By Simon Grey, on November 9th, 2011
Seriously, what’s so difficult about allowing student loans to be discharged in bankruptcy? Today, President Obama is effectively giving college students and their parents his middle finger. Whereas Jobs’ prank was harmless and symbolic, the President’s plan to bail out student loans will derail the entrepreneurial dreams and financial security of countless young people. [Ed. - this claim is utter bulls**t.Bailing out student loans will increase their financial security because they will no longer be slaves to the banks. And, with less debt, they can actually become entrepreneurs.]
By executive order, the President’s unconstitutional “We Can’t Wait – Pay As You Earn” plan modifies the existing Income-Based Repayment Plan so that, effective in 2012, graduates may cap their loan payments at 10percent instead of 15 percent of their discretionary income. Anything remaining after 25 years (formerly 20 years) becomes fundamentally the taxpayers’ responsibility. And, if a student wants to become a public servant (i.e. work for George Soros) his loan will be forgiven after just 10 years.
Obviously, Obama is playing for political points with this plan, presumably to mollify the OWSers, so I understand outrage for that reason. But what I don’t understand is how anyone thinks that student loans weren’t already the taxpayers’ responsibility. The government guaranteed student loans a long time ago, which is one of the reasons there’s a college bubble—private lenders face virtually no risk on the loans. In fact, the government guarantee of repayment is why default was taken off the table as an option: the government didn’t want taxpayers to take it in the shorts.
Neo-con bomb-lobbing aside, Obama’s plan is pretty terrible. It shouldn’t wreck the economy(at least no more than seeding a college bubble would), and it’s better than a jubilee for the loans, but there is still a much better solution available: the federal government should stop guaranteeing student loans and allow them to be discharged in bankruptcy. This way, college student wannabes won’t be as inclined to pursue worthless degrees and banks won’t be as inclined to fund the pursuit of worthless degrees. You don’t need bailouts, you don’t need special debt laws, all you need is the ability to discharge student debt during bankruptcy. Problem solved.
By Eldon Mast, on November 9th, 2011
The Labor Department announced on Tuesday that the number of positions waiting to be filled in the U.S. rose in September to the highest level in more than three years. Job openings increased by 225,000 to 3.35 million, the most since August 2008.
Hiring also advanced by 185,000 to 4.25 million.
Last Thursday the government announced that payrolls grew by 80,000 workers in October, and that gains in the prior two months were revised up, by nearly 102,000 positions.
In the 12 months ended in September, the recovery has now created a net 1.3 million jobs, from a gross total of 48.3 million new hires.
By B.P.T., on November 9th, 2011
The Mortgage Bankers’ Association purchase index will be released at 7:00 AM Eastern time, providing an update on the quantity of new mortgages and refinancings closed in the last week.
At 9:30 AM Eastern time, Federal Reserve Chairman Ben Bernanke will make remarks at the Conference on Small Business and Entrepreneurship during an Economic Recovery.
At 10:00 AM Eastern time, the Wholesale Trade report will be released for September, showing inventory levels for wholesalers in the United States. The consensus is that wholesale inventories increased 0.6% .
At 10:30 AM Eastern time, the weekly Energy Information Administration Petroleum Status Report will be released, giving investors an update on oil inventories in the United States.
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By The Gold Report, on November 8th, 2011
 A war-mongering U.S. government could be less than 18 months away from decimating the last 5% of value left in the dollar, says Richard Maybury, the author of the U.S. & World Early Warning Report. Until some new exchange-traded-fund-like basket of natural resources provides a store of value, this “juris naturalist” has some advice about how to protect your wealth during the coming collapse.
The Gold Report: Richard, last month, you made a presentation at the Casey Research/Sprott Inc. “When Money Dies” Summit entitled “The War that Will Kill the Dollar.” You explained that the corrupting influence of power had sent our country’s leaders shopping for war, disregarding Westphalian respect for sovereignty and hastening the collapse of society. What are the signs that we are reaching a critical point? And, is there any way we can change course?
