That Which Is Unseen

By Simon Grey, on January 16th, 2013

Some economic news:

This morning’s jobs report shows that the economy’s subsidized private sector (industries like health care services that receive big government subsidies) is back as a major source of new hiring.

If a stronger but sustainable U.S. recovery depends on reinvigorating industries not heavily dependent on government largesse, then this hiring out-performance by the subsidized private sector is a bearish indicator.

As Tonelson figures it, the subsidized private sector created 65,000 net new jobs in December, nearly 40% of total private-sector job growth, about the same as throughout the recovery. But is that a lot or a little?

One easy way to tell if an economist is shallow is to see how they analyze the role of government in the economy.  In this case, the assertion is that the government was responsible for about 40% of new net job creation.  But, I wonder, how much net job destruction the government was responsible for.



Leave a comment   U.S. Economics   , , , ,  

The Truth About Taxes

By Simon Grey, on January 11th, 2013

Ross Douthat speaks it:

Alas for liberals, the tax debate isn’t that simple, because it’s taking place in the context of immense projected future deficits and a welfare state that seems unsustainable without substantial increases in revenue. Given these realities, fairness and progressivity are necessarily less important to liberalism over the long run than simple dollar figures, and the American left actually has a long-run incentive to make the federal tax code less progressive, because only a broader base can keep the liberal edifice solvent in the long run. [Emphasis added.]

While it may be quite pleasant to imagine that the tax code can be used to arbitrate fairness across social classes (a bullshit concept if there ever was one), the simple reality is that taxes have only one fundamental purpose:  revenue.  That’s it.
Taxes exist to generate revenue to the government.  Thus, while it may be pleasant to imagine soaking the rich with a 90% income tax rate—in the name of fairness, of course—the reality is that this attempt at soaking the rich will inevitably lead to a decrease in tax revenues for the very simple reason that people simply do not like having large portions of their income taken away from them by jack-booted parasites.  Thus, in the long run, the tax code must conform to fiscal reality instead of nebulous concepts of social fairness.  The liberal vision of social fairness is literally unaffordable, and this must inevitably be reflected in the tax code.
The more rational approach to taxation is exactly what Douthat recommends:  increase the tax base and keep rates lower.  This would effectively mean lowering marginal tax rates on the wealthy and actually imposing real income taxes on the bottom two brackets.  This won’t be fair, per the liberal definition, but it will ensure that the government remains funded.  Of course, once poor moochers have teeth in the game, they may decide that they don’t want to pay the government for overpriced, substandard services.  But then, those who are poor often tend to be short-sighted and foolish, and so it is also conceivable that they will learn nothing from history, and thus condemn themselves to a life of dependency.  But at least they’ll have skin in the game.



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A Lack of Prudence

By Simon Grey, on January 8th, 2013

What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom.—Adam Smith, The Wealth of Nations

Here’s some nonsense on stilts:

Richard Feynman was once asked what he would pass on if the whole edifice of modern scientific knowledge had been lost, and all he could give to posterity was a single sentence. What axiom would convey the maximum amount of scientific information in the fewest possible words? His candidate was ‘all things are made of atoms.’ In a similar spirit, if the whole ramshackle structure of contemporary macroeconomics vanished into thin air and the field had to be reconstructed from scratch, the sentence which packs as much of the discipline into the fewest possible words might be ‘governments are not households.’ The principles of running an economy are in many crucial respects different from those of keeping your own finances in order. The example of the hypothetical tenner is part of the reason why: governments need to keep money moving around. For a household, to deposit the money in a savings account might well be the most sensible course. Governments, on the other hand, need that velocity – they need GDP. In order to get it, they sometimes have to borrow that first tenner, which they can do in a range of ways not available to ordinary citizens (who can’t, for example, just print the money). Once that first tenner is spent, the government’s hope is that it will continue to be spent many more times. [Emphasis added.]

The fundamental fallacy of Keynesian economic analysis is that it is predicated on the notion that the rules of fiscal common sense do not apply to the government.  Contra Smith, the Keynesians assume that the government need not live within its means, and that it focus on attaining certain target numbers for highly abstract, generally unrealistic abstract notions of economic productivity.
The shallowness of the Keynesian worldview is apparent in many ways:

First, the Keynesian emphasis on monetary velocity is extraordinarily shallow.  It is assumed that government spending increases monetary velocity by spreading money throughout the economy.  Even if this assertion is true, what is often neglected is how, at least in regards to taxation and borrowing, the only way the government spreads money throughout the economy is by first taking money from the economy (of course, this is not technically the case with inflation, but since governments do not fund their budgetary expenditures solely by inflation, one must necessarily conclude that governments at least partially fund their expenses by either debt, taxes, or some combination of the two, which requires the further conclusion that, at some point, money must first be taken from the economy to later be put in to the economy).  Another observation that is often neglected is that money that is not spent by the government (i.e. privately-spent money) also has some degree of velocity as well.  Money does not generally sit stagnant, except among those who wish to store currency under their mattress or such-like, and so money that is spent my non-government market actors has the same velocity as money spent by government market actors, assuming that in both cases, no currency is ever removed from circulation.  Thus, the assertion that government policy must needs be different from household economic policy is fallacious because the justification for the assertion that government policy is special is itself specious.

