By Winton Bates, on February 26th, 2010
‘Where have you been? Have you been hiding from me?’ I saw it was Jim speaking when I looked up from reading the paper. I hadn’t exactly been avoiding him, but then I hadn’t really missed not seeing him for a few months.
Jim asked me if I could give him a lift home. He gave me some long and convoluted explanation about why he needed a lift, but I thought he was probably just looking for a captive audience – someone to talk to about something that was on his mind.
He certainly did have something on his mind. As soon as we started off he asked me what I thought of the outcome of the Copenhagen climate change summit. I admitted that I thought it was fairly predictable. Given the way western governments were approaching the issue it would have been hard for China and India to accept that they were serious about achieving concerted action even if the science was settled. I said that if governments thought the stock of greenhouse gas emissions was a serious problem they would be focusing on the incentives needed to develop technologies that would reduce the stock of emissions, rather than just attempting to cap the growth of emissions.
Jim said: ‘I thought that emissions trading schemes, like the one Kevin Rudd is proposing were meant to provide appropriate incentives for firms to develop better technologies.’ I responded that in my view Rudd’s ETS stood for Enormous Transfer Scheme. I suggested that the Australian government was attempting to confuse welfare issues with environmental issues in order to smuggle income redistributions into the scheme. I added that it was crazy for Australia to go it alone without concerted international action and that if we are concerned about incentives for developing new technologies we should be thinking in terms of explicit taxes rather than cap and trade systems.
Jim said: ‘Ah, that’s Warwick McKibbin’s view isn’t it.’ While I was still pondering whether I had under-estimated Jim’s knowledge of the topic, he pointed to a house we were just passing. ‘Look at that abomination’ he said. I assumed that he was referring to the solar panels that covered a substantial part of the roof. I said: ‘I don’t think they look too bad, actually’. ‘It’s not how they look’, he replied. ‘Every time I pass that house it reminds me that the government subsidies that encourage people to put those things on their roofs are an abomination. Solar panels are about the most costly method there is of generating electricity. If governments were really serious about climate change they would be spending taxpayer’s money more wisely so we get bigger bangs for our bucks.’
I observed that Jim’s comment must mean that he was obviously not a fan of Tony Abbott’s winner-picking proposals to reduce CO2 emissions. Jim said: ‘I wouldn’t mind so much if Abbott could actually pick a winner to subsidize. The technologies that he has picked so far are either proven losers or have no track record. If he really wanted to pick a technology that had some hope of competing with fossil fuels without huge subsidies he would advocate the nuclear power option.’
I couldn’t help asking: ‘Does that mean that you would support revival of the proposal to build a nuclear power station at Murray’s beach on Jervis Bay?’ When I glanced across to see how Jim was reacting to the idea of a nuclear power station in his own back yard, he growled: ‘Look where you are going!’
After what seemed like a long silence, Jim asked: ‘What do you think of no regrets policies?’ I replied: ‘What, like the federal government’s home insulation scheme?’ Jim replied: ‘I think the government might actually be regretting introducing that scheme with so much haste last year. No, what I meant was a great big new tax on carbon emissions’.
I was dumbfounded. When I asked Jim to explain how this could be a no regrets policy he asked me whether I had supported the introduction of the GST as a broad-based tax to replace less efficient forms of taxation. When I nodded he then asked: ‘Do you think a tax on carbon emissions would be a more efficient way of raising revenue than existing taxes on insurance and stamp duties on property transfers?’ I had to admit that it would probably be more efficient than some other taxes. Jim then said: ‘So wouldn’t it make sense to introduce a great big new tax on carbon emissions as a no regrets policy? If we do this we might even be able to have an impact on global emissions by persuading governments in some other countries that this is a good idea’.
While I was pondering how to respond Jim laughed and said: ‘I don’t expect you to see anything about this on your blog. Judging from what you have written there about climate change I expect that the polar ice caps would need to melt before you would support introduction of a tax on carbon emissions as a precautionary measure’.
By Ajay Shah, on February 26th, 2010
Financial stability, regulatory coordination, financial reforms
So far, in India, regulatory coordination was based on the HLCC. This has not been a particularly good experience. The HLCC was not statutory and there was no defined mechanism through which decisions would be obtained. Many inter-regulatory difficulties simply languished. One peculiar aspect of the HLCC was that it was chaired by the RBI governor, while RBI was at the centre of many inter-regulatory disputes. It was awkward, having one of the competing views on a question being the chair.