Richard Maybury: You can see the signs very clearly in the Middle East and North Africa. The Federal government is involved in several wars there that have nothing to do with America. One of the best examples is Libya. U.S. officials are taking credit for Moammar Gadhafi’s death just a year after they were bragging about having tamed the threat. Now Libya is a mess. It will very likely be taken over by some sort of Islamic government that isn’t going to be very friendly to America.
TGR: Why do we, as a country, do this? If it’s not going to end well for us, what’s the economic or political reason to get involved?
RM: The U.S. government gets into wars in far corners of the world that have nothing to do with America because the leaders like getting into wars. That is how presidents achieve greatness in the history books. A president has no prayer of going down in history as great unless he has won a war. Look at Mount Rushmore. All four presidents featured there won wars. That seems to be the number one criteria historians use for deciding whether someone is a great president. It constitutes an automatic incentive to go out looking for wars.
TGR: What is the incentive for the American people to go war shopping?
RM: Nothing. It’s absurd. During the First Gulf War, people had a tremendous good feeling about going to war with Iraq. They would come home from work, order a pizza, sit in front of their TV sets and watch the war like it was a football game. War became a form of entertainment.
TGR: Is there anything we could do to incentivize our presidents to act peacefully?
RM: I doubt it very much. People go into politics because they seek political power. Once they get the power, they naturally want to use it on somebody. What is the point of having power if you can’t use it? So, no matter what kinds of controls you put on, future presidents will find a way around it.
The ideal situation would be one where war is used as a last resort. Westphalian sovereignty, a set of agreements dating back in the 1600s, established the precedent that the European powers would only go to war in self-defense. You had to have a clear and present danger before you could go to war. And, even then, it was supposed to be the last resort. That was the basis of international law up until this year. That isn’t to say that the Westphalia treaties weren’t violated a lot of times, but they helped. After Iraq, Serbia and now Libya, it is pretty clear that the policy is we can just go out and hit anybody we want for any reason we want as long as we believe the other guy is up to no good.
TGR: If this is the new reality, then let’s talk about some of the economics around it. War is expensive. You have pointed out that since the Federal Reserve was created in 1913, the dollar has lost 95% of its buying power. You said, “War destroys currencies.” It usually leads to governments printing more dollars to pay for guns and tanks. How much debt and overprinting can the country take before the velocity of economics, which is something that you also talked about in association with how quickly dollars are exchanged, catches up with reality and the dollar loses that last 5% of its value?
RM: Velocity refers to the speed at which money changes hands, and it is a measure of money demand. When people don’t really want the money, they start trading it away faster, trying to get their hands on things they do want, things that have value that they trust. The cost of this war in the Islamic world will continue going up. At some point, it’s going to be a major contributor to people losing what confidence is left in the dollar and people all over the world will start dumping it. This is a psychological thing. It’s about emotions, so it is hard to pinpoint when they will lose all confidence in the dollar.
TGR: What would it look like if that last 5% were gone? Are we talking about hyperinflation? Are we talking about banks collapsing? Are we talking about bartering? What would it look like?
RM: We are talking about all of that. It would be chaos. We saw it in Zimbabwe when the Zimbabwean dollar became worthless because the government printed so many that people wouldn’t accept them anymore. The country experienced enormous runaway inflation where prices were rising 50% a day before the Zimbabwe dollar collapsed.
It would probably start with someone somewhere in the world selling off his dollars and begin trading them for whatever it was he had confidence in. The foreign exchange value of the dollar would fall. Other people would notice; they would get scared and start selling their dollars. The foreign exchange value of the dollar would drop more. This process would continue until you have panic around the world to get out of dollars. Americans would be the last ones to get involved. We are always the last to know what is happening to America. Suddenly Americans would wake up one morning and find that a gallon of milk that cost $4 the day before costs $6 today. The next day they would find that it costs $12. And the next day they would find that it costs $36. That is when Americans would realize that they are in deep trouble; their dollars are about to become worthless.
