By Thersites, on February 11th, 2010
From Reuters:
WASHINGTON (Reuters) – Adding a $1 per pack tax to cigarettes could raise more than $9 billion a year for states, health advocates said on Wednesday, and a poll released with the study shows Americans would support such a tax.
The poll, conducted by International Communications Research, found 60 percent of voters would support the tax to help struggling states and would prefer it over other tax increases or budget cuts.
An increase in tobacco tax rates is not only sound public health policy but a smart and predictable way to help boost the economy and generate long-term health savings for states facing deepening budget deficits,” said John Seffrin, chief executive of the American Cancer Society Cancer Action Network.
“We have irrefutable evidence that raising the tobacco tax lowers smoking rates among adults and deters millions of children from picking up their first cigarette,” Seffrin said in a statement.
The report was released by the Cancer Action Network, the advocacy arm of the American Cancer Society, the Campaign for Tobacco-Free Kids, American Heart Association, American Lung Association and the Robert Wood Johnson Foundation.
All these non-profit groups have long supported taxing tobacco more as a way to discourage smoking.
The report, available here, projects the revenue that each state could earn by increasing cigarette taxes, based on research that shows a 10 percent cigarette tax increase reduces total consumption by 4 percent.
Now first off, let me just say that I am no fan of cigarettes. I have lived with smokers and I find it to be a repulsive habit. That being said, that people are advocating taxing cigarettes, junk food or anything else is wrong for numerous reasons. First, it is your choice whether or not you want to consume things that may be unhealthy. Forced “morality” through social engineering is immoral plain and simple. Second, these types of proposals that are sold as reducing consumption of these products (which is great so long as its voluntary) are also sold as being revenue generators, which is simply an insane concept when you think about it. The government would literally be coming up with rationalizations for taking money from you. Since the government has grown into such a Leviathan it will look for reasons to penalize the people to fund itself. This is legalized plunder. A state that has to search for things to tax is a state that has grown too big.
Now the argument that this is for the public good besides the fact that it makes our citizens healthier always falls along the following lines as mentioned in the Reuters article:
“Each year in the United States, smoking-caused disease results in $96 billion in health care costs, much of which is paid by taxpayers through higher insurance premiums and government-funded health programs such as Medicaid,” the report argues
“Indeed, higher Medicaid costs are one of the reasons states are facing budget difficulties.”
Again here, as with almost all of these proposed government fixes, that smoking or obesity for example contributes significantly to healthcare costs which in turn kills the fiscal health of the nation merely addresses a symptom, not the root cause of our ultimate insolvency which is the social welfare state itself. Smokers, drinkers and obese people would not cost us so much if the social programs didn’t exist in the first place. Keep people off the dole and you won’t have proposals for ridiculous social engineering nor will you have massive budgetary problems.
By Thersites, on February 11th, 2010
Though I have written extensively about the Recession of 1920, it is worth revisiting it per Glenn Beck’s show last night. Beck rightly pointed out that the policies of decreased taxes and decreased government spending implemented by both Harding and Coolidge paved the way for the dramatic economic growth of the roaring 20s. What Beck didn’t mention was that prior to this period of unprecedented economic expansion, President Warren Harding had inherited one of the worst recessions in American history. This Recession of 1920-21 is another one of the dirty secrets glossed over in the Progressive history books.
By late 1919, America was facing inflation in prices as measured by CPI of 20%. Between 1920 and 1921, unemployment doubled from 5.2 to 11.7%. During this same period, from their peak in June of 1920, prices declined by 15.8% on a year-over-year basis, a 50% greater deflation in prices than during ANY 12-month period during the Great Depression. So what was Harding’s proposal to deal with this mess? To understand how to get out of recession, Harding looked towards how we got into it in the first place.
For America was coming out of World War I. Government was controlling huge swaths of the economy, as it had mobilized land, labor and capital towards war production and away from normal commerce as dictated by consumer demand. In addition to the mass of resources that needed to be reallocated according to market forces, the economy had been further distorted due to the policies of the Federal Reserve which had inflated the money supply by 71% from 1913-1919 (while the physical volume of business had only increased by 9.6%), and whose policies had led to an increase in prices of a staggering 234% between 1914 and 1920. Prices needed to readjust according to the reallocation of resources. In addition, not surprisingly, due to the costs of war, the federal budget had grown to $18.5bn.