Second, Keynesians neglect to understand that money is not itself production.  As was noted in the excerpted piece, households cannot print money whereas the government can.  Unfortunately, the mere printing of money does not itself magically cause more products to appear in the economy.  Now, inflation can draw demand forward, but only to a limited extent, because ultimately shifting production forward runs into the very serious problem of running out of demand, production materials, or both.  One of the reasons why the housing market collapsed in 2008 was due in part to demand exhausting itself.  To put it simply, people stopped wanting houses at the prices provided.  Sure, the housing supply is at its highest, but now the demand for houses has declined, which is why housing prices remain relatively depressed.  Quite simply, demand is not infinite—neither is production—which is why inflation will always fail to permanently increase production.  There are limits to everything, and inflating the currency does not change that very simple fact.

Third, Keynesians fail to realize the scalability of hierarchy.  The reason why the government is often compared to a household is because the household is a useful metaphor for understanding hierarchy.  Every household has a head, every household has expenses, every household has members, and so on.  A functioning household is one where everyone contributes to its upkeep, and one that lives within its means, and so on.  Of course, the metaphor is not exactly perfect, but it is generally useful, and so it serves as a useful point of comparison, and provides people with simple heuristics for evaluating, say, the long-term reliability and stability of any hierarchical organization, such as a business, charity, church, or government.  If a functioning family is one that minimizes deadweight and free riders through the proper division of labor, and manages to avoid fiscal problems by living within its means, then it is generally reasonable to expect that a state or business that minimizes deadweight and free riders, and also lives within its means, well do reasonably well and be expected to have a lot of stability.
And so, while governments are not households, the difference is more along the lines of scale than quality.  Governments are similar enough in form to households that the microeconomic analysis used to evaluate the fiscal health and stability of a household should be a useful heuristic for evaluating the fiscal health and stability of a government. Furthermore, the form of government is not so radically different from the form of households that it justifies a radically different set of analysis and evaluation.

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A Federal Budget Cut We Need

By Simon Grey, on December 3rd, 2012

Congress has an idea:

American consumers have shown about as much appetite for the $1 coin as kids do their spinach. They may not know what’s best for them either. Congressional auditors say doing away with dollar bills entirely and replacing them with dollar coins could save taxpayers some $4.4 billion over the next 30 years. The federal deficit for this year is over a trillion dollars.

America is fighting several unconstitutional wars, has a plethora of unconstitutional government spending programs, and a large number of unconstitutional agencies. Yet, somehow, Congressional auditors are recommending a policy that is considerably more inconvenient to citizens in order to save $4.4 billion. That’s not even half a percent of the budget. Are they serious? Or is this just a ploy to look serious about budget cuts?

What’s sad is how they apparently are not able to see a really obvious metric for determining spending cuts: the constitution.

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Old is new again

By Christopher Briem, on November 14th, 2012

So the CP daily blogh points to some recent reporting from PublicSource here in town on the impact of bid rigging in some municipal bonds for local school districts and the Port Authority.  I am unclear what the new news is. Some may recall a few old posts on this here.  August 2011: Monty Hall Meets Public Finance

or these posts on another whole Port Authority financial miasma that almost went a whole lot worse in the end.

Feb 2011: Bad bonds, bad bonds, watcha gonna do

or:

Nov 2008: More Port Authority financial problems?

the bid rigging issue was in the end just a matter of whether borrowers paid a slightly non-competitive price (i.e. rate) for some debt.  A marginal issue by definition.  The variable rate bond issue that nobody ever poked at up front really could have been bad financially.

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Blindly sending money down leaky pipes

By Ajay Shah, on November 13th, 2012

Proposals to spend more on government programs in India are generally criticised on the grounds that this is sending more money down a leaky pipe. In addition to the problem that the pipes leak, there is an equally big problem that we have no idea about what happens at the other end.

In order to build and refine a system, the first foundation that has to be laid is that of measurement. What you measure is what you can manage. In India, all too often, government agencies and programs start out with lofty ambitions, and embark on spending money to get there. But there is little measurement about the extent to which those objectives have been achieved. Under these conditions, there is little chance of programs being designed properly, and of wastage and theft being checked.

I was reminded of this as I read As Dengue fever sweeps India, a slow response stirs experts’ fears by Gardiner Harris in the New York Times. There may be an epidemic of Dengue out there. Or there might not be one. The point is, we just don’t know. The statistical system simply does not measure this.