On these questions, the Raghuram Rajan report had said:
A Financial Sector Oversight Agency (FSOA) should be set up by statute. The FSOA’s focus will be both macro-prudential as well as supervisory; the FSOA will develop periodic assessments of macroeconomic risks, risk concentrations, as well as risk exposures in the economy; it will monitor the functioning of large, systemically important, financial conglomerates; anticipating potential risks, it will initiate balanced supervisory action by the concerned regulators to address those risks; it will address and defuse inter-regulatory conflicts, and look out for the build-up of systemic risks.
The FSOA should be comprised of chiefs of the regulatory bodies (with a chair, typically the senior-most regulator, appointed from amongst them by the government), and should also include the Finance Secretary as a permanent invitee. The FSOA should have a permanent secretariat comprised of staff including those on deputation from the various regulators. There should be a prescribed minimum frequency of meetings of the FSOA. All issues of regulatory co-ordination, and supervision of systemically important financial conglomerates and financial institutions will be taken up by the FSOA.
The discussions of the FSOA with the management of systemically important institutions will be principles-based, and ts will initiatete the process of gradually implementing more principles-based regulation throughout the system. It will be important that the FSOA add value by substituting for some existing processes instead of adding another layer, while bringing collective regulatory views to bear. It is not our intent that the FSOA be a super-regulator displacing existing regulators. Instead it provides needed coordination and fills gaps that current structures have proved inadequate for.
In addition, there is merit in setting up a Working Group on Financial Sector Reforms with the Finance Minister as the Chairman. The main focus of this working group would be to monitor progress on financial sector reforms (such as the proposals of the Patil, Parekh, Mistry, and this committee), and to initiate needed action. The working group’s membership would include the regulators, as well as ministries on as-needed basis. The working group would be supported by a secretariat inside the Finance Ministry.
There was a contrasting view. After the global financial crisis, we got a strong campaign by RBI, based on the proposition of financial stability. It was claimed that now that financial stability is important, the original role and structure of RBI (as envisaged in the 1934 legislation) is the right one, so all reform proposals should now be shelved. Suggestions were made that the financial stability function should be handed over to RBI, which could ultimately lead to RBI becoming the super-regulator of finance, with the power to give instructions to other regulators such as SEBI based on financial stability considerations. Every bureaucracy likes to stave off change, and to grow its turf, so the arguments put forward by RBI were less than persuasive given its self-interest.
I have been skeptical about the idea of placing financial stability functions at RBI, for a few reasons:
- Crisis management involves utilisation of taxpayer resources, which can only be authorised by the treasury. Indeed, if a banking regulator is given a stability function, he will be inclined to cover up for the failures of banking supervision by utilisation of taxpayer money.
There is a similar problem when a banking regulator who is also a central bank is inclined to cover up for the failures of banking supervision by giving `short-term liquidity support’. This problem is already with us in India. We should not make matters worse.
- The essence of financial stability thinking is to break out of India’s silo system, and look at the overall financial system. The inhabitants of any one silo in India are likely to be ill equipped to think about the overall financial system.
- Financial stability thinking repeatedly involves asking any one regulatory agency to question its existing way of thinking. If an existing agency doing a lot of financial regulation is asked to do financial stability, this will not come about. Worse, there is the danger of `regulatory capture’ where every regulatory agency tends to adopt the world view and maximisation of its firms. If RBI is asked to do financial stability work, we run the risk that these new levers of power will be used to favour banks at the expense of other kinds of financial firms.
- It is hard to obtain sensible notions of transparency and accountability in the nascent field of financial stability. There is much merit in a principal-agent problem approach in designing the block diagrams of government. When a clear document can be written down specifying a job that has to be done, then it is better for government to contract that out to an external agency, since the clarity of mandate makes possible accountability. But for the things where a clear contract cannot be written down, contracting-out to an external agency is hard, and it is better to in-source these functions.
- New work that we initiate in India should not interfere with our long term goals of establishing a proper central bank.