One will note the parallels to our economic situation today. Just as war led resources to be allocated away from where an unfettered economy would have directed them, so too did the artificial boom fueled by the Federal Reserve and various government policies lead resources to be misallocated towards assets such as houses and stocks during our most recent boom and bust cycle. While unsustainable businesses and concomitant rises in prices developed in the private sector, the government too drastically increased.
Harding understood the root cause of recession. As he noted in his inaugural address:
The economic mechanism is intricate and its parts interdependent, and has suffered the shocks and jars incident to abnormal demands, credit inflations, and price upheavals. The normal balances have been impaired, the channels of distribution have been clogged, the relations of labor and management have been strained. We must seek the readjustment with care and courage…All the penalties will not be light, nor evenly distributed. There is no way of making them so. There is no instant step from disorder to order. We must face a condition of grim reality, charge off our losses and start afresh. It is the oldest lesson of civilization.
And so what was his big Keynesian stimulus plan to bring the economy back from the abyss? He argued during his Republican nomination speech:
Gross expansion of currency and credit have depreciated the dollar just as expansion and inflation have discredited the coins of the world. We inflated in haste, we must deflate in deliberation. We debased the dollar in reckless finance, we must restore in honesty. Deflation on the one hand and restoration of the 100-cent dollar on the other ought to have begun on the day after the armistice, but plans were lacking or courage failed. The unpreparedness for peace was little less costly than unpreparedness for war. We can promise no one remedy which will cure an ill of such wide proportions, but we do pledge that earnest and consistent attack which the party platform covenants. We will attempt intelligent and courageous deflation, and strike at government borrowing which enlarges the evil, and we will attack high cost of government with every energy and facility which attend Republican capacity. We promise that relief which will attend the halting of waste and extravagance, and the renewal of the practice of public economy, not alone because it will relieve tax burdens, but because it will be an example to stimulate thrift and economy in private life.
And so, shockingly Harding practiced what he preached. Regarding deflation, the Federal Reserve jacked up interest rates from 4.75% in January 1920 to 7% in June 1920, and held this rate through the aforementioned major drop in prices through May of 1921. Harding slashed the federal budget from $18.5bn in 1919 to $6.4bn in 1920 all the way down to $5.1bn in 1921. Meanwhile, the government actually ran surpluses during these years, allowing them to pay down the debt by $300mm from 1920-21. The Chief Economist of Chase National Bank of the era, Benjamin Anderson summed Harding’s philosophy and his attack on the recession as follows:
The idea that a balanced budget with vast pump-priming government expenditure is a necessary means of getting out of a depression received no consideration at all. It was not regarded as the function of the government to provide money to make business activity. It was rather the business of the US Treasury to look after the solvency of the government, and the most important relief that the government felt that it could afford to business was to reduce as much as possible the amount of government expenditure, which had risen to great heights during the war; to reduce taxes—but not much; and to reduce public debt.
Nor did the government increase public employment with a view to taking up idle labor. There was a reduction in the army and navy in the course of these years, and there was a steady decline in the number of civilian employees of the federal government. This policy on the part of the government generated, of course, a great confidence in the credit of the government, and the strength of the gold dollar was taken for granted. The credit of the government and confidence in the currency are basic foundations for general business confidence. The relief to business through reduced taxes was extremely helpful.
According to Anderson, how did the recession end?
…we took our losses, we readjusted our financial structure, we endured our depression and in August 1921 we started up again. The rally in business production and employment that started in August 1921 was soundly based on a drastic cleaning up of credit weakness, a drastic reduction in the costs of production, and on the free play of private enterprise. It was not based on governmental policy designed to make business good. (See Benjamin Anderson’s Economics and the Public Welfare or his gratis “The Return to Normal“)
Now we can debate fiscal and economic policy all day, but across the spectrum, it should be clear to all that a government that intervened and created the conditions for economic crisis will not be able to solve it. If government’s can create prosperity when the private sector is imperiled, then why would Americans be against government central planning when all is rosy? Do the rules of economics not apply during downturns?
If we can agree that recessions are the result of resources being improperly allocated, then we can also agree that the only way to return to economic health is to allow for their reallocation according to the market. This involves allowing nonproductive business ventures to go belly-up, prices to naturally fall where they have unjustifiably risen and reduction in the size of government allowing resources to be released to entrepreneurs to reverse the ills of the artificial boom and spur growth. All measures that impede the natural cleansing of an economy will only ensure pain and suffering like that witnessed over the last few decades in Japan. Harding had things right and it would do our lawmakers good to follow his lesson: central planning and government control creates problems; innovative Americans are the only ones who can solve them.
