitol, they put up barriers to entry by stifling debate in marginalizing anti-statists such as the Tea Partiers, imposing punitive tariffs in engaging in ad hominem attacks against opponents and peddling their products in the marketplace of ideas by sophistry, obfuscation and at times fraud.
More generally, given that in most cases one need be accepted by the elite in order to enter academia, the political realm and even many industries, this creates another superficial barrier to entry. This is well-depicted when one considers that while the Austrians seem to be the most accurate economists, most all professors of the subject are evidently blacklisted from the most prestigious institutions, and in the fact that there are so few Ron Paul’s in Congress.
Those wedded to the state – be it the politicians or their propaganda arms in academia and the MSM further cement their power by creating a permanent underclass via their policies. This would explain why the most liberal urban areas are afflicted with the most widespread poverty, crime and education problems. It is the policies of the statists that make these areas fertile for these conditions, but the people, imbued with the notion that the state is there to help them with their plight given its coddling from day one remain even more wedded to the paternal politicians the more desperate their situation. The politicians throw their impoverished constituents crumbs, but at some point the pols will run out of crumbs when they plunder those who produce them to a large enough degree.
The slums of America reflect the ultimate end of statist policies, and the reason is as follows. Statists remove the incentives to produce by encouraging failure, extending largess and attacking mutually beneficial exchange in free commerce. The economic and political environment of urban America destroys the values that led to the creation of wealth squandered on the welfare state in the first place.
Ultimately, my sense is that those in power today, radical Cloward-Piven and Alinsky-ites that they are are not so much concerned with developing a socialist Utopia. Contrary to this, I think they are using the socialists in academia, and the elites, former students brainwashed by academia, CNN and the New York Times as useful idiots. They have institutionalized their progressive ideas over the last hundred years so that those with the most influence in society know of nothing else and more disastrously lend credence to their policies.
They are at peace with their yielding a hellish country like the ones incubated historically by leftists replete with widespread poverty, chaos and violence to reach their goal. The goal of this administration and most all in government is power. They will usurp our freedoms stealthily or outright in order to preserve and enlarge it. Most evil in my view is the man bankrolling the whole operation, George Soros, who will push the country to the brink with his puppet politicians running the show, for his own profit.
In sum, I urge you to understand that ideology is a mere means to an end – secondary to all those who use the state as an instrument, be it the One-Worlders, Greens or Marxists. Do not be fooled, their concern rests with one thing and one thing alone: power. With every state encroachment, their power increases whilst individual liberty is extinguished.
By Eldon Mast, on January 8th, 2010
Online sales rose 4 percent during the November and December holiday period, reversing last year’s decline, according to the market research firm comScore.
The heaviest online spending day in history came on Tuesday Dec. 15, when online shoppers spent $913M. For the full holiday online shopping season, $29.1 billion was spent creating a 4% increase versus the same period in 2008.
“The 2009 online holiday shopping season was a positive one.” said comScore’s chairman Gian Fulgoni. This year’s growth rate “surpassed our forecast and returned to solidly positive rates after nearly a full year of marginally negative growth.”
The top growth rate category online for the 2009 holiday season was “Jewelry & Watches”, growing a hefty 20% versus year ago.
(click to enlarge)
 (source: comScore)
By Trace Mayer, on January 8th, 2010
The most important decision an investor can make is what to use as the numeraire. But few investors even know what a numeraire is let alone have put deliberate thought into choosing their numeraire. With advances in technology using a reliable numeraire is easier than ever.
CAPITAL ACCUMULATION
Investing is the process of allocating capital. Capital is the result of consuming less than what is produced.
For example, if 10 pounds of corn are produced and 7 pounds of corn are eaten then there are 3 pounds of surplus corn. This 3 pounds of corn is capital that can then be allocated and produce a return. That return can be measured using financial statements, like an income statement and balance sheet, and an accurate numeraire.
As individuals or society wisely allocate capital that generates a return then the standard of living will increase. For example, enough capital may be stored and then allocated resulting in a the farmer being able to purchase and use a shovel instead of his hands to produce more corn. Now the farmer can spend the same amount of time but produce 2-3x as much corn because of the capital that has been stored and allocated into shovels, plows, tractors, semi-trucks, etc. This is called increased productivity.
On the other hand, if an individual or society consumes more than they produce then they begin to erode their capital. Generally, this is unwise and will lead to a lower standard of living. Remember the old advice: do not eat the seed corn.
Like gravity does not care whether the sentient human or inanimate rock knows their condition as they hurl towards the earth from thousands of feet in the air so likewise economic law does not care whether individuals and society can accurately measure whether their capital is being accumulated or eroded.
VALUE CALCULATION
In this process of investing an individual makes a value calculation about whether to consume or save resources. The key role interest rates play is in regulating production and consumption over time. Generally, low interest rates encourage consumption while high interest rates encourage saving.
Individuals produce commodities because they add value. Corn is for food, oil is for fuel, steel is for buildings and water is for drinking. Commodities are vital to sustain life. Consequently, accurately measuring the demand for commodities over time is equally important so that the market can provide supply and avoid consequences such as starvation, dehydration, malnutrition, etc. The Founding Fathers understood these economic principles and with the 1792 Coinage Act answered the question: What Is A Dollar?