A public goods perspective

What should government do, and what should government not do? The government should work on the provision of public goods and stay out of private goods. In the field of health, what are the public goods and what are the private goods?

When I have a toothache, and I go to a dentist, and I get better, this is a private good. Yet, most government spending is oriented towards building `primary health centres’ and hospitals and such like. Even if these worked well — i.e. even if they were not characterised by theft and incompetence — they are a bad use of public money as they deliver private goods and not public goods.

A public good is something that is `non-rival’ (my consumption of that good does not reduce your access to it) and `non-excludable’ (it is not possible to exclude me from benefiting from this good). The best example is clean air. My breathing in clean air does not diminish the amount of clean air available for you. When one more child is born, it is not possible to exclude him from benefiting from clean air.

What are the public goods in health? A few examples that come to mind:

  • Statistics. Measurement of what is going on about health in India.
  • Epidemiology. Tracking down and eradicating Smallpox. Mounting a response to fresh strains of the common cold.
  • Running public systems that measure and ensure that medicines are not counterfeited, are properly stored in a cold chain.
  • Running certification systems. Enforcing against quacks that practice medicine.
  • Getting research done on diseases that matter on India, and releasing the findings into the public domain (i.e. unencumbered by patents).
We in India have this essentially upside down. Health policy in India is unfortunately shaped by the views of doctors, and is low on skills in public economics. We like to focus on Primary Health Centres that are run by the government, and we cut corners on all the five critical public goods listed above.
It is fashionable to say that India should spend more on health. I would advocate spending less on the things that the Indian government does in health. Until the pipes are fixed, we should be closing the taps.

An objectives-and-accountability perspective

The Indian State is in a crisis. The two key factors at work are mission creep and a lack of accountability.

Mission creep has set in because in India, almost any do-gooding is seen as the responsibility of the State. We need to narrow the mission statement of the State to a tangible set of public goods. Clarity of mission, and a controlled and narrow mission, is of essence to obtaining performance.

Consider the principal-agent relationship between you and your contractor. If the contractor is failing to deliver, you would narrow down the specifications given to him, and monitor him tightly to make sure the work gets done. That is precisely what we need to do, in the principal-agent relationship between citizens and the State. The State has failed on a sprawling mission. We need to narrow down the tasks given to the State, and tightly monitor the delivery of results.

Government and government agencies will work well when they have narrowly defined functions and strong accountability mechanisms. In the field of health, absent measurement of health outcomes, there is no accountability.

Conclusion

Is there a Dengue epidemic in India? We don’t know.

An information system about the health of the people of India is a public good. It should achieve pride of place in the responsibilities of the State. However, health expenditures in India are squandered on private goods. To add insult to injury, there is theft and incompetence, so even these attempts at delivering private goods do not work so well. But the main point is that running PHCs and hospitals should not be done, even if the Indian State had the ability to run these things well.

In order to reconstruct the Indian State, we need to push on the combination of narrowing the mandate (focusing on a few core public goods) and strong accountability mechanisms.



Leave a comment   International Economics   , , , , ,  

I Wonder If They’re Yellow

By Simon Grey, on September 12th, 2012

Drugs are apparently being imported into the US by submarines:

Although they captured 129 tons of cocaine on its way to the U.S. last year, the Coast Guard thinks that close to 500 tons could now be making it through. “My staff watches multi-ton loads go by,” Rear Adm. Charles D. Michel told The Times. Part of the problem is a new class of fully submersible craft, three of which have been seized in recent weeks. (Before, the subs were only semi-submersible, depending on a snorkel to bring in air for the engine.) These new drug-running subs are capable of carrying up to ten tons of cocaine at a time and can run from Ecuador to Los Angeles without coming up for air. On top of it all, officials are also worried that these subs could be used by terrorists. [Emphasis added.]

Let me see if I get this straight:  We have a costly federal policy to slow down or possibly eliminate drug use.  While this policy has been in place, drug usage has increased, which is the exact opposite effect intended by the policy.  This has occurred in spite of the price of drugs increasing by the ban (in terms of direct cost, risk, and seeking alternatives).  In sum, we’ve spent a lot of tax money making the problem not go away.
Furthermore, basic economic principles would suggest that there is a causal link between an increase in government spending on the war on drugs and the increase in drug usage and its attendant ill social costs.  By making certain drugs illegal, the price of such drugs generally increases because supply is limited.  However, the increasing prices attract new suppliers who rush to capitalize on the high prices.  Some of these suppliers inevitably get weeded out of the supply chain by law enforcement, which creates perpetual supply shortages, and consequently perpetually high prices, which perpetually attracts new suppliers.
Additionally, this causes consumers to seek legal alternatives to drugs, which means going to legal but riskier alternatives.  Going from, say, pot to alcohol is one example of this. Another is the production of brand-new compounds that manage to escape bans since they were not previously made illegal due to their non-existence.  Alternatively, some people turn from expensive illegal drugs to cheap illegal drugs (this is the main theory as to why meth became popular).
Thus, not only has the war on drugs failed, it was never winnable in the first place.  The incentive structure set in place never dealt with the fundamental issue:  demand.  By attacking supply, the federal government ensured that drug prices would go up and that there would be a steady stream of interchangeable suppliers, while simultaneously encouraging consumers to try risky but legal alternatives, or riskier, cheaper, illegal alternatives.
And what is the result of this mess?  Not only has drug use increased, and not only are taxpayers on the hook for an unwinnable war (the hallmark of an empire, if I’m not mistaken), but the federal government has subsidized the development of enemy weapons.