I am quite comfortable with the two interesting models out there. In the US, there are many financial regulators, and stability functions are being placed in a council of regulators. That makes sense. And in the UK, the Bank of England does no financial regulation, and it has been asked to do stability work. That also makes sense since the BoE takes an outsiders view of the work of the FSA. The staff quality of the Bank of England also encourages confidence that this will be in a technically sound way, without being imbued with an ideology of hostility to finance. In an Indian setting, both approaches make sense. Either all financial regulation is removed from RBI, a high quality central bank is created with staff quality matching that of the BoE, and this is tasked with the financial stability function. Or, we go for a council of regulators.
This debate had simmered for some time. In the budget speech today, the Finance Minister announced the decision taken by government on how this should be handled:
37. The financial crisis of 2008-09 has fundamentally changed the structure of banking and financial markets the world over. With a view to strengthen and institutionalise the mechanism for maintaining financial stability, Government has decided to setup an apex-level Financial Stability and Development Council. Without prejudice to the autonomy of regulators, this Council would monitor macro prudential supervision of the economy, including the functioning of large financial conglomerates, and address inter-regulatory coordination issues. It will also focus on financial literacy and financial inclusion.
This seems to be some kind of fusion between the Raghuram Rajan proposals of the FSOA and the Working Group on Financial Sector Reforms. More details are awaited from DEA on how they want to play this.
Financial Sector Legislative Reforms Commission
The four major committee reports on Indian finance — Patil, Mistry, Rajan and Aziz — have all emphasised a comprehensive overhaul of outdated laws. The laws of 1934, 1952, 1956, etc. are quite out of touch with the India of today. And this job is complicated by the fact that one amendment to the laws at a time does not cut it. You might like to see my article in Pragati magazine in August 2009, where I argue that changing the laws is the essence of financial reform in India today.
In today’s budget speech, the FM said:
101. Most of our legislations governing the financial sector are very old. Large number of amendments to these Acts made at different points of time has also increased ambiguity and complexity. The Government proposes to set up a Financial Sector Legislative Reforms Commission to rewrite and clean up the financial sector laws to bring them in line with the requirements of the sector.
Large complex IT-intensive projects
Stepping away from new laws, economic reform in India is critically about big and complex IT systems. These present unique challenges of public administration, when compared with the traditional ways of working of government in India. A new process manual is required through which these big complex IT-intensive projects can be rolled out and run.
In today’s budget speech, the FM said:
104. An effective tax administration and financial governance system calls for creation of IT projects which are reliable, secure and efficient. IT projects like Tax Information Network, New Pension Scheme, National Treasury Management Agency, Expenditure Information Network, Goods and Service Tax, are in different stages of roll out. To look into various technological and systemic issues, I propose to set up a Technology Advisory Group for Unique Projects under the Chairmanship of Shri Nandan Nilekani.
Co-contribution for unorganised sector in NPS
There is an increasing sense that a government should help grow the participation of the informal sector in a defined-contribution individual account pension system by having co-contribution. In today’s budget speech, the FM said:
90. To encourage the people from the unorganised sector to voluntarily save for their retirement and to lower the cost of operations of the New Pension Scheme (NPS) for such subscribers, Government will contribute Rs.1,000 per year to each NPS account opened in the year 2010-11. This initiative, “Swavalamban” will be available for persons who join NPS, with a minimum contribution of Rs.1,000 and a maximum contribution of Rs.12,000 per annum during the financial year 2010-11. The scheme will be available for another three years. Accordingly, I am making an allocation of Rs.100 crore for the year 2010-11. It will benefit about 10 lakh NPS subscribers of the unorganised sector. The scheme will be managed by the interim Pension Fund Regulatory and Development Authority.
91. I also appeal to the State Governments to contribute a similar amount to the scheme and participate in providing social security to the vulnerable sections of the society.
A coherent vision for pension reforms is not yet in place: right alongside this, the government talks about a National Social Security Fund for unorganised sector workers with Rs.1000 crore.
Entry barriers in banking
One of the key mistakes in Indian banking has been the entry barriers: until recently, the rules inhibited placement of ATMs, placement of branches, new private banks, branches by foreign banks, money market mutual funds. There has been some progress on placement of ATMs and branches in recent months. A next step was announced in the budget speech:
38. The Indian banking system has emerged unscathed from the crisis. We need to ensure that the banking system grows in size and sophistication to meet the needs of a modern economy. Besides, there is a need to extend the geographic coverage of banks and improve access to banking services. In this context, I am happy to inform the Honourable Members that the RBI is considering giving some additional banking licenses to private sector players. Non Banking Financial Companies could also be considered, if they meet the RBI’s eligibility criteria.