By Eldon Mast, on February 11th, 2010
Treasury Secretary Timothy Geithner said the country’s debt rating is not at risk because of the trillions of dollars of government spending to shore up the economy.
Asked on ABC’s “This Week” Sunday whether the government would lose its triple AAA sovereign debt rating, Geithner said: “Absolutely not and that will never happen to this country.”
Geithner said there was less risk now that the economy would slip back into recession, a pattern known as a “double-dip” recession.
“We have much, much lower risk of that today than at any time over the last 12 months,” Geithner said.
The labor market which was under significant strain last year at this time is now on the cusp of creating a substantial number of new jobs. The unemployment rate is already beginning to reflect that turn falling from 10% in Dec to 9.7% in Jan.
“We had a huge shock to the American economy and we’re still living with the aftershocks,” Geithner said. “You’re seeing the first signs now of business starting to take some risks again.”
Geither went on to dismiss earlier comments by Sen. Scott Brown (R-Mass.) — calling his assessment of the $787 billion stimulus package — “Flat wrong!”
After winning the Massachusetts election, Brown was quoted as saying that the stimulus did not create or save any jobs.
“I don’t think there is any basis for that judgment,” Geithner said.
The White House and independent economists (including our job charts here) have illustrated that the stimulus package has saved at least several million jobs and is on the verge of creating several million more by later this year.
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By Winton Bates, on February 10th, 2010
In a post a few months ago I discussed whether Ayn Rand actually viewed selfishness as a virtue. I suggested that in arguing that selfishness is a virtue she was adopting a peculiar view of selfishness because the heroes of her novels did not seem to me to be particularly selfish.
The point was explained more clearly by Neera Badhwar in the recent discussion of Ayn Rand’s ethical thought on Cato Unbound (What’s living and dead in Ayn Rand’s moral and political thought):
‘Like Aristotle, Rand holds that the virtues, including justice, are not only means to the agent’s happiness, but also an essential, constitutive part of it. Julia Annas calls Aristotle’s ethical egoism a “formal” egoism because it essentially incorporates regard for others. Rand’s eudaimonistic egoism, likewise, is a formal egoism’.
Some other participants in the Cato discussion were not so sure that Rand viewed the virtues as an essential, constitutive part of the agent’s happiness.
Roderick Long noted that Rand appears to waver between treating virtue as a constitutive part of the agent’s own interest and as an instrumental strategy for attaining that interest: ‘The constitutive approach predominates in her novels: the chief reason that Rand’s fictional protagonists … do not cheat their customers, for example, is pretty clearly that they would regard such parasitism on the productive efforts of others as directly inconsistent with the nobility and independence of spirit that they cherish for themselves, and not because they’re hoping that a policy of honesty will maximize their chances of longevity’. He suggests, however, that in her philosophical writings that ‘her emphasis began to shift, though never unequivocally, to the instrumental reading’.
Other participants suggested that Michael Huemer had an instrumental reading of Rand’s views in mind in his initial contribution to the discussion. Huemer suggested that: ‘ethical egoism posits that the only thing that ought to matter intrinsically to me is my own welfare—for me, my own welfare or happiness is the only end in itself. It follows from this that I ought not to regard other individuals as ends in themselves; rather, I should see them only as means to my happiness—just as I see everything else in the world. This is a very simple and straightforward implication of the theory. I cannot hold my own well-being as the only end in itself, and simultaneously say that I recognize other persons as ends in themselves too’.
In defending the constitutive interpretation, Neera Badhwar made the point that ‘Rand shows her philosophy in the worlds she creates in her novels better than in her non-fictional statements’. I think this is a good point. Rand’s ongoing influence stems mainly from her novels rather than her philosophical writings.
Much of the Cato discussion centred on the question of whether what is good and right for one individual can ever conflict with what is objectively good and right for another individual. Douglas Rasmussen expressed his view that ‘if human flourishing is individualized and agent-relative … then this would mean that human flourishing is different for each person, and thus it is possible for there to be conflict—that is, there is no way that one can in principle rule this out’.
Roderick Long was closest to endorsing Rand’s view that there can be no conflicts between two people’s rational interests: ‘One’s individual nature can make the requirements of human nature more specific, but it cannot contradict them. …So the fact that the human good is individualized differently for different people doesn’t entail that one person’s good can conflict fundamentally with another’s.’