Now, I’m not necessarily inclined to think that every appeal to national security is completely valid when it comes to determining policy, but it can’t be denied that federal policy has been responsible for subsidizing the development of cheap submarines that could hypothetically be used in attacks against the US.    Furthermore, the war on drugs has required that federal government constantly intervene in other nation’s affairs—particularly South American nations—which increases the odds of a terrorist attack.  Thus, federal policy has done its damnedest to ensure that the US is not only more likely to be attacked by terrorists, but it has also subsidized the terrorists’ weapon development program in the interim.
The best solution to this complete failure of a policy is to call it quits.  Doubling down on the war on drugs doesn’t change the incentive structure of the drug market, and will thus only make the problem worse.  The federal government is inept anyway, so expecting it to clean up its mess is a pipe dream.  Therefore, the best solution is for the government to stop, and in so doing stop making the problem worse.



One comment   Economic Theory   , , ,  

Dependency

By Simon Grey, on August 9th, 2012

Some hack is complaining about how people who were promised that the government would take care of them are relying on the government to take care of them:

How much do senior citizens rely on Social Security? Even more than you might think. A new study finds that more than 46 percent of Americans die with less than $10,000 in financial assets, with many spending the end of their life strongly dependent on the government.

There’s a lot of stupidity in this first paragraph.
First, since you can’t take anything with you when you die, what good is it to have any assets left at death?  Yes, you could always leave an inheritance for your children, but if leave a certain amount of wealth to your kids, the government takes half of it, unless you’re crafty enough to spend a sizable portion of your wealth on lawyers in order to not spend a sizable portion of your wealth on bureaucrats and their politician lackeys.  Furthermore, your kids could waste your inheritance because you were a terrible parent who didn’t raise them right, so there’s no point in leaving anything to them anyway.
Second, the whole point of having government programs was to pay for people to not have to worry about paying for things in their old age.  The government was supposed to provide for them.  How could anyone possibly expect others to refrain from receiving government benefits when the whole point of said benefits was to give them to as many people as possible?  (I, of course, refer more to social security than other programs, though I’ve yet to hear of any social spending program turn down money because it wasn’t interested in increasing its scope.)  Why begrudge people for taking advantage of a system that asked to be taken advantage of.

Why should low financial asset levels be a problem, then, if these seniors’ income seems to remain steady? After all, you can’t take it with you. With almost no financial assets, these seniors “have little capacity to pay for unanticipated needs such as health expenses or other financial shocks or to pay for entertainment, travel, or other activities.”

Again, the whole purpose of having government programs, like Medicaid or Medicare, or, recently, ObamaCare, is so that people don’t have to worry about unexpected health expenses.  The government promised to step in.  Why should anyone be surprised when people start acting like the government is supposed to step in?
Also, a lot of the things on the list are completely unnecessary.  Travel, entertainment, and other activities?  Yes, these things cost money, but is it really so heart-rending if some old fart can’t buy tickets to Batman?  Or can’t go see the Grand Canyon in their own RV before they take the eternal dirt nap?
Really, this is a story about a non-issue that only matters now because the government is going broke and is going to have to find a way to cut the budget.  Of course, it’s hard to feel bad for those currently lamenting the problems seniors face today when a lot of these problems were easily predicted by those who opposed the government welfare programs in the first place.

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Summer Shopping Opportunities for Mining Equities Abound: Rick Mills

By The Gold Report, on July 24th, 2012

Richard Mills Equity valuations have so far failed to keep pace with rising bullion prices, but that makes for some outstanding investor opportunities among a few particularly well-positioned juniors that Rick Mills identifies as running ahead of the herd this summer. In this exclusive interview with The Gold Report, Mills, publisher of Ahead of the Herd newsletter, points to continued low interest rates and increasing inflation as reasons that precious metals prices will keep climbing. And if discussions about elevating gold to Tier 1 asset status come to fruition, hold onto your hat, because that could shift the rate of ascent from steady to meteoric in a New York minute.

The Gold Report: Prices of the mining equities were languishing when we spoke in January, particularly precious metals equities, and we’ve had little respite since then. But you foresee potential for a bullish resurgence in gold equities. What’s your rationale behind that outlook?