A coherent vision for banking policy is not yet in place: right alongside this, the government promises to put Rs.16,500 crore or roughly 0.3% of GDP to increase the equity capital of PSU banks.
By Eldon Mast, on February 26th, 2010
Improvement in the factory sector looked material last month. The overall level of durable goods orders jumped 3.0% and that followed an upwardly revised 1.9% December increase. Transportation spiked 15.6% in January after a 1.5% rise the month before. For the latest month, non-defense aircraft lifted-off to a monthly 126.0% increase; defense aircraft rose 11.6%;
The results far outpaced analyst expectations for only a 1.5% overall gain. The notable strength of course came from orders for non-defense aircraft & parts. Those gains that more than doubled, recouped any declines the prior two months.
Regardless of the aircraft sector, the durable factory goods sector appeared on the mend as well. Less the transportation sector, orders were enough to lift the y/y gain in orders to 8.6%. This strength suggests further improvement in shipments and that industrial output is accelerating after the modest y/y gains already logged in prior months.
Looking at core components, most of them posted gains. Leading those components: Computers & electronics were up 4.6% and communications equipment rose 3.1%. Also improving were primary metals, and electrical equipment.
Thursday’s report underscores a manufacturing sector that continues its path of accelerated Q1 growth.
By Trace Mayer, on February 25th, 2010
Operating a website requires monitoring to make sure there are no problems but doing so can uncover very interesting nuggets of information. For example, on 24 February 2010 at 11:15 EST in the evening someone at Goldman Sachs Company in the main NYC office found RunToGold through Google by searching for the phrase ‘buying silver‘.
 Gee, I wonder who that someone was and what they are thinking. Originally, I was thinking of posting their home address, picture, resume, social security number and other websites they visited but they are not safe for work and considering the hostile feelings towards the company I decided against the personal information. But Eric Schmidt, CEO of Google, would probably not mind considering his statement to Maria Bartiromo:
I think judgment matters. If you have something that you don’t want anyone to know, maybe you shouldn’t be doing it in the first place. If you really need that kind of privacy, the reality is that search engines — including Google — do retain this information for some time and it’s important, for example, that we are all subject in the United States to the Patriot Act and it is possible that all that information could be made available to the authorities.
BUYING SILVER INTENT
The brilliance of the Google Superbowl ad was in its ability to communicate an entire story with only a few lines of text.
Truly, one’s search patterns can reveal intentions. Now, what can be discerned by these virtual footprints from one of Goldman Sachs’ 36,000+ employees? Conclusively, probably not much and we (NSA) would need access to more transactional databases and the passage of S. 733 the Cybersecurity Act of 2009 but we can still speculate about talk around the water cooler or higher order drama. Who knows if that someone was the secretary, their boss or both. It was 11:15PM after all!
SILVER BACKWARDATION CLOSE
Lately I have not followed the SIFO rates closely so this was my initial suspicion and once again it appears that silver is nearing backwardation. While the paper silver market which has an unlimited supply of silver and the physical silver market is constrained by actual metal the fractures between the two are beginning to emerge again.
In 2009 I chronicled the silver backwardation that led to a 60% rise in silver prices over a seven month period. Additionally, the gold to silver ratio has moved over 10% in less than two months. With silver recently slipping below its 200dma it is becoming a good value. But with silver getting cheaper this move in the ratio portends a slowing of the precious metals bull. And so there are conflicting signals.
CFTC SILVER MARKET INVESTIGATION
The slide towards backwardation is particularly enthralling given the CFTC’s three investigations of the silver market in five years. Ironically, silver analyst Ted Butler who has been particularly vehement of the CFTC’s faux investigations seems to like the new Chairman Gensler and on 10 February 2010 wrote,
I have been unabashed in my praise for Chairman Gensler since the time he assumed office. I have called him the greatest chairman in CFTC history. … I understand that disagreement [with the praise]. Yes, he was a partner of Goldman Sachs, the dreaded “vampire squid” of the financial world. Yes, he was a participant in the deregulation of 2000, which added greatly to the financial crises of the past couple of years. Yes, he is an “insider,” with connections and access to those in power.