NUMERAIRE
In economics, the numeraire is an item or commodity acting as a measure of value or as a standard for currency exchange. In accordance with Article 1 Section 8 Clause 5 and Article 10 Section 10 Clause 1 of the United States Constitution the Coinage Act of 1792 provided in Section 9:
DOLLARS or UNITS – each to be of the value of a Spanish milled dollar as the same is now current, and to contain three hundred and seventy one grains and four sixteenth parts of a grain of pure, or four hundred and sixteen grains of standard silver.
However, government has strayed with unconstitutional legal tender laws and along with central bank intervention in the gold market the environment is extremely difficult, if not impossible, to accurately perform mental calculations of value. The result is a broken pricing mechanism.
Additionally, most people are completely oblivious to the importance of choosing an accurate numeraire. More daunting is that for the small percentage of people who measure their financial vital signs few use a precise numeraire to do so.
To assist you in performing these two tasks for an example I have created The Numeraire Spreadsheet. It functions as an example of how to implement provident living principles using an alternative numeraire.
CONCLUSION
Keeping financial statements such as an income statement and balance sheet takes diligence. It also takes persistence and diligence to use an accurate numeraire. But doing so will allow you to view your financial condition with improved clarity and which will likely increase your ability to perform better allocations of capital which will help you multiply your net worth. For the New Year make it a goal to spend about 15-30 minutes per month to accurately measure and track your financial condition.
If you have an suggestions for The Numeraire Spreadsheet or any stories from using it then please leave a comment.
By Winton Bates, on January 7th, 2010
Several researchers have noted that there is a tendency for average life satisfaction to be lower in the countries with high economic growth rates even though there is strong evidence that average life satisfaction is higher in countries with higher incomes. Carol Graham and Eduardo Lora have referred to this as the ‘paradox of unhappy growth’. In one recent paper Eduardo Lora (with Juan Camilo Chaparro) suggests that ‘unhappy growth’ may help to explain why some countries have been reluctant to adopt economic reforms that would lift economic growth rates (‘The conflictive relationship between satisfaction and income’, Nov. 2008).
This is an interesting view, but I doubt its validity. It seems to me that ‘unhappy growth’ could be a misnomer. Before explaining why I should try to summarise the authors’ explanations for ‘unhappy growth’. One explanation is in terms of an aspirational treadmill. Economic growth raises aspirations, so people experiencing high income growth may come to expect higher incomes and hence feel less satisfied with their current incomes than people experiencing low growth. The other explanation is that economic growth is often associated with structural changes that result in income losses to some groups as well as gains to others. As a result of loss aversion the average life satisfaction may decline while average income rises.
Both of these explanations seem plausible, but they leave us with a paradox. How can high incomes – which must have resulted from economic growth in the past – be associated with high average life satisfaction if economic growth reduces average life satisfaction?
There is a simple explanation that dissolves this paradox. The observation of lower average life satisfaction in the countries with higher growth rates might just reflect the shorter time that the people in the countries with higher growth have had to accumulate the capital necessary to enjoy the fruits of their current income levels. Consider two countries which currently have similar per capita incomes, one of which has experienced rapid growth over the last couple of decades and one which has experienced low growth. It would be reasonable to expect that per capita net wealth would be lower in the high-growth country than in the low-growth country because people in the former country have had less opportunity to accumulate wealth from their current incomes. People with lower per capita net wealth could be expected to have poorer standards of housing and to feel less financially secure, so it is only to be expected that they would feel less satisfied with their lives. (This is similar to the explanation offered by Angus Deaton, namely that life satisfaction responds to the long-term average income, as in a permanent income model of life satisfaction. See: ‘Income, health and well-being around the world’).
There is some evidence that average life satisfaction is strongly influenced by net wealth. A study by Bruce Headey and Mark Wooden has shown, using Australian data, that wealth is at least as important to subjective well-being as is income (IZA Discussion Paper 1032, Feb. 2004).
There is also some evidence of a similar phenomenon with respect to education levels. Regression analysis suggests that there is a tendency for average education levels to be lower in countries with high growth rates, after controlling for income levels. This can be explained in terms of the time taken for accumulation of human capital. It would make no sense to attempt to explain it in terms of economic growth resulting in less education.
Finally, there is evidence in the following chart that people tend to perceive that their quality of life has improved in countries that have experienced relatively high growth rates. The perceived improvement in quality of life over the last five years can be calculated as the difference between the rating of life today and life 5 years ago using data from the Gallup World Poll. The chart plots perceived improvement in quality of life against per capita GDP growth rate for the period 2002-07 (based on rgdpl data from Penn World Tables) for 103 countries. The pink dots in the chart lie on a line fitted by regression.
The evidence of perceived improvements in quality of life in countries experiencing high economic growth rates is not consistent with the idea that economic growth makes people unhappy. I don’t accept that the failure of governments to adopt economic reforms can be explained by ‘unhappy growth’.
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