Rick Mills: I believe we’re going to see higher levels of inflation. We’re going through a deflationary bout now because most of the money issued by the Federal Reserve is actually parked at the Fed. It isn’t out there being spent, so it’s not causing inflation. It’s basically just propping up the banks. When the banks start lending and when the money gets into circulation, we’ll see increased levels of inflation and, of course, that will be good for gold.

TGR: Lack of access to capital for small business due to stringent credit requirements is one factor that has put a damper on the economy. What will prompt banks to ease up on credit standards?

RM: I’m probably going to stir up a little bit of controversy by saying so, but I firmly believe that the way out of the dilemma we’re in is to spend more money. A lot of people don’t agree. They think we should cut back on spending, raise taxes and go onto an austerity program. That is absolutely the wrong thing to do. Taxes should be reduced. I believe they should be spending a lot more money.

TGR: Who should be spending more money?

RM: World governments should implement massive global infrastructure maintenance and build-out programs, and put the money not into the banks but into the small businesses that will build the infrastructure. These small businesses are the ones responsible for most of the job creation. So, give the money directly to the small businesses. Hire them to do this infrastructure build.

“World governments should implement massive global infrastructure maintenance and build-out programs, and put the money not into the banks but into the small businesses that will build the infrastructure.”

Take a look at our global water supply problems, our highways, our bridges, the brownouts because our hydroelectric power corridors are so outdated, the switching stations literally melt when they overload. We can actually spend our way out of this. In a fiat currency regime, because nothing is anchored to gold, the only way to move forward is to keep spending money. We saw this when the U.S. Quantitative Easing Two stopped and the lack of liquidity immediately upset the markets. If we undertake the infrastructure build-out program and give the money to the small businesses that create jobs, as people get back to work, they’ll have money, spend it and revive the economy. And it’s not only the U.S.—every country in the world has an infrastructure deficit.

TGR: What would more capital distribution among small business mean for the price of precious metals?

RM: The moderate to high levels of inflation I anticipate will make gold a much more attractive asset. The banks will keep interest rates low to help stimulate business borrowing, and with low rates, typically below 2%, you’ve got higher rates of inflation than you are getting for interest. I wrote an article called “Six Percent Can Draw Gold from the Moon.” With high levels of real returns people don’t favor gold as an investment. But when rates are below 2%, the exact opposite happens, because the real rate of return is negative. For instance, if investors are getting 2% on bonds but the real rate of inflation is running at 3–3.5%, they actually lose purchase power because the real rate of return is negative 1–1.5%. So higher inflation just makes gold all that more attractive. It preserves purchasing power and, of course, the gold price is going up at the same time.

TGR: As we speak today, gold is up $25/ounce (oz), flirting with $1,600/oz. Given that—and the fact that gold is not only a store of value but also a hedge against inflation—where do you predict the gold price will go during the rest of the summer and into the fall?

RM: I honestly don’t have a price prediction except that gold will go higher. When we talked last year, I was perfectly comfortable with $1,500/oz gold and thought that was a good price for it. Of course, it immediately spiked up to $1,900/oz but has come back to my range. I’m still perfectly happy with $1,500/oz gold. As more people catch on to the fact that they need to own some gold, the price will slowly rise.

TGR: Some people believe one of the reasons gold will go higher is because of the whispers we’re hearing that the Bank for International Settlements (BIS) intends to reclassify gold as a risk-free asset in the context of the Basel III framework. Could you help our readers understand why that would be bullish for gold?

RM: Tier 1 capital is the core measure that regulators use to gauge a bank’s financial strength. It typically consists mostly of common stock and disclosed reserves or retained earnings but it might also include non-redeemable, non-cumulative preferred stocks. The Basel Committee for Bank Supervision, known as the BCBS, which is the maker of the global capital requirements, also implemented the Basel III rules that form the basis for global bank regulation. The BCBS is studying making gold a bank capital Tier 1 asset. Gold has typically been a Tier 3 asset, which means that it’s been discounted at 50% of its current market value. With that discount, banks really never had reason to hold gold as an asset. If the BCBS raises gold to the level of a Tier 1 capital asset, though, banks could operate with far less equity capital than is normally required and gold would be the ultimate backstop for debt, currencies and bank equity capital. It would be a huge move, and making it would really propel some superior interest in gold.

TGR: Certain central banks, such as China’s, are stockpiling gold already. If it becomes a zero-risk-weighted Tier 1 asset, countries all over the planet would start accumulating gold, which would of course drive up demand. What’s the timeline on the BCBS decision?

RM: We simply don’t know. But if it happens, you’re going to see substantial demand for physical bullion and it’s going to be a hugely important step toward gold’s re-monetization. Moving from a Tier 3 to a Tier 1 asset would have gold compete directly as a safe-haven investment against bonds issued by over-indebted governments and yielding less than zero in inflation-adjusted terms—those negative real interest rates we discussed.