What could Goldman Sachs know about the silver market, what might be being discussed around the water cooler and how might Chairman Gensler’s influence with his old cronies play into this?
CONCLUSION
The digital world offers tremendous opportunity to covertly monitor and draw inferences. In this case, someone at Goldman Sachs was researching about buying silver and they could have easily cloaked their behavior with anonymous web surfing. Imagine the latent power Google and the NSA have and would using it constitute ‘insider trading‘?
Yet, a former Goldman Sachs employee is the CFTC chairman who is embarking on the third investigation of the market in five years while the metal drifts towards backwardation. The paper price of gold and silver may be drifting lower but the physical silver is getting cheaper and a better value.
If you do not have a core position, to protect against the Laboon of sovereign debt defaults, negative FDIC funds, quantitative easing, etc. then yesterday was when you should have acquired. If you already have a core position then it may good to wait a little while longer for even better silver prices such as 0.95x the 200dma.
Order the new Bank Privacy Report before the end of February and get 50% off.
DISCLOSURES: Long physical gold and silver with no interest in sovereign debt from Greece, Portugal, Italy, Ireland, Spain, etc., GS, or the problematic SLV, Streettracks Gold ETF Trust Shares or the platinum ETFs.
By Ajay Shah, on February 25th, 2010
Even if you don’t usually read the Economic Survey, this year, the chapter titled Micro foundations of inclusive growth is well worth reading.
By Claus Vistesen, on February 25th, 2010
It is a well known dictum in the context of economic analysis that you have to distinguish between stocks and flows and how focus on one instead of the other lead to misguided analysis. It is the same with growth and levels with the former defined as the growth from one period to another in a given economic variable and the latter signifying a broader perspective of the level of economic activity relative to a past or average level. One example which springs immediately to my mind was the exuberant media coverage in Denmark of the recent record high annual increase in domestic car sales in the last months of 2009 and January 2010. Surely these had to signify that recovery, at last, had hit the shores of my home country. Alas, looking at the data reveal that those months of 2008 and 2009 respectively were exactly the pinnacle of the contraction and thus the increase observed at the end of 2009 and in the beginning of 2010 was all down to the so-called base effect.
Such low or high base effects are treacherous companions for the economic analyst since they may serve to bias the analysis either in the direction of excessive pessimism or optimism. In general, any good economic analyst should be able to discern what the underlying trend is beyond any base effects. However, the I should emphasize the treacherous aspect here since it is also well known that short to medium term growth trends as a result of low/high base effects may be significant drivers of tactital decisions not to speak of outright policy movements in the context of inflation and the effect of headline price fluctuations. In this, the real savvy economic analyst is able to master the effects and trends of both short term growth movements (and their tactital repercussions) as well as the underlying level and trend of activity relative to the past.
Allow me a demonstration on this in the context of Eurozone industrial production activity;
The two graphs above show the actual trend in Eurozone industrial production both in levels and in growth overlaid with an in sample forecast by the Alpha.Sources proprietary forecasting model [1]. So far the model has been used to generate three out of sample forecasts (October 09 to December 09) and the results indicate a slight, but noticable, pessimistic bias. Consequently, the model has overestimated the annual decline in the IP index with an average of 17% in these three months.
But this is just technical drivel.
What is real important is to note the distinction between the level and growth better illustrated in the following chart;
In this way, the annual growth rate appears to be mean reverting which would imply a sharp surge in relative growth to compensate for the slump in annual growth around autumn 2008 and into 2009. However, looking at the level index and the implied forecasts generated by the model it appears that the industrial production (and thus in some sense economic activity) may have taken a lasting hit. Consequently, the relative level of activity observed in the second half of 2009 has fallen back to levels not observed since 1998 even if the index, in changes, has gravitated sharply higher moving into 2010.
In fact, and even if we assume that the index moves sideways from here the first half of 2010 is likely to see a continuing sharp surge into positive growth rates. My back of the envelope calculations suggest that a continuos monthly growth rate of 2-3% throughout the first half of 2009 are very likely since this would materialize as the index moved sideways. In fact, even if the index fell slightly from its level in H01-2009 it is likely that we well see positive growth rates y-o-y even if it would hardly constitute evidence of anything but the fact that the recovery is still a long way off.
What does it Mean?