TGR: Of course the Fed wants to avoid that scenario. You describe yourself as a follower of Austrian economics made famous by the Nobel laureates Friedrich Hayek and Ludwig von Mises. They describe financial systems as complex processes run by billions of constantly changing individuals rather than something that can be manipulated from a central point, which seems to be what is being attempted right now. If that is the case, what will be the outcome if the central government tries to force a more Keynesian control of the flow of money?
RM: They will mess it up even worse than they already have. The world has been living under Keynesian economics since 1971 when Nixon took the dollar off the gold standard. John Maynard Keynes was a semi-socialist. He believed that the way to fix the economy was to print a whole bunch of dollars and dump them out there. This has been standard procedure for the past 40 years. All currencies have been dropping in value during that time. Another round of quantitative easing (QE) could further speed the rate at which the money circulates, something that has the same effect as increasing the supply of dollars, creating a larger demand for goods and services and having an inflationary effect. I think Fed officials are dropping hints about the next QE because they are trying to cause velocity to rise, a secret QE if you will.
TGR: What if the stealth QE campaign doesn’t work? What form might a real QE3 take?
RM: It is hard to tell what they will do. One of the myths that everyone is taught is that the government has some sort of tremendous understanding of economics and the ability to make adjustments to economic activity. The term fine-tuning is used sometimes. Actually, we are talking about a group of human beings who don’t know much more about real economics than anybody else. They think they do, but they don’t. They just bounce around from one attempt to control things to the next, making a mess of the country. The economy is not a machine. It is people, human beings. It is a biological system, not a mechanical system. But, the government treats it like a mechanical system, so they are always making mistakes.
TGR: If war and hyperinflation are the inevitable future, how can investors survive or maybe even thrive during a time like this? What are the opportunities? Natural resources? Commodity equities? Where can we be safe other than putting that $100 bill under the bed?
RM: Well, I wouldn’t put $100 under the mattress, at least not for very long, because it will soon become worthless. But commodities, stocks of raw materials firms, gold and silver and platinum coins have value. Generally, I try to see the world in terms of two kinds of investments: dollars and non-dollars. You definitely want non-dollars, things that do not have their value tied to the value of the dollar. An example of a dollar asset is something like a bond or bank CD. Their values are tied directly to the value of the dollar. If the dollar falls, then their values fall.
Gold is a non-dollar asset. When the dollar falls, usually gold rises. The same is true with silver and oil. All of these things have values that are not tied to the dollar. My advice is to invest in non-dollar assets. Gold would be at the top of the list, silver and platinum and then oil.
TGR: In your Early Warning Report Newsletter, you predicted that gold will top $3,000/ounce (oz), silver will hit $50/oz and oil will exceed $300/barrel. Gasoline will go to $9/gallon. When will we see these rises? And what will be the catalysts that take them there?
RM: The next QE, which I expect to come along no later than March, could set off a flight from dollars. Then we could see those predictions realized within 18 months.
TGR: You said that once we have had this loss of the entire value of the dollar and people are looking for another way to trade, money could be based on some collection of metals with currency acting as a receipt for the tangible gold, silver, platinum and whatever else happens to be in that basket. What would that transition look like? How painful would that be? How would it be orchestrated?
RM: It doesn’t have to be painful. The markets are moving in that direction. People trade exchange-traded funds (ETFs) for practically everything now. I can envision a mutual fund or an ETF that is a collection of various things. It could be gold, silver and platinum. It could have oil in there. It might include Swiss francs. It could even have various patches of real estate. The ETF itself would then become a currency, not because anybody has it planned that way, but because the markets will see that there will be a demand for something that is a non-dollar asset that is easily tradable and seen as a store of value. There would probably be hundreds of these baskets of assets at the start. Some would work better than others would; the less workable ones would shake out. You might wind up with maybe a half dozen ETFs or mutual funds that are baskets of various assets circulating in the world. They would essentially become the currencies.
TGR: Would investing in ETFs now be a good way to prepare?
RM: No. I don’t know of any that are arranged that way. It may be a while until somebody catches the idea and decides to give it a try.
TGR: What about the precious metal equities? Would that be a good way to prepare?