Neera Badhwar responded by suggesting that such fundamental conflicts, including situations where there are two equally good candidates for one job, occur frequently.
I think it is appropriate to give Douglas Rasmussen the final word in this highly selective summary of a complex discussion:
‘I do think that it is possible for people to cooperate peaceably. This is why basic negative rights are so important, but the issue here between me and Rand seems to be whether the existence of such rights depends on the assumption that what is objectively good for one individual cannot ever conflict with what is objectively good for another. I don’t assume this. She did.’
By Claus Vistesen, on February 10th, 2010
The good folks at Icfai University Press and specifically the editor of the magazine The Analyst have queried me to answer some question on the Asian economies and their ascend to the top position (or not) of the global economy and what this means. They have shipped me some questions, given me a deadline and below I provide some answers in Q&A format. Enjoy!
Question: History reveals that every international crisis leaves a lasting mark on the world, once the crisis is over and the difficulties it brought have been encountered, things tend to change. Similarly, do you think that the current global economic crisis must lead to a fundamental reassessment of how power and influence is expressed through the world?
I belive that the current financial crisis have accentuated what we already knew and what has been present in the data and the discourse for some time. Specifically I am talking about the idea that big emerging markets such as India, Brazil, China, Indonesia, Chile, Turkey etc have slowly but steadily taken over as the global powerhouses in terms of economic growth and thus it is also natural that they are gunning for more political and institutional power. When it comes to financial crises in particular the latest batch of proposals from the Obama administration to regulate the financial industry is another and more micro oriented theme which is a recurring event in the context of economic crises. Crises are often, in this way, catalysts for abrupt discrete changes in the economic and political environment.
Ultimately then I think that this fundamental reassessment of power and influence in the world (both politically and economically) have not been initiated by this crisis but it may be reinforced.
Question: As the Great Depression paved the way to World War II and to a new world order, how far the present crisis produce grave repercussions on the global economic order?
This intimately depends on how you define world order naturally. If I have to point towards the most enduring change which appears to have come on the back on this crisis it is the attitude to debt and long term sustainability of public finances. Those of us who have been interested in demographics and its effect on macroeconomic processes have long been waiting for (and predicting) the inflection point where the mismatch between expensive welfare systems and the increasingly broken demographic structure as as result of persistently below replacement fertility. In this way, the ability to take on debt today as a liability for the future and despite the theatricals on sovereign spreads and CDS on Greek and Spanish government debt, are in fact fundamentally driven by long term liability problems. For an excellent excursion into this topic in the context of Australia/New Zealand and beyond I warmly recommend this one by John Hempton.
Extrapolating to the idea of a new economic order this brings us into a fundamental dilemma. With every part of the national identity overlevered [1] and in need to rebuild their balance sheet most economies are looking to the last part of the identity to make up for the shortfall of savings; the external balance. The problem is that not everyone can export excess savings (i.e. run a current account surplus) at the same time. In my opinion this is where the big new emerging economies come in and despite by personal skepticism towards China pulling the world anywhere it remains obvious that those who can reasonably be expected to run sustainable net external borrowing positions (i.e. current account deficits) are exactly those economies mentioned above who are about to ascend as the new drivers of economic growth. If they don’t, it is not easy to see where the growth is going to come from.
Question: The world financial crisis has been a defining moment in the ascension of emerging economies onto the international economic stage. Please comment.
Not really. In my opinion this goes back to the idea of decoupling from the US economy and how, before the crisis, many observers had their hopes pinned on the Eurozone (and the Euro) as well as Japan (and the JPY) to take over the baton from the US economy in steering forward global demand. In the context of Bretton Woods II this seemed a turkey shoot of an argument. Just de-peg from the US dollar and re-peg to the Euro and it is all engines go. Obviously, this was always going to be a mirage and essentially a smoke screen puffed up by those who have a fundamental desire to see the US economy fail and cave in on itself. So, why this detour in answering the question above?
Well, quite simply, the world “decoupled” for the US and indeed the advanced (G7) economies a long time ago.