Well, I will end the economics lesson here and simply note that both perspectives are important. This is especially the case at the moment where investors and economists alike are busy pondering whether there will be a double-dip recession or whether policy driven liquidity will push our economies towards a new bubble. Ironically, the real challenge here is to realize that these two outcomes may prevail at the same time.
In terms of the level of growth and activity the massive debt overhang in all real economic sectors mean that growth will be significantly impaired not least because long run inflation, in my honest opinion, will languish close to the deflation mark. This is especially the case in economies who need to correct external imbalances in the context of a fixed currency union.
However, there are also risks in the other direction.
No where is this more prevalent than in the Eurozone where the ECB is struggling with the obvious need to maintain rates fixed at the bottom to avoid a collapse in Southern Europe while frothy house markets in France (and lately Finland and others) look set to move higher. In fact, in a global perspective analysts closer to the situation than me have lately identified Canada and Australia as obvious places where ultra loose global fiscal and monetary policy risk fuelling asset bubbles.
Personally, I tend to focus my gaze on the level effect and thus the underlying growth dynamics but as divergence grows the other part of the equation becomes crucial to latch on too, not least in relation to international capital flows. This current dual aspect of the distinction between growth and levels makes for a treacherous but also fascinating companion, on the professional level, for the economic analyst.
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[1] – Sounds fancy no  … the model is quite simple and uses a VAR setup with the lagged change in the manufacturing order index as the only real economic variable on the right hand side to explain the annual change in the IP index.
By Rok Spruk, on February 24th, 2010
From today’s edition of Economist (link):
By Eldon Mast, on February 24th, 2010
Seasonal factors play an important part in the monitoring housing prices, pushing up prices during the high traffic months of the spring and summer and pulling them down in the cold of the fall and winter.
The Case-Shiller data on home prices was released on Tuesday. When seasonally adjusted, the data points to an extended price recovery, at plus 0.3 percent in December vs. 0.2 percent gains in the prior three months going back to September. These results point to a building on top of last years mid-year gains.
City-by-city, the data shows consistent improvement continuing to build in the West and the Midwest. The narrower 10 City Composite Index also accelerated to a gained 0.3% following three months of only a 0.2% increase.
By Richard Daughty, on February 24th, 2010
People hear my clear, clarion call for them to buy gold, silver and oil as their protection from the monetary and fiscal stupidities which abound – abound! – all around us, and they have questions, such as the one that is burned into my brain from an altercation this morning outside of the hardware store, where I was telling some idiot to buy gold, silver and oil, and which elicited the response, “Why are you yelling at us in such a deafening manner? Can’t you see that we are standing right here, you moron?” which is, if you count, actually TWO questions!
And it gets worse when another popular response is “What about the stock market? Will it go up or down?” and my answer is, being as polite as I can be, always the same: “What is it with you greedy people always asking two questions at once, which only confuses me and makes me angry? Get out of my sight, you silly rude persons, or I will, as was said in ‘Monty Python and the Holy Grail’ and from which I am obviously ripping off this stilted style of dialog because I have no creativity or talent of my own to come up with anything better, taunt you again!”
Actually, I am rude to these people because they are so stupid compared to, apparently, the incandescent brilliance of my Super Mogambo Brain (SMB), which clearly sees nothing but total, unmitigated disaster from the current monetary and fiscal position of the US and the world, and although it seems so blindingly obvious to me, I figure my surprising genius is the result of my (for one thing) living under a yellow sun, here on this planet you call Earth, and which we call Glabbynakker on my home planet, which refers to the shiny excretory pellets, which are little blue, watery balls, of a stupid creature called Glabby (actually the Greater Glabby, versus the Nervous Glabby, which doesn’t stink as much), and if you could see a glabbynakker and the Earth side-by-side, you would see the resemblance and understand why we don’t call it, like I said, Earth, and it has nothing to do with the fact that Earthlings are, apparently, morons, although the analogy of comparing Earthling intelligence to alien poopie is entirely apt, in a kind of rude, crude and inappropriate way that was not intentional at anytime heretofore, up until now, when I just thought of it, so that, from now on, it will be.