RM: Yes. There are lots of good precious metal stocks. I own quite a few. That is another way to protect yourself. However, be sure to deal with a broker who really knows natural resources. You have to have some skill in picking those stocks. It’s not like going down and buying a gold coin where you just walk into the coin dealer and tell him I want a handful of American Eagles or Canadian Maple Leaves. You really have to know what you are doing when you are buying gold stocks.
TGR: Any final thoughts you want to leave with The Gold Report readers?
RM: The world has changed. When you look at the news and you say to yourself, “My God, America isn’t what it was; the world isn’t what it was,” have the confidence to know you are right. We are probably not going back to what America or the world was anytime in my lifetime. Therefore, you want to start learning everything you possibly can about this new condition and adapt to it.
TGR: Thank you for sharing your thoughts.
RM: Thank you, JT. I appreciate being here.
Richard Maybury, the author of the U.S. & World Early Warning Report, has written 22 books, including the Uncle Eric series, which focuses on economics, law and history. He has been interviewed on more than 250 radio and television shows. He is a Vietnam War veteran who served in the Air Force’s 605th Air Commando Squadron, a special operations unit involved in covert warfare in Central and South America. He has since lived and traveled the world, visiting 47 states and 45 countries. He considers himself a “juris naturalist” who believes in a natural law higher than any government’s law. You can visit his website at or phone 1-800-509-5400.
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By Ajay Shah, on November 8th, 2011
When electricity distribution networks fall into place, people start using electricity for everything. Heating, air conditioning, cooking, etc.: electricity is the supple path to all applications. Electricity is conveniently accessed at home, but at a system level, there are problems. Electricity is typically made in big facilities, primarily by burning coal or gas. It is then inefficiently transported to the home. Coal has the worst carbon footprint. Given the domination of coal in Indian electricity production, electricity consumption in India is highly carbon intensive.
Gas delivered to the home is a superior alternative, but this requires gas distribution to the home. A brand-new distribution infrastructure needs to be built, for delivering gas to the home. Once gas is at the home, it can be used for cooking and for heating. To the extent that this is done, it reduces the carbon footprint of residential energy consumption. And, given the way the world is going, gas delivered to the home is likely to be significantly cheaper (per joule) when compared with electricity, even without a carbon tax. (Question: Does someone know the price per joule for residential electricity versus piped gas in India?)
When we think about global warming in India, the dominant impulse is to say to the rich countries “this is not our problem; you guys loaded up the atmosphere with CO2, you guys fix it“. While this approach has strengths, it is also important for India to find low-carbon paths to development. We have a problem in having a highly coal-fired economy. We also have the malleability in having the bulk of our energy system of 2050 having not yet been built out: this gives us choices about what should be done. In contrast, most rich countries have less room to maneuver. Policy decisions in India will determine whether cities develop energy-efficient mass transportation systems (such as the Delhi Metro) or not; in contrast, there is no possibility of Los Angeles or the Bay Area developing a good transportation system.
I suspect that gas is likely to be India’s low-carbon bridge to renewables and nuclear, exactly as it will be for the rest of the world. From this perspective, we need to start looking for market-based channels to do more on building the gas ecosystem. One interesting litmus test that we can use is the number of households where one sees gas-fired water heating.
This requires distribution networks for gas, and then households have to switch from electric ovens, water heaters, stoves to gas-fired equivalents. In India, a few cities are now starting to have gas distribution to the home. In time, households should increasingly build up the capital stock of gas-fired appliances, motivated by the superior pricing of gas.
And this gives us an illustration of India’s malleability. The CMIE household survey shows that at present, 5.5% of households in India today have one or more geysers (this is for the quarter ended June 2011). For these 5.5% of households, there is the question of junking the existing capital stock and shifting over to a gas-fired appliance. Presumably the differential pricing of electricity versus gas will justify such a shift for the household, but for India, it is a waste when there is such destruction of capital stock. Far more interesting are the remaining 94.5% of households. We should be doing things today, so that over the next 25 years, when 94.5% of India’s households will buy a geyser, they will go towards a gas-fired heater rather than an electric one. From this perspective, I was surprised to see a sales flyer of a small company — P. K. L. Ltd. — talking about a gas-fired water heater: This was news, at least to me. I have never seen a gas-fired water heater being sold to a household before in India. I walked over to the Croma website and they don’t have one. Similarly, all the water heaters at ezone are electric. Amusingly enough, the P. K. L. Ltd. website also does not talk about a gas-fired water heater. So either this is vapourware or their website is not updated. Do you know any firm selling gas-fired water heating for homes in India, and do you know any home that has one?