“As more people catch on to the fact that they need to own some gold, the price will slowly rise.”

Another factor to bear in mind, one that isn’t widely recognized, is that there is a huge shortage of good collateral; banks are increasingly accepting gold as collateral because they’re reluctant to take each other’s fiat currencies. So there’s another huge step toward the re-monetization of gold.

TGR: That would certainly suggest increasing value for the shares of companies searching for and producing gold. Some of them are producing gold very profitably at well under $1,500/oz, and a number of them, juniors in particular, have significant gold resources in the ground—but in both cases, their share prices remain weak. In this scenario, what are you able to identify as big opportunities for investors over the next several years?

RM: I can tell you about several juniors with some very exciting things happening this summer. They’re interesting companies that everyone should have on their radar screens.

TGR: Where shall we begin?

RM: Starting alphabetically, Altair Ventures Inc.’s (AVX:TSX.V) geologists and consultants (including Jim Oliver, former senior vice president, geology at Hunter Dickinson) have provided guidance on drill hole locations for the just-started minimum 5,000-meter (m) drilling program, as the company chases resources on two zones on its Kena gold property in British Columbia. Total Measured and Indicated (M&I) resources for the two zones comprise 549,000 contained ounces of gold, while total Inferred resources comprise 513,000 oz. Altair is going to twin some historical holes from these two zones, check results, make sure everything is good and then try and expand the existing, already sizeable, kernels of resources. Altair is looking to grow the two resource blocks and bring them together to form one large block.

Altair is well run. President and CEO Fayyaz Alimohamed—whom you’ve interviewed in The Gold Report—is very, very smart. Robert Archer, president and CEO of Cangold Limited (CLD:TSX.V) and Great Panther Silver Ltd. (GPR:TSX; GPL:NYSE.A), is on Altair’s board so the technical advice he receives is second to none. The company has been holding its own, but this is one investors should be looking at because the drill program has started and the results off of this beautiful property could really propel Altair upward.

TGR: Do you anticipate permitting being an issue with Altair?

RM: No, I don’t see any unusual problems cropping up.

TGR: Okay. What else do you have in your quiver besides this micro-cap gold explorer in B.C.?

RM: NioGold Mining Corp. (NOX:TSX.V; NOXGF:OTCPK) will be releasing its updated NI 43-101 resource calculation in early August. It has done lots of drillings, released lots of assays and still has lots of news coming on its Marban and Malartic Block properties in Québec’s Abitibi region. NioGold finished its second-year program and, with $9 million (M) to spend, it’s planning its third year. It will get very aggressive with the Norlartic-Kierens. This thing is going to have a huge amount of news flow from its third year program.

TGR: And it has a joint-venture partner spending the money.

RM: That’s right. NioGold has $5M, but Aurizon Mines Ltd. (ARZ:TSX; AZK:NYSE.A) is spending the money, hitting on just about every hole drilled and growing the resource. I think the NI 43-101 that’s due in August is going to surprise a lot of people. In fact, NioGold is one of the few companies that’s having money spent on a project by another company and in this business, spending a lot of money means a lot of news flow. News is the lifeblood of a junior. If you want to move the share price, put out a lot of great assay results. This one has that kind of potential. I think it’s set to have a really great summer.

TGR: Who else is on your list?

RM: I really like Terraco Gold Corp. (TEN:TSX.V). It’s a unique company. Besides the exploration potential on its Moonlight property in Nevada, its Almaden project in Idaho already has a significant gold resource—and to this cowboy it certainly looks as if it’s increasing the resource by metallurgical studies and huge drill holes. Instead of putting down the skinny drill holes, Terraco put down a four-inch hole and the grade went up drastically, to 1.3 grams/ton. Judging just on the basis of the internals of the deposit, it looks as if the company can increase the grade and the resource size simultaneously.

TGR: That’s terrific.

RM: But it goes beyond the projects. Terraco has a royalty option—an option to acquire up to a 2.5% net smelter royalty (NSR) on the Spring Valley gold project, which adjoins Terraco’s Moonlight project in Nevada and is joint ventured between Barrick Gold Corp. (ABX:TSX; ABX:NYSE) and Midway Gold Corp. (MDW:TSX.V: MWD:NYSE.A). A royalty is simply a right to receive a percentage of production from a mine. So when you invest in a royalty you’re buying a percentage of the metal produced from a given property in exchange for an initial payment, but you’re not assuming any responsibility for the actual mining operation. So Terraco doesn’t have to contribute to the operating or capital costs at the mine after the initial payment is made. This is one of the things I like most about Terraco.

TGR: Could you elaborate? Some investors may not understand the value of these royalties.

RM: When thinking about how to value a junior gold company, you usually look at how many ounces it has in the ground. The company gets a certain amount of money for each one, say $90–113/oz in the ground. The market values royalties much higher, something like $800/oz and sometimes as high as $1,200/oz in the ground gold production. It’s 800% higher than a normal company would be valued.