But I digress, and more to the point, if these people had been polite to me, I would have told them that they are obviously new around here, because everybody in THIS stinking little one-horse, provincial little nowhere town full of buttheads, already knows EXACTLY how I feel about the Federal Reserve creating so much excess money and credit (inflation in the money supply), especially so that the Congress can deficit-spend it (inflation in the debt), which results in inflation in prices of something, or some things, or most things, or all things, which has, fortuitously, resulted only in inflation in stock prices, inflation in bond prices (thus driving interest rates low), inflation in housing prices, although it has also produced inflation in the size and expense of government, inflation in the percentage of the population living on the government’s handouts, simmering inflation in consumer prices that will soon explode, (making the poor poorer), inflation in wages and – lest we forget! – the literal creation of the derivatives market and its massive subsequent inflations in themselves and Every Freaking Thing (EFT)! Hahahaha! We’re freaking doomed!
But the essential point is not that the idiotic Congress and the Federal Reserve disregarded the Constitution because some stinking, know-nothing lowlife bastards on the Supreme Court in 1934 said, and reaffirmed at every legal challenge since then, that it was OK to have a fiat money instead of gold as money even though the Constitution itself said otherwise, but what happens when you start creating too much money and credit; you get inflation in prices.
And as for the stock markets? They will go up and down, but mostly up, with heart-stopping falls and amazing rises, because there is a constant torrent of government deficit-spending money coming into the economy and it all, every last dime of it, will eventually come finally to rest as a profit in somebody’s pocket, and that person will have to “do something” with it.
And since the stock market will have been going up, up, up due to all the previous trillions of dollars coming into people’s pockets and being “put to work” in the stock market, it is a “natural” place to invest all of this money, as it is one of the few places such immense amounts of money, such mountains of money, such Unbelievable Freaking Scads (UFS) of money, can be conveniently “put to work”, being merely stored on computers.
Then, one day, you’re sitting on the sofa watching TV and listening to your family whining about something, probably about how you watch too much TV and eat like a pig until now you are a fat, stupid slob with stains on the front of my shirt and down the front of my pants and even on my socks (“Mom! Dad spilled food on his socks and now his feet smell even worse!”), which is really getting on my nerves, if you really want to know.
So there you are, not suspecting anything when, suddenly, out of a clear blue sky, one of Taleb’s “Black Swan Events” will come bursting onto the scene and everything will be wiped out, either figuratively (in which case gold, silver and oil should soar in price as inflation in the prices of necessities soar, as indeed the Black Swan Event could be massive inflation in food prices and a bond market collapse), or literally (in which case it won’t matter because we will all be dead).
Hoping for the best, go with gold, silver and oil! It’s not only the smart play, but also easy, as in, “Whee! This investing stuff is easy!”
Stock Market Rallies: Nothing Lasts Forever originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”
By Richard Daughty, on February 23rd, 2010
I can tell you the exact date (Saturday, February 13, 2010) that I saw that TheDailyBell.com had a “guest Editorial” by Dr. Ron Paul, who I admire because he is the only Senator in Congress whose economic philosophy is the Austrian school of economics, which, in fractured German, is “ein Austrian economischer”, which I purposely use to paraphrase John Kennedy, who famously said, “Ich bin ein Berliner”, which actually translates from German as “I am a cream-filled pastry”, but everybody knew what he meant, which was that he was just another clueless American Democrat who wanted to save the whole world by taking over the whole world so that they could change the whole world, and who had the majority of American voters and Congress behind him, all of whom have heads that, for all apparent intents and purposes, are cream-filled, and that is why Kennedy said that he, too, behaved as if he had a head filled with whipped cream.
Oh, I am sure that there are those who disagree with my interpretation of what a dead president meant when he said he was a “cream-filled pastry”, and there are those who dispute my understanding of the vital role of the taco (“The prefect snack, any time!”) and the candy bar (“Perfect for times between tacos!”) in today’s modern, health-conscious world, too, so go figure. Idiots!
Regardless, the state of my mental faculties or the fact that I sound, look and act exactly like an idiot is not the point. The point is about the importance of owning gold, silver and oil when the truly idiotic Federal Reserve keeps increasing the supply of credit and money, especially as it is used mainly to buy an avalanche of new government debt (monetizing the debt! Gaaaah! We’re freaking doomed!), and how the title of his article, “More Spending is Always the Answer”, is so ludicrously ridiculous that I could not believe my eyes that Senator Ron Paul, of all the people in the world, is saying that “more spending is always the answer”, because nothing could be farther from the truth, and it is, instead, waaaAAAaaay out there past the outermost, frigid fringes of Truth, a place where we find “The promise of True Love” and “The check’s in the mail.”