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By Simon Grey, on November 8th, 2011
If you weren’t sure about the existence of a college bubble, here’s proof:
When the number of psychology majors increase by 135% over25 years, you can be reasonably sure that there’s a college bubble because a) psychology is not a science, it’s a form of bovine fecal matter and b) economies don’t need psychologists in order to grow and thrive. In essence, more than doubling the number of psychologists in the economy is not going to cause massive growth.
So why are there so many psychology majors? Simple: The ease of obtaining student loans makes it appear that there is more demand for psychologists than actually exists. And why do current students believe there is more demand for psychologists than actually exists? Again, simple: the government has incentivized the extension of student loans by guaranteeing repayment thereof. When a student defaults, the government pays the lender then goes to collect the remaining debt. Sometimes the government uses the banks’ collections agencies to collect the loan, which then makes defaulting on student debt a very attractive proposition for the bank that originated the loan.
So how do we know that the increase in psych majors proves there’s a college bubble? Easy: the government’s involved, and is actively encouraging the pursuit of a college education. Plus, does anyone think that so many would pursue a psych degree if they couldn’t finance it so easily?
By B.P.T., on November 8th, 2011
At 7:30 AM Eastern time, the NFIB Small Business Optimism Index for October will be released, providing information regarding the health and confidence of small businesses in the United States. The consensus is that the index is at a level of 89.3, which is 0.4 points higher than the previous month’s value.
At 7:45 AM Eastern time, the weekly ICSC-Goldman Store Sales report will be released, giving an update on the health of the consumer through this analysis of retail sales.
At 8:55 AM Eastern time, the weekly Redbook report will be released, giving us more information about consumer spending.
By Christopher Briem, on November 7th, 2011
PG has a gloomy picture of seasonal hiring; based mostly it seems on some national punditry. Never fear, regional seasonal trends in retail employment look awfully metronomic (see below). Seasonal spikes of between 6 and 9K jobs spikes from September to December are pretty consistent, even during the worst of the recession here a couple years ago.
 The more interesting and more important trend is not the seasonal cycle, but the unabated decline of retail employment overall. Since we really are consuming as much as we used to if not more, the trend looks like the continued evisceration of main street retail. Generally there are more of the largest retail establishments and for sure a lot fewer of the smallest retail establishments than just a decade ago. The exception being the one 1000+ retail establishment that was showing up in 1998, but not there in 2009. I should know what that was, but can’t quite place it? I think it must be the Macy’s regional HQ jobs that were the vestige of Kaufmanns. I would have coded them as the industry Management of Companies and Enterprises, but if they were still coded as retail that would be a thousand or so jobs lost at one location.
At the smaller end of the spectrum, in just over a decade over a thousand retail establishments with fewer than 10 employees went away across the region.
| Retail Establishments in the Pittsburgh MSA by Establishment Size |
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Number of Employees |
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Total Establishments |
1-4 |
5-9 |
10-19 |
20-49 |
50-99 |
100-249 |
250-499 |
500-999 |
1000 or more |
| 2009 |
8,447 |
3,276 |
2,284 |
1,577 |
812 |
262 |
198 |
31 |
7 |
0 |
| 1998 |
9,493 |
3,949 |
2,657 |
1,620 |
750 |
301 |
172 |
38 |
5 |
1 |
By Ajay Shah, on November 7th, 2011
On 25 October, Dr. Subbarao announced a 25 basis point hike in the policy rate. Alongside this, he made statements that were widely interpreted as being dovish:
Keeping in view the domestic demand-supply balance, the global trends in commodity prices and the likely demand scenario, the baseline projection for WPI inflation for March 2012 is kept unchanged at 7 per cent. Elevated inflationary pressures are expected to ease from December 2011, though uncertainties about sudden adverse developments remain.