From 1980 to 2008 the share of total world GDP made up by G7 economies declined from 51.33% to 42% and the corresponding figure for newly industrialised Asian economies rose from 7.17% to 21% and according to IMF this trend is set to continue. This is the real decoupling and it represents a major structural change in the global economy which goes far beyond the current financial and economic turmoil. Whether there will be anything particularly defining about the role of emerging economies as a result of the financial crisis is too early to say. A sovereing default in Greece or elsewhere in the Eurozone should increasingly make investors aware that global risk is not primarily present in emerging markets but actually right at the heart of the G7 and OECD edifice. Perhaps this will be a definining moment, but the general ascend of big emerging economies to the center of the world stage is not a product of the current turmoil.
Question: To what extent will emerging economies remain the drivers of global economic growth in 2010?
To a very large extent I would argue. In 2010 the IMF estimates (in their October 2009 Outlook) that the world economy will resume growing at an annual rate of 3.1% after having contracted by -1.06% in 2009. Breaking this up on the major advanced economies (G7) and developing and emerging economies the IMF estimates that the former will grow by 1.7% and the latter by 5.1% in 2010. Yet this difference does not tell the whole story. Consider then the fact that measured in US dollars (current prices) the share of world GDP made up by the G7 as well as the emerging and developing economies was 53.8% and 30.7% respectively. Yet still, and out of a total estimated value of 2010 world GDP growth at trn 3.267 USD the G7 is expected to contribute to this with only trn 1135 USD while emerging and developing economies are expected to contribute with trn 1674 USD.
More generally, this is a tendency we should expect to continue. Consequently and while global GDP forecasts into 2014 are quite fickle, forecasts by the IMF has the current price value of total world output (in USD) rising from trn 60.429 USD in 2010 to trn 74.660 USD in 2014. Out of these trn 14.165 USD, the G7 and the emerging and developed world are expected to contribute with trn 4886 USD and trn 7871 USD respectively.
In this way and I hope that my readers will forgive me the excessive arithemetic; if we take the IMF’s forecast to heart, emerging markets are definitely going to be the main drivers of global headline GDP growth in 2010 and beyond.
Question: As the evolving international order is going to be Asia centered and polycentric for a variety of reasons. Do you think that India is ready to play a larger role to ensure stability, security and peace in the world?
I sure hope so. A lot of the future stake of the global economy is pinned on India, China, Brazil, etc to develop and evolve both politically and economically. India already plays a very big role in the global economy, but is somewhat dwarfed (in terms of attention at least) by China. However, I believe this will change. Despite some well described and severe issues with a growing gender gap (which is also an issue in China) India is set to enjoy a much more stable and slow demographic transition into old age than China who will age very quickly due to its one child policy.
In this sense I forsee that India will slowly but surely take over from China as the big global emerging economy powerhouse. However, and beyond the obvious political responsibility this entails it also comes with an economic ditto. Thus, one of the biggest problems with China is that she will never be able to run a respectable external deficit that would resolve and alleviate global macroeconomic imbalances. A deliberate mercantilist policy and the effects of the one child policy which strips the economy of the capacity to suck up its own (let alone foreign) savings are two crucial factors here. In my opinion we have one shot to correct these global imbalance and much will hinge upon India (and the rest of the emerging pack) here. Specifically, India must ensure that the demographic transition is kept in check from below as well as, currently, from above. By this I mean that Indian must ensure that it does not fall into a fertility trap with total fertility rates lingering below 1.5 children per woman. Secondly, India should shy away from mercantilist policy. Standard economic theory tells us that external borrowing is not an ill if matched by a sound and long term oriented investment policy as well as capacity in the economy proxied by a large share of young to mature workers out of the total population.
Especially the argument on preventing fertility to fall too far and too rapidly is quite politically incorret at the current juncture with climate and overpopulation (still) dominating the discourse. However, it is crucial in my opinion that we are able to differentiate the debate to look at both sides of this coin. Otherwise, India and the rest of us will regre it.
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[1] – (investments, consumption and the government)
By Thersites, on February 10th, 2010
From Bloomberg:
Treasury Secretary Timothy F. Geithner said the U.S. is in no danger of losing its Aaa debt rating even though the Obama administration has predicted a $1.6 trillion budget deficit in 2010.
“Absolutely not,” Geithner said, when asked in an ABC News interview broadcast today whether a downgrade is a concern. “That will never happen to this country.”
The U.S. plans to rein in the deficit once the labor market recovers, Geithner said. In the short run, that means focusing on ways to “make sure that this economy is growing again,” he said. The administration says the deficit will shrink over the next four years as more Americans find jobs and the economy accelerates.