It turns out that he was being sarcastic, as I should have known, and he says, “Continually increasing the debt is one of the logical outcomes of Keynesianism, since more government spending is always their answer. It is claimed that government must not stop spending when the economy is so fragile. Government must act.”
The problem is that “when times are good, government also increases in size and scope, because we can afford it, it is claimed.” Exactly!
In short, the blockheads in Congress, the Federal Reserve, the majority of the laughably-incompetent university economics professors in the country, the morons of the President’s council of economic advisors, and all Democrats, all believe that “There is never a good time to rein in government spending according to Keynesian economists and the proponents of big government.”
As a case in point, “Last week, the House approved another increase in the national debt ceiling”, he says, meaning that the idiotic American government can now legally borrow $1.9 trillion more, on top of the $12 trillion already borrowed and owed, “to stay afloat and avoid default”, although he did not mention that this monstrous new load of debt is only expected to last until just after the mid-term elections this year, at which point Congress will take us farther and farther into a deadly financial quicksand with another extension of the debt limit! Hahaha!
In this regard, Junior Mogambo Ranger (JMR) Alan L. writes, “Call one drop of water a dollar. Five drops equals one milliliter. Question: What is the volume of water of $14 trillion?”
Instantly, I am back in high school, feeling panicked and trapped because the teacher has asked me a question that not only do I NOT know the answer to, or how to figure it out, but I don’t even care, and I never WILL care about it because if I was ever actually on a train that was leaving Chicago towards Los Angeles, 2,000 miles away, going 60 miles an hour, and I knew that another train was leaving Los Angeles going to Chicago at 70 miles an hour, I wouldn’t get on the damn train! It’s that simple!
So I don’t freaking CARE how long it would be before they met and they crashed into each other with a big explosion and there are bodies everywhere and what a mess, because I won’t be there! I’ll read about it!
Apparently, JMR Alan saw the panic in my eyes, or perhaps it was the way I was reaching under my jacket preparing to shoot my way out of here if necessary, but either way, he was pretty quick coming up with the answer: “Twenty times the volume of the Great Lakes. That puts the entire area of the United States 50 meters underwater.”
Wow! I seem to remember some handsome rascal and clever bon vivant, with a twinkle in his dazzling blue eyes and a roughish grin on his boyish-yet-rugged face, say “We’re freaking doomed!” as a result of the abject stupidity of Congress and the Federal Reserve in the last 90 years or so since the Fed was created, and especially as a result of the stupidity of the last 40 years when Nixon refused to exchange dollars for gold, and doubly especially since 1997 when Alan Greenspan really started getting insane with monetary policy, and triply especially since 2008 when the unbelievably preposterous Ben Bernanke and his loathsome Federal Reserve doubled the money supply at a stroke! At A Freaking Stroke (AFS)! Doubled!
This – THIS! – is the worst thing that could happen for those of us whose fear of hyperinflation, which is guaranteed after a hyperinflation in the money supply, makes us buy gold, silver and oil with a fearful, frantic frenzy that precludes even thinking about spouses and children, except maybe about how they are a big, heavy weight around my aching neck and my only hope is to get more gold, silver and oil, which, when I do, make the whole problem worse and worse! I can’t win!
And don’t get me started on the hassles of having a few defensive fortifications in the backyard to further protect yourself against the massive social unrest that inflation causes. Neighbors are always whining about something, like maybe a couple of accidental shots, probably less than a hundred rounds all told, allegedly emanating from the Mogambo Bunker Of Trembling Terror (MBOTT), that didn’t even hit anybody, and the only real damage was Carl’s stupid barbeque grill, which was old, rusty and ugly to start with, and I didn’t think he would even mind, and there was some collateral damage to his stupid water heater, too, which was ditto on the old, rusty and ugly.
But the point is that the Federal Reserve is going to kill us with inflation in prices as a result of their relentless inflation in creation of money and credit as a result of the federal government deficit-spending so incredibly much money, and you should get some gold, silver and oil right away!
You will be glad you did, and you can fit a surprising lot of them in even the most modest-sized bunker, yet still have lots of room for supplies of ammunition, frozen pizzas and pornography. So, whee! This investing stuff is easy!
Money Supply Flood to Drown US Economy originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”
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