…
Inflation is broad-based and above the comfort level of the Reserve Bank. Further, these levels are expected to persist for two more months. … However, reassuringly, momentum indicators, particularly the de-seasonalised quarter-on-quarter headline and core inflation measures indicate moderation, consistent with the projection that inflation will begin to decline beginning December 2011.
…
The projected inflation trajectory indicates that the inflation rate will begin falling in December 2011 (January 2012 release) and then continue down a steady path to 7 per cent by March 2012. It is expected to moderate further in the first half of 2012-13. This reflects a combination of commodity price movements and the cumulative impact of monetary tightening. Further, moderating inflation rates are likely to impact expectations favourably. These expected outcomes provide some room for monetary policy to address growth risks in the short run. With this in mind, notwithstanding current rates of inflation persisting till November (December release), the likelihood of a rate action in the December mid-quarter review is relatively low. Beyond that, if the inflation trajectory conforms to projections, further rate hikes may not be warranted.
WPI inflation is not interesting in thinking about monetary policy. The WPI basket is not consumed by any household. The right measure of inflation that all of us should focus on is the CPI.
We just released an updated batch of seasonally adjusted data, and the news for inflation, for September 2011, is bad. CPI-IW grew at an annualised (seasonally adjusted) rate of 20.15% in September 2011. As a consequence, the 3-month moving average inflation went up from 8% in August to 11.77% in September. If we compute the policy rate as the halfway mark (8%) and subtract out this latest value of the 3-month moving average inflation rate (11.77%), the policy rate expressed in real terms is -377 basis points.
Here’s the picture of what’s been going on with point-on-point seasonally adjusted CPI-IW inflation:
The key fact about India’s inflation crisis is: “Headline inflation”, which I would define as the year-on-year rise of CPI-IW, has been outside the target range of 4-5 percent in every single month from February 2006 onwards. High inflationary expectations have now set in. Given what is happening on prices of both tradeables and non-tradeables, I find myself skeptical about the sanguine picture on inflation that was painted on 25 October.
The bottom line: Headline inflation (year-on-year rise of CPI-IW) went up from 8.99% in August to 10.06% in September. This is inconsistent with a sanguine analysis of inflation on 25 October.
Or perhaps the econometricians at RBI have some aces up their sleeves. Will point-on-point seasonally adjusted inflation, under the benign influence of a strongly negative real rate, veer back into the 4-5 per cent range by December 2011? Stay tuned. So far, the score is: September 2011, 20.15%.  
By Simon Grey, on November 7th, 2011
The only significant impact that immigrants have on the labor market is to increase the supply of labor, which tends to put downward pressure on wages. Everything else equal, the only way an immigrant will be hired over a native worker is if he is willing to accept lower wages. In order to maximize profits, business owners look to pay the lowest wage possible without affecting marginal productivity. If an immigrant is willing to work for less, and he is productive enough, it only makes sense to choose the lower-cost labor. Billions of people the world over make this same decision on a daily basis while shopping for goods and services — it’s called bargain hunting.
Here’s the problem: the government mandates a minimum wage for citizens. The government requires that people be paid a certain amount of money per hour, and the government also mandates payroll taxes, some of which the employer must match. Toss in regulatory compliance for employers, and the cost of employment has a somewhat high floor.
Now, illegal immigrants, who can offer their labor under the table, are more than able to compete with this price because employers don’t have to pay them a minimum wage. Citizens are prevented by law from competing with illegal labor on price. As such, increasing the size of the labor market will have the adverse effect of causing citizens to be in a position where they will lose their jobs because they are forced to keep their wages high.
The proper solution to this problem, then, is the deregulation of the labor market. Allowing an increase in the labor market without allowing citizens to compete on price is cruel and unjust, and therefore migrant workers should be prevented from coming to the United States until the federal government has removed the fetters binding American labor.
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