“This is within our capacity to do,” Geithner said.
Where to begin? First off, I have long believed that Tim Geithner is in fact the fall guy for the economy in the Obama administration. He has been involved with the bailouts from day one including perhaps a criminal one with AIG, come off as smarmy and weaselly in testimony and been perceived as less competent and well-liked than Bernanke in the court of public opinion. If I had to guess, when it becomes clear that we are stuck in the economic doldrums (probably closer to the 2010 elections), Barack Obama will fire Geithner and trudge out a man with more panache and credibility, likely Paul Volcker.
On the substance of Geithner’s comments, that anyone in this administration can actually believe that the economy is going to accelerate and the deficit will shrink over the next four years is laughable. Even if you had breakneck economic growth, and there are absolutely no signs of that on the horizon, the deficit is still growing at an exponential rate, and Congress has shown no signs that it is going to take the steps to deal with the most bloated line items — namely entitlements. The most expensive parts of our budget are considered sacred, and for a politician to touch them would be considered a sin.
How could Geithner be right that we will never lose our rating? Well, the ratings agencies are US companies, granted an oligopoly by the state, so it is possible that government could threaten them were they to consider downgrading us. In this scenario we could have a de facto downgrade however if yields spike up in the bond markets on US debt with Treasuries trading effectively as if we have been downgraded. Another scenario is that the government builds false demand (or an artificial “bid” in trader lingo) to keep the yields on our debt low by either pressuring the primary dealers to continue to gobble up our bonds (and then at times selling them back to the Fed shortly thereafter), threatening foreign nations to prop us up or creating some kind of incentive to get Americans to invest in Treasuries. Otherwise, I don’t see how America can be considered fiscally Aaa, but then again the ratings agencies rate a lot of junk Aaa. They can in fact put lipstick on a pig.
By Trace Mayer, on February 9th, 2010
When a daisy chain of retrocessionaires exists, a single weak link can pose trouble for all. In assessing the soundness of their reinsurance protection, insurers must therefore apply a stress test to all participants in the chain, and must contemplate a catastrophe loss occurring during a very unfavorable economic environment. After all, you only find out who is swimming naked when the tide goes out. At Berkshire, we retain our risks and depend on no one. And whatever the world’s problems, our checks will clear. – Warren Buffett in the 2001 Berkshire Hathaway Chairmen’s Letter 
Having read all of the Berkshire Hathaway Chairman’s letters I can attest that there are many pearls of investing wisdom contained therein. I prefer to keep my capital safe and not dependent on insolvent banks, which are barbarous relics compared to digital gold currency, in order for my checks to clear. Just look at the FDIC failed institution list. Nevertheless, the Great Credit Contraction grinds on and it appears the next round is imminent; a Laboon is coming. As Australia’s News reports for the week of 6 Feburary 2010,
Representatives from 24 central banks and monetary authorities including the US Federal Reserve and European Central Bank landed in Sydney to meet tomorrow at a secret location, the Herald Sun reports.
Organised by the Bank for International Settlements last year, the two-day talks are shrouded in secrecy with high-level security believed to have been invoked by law enforcement agencies.
If the recovery is doing so well and if the credit crisis has subsided then why all the secrecy? Why not tell everyone, openly, the true state of affairs? Why does the Fed deny release of gold swap information under the FOIA requests from GATA? But we know why. Vampire squids operate in the shadows of secrecy and evaporate in the sunlight of truth.
THE LAST DAYS OF LEHMAN BROTHERS
Over the weekend I watched The Last Days Of Lehman Brothers and found it pretty entertaining. For those who have not seen it I would recommend picking up a copy.
The day of reckoning has only been delayed and will be intensified. This round will be attacks against currencies not investment banks. Perhaps that day of reckoning is coming sooner?
EURO BEGINS EVAPORATING
The only plausible fiat replacement for the FRN$ is the Euro. But if you think the FRN$ has problems the Euro’s are a multitude greater. But after the Euro evaporates, and it will eventually, then it will be time for the FRN$ to evaporate. There is only one alternative for the world reserve currency.
On May 20, 1999 Alan Greenspan testified before Congress, “And gold is always accepted and is the ultimate means of payment and is perceived to be an element of stability in the currency and in the ultimate value of the currency and that historically has always been the reason why governments hold gold.”