TGR: What do you see when you look at Terraco in light of its royalty position?

RM: When you do the math on Terraco, you can see why I like this company so much. Even if Spring Valley were to remain at 3.5 million ounces (Moz), 75% recovery on $1,200/oz gold for the next 15 years at $650/oz gold cost at a 3% discount rate gives you $70M–80M net present value (NPV) minus the $12.5M to exercise the option. Using those very conservative numbers, that comes to about $57M NPV. These outstanding shares fully diluted put a $0.35/share base price on Terraco right now. You can see a minimum, a base that doesn’t even include Moonlight or Almaden, which has 1 Moz and growing in a shallow open-pit resource that could be a mine today.

TGR: And Terraco’s trading around $0.12.

RM: A very good value play for anybody to look at. Terraco offers the Moonlight exploration upside, 1 Moz of gold at Almaden with considerable upside because it’s looking for higher-grade feeder gold shoots coming up from underneath much like the Ken Snyder mine, and the royalty.

TGR: Excellent.

RM: It’s hard to find value like a NioGold or a Terraco and the upside of an exploration program such as Altier’s.

TGR: Now that we’ve heard about a few of your favorite gold mining companies, where shall we go next?

RM: I want to talk about one more, a silver company. Based on 15,000m of widely scattered drilling, the first resource estimate that Kootenay Silver Inc. (KTN:TSX.V) put out on its Promontorio silver project in Sonora, Mexico, showed 10 Moz silver. Total resource silver equivalent would be 21 Moz. Since then, the company has done another 35,000m of concentrated drilling, targeting the resource area in the pit and a 1 kilometer (km) strike length, and is about to release an updated resource estimate. I’m pretty excited to see what it’s going to be—I expect a real barn-burner of a resource. To top it off, the company now realizes its resource is in a diatreme system. These are large-scale, grouped systems, such as Peñasquito. Not only does Kootenay have coming what I expect to be a significant upward revaluation in its early resource, but also some of the greatest blue-sky potential you’ll ever see on the exploration side. Management in all the companies I’ve mentioned is exceptional, and Kootenay has one of the best run teams out there. It’s definitely worth looking at just because of the quality of the management team, and it’s definitely another one that people should have on their radar screens.

TGR: And certainly, Mexico has been a great place to mine, whether it’s gold or silver. Are you as bullish on silver as you are on gold?

RM: Yes, I am, but I think you invest in these companies because of management, not because it’s either gold or silver. While I believe that silver trades more as an industrial metal than a monetary metal, it trades in lock-step with gold. Consequently, when gold goes parabolic for the reasons we discussed earlier, silver will ride right along with it. They’re both going to be fantastic.

TGR: You’re apparently bullish on uranium, too.

RM: Absolutely. The Japanese are turning reactors back on because the country has realized that the economy can’t survive without nuclear power. Germany is finding out that the decision to shut down its nuclear power plants was perhaps a knee-jerk reaction to what happened at Fukushima—a political decision made in the haste of the moment and it is bitterly regretting it. I think we’ll see a reversal there.

“I see this as a perfect time to be looking at companies with great management teams and projects that can really increase their share value at any time.”

And, you know, the Megatons-to-Megawatts program with Russia will end next year. The American government did sell off some high-grade nuclear material but that was more of a political gesture in response to lobbying efforts on behalf of one of the more powerful Congressional districts to keep 1,200 people working. Uranium actually has been a very good contrarian play for a while, and now I believe we’ll see much higher uranium prices over the coming years.

TGR: Have you any companies you’d like to mention in that context?

RM: I do. Uranerz Energy Corp. (URZ:TSX; URZ:NYSE.A) potentially has two near-term catalysts that would drive up its share price. Uranerz is approaching its one-year anniversary for construction of its mine in Wyoming’s Powder River Basin. Everything’s going fantastically. The plant is erected; electrical work is ongoing. The only thing left is the plumbing; the only permit still to be issued is for the deep disposal well. The Environmental Protection Agency (EPA) wanted some clarification, which Uranerz supplied, and now the company is waiting for the EPA to come back and approve the permit. The share price has been a little beaten down because it doesn’t have the permit. Dealing with a government organization, you really can’t put a timeline on it but I expect the permit to be in Uranerz’s hands within a month. If that happens in August, the company will be in production in November. Those two catalysts—receiving the final permit and moving quickly into production—can put a swift kick in the butt of any company’s share price.

This is not going to be an insignificant producer, either. Uranerz will produce 300,000 pounds (lb) of yellowcake a year. It has a tolling agreement with Cameco Corp. (CCO:TSX; CCJ:NYSE) to process resin and an offtake sales agreement with Exelon Generation Co. LLC, a subsidiary of Exelon Corp. (EXC:NYSE) to buy product for $65–75/lb.