WHEN THE TIDE GOES OUT THE LABOON COMES
In Southeast Asia on the coasts of Thailand and Burma (Myanmar) live the Moken people who catch fish for their sustenance. For hundreds of years the tribal knowledge of the sea has been passed from father to son. One sign of particular importance is when the water recedes. Why? Because then soon comes the ‘Laboon‘ – a wave that eats people.
The elders of the village saw this terrible sign in December of 2004 when the massive tsunami slammed Southeast Asia killing over 200,000 people. I am sure the greyheads shouted and hooped and hollored in an attempt to warn everyone to run to higher ground. And like humans are I am sure not everyone listened or was liquid enough to move and undoubtably some must have perished in the Laboon.
In the financial world, gold is the highest ground to protect against financial asset destruction because it is the King of Commodities, the ultimate means of payment and is always accepted. Gold can stay at the bottom of the ocean for 500 years and still have the same amount of value when you pull it out. In other words, you can wait any crisis out indefinitely.
On the other hand, when you are in money market funds, auction rate securities, the massive bond market, (nationalized) retirement accounts, frozen bank accounts in Greece or Iceland, Monex, Failure-To-Delivers that weave the fiction of liquidity on the NYSE through the DTCC, or any other multitude of financial asset then you do not own an asset with intrinsic value. That asset can become either worthless or not be accepted for value like with ARS, CMBS, and etc. which makes H.R. 4248 The Free Competition In Currency Act of 2009 all the more important.
THE GOLD PULLBACK WAS HIT
On 28 December 2009 in Third Round Of Gold Upleg Ready To Start I concluded,
Sure, the third round of the upleg could not materialize for any number of reasons such as interest rates being raised, the mythical Cibola being discovered, etc. As the upleg progresses the gold to silver ratio should probably close from the current 63.27 towards a more normal 50-55. The better time to buy gold, silver or platinum was before the first or second rounds of this upleg. But if the precious metals are absent from one’s portfolio then the second best time to buy them is now although the real bargain may be around $1,050-$1,080 but we may not see that.
With gold trading around $995 on 9 September 2009 in Gold Party Barely Started I wrote, “This puts $1,300 gold and $25 silver within range without greatly exceeding previous trading norms”. With the current silver to gold ratio at 70.8 silver looks increasingly cheap.
I reiterated the opinion of $1300 by Q2 2010 on 9 October 2009 when interviewed on BNN. About a month later I was joined in the $1300 price target by Paul T. Jones II of Tudor Investment Corporation and on 4 February 2010 John Embry of Sprott Asset Management, a long-time gold advocate, chimed in with a similar opinion.
Gold should continue to consolidate over the next few weeks but, the next big move is likely to be up.
This is the view of Sprott Asset Management’s chief investment strategist John Embry, who says he is looking for the price of the yellow metal to hit around $1,350 to $1,400 by late spring.
CONCLUSION
The Last Days of Lehman Brothers, like the movie Rollover, is playing out before our eyes but not with investment banks but with currencies, the common stock of nations. A memorable quote was, ‘Nothing is something.’ And that is the reason to own gold. As The Great Credit Contraction grinds on capital will oscillate in waves between gold, the FRN$ and the Euro as capital seeks safety and liquidity which results in the fictitious capital being evaporated. For those who have not secured their financial castle on high ground, now is not the time to be hunting around for sand dollars in the retreated water.
The bailouts, quantitative easing and gigantic government enforced Ponzi scams known as retirement schemes will only cause the Laboon, which currently races towards the financial shore at a breakneak pace, to be that much larger and more intense. Despite what Geithner shrills, Treasury debt will not only lose its Aaa status it will eventually become worthless. The impotent costumed officials will be no more successful at holding off the Laboon than King Cnut was in ordering the sea to go out.
DISCLOSURES: Long physical gold and silver with no interest in sovereign debt from Greece, Portugal, Italy, Ireland, Spain, etc., Euros or the problematic SLV, Streettracks Gold ETF Trust Shares or the platinum ETFs.
By Russ Nelson, on February 9th, 2010
Seems like every handful of years, somebody starts yammering about how much money candidates spend to get elected. About how that spending is going up and up and up. And they claim that that’s a sure sign of corruption.
Not likely. Look instead at the ratio of federal spending versus spending by presidential candidates over several decades:
See how the ratio varies between 1 and 2.5? That’s because candidates spend in proportion to the power they’ll have. If you want them to spend less, expect them to do less and spend less of your own money.
By Eldon Mast, on February 9th, 2010
You may recall our optimistic prediction in November that the positive trending in the labor market pointed to net jobs growth by Christmas. Revised government numbers on Friday bolstered that assertion.
Further it is now clear that for job seekers in 2010, the economy will likely be their friend. With a 5.7% GDP growth in the fourth quarter of 2009, following the 2.2% increase in the third quarter, this recovery is already stronger than the last two.
Furthermore, (as our updated chart illustrates) the U.S. labor market is on the cusp of substantial, sustained positive job growth. And this net jobs creation is coming only two quarters after the end of our deep recession. That’s just one-third of the 21 months it took for job growth to resume after the 2001 recession. A jobless recovery? Not this time. As our chart suggests, given current trending, the U.S economy will likely add more than 100,000 jobs in February. And the picture looks even better come springtime.
The government’s monthly job report on Friday showed that the disastrous labor situation that plagued the nation’s economy going into 2009 is now on the mend. The unemployment rate has peaked and now fallen in January to 9.7%.
Perhaps the most encouraging sign from the current report was the addition of 52,000 temporary workers. Temporary worker hiring often signals that employers are starting to gear up again.
Additionally — the report shows — employers brought many “reduced hour” workers back to full-time work status in January. That concrete move is frequently seen as a precursor to hiring additional workers as recovery takes root.
Even cautious economists like Mark Vitner of Wells Fargo remarked on Friday that despite his opinion that the January falling unemployment rate “showed an exaggerated sense of improvement in labor market,” he continued, “But there is improvement. I don’t want to take that away.”
You may recall our optimistic prediction in November that the positive trending in the labor market pointed to net jobs growth by Christmas. Revised government numbers on Friday bolstered that assertion.
Further it is now clear that for job seekers in 2010, the economy will likely be their friend. With a 5.7% GDP growth in the fourth quarter of 2009, following the 2.2% increase in the third quarter, this recovery is already stronger than the last two.
By Ajay Shah, on February 8th, 2010
- Read this interview in the Times of India with Steve Coll, and this Congressional testimony of his. If you haven’t yet read Ghost Wars, you should.
- Vijay Kelkar’s recent speech on privatisation.
- The comments on this blog post are worth reading.
- Sanjeev Sanyal, in Business Standard, summarises our public policy problem: we need to build a strong (i.e. capable) State with a limited mission.
- Joe Leahy, in the Financial Times, has an article titled India: A nation develops about global quality R&D taking place in India. I’m pleased that researchers are being paid salaries large enough to make it easy to relocate to India. Also see David Brooks in the New York Times on Israel’s achievements in this.
- Tamal Bandyopadhyay in Mint on the woes of foreign banks in India.
- Pratip Kar in Business Standard on competition between stock exchanges in India.
- Parth Shah debates Vinod Raina in the Business Standard on private schools.
- Nitin Pai has a response to Barbara Crossette’s diatribe.
- Vikas Bajaj in the New York Times on the literature festival in Jaipur. How civilised. I have long felt that a genuine life of the mind in India is 25 years or more into the future. Maybe that’s being too pessimistic.
- Olivier Coibion and Yuriy Gorodnichenko remind us that we are in the Great Moderation.
- Shai Bernstein, Josh Lerner, Morten Sorensen and Per Stroemberg have an NBER working paper titled Private Equity and Industry Performance . They find that industries where PE funds have invested in the past five years have grown more quickly in productivity and employment.
- Michael Slackman in the New York Times, taking stock of Dubai.
- One of the best blogs that I know of, from India, is `Wanderer’s Eye’, by Aniruddha Dhamorikar. E.g. see his latest post, on a mother wasp. Also see: a great collection of pictures on India.
- In the Hall of Shame of the 25 dirtiest cities of the world, by Forbes magazine, Bombay is at rank 7 and Delhi is at rank 24.
- Watch me talk about the recent RBI credit policy announcement — part 1, part 2.
- Raghuram Rajan has a careful response to the Obama’s proposals, which illuminates my recent writings on this.
- Scott McNealy has a beautiful goodbye note to Sun.
- Chris Anderson has an amazing story in Wired magazine about the new world of `small batch’ manufacturing.
- Miles Corwin has an inspiring story for everyone who wants to be a writer or a journalist. And, for anyone engaged in deep thinking about the media, do not miss this lecture by Alan Rusbridger.
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