As I said, I believe all of this is potentially going to happen this year and it represents a fundamental change in the company’s prospects. In an industry that is in a turnaround phase, as a contrarian investment, Uranerz represents probably the best value in the uranium sector today.

TGR: Any other names outside of uranium and precious metals that you want to talk about?

RM: Yes, a district-size nickel play in Greenland. North American Nickel Inc.’s (NAN:TSX.V) Maniitsoq project basically comprises a whole nickel belt 75km long and several kilometers wide. It has 119 drill holes. There’s nickel tenor all along the length of it. The company just released news that the Geological Survey of Denmark and Greenland (GEUS) has announced that the Maniitsoq structure represents the remains of a gigantic meteor impact 3 billion years ago. There’s a lot of postulation that a meteor impact caused the nickel emplacement in the norites at Sudbury (Ontario), which fuels speculation that Maniitsoq could be another Sudbury.

TGR: That would be a real plus.

RM: It would be but I’m not presently overly concerned about how the nickel was emplaced. To me what’s important is that North American Nickel already has three extremely high-quality targets and scads of nickel tenor, it’s currently flying a Variable Time-Domain ElectroMagnetic (VTEM) survey and will be drilling within a month.

Then, if drilling results in good nickel intercepts and identifies nickel emplacements around the area that confirm that Maniitsoq may be another Sudbury, the stock will explode. It can’t help but happen.

What’s important is that North American Nickel drills and hits nickel—the basic, undeniable fact of this play is that North American Nickel owns it all. Other companies won’t be coming in and staking ground. There won’t be any sister plays or feed-off plays or anything like that. Hit nickel here and we’re going to experience potentially one of the biggest speculations that anyone has seen on the Toronto Venture Exchange. And that’s not an embellishment, North American Nickel will own the whole camp.

TGR: So you’re fond of this nickel play, bullish on uranium and clearly enthusiastic about the precious metals companies you talked about. Is part of the rationale behind your thinking the idea that emerging economies and developing nations will be implementing infrastructure programs that need more energy, more steel and more base metals? Would you say you’re generally a commodities bull?

RM: I am a commodities bull, and although everything you just said is true, it goes deeper. It goes to the fact that a discovery is a discovery, and the market rewards discoveries. It rewards finding a resource and doubling it and tripling it. It rewards companies that go from near-term producer status to producers with cash flow. It rewards management, those who go to work for shareholders, build value and run solid junior companies. It rewards those that run ahead of the herd.

To me it doesn’t matter whether we’re in a bull market for commodities or a soft market, this kind of quality, this kind of shareholder value-building, will be rewarded. It always has been and I see nothing going on now in the market to change that. When you add in what we talked about with inflationary pressures and gold potentially as a Tier 1 asset, I see this as a perfect time to be looking at these companies with great management teams and projects that can really increase their share value at any time.

TGR: Excellent summary, Rick. Thank you so much for your time.

Richard (Rick) Mills is the founder, owner and president of Northern Venture Group, which owns aheadoftheherd.com, as well as publisher, editor and host of the website. Focusing on the junior resource sector, Mills has had articles appearing on more than 400 different websites including: The Wall Street Journal, Safe Haven, Market Oracle, USA Today, National Post, Stockhouse, LewRockwell, Pinnacle Digest, Uranium Miner, Beforeitsnews, Seeking Alpha, Montreal Gazette, Casey Research, 24hgold, Vancouver Sun, CBS News, Silver Bear Cafe, Infomine, Huffington Post, Mineweb, 321Gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Calgary Herald, Resource Investor, Mining.com, Forbes, FN Arena, Uraniumseek, Financial Sense, Goldseek, Dallas News, VantageWire, Resource Clips and the Association of Mining Analysts.



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A Welcome Definition

By Simon Grey, on July 18th, 2012

Foseti provides one for “austerity”:

I’ve complained a few times that opponents of austerity refuse to define what they’re opposed to.
Naively, I’d assumed that austerity meant that governments were cutting spending. Actually, it turns out governments continue to spend more money during period of austerity and even periods of “crippling austerity.”
I’ve done some investigation and I now believe I can define “austerity.” Here goes:
Austerity is when more than half of a country’s working age population has to . . . wait for it . . . seriously, I hope you’re sitting down for this . . . go to work at an actual job every day.*

One way to tell that Krugman et al are big-government socialist shills is simply by noting that they use the word “austerity” in a rather vague manner to refer to countries that are apparently not Keynesian enough in their approach to dealing with the current economic crisis.  Basically, Krugman’s version of austerity is not spending cuts or tax increases, but rather deficit spending that doesn’t incur a large enough deficit.  I don’t see how this is austerity as much as a milder form of irresponsibility, but then I’ve never won any prizes in economics, let alone one in honor of Alfred Nobel.  So what do I know about austerity?



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